y: PRIMER -7- HJ 4652 "ecleral income tax Drim.er . ^ Southern Branch of the University of California Los Angeles Form L-1 4G5e S5^ T' JUL 3 1323 (^^•3 7 OEC 16 19*-S4 Form L-9 JUN I 1926 NOV 8 1927 ^CT \ 7 182^ 2 1 «a' '•"D H" J . i!?|R'l.^tS£U FEDERAL INCOME TAX PRIMER BASED ON REVENUE ACT OF 1921 AND ON 1922 REGULATIONS BY COLEMAN SILBERT OF THE BOSTON BAR BOSTON FINANCIAL PUBLISHING COMPANY 1922 e54 8S>0 Copyright 1922 by Financial Publishing Co. J 1 TABLE OF CONTENTS INCOME TAX ON INDIVIDUALS Par. Page List of abbreviations 1 y, 1. To whom it applies 2 Gross or Taxable Income 2. General definition 2 -^3. Certain non-taxable items 2 jy 4. Year when income is taxable_. 2 W ITEM: INCOME FROM SALARIES, WAGES, • COMMISSIONS, ETC. 5. Salaries: Not paid in cash — credited, not paid — } percentage of profits — contingent — gifts — trav- , eling expenses 3 an 6. Salaries of wife and dependent children 3 7. Non-taxable salaries: State employees — Federal em- ployees — notary public fees 3 8. Bonuses — when reported 4 J 9. Pensions — gratuities — military pensions 4 10 Expenses: Daily fares and meals — traveling expenses 4 ITEM: INTEREST (n 11. Interest on bank deposits — coupons 4 ^^ 12. Non-Taxable Interest: State bonds — Federal Farm ffi Loan Bonds — Interest from building and loan V/ associations — Tax-free covenant bonds 5 ' 13. Bonds sold between interest dates 5 ITEM: INCOME FROM PARTNERSHIPS, (PERSONAL SERVICE CORPORATIONS), AND FIDUCIARIES 14. Partnerships: Loss in the business 5 15. Different fiscal years 5 16. Credits 5 17. Personal Service Corporations: Different fiscal years 6 18, Credits 6 19. Fiduciaries : Gifts 6 20. What must be reported _^ 7 21. Revocable trust 7 22. Different fiscal years 7 23. Credits , 7 ITEM: INCOME FROM RENTS AND ROYALTIES 24. How reported: Lessor's taxes paid by lessee 7 25. Repairs 8 26. Depreciation 8 27. Other expenses ^ 8 28. Interest .' 8 29. Taxes 8 30. Royalties 8 31. Loss in this item 8 ITEM: PROFIT OR LOSS FROM BUSINESS OR Par. PROFESSION Page 32. General statement: Personal expenses 9 33. Compensation for services extending over more than one year 9 Total Sales 34. Trade discounts 9 Materials and Supplies 35. Cash basis 9 Merchandise Bought for Sale 36. Trade discounts 9 37. Transportation charges, etc 9 Inventory 38. Where required _. . . . 10 39. What included; Unidentified goods 10 40. How figured: Change in method •.:.••• 10 Salaries and Wages 41. Reasonable allowance for services rendered 10 42. Own salary, wife's and children's 10 43. Not paid in money 11 44. Increases in salary 11 45. Bonuses 11 46. Allowance to widow of employee 11 47. Traveling expenses 11 48 Rent 11 Interest 49. Interest deductible: loans secured by tax-exempt se- curities — overdue taxes 11 50. Interest not deductible 11 Taxes 51. Taxes deductible: Penalties 11 52. Taxes not deductible 12 53 Repairs 12 Wear and Tear 54. Depreciation: Not temporary fluctuation 12 55. For what property: Not stocks and bonds — personal use 12 56. How to figure 13 57. When taken '._. 13 58. Obsolescence 13 58a. Depletion '. 13 Losses 59. General statement 13 60. Amount of loss 14 61. Year taken 14 62. Special provision 14 62a. Amortization 14 Bad Debts 63. To what applies 14 64. Two methods 15 Par. Page 65. Charged off wholly 15 66. Charged off in part. 15 67. When charged off .^ 15 68. Reserve for bad debts 15 69. Secured debts 15 Other Expenses 70. Capital charges 16 71. Personal expenses 16 72. Year in which deducted 16 73. Insurance 17 74. Other professional expenses 17 75. Pensions 17 76. Allowance to widow of employee 17 77. Traveling expenses 17 78. Damages for injuries 17 Loss in Business 79. Effect for year 17 80. Deduction of net loss in business against net income of later years 17 r PROFIT OR LOSS FROM SALE OF REAL ESTATE ITEMS: \ PROFIT OR LOSS FROM SALE OF STOCKS, [ BONDS, ETC. 81. General statement: Year loss or profit is taken 19 82. No gain or loss 19 83. Effect of depreciation on sale or disposition of property 19 84. When made on sale of real estate 20 85. Non-deductible losses 20 86. Thirty-day clause 20 86a. Short sales 21 87. Tax-exempt dividends , . 21 88. When the property can't be identified 21 Property Bought or Acquired On or After March 1, 1913 89. Gain on property bought on or after March 1, 1913 21 90. Loss on property bought on or after March 1, 1913. ... 22 91. Gain on gifts acquired from living persons on or after March 1, 1913 and before January 1, 1921, and gifts acquired by inheritance on or at any time after March 1, 1913 22 92. Loss on gifts acquired from living persons on or after March 1, 1913, and gifts acquired by inheritance on or at any time after March 1, 1913 22 93. Gain or loss on gifts acquired from living persons on or after January 1, 1921 22 Property Bought or Acquired Before March 1, 1913 94. Gain on property bought or acquired before March 1, 1913 23 95. Loss on property bought or acquired before March 1, 1913 23 Special Cases 96. Preferred stock with common as bonus .,.. 24 97. Sale of stock after stock dividend 24 98. Stock dividend of different class from original stock 25 99. Sale of unidentified part of stock dividend 25 100. Sale of rights 26 100a. Court decision ^ 26 V Par. Gain or Loss on Exchange Page 101. No gain or loss ._ .^ 26 102. Rule for other exchanges 27 103. New property substituted for old 27 104. When property received on non-taxable exchange is of different kinds 27 105. Where part of property received on exchange has a market value and part has not 27 106. Sale of real estate, taking purchase mortgage 28 107. Foreclosure sale of purchase mortgage •••• 28 108. Property destroyed, stolen, or taken by eminent do- main or condemned ^ 28 109. Where acquired before March 1, 1913 29 110. Liquidating dividends 29 111. Sale of partnership interest 29 ITEM: DIVIDENDS 112. How taxed .^ 30 113. Definition 30 114. Federal Reserve Bank dividends 30 115. Out of what earnings 31 116. Stock dividends 31 117. Other dividends not in cash 31 118. Dividends by insurance companies to policyholders.... 31 ITEM: INTEREST FROM LIBERTY BONDS, ETC. 119. Exempt from normal tax 31 120. Credits for Liberty Bonds held by fiduciaries, partner- ships and personal service corporations 32 121. What is wholly tax-exempt 32 122. Second, Third and Fourth Liberty Bonds 32 122a. No need of original subscription 33 123. Victory notes 33 124. Treasury certificates of indebtedness 33 125. War Savings Certificates 33 126. War Finance Corporation Bonds 33 127. How to compute the exemption 33 ITEM: OTHER INCOME 128. What included 33 129. Dividends from foreign corporations 34 DEDUCTIONS Interest 130. When deductible 34 131. "Originally subscribed" 34 132. Interest on taxes 35 Taxes 133. General rule 35 134. Estate and inheritance taxes 35 Losses 135. Which deductible here ^.. • • 35 136. In what year deducted 36 137. Deductible and non-deductible losses 36 138. Amount of deduction 36 Par. Contributions Page 139. When deductible 36 140. By partnership 36 Bad Debts 141. What included ^1 142. Indorsers and sureties Zl Other Deductions Authorized by Law 143. Payments to beneficiaries under a will Zl 144. Family or personal expenses ^ 37 COMPUTATION OF TAX 145. Net income 38 146. Returns for less than a year 38 147. Credits 38 148. Personal exemption 38 149. How much a "head of a family" must contribute 39 150. Date for determining amount of exemption 39 151. Normal tax 40 152. Surtax 40 153. Elective tax on profits from sale of capital assets 40 Credits on Tax 154. Tax paid at source 41 155. Foreign income and excess profits taxes 41 Payment of Tax 156. When due 41 157. How made 42 PARTNERSHIPS, PERSONAL SERVICE CORPORATIONS, AND FIDUCIARIES 158. Partnerships 42 159. Personal service corporations 42 Fiduciaries 160. Definition 43 161. Returns ^ 43 162. Expenses of administration 44 163. Trusts with same founder and same trustee, returns by trustee 44 164. Sale of capital assets _^ 44 165. When the fiduciary pays the tax 45 166. When the beneficiary pays the tax 45 PART II. INCOME TAX ON CORPORATIONS Miscellaneous Provisions 167. Definition of corporation 46 168. Corporations subject to the tax 46 169. Tax-exempt corporations , 46 vii Par. Returns Page 170. By what corporations made 47 171. When and where made and by whom sworn to 47 172. Consolidated returns 48 173. Special provision for related trades or businesses 48 174. Returns of dividends 48 GROSS INCOME 175. General statement ^ 48 176. Gross sales ._^ 49 177. Cost of goods sold 49 178. Gross income from other operations 49 179. Taxable interest on obligations of the U. S. and War Finance Corporation Bonds 49 180. Other taxable interest 49 181. Rentals ^. . . 49 182. Royalties ^ 49 183. Earnings from Personal Service Corporations 49 184. Dividends 49 185. Income from other sources SO DEDUCTIONS 186. Ordinary and necessary expenses SO 187. Compensation of officers SO 188. Repairs SO 189. Interest 50 190. Taxes SO 191. Bad debts Si 192 Wear and tear (depreciation) and obsolescence SI 193. Depletion ,.. SI 194. Amortization 51 195. Profit or loss on sale of capital assets 51 196. Other losses 51 197. Net Loss 51 198. Dividends 52 Computation of Tax 199. Credits for income tax 52 200. Rates 52 201. No elective rate on profits from sale of capital assets.. 53 202. Evasion of surtaxes by incorporation S3 203. Return for less than a year 53 204. Credits against tax 54 205. Payment of tax 54 EXCESS-PROFITS TAX 206. General statement 54 Computation of Invested Capital, Etc. 207. What included 54 208. Excess-profits credit 56 209. How the excess-profits tax is computed 56 210. Examples 56 PART III. GENERAL AND MISCELLANEOUS PROVISIONS Par. Page 211. Name of Act and when it took effect 58 RETURNS Who Must File a Return and On What Forms 212. Net income of $1,000 or more 58 213. Net income of $2,000 or more 58 214. Returns by husband and wife 58 215. Combined net income less than $2,000 59 216. Gross income of $5,000 or more 59 217. Husband and wife 60 218. Return of minor's income 60 219. Returns by agent or guardian 60 220. Definition of net income 60 221. Status 60 222. Forms 61 223. Forms for husband and wife. . . . 61 224. Method of return by husband and wife may be changed 61 225. The income of dependent minors 61 226. Returns by executors and administrators 61 227. Returns by trustees 61 228. Returns by receivers 61 229. Related trades or businesses 61 Returns of Information at Source 230. Who make ^. 62 231. Fixed or determinable income 62 232. What items need not be reported 62 233. Where made out 62 234. Interest on bonds of domestic or foreign corporations.. 62 235. Income withheld from nonresident alien ,. . 63 236. "Foreign items" . 63 237. Returns by brokers 63 When Returns Must Be Filed 238. By nonresident aliens 63 239. Individual, partnership and fiduciary returns 63 240. Executors and administrators 63 241. Trustees 63 242. When separate return for less than twelve months is made 63 243. Date of mailing 63 244. Extensions ^. 64 245. Where returns are to be filed 64 For What Period Returns Are Filed 246. The taxable year 64 247. Choice of calendar or fiscal year._^ 64 248. Change in accounting period j_ 64 249. After permission granted... ._^... 64 250. Separate return caused by change...... 65 Basis of Returns 251. Cash or accrual basis 65 252. Constructive receipt 65 253. When inventories are required 66 254. Change of basis ^ 66 ix Par. Withholding at Source Page 255. Eight per cent, deduction _^ 66 256. Ten per cent, deduction (commencing in 1922 twelve and one-half per cent.) 66 257. Exceptions to withholding in Par. 255 and Par. 256 66 258. Fixed or determinable income 67 259. Annual or periodical ^. 67 260. Two per cent, deduction 67 261. Exemption from 2% withholding 67 262. Owners unknown 68 263. Ownership certificates 68 264. Returns by withholding agents 68 Nonresident Alien 265. Definition 69 266. Proof of residence of alien .^. 69 267. Duty of employers — returns by the aliens 69 PART IV. ADMINISTRATIVE PROVISIONS 268. Failure to file return on time and fraudulent returns... 70 Payment of Tax 269. Extension of time 70 270. Where taxpayer about to leave the country, etc 70 Additional Assessments 271. Penalties and interest 71 272. When may be made 71 273. Income of decedent .._ 71 274. Notice to taxpayer, appeal, etc.; understated returns..... 72 275. Extension of time for payment 72 276. Examination of books Th Failure To Pay Tax 277. Penalties ^^ ^. . . 12> 278. What constitutes notice IZ Suits By Government 279. Time limit ^. 74 280. Suits against stockholders -. ••^' 74 281. Attachments, etc ».. . . 74 282. Compromises 74 Claims for Abatement 283. When made and effect of 74 284. Form of 74 Claims for Credit 285. Purpose 75 286. May be combined with claim for refund 75 287. Effect of claim for credit 75 Refunds 288. When must be made ^ 75 289. How made 75 X Par. Page 290. To whom made .^ 75 291. On examination of returns , . 76 292. Interest 76 Suits By Taxpayers 293. Requirements and limitations 76 294. Against whom brought 76 295. Interest .^ 11 296.' How the money is obtained after judgment 11 297. Injunctions 11 Miscellaneous Provisions 298. Regulations ^ 77 299. Inspection of returns and copy 11 300. Hypothetical questions 78 301. Committee on appeals and review 78 302. Registration of attorneys, etc 78 303. Reopening of cases 78 304. Final agreement ^^ 78 PART V. DECISIONS OF THE UNITED STATES SUPREME COURT ON INCOME TAX AND RELATED STATUTES SINCE 1913 A. Decisions on general matters 79 B. Decisions relating to taxable and non-taxable income... 80 C. Decisions relating to deductions 86 D. Decisions relating to administrative provisions 87 E. Excess-profits tax decision 88 PART VI. REVENUE ACT OF 1921. Titles I, II, III, XIII, XIV. A. Important changes and new provisions in the Revenue Act of 1921 89 B. Provisions in the Revenue Act of 1921 not applicable until 1922 , . 95 C. Provisions in the Revenue Act of 1921 of limited duration 96 D. Text of Revenue Act of 1921: Titles I, II, III, XIII, XIV 97 Index 159 EXPLANATION OF ABBREVIATIONS Par. — Paragraph of this book. Sec. — Section of Revenue Act of 1921. Art.— Article of Regulations 62, 1922. T. D. — Treasury Decision. Bull. — Cumulative Bulletins of Decisions of Income Tax Unit: 1,2,3,4. 37-21-1098. — Reference to Weekly Bulletins issued during 1921 after those contained in Bulletins. I-l-l, etc. — Reference to Weekly Internal Revenue Bulletins commencing in 1922. I. T. — Income Tax Unit. Ct. D. — Court Decision. O. D. — Office Decision. O. or L. O. — Solicitor's Law Opinion. S. — Solicitor's Memorandum. Sol. Op. — Solicitor's Opinion. T. B. M. — Advisory Tax Board Memorandum. T. B. R. — Advisory Tax Board Recommendation. The Ad- visory Tax Board is no longer in existence. A. R. M. — Committee on Appeals and Review Memorandum. A. R. R. — Committee on Appeals and Review Recommenda- tion. INCOME TAX ON INDIVIDUALS 1. To whom it applies. — The provisions herein stated refer only to citizens and residents of the United States. There are special provisions for : (1) Citizens of a possession of the United States (see Sec. 260 of the Act). (2) Citizens under Sec. 262 of the Act. (3) Nonresident aliens (see in particular Sec. 217 of the Act). Gross or Taxable Income 2. General definition. — Gross income includes all gains, profits and income derived from any business, trade, or pro- fession, from salaries or wages or compensation for personal service, from sales or dealings in any kind of property, from rent, interest dividends, or from any source whatever (Sec. 213a and Art. 31). This includes income from within as well as from without the United States except as limited in the special cases men- tioned in Par. 1 (Art. 3). 3. Certain non-taxable items. — Gross income does not in- clude the following items : 1. Proceeds of life insurance policies paid on death of insured (Sec. 213b (1) ). 2. The amount received by the insured not in excess of premiums paid by him or for him under life insurance, endowment, or annuity contracts (Sec. 213b (2) ). For the taxability of any excess see Par. 128. 3. Property acquired by gift or inheritance (Sec. 213b (3) ). The income from such property is taxable. 4. Amounts received through accident or health insur- ance or under Workmen's Compensation Acts plus any damages received for personal injury or sickness (Sec. 213b (6) ). 5. Alimony or money paid under separation agree- ment (Art. 73). 4. Year when income is taxable. — If returns are made on a cash basis, the income is reported for the year when it is paid or credited (Art. 52) to the taxpayer. If income is re- 2 ported on an accrual basis, it is reported for the year when it accrues (Art. 51). See Sec. 213a. Unliquidated claims are income for the year when liqui- dated by payment, judgment or agreement (see Art. 51. See also Par. 7Z). Contingent claims are income only when the contingency has occurred (Bull. 3, p. 142; A. R. R. 232). (See also Par. 72.) Forms 1040, 1040A, and 1041 (see Par. 160) ITEM: INCOME FROM SALARIES, WAGES, COMMISSIONS, ETC. 5. Salaries. — All salaries are to be included, even those from your own business or partnership. If you are paid oth- erwise than by money, wholly or in part, the market value of what you receive is to be included (Art. 33). Salaries are to be reported for the year when credited to you even though received later (Art. 52). See also Par. ZZ. Salaries, even if partly non-deductible as a business ex- pense because excessive (Par. 41), unless they are to be treated wholly or in part as dividends or capital payments, must be reported in full (Art. 106). A salary based on a percentage of profits is to be included here (Bull. 3, p. 143 ; A. R. R. 346). Salaries which are purely contingent are not to be included until the contingency has taken place (Bull. 1, p. 109; O. D. 159). Gifts are not to be included (see also Par. 9). Supper money is considered a gift (Bull. 2, p. 90; O. D. 514). For traveling expenses see Par. 10. 6. Salaries of wife and dependent children. — Any salary received by a wife should be reported as part of the husband's income or preferably on a separate return, or joint return with the husband (Art. 401). The salaries or wages of dependent minor children should be included in the parent's return (Art. 403). 7. Non-taxable salaries. — Salaries of officers or employees of a State, County, City or Town, or any political subdivision of a State, are not taxable (Art. 88). Salaries of Federal em- ployees are taxable (Art. 32). The fees of a notary public are not taxable (Art. 88). 3 8. Bonuses. — Any bonus given during the term of service or at the end is to be reported as far as it does not exceed reasonable compensation when added to the regular salary. Any part over this would be a gift. In this case, of course, the excess would not be deductible as an expense of the busi- ness (see Par. 45) (Art. 107). Of course whatever should be here reported is deductible as a business expense (see Par. 45) and vice-versa; but the fact that the employer does not deduct it does not mean that the employee should not return it if the bonus is allowable as salary (Bull. 3, p. 144; O. D. 570). The bonus must be paid or credited during the taxable year (Bull. 2, p. Ill ; O. D. 497). 9. Pensions. — Pensions paid to retired employees are to be reported (Art. 108). Pensions paid to others are gifts and not income (Art. 32). All allotments, allowance and pensions to those who served in the military or naval service of the United States or to their beneficiaries need not be reported (Sec. 213b (9) ). 10. Expenses. — Fares expended in going to and from work are not deductible (Art. 101a) ; neither is money spent in town for meals; see Par. 71. Those who have to pay traveling expenses out of their salaries are allowed to deduct them in full. Those who in addition to their salaries are repaid their actual expenses return the payments as income and deduct them as expenses. Where any lump sum or per diem allowance exceeds the actual expenditures, the excess is to be reported as income (Art. 292). Traveling salesmen claiming deductions must make out a statement and attach it as part of the return. The actual records of the expenditures may be called for (Art. 292). ITEM: INTEREST (For interest on Liberty Bonds, etc., see below) 11. Interest on bank deposits, etc. — This is income for the year when credited on the books (Art. 53). Likewise interest coupons when due and payable are in- come, even though not yet cashed (Art. 53). If defaulted they are income when paid (Art. 53). 4 12. Non-taxable interest. — (1) The interest on State bonds or any political subdivision thereof or the District of Colum- bia (213b (4) ). (2) Interest on Federal Farm Loan Bonds (Sec. 213b (4) ). (3) Interest not in excess of $300 received from 1922-1926 as dividends or interest from mutual domestic building or loan associations (Sec. 213b (10) ). • (4) Interest accrued before March 1, 1913 (Art. 90). None of these items need be reported on the return. All the interest from tax-free covenant bonds is to be re- ported (Sec. 221d) ; for credit for taxes paid at source, see Par. 154. Taxes paid on interest from tax-free covenant bonds are not taxable income (Sec. 234a (3) ). 13. Bonds sold between interest dates. — When the price is plus accrued interest the seller reports the interest for the period he held the bond and the purchaser for the period he holds the bond (Bull. 3, p. 90; Sol. Op. 46). ITEM: INCOME FROM PARTNERSHIPS, (PER- SONAL SERVICE CORPORATIONS) AND FIDUCIARIES (For partnerships generally see Par. 158) 14. Partnerships. — Partnerships themselves are not taxed. A partner must return whatever income he received and his share of any profit he is entitled to, even though it is not distributed (Sec. 218a). Of course if he pays one year on any profit not distributed he does not have to pay on it again when he receives it (see Art. 1570). If there is a loss' in the business his share of the loss should be entered and subtracted from any gains in the return (Art. 332). 15. Different fiscal years. — If the partnership year is dififerent from the partner's, he returns his share for the entire partnership year which ends before his (Sec. 218a). For the fiscal years 1920-1 and 1921-2 there is an ad- justment of the taxes because of the different Revenue Acts and rates (Sec. 205c and Arts. 334 and 335). 16. Credits. — From the profit of the partnership there must be deducted his percentage of the interest received 5 from Liberty Bonds held by the partnership and also of dividends from corporations received by the partnership. That is, if he gets one-third of the profits, he deducts from • his profits one-third of such interest and dividends. What is left from his share of the profits after this deduction is entered in this item (Sec. 218b). (For Personal Service Corporations generally see Par. 159) 17. Personal service corporations. — They are not them- selves taxed until Jan. 1, 1922. Until then they are treated like partnerships. Therefore each stockholder must return any dividends he received plus his share of the profits not distributed at the end of the fiscal year of the corporation ending at the same time with or before his own (Sec. 218d). This applies to earnings accumulated from 1918-1921 ; earn- ings from Feb. 28, 1913 to Jan. 1, 1918 are returned as divi- dends; see Par. 113 (Sec. 201a). For the fiscal year 1920-1 see Art. 337. For the fiscal year 1921-2, there is an adjustment, as com- mencing with Jan. 1, 1922 it will be treated like an ordinary corporation, and the members will be taxed only upon divi- dends declared (Sec. 218d and Article 338). 18. Credits. — From his share the stockholder may de- duct his proportionate share of the interest on Liberty Bonds owned by the corporation and also of dividends re- ceived by the corporation. If he owns five per cent, of the stock, he deducts five per cent, of such interest and divi- dends from his share of the earnings. What is left after the deduction is entered in this item (Sec. 218d). See also Art. 339. (For fiduciaries generally see commencing at Par. 160) 19. Fiduciaries. — Any income received from a fiduciary, i. e., a trustee, receiver, executor, or administrator, must be here reported. Of course if the income is such that the tax has already been paid by the trustee (see Par. 165), the bene- ficiary need not pay on it again (Art. 344), and so should not return this. Any legacies or gifts are not to be reported; only the income from them which is taxable to the beneficiary (Sec. 213b (3) ). 6 20. What must be reported. — Any income to be dis- tributed at regular intervals, as every year, etc., must be reported and the tax on it paid by the beneficiary. It makes no difference whether it is received or not. Also any in- come, given or credited, from an executor or administrator is taxed to the beneficiary. In the latter case note that it must be received or credited. In the former case it is to be taxed if it is accumulated in the trust, even though not paid or credited (Sec. 219d). These are the only two kinds of income from trusts or estates to be returned by the beneficiary except that any income collected by a guardian of a minor is to be reported by the minor (Sec. 219d) and see next Par. 21. 21. Revocable trusts. — Where the person establishing a trust reserves the right to revoke it, the trust is not treated as a unit for purposes of computing the tax, and all of its taxable income is included as part of the taxable income of the person who established the trust (Art. 341). The trus- tee in such a case merely makes a return. 22. Different fiscal years. — If the fiscal year of the bene- ficiary is different from that of the trust or estate, he makes the return of all income received during the fiscal year of the trust or estate ending before his own (Sec. 219d and Art. 345). 23. Credits. — The beneficiary does not get any additional personal exemption (Par. 148) because he receives income from one or more trusts (Art. 346). He is allowed to de- duct for the normal tax any interest on Liberty Bond or dividends included in the income taxable to him and only the balance is reported here (Sec. 219d). Example: A trust has income of $15,000. Dividends and interest on Liberty Bonds amount to $800. Of this income $9,000 is taxable to the trustee. In this part sup- pose $500 of the interest and dividends are included and the balance $300 are included in the $6,000 taxable to the beneficiary. The beneficiary would here enter only $5,700. ITEM: INCOME FROM RENTS AND ROYALTIES 24. How reported. — The rent need not be reported sep- arately for each tenant or source, unless $1,000 or over an- nually is received. 7 Taxes assessed to the landlord and paid by the tenant are to be returned as additional rent (Art. 109). For income by reason of new buildings, etc., put up by a lessee which belong- to the lessor see Art. 48. 25. Repairs. — See Par. 53. Where a single home is occu- pied by the owner, no deduction for repairs may be made. If it is a double house of which the owner occupies one part, one-half may be deducted, etc. (see Art. 162; see also Bull. 37-21, p. 7; O. D. 1026). 26. Depreciation. — See commencing at Par. 54. It may be here added that ordinarily 3-4% may be deducted for a wooden building and 2-3% for a brick building. Where the owner occupies the whole or part of a house, the same rule as to how much can be deducted for depreciation applies as in the case of repairs (Par. 25), (Art. 162). When such property is sold only the depreciation if any that it was permissible to deduct will be added to the sale price (see Par. 83). (Art. 1561). 27. Other expenses. — Premiums for fire or accident insur- ance may be deducted. Where the owner occupies the whole or any part, the same rule as to how much may be deducted for expenses applies as in the case of repairs (Par. 25) and depreciation (Par. 26). (See Aft. 291.) 28. Interest. — All interest paid in connection with real estate may be deducted, no matter whether the owner oc- cupies or not (Sec. 214a (3) ). 29. Taxes. — All taxes paid on the property may be de- ducted, no matter whether the owner occupies or not (Sec. 214a (4) ). Taxes paid for the landlord by the tenant are deductible by the landlord (Art. 109). 30. Royalties. — This is the income on patents, copyrights, etc. (see Art. 541). The cost of securing the patent or copy- right is not a deductible expense (Art. 293). Depreciation is allowed to be deducted computed as shown in Par. 56. 31. Loss in this item. — If there is a loss in this item enter it as a minus and deduct it from gains in other items, if any. ITEM: PROFIT OR LOSS FROM BUSINESS OR PROFESSION 32. General statement. — It must be borne constantly in mind that we are dealing in this schedule with income from a business or trade or profession. In particular it must be remembered that the various deductions for expenses are al- lowed only insofar as incurred in such business, trade or pro- fession. Personal expenses cannot be deducted in this sched- ule nor in any other (see Par. 71). 33. Compensation for services extending over more than one year. — Where one lump sum is paid for services extend- ing over more than one year, it will be income for the year it is so paid, and those paying it may deduct it only in that year. This applies to lawyer's fees. If, however, the contract can be said to be divisible so that a distinct part is chargeable to a particular year and a separate bill was rendered or was ren- derable, those reporting on an annual basis may report such parts separately each year and those incurring the expense must deduct it each year (Art. 32 and Bull. 4, p. 98; Ct. D. 10). See also 1-3-29; A. R. R. 702. Total Sales 34. Trade discounts. — Trade discounts actually taken will be deducted from the sale price either directly or by way of a separate account. In one case it has been held that such deduction for the past year may be made any time up to the' time of the making of the return (Bull. 1, p. 221 ; O. D. 146). Materials and Supplies 35. Cash basis. — If the business is one where no inventory is required and is run on a cash basis, you may include here the cost of all materials and supplies whether used or not (Art. 102). This applies to professional men (Art. 104). Merchandise Bought for Sale 36. Trade discounts. — In figuring cost trade discounts taken must be deducted (Art. 1583). 37. Transportation charges, etc. Costs of transportation and other like charges may be figured in as part of the cost of the merchandise (Art. 1583). 9 Inventory 38. Where required. — In all businesses dealing with the production, purchase or sale of merchandise, inventories are required to be made at the beginning of the year and at the end of the year. Form 1126 must be filled out and filed with the return (Art. 1581). 39. What included. — Only goods to which the taxpayer has title are to be included. Goods consigned are to be in- cluded. It makes no difference where the goods are. Goods sent F. O. B. shipping point to the taxpayer are to be in- cluded, even while in transit. Goods sent by the taxpayer F. O. B. shipping point are not to be included (Art. 1581). All goods whether finished or not are to be included (Art. 1581). If the goods are mixed up so that it cannot be determined what invoices they go with, they are to be considered as the goods last purchased (Art. 1582) ; for optional method see Art. 1582, 3d Par. 40. How figured. — Inventories may be figured (1) at cost, or (2) at cost or market, whichever is lower. All goods must be treated consistently according to one method or the other. They cannot both be used. To change from one method to the other permission must be secured from the Commissioner (Art, 1582). For new special rule as to unsaleable or defec- tive goods see Art. 1582, 2d Par. Salaries and Wages 41. Reasonable allowance for services rendered. — Salaries and wages are allowed as an expense when they are reason- able and for services rendered (Sec. 214a (1) ). See in general as to what are reasonable salaries Art. 105 and Bull. 3, p. 133; L. O. 1045. They are deductible for the year they are incurred or paid. Where services extend over more than one year see Par. 33. 42. Own salary, wife's or children's. — If you work your- self deduct your own salary here; likewise the salary of your wife, but not of your minor dependent children (Art. 291) ; your salary must be returned as income. The salary of your wife should preferably be reported in a joint return or in her separate return (Art. 401). 10 43. Not paid in money. — Whenever salaries or wages are paid otherwise than by money the market value of what is given is deductible (see Art. 22 and Art. 33). 44. Increase in salaries. — Increases in salaries agreed upon after the year is over cannot be made to apply to the past year and cannot be deducted as an expense for the past year (Bull. 4, p. 131; A.R. R. 493). 45. Bonuses. — Bonuses given to employees may be de- ducted if when added to the regular salary, they do not amount to more than a reasonable compensation (Art. 107). A bonus given at the end of an employee's service is de- ductible as well as the annual bonuses (37-21-1814; O. D. 1029). 46. Allowance to widow of employee. — See Par. 16. 47. Traveling expenses. — See Par. 77 . Rent 48. Rent paid for business property not owned by the taxpayer is deductible. If the taxpayer has to pay the taxes he may add this as part of the rent (Art. 109). For treatment of capital improvements made by lessee which belong to lessor, see Art. 109. A professional man may deduct the rent (or the part there- of) paid for office room (Art. 104). Interest 49. Interest deductible. — All interest paid in connection with the business is here deductible. If the money is used in the business it makes no difference that the loan is secured by tax-exempt securities (Sec. 214a (2) ). Interest paid because taxes are paid late is deductible (Bull. 2, p. 227; O. D. 922). 50. Interest not deductible. — No deduction may be taken for any allowance by way of interest on your own capital invested in your own business (Art. 122). Taxes 51. Deductible taxes. — All business taxes, except those listed in the next paragraph, are deductible (Sec. 214a (3) ). 11 Automobile licenses used in the business are here deduct- ible (Art. 131). Revenue stamps used in the course of busi- ness are here deductible. Penalties added to the Federal taxes are deductible except when imposed for fraudulent conduct (Bull. 1, p. 241 ; O. 926). Interest on taxes is deductible as interest, not taxes, see Par. 49. 52. Taxes not deductible.— (Sec. 214a (3) ). (1) Federal income and excess profits taxes. (2) Local betterment assessments. (3) Foreign income and excess profits taxes allowed as a credit directly against the amount of the tax (Par. 155). If any part is not allowed as a credit (see Par. 155) it is de- ductible under Par. 51. 4. Taxes on stockholder's interest paid by corporation. Repairs 53. Repairs. — This refers to the ordinary incidental ex- penses necessary to keep things in good condition. It does not include depreciation or replacements (Art. 103). Amounts expended for books, furniture and instruments are not repairs (Art. 104). A deduction is allowed for a proper proportion only of the expenses incurred (and depreciation sufifered) when a car bought for personal use is at times used for business purposes (Bull. 3, p. 131; A. R. R. 266). Wear and Tear 54. Depreciation. — A reasonable allowance for the wear and tear of property used in the business (Art. 162) may be deducted (Sec. 214a (8) ). The mere fact that the value of goods has decreased due to fluctuation in the market is not depreciation (Art. 161). The reason for the deduction is the gradual loss of your capital investment. 55. For what property. — (1) All real and personal property used for business pur- poses, but not stock in trade, etc., which are included in in- ventories ; automobiles used in a profession. See Par. 53. No depreciation is allowed for land : only for buildings. (2) Patents, copyrights, licenses, franchises having a lim- ited duration (Art. 163). 12 (3) Other intangible property, as good will, if it can be shown that it will last only a limited time. The full facts must be furnished to the Commissioner (Art. 163). Note. — No depreciation is allowed on stocks, bonds, etc. (Art. 161). No depreciation is allowed on property for per- sonal use or pleasure, as personal automobile, building used for residence only (Art. 162). 56. How to figure. — Estimate how long the property can be used and divide the cost by the number of years. The sum thus given is the amount to deduct each year. If the property was acquired before March 1, 1913, take the market value on that date and figure the number of years from that time. This market value, unless otherwise shown, will be considered to be cost minus depreciation up to March 1, 1913 (Art. 164). Where goods are acquired during the year only a proportionate share of a year's depreciation may be taken (1-2-18; I. T. 1158). Other methods are allowed. The method adopted must be set out in the return (Art. 165). 57. When taken. — To be allowable the deduction for de- preciation must be charged off on the books (Art. 169). This may be done even after the year is over (Bull. 4, p. 64; A. R. R. Z77^. If the return has already been filed, permission may be given to amend the return to deduct depreciation not charged off or not sufficiently charged off. It is wrong to de- duct more for depreciation any year because you failed to de- duct it before (Art. 167). 58. Obsolescence. — If property not stock in trade becomes useless in the business due to changes in business conditions or to new inventions, etc., its value less the cost of salvage may be charged off as a loss. Full explanation must be given in the return (Arts. 143, 167 and 170). In certain exceptional cases good will may be the subject of obsolescence (Bull. 2, p. 141 ; O. D. 472). 58a. Depletion.— See Sec. 214a (10). Losses 59. General statement. — All losses incurred in the business and not compensated by insurance are deductible (Sec. 214a (4) ). Here are entered only property losses due to fires, storms, 13 shipwreck, or other casualty or from theft. For losses on the sale of capital assets see commencing at Par. 81. See also Par. 135. 60. Amount of loss. — In such cases the value as of March 1, 1913 is taken as a basis for computing the loss (Sec. 214a (6) ). Example: Property costs $1,000 bought 1910. On March 1, 1913, it was worth $1,500. It was thereafter partially damaged by fire so that it was worth only $500. The de- ductible loss is $1,000. 61. Year taken. — All losses must be taken for the year act- ually sustained. If ascertained after the return is filed, an amended return should be filed. The loss should not be taken for the year when discovered (Sec. 214a (6) and Art. HI). Some overlapping is allowed, if consistently done (Art. 111). Example : Theft discovered the next year. Loss belongs to year loss occurred (Art. 111). (a) The rule applies even though part of the loss is paid for by insurance the second year (Bull. 1, p. 123; T. B. R. 55). 62. Special provision. — Where substantial financial loss or sacrifice would result, the Commissioner upon applica- tion may allow the loss to be deducted for a different year. The return should be made out with the loss deducted for the year it was sustained and permission to change should be asked in an application setting forth the facts, attached to the return. This applies to the returns from 1917 on (Art. 146). It does not apply to shrinkage in inventory. 62a. Amortization. — See Sec. 214a (9). Bad Debts 63. To what applies. — This section on bad debts concerns only those reporting on the accrual basis, as no bad debt may be charged off unless it has already been reported as income in the same return or a previous return when contracted. This includes debts for salaries, wages, etc. (Art. 152). Notes and accounts receivable which were purchased may be charged off only to the extent of their cost (Arts. 151 and 152). For worthless purchase mortgage debt see Par. 107. 14 64. Two methods, — Taxpayers are given the choice either (1) of charging off debts in whole or in part or (2) setting up a reasonable addition to a reserve for bad debts which will be deductible (Sec. 214a (7) ). They may choose whichever method they desire, no matter what their past practice has been. They must state with their return which method they select and may not change there- after without permission from the Commissioner (Art. 151). 65. Charged off wholly. — If the circumstances show that no part of the debt is recoverable, it may be wholly charged off. It is not essential that suit be brought or that the debtor be bankrupt (Art. 151). 66. Charged off in part. — Whenever this is done, there must be a sufficient reason in the case of each debt. No gen- eral average partial reduction is permissible. A statement must accompany the return explaining the de- duction (Art. 151). 67. When charged off. — Bad debts to be deductible must be actually charged off on the books before the year ends (Sec. 214a (7) ). 68. A reserve for bad debts. — Those adopting this method must file a statement witTi their return. You must first figure what reserve should have been set up at the close of the pre- vious year, which then of course was not and would not now be deductible. Charge to reserve the debts charged off during the year: those outstanding Dec. 31, 1920 are deductible, those accruing later are not deductible. A reasonable sum may then be added as a reserve which also is deductible (Art. 155). Example: Suppose on Dec. 30, 1920, you would have set up a reserve of $5,000. During the year you charged off $3,000, of which $1,800 were outstanding Dec. 31, 1920. For next year you estimate you need $6,000 as a reserve. To the $2,000 which would be left, you may add $4,000. The $4,000 is deductible as well as the $1,800. 69. Secured debts. — Mere fluctuation in the value of a security is no cause for any deduction. If, however, it can be shown to the satisfaction of the Commissioner that a part of the debt will not be collected for reasons other than market 15 fluctuation of the security such part may be deducted. If the security is entirely worthless (and nothing can be recovered from the debtor) the entire amount of the debt may be al- lowed as a deduction. When the security is sold for less than the debt and nothing can be recovered from the debtor, the balance still owed is allowed as a deduction in whole or in part for the year when it is definitely ascertained that it will not be paid. This rule applies whether the creditor is the purchaser or some one else. If the creditor buys in the se- curity for the amount of the debt there is no gain or loss until the security is sold or disposed of (Art. 153). Other Expenses 70. Capital charges. — Certain expenditures in the nature of a permanent investment, as for buildings, machines, etc., may not be deducted as an expense nor any expenditures in con- nection therewith (Sec. 215a (2) ). Such are (1) Commissions for purchase of business prop- erty (Art. 293), (2) cost of defending suits relating to busi- ness property (Art. 293). Such charges are added as part of the cost. For expenses of administration see Par. 162. 71. Personal expenses. — Expenses for one's self or for the family are not deductible (215a (1) ). Such are: (1) Life insurance (Art. 291). (2) Allowances to children (Art. 291). (3) Alimony (Art. 291). (4) Insurance on own dwelling (Art. 291). 72. Year in which deducted. — The rule is the same as in Par. 61 : the expense is deducted in the year it is paid or in- curred. Examples: 1. Goods bought one year and returned in damaged condition the next year. Loss belongs to latter year (Bull. 2, p. 155; A. R. R. 155). 2. Contingent claims. No deduction can be taken until it is determined that a loss will be suffered (Bull. 2, p. 137; O. D. 556). 3. Unliquidated claims. This is charged to the year when liquidated by judgment, agreement, or otherwise (Art. Ill and Bull. l,p. 217; S. 983). 16 73. Insurance. — Premiums paid for accident insurance connected with the business against liability to employees or to any one else, premiums paid under Workmen's Compen- sation Acts, premiums for fire insurance on business property are deductible (Art. 101). Premiums paid for life insurance on life of employee where taxpayer is a beneficiary are not deductible (Sec. 215a (4) ). Life insurance put on for the benefit of the officers or employees is deductible (Art. 294). 74. Other professional expenses. Dues to professional so- cieties, subscriptions to professional journals, expense of fuel, light, water and telephone used in the office may be deducted (Art. 104). 75. Pensions. — Pensions paid to employees or their fam- ilies are a deductible expense (Art. 108). 76. Allowance to widow of employee. — The amount ordi- narily earned by a deceased employee ^aid to the widow for a limited period is allowed as an expense (Art. 108). Amounts paid beyond that period are not allowed (36-21-1798; O. D. 1017). 77. Traveling expenses. — All traveling expenses may be here deducted. The entire amount spent for board and lodg- ing is deductible (Sec. 214a (1) and Art. 101a). See also Par. 10. 78. Damages for injuries. — Any amount paid to employees or any one else for injuries sustained in connection with the business not covered by insurance may be deducted. It need not be as a result of a suit; it may be by agreement (Art. 108). Loss in Business 79. Effect for same year. — If there is a loss in the business it is to be subtracted from any gains in the other items. 80. Deduction of net loss in business against income of later years. — If the business schedule is minus, that is if there is a loss, this to an amount figured below may be set off against the net income of the following year, and if this net income is less than the loss the remainder of the loss may be set off against the net income of the year after. If there is a loss in the sale of business capital assets it is to be added to this loss; if there is a gain it is to be subtracted. This cannot be used until 1922 for loss in 1921. 17 The amount of such loss that may be so set off is figured as follows (Sec. 204; Arts. 1601 and 1602) : Take the entire net income for the year. If this is positive, you need proceed no further as no deduction will be allowed. If this is minus proceed and add : (1) Difference if any between (a) interest received from entirely tax-exempt securities (see Par. 12 and Par. 121) and (b) non-deductible interest paid to purchase or carry tax- exempt securities (Par. 130). If (b) is greater, ignore this item. (2) Difference if any between (a) deductible losses on transactions outside the business and (b) all the taxable gains or profits outside the business. If (b) is greater, ignore this item. If their sum is less than the minus, the difference is the amount that may be deducted. If only one item is positive, if that is less than the minus, the difference is the amount that may be deducted. If their sum or either one is greater than the minus, there is no deduction. If both items are nega- tive the whole original minus is to be deducted. Examples: (1) Net loss in business (and sale of capital assets thereof) $5,000 Net income on entire return $3,000 No deductible loss. (2) Net loss in business, etc $5,000 Net loss on entire return $2,000 Interest from tax-exempt securities $100 Non-deductible interest 40 $60 Losses on transactions outside busi- ness $1,500 Gains on transactions outside busi- ness 600 $900 $960 Deductible loss against future years $1,040 (Art. 1605.) This deduction is open to a partnership business and busi- ness carried on by trustees (Sec. 204c and Art. 1603). For fiscal year 1920-1 see Sec. 204d. 18 ITEMS: PROFIT OR LOSS FROM SALE OF REAL ESTATE PROFIT OR LOSS FROM SALE OF STOCKS, BONDS, ETC. 81. General statement. — These two items will be treated together, as the rules applicable to them are practically the same. The one item, of real estate, always involves the ques- tion of depreciation (see Par. S3) ; stocks and bonds do not, although patents and copyrights which come in the same item, do. Instead of the word "profit" the word "gain," which is found in the statute, will be used. These items include the sale of capital assets of any kind, whether used in business or not, but not stock in trade. It includes in certain cases the sale of good will when sold with the business it belongs to (Art. 41). There are special rules for sales on the installment plan (Arts. 42-45). However, although all gains are income, all losses are not deductible. See Par. 85. Gain from the sale of tax-exempt securities is taxable (Bull. 3, p. 49; CD. 737). For year profits and losses are returned see Pars. 4 and 61-2. 82. No gain or loss. — No gain or loss occurs until the property is sold or disposed of. Mere increase or decrease in value does not constitute gain or loss (Arts. 23 and 144). A donor suffers no gain or loss when making a gift (Art. 141). No gain or loss is registered when property passes to an executor, administrator, trustee, heir or legatee. A gain or loss occurs only when the property is sold by such a person (Art. 1563). Likewise, there is no loss if a life tenant re- ceives his estate after it has shrunk in value (Sec. 215b and Art. 295). Worthless stock is treated as a bad debt. See Par. 141. 83. Effect of depreciation on sale or disposition of prop- erty. — When property is sold or disposed of, the amount of any deductible depreciation charged off against the property should be added to the sale price to compute the gain or loss (Art. 1561). In the following paragraphs and examples it will be as- 19 sumed that this is done in each instance, in order not to com- plicate matters. See in general commencing at Par. 54. In the sale of a dwelling used solely as a residence by the owner as no depreciation was deductible, none need be added to the sale price. 84. When made on sale of real estate. — Gain or loss on sale of real estate as well as any other property is made or incurred on the day the deed is passed, not on the day the contract is made (Bull. 2, p. 78; A. R. R. 13). 85. Non-deductible losses. — (1) Shrinkage in inventory is not a deductible loss, except as reflected by the inventory. (2) Losses from illegal transactions as gambling are not de- ductible (Art. 141). (3) Losses on transaction not entered into profit, as buying a dwelling house for personal residence only (Art. 141). (4) Shrinkage in value of life estate see Par. 82. (5) Loss on sale of capital assets of a trust when the in- come of the life tenant is not diminished. See Sec. 215b. 86. Thirty-day clause. — On sale of stock or securities on transactions not connected with the business. No loss is al- lowed where within 30 days before or after the disposition of the stock or securities substantially the same stock or se- curities are acquired (except by inheritance) and held for any time after the disposition. If only a part is acquired then only a part of the loss is disallowed (Sec. 214a (5) ). The property so acquired takes the place of the old in figuring gain or loss on any subsequent sale (Sec. 202d (3) ). Such losses in the regular course of business by a dealer in securities are deductible under Par. 59. Example: Suppose stock purchased for $1,000 and sold for 800; repurchased within 30 days for $775. No loss is allowed and the last stock bought is still figured as costing $1,000. Example: Ten shares bought @ 100 for $1,000. Sold @80 for $800. Three repurchased within 30 days @ 90 for $270. Of the $200 loss only 3/10 is disallowed, leaving a net loss of $140. The three new shares are figured as cost- ing $300. Example: Suppose A had ten shares of a certain stock and bought ten more and sold the latter ten within thirty 20 days for a loss, the loss would be deductible as the stock purchased is not held after the sale. Likewise if all twenty were sold at a loss, the whole loss would be deductible (Art. 147). 86a. Short sales. — The thirty-day rule does not apply to short sales, even though the purchase to replace the bor- rowed stock takes place within thirty days of the short sale (Art. 147). 87. Tax-exempt dividends. — On the sale of stock, any tax- exempt dividends received i. e. out of earnings before March 1, 1913 (see Par. 113) are to be added to the sale price and no loss will be allowed unless such increased sale price is less than the cost (Sec. 201b). Example: Stock cost $150. Tax-exempt dividends $40. Sale price $120. There will be no loss. Note: There will be no gain either, as tax-exempt divi- dends are ignored in figuring gains, (Art. 1543), 88. When the property can't be identified. — If property, as for example, stock is bought at various times, and a portion is sold and you can't tell which part you sold, you must take the property earliest bought to determine the gain or loss (Art. 39). . Example: 25 shares bought at 100 in 1915. 25 shares bought at 125 in 1918. 30 sold in 1921 at 150 for 4,500 can't be identified. Cost price then would be 25 (g 100 = 2500 5 (g 125 = 625 3125— gain of 1375. Property Bought or Acquired On or After March 1, 1913 89. Gain on property bought on or after March 1, 1913. — There is a gain when the sale price is greater than the cost, the amount of gain being the difference (Sec. 202a). 90. Loss on property bought! on or after March 1, 1913. — There is a deductible loss if such property is sold for 21 less than its cost. The amount of the loss will be the differ- ence between the cost and the selling price (Sec. 202a). If stock or securities see thirty-day clause (Par. 86), and if stock, rule as to tax-exempt dividend (Par. 87). 91. Gain on gifts acquired from living persons on or after March 1, 1913 and before Jan. 1, 1921, and gifts acquired by inheritance at any time on or after March 1, 1913. There is a gain if the sale price is greater than the market value of the property when acquired. Property acquired by inheri- tance dates from the date of the death of the donor. The amount of the gain is the difference between the sale price and its market value. Of course there is no gain when a legatee or heir receives a gift, only when he disposes of it (Sees. 202a 2 and 3 and Art. 1563). See also Par. 164. 92. Loss on gifts acquired from living persons on or after March 1, 1913 and before Jan. 1, 1921, and gifts acquired by inheritance at any time on or after March 1, 1913. There is a deductible loss if the sale price is less than its market value at the time it was acquired. Property acquired by inheritance is acquired at the date of the death of the donor (Sec. 202a 2 and 3 and Art. 1563). See also Par. 164. The gift or inheritance must be accepted for purposes of profit (see Bull. 1, p. 122; T. B. R. 35). If stock or securities see also Par. 86 and, if stock, rule as to tax-exempt dividends (Par. 87). 93. Gain or loss on gifts acquired from living persons on or after Jan. 1, 1921. — There is a gain or loss according as the sale price is greater or less than the cost to the person who gave you the gift or if he inherited it, according as the sale price is greater or less than the market value at the date of the death of the person through whom he got it. If the per- son who gave it to you himself got it by gift from a person who was living at the time of the gift, you must go back until you find a person who did not get it by gift from a per- son living at the time of the gift and take as a basis the cost to him or if he inherited it, its market value when he in- herited it (Sec. 202a (2) and Art. 1562). If this was before March 1, 1913, see Par. 94 and Par. 95. 22 To deduct a loss the gift must also be accepted for purposes of profit (see Bull. 1, p. 122; T. B. R. 35). In case of loss see Par. 86 and Par. 87 Property Bought or Acquired Before March 1, 1913 94. Gain on property bought or acquired before March 1, 1913. — There is a gain if the sale price is (Sec. 202a) : (1) More than the cost and also (2) More than the market value on March 1, 1913. The amount of the gain, if any, is determined as follows (Sec. 202b) : (1) Find the diflference between the sale price and cost. (2) Find the difference between the sale price and the market value March 1, 1913. Take the lesser of the two. Note. If the property is such that depreciation is allowed, any depreciation since March 1, 1913 should be added to the sale price in figuring the gain (Art. 1561). Note. If the property was acquired by gift or inheritance instead of taking the cost take the market value when ac- quired. Property acquired by inheritance dates from the death of the donor (Sec. 202a 2 and 3) and (Art. 1563). See also Par. 164. Examples : 11X1^X\>0 . Value Sale price (plus Cost March 1, 1913 Depreciation) Gain 100 125 150 25 100 75 150 50 100 110 105 None 100 70 80 None 95. Loss on property bought or acquired before March 1, 1913. — In order to have a loss the selling price must be: (1) Less than the cost and also (2) Less than the market value on March 1, 1913. The amount of the loss is determined as follows: (1) Find the difference between the cost and the sale price. (2) Find the difference between the market value on March 1, 1913 and the sale price. The amount of the loss will be the smaller sum of the two (Sec. 202b). 23 See rules as to 30-days clause (Par. 86) and tax-exempt dividends (Par. 87). Examples : Market Value Selling price (plus Cost March 1, 1913 Depreciation) Loss 150 200 175 None 150 125 100 25 150 175 125 25 150 100 125 None Note. Depreciation, if any, should be added to sale price (Art. 1561). Note. If the property was acquired by gift or inheritance, instead of taking the cost take the market value when acquired. Property acquired by inheritance is acquired on the date of the death of the donor (Sec. 202a 2 and 3 and Art. 1563). See also Par. 164. Special Cases 96. Preferred stock with common as bonus. — If the cost can be fairly divided between the two, this should be done and gain or loss can be computed in the usual way when any shares of either class are sold. If the lump sum cannot be fairly divided there will be no gain until some of the stock is sold for at least the cost of all the stock, and as the balance of the stock, if any, is sold, this will all constitute gain. No loss may be figured until all the stock is sold, and the total loss if any will be deducted in one lump sum (Art. 39). 97. Sale of stock after stock dividend. — There is no tax- able income from a stock dividend (Par. 116). Whether there is a gain or loss is determined when the original stock or the stock dividend is sold. To determine whether there is a gain or loss divide the cost of the original stock by the total num- ber of shares, original and additional, multiply it by the num- ber sold, and compare it with the sale price. There is a gain or loss according as the sale price is greater or less than such cost (Art. 1548(1) ). If you can't identify your stock in such a case you arc deemed to be selling your earliest stock and the proportionate share of the stock dividend with it (1548 (3) ). 24 Example: Bought 20 shares @ 100, 80 at @ 125. Stock dividend of 10 shares. Sold 28 @ 125 for $3500. Cost would be figured as follows : 20 original @ 100 = $2000 20 2 (that is X 10) dividend stock @ 100 = 200 20 + 80 6 from the second lot (S 125 = 750 $2950 Gain $550 98. Stock dividend of different class from original stock. — Where, for example, a stock dividend of preferred is de- clared to holders of common stock, the profit or loss on the subsequent sale of the stock is computed as follows : Suppose the cost of the original stock to be $1,000. Suppose the market value of the original common at the time of the dividend to be $750 and the market value of the preferred to be 3 (750) $500. The cost of the common will be — ( ) of $1,000, 5 (1250) 2 (500) that is, $600; the cost of the preferred will be — ( ) of 5 (1250) $1,000, that is, $400. To find the cost per share, divide these totals respectively by the number of shares of each class. This will be the basis for determining any gain or loss on a sub- sequent sale (Art. 1548 (2) ). 99. Sale of unidentified part of stock dividend. — If part of a stock dividend is declared on stock bought at various prices and it cannot be determined to what lots the stock dividend sold belongs, it will be deemed to belong to the earliest stock bought, secondly to the stock next bought, etc., to the extent that the stock dividend can belong to each lot (1548 (4) ). Example: 15 shares bought @ 50. 20 shares @ 60. 25 shares @ 55. A stock dividend of 10 shares declared on these 60. Then 8 of these ten are sold at 57. The gain is figured as follows : 25 |§ X 10 = 2i 2| @ 50 = $125.00 Saleprice 456 |§ X 10 = 3i 3i @ 60 = 200.00 Cost 444.17 |fX10 = 4i 2i@55= 119.17 Gain 11.83 8 444.17 100. Sale of rights. — The regulations provide that the en- tire amount realized from the sale of rights to subscribe for stock is income (Art. 39). In the example in Par. 100a the income would be $375. A different method upheld by a District Court is also shown. There has been no decision by the U. S. Supreme Court. No income is derived from the exercise of the right to sub- scribe (Art. 39). 100a. Court decision. — Suppose I own ten shares bought @ $100 and I am allowed to subscribe for five more @ $125 each and I sell my right to do so for $75 each. What is my taxable gain? First figure it per share and then multiply by five, the number sold. Take the sum of the original cost $1,000 and $625 the new price, divide it by the total number of shares 15 (10+5). Subtract this from the sum of the subscription price $125 plus the sale price per share of your right, $75, and you get a gain of $200 — 107§ = $92f On five shares a total gain of $461§. xu^ — tiQT' 125 200 92^ -"fr — P07^ 75 (i. e.a^) 107f 5_ Old price 200 new price 92^ 461 1 Total gain Gain per share Gain or Loss on Exchange 101. No gain or loss. — In the following cases of exchange no gain or loss is figured (Sec. 202c). 1. Exchange of property held for investment for like prop- erty. This includes the exchange of stocks for stocks, bonds, notes, or any evidence of indebtedness for any evidence of indebtedness, real estate for real estate. The exchange of bonds for stock comes under Par. 102 (Art. 1566). 2. Exchange of property used productively in trade or business for like property. Example : Machine, building. It does not include stock- in-trade or other property held primarily for sale. 26 3. Exchange of stock on a merger or reorganization of one or more corporations. 4. When one or more persons transfer property to a cor- poration and immediately receive at least 80% of the voting stock and at least 80% of all other stock. In the case of two or more persons, their stock interests must be about in the same proportion as their property interests before the trans- fer. The gain or loss would come when the new property was sold, 102. Rule for other exchanges. — In other cases than those just mentioned in Par. 101, there is a profit or loss in the case of exchanges of all kinds whenever the property received can be readily sold on the market, otherwise there is no gain or loss until the new property is sold (Sec. 202c). See Pars. 94-5. 103. New property substituted for old. — Whenever there is no gain or loss on an exchange as set forth in Par. 101 and Par. 102, the new property takes the place of the old and the cost of the old is the cost of the new and if the old was ac- quired before March 1, 1913 the new is looked upon as being acquired at the same time and the March 1, 1913 market value of the old would be that of the new (Sec. 202d). 104. Where property received on non-taxable exchange is of different kinds. — Suppose, 100 shares common bought at 250 for $25,000 is exchanged for 50 common worth $440 each, in all $22,000 and 50 preferred worth $110 each, in all $5,500. Their market value is in the ratio of 4 to 1. Their respective costs will be deemed to be in the same ratio, namely $20,000, and $5,000 respectively (Art. 1567). These will be the bases for determining future gains or losses. 105. When part of the property received has a market value and the rest has not. — Suppose a house is exchanged for stock in a close corporation (which can't be readily sold) and for $5,000 in cash (Art. 1568). First suppose the house cost $15,000. Then the cost of the new stock is deemed to be the cost of the old minus the other property which has a market value. If the stock sells there- 27 after for more than $10,000 there will be a gain, if for less, there will be a loss. Suppose the house cost $4,000. There is immediately a gain of $1,000 and when the stock or any part is sold, the whole sale price will also be a gain (Sec. 202e). 106. Sale of real estate, taking mortgage back. — If the mortgage note can be readily discounted (Art. 1564), it has to be considered equivalent to cash and the gain or loss fig- ured in the usual way (Art. 46). If the mortgage note cannot be discounted, the transaction is to be treated as an exchange. If no cash was paid in, the gain or loss will be all figured when the note is paid. If some cash is paid in the transaction is to be treated as in Par. 105 (Art. 46). 107. Purchase-Mortgage: foreclosure sale. — Where a mortgagee, who was previously the owner and sold the property, taking back a purchase mortgage, buys it in on foreclosure sale there is no gain or loss until the security is disposed of, no matter at what price it is bought in. In cases where the mortgagee had previously reported a gain at the time of his sale to the purchaser, and he buys in the property for less than the mortgage debt (and nothing further can be secured from the debtor) he is allowed to deduct this difference as a loss up to the amount of the income previously reported (Art. 46 and Bull. 4, p. 39; O. D. 842). On future sales it is figured at the original cost (less depreciation). Example: A buys a house for $2,000, subject to first mortgage of $4,000. He sells it to B, subject to the same mortgage, for $2,800, taking back a second mortgage for this amount. He reports a gain of $800. Later B defaults and goes bankrupt and A buys it in for $1,500. He may deduct only $800 as a loss. If he sells later for $1,500, he may then deduct $500 more. If he sells it for $2,000 or over there will be no loss (Art. 46). 108. Property destroyed, stolen or taken by eminent do- main or condemned. — In such a case if there are proceeds which exceed the cost and no replacement is made the differ- ence is gain (Art. 262). If, however, the entire proceeds are used to gef similar property or to buy 80% of the stock of a 28 corporation issued for such property, or if a replacement fund with the permission of the Commissioner is set aside, then there will be no gain. If only a part is used, the gain will be cut down by the same percentage (Sec. 214a (12) and Arts. 261 and 263). For losses see Pars. 59 and 137. Example : A building cost $60,000. It is destroyed by fire and $100,000 insurance received. If the money is not put to the same use as before, there is a gain of $40,000. Suppose $70,000 is reinvested, that is 7/10 of $100,000. The gain is cut down 7/10 to $12,000. The cost of the new building is reckoned at $42,000 (i. e. 7/10 of $60,000) (Sec. 202d (2) ). 109. When acquired before March 1, 1913. — When prop- erty destroyed, stolen, or condemned, was acquired before March 1, 1913, its market value on that date is to be ascer- tained and the usual rule in Par. 94 is to be followed in de- termining whether there is gain and the amount of gain (Arts. 49 and 262). The present cost of replacement is not material (see Bull. 4, p. 92; A. R. M. 122). The new prop- erty is figured at cost or March 1, 1913 value, whichever is higher (Art. 261). 110. Liquidating dividends. — Where stockholders are paid out of capital instead of out of earnings, the amount so re- ceived goes to reduce the cost of the stock. If it was bought before March 1, 1913 it goes to reduce by the same amount its market value on that day. When sold later the gain or loss is to be reckoned in the usual way on the basis of the reduced cost and value (Sec. 201c and Art. 1544). Where a corporation is liquidated entirely, the total amount received from capital is taken as a sale price and the gain or loss is figured in the usual way (see Art. 1544). Of course, if any of the liquidating dividends are out of earnings after Feb. 28, 1913, they are taxable income (Art. 1545). 111. Sale of partnership interest. — If a partner sells his interest and receives in cash or other property which has a ready market more or less than he paid in (if before March 1, 1913 it must be also more or less than his interest was worth on that day) there is a gain or loss, as the case may be. If a partner withdraws or a partnership dissolves and 29 the partner gets his share in kind, that is so much stock in trade, so much supplies, in other words there is merely a division of the partnership property, there is no gain or loss. Only when it is sold, is the gain or loss to be computed as in the case of liquidating dividends received by stockholders (see Par. 110). If there is any part of undistributed earnings in the business on which he had to pay the tax (see Par. 158), the amount of such earnings must be added to the cost of his interest in figuring gain or loss (Art. 1570). When there is a change in the partnership, the return should set out all the facts (Art. 1570). ITEM: DIVIDENDS 112. How taxed. — Dividends from domestic corporations and certain foreign corporations (Par. 129) are not subject to the normal tax, but only to the surtax. Here are to be in- serted only dividends from domestic corporations. No such item appears, therefore, on Form 1040A, which is for income of less than $5,000, as the surtax commences only with in- comes of $5,000. Item 8 on page 2 of Form 1040A is inserted for answer only to determine whether Form 1040 should be used, or in the event that it may become necessary to use it. Not only dividends received directly, but the taxpayer's proportionate share of dividends received by partnerships, personal service corporations, and fiduciaries, in which he has an interest, are all to be reported here for the surtax. These were not reported above. See Pars. 16, 18, 23. 113. Definitions. — Taxable dividends are distributions made by corporations out of earnings earned on or after March 1, 1913. Distribution from earnings of personal service cor- porations earned from 1918-1921 are not included (Sec. 201a). All distributions from earnings or appreciation in property (Art. 1543) before March 1, 1913 are tax-exempt (Sec. 201b). For their effect in figuring losses on sale of stock see Par. 87. 114. Federal Reserve Bank Dividends. — Dividends from the Federal Reserve Banks themselves are totally exempt. However, dividends from national and state banks which are members of the Federal Reserve System are taxable (Art. 76). 30 115. Out of what earnings. — As long as there are earn- ings since Feb. 28, 1913 all distributions for income tax pur- poses are deemed to be out of such earnings and are there- fore taxable. When these are all used up, the other distribu- tions being from earnings before March 1, 1913 would be tax- exempt (201b). The year they are earned makes no differ- ence as to the tax-rate. They are all taxed at the rate for the year when received (Arts. 1541 and 1542). They are deemed received when the stockholder has an unconditional right to demand the cash or property declared as a dividend (Sec. 201e). 116. Stock dividends. — Dividends in good faith in the form of stock of the corporation are not taxable (201d). Cash with option to buy stock is a cash dividend, not a stock divi- dend, and is taxable (Bull. 3, p. 22; O. D. 565). Scrip dividends are taxable and are returnable for the year when the warrants are issued (Art. 547). For taxable gains on sale of the stock declared as a stock dividend see Pars. 98 and 99. 117. Other dividends not in cash. — Dividends need not be in cash, they may be in any property (Sec. 201a). Such prop- erty is to be returned at its market value. This includes Liberty bonds whether wholly tax-exempt or not (T. D. 2512), stock of another corporation even if the stock is of a corporation to which has been transferred all or a part of the assets of the corporation declaring the dividend (Art. 1547), notes or bonds of the corporation itself (T. D. 3170). 118. Dividends by insurance companies to policyholders.— The usual annual dividends to holders of unmatured policies need not be reported, being returns of premiums : See Par. 3. Dividends on paid-up policies are to be treated as any other dividends (Art. 47). ITEM: TAXABLE INTEREST ON LIBERTY BONDS, ETC. General Summary (Art. 83) 119. Exempt from normal tax. — Interest from all U. S. obligations and War Finance Corporation bonds are exempt from normal tax without limit. Therefore as Form 1040A is 31 concerned only with income subject to normal tax it contains no item of interest from U. S. obligations. Items 9 and 10 on page 2 of Form 1040A are inserted for purposes of informa- tion in the event that it turns out that any one reporting on Form 1040A has taxable income of $5,000 or over (Art. 78). 120, Credits for Liberty bonds held by fiduciaries, part- nerships and personal service corporations. — If any interest on Liberty bonds, etc., is included in the income or a part thereof of a trust, taxable to the beneficiary, he is to include his share of such interest, which will be included in the credit for the normal tax. See Par. 147 (Sec. 219d and Art. 84a). Likewise each partner and each member of a personal serv- ice corporation return their proportionate share of Liberty bonds, etc., held by the partnership or personal service cor- poration, which will be included in the credit for the normal tax. See Par. 147 (Sec. 218b and Art. 84b). 121, What is wholly tax-exempt, — (1) Interest on all obli- gations of the United States issued before Sept, 1, 1917 (Sec. 213b (4) ) including First Liberty Loan Bonds 3|%, uncon- verted only (Art. 77). (2) Victory Loan 3f notes {hxX.. 81), including those con- verted from Victory 4f notes (Art. 82). (3) Postal Savings Certificates (Sec. 213b (4) ). No return whatsoever need be made of such interest. 122, Second, Third, Fourth Liberty Bonds, — This includes First Liberty bonds converted into Second, Third, or Fourth Liberty bonds, as well as seconds converted into thirds. All these bear either 4% or 4|% interest. Exemption 1. For all time. Interest on $5,000 of such bonds are exempt for all time. This particular exemption in- cludes Treasury Certificates of indebtedness and War Savings Certificates. In other words $5,000 worth may be divided up as you please among these three (Sec, 1328b and Art, 79). Exemption 2, Jan. 1, 1921-July 2, 1923. Additional inter- est on $125,000 of these three issues of bonds (Sec, 1328a and Art. 78), Interest before Jan. 1, 1921 (i. e. for fiscal year end- ing in 1921) must be computed according to the 1918 act (Art. 85), 32 Exemption 2a. July 2, 1923-July 2, 1926. Additional $50,000. When exemption 2 expires, exemption 2a takes its place (Sec. 1328a and Art. 78). Both Exemption 2 and Exemption 2a are in addition to Exemption 1. Exemption 3. Jan. 1, 1921-July 2, 1923. Additional $30,000. Interest from $30,000 First Liberty bonds converted into Fourth Liberty bonds 4^ (Sec. 1328b and Art. 80). 122a. No need of original subscription. — There is no re- quirement that any of the bonds need be those originally subscribed (Sec. 1328b). 123. Victory notes. — All Victory 4f notes including Vic- tory 3f notes converted into Victory 4f notes are subject to surtax (Arts. 81 and 82). For an adjustment of interest in the latter case see Art. 82. 124. Treasury certificates of indebtedness. — These are ex- empt from surtax up to $5,000, to the extent that the exemp- tion is not used up by Liberty bonds or War Savings Certi- ficates (see Par. 122). (Act of Sept. 24, 1917, c56. Sec. 7 and Act of Sept. 24, 1918, c276. Sec. 1 (3) 2d Par., and see Art. 79). 125. War Savings Certificates. — These are exempt from surtax up to $3,000, to the extent that the exemption is not used for Liberty bonds or Treasury Certificates (Par. 122). See authorities in Par. 124. 126. War Finance Corporation bonds. — These are exempt from surtax up to $5,000. (Act April 5, 1918, Sec. 16.) 127. How to compute the exemption. — If the amount held at no time exceeds the exemptions, no interest will be taxable. Otherwise each period must be figured separately. No aver- aging is permitted : interest on bonds above the exemptions are taxable, even though at other times the bonds held fall below the exemptions. For bonds sold or bought between interest dates see Par. 13. ITEM: OTHER INCOME 128. What included. — All income not elsewhere reported is to be reported here, including: 33 (1) Bad debts previously charged off or taken as a deduc- tion, but later received in whole or in part. This is accounted for the year received (Art, 51). (2) Amount by which receipts to a living person from a life insurance policy exceed the premiums paid by him or for him (see 47-21, p. 6; O. D. 1108). (Sec. 213b 2 and Art. 47). Where a policy issued before March 1, 1913 return the excess only from March 1, 1913 (Art. 90 and Bull. 3, p. 54; Sol. Op. 55). 129. Dividends from foreign corporations. — The nature of the income is asked for, as dividends from foreign corpora- tions which for three years before the end of its taxable year or for such part of three years as it has been in existence, derived more than 50% of its income from sources with the U. S. (see Sec. 217), are credited against net income for the normal tax just like dividends from domestic corporations. This must be proved to the satisfaction of the Commissioner (Sec. 216a). DEDUCTIONS ITEM: INTEREST 130. When deductible. — All interest on indebtedness not deducted elsewhere (Par. 49) may be deducted except (Sec. 214a (2) ) : 1. Interest paid to purchase or carry securities the inter- est of which is wholly tax-exempt, except (a) All U. S. obligations issued after Sept. 24, 1917 and originally subscribed for. This means any such interest paid during the year may be deducted even though from bonds sold during the year. See next Par. 2. No deduction is allowed on a cash basis for interest only accrued on obligations of a deceased person (Bull. 2, p. 114; A. R. R. 113). (a) The whole amount when paid by the executor or ad- ministrator would be allowed as a deduction (Bull. 2, p. 114; A. R. R. 113). 131. Originally subscribed. — This applies where you sub- scribed through a bank (Bull. 1, p. 88; T. B. R. 28), and where you converted your bonds into the same issue (Bull. 3, p. 124; 34 O. D. 718) but it does not apply where you inherited the stock (Bull. 3, p. 124; O. D. 742). 132. Interest on taxes. — Interest paid when taxes are paid late may be deducted (see Par. 49). ITEM : TAXES 133. General rule. — The rule is the same as for the deduc- tion of business taxes (see Par. 51). Here are entered all other taxes including- those paid on property used for per- sonal use only i. e. license fee for personal automobile (Art. 131). For inheritance and estate taxes, see next paragraph (134). Other deductible taxes are: (1) On telephone and telegraph messages. (2) On admissions and dues. 134. Estate and inheritance taxes. — Estate and inheritance taxes are all deductible (Art. 134). Where books are kept on an accrual basis, they are de- ductible at the date when due and will be deductible in the taxable year in which that date falls, unless the law of the jurisdiction imposing such taxes provide otherwise (Sec. 214a (3) ). Where the tax is on the right to transmit, the estate may deduct the tax (Art. 134, 2d Par.), as the Federal Estate Tax. Where the tax is on the right to receive the beneficiary may deduct the tax (Art. 134, 2d Par.). These two rules apply even though the taxes by the terms of the instrument may be payable by some one else (Art. 134, 3d Par.). Remainder men who have to pay without reimbursement the tax on the life estate as well as on their own estate may deduct both taxes (Art. 134, 4th Par.). ITEM: LOSSES 135. Which deductible here. — Deductible losses are (1) those incurred in business (Par. 59) ; (2) those incurred in transactions entered into for profit (Par. 81) ; and (3) certain other losses due to casualties. Only the last are here entered. 136. In what year deducted. — These losses are to be de- 35 ducted for the year sustained. The rule is the same as for business losses (see Par. 61). 137. Deductible losses. — The only losses other than losses in business and in transactions entered into for profit are where losses not connected with the business occur from fire, storm, shipwreck, or other casualty or from theft, if not cov- ered by insurance (214a (6) ). Thus damages to a pleasure auto as a result of a collision due to a slippery street are not deductible (Bull. 3, p. 158; O. D. 629). Any expense paid de- fending a suit not connected with the business is not de- ductible (Bull. 4, p. 159; A. R. R. 444). When a cause of a loss is not known, i. e., when you find your ring or watch missing, and cannot prove it was stolen, such loss is not deductible (Bull. 2, p. 130; O. D. 526). 138. Amount of deduction. — The market value of the prop- erty on March 1, 1913 in case of such destruction or damage is taken as a basis; Example: Property in 1910 cost $80,000. On March 1, 1913 worth $100,000. Damaged by fire, not covered by in- surance, so that its salvage value is $10,000. $90,000 may be deducted as a loss. ITEM: CONTRIBUTIONS 139. Contributions. — A deduction of 15% of net income is allowed for contributions to : (1) The United States, any state, territory, or any political unit therein (city, town, county, etc.), or the District of Co- lumbia for public purposes. (2) Any corporation, community fund, or foundation or- ganized and operated only for religious, charitable, scientific, literary or educational purposes, including posts of the Amer- ican Legion or the Women's Auxiliaries thereof, or for pre- vention of cruelty to children or animals. Example: A man has a net income of $5,000. He may be allowed to deduct up to $750 for contributions actually made. 140. By partnerships. — These are not allowed as a deduc- tion against the partnership income which must be reported 36 in full without any deduction. But if an individual part- ner has not used the 15% allowance, he may deduct up to the 15% his proportionate share of the contributions of the part- nership (Art. 251). Example: A partner's net income subject to tax from all sources is $10,000. He has contributions of $1,000. A partnership in which he has a -J interest contributed $2,100. He stands $700. 15% of $10,000 is $1,500. He used up $1,000 of this, he may deduct further $500 out of the $700. ITEM: BAD DEBTS 141. What included. — Here are included losses from bad debts not incurred in business previously reported as income. The rules are the same as in the case of bad debts incurred in business, see commencing at Par. 63. Stocks or bonds or claims which have become worthless are treated as bad debts and are here deducted to the extent of their market value on March 1, 1913, or if acquired thereafter to the extent of the purchase price (Arts. 90, 144, 151, 152 and 154). They may be deducted in part if the Commissioner is satisfied it is not a case of temporary fluctuation (Art. 154). 142. Indorsers and sureties. — No deduction may be made by indorsers and sureties until their liability has become fixed ; otherwise they have only contingent claims which are not deductible (Bull. 2, p. 137; O. D. 556). ITEM: OTHER DEDUCTIONS AUTHORIZED BY LAW 143. Payments to beneficiaries under a will, — This deduc- tion must be used by an executor or administrator who has paid or credited the legatees or heirs with any income due them. In this case, they, and not he, pay the tax on such income. 144. Family or personal expenses. — Attention is again called to the fact that such expenses are not deductible (see Par. 71). No deduction is allowed for any gifts (Art. 107). See also Par. 70 as to capital expenditures. 37 COMPUTATION OF TAX 145. Net income. — This is found by adding all the items which show a gain and subtracting from their sum all the items showing a loss as well as the deductions (Sec. 212a). 146. Returns for less than a year. — If a return is made for less than a year, the income is put on an annual basis by dividing it by the number of months and multiplying by twelve (Sec. 226c). Example: A person with a fiscal year ending Sept. 30 changes his taxable year to the calendar year and makes a separate return for the three months Oct. 1 — Dec. 31. He had income of $3,000. Dividing by three and multiplying by twelve we have $12,000 as the net income. When the tax is computed on this annual basis only a proportionate part is assessed, i. e., in the above example only one-fourth. 147. Credits. — For purposes of the normal tax only certain credits are allowed as a further deduction from net income. These are (Sec. 216) : (1) Taxable interest on Liberty bonds, etc., taken from item above. (2) Dividends received from corporations, taken from item above. (3) A personal exemption, see next Par. 148. 148. Personal exemption. — (1) $1,000 to every single per- son or married person not living with husband or wife (Sec. 216c). (2) $2,500 or $2,000 to every married person living with husband or wife or to every head of a family. Such persons are allowed $2,500 if the net income is not more than $5,000, otherwise only $2,000. However on incomes up to $5,020 the tax is not to be increased by this reduction to $2,000, in an amount more than the amount of income in excess of $5,000 (Sec. 216c). Example: Married man has an income of $5,015. He is allowed only a $2,000 exemption. His tax is figured as follows : 38 $5,015 $5,015 $100.60 2,000 2,500 15.00 $3,015 $2,515 $115.60 .04 .04 $120.60 $100.60 He pays a tax of $115.60 not $120.60. (a) The husband and wife may divide up the $2000 or $2500 as they see fit if they make separate returns (Sec. 216c). (b) A head of a family is one who supports one or more person connected with him or her by blood relationship, mar- riage or adoption (Art. 302) (see next Par. 149). (3) $400 additional. To every taxpayer who is the chief support of dependents (not a husband or wife) not over 18 years of age or of persons of any age incapable of self-support because of mental or physical defects (Sec. 216d). The tax- payer need not be the head of a family (Art. 304). There is no limit to the number of these $400 exemptions. Only one person can be the chief support; therefore only one person is allowed this exemption (Bull. 4, p. 214; O. D. 776). If the children receive one-half of their support from inde- pendent sources, the credit is not allowed (Art. 304). 149. How much a "head of a family" must contribute. — In order to get the exemption as head of a family it is neces- sary to show that you furnish more than one-half of the sup- port of those so connected with you (Bull. 4, p. 214; O. D. 775). 150. Date for determining amount of exemption. — The amount of exemption depends on what you are on the last day of your taxable year. If on that day you are married, you are allowed the married person's exemption. If on that day you are the head of a family or have dependents not over eighteen, you are allowed those exemptions. The same rule applies where the return is for less than a year. The status of a deceased person is determined by what he was on the day he died. The surviving spouse of a deceased married person is allowed the full exemption he or she would 39 be entitled to by the status at the end of the year, regardless of whether the executor or administrator used up the full exemption when making the return for the deceased (Sec. 216f and Art. 305). Example: A married man dies leaving a wife and two children June 15, 1921. His net income up to that time was $3,900. He is allowed an exemption of $3,300. His wife supports the children and has an income of $3,500. She is allowed the full exemption of $3,300 as head of a family and for the two children. 151. Normal tax. — This is 8% on the net income minus the credits, except that in the case of citizens or residents, it is only 4% on the first $4,000 (Sec. 210). Example: Net income $1'0,000, credits $2,500. Balance subject to normal tax $7,500. Tax, $4,000 @ 4% = $160.00 $3,500 @ 8%= 280.00 $440.00 normal tax. 152. Surtax. — This is the tax on all net income over $5,000 allowing no deduction for credits. From $5,000 to $6,000 it is 1%, and then goes up to 65^ on net income exceeding $1,000,000. For the year 1922 there are new rates. The sur- tax starts at $6,000 at 1% and goes up to 50% on net income exceeding $200,000 (Sec. 211). The sum of the normal tax and the surtax is the total tax to pay. Where the return is for less than a year, for example 5 months, only 5/12 of this total is to be paid, etc. For rates in such a case see also Sec. 226b and Art. 431. For fiscal years 1920-1 and 1921-2 see Sec. 205 a and b. 153. Elective rate for profits from sale of capital assets. — This applies only to profits made on sales made after Dec. 31, 1921. An optional flat rate of 12^% is permitted on such profits, but the total tax, that is this tax on capital gains and the regular normal tax and surtax on the rest of the income, must be at least 12^% of the entire income (Sec. 206). For capital assets included (see Sec. 206a (6) ). If the elective method is adopted, any personal exemption not entirely used up by the other income, may not be used 40 to reduce the capital gains ; nor will any loss on other income be offset against the capital gains (Art. 1651). This elective rate may be used by members of partnerships and beneficiaries of trusts for their share of capital gains in such partnerships and trusts (Sec. 206c and Art. 1653). Credits on Tax 154. Tax paid at source. — All taxes paid at the source are here allowed as a credit. In the case of citizens or residents this applies only to taxes paid on the interest of the so-called tax-free covenant bonds in which the corporation agrees to pay any normal income tax on the interest of the bonds up to 2% (Sec. 221b and (d) ). This tax so paid need not be returned as extra income (234a (3) ). Where such a bond is sold between interest dates, the purchaser alone gets the benefit of this credit (Bull. 4, p. 232; O. D. 830). 155. Foreign income and excess profits taxes. — Citizens, and alien residents whose countries allow a similar credit to U. S. citizens are allowed a credit against the tax for income and excess profits taxes paid to any foreign country. Citizens are also allowed such credit for taxes paid to any possession of the U. S. (Sec. 222a). This credit on the tax may not exceed in percentage the percentage which the income from sources without the U. S. is to the income from all sources (Sec. 222a (5) ). Partners and beneficiaries are allowed their proportionate share of such taxes paid by the partnership or trust (Sec. 222a (4) ). Where the foreign tax is too large to be all credited here, the remainder is allowed as a deduction (see Par. 52). To claim this credit Form 1116 must be made out (Art. 383). Taxes claimed on an accrual basis are subject to redetermi- nation when fixed (Sec. 222b and Art. 384). Payment of Tax 156. When due. — The whole tax may be paid at the time of making the return or the taxpayer may pay one-fourth of it and the balance in three equal payments payable every three months thereafter (Sec. 250a). If any installment is not 41 paid when due, the whole amount of the tax becomes pay- able (Sec. 250a). The installment plan is not permitted when the return is not filed on time or is false or fraudulent (Art. 1001). 157. How made. — Payments of tax may be made by uncer- tified checks (Sec. 1325). They should be made payable to "Collector of Internal Revenue at ." PARTNERSHIPS, PERSONAL SERVICE CORPORA- TIONS AND FIDUCIARIES 158. Partnerships. — Partnerships are not taxed : only the individual partners (Sec. 218a). The partnership must make an annual return on Form 1065 regardless of the amount of its net income (Sec. 224 and 227a). This is computed as in the case of an individual, except that no deduction is allowed for contributions (Sec. 218c), but see Par. 140. Only one partner need swear to it (Sec. 224). For fiscal years 1920-1 and 1921-2 see Sec. 205 (c) and Arts. 334-5. It has to file annually the usual returns on Forms 1099 and 1096 of information at the source of amounts of $1,000 or over paid to each person. Such returns are to be filed on a calen- dar year basis no matter what the fiscal year of the partner- ship is (Art. 1071). Beginning in 1922 they may Have the benefit of the elective rate on profits from the sale of capital assets (Par. 153). Where a partner withdraws, or a new partner comes in, a new partnership is formed. The old and the new partnership each file separate returns (Bull. 1, p. 190; O. D. 228). 159. Personal Service Corporations. — Until Jan. 1, 1922 they are not taxed but are treated as partnerships. Only the individual members are taxed (Sec. 218d). See Sec. 200 (5). It must make an annual return on Form 1065 (1120 for 1922) of its net income regardless of amount. No deduction is allowed for contributions (Sec. 227a and Sec. 218c and d). For a fiscal year ending in 1921, see Art. 337. For a fiscal year ending in 1922, the 1921 income will be reported on Form 1065 and the 1922 on Form 1120 (see Art. 337). 42 It files annually the usual returns on Forms 1099 and 1096 of information at the source of amounts of $1,000 or over paid to each person. These are all filed on a calendar year basis (Art. 1071). For alternative tax if present law is declared unconstitu- tional see Sec. 1332. Estates and Trusts 160. Definition. — Fiduciaries are executors, administrators, trustees, or receivers in charge of all the property of an in- dividual, guardians, etc. (Sec. 200 (2) ). A trust is established when a person is vested with legal title and is not subject to the control of others. It is to be distinguished from an agency (Art. 1522) and from an asso- ciation (Art. 1504). 161. Returns. — The fiduciary must file annually a return (Sec. 225a). The fiduciary files a return no matter whether he or the beneficiary pays the tax (Sec. 219b) for: (1) Every estate or trust with income of $1,000 or over (see Par. 163). They use Forms 1040 and 1040A if they pay the tax; if the beneficiaries pay the tax they use Form 1041 (Art. 421). If the tax is to be paid partly by the trustee and partly by the beneficiary, the trustee returns all the income on Form 1041 and returns on Form 1040 or 1040A what he pays for (Art. 347). (2) Every individual beneficiary with income of $1,000 or over, if the beneficiary is single or if he is married and not liv- ing with husband or wife. Forms 1040 and 1040A. (3) Every individual beneficiary with income of $2,000 or over, if married and living with husband or wife. Forms 1040 and 1040A. (4) Every individual beneficiary with gross income of $5,000. Forms 1040 and 1040A. (5) Every nonresident alien beneficiary, regardless of amount of income. Forms 1040 and 1040A. (6) Every estate or trust of which any beneficiary is a non- resident alien if no agent is appointed: (See Art. 425). Where there are two or more fiduciaries only one need sign and swear to it (Sec. 225b). 43 The net income is computed on the same basis as that of the individual, except that all contributions under Par. 128 allowed under the trust and chargeable to income may be deducted when paid or set aside (Sec. 219b). 162. Expenses of administration. — These expenses are charged not to income but to capital and are therefore not allowed as a deduction. This includes (Art. 293) : (1) Fees to administrator or executor. (2) Fee to their attorney. (3) Court costs. Such extra expenses when incurred for carrying on a busi- ness may be deductible (Bull. 4, p. 119; Sol. Op. 88). 163. Returns by trusts with same founder and same trus- tee. — Where two or more trusts whose income is taxable to the beneficiaries are founded by the same person and are in charge of the same trustee, only one return on 1041 need be made by the trustee (Art. 423). 164. Sale of capital assets by fiduciaries of estates. — As has already been stated (Par. 82) there is no gain or loss at the death of a decedent by transfer of title to his property to an executor or administrator or by their transfer in turn to a trustee. When there is a sale, there will be a gain or loss according as the sale price is more or less than the market value at the date of the death of the decedent (Arts. 343, 1563 and Bull. 2, p. 34; O. 1012). This rule applies to vested re- mainders (Bull. 3, p. 50; Sol. Op. 35). But a contingent re- mainder is valued as of the date of the death of the life tenant (Bull. 3, p. 53; O. D. 727); where a life tenant's estate has shrunk in value between the date of death and his receiving it, there is no loss (Art. 295). Where property is bought by the fiduciary the basis for computing gain or loss is the cost, whether the property is sold by the fiduciary or by the beneficiary (1-3-28; I. T. 1165). If bought before March 1, 1913 see also Pars. 94-5. Where the personal estate is sufficient to take care of all debts a gain or a loss on sale of real estate will not be re- ported or deducted by the fiduciary (Bull. 2, p. 175; S. 1229a). Such gain or loss would be reported or deducted by the beneficiaries (see Art. 342). 44 Gain or loss on the sale of capital assets by a fiduciary is gain or loss to the fiduciary (Art. 343 and Bull. 1, p. 181 ; O. D. 156). 165. When the fiduciary pays the tax. — (1) Income re- ceived by estates (Sec. 219a). If, however, this is paid or credited to the legatee, heir, or other beneficiary, the bene- ficiary pays in the amount so paid or credited (Sec. 219 c and d). (2) Income accumulated for unborn, or unascertained per- sons or persons with contingent interest (Sec. 219a). (3) Income held for future distribution under the terms of the trust (Sec. 219a). (4) Income which trustee may in his discretion accumu- late or distribute (Art. 342). (5) Income of trust with nonresident alien beneficiary, if the trustee makes the return ; see Par. 164 (6) and Art. 425. Each trust or estate is allowed as credits for the normal tax an exemption of $1,000, and the amount of dividends and taxable Liberty bonds, etc., interest received (Sec. 219c and Art. 84a). This does not apply to (5). See also Par. 150. It makes no difference that the ultimate beneficiary is a tax-exempt corporation (Art. 342). Each trust will be taxed separately (Bull. 1, p. 175; O. D. 316). 166. When the beneficiary pays the tax- — (1) Income of an estate received from the executor or administrator (Sec. 219c and d). (2) Income to be distributed periodically, even though at irregular intervals. The money need not be actually dis- tributed (Sec. 219d). (3) Income collected by a guardian of an infant subject to orders of the court (Sec. 219d). (4) Income from a revocable trust (see Par. 21). For credits, etc., see Par. 23. Of course if the fiduciary has already paid the tax the bene- ficiary need not pay again on the same income (Art. 344). 45 PART II. INCOME TAX ON CORPORATIONS This part deals almost entirely with the tax on domestic corporations, those organized in the United States, although most of its provisions are applicable to foreign corporations. For foreign corporations see in particular Sees. 232 and 233. For special domestic corporations see Sec. 262. The income tax on corporations is in many respects similar to the tax on individuals in Part I. Miscellaneous Provisions 167. Definition of corporation. — The term corporation in- cludes associations, joint-stock companies, and insurance com- panies (Sec. 2 (2) ). For special provisions with respect to insurance companies see Sees. 242-247. An association is distinguished from a partnership in that its affairs are managed by officers and the interests of the members are transferable without the consent of the others (Art. 1503). A Massachusetts Trust is not an association (see Par. 160 (Art. 1504) ). 168. Corporations subject to the tax. — All corporations not expressly exempted are subject to the tax. This includes: (1) Corporations dissolved during the year (see Art. 621). (2) Corporations commencing business during the year (see Art. 621). (3) Personal service corporations, in effect Jan. 1, 1922 (Sec. 231 (14) ). See also the special provision in Sec. 229 permitting certain individuals or partnerships incorporating within four months after the passage of the Act (Nov. 23, 1921) to be taxed as corporations from Jan. 1, 1921. 169. Tax - exempt corporations. — Labor organizations, mutual savings banks, fraternal societies, social clubs, civic organizations, religious, charitable, educational, etc., corpora- 46 tions are not subject to the tax. The full list is set forth in Section 232. This applies to foreign as well as domestic corporations. Tax-exempt corporations are subject to the provisions about withholding and furnishing information at the source (T. D. 2693). Corporations claiming exemption must file an affidavit with the collector as to the facts together with copy of charter and by-laws. Once the exemption is granted, nothing further need be done, unless the character of the organization changes (Art. 511). Returns 170. By what corporations made. — All corporations not tax-exempt (Par. 168) must file a return on Form 1120 (Sec. 239a). This includes: (1) Corporations doing no business, if not dissolved. This should be stated in the return (see Art. 621 and Bull. 4, p. 307; CD. 882). (2) Corporations with no taxable income or without any net income. (3) Corporation buying out another corporation as well as the corporation bought out (36-21, p. 15; O. D. 1025). Where there is merely a transfer of the assets to a new corporation the stockholders remaining the same, only the new corporation need file a return for the year including its own income and that of its predecessor (48-21-1950; O. D. 1119). (4) Personal service corporations (Sec. 239b). For form see Par. 159. 171. When and where made and by whom sworn to. — The time to make the returns is the same as for individuals (see Par. 239) (Sec. 241a). Foreign corporations not having any office or place of business in U. S. are subject to the same rules as nonresident aliens (Sees. 241a and 227). The returns are to be filed in the district where the prin- cipal place of business or office or agency is. If it has none in the U. S. it is to be filed with the collector at Baltimore, Mary- land (Sec. 241b). The return is to be sworn to by the President, Vice-Presi- dent or other principal officer and by the Treasurer or Assis- 47 tant Treasurer. In the case of a foreign corporation without an office or place of business in the U. S. but having an agent here, he shall make the return (Sec. 239a). For receivers, assignees and trustees in bankruptcy see Sec. 239a. For extensions, etc., see Pars. 242-4. 172. Consolidated returns. — Beginning with Jan. 1, 1922 affiliated domestic corporations may if they wish file a consol- idated return. Until then they must file consolidated returns (Sec. 240a and e). Corporation electing on or after Jan. 1, 1922 to file consol- idated returns must continue to do so unless permission to change is granted by the Commissioner (Sec. 240a). Corporations are affiliated : (1) If one corporation owns or controls substantially all the stock of the other or others. (2) If the same interests own or control about in the same percentages substantially all the stock of two or more cor- porations. Where at least 95% of the stock is so owned or controlled the corporations are affiliated. In the cases where 70-94% is so owned or controlled a full disclosure of the facts must be made and it is a question of fact to be decided in each case (Art. 633). Corporations may be affiliated even if the percentage is less than seventy per cent. 173. Special provision for related trades or business. — See Par. 229. 174. Returns of dividends. — Any corporation, not tax- exempt, including personal service corporations, may be called upon by the Commissioner to render a sworn return showing amounts of dividends paid to each stockholder, his address, and number of shares owned by him (Sec. 254 and Art. 1060). See Sec. 239c and Item 15 of Schedule L of the return. Forms 1120 and 1065 (see Pars. 158-9). GROSS INCOME 175. General statement. — All income from all sources, within or without the U. S. is to be reported (Sec. 233 and Art. 503) except, that 48 1. Foreign corporations report only income from sources within the U. S. (Sec. 233b). 2. Certain domestic corporations have special provisions (Sec. 262). The gains arising from any property or fund set aside as a sinking fund to secure the payment of bonds or other in- debtedness of the corporation is income of the corporation, and not of the trustee in control of the sinking fund (Art. 542). Gross or taxable income for corporations is the same as in the case of individuals (see Pars. 2-4) (Sec. 233a). 176. Gross sales. — See Par. 34. 177. Cost of goods sold.— See Pars. 35-40. 178. Gross income from other operations. — See Par. 185. This includes gains from ultra vires transactions : see Part V B VII 3 and Par. 195. 179. Taxable interest on obligations of the U. S. and War Finance Corporation Bonds. — Include here whatever w^ould be taxable in the case of an individual (Pars. 119-127). It is here included only for purposes of the excess-profits tax as all interest from such bonds owned by corporations is sub- ject in this connection only to the excess-profits tax. There- fore after Jan. 1, 1922 it will no longer be included as income (Sec. 236a and Art. 591). Each of the corporations making consolidated returns (Par. 172) is allowed the Liberty Bond, etc., exemptions in Pars. 122-6. 180. Other taxable interest.— See Pars. 11-13. 181. Rentals.— See Pars. 24-29. 182. Royalties.— See Par. 30. 183. Earnings from personal service corporations. — See Pars. 17-18. 184. Dividends. — Dividends from personal service corpora- tions out of earnings accumulated on or after Jan. 1, 1918 are not included (Sec. 201a). All other dividends are included here. Below a deduction is allowed for dividends from all domestic corporations (except under Sec. 262) and certain foreign corporations (Sec. 234a (6) ). See in general Pars. 112-118. 49 185. Income from other sources. — See Par. 128. Include here apportionable gain from sale or retirement of its bonds not reported as income in any previous year (Art. 545). A corporation realizes no gain from the sale of its capital stock (Art. 543). Deductions 186. Ordinary and necessary expenses. — Here are deducted all expenses not called for separately elsewhere, including: 1. Salaries and wages except those for officers, next Par. 187. See Pars. 41-47. 2. Rent (see Par. 48), (Sec. 234a (1) ). 3. Insurance (see Par. 73). 4. Traveling expenses (see Par. 77). See in general Pars. 70-72 and 74-76 and 78. Expenses of organization are not deductible, being a capital account, except that if merely incidental they may be de- ducted in the year incurred (Art. 582). No deduction is allowed for any charitable contributions (Art. 561) ; but where they are connected with the business as a contribution to a hospital or other institution for employees, they are deductible (Art. 562). 187. Compensation of officers. — See Pars. 41-47 (Sec. 234a (1)). 188. Repairs.— See Par. 53 (Sec. 234a (1) ). 189. Interest.— See Pars. 49-50 (Sec. 234a (2) ). Include here apportionable amount of discount on sale of its bonds and any premiums paid for retirement of bonds, not deducted in any previous year (Art. 545). "Interest" paid on preferred stock, being really dividends, is not deductible (Art. 564). Interest paid on scrip divi- dends is deductible (Art. 564). 1901. Taxes. — See Pars. 51-52. No deduction is allowed for taxes paid on interest from bonds containing a tax-free covenant clause (Par. 260). Such tax paid need not be re- ported as income by the bondholder (Sec. 234a (3) ). SO Taxes paid for shareholder upon his interest as shareholder are deductible by the corporation although not by the stock- holder (Sec. 234a (3) ). 191. Bad debts.— See Pars. 63-69 (Sec. 234a (5) ). 192. Wear and tear (depreciation) and obsolescence. — See Pars. 54-58 (Sec. 234a (7) ). 193. Depletion.— See Sec. 234a (9). 194. Amortization. — See Sec. 234a (8). 195. Profit or loss on sale of capital assets. — See Pars. 81- 110 (Sees. 233, 234a (4) and 234a (14) ). With respect to the thirty-day clause, this does not apply to incorporated dealers in securities on transactions made in the ordinary course of their business but does apply to all other corporations (Sec. 234a (4) ). A corporation suffers no gain or loss on the sale or redemp- tion of its own stock. It is entirely a capital account (Art. 543). If the assets of the corporation are distributed in kind to the stockholders, there is no gain or loss to the corporation (Art. 548). "Loss" by declaration of dividends in form of Liberty Bonds valued at market price which is less than cost is not de- ductible (Bull. 1, p. 28; O. D. 262). Where a cash dividend is declared and paid for by securities valued at market price below cost, the difference is deductible as a loss (Bull. 4, p. 27; A. R. R. 435). Losses on ultra vires transactions are not deductible (Bull. 2, p. 212; O. 968) ; for gains see Par. 178. For year loss is deductible, see Par. 81. 196. Other losses. — This refers to losses by fires, storms, shipwreck, or other casualty, or from theft, to the extent not compensated for by insurance (see Pars. 59-62), (Sec. 234a (4)). For year loss is deductible, see Pars. 61-2. 197. Net loss. — If the business shows a net loss, it may be used to offset income for the next two years as pointed out in Par. 80. In the case of corporations this amount is to be cut down only (1) by the excess if any of tax-exempt interest (Par. 12 and Par. 121) over non-deductible interest (Pars. 50 51 and 130) and (2) by certain depletion if any, without taking the deduction for dividends (Sec. 204a and Art. 1601). This does not apply until 1922 for loss in 1921, etc. Example: Net loss of corporation as shown be- fore any deduction for dividends $5,000 Tax-exempt interest $3,000 Non-deductible interest 800 2,200 Net loss to be deducted from gains of next two years $2,800 198. Dividends. — A deduction is allowed for all dividends received from domestic corporations (except under Sec. 262) and certain foreign corporations (Sec. 234a (6) ). Dividends from personal service corporations out of earn- ings 1918-1921 were not reported as dividends and are not deductible (see Par. 147). Computation of Tax 199. Credits for income tax. — The tax is on net income, that is, gross income minus the deductions (Sec. 232). In computing the income tax certain credits are allowed : (1) Taxable interest on obligations of the United States, etc., reported above. As this will not be reported after 1921 (Par. 179) there will likewise be no credit for it thereafter (Sec. 236a). (2) Excess-profits tax for the same year (see commencing at Par. 206). This likewise will disappear after 1921 (Sec. 236c). For fiscal years 1920-1 and 1921-2 see Sec. 236c (1) and (2). (3) Specific credit of $2,000 if net income is $25,000 or less. The tax without the credit is not to exceed in any event the tax with this credit by the amount of net income in excess of $25,000 (Sec. 236b). This applies only to corporations with income of over $25,000 but less than $25,200. Corporations filing consolidated returns are allowed only one credit of $2,000 (Sec. 240b). 200. Rates — Ten per cent, of net income (minus credits) for 1921. Twelve and one-half per cent, of net income (minus credit) for 1922 and thereafter (Sec. 230). 52 Example of computing tax on net income over $25,000 but less than $25,200: Take as net income $25,150 Taxable interest on Liberty- Bonds, etc $ 750 Excess-profits tax 2,250 Total credit $3,000 $22,150 10% = $2,215 10% of $20,150 (i. e. $2,000 credit allowed) = $2,015 Amount over $25,000 150 $2,165 The latter is the tax due (Art. 591). For fiscal years 1920-1 and 1921-2 see Sec. 205a and b. 201. No elective rate on profits from sale of capital assets. — Corporations are not allowed any elective rate on gains from sales of capital assets (Sec. 206b). 202. Evasion of surtaxes by incorporation. — If a corpora- tion is created or used to prevent surtaxes by allowing a sur- plus to accumulate, an additional tax of 25% shall be imposed on the net income of the corporation. If all the stockholders agree, they may be taxed upon their distributive shares as if they were members of a partnership. If it is a holding company or if the surplus is larger than the reasonable needs of the business require it shall be prima facie proof of such evasion. No tax will be imposed in the latter case until the Commissioner certifies that such accumu- lation is unreasonable for the purposes of the business (Sec. 220). Mere investment in stock of another corporation is not suffi- cient (Art. 352). Ordinarily, substantially all the stock must be owned (Art. 352). Investment in Liberty Bonds, etc., is immaterial (Art. 353). 203. Return for less than a year. — In such case first deduct a proportionate part of $2,000 credit, if it is deductible (Art. 626) and also, for 1921 only, the other two credits. Then put the net income on an annual basis (Sec. 239b and Art. 626), as in Par. 146 and proceed to compute the tax. 53 204. Credits against tax. — (1) Income taxes and excess-profits taxes paid to foreign countries or possessions of the U. S. (Sec, 238). This credit shall not exceed the same proportion of the entire tax which the net income from sources without the U. S. bears to the entire net income. This is allowed only to domestic corporations except those under Sec. 262 (Sec. 238a and f) ; where a domestic corpora- tion owns a majority of the voting stock of a foreign corpora- tion which pays the tax see Sec. 238e; Form 1118 should be filled out. (2) Taxes withheld at source on interest on bonds con- taining tax-free covenant clauses. This concerns only foreign corporations not engaged in trade or business in the U. S. and not having any office or place of business therein (Par. 260), (Sees. 237 and 221d). 205. Payment of tax. — See Pars. 156-7. EXCESS PROFITS TAX 206. General statement. — The excess profits tax is not in effect after 1921. It is a heavy tax upon the net income, com- puted in the same way as for the income tax (Sec. 320) in excess of certain credits, two in number. The one of these two credits is a sum amounting to 8% of the invested capital for the taxable year (Sec. 312). This necessitates the task of computing the invested capital. It applies to all corporations subject to the income tax (Par. 168), (Sec. 304a), except those with net incomes of less than $3,000 (Sec. 304b). All corporations with incomes of $3,000 or over must fill out the schedules for computing the excess profits tax (Sec. 336). Computation of Invested Capital, etc. 207. What included. — Invested capital includes: (1) Cash paid in for stock (Sec. 326a (1) ). (2) Tangible property, up to its value in cash. Any excess over the par value of the stock issued therefor may be in- cluded only by the permission of the Commissioner (Sec. 326a (2) ). Notes may not be included if the local law does not allow the issue of shares for notes (Art. 833). (3) Paid in or earned surplus and undivided profits but not 54 surplus or undivided profits earned during the taxable year (326a (3) ). Attention is here called to the fact that all dividends de- clared during the first 60 days of a taxable year are deemed made out of earnings of previous years ; all declared there- after are chargeable to the profits of that year to the extent of such profits (Sec. 201f). (4) Intangible property, i. e., patents, copyrights, goodwill and most contracts (Art. 811), etc., not in excess of their cash value, the par value of the stock issued for them and of 25% of the par value of all the stock outstanding at the beginning of the taxable year, whichever is lowest (Sees. 326a (4) and (5) ). If the intangible property was paid in before March 3, 1917, the amount allowed therefor must not exceed 25% of the stock outstanding on March 3, 1917; if paid in on or after March 3, 1917, the amount allowed therefor must not exceed 25% of the stock outstanding at the beginning of the taxable year. For no par value stock see Sec. 325b. Invested capital does not include borrowed capital (Sec. 326b). Dividends credited to stockholders but left in the business constitute borrowed capital if interest is paid or the stockholders share equally with or ahead of creditors (Art. 813). Securities (except U. S. obligations) the income from which is not taxable to a corporation are called inadmissable assets (Sec. 325a). If there are any, a percentage of the invested capital is to be deducted equal to the percentage which the amount of inadmissable assets is of the amount of admissable (all other assets) and inadmissable assets held during the year (Sec. 326c). The invested capital is only the average invested capital throughout the taxable year (Sec. 326d and Art. 853-4). In- come and excess profits taxes must be deducted as of the date due (Art. 845). Some dividends other than stock dividends are chargeable to surplus; see Sec. 201f referred to above in this paragraph (Arts. 858 and 859). Special attention is called to the fact that original values must be taken. Appreciation in property is immaterial as well as any March 1, 1913 values (Bull. 4, p. 373; T. D. 3181 and Art. 831). 55 For reorganizations after March 3, 1917 see Sec. 331. 208. Excess-profits credit. — Eight per cent, of the invested capital thus computed, and a specific credit of $3,000 (the latter is not allowed foreign corporations or certain domestic corporations under Sec. 262 [Sec. 312] ) are allowed as credit against net income in computing the tax (Sec. 312). Only one credit of $3,000 is allowed on consolidated returns (Art. 791). For special cases see Sees. 327-8. For returns for less than a year see Sees. 305 and 326d and Arts. 718, 732, 751, 761, 855 and 856. For fiscal years 1920-1 and 1921-2 see Sec. 335. 209. How the excess profits tax is computed. — The tax is (Sec. 301a) : (1) 20% of the net income in excess of excess-profits credit and not in excess of 20% of the invested capital plus (2) 40% of the net income in excess of 20% of the invested capital. The maximum tax is 20% of the income from $3,000- $20,000 plus 40% of the income over $20,000 (Sec. 302). Where part of income is derived from business within class of personal service corporation see Sec. 303. For tax on income from government contracts see Sec. 301b and Sec. 302. 210. Examples. — (1) Corporation with invested capital of $120,000 and net income of $50,000. The credit is 8% of $120,000 + $3,000 $12,600 20% of the invested capital is 24,000 The tax therefore is (1) 20% ($24,000— $12,600) $ 2,280 (2) 40% ($50,00a-$24,000) 10,400 $12,680 (2) Corporation with invested capital of $250,000 and net income of $10,000. The credit is 8% of $250,000 + $3,000 $23,000 No tax is due. 56 (3) Corporation with invested capital of $20,000 and net income of $5,000. 20% of the invested capital is $4,000 The credit is $l,6004-$3,000 4,600 —$600 20% of— 600 is Therefore there is no tax under this first bracket and in addition the $600 of the credit not used up is carried over into the second bracket (Sec. 301c). If nothing were carried over, $1,000 would be taxable, that is, the difference between the net income and 20% of the invested capital. Here the tax is 40% (1,000— 600) =$160.00. (4) Corporation has invested capital of $50,000, net income of $75,000. 20% of invested capital is $10,000 The credit is 4,000 + 3,000 is 7,000 The tax is 20% (3,000) $ 600 40% (75,000—10,000) 26,000 $26,600 We test this by the maximum test 20% (20,000—3,000) $ 3,400 40% (75,000—20,000) 22,000 $25,400 As this is less, the excess-profits tax is $25,400. 57 PART III. GENERAL AND MISCELLANEOUS PROVISIONS The provisions of Part IIL unless expressly limited apply to all taxpayers. 211. Name of Act and when it took effect. — The name of the present revenue law is "Revenue Act of 1921." (Sec. 1.) It was passed on November 23, 1921, at 3.55 P. M. Unless it is otherwise stated. Titles II and III, the Income Tax and Excess Profits Tax, (Sees. 200-337) take effect as of Jan. 1, 1921 (Sees. 263 and 338) ; the general administrative pro- visions in Title XIII (Sees. 1300-1332) take effect as of Nov. 23, 1921 (Sec. 1404). RETURNS Who must file a return and on what Forms Return by corporation see Par. 170. Return by partnership see Par. 158. Return by personal service corporation see Par. 159. Return by fiduciary see Par. 161. Return by nonresident alien, or his agent see Art. 404. See also Sec. 1307, providing that Commissioner may call upon any one to make a return in order to determine whether there is a tax due. 212. Net income of $1,000 or more. — All individuals who are single or who if married do not live with husband or wife, having a net income for the year of $1,000 or over must file a return (Sec. 223a (1) ). 213. Net income of $2,000 or more. — Individuals who are married and live with husband or wife, having a net income of $2,000 or more, must file a return (Sec. 223a (2) ). 214. Returns by husband and wife. — If the combined net income of husband and wife is $2,000 or over, each shall file separate returns or may file a single joint return. They must do one or the other. In the case of a joint return the tax, both the normal tax and surtax, will be computed on the combined income (Sec. 223b). 58 Example: Husband has income of $1,2CX), wife of $900. The combined income is $2,100. They must file separate or joint returns. Example: Husband has income of $60,000. The wife loses $48,000. The combined income is $12,000. They may file a joint return, and should do so, as the tax would be considerably less than in the case of separate returns. Normal tax on $58,000^ ($2,000 exemption) $ 4,000 at 4% $ 160.00 $54,000 at 8fo 4,320.00 Surtax on $60,000 8,110.00 Total tax $12,590.00 Normal tax on $10,000— ($2,000 exemption) $4,000 at 4% $ 160.00 $6,000 at 8% 480.00 Surtax on $12,000 190.00 830.00 Difference $11,760.00 215. Combined net income less than $2,000. — If the one has an income of $2,000 or over, but the other has losses which bring down the income of the one below $2,000, no return need be filed by either (Art. 401). Example: Wife runs a business and loses $500. The husband earns a salary of $2,400. The combined net in- come is $1,900 and no return need be filed. 216. Gross income of $5,000 or more. — Every one with gross income for the year of $5,000 or over must make a re- turn. It makes no difference what the net income is, that is after deductions are allowed (Sec. 223a (3) ). Gross income means taxable income. See Par. 2. In com- puting gross income to determine whether a return should be filed, leave out all non-taxable income, as in Pars. 3, 7, 12, 114, and 121. (See Art. 71). In the case of a business, the gross income is the difference between the sales and the cost. Any gross income outside the business would be added to determine whether a return need be filed (Art. 35). 59 217. Husband and wife. — If the combined gross income of husband and wife is $5,000 or over, they must file either separate returns or a joint return (Sec. 223b). Example: The husband has gross income of $12,000, and net income of $10,000. The wife has a loss of $11,000. A return must be filed, even though there is in the aggre- gate a loss. 218. Return of minor's income. — A minor (ordinarily a person under twenty-one years of age) if married, if he has an income from property or a trust, or if he has been emanci- pated, that is, made free by his parent, must make a return wherever any individual with his income would have to make one. If he still lives with his parent his earnings, not any other income (Bull. 3, p. 116; Sol. Op. 14), must be reported by the parent as part of the parent's return. Whenever a return is to be made by a minor and the minor is unable to make the return, it is to be made out by his guardian who ordinarily will be his parent (Sec. 223c). 219. Return by agent or guardian. — When a taxpayer can- not make his return, it is to be made by an agent authorized to do so, or by his guardian or other person in charge of him or his property (Sec. 223c). 220. Definition of net income. — Net income means the gross taxable income minus deductions but not minus the credits allowed in Par. 147 (Sec. 212a). Example: A widower with a dependent child under eighteen has an income of $1,100. For the dependent child he is allowed a credit of $400 (Par. 148). He must, how- ever, file a return. In other words a return must be filed even though no tax may be assessed. Example: A widow supports a child, age twenty, at home. Her income is $1,500. Although she does not re- ceive the credit of $400 as the child is not under eighteen, she receives a credit of $2,500 as head of a family (Par. 148) and no tax will be assessed. She must however, file a re- turn. 221. Status. — Whether an individual is single or married or is living with husband or wife depends upon what he is on 60 the last day of the year or period for which he is being taxed (Art. 305). 222. Forms. — The return is made on Form 1040. If the net income is not more than $5,000 and if in addition the credits in Par. 148 when deducted from the net income do not leave more than $4,000 use Form 1040A (Art. 402). 223. Forms for husband and wife. — In the case of husband and wife if the combined net income is $5,000 or over. Form 1040 must be used no matter what the separate net income is and whether they make separate returns or joint returns (see return). 224. Method of return by husband and wife may be changed.— Husband and wife may change yearly from joint to separate returns or vice versa as they see fit (27-21-1715; O. D. 968). 225. The income of dependent minors. — The income of de- pendent minors must be included to determine whether the parent need file a return (see Art. 403). Example: Suppose a widow earns $800 and a dependent minor (i. e., ordinarily under 21) earns $300. The widow must file a return as the total is not less than $1,000. 226. Returns by executors and administrators. — They file a return of the income of the decedent, if the decedent would have had to file one if alive (Art. 421). The status of the decedent is determined as of the date of death (Art. 305). For returns of the income of the estate, see Par. 161. Ancillary administrators need file no return if the domicil- iary administrator returns the entire income of the estate (Art. 442). 227. Returns by trustees. — See Par. 161. 228. Returns by receivers. — They return as the taxpayer would (Art. 424). 229. Related trades or business. — Where the same interests own or control two or more related trades or business the Commissioner may compel them to file consolidated accounts 61 in order properly to distribute the income between them (Sec. 240d). For affiliated corporations see Par. 172. Returns of Information at Source 230. Who make. — All making payments of fixed or de- terminable income of $1,000 or more a year must render a re- turn showing such payments (Sec. 256). A separate return for each one paid is made on Form 1099 together with a letter on Form 1096 to be sent to the Commissioner on or before March 15 (Art. 1071). 231. Fixed or determinable income. — Fixed income is like salary or wages, which is agreed upon. Determinable income is like commission, which can be figured out by arithmetic. A lawyer's fee or doctor's bill would not be reported, as they are not ordinarily agreed upon or determinable by arithmetic. The income does not have to be paid at definite times like every week, etc. It should not be confused with the require- ments for withholding at the source Par. 255 (Art. 1071). 232. What items need not be reported. — The following items need not be reported by way of information at source: 1. Payments to a corporation (Art. 1073). 2. Payments of interest on obligations of the U. S. (Sec. 256, 4th Par.). 3. Dividends by domestic corporations, and by foreign cor- porations subject to the corporation tax (Sec. 256). 4. Payments for merchandise, freight, storage, etc. (Art. 1073). 5. Payments of rent to real estate agents (Art. 1073). The real estate agent would have to report his payments to the landlord of $1,000 or more. 233. Where made out. — Where a business has several offices, the one with the records should make the return. If all of them have records, the main office should make it (Art. 1072). 234. Interest on bonds of domestic or foreign corporations. — Information returns are required, no matter what the 62 amount of interest, except where the owner of the bond is a domestic or resident foreign corporation. The ownership cer- tificates must be sent in as information returns. If none are filed, the withholding agent must make them out and send them in (Sec. 256 2d Par. and Art. 1074). See Par. 263. 235. Income withheld from nonresident alien. — All amounts withheld at the source from nonresident aliens (Par. 255 and 260) must be reported annually on Form 1042 (Art. 1075). See Par. 264. 236. "Foreign items."— See Sec. 256 2d Par. and Articles 1076-1079. See also Sec. 259. 237. Returns by brokers. — See Sec. 255. When Returns Must be Filed 238. By nonresident aliens. — See Sec. 227a. 239. Individual, partnership and fiduciary returns. — Re- turns are to be made on or before March 15. If the fiscal year is not the calendar year, the returns are to be made on or before the fifteenth day of the third month after the fiscal year (Sec. 227a). 240. Executors and administrators. — The return of the in- come of a decedent should be made immediately after his ap- pointment. When his duties end, he should file a return im- mediately for the portion of that taxable year (Art. 442). For usual returns see Par. 239. 241. Trustees. — When a trustee's duties end, he should file a return immediately for the portion of that taxable year (Art. 442). For usual returns see Par. 239. 242. When separate return for less than twelve months is made. — Where a separate return is required for less than 12 months (Par. 250), the return is to be made on or before the fifteenth day of the third month following the end of such period (Art. 26). 243. Date of mailing. — The return if mailed must be sent in time to reach the collector's office on or before the date due (Art. 446). 63 244. Extensions. — In cases of sickness or absence, the col- lector may grant extensions for not more than 30 days. The Commissioner himself will not ordinarily take up the question of an initial extension. If an extension is granted, a tentative return may be asked for. Further extensions may be made only by the Commissioner, not extending beyond September 15 or, in case of a fiscal year, the due date of the third install- ment. The request for extensions must be made before the due date of the return (Sec. 1311 Amending Revised Statutes Sec. 3176 and Arts. 443 and 444). Sickness of one or more of the officers of a corporation is not a sufficient reason unless there is no other officer able to make out the return (Art. 443). 245. Where returns are to be filed. — The returns may be filed where the person has his legal residence or principal place of business. If he has neither in the U. S. the return is to be filed with the collector at Baltimore, Maryland (Sec. 227b). For What Period Returns are Filed 246. The taxable year. — The returns may be made either for the preceding calendar year or for any other period of twelve months ending on the last day of a month, which is called a fiscal year (Sec. 200 (1) ). 247. Choice of calendar or fiscal year. — A person making his first return may choose which he desires, but it must fol- low his books. If he does not keep books, he must return for the calendar year (Sec. 212b and Art. 25). 248. Change in accounting period. — If a person desires to change from fiscal to calendar year or vice versa, or from one fiscal year to a different one, he must secure the approval of the Commissioner. Notice must be given at least thirty days before the date fixed for the end of the new taxable year or period (Art. 26). Example: Fiscal year ending Aug. 31, 1921. Taxpayer desires to change to calendar year. Notice would have to be given by Dec. 1, 1920, being thirty days before Dec. 31. 249. After permission granted. — When permission has been secured from the Commissioner, the change must be carried out. The taxpayer may not do as he pleases (Art. 26). 64 250. Separate return caused by change. — If there is a change from a fiscal year to a calendar year, a separate re- turn is to be filed for the period from the end of the last fiscal year and the following December 31 (Sec. 226a). Example: Fiscal year ending August 31, 1921. A sep- arate return would be filed for the period from August 31, 1920 to January 1, 1921. If there is a change from a calendar year to a fiscal year, a separate return is to be filed for the period ending with the date of the new fiscal year (Sec. 226a). Example: For 1922 it is desired to report for a fiscal year ending Aug. 31, 1922. A separate return would be filed from Jan. 1, 1922 to Aug. 31, 1922. Then it would go on regularly afterwards, returns being made annually on November 15 (see Par. 239). If there is a change from one fiscal year to a different one, a separate return would be filed from the end of the pre- vious year to the date of the new fiscal year (Sec. 226a). Example: Suppose fiscal year ending Aug. 31, 1922. Change is desired to fiscal year ending Sept. 30, 1922, A separate return would be filed for the one month of Sep- tember, 1921. For the tax rate on such separate returns see Sec. 226b. For computing the net income of such separate returns see Par. 146. Basis of Returns 251. Cash or accrual basis. — Returns may be made either on a cash basis or on an accrual basis (Sec. 212b and Sec. 213a). The former would show only receipts and disburse- ments. An accrual basis would be required wherever it was necessary to take inventory (Art. 23). All the income must be treated entirely one way or the other. Both bases may not be used for the same year (Sec. 200 (4) and Art. 23). The fundamental principle is that the basis chosen must clearly reflect the income (Sec. 212b). 252. Constructive receipt. — When the return is made on a cash basis it is not necessary that there be an actual receipt: constructive receipt is sufficient (Arts. 52 and 53). 65 Examples: Salary credited on the books; interest cred- ited by the bank; dividends set aside for stockholders; coupons on bonds when due, even though not cut. 253. When inventories are required. — In any business con- cerned with the production, purchase or sale of merchandise, inventories must be taken at the beginning and end of the year (Sec. 203 and Arts. 24 and 1581). 254. Change of basis. — Permission to change from one basis to the other must be secured from the Commissioner. Application should be made at least thirty days before the return is due (Art. 23 (3) ). Withholding At Source 255. Eight per cent deduction. — Where fixed or determin- able annual or periodical income is payable to a nonresident alien (Par. 265) or to a partnership comprised wholly or in part of one or more nonresident aliens, those having the con- trol or custody of the income must deduct eight per cent thereof (Sec. 221a). This does not apply to such partnerships having a usual place of business in the U. S.; the partnership itself files a return as agent of the alien (Art. 404) on Form 1040B (Art. 371a). 256. Ten per cent deduction (commencing in 1922, twelve and one-half per cent). — Where fixed or determinable annual or periodical income is payable to a foreign corporation not engaged in trade or business in the U. S. and not having an oflfice or place of business in the U. S., those having the con- trol or custody of the income must deduct ten per cent for 1921 and twelve and one-half per cent thereafter (Sec. 237). 257. Exceptions to withholding in Par. 255 and Par 256. — In the following cases the income need not be withheld: (1) Dividends of domestic corporations, and of foreign corporations defined in Sec. 216b (Sec. 221a). For dividends of personal service corporations prior to Jan. 1, 1922 see Art. 363. (2) Interest on deposit with banking houses paid to those not engaged in business in the U. S. and not having an office or place of business therein (Sec. 221a). 66 (3) Interest on tax-free covenant bonds. This is governed solely by Par, 260. (4) Interest on bonds of a domestic corporation, if Form 1001 C claiming personal exemption is filed with the with- holding agent not later than May 1 by the nonresident alien (Art. 364b). Only nonresident aliens whose gross income from all sources within the U. S. is not more than $1,000 may thus claim exemption. See Par. 267. 258. Fixed or determinable income. — See Par. 230 for defi- nition (Art. 362). 259. Annual or periodical. — This means payable from time to time, whether or not at regular intervals; as for example, commissions on sales credited throughout the period (Art. 362). 260. Two per cent deduction. — When domestic or resident foreign corporations issue bonds in which they agree to be re- sponsible for any part of the income tax on such interest called tax-free covenant bonds they shall withhold 2^o of such interest, when payable to citizens or aliens, resident or nonresident, partnerships, or foreign corporations not en- gaged in business or trade in the United States and not having an office or place of business in the U. S. (Sec. 221b and Sec. 237). The 2% is to be withheld, even if the corporation as- sumes responsibility for less than 2%. The bonds of foreign corporations having a fiscal agent in the U. S. are included (Art. 361). Note that such interest payable to domestic or resident for- eign corporations is not to be withheld (Art. 363). If a trust deed under which the bonds are issued contains a tax-free covenant, the tax must be withheld (Art. 361). 261. Exemption from 2% withholding. — The two per cent tax payable to citizens or residents will not be withheld in cases where no tax is due from them because of personal ex- emption (see Par. 148). They must file Form 1001 claiming the exemption. These must be filed not later than February first following the taxable year and in the case of coupons at the time of their presentation for payment (Art. 363). Alien residents should also file Form 1078 (Art. 363). 67 Nonresident aliens who are entitled to personal exemption may claim it by filing Form 1001 B with the withholding agent not later than May 1. If so, the tax will not be withheld. Only nonresident aliens whose gross income from all sources within the U. S. is not more than $1,000 may thus claim ex- emption. See Par. 267. Foreign corporations having a place of business or an office in the U. S. should file Form 1086 to avoid withholding (Art. 601). 262. Owners unknown. — In all cases where the owners of bonds or other like securities are unknown, the tax is to be withheld (Sec. 221a and b and Art. 361). 263. Ownership certificates. — In the case of all interest payments on bonds or other obligations of domestic or resi- dent foreign corporations except tax-exempt bonds or U. S. obligations, all owners, except domestic and resident foreign corporations, must file ownership certificates when presenting the coupons for payment. Where the tax is to be withheld Form 1000 is used, otherwise Form 1001 (Arts. 365-367). These must be filed even though Form lOOlB (Par. 261) or Form lOOlC (Par. 257) has been filed (Art. 364). Substitute certificates are permitted in certain cases (Art. 368). 264. Returns by withholding agents. — Those withholding any tax on interest from corporate bonds or other obligations at the source file with the collector monthly returns on Form 1012. An annual return accompanied by any certificates claiming exemption must be filed on or before March 1 on Form 1013. They are responsible for the payment of all such taxes for which exemption certificates have not been filed ; payment is to be made on or before June 15 (Sec. 221c and Art. 371). In all other cases of withholding an annual return on Form 1042 must be made out and payment made on or before June 15. Where there is no withholding by a debtor corporation on interest on its bonds, monthly returns on the 20th day of each month are made on Form 1096A together with all the Forms 1001 filed. An annual return on or before March 15 is made on Form 1096B to the Commissioner (Art. 373). In the case of a nonresident alien see Par. 267. 68 Nonresident Alien 265. Definition. — A nonresident alien is an individual who is neither a citizen nor a resident of the U. S. The only alien whose status it is difficult to determine is the one actually present in the U. S. If he is only a transient, here for a short stay, he is a nonresident alien. If he expects to be here for a long time, even though he intends to return to his own country, he is a resident (Art. 311). Once a resident one remains so, until he actually leaves the U. S. (Art. 313). As in other cases (Par. 221), the status is determined as of the last day of the taxable year (Art. 313). 266. Proof of residence of alien. — It becomes important for residents in this country to determine whether an alien is a resident or nonresident. For example, the employers of nonresident aliens have to withhold 8% of their salary (Par. 255), unless exemption is claimed. Likewise a resident alien is taxed just like a citizen on in- come from all sources ; a nonresident alien only on his income from sources within the U. S. (Sec. 213 (c) ). An alien is presumed to be nonresident. This presumption may be over- come by (Art. 312) : (1) Filing declaration of intention to be naturalized. (2) Filing Form 1078 or the equivalent. (3) Proof of acts and statements of the alien. 267. Duty of employers. — As has been stated in the pre- ceding paragraph, employers of nonresident aliens must de- duct from their salaries a tax of 8% (unless personal ex- emption on Form 1115 is claimed (see Sec. 217g and Art. 315). Where an employee has not filed his first papers, an employer should require him to file Form 1078 or similar paper to prove he is not a nonresident. Otherwise the employer may find it difficult to prove his case where he has not withheld the tax (Art. 314). On or before March 1 the employer must file with the col- lector Form 1042 together with all Forms 1115 filed with him, if he has any withholding. If he has no withholding, he sends the Forms 1115 with a letter of "transmittal directly to the Commissioner on or before March 15 (Art. 315). 69 The alien himself instead of filing Form 1115 may file a return and claim exemption (Sec. 217 g and Art. 329). A non- resident alien is entitled to a personal exemption of only $1,000 (Sec. 216e). Except by filing Form 1115 as provided in this paragraph or by filing Form 1001 C (Par. 257) or Form lOOlB (Par. 261), the alien to be entitled to the exemption must file a return of all his gross income from sources within the U. S. and may claim the exemption on the return only (Art. 329). PART IV. ADMINISTRATIVE PROVISIONS 268. Failure to file a return on time and fraudulent re- turns. — A penalty of 25% of the tax will be imposed for fail- ure to return on time unless there is reasonable cause (Sec. 1311 and Art. 1004). A penalty of not more than $1,000 may also be imposed (Sec. 253). In case of a false or fraudulent return a penalty of 50% of the tax will be imposed (Sec. 1311) ; a wilful failure constitutes a misdemeanor and renders one liable to a fine of $10,000 and imprisonment for one year or both (Sec. 253). If no return is filed, or a false or fraudulent return is filed, the collector shall make the return from such information as he can obtain. Instead the Commissioner may make the re- turn, or he may amend the collector's return. Such returns shall be prima facie sufficient (Sec. 1311). For understated return see Par. 272. Payment of Tax See Pars. 156-7 and 205. For protest see Pars. 292 and 293. 269. Extension of time. — When an extension of time for filing a return is granted, the time for the payment of the first instalment is likewise postponed (Sec. 250a), but not subse- quent instalments unless expressly so provided in the exten- sion (Sec. 250a). Interest is charged at the rate of six per cent per annum. 270. Where taxpayer about to leave the country, etc. — Persons departing from the country must pay the tax for the period of the taxable year already elapsed. If they are not in 70 default on previous bills, security for such payment may be taken. In the case of a citizen the provision as to security may be waived by the Commissioner (Sec. 250g). An alien must first secure from the collector or agent in charge a certificate showing full compliance with the tax law (Sec. 250g). In any case where the Commissioner thinks the collection of taxes may be rendered ineffectual, he may demand imme- diate payment of taxes for the taxable year last past and for the part of the current year already elapsed (Sec. 250g). Additional Assessments 271. Penalties and interest. — In all cases of deficiencies under the 1921 Act (Art. 1001) interest will be charged at the rate of six per cent per annum from the time the tax was due (Sec. 250b). If the deficiency is due to negligence or intentional disre- gard of the rules and regulations but without intent to de- fraud (this latter applies only to returns for 1921 and after (Art. 1005) ) an additional 5% of the deficiency plus interest at the rate of 12 per cent per annum will be added (Sec. 250b). If there was fraud with intent to evade tax 50% of the de- ficiency will be imposed as an additional tax (Sec. 1311). This constitutes a misdemeanor and renders the taxpayer liable to a fine of $10,000 or one year's imprisonment or both (Sec. 253). For final and conclusive assessments see Par, 304. 272. When may be made. — Additional assessments for 1921 and succeeding years may be made within four years after the return was filed unless taxpayer waives this limita- tion ; for taxes due under previous acts they may be made within five years after the return was made. No suits for additional taxes shall be brought more than five years after the return was filed. In the case of a false or fraudulent return with intent to evade the tax, or where a return was not filed, these limita- tions do not apply (Sec. 250d). 273. Income of decedent. — Upon request from the fidu- ciary in charge of the estate, all taxes upon the income of a decedent in his life time must be finally assessed within 71 one year after the request, except where there is fraud (Sec. 250d). 274. Notice to taxpayer, appeal, etc. — Notice of a proposed additional assessment must be sent by registered mail to the taxpayer. He is allowed a reasonable time to protest in writ- ing to the income tax unit at Washington and ordinarily will be granted a hearing. For cause shown he may be granted an extension of time to present additional data. If the unit's decision is adverse the taxpayer is to be notified. If there was no protest he is to be notified that the proposed assess- ment will stand. In either case he has thirty days from the mailing of the notice in which to file an appeal with the Com- missioner. Appeals mailed in time so to reach the Commis- sioner will be accepted. No particular form is necessary for the appeal. He may on appeal submit additional facts. He is ordinarily entitled to a hearing and may get an extension of time for cause shown by filing an affidavit (Sec. 250d and Art. 1006). After the decision by the Commissioner or his agent or after the expiration of the thirty days if no appeal is taken, the assessment may be made (Art. 1006). If the tax is not paid then a demand for payment within ten days will issue. In such cases payment must reach the collector within the ten days ; mailing within the ten days is not sufficient except that remittances mailed in time so to reach the collector will be accepted without penalty or interest (Art. 1007). The ten days begins from the mailing of the demand. If no appeal is taken or if the assessment is made on appeal according to the decision below no claim for abatement will be entertained. The tax must be paid and the taxpayer must resort to a claim for refund or credit (Art. 1007). This procedure applies to assessments under the 1916, 1917, 1918 or 1921 Acts. If the collector or deputy collector has reason to believe the income in the return is understated, after notice to the taxpayer, he may upon proof increase the amount (Sec. 228). In such a case the same procedure for an appeal to the Com- missioner, etc., is followed (Art. 1006). 275. Extension of time for payment. — Where the payment of the additional assessment at the time required would re- 72 suit in undue hardship to the taxpayer, the Commissioner may, except where there has been negligence or fraud with intent to evade the tax, extend the time to not later than May 23, 1923 (Sec. 250f). At least 8% interest must be paid. If not paid at the time to which it was postponed, an additional 5% of the assess- ment and 12% interest from the original date it was payable will be imposed (Sec. 250f). Undue hardship is not mere inconvenience. Form 1127 must be filled out. A bond may be required (Art. 1014). This applies also to deficiencies under the 1917 and 1918 Acts (Sec. 250h). 276. Examination of books. — To check up a return or to make one where none has been filed, the revenue agents or inspectors designated by the Commissioner may inspect all books, papers, records, or memoranda bearing on the return and may require the attendance of any person having any knowledge of the matters and may take testimony under oath (Sec. 1308). No unnecessary examinations are permitted. Not more than one each taxable year is permitted, unless the Commis- sioner notifies the taxpayer that the additional investigation is necessary (Sec. 1309). Failure to Pay Tax 277. Penalties. — If a tax is not paid when due and for ten days after notice and demand by the collector, then, except in cases of estates of insane, deceased, or insolvent persons, an additional tax of 5% of the amount due plus interest at the rate of 12% per annum will be added (Sec. 250e) ; a penalty not exceeding $1,000 may also be imposed (Sec. 253). See Par. 274. Where a taxpayer becomes insane, insolvent, or dies after the ten days, the 12% interest runs, but the 5% penalty will not be imposed. Where a bona fide claim for abatement (Par. 283) reaches (Art. 1007) the collector within the ten days, only 6% in- terest will be charged on any tax found to be due (Sec. 250e). This applies also to assessment and collection of taxes under the 1917 and 1918 Acts (Sec. 250h). 278. What constitutes notice. — The instructions on the re- 11 turn constitute notice of the first installment. For notices by collectors to taxpayers as to the subsequent installments see Sec. 250e 2d Par. and Art. 1007. Suits by Government 279. Time limit. — Except in cases of fraud with intent to evade tax, suits for collection of taxes may be brought only within five years after the tax was due (Sec. 1320). This does not afifect suits pending Nov. 23, 1921 (Sec. 1320). There is no time limit when there is fraud or failure to file a return (Art. 1008). For suits to recover additional assessment see Par. 272. All suits by the collector must be authorized by the Com- missioner (Art. 1008). 280. Suits against stockholders. — Where a corporation has liquidated and been left without assets, the stockholders are personally liable for all taxes to the amount of assets turned over to them (Bull. 4, p. 324; O. D. 769). 281. Attachments, etc. — The collector may enforce the tax by distraint on personalty, if any, otherwise on real estate (Art. 1009). The tax should be a lien on the real estate. This may be enforced by a bill in equity. The lien is not good against a bona fide purchaser for value without notice of the lien unless and until it is recorded (Art. 1010). 282. Compromises. — The Commissioner, with the consent of the Secretary of the Treasury and the recommendation of the Attorney-General may compromise any suit for taxes, penalties, or interest, except a suit for taxes against a solvent taxpayer. Before suit the recommendation of the Attorney- General is not necessary (Art. 1011). Claims for Abatement 283. When made and effect of. — See Par. 277. They do not operate to suspend payment of the tax. The collector may collect the tax and compel the taxpayer to resort to a claim for refund (Art. 1032). Claims for abatement of additional assessments may not be made in certain cases (see Par. 274). 284. Form of. — Claims for abatement are made on Form 843 and should be accompanied by affidavits (Art. 1032). 74 Claims for Credit 285. Purpose. — Where a taxpayer has paid taxes and in- stead of asking for a refund desires to have such sum credited to his account against taxes due from him to the government, he should file a claim for credit on Form 843. The advantage is that if his petition is granted a credit will be given to him immediately so that he need not pay his own taxes while waiting for the payment of any refund allowed by the gov- ernment (Sec. 252 and Art. 1034). If any balance is due a refund will be made (Art. 1034). See in general paragraphs on refund commencing at Par. 288. 286. May be combined with claim for refund. — A claim for credit may be filed while a claim for refund (Par. 288) is pending. 287. Effect of claim for credit. — When a claim for credit against taxes due is filed, it has the same effect with respect to penalties and interest on the taxes due as a claim for abate- ment: see Pars. 277 and 283 (Art. 1035). Refunds 288. When must be made. — Claims by taxpayers for re- fund or credit of taxes wrongfully collected under the 1916 or following Acts must be made within four years after the return was due (Sec. 1316). Payment may be made at any time by the government (Sec. 1315). For claim for refund or credit as condition prece- dent to suits by taxpayers see Par. 293. No refund may be made of an additional assessment, if the return was false or fraudulent or contained a wilful under- statement (Sec. 1323). 289. How made. — Claims for refunds are made on Form 843. They should be accompanied by a receipt (Sec. 251) or by the cancelled check. The taxpayer must understand that the burden is on him to prove his case (Art. 1036). For refunds due to changes in invested capital see Art. 1037. No claim need be filed in such a case. 290. To whom made. — They should be handed in to the collector (see Form 843) ; they may be sent direct to the Commissioner of Internal Revenue (Sec. 1316). 75 291. On examination of returns. — If any time within five years after the date a return was due, it is ascertained on an examination of the return under any income tax act that a tax in excess of the amount due has been paid, such excess will be credited against any taxes due from the taxpayer and the balance refunded (Sec. 252). They may be paid at any time if a claim has been filed within these five years (Sec. 252). Excess profits taxes in excess of the amount, due to change in invested capital caused by the Commissioner, may be cred- ited or refunded at any time (Sec. 252). This applies to all Income Tax Acts. For refunds when claimed by taxpayer see Par. 288. 292. Interest. — Interest at 6% per annum is allowed in all cases of refunds or credits from six months after the date of filing the claim for refund or credit (Sec. 1324a). The same interest will be allowed from the date of payment (Sec. 1324a) (1) if paid under a specific detailed protest; (2) if paid pursuant to an additional assessment. Suits by Taxpayers 293. Requirements and limitations. — (1) Protest at time of payment? It is recommended that this be done in doubtful cases. (2) Claim for refund or credit must have been duly filed with the Commissioner (Sec. 1318). (3) Suits may not be commenced within six months after filing of the claim, unless the Commissioner renders a decision before (Sec. 1318). A claim for refund or credit is necessary even though a claim for abatement had been filed (Sec. 1318). See Part V D II c. (4) Suits may not commence more than five years after payment (Sec. 1318). (5) No suit shall be maintained to recover any additional assessment if the return was false or fraudulent or contained a wilful understatement (Sec. 1323). 294. Against whom brought. — Suits for recovery of taxes must be brought against the collector to whom the tax was paid. They may not be brought against his successor in office (Sec. 1318). See Part V D II b. Where the collector is dead see Sec. 1310c. 76 295. Interest. — Where judgment is obtained against the collector or the United States, interest on the tax will be in- cluded (Sec. 1324b). 296. How money is obtained after judgment. — When a judgment is obtained against a collector in order to obtain the money the following papers must be filed (Art. 1051) : (1) A claim for refund on Form 843. (2) Certified copy of final judgment. (3) Certificate of "probable course" by the judge. (4) Itemized bill of the costs. (5) Certificate of docket entries. 297. Injunctions. — The courts are not permitted to issue injunctions restraining the enforcement of taxes (Sec. 3224 of the Revised Statutes and Art. 1050). Where only the date of collectibility was in issue a district court permitted an injunction to issue : Polk vs. Page, 276 Fed. 128. There has been no decision by the U. S. Supreme Court. Miscellaneous Provisions 298. Regulations. — The Commissioner, with the approval of the Secretary of the Treasury is authorized to make all needful rules and regulations for the enforcement of the Act (Sec. 1303). Regulations reversing previous regulations need not be re- troactive, except where a court decision requires (Sec. 1314). Regulations not in conflict with statute have the force of law (see Part V, D. 1 b). 299. Inspection of retiurns and copy. — Bona fide stock- holders of one per cent or more of the stock may be permit- ted by the Commissioner to inspect the returns of the cor- poration and of its subsidiaries (Sec. 257 and Art. 1093). For rules of inspection in general see Art. 1090. A copy of a return will be furnished upon request in writ- ing by the taxpayer or his attorney or in the case of a de- ceased person by the fiduciary in charge of his estate (Art. 1091). n 300. Hypothetical questions. — No hypothetical questions will be answered by the Income Tax Department. Questions on actual cases only will be answered. The full facts includ- ing the names of all parties concerned must be given (1-2-26; Mimeo. to Collectors 2880). 301. Committee on appeals and review. — Upon request by the taxpayer, a decision appealed from will ordinarily be re- ferred to this special Committee selected to assist the In- come Tax Unit. 302. Registration of attorneys, etc. — Only attorneys who are duly registered with the Bureau of Internal Revenue may represent taxpayers at Washington before the Bureau. All attorneys must have a power of attorney from the tax- payers they represent (Statement by Commissioner, July 25, 1921). 303. Reopening of cases. — Cases on which a final decision has been handed down will not be reopened except in the event of newly discovered evidence. An explanation must be given why the evidence could not have been presented before (46-21-1927; T. D. 3240). 304. Final agreement. — The Commissioner, with the ap- proval of the Secretary of the Treasury may agree in writing with a taxpayer that the particular determination and assess- ment in question shall be final and conclusive. If this is done, no action may thereafter be taken either by the government or the taxpayer, except where there has been fraud or mal- feasance or misrepresentation of a material fact (Sec. 1312 and Art. 1134). 78 PART V. DECISIONS OF THE UNITED STATES SUPREME COURT ON INCOME TAX AND RELATED STATUTES SINCE 1913 A. DECISIONS ON GENERAL MATTERS I. The sixteenth amendment only removed the require- ment as to apportionment. Brushaber v. Union Pacific Railroad Company, 240 U. S. 1 (Jan. 24, 1916). Stanton v. Baltic Mining Co., 240 U. S. 103 (Feb. 21, 1916). Tyee Realty Company v. Anderson and Thorne v. Anderson, 240 U. S. 115 (Feb. 21, 1916). Dodge V. Brady, 240 U. S. 122 (Feb. 21, 1916). a. The sixteenth amendment did not bring within the scope of the income tax subjects otherwise excepted under the constitution. Evans v. Gore, 253 U. S. 245 (June 1, 1920). II. The Income Tax Act is constitutional (1913 Act). Brushaber v. Union Pacific Railroad Company, 240 U. S. 1 (Jan. 24, 1916). Stanton v. Baltic Mining Co., 240 U. S. 103 (Feb. 21, 1916). Tyee Realty Company v. Anderson and Thorne v. Anderson, 240 U. S. 115 (Feb. 21, 1916). Dodge v. Brady, 240 U. S. 122 (Feb. 21, 1916). III. Federal Income Tax Acts may be retroactive. Brushaber v. Union Pacific Railroad Company, 240 U. S. 1 (Jan. 24, 1916). Held in the case of the 1913 Act passed Oct. 3, 1913, retroactive to March 1, 1913. Tyee Realty Company v. Anderson and Thorne v. Anderson, 240 U. S. 115 (Feb. 21, 1916). IV. The Federal Income Tax Act should be construed most strongly against the government and all doubts should be resolved in favor of the taxpayer. Gould v. Gould, 245 U. S. 151 (Dec. 19, 1917). 79 V. Federal Progressive Income Tax Acts are constitu- tional. Decisions on surtax in the 1913 Act. Brushaber v. Union Pacific Railroad Company, 240 U. S. 1 (Jan. 24, 1916). Tyee Realty Company v. Anderson and Thome v. Anderson, 240 U. S. 115 (Feb. 21, 1916). Dodge V. Brady, 240 U. S. 122 (Feb. 21, 1916). VI. The 1909 Corporation Income (Excise) Act applied to mining companies. Stratton's Independence v. Howbert, 231 U. S. 399 (Dec. 1, 1913). VII. A Massachusetts Trust is not an association. It is therefore not taxed as a corporation, but the trustees are taxed as fiduciaries. Crocker v. Malley, 249 U. S. 223 (March 17, 1919). This is still law; see Par. 160. B. DECISIONS RELATING TO TAXABLE AND NON- TAXABLE INCOME I. Profit on Foreign Sales of goods exported from the U. S. by a domestic corporation is taxable. William E. Peck & Co., Inc., v. Lowe, 247 U. S. 165 (May 20, 1918). It was held to be included within taxable income under the 1913 Act and the Act so construed was held not to violate the constitutional pro- hibition against a "Tax or duty on articles ex- ported from any state." This case is still law, see Par. 2. The statute construed was practically the same as Sec. 213a. The 1921 statute, Sec. 217e, provides that such profit in the case of a foreign corporation shall not be taxable. II. A nonresident alien is taxed on income from stocks and bonds of domestic corporations and from bonds and mort- gages secured by property situated in the U. S. The stocks, bonds, and mortgages were held by an agent in the U. S. who collected the income. 80 DeGanay v. Lederer, 250 U. S. Z76 (June 9, 1919). This was under the 1913 Act taxing nonresident aliens on "the entire net income from all prop- erty owned in the U. S," It was also stated that there was no question that Congress had the power to tax such income. This case is law under the present statute, Sec. 217a. III. Alimony is not income (under the 1913 Act). Gould V. Gould, 245 U. S. 151 (Dec. 19, 1917). This is still law, see Par. 3. The statute construed was practically the same as Sec. 213a. IV. Salaries of Federal Judges appointed before the In- come Tax Act cannot be taxed. Evans v. Gore, 253 U. S. 245 (June 1, 1920). 1918 Act. It was held to be against the constitutional pro- vision (Art. Ill, Sec. 1), that their salaries should not be diminished during their term of office. The present Act, Sec. 213a, includes in gross income the salaries of the Federal Judges and of the President of the United States, in whose case there is a similar constitutional provision (Art. II, Sec. 1, Par. 6). This would apply only to Judges appointed after the Act and to a President elected after the Act. As the rates in the 1921 Act do not exceed the rates in the 1918 Act, Sec. 213a applies to all Judges appointed or Presidents elected since the date of the passage of the 1918 Act, Feb. 24, 1919 (Art. 32). V. The excess of an excessive reserve held by an Insur- ance Company is not income. Maryland Casualty Co. v. United States, 251 U. S. 342 (Jan. 12, 1920). Under the 1909 Corporation Excise Act and the 1913 Income Act. For present law see in general Sees. 242-247. Cf. also the new provision as to a reserve for bad debts. Pars. 68 and 191. VI. Premiums in the hands of the agents are income to the Insurance Company. 81 Maryland Casualty Co. v. United States, 251 U. S. 342 (Jan. 12, 1920). Under the 1909 Corporation Excise Act and the 1913 Income Act. Such premiums were held included in the language "net income re- ceived," receipt by the agent being receipt by the Company. For the present law see Sees. 242-247. VII. Profit from the sale o£ capital assets. See com- mencing at Par. 81 and Par. 195. 1. A tax on the gain from the sale of capital assets is per- mitted by the Sixteenth Amendment. Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509 (March 28, 1921). Goodrich v. Edwards, 255 U. S. 527 (March 28, 1921). Walsh V. Brewster, 255 U. S. 536 (March 28, 1921). See Stratton's Independence v. Howbert, 231 U. S. 399, 415 (Dec. 1, 1913). See Eisner v. Macomber, 252 U. S. 189, 207 (March 8, 1920). 2. Profits from the sale of capital assets are included in the Income Tax Act. Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 527 (March 28, 1921). 1916 Act as amended by the 1917 Act. The in- tent was pretty clear. One section was like the present Sec. 213a. Of course, the present Section 202 admits of no doubt that they are taxed. Eldorado Coal & Mining Co. v. Moyer, 255 U. S. 522, (March 28, 1921). Same Act. Goodrich V. Edwards, 255 U. S. 527 (March 28, 1921). Same Act. Walsh V. Brewster, 255 U. S. 536 (March 28, 1921). 1916 Act unamended. See also decisions that such profits are income under the 1909 Corporation Excise Act. Doyle V. Mitchell Bros., 247 U. S. 179 (May 20, 1918). Hays V. Gauley Mt. Coal Co., 247 U. S. 189 (May 20, 1918). U. S. V. Cleveland, Etc., Railway Co., 247 U. S. 195 (May 20, 1918). 82 3. The profit from the sale of capital assets on a single transaction is taxable. One need not be a dealer. Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509. 1916 statute amended. Cf. Walsh V. Brewster, 255 U. S. 536 (March 28, 1921), where profits from occasional sales were held taxal3le. 1916 statute. Cf. Hays v. Gauley Mt. Coal Co., 247 U. S. 189 (May 20, 1918), case of single sale under the 1909 Cor- poration Excise Act. Note that it was an ultra vires transaction. This is still the law, as the language of the 1916 statute is similar to the 1921 Act. 4. Property acquired before March 1, 1913. (a) Where the sale price is greater than the March 1, 1913 value, and the cost, but the March 1, 1913 value is greater than the cost, only the difference between the sale price and the March 1, 1913 value is taxed by the statute. See Lynch v. Turrish, 247 U. S. 221 (June 3, 1918). 1913 Income Tax Act. Statute similar to present Sec. 213a. The present statute specifically adopts this rule in Sec. 202a. See Par. 94. Cf. the cases under the 1909 Corporation Excise Act. Doyle V. Mitchell Bros., 247 U. S. 179 (May 20, 1918). Hays V. Gauley Mt. Coal Co., 247 U. S. 189 (May 20, 1918). Here the facts did not include a statement of the March 1, 1913 value and so the taxpayer recovered nothing. U. S. V. Cleveland, Etc., Railway Co., 247 U. S. 195 (May 20, 1918). (b) Where the sale price is greater than the March 1, 1913 value, but less than the cost, there is no taxable in- come under the statute. Goodrich v. Edwards, 255 U. S. 527 (March 28, 1921). 1916 Act. The present law Sec. 202a provides so explicitly. See Par. 94. (c) Where the sale price is greater than the March 1, 1913 value, and the cost, but the cost is greater than the 83 March 1, 1913 value, the statute taxes only the difference between the sale price and the cost. Goodrich v. Edwards, 255 U. S. 527 (March 28, 1921) 1916 Act. Walsh V. Brewster, 255 U. S. 536 (March 28, 1921) 1916 Act. The present statute in Sec. 202a provides so explicitly. See Par. 94. (d) Where the sale price is greater than the March 1, 1913 value but only equal to the cost, there is no gain under the statute. Walsh V. Brewster, 255 U. S. 536 (March 28, 1921) 1916 Act. The present statute in Sec. 202a provides likewise. See Par. 94. 5. Interest on the cost is not to be added as part of the cost under the statute. Walsh V. Brewster, 255 U. S. 536 (March 28, 1921) 1916 Act. For four years after the purchase, the bonds were not interest-bearing. The plaintiff was not allowed to add interest on his investment to the cost. Hays V. Mt. Gauley Coal Co., 247 U. S. 189 (May 20, 1918). Under the 1909 Corporation Excise Act. This is also the present law. See Sec. 202a. VIII. Dividends. 1. Stock dividends are not taxable under the 16th amend- ment. Eisner v. Macomber, 252 U. S. 189 (March 8, 1920). It was said that the profit from the sale of stock dividends would be taxable. Walsh V. Brewster, 255 U. S. 536 (March 28, 1921). Cf. Towne v. Eisner, 245 U. S. 418 (Jan. 7, 1918)_. Held that under the 1913 Act stock dividends were not income. Eisner v. Macomber was decided under the 1916 Act which expressly taxed stock dividends. For present statute see Sec. 201d and Par. 116. 84 2. Dividends in the form of stock of other corporations are " Peabody v. Eisner, 247 U. S. 347 (June 3, 1918). U. S. V. Phellis, 42 Sup. Ct. Rep. 63 (Nov. 21, 1921). In this case the stock received was that of a cor- poration to which all the assets of the cor- poration in question were transferred, but the value of the corporation's stock was still worth par. The dividend was not greater in amount than the surplus and profits. The corpora- tions were not identical. Rockfeller v. U. S. and N. Y. Trust Co. and Harkness V. Edwards, 42 Sup. Ct. Rep. 68 (Nov. 21, 1921). Two cases similar to the Phellis case. In the one the stock was given out by the old cor- poration. In the other the stock was given directly to the stockholders by the new cor- poration. It was also held that this made no difference. Present Law : Dividends in the form of stock of other cor- porations are taxable, see Par. 117. See Sec. 202c (2) where the law provides that in reorganizations where new stock is received in place of the old stock, no tax will be imposed. This would not affect the law as laid down by the Phellis and Rockfeller cases, as no stock was given up in those cases : see Par. 117. 3. Dividends out of earnings before March 1, 1913. (a) Under the 1913 Act they were taxed. Lynch v. Hornby, 247 U. S. 339 (June 3. 1918). It was also held that this was constitutional. Peabody v. Eisner, 247 U. S. 347 (June 3, 1918). But see Southern Pacific Co. v. Lowe, 247 U. S. 330 (June 3, 1918). And Gulf Oil Corporation v. Lewellyn, 248 U. S. 71 (Dec. 9, 1918) under the 1913 Act. In both these cases it was held that where the dividends came from subsidiaries entirely con- trolled by the plaintiff, etc., were only book- keeping entries, and the proceeds were within the control of the plaintiffs before March 1, 1913, they were not income, but capital on March 1, 1913. Present Law: such dividends are tax-exempt (Sec. 201a and b) ; all the earnings on or after March 1, 1913 must be first distributed. See Par. 113. 85 C. DECISIONS RELATING TO DEDUCTIONS I. Alimony paid is not deductible. Statement made in Gould V. Gould, 245 U. S. 151 (Dec. 19, 1917). Under the 1913 Act. This is also law today, see Par. 71. II. Interest. Anderson v. Forty-Two Broadway Co., 239 U. S. 69 (Nov. 8, 1915). It was held that Congress had the power to limit in the case of corporations the deduction for interest to interest on indebtedness not ex- ceeding in amount the capital of the corpora- tion. This statute has been repealed and there is no such limita- tion in the present law. See Pars. 189 and 49. III. Taxes. U. S. V. Woodward, 41 Sup. Ct. Rep. 615 (June 6, 1921). Held that the Federal estate tax paid by an estate could be deducted from its income. Act of 1918. This is clearly written into the pres- ent law, Sees. 214a (3) and 234a (3). See also Pars. 134 and 190. IV. Depreciation and Depletion by mining companies. (a) Congress may fix 5% of the gross value at the mine of its output as the limit for yearly depreciation. Stanton v. Baltic Mining Co., 240 U. S. 103 (Feb. 21, 1916). Decision under the 1913 Act. For the present law see Sees. 214a (10) and 234a (9). (b) Cf. the decisions under the 1909 Corporation Excise Act that mining companies might not make any deduction for depletion Stratton's Independence v. Howbert, 231 U. S. 399 (Dec. 1, 1913). Von Baumback v. Sargent Land Co., 242 U. S. 503 (June 15, 1917). United States v. Biwabik Mining Co., 247 U. S. 116 (May 20, 1918). 86 Goldfield Consolidated Mines Company v, Scott, 247 U. S. 126 (May 20, 1918). The first and fourth cases were cases of owner- ship ; the second and the third were cases of leases. V. In case of Insurance Companies. (a) Maryland Casualty Co. v. United States, 251 U. S. 342 (Jan. 12, 1920). 1913 Act and 1909 Corporation Excise Act. Re- serves may not be set aside for ordinary run- ning expenses. See Sec. 234a (10) and Sees. 242-247. (b) Penn Mutual Life Insurance Co. v. Lederer, 252 U. S. 523 (April 19, 1920). Cash dividends not used to reduce premiums are not deductible. Under the 1913 Act. See present law Sees. 242-247. D. DECISIONS RELATING TO ADMINISTRATIVE PROVISIONS I. Regulations. (a) Congress may delegate to the Secretary of the Treas- ury the power to make regulations in enforcement of the Income Tax Act. Brushaber v. Union Pacific Railroad Co., 240 U. S. 1 (Jan. 24, 1916). See Sec. 1303 and Par. 298. (b) Regulations, not in conflict with any statute, have the force of law. Maryland Casualty Co. v. U. S., 251 U. S. 342 (Jan. 12, 1920). See Par. 298. II. Suits by taxpayers. (a) No injunction will be used to restrain enforcement of the Income Tax Act, even if the Act is unconstitutional. Dodge v. Osborn, 240 U. S. 118 (Feb. 21, 1916). Court so construed Sec. 3224 of the revised stat- utes and held that it was constitutional. This is the present law. See Par. 297. (b) A suit for recovery of taxes may not be brought against the successor in office of the collector who collected the tax. 87 Smietanka v. Indiana Steel Co., 42 Sup. Ct. Rep. 1 (Oct. 24, 1921). This is the present law; see Par. 294. (c) No suit for recovery of taxes may be brought unless a claim for refund has been filed, even if a claim for abate- ment had previously been filed. Rock Island, Etc., R. R. v. United States, 254 U. S. 141 (Nov. 22, 1920). For present law see Par. 293. (d) Under the 1913 Act appeals to the Commissioner had to be made within two years from the dates for the original returns, not the amended returns. Maryland Casualty Co. v. U. S., 251 U. S. 342 (Jan. 12, 1920). This provision has been repealed ; cf. in another connection Sec. 250d and Par. 272. (e) In a suit to recover taxes paid the taxpayer will not recover all the taxes paid, if on any theory any tax is due to the government from the plaintiff: the plaintiff will re- cover only the difference, if any. Crocker v. Malley, 249 U. S. 223 (March 17, 1919). The defendant had taxed the plaintiffs as an association. Held they were not taxable as an association but were taxable as trustees and the trustees could recover only the difference between the two taxes. This is the present law. See T. D. 3251. E. EXCESS PROFITS TAX DECISION Invested capital under the 1917 Act means original invest- ment and does include any later appreciation in value of the assets and so construed the Act is constitutional. La Belle Iron Works v. United States, 41 Sup. Ct. Rep. 528 (May 16, 1921). This is also tBe law under the 1921 statute. See Par. 207. PART VI. REVENUE ACT OF 1921 Titles I, II, III, XIII, XIV. A. IMPORTANT CHANGES AND NEW PROVISIONS IN THE REVENUE ACT OF 1921. Sec. 201b. Second Sentence. Pars. 86 and 195. Tax-exempt dividends, out of earnings or appreciation of property before March 1, 1913, are to be added to the sale price of stock in determining- any loss on the sale. Sec. 201c. Pars. 110 and 195. For computing gain on liquidating dividends only returns of capital are considered ; dividends out of earnings be- fore March 1, 1913 are not included. See above Sec. 201b. Sec. 202a (2). Pars. 93 and 195. In determining the gain or loss on gifts from living per- sons after Dec. 31, 1920, the basis is the cost or market value of the property given as a gift to the donor or if he received it as a gift from a living person, then the cost or market value to the last person who did not receive it as a gift from a living person. Sec. 202 (c). Pars. 101-6, 195. Rules as to gain or loss on exchange of property. Sec. 204. Pars. 80 and 197. Net loss in business for any year may be offset to a cer- tain amount against the net income of the two succeed- ing years commencing in 1922 for loss in 1921, etc. Sec. 206. Pars. 153 and 201. An alternative tax on gains from the sale of certain cap- ital assets on or after Jan. 1, 1922, is provided. Sec. 211a (2). Par. 152. Beginning in 1922 the surtax is decreased, the maximum rate being 50%. Gross Income of Individuals Sec. 213b (1). Pars. 3 and 175. Insurance proceeds on the death of an insured are not taxable, no matter to whom paid. Sec. 213b (4). Pars. 121 and 179. Interest from all Postal Savings Certificates is wholly tax-exempt; wholly tax-exempt interest need not be re- ported at all. Sec. 213b (9). Par. 9. Allotments under War Risk Insurance and the Vocational Rehabilitation Acts, or pensions from the United States for military or naval service are not taxable. Sec. 213b (10). Par. 12. Dividends or interest from mutual domestic building and loan associations are exempt from 1922-1926 to an amount not exceeding $300 (yearly). Sec. 213b (11). Rental value of home furnished to minister as part of his compensation is not taxable. Deductions Allowed to Individuals Sec. 214a (1). Pars. 10, 47, 77. The entire amount expended for board and lodging as part of traveling expenses connected with a business is deductible as expense. Sec. 214a (2). Pars. 130-1. Interest paid to purchase or carry wholly tax-exempt U. S. obligations issued after Sept. 24, 1917, is deductible only if the obligations were originally subscribed. Sec. 214a (3). Pars. 52 and 133. Taxes on a stockholder's interest paid for a stockholder by the corporation are not deductible by the taxpayer. Sec. 214a (5). Par. 86. Thirty-day clause on sale of stock or securities not con- nected with the business on or after Nov. 23, 1921. Sec. 214a (6). Pars. 62, 81, 136. The Commissioner may allow losses to be deducted for years other than those in which they were sustained. 90 Pars. 60 and 138. The basis for determining losses from destruction or damage to property: the March 1, 1913 value shall be taken as the basis. Sec. 214a (7). Pars. 63-69 and 141-2. Bad debts may be charged off in part as well as entirely; an alternative method of setting up a reserve is permitted. Sec. 214a (11). Pars. 139-140. Contributions to community charities whether incorp- orated or not are deductible; also those to posts of the American Legion or the Women's Auxiliary Units there- of; also those to domestic political units for public pur- poses. Sec. 214a (12). Pars. 108-9. Gain derived from proceeds received on destruction of property is cut down if the proceeds are reinvested or set aside as a replacement fund. Sec. 215b. Par. 82. A life tenant is not allowed any deduction for shrinkage in his estate. Credits Allowed Individuals Sec. 216a. Pars. 147, 129. Dividends from certain foreign corporations only are al- lowed as a credit against net income. Sec. 216c. Pars. 148-9. Married persons living with husband or wife and heads of families are allowed a personal exemption of $2,5CX) on incomes not over $5,000; special rule as to the ex- emption on income not over $5,020. Sec. 216d. Par. 148. $400 is allowed for each dependent child under eighteen, etc. Sec. 216e. Pars. 265-7. All nonresident aliens get personal exemption of $1,000, but no other or additional exemption. Sec. 217. Restatement of taxable income of nonresident aliens. 91 Sec. 219f. Provisions for taxing- income from trust created by em- ployers for employees. Sec. 220. Par. 202. 25% additional tax on income of corporations formed or used to evade surtaxes with option to stockholders to be taxed as partners. Sec. 221a. Pars. 255 and 257. Tax may be withheld at source from partnerships com- posed wholly or in part of nonresident aliens. Tax may not be withheld on interest on bank deposits by nonresident aliens. Sec. 223a (3). Pars. 216-17. All individuals with gross income of $5,000 or over must make returns. Sec. 225a (3). Pars. 226-7 and 161. Fiduciaries must make returns for all beneficiaries with gross income of $5,000 or over. Sec. 226c. Par. 146. Where income is reported by individuals for a taxable period less than twelve months, it is to be put on an an- nual basis. Sec. 229. Par. 168. Corporations formed during four months after passage of Act fXov. 23, 1921) may elect to be treated as corpora- tions from Jan. 1, 1921, if their income was at least 20^ of their invested capital. Sec. 230. Par. 200. Corporation tax rates commencing in 1922 are twelve and one-half per cent, of net income in excess of credit. Sec. 231 (14). Pars. 168-9. Personal Service Corporations are to be treated as ordi- nary corporations commencing in 1922. Sec. 232. Restatement of net income of foreign corporations. Sec. 233b. Restatement of gross income of foreign corporations. 92 Deductions and Credits Allowed Corporations Sec. 234a (2). Par. 189. Same as Sec. 214a (2). Sec. 234a (3). Par. 190. Taxes on stockholder's interest paid by the corporation are deductible by the corporation. Pars. 190 and 12. Taxes paid on interest from tax-free covenant bonds are not deductible by the corporation ; the amount of such taxes need not be returned as additional income by the obligees. Sec. 234a (4). Par. 195. The thirty-day clause (Sec. 214a (5) ) applies to all cor- porations except dealers in securities. Pars. 195-6. Same as Sec. 214a (6). Sec. 234a (5). Par. 191. Same as Sec. 214a (7), Sec. 234a (6). Par. 198. Dividends from certain foreign corporations only are al- lowed as a deduction. Sec. 234a (14). Par. 195. Same as Sec. 214a (12). Sec. 235. Same as Sec. 215b. Sec. 235b. Par. 199. $2,000 credit is allowed to corporations with net income of S25,CX)0 or less; special provisions for corporations with net income over S25,OO0 and less than 525,200. Sec. 238a. Par. 204. Limit to credit against tax that may be taken for foreign income and excess-profits taxes paid by corporation. Sec. 238e. Par. 204. Credit allowed to domestic corporations owning majority of voting stock of certain foreign corporations paying for- eign income and excess profits taxes. Sec. 239b. Par. 203. Net income of corporation returning for less than twelve months is put on annual basis. 93 Sec. 239c. Par. 174. Corporations are to make return of earnings during the year distributed or ordered to be distributed to the stock- holders. Sec. 240a. Par. 172. Affiliated corporations commencing in 1922 have the op- tion of making consolidated returns. Sec. 240d. Pars. 229 and 173. Provision as to apportionment of income in related trades or business. Administrative Provisions Sec. 250b. Par. 271. 6% interest must be paid on deficiencies in tax under the 1921 Act even if underpayment made in good faith. Par. 271. If there is intentional disregard of the rules without in- tent to defraud, a 5% penalty and 12% interest on addi- tional assessments are imposed. Sec. 250d. Par. 272. Additional assessments under 1921 and following returns must be made within four years. Par. 273. In case of income of a deceased person final assessment must be made within one year of request by person in charge of the estate. Pars. 274 and 283. Before an additional assessment may be made the tax- payer must be given at least 30 days' notice by regis- tered mail with opportunity for appeal and hearing. No claim for abatement is permitted after such assessment. Sec. 250f. Par. 275. In cases of undue hardship, an extension not later than May 23, 1923 may be granted for payment of an addi- tional assessment. Sec. 250g. Par. 270. Provisions as to requiring security from citizens leaving the country may be waived. 94 Sec. 252. Par. 291. Refunds or credits may be made at any time on excess payments due to changes in invested capital caused by the Commissioner. Sec. 1312. Par. 304. Provision for final assessment by agreement between tax- payer and Commissioner. Sec. 1314. Par. 301. Regulations need not be retroactive. Sec. 1316. Par. 288. Claims for refund and claims for credit must be pre- sented within four years. Sec. 1318. Par. 293. Suits for recovery of taxes must be brought not sooner than six months after the filing of the claim unless the Commissioner has rendered a decision before then and not later than five years from the date of payment of the tax. Sec. 1320. Par. 279. Except in case of fraud with intent to evade tax, etc., no suit by the government for the collection of internal rev- enue taxes may be begun after 5 years from the time such taxes were due. Sec. 1324a. Par. 292. Provisions for interest on claims for refund. Sec. 1324b. Par. 295. Provision for interest in judgment against collector or the United States. Sec. 1328. Pars. 122-127 and 179. New Liberty Bond exemptions. B. PROVISIONS IN THE REVENUE ACT OF 1921 NOT APPLICABLE UNTIL 1922. Sec. 204. Pars. 80 and 197. The net loss allowance does not apply until 1922 for net loss in 1921, etc. 95 Sec. 206. Pars. 153 and 201. The alternative tax on gains from the sale of capital assets applies only to sales on or after Jan. 1, 1922. Sec. 211a (2). Par. 152. The lower surtax rates do not apply until 1922. Sec. 213a (10). Par. 12. Interest on dividends from mutual domestic building and loan associations is tax-exempt up to $300 for 5 years commencing in 1922. Sec. 231 (14). Pars. 168-9. Personal Service Corporations are treated as all corpora- tions commencing in 1922. Sec. 240a. Par. 172. The option given to affiliated corporations of making con- solidated or separate returns does not apply until 1922. C. PROVISIONS IN THE REVENUE ACT OF 1921 OF LIMITED DURATION. Sec. 213b (10). Par. 12. Dividends on interest from mutual domestic buildings and loan associations are exempt only from 1922-1926. Sec. 218d. Par. 159. Personal Service Corporations are treated like partner- ships up to Jan. 1, 1922. Sec. 229. Par. 168. Certain corporations formed during four months after passage of Act (Nov. 23, 1921) may elect to be treated as corporations from Jan. 1, 1921. Sec. 301. Pars. 206-210. Excess-profits tax in effect only for 1921. With this goes the provision in Sec. 201f as to dividends paid within the first sixty days of a taxable year, etc. Sec. 1328. Pars. 122-127 and 179. Liberty Bond exemption of $125,000 expires July 2, 1923. Liberty Bond exemption of $50,000 runs from July 2, 1923-July 2, 1926. Liberty Bond exemption of $30,000 first 4|s expires July 2, 1923. 96 D. TEXT OF THE REVENUE ACT OF 1921 Titles I, II, III, XIII, XIV. Approved by the President, November 23, 1921, 3.55 P. M. AN ACT To reduce and equalize taxation, to provide revenue, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, TITLE I.— GENERAL DEFINITIONS. Section 1. That this Act may be cited as the "Revenue Act of 1921." Sec. 2. That when used in this Act — (1) The term "person" includes partnerships and corporations, as well as individuals ; (2) The term "corporation" includes associations, joint-stock com- panies, and insurance companies ; (3) The term "domestic" when applied to a corporation or part- nership means created or organized in the United States ; (4) The term "foreign" when applied to a corporation or partner- ship means created or organized outside the United States ; (5) The term "United States" when used in a geographical sense includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia; (6) The term "Secretary" means the Secretary of the Treasury; (7) The term "Commissioner" means the Commissioner of Internal Revenue ; (8) The term "collector" means collector of internal revenue; (9) The term "taxpayer" includes any person, trust or estate sub- ject to a tax imposed by this Act; (10) The term "military or naval forces of the United States" in- cludes the Marine Corps, the Coast Guard, the Army Nurse Corps, Fe- male, and the Navy Nurse Corps, Female, but this shall not be deemed to exclude other units otherwise included within such terms ; and (11) The term "government contract" means (a) a contract made with the United States, or with any department, bureau, officer, commis- sion, board, or agency, under the United States and acting in its behalf, or with any agency controlled by any of the above if the contract is for the benefit of the United States, or (b) a subcontract made with a con- tractor performing such a contract if the products or services to be furnished under the subcontract are for the benefit of the United States. The term "government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive" when applied to a contract of the kind referred to in clause (a) of this subdivision, includes all such contracts which, although entered into during such period, were originally not enforceable, but which have been or may become enforce- able by reason of subsequent validation in pursuance of law. 97 TITLE II.— INCOME TAX. (General effective date of this Title, January 1, 1921.) PART I.— GENERAL PROVISIONS. Definitions. Sec. 200. That when used in this title — (1) The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term "fiscal year" means an accounting period of twelve months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1921, shall be the calendar year 1921 or any fiscal year ending during the calendar year 1921 ; (2) The term "fiduciary" means a guardian, trustee, executor, ad- ministrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate; (3) The term "withholding agent" means any person required to de- duct and withhold any tax under the provisions of section 221 or section 237; (4) The term "paid," for the purposes of the deductions and credits under this title, means "paid or accrued" or "paid or incurred," and the terms "paid or incurred" and "paid or accrued" shall be construed accord- ing to the method of accounting upon the basis of which the net income is computed under section 212; and (5) The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing fac- tor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits, or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. Dividends. Sec. 201. (a) That the term "dividend" when used in this title (ex- cept in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913, except a distribution made by a personal service corporation out of earnings or profits accumulated since December 31, 1917, and prior to January 1, 1922. (b) For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since Feb- ruary 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed ex- empt from the tax, after the earnings and profits accumulated since Feb- ruary 28, 1913, have been distributed. If any such tax-free distribution has been made the distributee shall not be allowed as a deduction from gross income any loss sustained from the sale or other disposition of his stock or shares unless, and then only to the extent that, the basis provided 98 in section 202 exceeds the sum of (1) the amount realized from the sale or other disposition of such stock or shares, and (2) the aggregate amount of such distributions received by him thereon. (c) Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee. (d) A stock dividend shall not be subject to tax but if after the dis- tribution of any such dividend the corporation proceeds to cancel or re- deem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation after February 28, 1913. (e) For the purposes of this Act, a taxable distribution made by a corporation to its shareholders or members shall be included in the gross income of the distributees as of the date when the cash or other property is unqualifiedly made subject to their demands. (f) Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumu- lated during preceding taxable years ; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period. This subdivision shall not be in effect after December 31, 1921. Basis For Determining Gain or Loss. Sec. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such prop- erty; except that — (1) In the case of such property, which should be included in the inventory, the basis shall be the last inventory value thereof ; (2) In the case of such propertj% acquired by gift after December 31, 1920, the basis shall be the same as that which it would have in the hands of the donor or the last preceding owner by whom it was not ac- quired by gift. If the facts necessary to determine such basis are un- known to the donee, the Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the value of such property as found by the Commissioner as of the date or approximate date at which, according to the best in- formation the Commissioner is able to obtain, such property was ac- quired by such donor or last preceding owner. In the case of such prop- erty acquired by gift on or before December 31, 1920, the basis for ascertaining gain or loss from a sale or other disposition thereof shall be the fair market price or value of such property at the time of such ac- quisition ; 99 (3) In the case of such property, acquired by bequest, devise, or inheritance, the basis shall be the fair market price or value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402. (b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a) ; but — (1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market price or value ; (2) If its fair market price or value as of March 1, 1913, is lower than such basis, the deductible loss is the excess of the fair market price or value as of March 1, 1913, over the amount realized therefor ; and (3) If the amount realized therefor is more than such basis but not more than its fair market price or value as of March 1, 1913, or less than such basis but not less than such fair market price or value, no gain shall be included in and no loss deducted from the gross income. (c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily re- alizable market value ; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized — (1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use; (2) When in the reorganization of one or more corporations a per- son receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorgani- zation. The word "reorganization," as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corpora- tion, or of substantially all the properties of another corporation), re- capitalization, or mere change in identity, form, or place of organization of a corporation, (however effected) ; or (3) When (a) a person transfers any property, real, personal or mixed, to a corporation, and immediately after the transfer is in control of such corporation, or (b) two or more persons transfer any such property to a corporation, and immediately after the transfer are in control of such corporation, and the amounts of stock, securities, or both, received by such persons are in substantially the same proportion as their interests in the property before such transfer. For the purposes of this paragraph, a person is, or two or more persons are, "in control" of a corporation when owning at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. (d) (1) Where property is exchanged for other property and no gain or loss is recognized under the provisions of subdivision (c), the property received shall, for the purposes of this section, be treated as taking fhe place of the property exchanged therefor, except as provided in subdivision (e) ; (2) Where property is compulsorily or involuntarily converted into cash or its equivalent in the manner described in paragraph (12) of sub- division (a) of section 214 and paragraph (14) of subdivision (a) of 100 section 234, and the taxpayer proceeds in good faith to expend or set aside the proceeds of such conversion in the form and in the manner therein provided, the property acquired shall, for the purpose of this section, be treated as taking the place of a like proportion of the property converted ; (3) Where no deduction is allowed for a loss or a part thereof under the provisions of paragraph (5) of subdivision (a) of section 214 and paragraph (4) of subdivision (a) of section 234, that part of the property acquired with relation to which such loss is disallowed shall for the purposes of this section be treated as taking the place of the property sold or disposed of. (e) Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, pro- vided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess ; but when property is exchanged for property specified in paragraphs (1), (2), and (3) of sub- division (c) as received in exchange, together with money or other prop- erty of a readily realizable market value other than that specified in such paragraphs, the money or the fair market value of such other property received in exchange shall be applied against and reduce the basis, pro- vided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess. (f) Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in install- ments) the taxation of that portion of any installment payment repre- senting gain or profit in the year in which such payment is received. Inventories. Sec. 203. That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may pre- scribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. Net Losses. Sec. 204. (a) That as used in this section the term "net loss" means onlv net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business) ; and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: (1) the gross income of the taxpayer for the taxable year, (2) the amount by which the interest re- ceived free from taxation under this title exceeds so much of the interest paid or accrued within the taxable year on indebtedness as is not per- mitted to be deducted by paragraph (2) of subdivision (a) of section 214 or by paragraph (2) of subdivision (a) of section 234, (3) the amount by which the deductible losses not sustained in such trade or business ex- ceed the taxable gains or profits not derived from such trade or business, (4) amounts received as dividends and allowed as a deduction under paragraph (6) of subdivision (a) of section 234, and (5) so much of the depletion deduction allowed with respect to any mine, oil or gas well as is based upon discovery value in lieu of cost. 101 (b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeed- ing taxable year, the amount of such excess shall be allowed as a deduc- tion in computing the net income for the next succeeding taxable year ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary. (c) The benefit of this section shall be allowed to the members of a partnership and the beneficiaries of an estate or trust, and to insurance companies subject to the tax imposed by section 243 or 246, under regula- tions prescribed by the Commissioner with the approval of the Secretary. (d) If it appears, upon the production of evidence satisfactory to the Commissioner, that a taxpayer having a fiscal year beginning in 1920 and ending in 1921 has sustained a net loss during such fiscal year, such taxpayer shall be entitled to the benefits of this section in respect to the same proportion of such net loss which the portion of such fiscal year falling within the calendar year 1921 is of the entire fiscal year. Fiscal Years 1920-1921 and 1921-1922. Sec. 205. (a) That if a taxpayer makes return for a fiscal year be- ginning in 1920 and ending in 1921, his tax under this title for the taxable year 1921 shall be the sum of: (1) the same proportion of a tax for the entire period computed under Title II of the Revenue Act of 1918 at the rates for the calendar year 1920 which the portion of such period falling within the calendar year 1920 is of the entire period, and (2) the same proportion of a tax for the entire period computed under this title at the rates for the calendar year 1921, which the portion of such period falling within the calendar year 1921 is of the entire period. Any amount paid before or after the passage of this Act on account of the tax imposed for such fiscal year by Title II of the Revenue Act of 1918 shall be credited toward the payment of the tax imposed for such fiscal year by this Act, and if the amount so paid exceeds the amount of such tax imposed by this Act, the excess shall be credited or refunded in accordance with the provisions of section 252. (b) If a taxpayer makes return for a fiscal year beginning in 1921 and ending in 1922, his tax under this title for the taxable year 1922 shall be the sum of: (1) the same proportion of a tax for the entire period com- puted under this title (as in force on December 31, 1921) at the rates for the calendar year 1921 which the portion of such period falling within the calendar year 1921 is of the entire period, and (2) the same propor- tion of a tax for the entire period computed under this title (as in force on January 1. 1922) at the rates for the calendar year 1922 which the portion of such period falling within the calendar year 1922 is of the entire period: Provided, That in the case of a personal service corpora- tion the amount to be paid shall be only that specified in clause (2). (c) If a fiscal year of a partnership begins in 1920 and ends in 1921, or begins in 1921 and ends in 1922. then (1) the rates for the calendar year during which such fiscal year begins shall apply to an amount of each partner's share of such partnership net income (determined under the law applicable to such year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and (2) the rates for the calendar year during which such fiscal year ends shall apply to an amount of each partner's share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year. 102 Capital Gain. Sec. 206. (a) That for the purpose of this title: (1) The term "capital gain" means taxable gain from the sale or ex- change of capital assets consummated after December 31, 1921 ; (2) The term "capital loss" means deductible loss resulting from the sale or exchange of capital assets consummated after December 31, 1921 ; (3) The term "capital deductions" means such deductions as are allowed under this title for the purpose of computing net income and are properly allocable to or chargeable against items of capital gain as defined in this section ; (4) The term "capital net gain" means the excess of the total amount of capital gain over the sum of the capital deductions and capital losses ; (5) The term "ordinary net income" means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions ; and (6) The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the tax- payer if on hand at the close of the taxable year. (b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows: A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus I2V2 per centum of the capital net gain ; but if the taxpayer elects to be taxed under this section the total tax shall in no such case be less than 12^/^ per centum of the total net income. The total tax thus determined shall be computed, collected and paid in the same manner, at the same time and subject to the same provisions of law, including penalties, as other taxes under this title. (c) In the case of a partnership or of an estate or trust, the proper part of each share of the net income which consists, respectively, of ordinary net income and capital net gain, shall be determined under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary, and shall be separately shown in the return of the partnership or estate or trust, and shall be taxed to the member or bene- ficiary or to the estate or trust as provided in sections 218 and 219, but at the rates and in the manner provided in subdivision (b) of this section. PART II.— INDIVIDUALS. Normal Tax. Sec. 210. That, in lieu of the tax imposed by section 210 of the Revenue Act of 1918, there shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax of 8 per centum of the amount of the net income in excess of the credits pro- vided in section 216; Provided, That in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 4 per centum. Surtax. Sec. 211. (a) That, in lieu of the tax imposed by section 211 of the Revenue Act of 1918, but in addition to the normal tax imposed by section 103 210 of this Act, there shall be levied, collected, and paid for each taxable year upon the net income of every individual — (1) For the calendar year 1921, a surtax equal to the sum of the following : 1 per centum of the amount by which the net income exceeds $5,000 and does not exceed $6,000; 2 per centum of the amount by which the net income exceeds $6,000 and does not exceed $8,000; 3 per centum of the amount by which the net income exceeds $8,000 and does not exceed $10,000; 4 per centum of the amount by which the net income exceeds $10,000 and does not exceed $12,000; 5 per centum of the amount by which the net income exceeds $12,000 and does not exceed $14,000 ; 6 per centum of the amount by which the net income exceeds $14,000 and does not exceed $16,000; 7 per centum of the amount by which the net income exceeds $16,000 and does not exceed $18,000 ; 8 per centum of the amount by which the net income exceeds $18,000 and does not exceed $20,000; 9 per centum of the amount by which the net income exceeds $20,000 and does not exceed $22,000; 10 per centum of the amount by which the net income exceeds $22,000 and does not exceed $24,000; 11 per centum of the amount by which the net income exceeds $24,000 and does not exceed $26,000 ; 12 per centum of the amount by which the net income exceeds $26,000 and does not exceed $28,000; 13 per centum of the amount by which the net income exceeds $28,000 and does not exceed $30,000; 14 per centum of the amount by which the net income exceeds $30,000 and does not exceed $32,000; 15 per centum of the amount by which the net income exceeds $32,000 and does not exceed $34,000 ; 16 per centum of the amount by which the net income exceeds $34,000 and does not exceed $36,000; 17 per centum of the amount by which the net income exceeds $36,000 and does not exceed $38,000 ; 18 per centum of the amount by which the net income exceeds $38,000 and does not exceed $40,000 ; 19 per centum of the amount by which the net income exceeds $40,000 and does not exceed $42,000 ; 20 per centum of the amount by which the net income exceeds $42,000 and does not exceed $44,000; 21 per centum of the amount by which the net income exceeds $44,000 and does not exceed $46,000 ; 22 per centum of the amount by which the net income exceeds $46,000 and does not exceed $48,000; 23 per centum of the amount by which the net income exceeds $48,000 and does not exceed $50,000; 24 per centum of the amount by which the net income exceeds $50,000 and does not exceed $52,000 ; 25 per centum of the amount by which the net income exceeds $52,000 and does not exceed $54,000 ; 26 per centum of the amount by which the net income exceeds $54,000 and does not exceed $56,000; 27 per centum of the amount by which the net income exceeds $56,000 and does not exceed $58,000; e-eonnn 28 per centum of the amount by which the net income exceeds $58,000 and does not exceed $60,000; 104 29 per centum of the amount by which the net income exceeds $60,000 and does not exceed $62,000; 30 per centum of the amount by which the net income exceeds $62,000 and does not exceed $64,000 ; 31 per centum of the amount by which the net income exceeds $64,000 and does not exceed $66,000; 32 per centum of the amount by which the net income exceeds $66,000 and does not exceed $68,000; 33 per centum of the amount by which the net income exceeds $68,000 and does not exceed $70,000 ; 34 per centum of the amount by which the net income exceeds $70,000 and does not exceed $72,000; 35 per centum of the amount by which the net income exceeds $72,000 and does not exceed $74,000; 36 per centum of the amount by which the net income exceeds $74,000 and does not exceed $76,000 ; 37 per centum of the amount by which the net income exceeds $76,000 and does not exceed $78,000; 38 per centum of the amount by which the net income exceeds $78,000 and does not exceed $80,000; 39 per centum of the amount by which the net income exceeds $80,000 and does not exceed $82,000; 40 per centum of the amount by which the net income exceeds $82,000 and does not exceed $84,000; 41 per centum of the amount by which the net income exceeds $84,000 and does not exceed $86,000; 42 per centum of the amount by which the net income exceeds $86,000 and does not exceed $88,000; 43 per centum of the amount by which the net income exceeds $88,000 and does not exceed $90,000; 44 per centum of the amount by which the net income exceeds $90,000 and does not exceed $92,000 ; 45 per centum of the amount by which the net income exceeds $92,000 and does not exceed $94,000; 46 per centum of the amount by which the net income exceeds $94,000 and does not exceed $96,000; 47 per centum of the amount by which the net income exceeds $96,000 and does not exceed $98,000; 48 per centum of the amount by which the net income exceeds $98,000 and does not exceed $100,000; 52 per centum of the amount by which the net income exceeds $100,000 and does not exceed $150,000; 56 per centum of the amount by which the net income exceeds $150,000 and does not exceed $200,000; 60 per centum of the amount by which the net income exceeds $200,000 and does not exceed $300,000; 63 per centum of the amount by which the net income exceeds $300,000 and does not exceed $500,000; 64 per centum of the amount by which the net income exceeds $500,000 and does not exceed $1,000,000; 65 per centum of the amount by which the net income exceeds $1,000,- 000; (2) For the calendar year 1922 and each calendar year thereafter, a surtax equal to the sum of the following: 1 per centum of the amount by which the net income exceeds $6,000 and does not exceed $10,000; 2 per centum of the amount by which the net income exceeds $10,000 and does not exceed $12,000; 3 per centum of the amount by which the net income exceeds $12,000 and does not exceed $14,000; 105 4 per centum of the amount by which the net income exceeds $14,000 and does not exceed $16,000; 5 per centum of the amount by which the net income exceeds $16,000 and does not exceed $18,000; 6 per centum of the amount by which the net income exceeds $18,000 and does not exceed $20,000; 8 per centum of the amount by which the net income exceeds $20,000 and does not exceed $22,000; 9 per centum of the amount by which the net income exceeds $22,000 and does not exceed $24,000; 10 per centum of the amount by which the net income exceeds $24,000 and does not exceed $26,000 ; 11 per centum of the amount by which the net income exceeds $26,000 and does not exceed $28,000; 12 per centum of the amount by which the net income exceeds $28,000 and does not exceed $30,000; 13 per centum of the amount by which the net income exceeds $30,000 and does not exceed $32,000; 15 per centum of the amount by which the net income exceeds $32,000 and does not exceed $36,000; 16 per centum of the amount by which the net income exceeds $36,000 and does not exceed $38,000; 17 per centum of the amount by which the net income exceeds $38,000 and does not exceed $40,000 ; 18 per centum of the amount by which the net income exceeds $40,000 and does not exceed $42,000 ; 19 per centum of the amount by which the net income exceeds $42,000 and does not exceed $44,000; 20 per centum of the amount by which the net income exceeds $44,000 and does not exceed $46,000; 21 per centum of the amount by which the net income exceeds $46,000 and does not exceed $48,000; 22 per centum of the amount by which the net income exceeds $48,000 and does not exceed $50,000 ; 23 per centum of the amount by which the net income exceeds $50,000 and does not exceed $52,000; 24 per centum of the amount by which the net income exceeds $52,000 and does not exceed $54,000 ; 25 per centum of the amount by which the net income exceeds $54,000 and does not exceed $56,000; 26 per centum of the amount by which the net income exceeds $56,000 and does not exceed $58,000 ; 27 per centum of the amount by which the net income exceeds $58,000 and does not exceed $60,000 ; 28 per centum of the amount by which the net income exceeds $60,000 and does not exceed $62,000; 29 per centum of the amount by which the net income exceeds $62,000 and does not exceed $64,000 ; 30 per centum of the amount by which the net income exceeds $64,000 and does not exceed $66,000; 31 per centum of the amount by which the net income exceeds $66,000 and does not exceed $68,000 ; 32 per centum of the amount by which the net income exceeds $68,000 and does not exceed $70,000; 33 per centum of the amount by which the net income exceeds $70,000 and does not exceed $72,000; 34 per centum of the amount by which the net income exceeds $72,000 and docs not exceed $74,000; 35 per centum of the amount by which the net income exceeds $74,000 and does not exceed $76,000; 36 per centum of the amount by which the net income exceeds $76,000 and does not exceed $78,000; 106 37 per centum of the amount by which the net income exceeds $78,000 and does not exceed $80,000; 38 per centum of the amount by which the net income exceeds $80,000 and does not exceed $82,000 ; 39 per centum of the amount by which the net income exceeds $82,000 and does not exceed $84,000 ; 40 per centum of the amount by which the net income exceeds $84,000 and does not exceed $86,000 ; 41 per centum of the amount by which the net income exceeds $86,000 and does not exceed $88,000; 42 per centum of the amount by which the net income exceeds $88,000 and does not exceed $90,000 ; 43 per centum of the amount by which the net income exceeds $90,000 and does not exceed $92,000; 44 per centum of the amount by which the net income exceeds $92,000 and does not exceed $94,000 ; 45 per centum of the amount by which the net income exceeds $94,000 and does not exceed $96,000; 46 per centum of the amount by which the net income exceeds $96^000 and does not exceed $98,000 ; 47 per centum of the amount by which the net income exceeds $98,000 and does not exceed $100,000; 48 per centum of the amount by which the net income exceeds $100,000 and does not exceed $150,000; 49 per centum of the amount by which the net income exceeds $150,000 and does not exceed $200,000; 50 per centum of the amount by which the net income exceeds $200,000. (b) In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demon- strated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed, for the calendar year 1921, 20 per centum, and for each calendar year thereafter 16 per centum, of the selling price of such property or interest. Net Income of Individuals Defined. Sec. 212. (a) That in the case of an individual the term "net in- come" means the gross income as defined in section 213, less the deduc- tions allowed by section 214. (b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the in- come. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual account- ing period or does not keep books, the net income shall be computed on the basis of the calendar year. (c) If a taxpayer changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of section 226. Gross Income Defined. Sec. 213. That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" — 107 (a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the Presi- dent of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political sub- division thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from profes- sions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property ; also from interest, rent, dividends, securi- ties, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items (except as provided in subdivision (e) of section 201) shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period ; but (b) Does not include the following items, which shall be exempt from taxation under this title : (1) The proceeds of life insurance policies paid upon the death of the insured ; (2) The amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity con- tracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract ; (3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income) ; (4) Interest upon (a) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (b) securi- ties issued under the provisions of the Federal Farm Loan Act of Juiy 17, 1916; or (c) the obligations of the United States or its possessions; or (d) bonds issued by the War Finance Corporation. In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), and in the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from in- come, war-profits and excess-profits taxes ; (5) The income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments, or from any other source within the United States ; (6) Amounts received, through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness; (7) Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Terri- tory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof. Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and pur- pose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment 108 thereof will impose a loss or burden upon such State, Territory, District of Columbia, or political subdivision; but this provision is not intended and shall not be construed to confer upon such person any financial gain or exemption or to relieve such person from the payment of a tax as pro- vided for in this title upon the part or portion of such income to which such person is entitled under such contract ; (8) The income of a nonresident alien or foreign corporation which consists exclusively of earnings derived from the operation of a ship or ships, documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States; (9) Amounts received as compensation, family allotments and allow- ances under the provisions of the War Risk Insurance and the Vocational Rehabilitation Acts, or as pensions from the United States for service of -the beneficiary or another in the military or naval forces of the United States in time of war ; (10) So much of the amount received by an individual after Decem- ber 31, 1921, and before January 1, 1927, as dividends or interest from domestic building and loan associations, operated exclusively for the pur- pose of making loans to members, as does not exceed $300; (11) The rental value of a dwelling house and appurtenances thereof furnished to a minister of the gospel as part of his compensation. (12) The receipts of shipowners' mutual protection and indemnity associations, not organized for profit, and no part of the net earnings of which inures to the benefit of any private stockholder or member, but such corporations shall be subject as other persons to the tax upon their net income from interest, dividends, and rents. (c) In the case of a nonresident alien individual, gross income means only the gross income from sources within the United States, determined under the provisions of section 217. Deductions Allowed Individuals. Sec. 214. (a) That in computing net income there shall be allowed as deductions : (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reason- able allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount ex- pended for meals and lodging) while away from home in the pursuit of a trade or business ; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity ; (2) All interest paid or accrued within the taxable year on indebt- edness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title ; (3) Taxes paid or accrued within the taxable year except (a) income, war-profits, and excess-profits taxes imposed by the authority of the United States, (b) so much of the income, war-profits and excess-profits taxes, imposed by the authority of any foreign country or possession of the United States, as is allowed as a credit under section 222, (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and (d) taxes imposed upon the taxpayer upon his interest as shareholder or member of a corporation, which are paid by the corporation without reimbursement from the taxpayer. For the purpose of this paragraph estate, inheritance, legacy, and succession taxes 109 accrue on the due date thereof except as otherwise provided by the law of the jurisdiction imposing such taxes ; (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business ; (5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business ; but in the case of a nonresident alien individual only if and to the extent that the profit, if such transaction had resulted in a profit, would be taxable under this title. No deduction shall be allowed under this paragraph for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities made after the passage of this Act where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. If such acquisition is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed; (6) Losses sustained during the taxable year of property not con- nected with the trade or business (but in the case of a nonresident alien individual only property within the United States) if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not com- pensated for by insurance or otherwise. Losses allowed under paragraphs (4), (5), and (6) of this subdivision shall be deducted as of the taxable year in which sustained unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period. In case of losses arising from destruction of or dam- age to property, where the property so destroyed or damaged was ac- quired before March 1, 1913, the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913; (7) Debts ascertained to be worthless and charged off within the taxable year (or. in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part; (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the case of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913 ; (9) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German Government, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men rontrihutine to the prosecution of such war. there shall be allowed, for anv taxable year ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable year 1918, 1919, 1920, or 1921) a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. At any time before March 3. 1924, the Commissioner mav. and at the request of the taxpayer shall, re-examine the return, and if he then finds as a result of an appraisal or form other evidence that the deduction originally al- lowed was incorrect, the income, war-profits, and excess-profits taxes for the year or years affected shall be redetermined ; and the amount of tax due upon such redetermination, if any, shall be paid upon notice and de- mand by the collector, or the amount of tax overpaid, if any, shall be 110 credited or refunded to the taxpayer in accordance with the provisions of section 252; (10) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted : Pro- vided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date: Pro- vided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1. 1913. and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter: And provided further. That such depletion allowance based on discovery value shall not exceed the net income, computed without allowance for depletion, from the prop- erty upon which the discovery is made, except where such net income so comQuted is less than the depletion allowance based on cost or fair market value as of March 1, 1913 ; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee ; (11) Contributions or gifts made within the taxable year to or for the use of: (a) The United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, for exclusively public purposes ; (b) any corporation, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including posts of the American Legion or the Women's Auxiliary units thereof, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; or (c) the special fund for vocational rehabilitation authorized by section 7 of the Voca- tional Rehabilitation Act ; to an amount which in all the above cases com- bined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this paragraph. In case of a nonresi- dent alien individual this deduction shall be allowed only as to contribu- tions or gifts made to domestic corporations, or to community chests, funds, or foundations, created in the United States, or to such vocational rehabilitation fund. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary ; (12) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (a) its destruction in whole or in part, (b) theft or seizure, or (c) an exercise of the power of requisition or condemnation, or the threat or imminence thereof ; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corpora- tion owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire pro- ceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains de- rived from the compulsory or involuntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the ex- emption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax acts. Ill (b) In the case of a nonresident alien individual the deductions al- lowed in subdivision (a), except those allowed in paragraphs (5), (6), and (11), shall be allowed only if and to the extent that they are con- nected with Income from sources within the United States ; and the proper apportionment and allocation of the deductions with respect to sources of income within and without the United States shall be determined as pro- vided in section 217 under rules and regulations prescribed by the Com- missioner with the approval of the Secretary. In the case of a citizen entitled to the benefits of section 262 the deductions shall be the same and shall be determined in the same manner as in the case of a nonresident alien individual. Items not Deductible. Sec. 215. (a) That in computing net income no deduction shall in any case be allowed in respect of — (1) Personal, living, or family expenses; (2) Any amount paid out for new buildings or for permanent im- provements or betterments made to increase the value of any property or estate ; (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made ; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. (b) Amounts paid under the laws of any State, Territory, District of Columbia, possession of the United States, or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled. Credits Allowed Individuals. Sec. 216. That for the purpose of the normal tax only there shall be allowed the following credits : (a) The amount received as dividends (1) from a domestic corpora- tion other than a corporation entitled to the benefits of section 262, or (2) from a foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of section 217; (b) The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is in- cluded in gross income under section 213 ; (c) In the case of a single person, a personal exemption of $1,OC)0; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,500, unless the net income is in excess of $5,000, in which case the personal exemption shall be $2,000. A husband and wife living together shall receive but one per- sonal exemption. The amount of such personal exemption shall be $2,500, unless the aggregate net incoi^e of such husband and wife is in excess 112 of $5,000, in which case the amount of such personal exemption shall be $2,000. If such husband and wife make separate returns, the personal ex- emption may be taken by either or divided between them. In no case shall the reduction of the personal exemption from $2,500 to $2,000 oper- ate to increase the tax, which would be payable if the exemption were $2,500, by more than the amount of the net income in excess of $5,000; (d) $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective ; (e) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the personal exemption shall be only $1,000, and he shall not be entitled to the credit provided in subdivi- sion (d). (f) The credits allowed by subdivisions (c), (d), and (e) of this section shall be determined by the status of the taxpayer on the last day of the period for which the return of income is made ; but in the case of an individual who dies during the taxable year, such credits shall be de- termined by his status at the time of his death, and in such case full credits shall be allowed to the surviving spouse, if any, according to his or her status at the close of the period for which such survivor makes return of income. Net Income of Nonresident Alien Individuals. Sec. 217. (a) That in the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States : (1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including (a) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein, or (b) interest received from a resident alien in- dividual or a resident foreign corporation when it is shown to the satis- faction of the Commissioner that less than 20 per centum of the gross income of such resident payor has been derived from sources within the United States, as determined under the provisions of this section, for the three-year period ending with the close of the taxable year of such payor, or for such part of such period immediately preceding the close of such taxable year as may be applicable ; (2) The amount received as dividends (a) from a domestic corpora- tion other than a corporation entitled to the benefits of section 262, or (b) from a foreign corporation unless less than 50 per centum of the gross income of such foreign corporation for the three-year period end- ing with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as de- termined under the provisions of this section ; (3) Compensation for labor or personal services performed in the United States ; (4) Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property ; and (5) Gains, profits, and income from the sale of real property located in the United States. 113 (b) From the items of gross income specified in subdivision (a) there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States. (c) The following items of gross income shall be treated as income from sources without the United States : (1) Interest other than that derived from sources within the United States as provided in paragraph (1) of subdivision (a) ; (2) Dividends other than those derived from sources within the United States as provided in paragraph (2) of subdivision (a) ; (3) Compensation for labor or personal service performed without the United States ; (4) Rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property ; and (5) Gains, profits, and income from the sale of real property located without the United States. (d) From the items of gross income specified in subdivision (c) there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be treated in full as net income from sources without the United States. (e) Items of gross income, expenses, losses and deductions, other than those specified in subdivisions (a) and (c), shall be allocated or apportioned to sources within or without the United States under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the pur- pose of computing the net income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States. In the case of gross income derived from sources partly within and partly without the United States, the net income may first be computed by deducting the expenses, losses or other deductions appor- tioned or allocated thereto and a ratable part of any expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income; and the portion of such net income attributable to sources within the United States may be determined by processes or for- mulas of general apportionment prescribed by the Commissioner with the approval of the Secretary. Gains, profits and income from (1) trans- portation or other services rendered partly within and partly without the United States, or (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States, or produced (in whole or in part) by the taxpayer without and sold within the United States, shall be treated as derived partly from sources within and partly from sources without the United States. Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from the country in which sold. 114 (f) As used in this section the words "sale" or "sold" include "ex- change" or "exchanged" ; and the word "produced" includes "created," "fabricated," "manufactured," "extracted," "processed," "cured," or "aged." (g) A nonresident alien individual or a citizen entitled to the benefits of section 262 shall receive the benefit of the deductions and credits al- lowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received from all sources corporate or otherwise in the United States, in the manner prescribed in this title; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits : Provided, That the benefit of the credit allowed in subdivision (e) of section 216 mav. in the discretion of the Commissioner, be received by filing a claim therefor with the withholding agent. In case of failure to file a return, the collector shall collect the tax on such income, and all property belonging to such nonresident alien individual or foreign trader shall be liable to distraint for the tax. Partnerships and Personal Service Corporations. Sec. 218. (a) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his dis- tributive share, whether distributed or not, of the net income of the part- nership for the taxable year, or. if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner's net income is computed. (b) The partner shall, for the purpose of the normal tax, be allowed as credits, in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the partnership. (c) The net income of the partnership shall be computed in the same manner and on the same basis as provided in section 212 except that the deduction provided in paragraph (11) of subdivision (a) of section 214 shall not be allowed. (d) Personal service corporations shall not be subject to taxation under this title, but the individual stockholders thereof shall be taxed in the same manner as the members of partnerships. All the provisions of this title relating to partnerships and the members thereof shall so far as practicable apply to personal service corporations and the stockholders thereof : Provided, That for the purpose of this subdivision amounts dis- tributed by a personal service corporation during its taxable year shall be accounted for by the distributees ; and any portion of the net income remaining undistributed at the close of its taxable year shall be accounted for bv the stockholders of such corporation at the close of its taxable year in proportion to their respective shares. This subdivision shall not be in effect after December 31. 1921. In the case of a personal service corporation having a fiscal year beginning in 1921 and ending in 1922, amounts distributed prior to January 1, 1922, to its stockholders out of earnings or profits accumulated after December 31, 1920, shall be taxed to the distributees ; and the stockholders of record on December 31, 1921, shall be taxed upon their distributive shares of the difference (if any) between such distributive profits and the portion of the corporation's net income assignable to the calendar year 1921, deter- mined in the manner provided in clause (1) of subdivision (c) of section 205 of this Act. lis Estates and Trusts. Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including — (1) Income received by estates of deceased persons during the period of administration or settlement of the estate; (2) Income accumulated in trust for the benefit of unborn or un- ascertained persons or persons with contingent interests ; (3) Income held for future distribution under the terms of the will or trust ; and (4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct. (b) The fiduciary shall be responsible for making the return of in- come for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) there shall also be allowed as a deduction, without limitation, any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (11) of subdivision (a) of section 214. In cases in which there is any income of the class de- scribed in paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable to each beneficiary, whether or not distributed before the close of the taxable year for which the return is made. (c) In cases under paragraphs (1), (2), or (.3) of subdivision (a) or in any other case within subdivision (a) of this section except para- graph (4) thereof the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determin- ing the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir, or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216. (d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted bv subdivision (c) to be deducted from the net in- come upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net in- come of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not. or. if his taxable vear is different from that of the estate or trust, then there shall be included in computing his net income his distributive share of the income of the estate or trust for its taxable year ending within the taxable year of the beneficiary. In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits, in addi- tion to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust. (e) In the case of an estate or trust the income of which consists both of income of the class described in paragraph (4) of subdivision (a) of this section and other income, the net income of the estate or trust shall be computed and a return thereof made by the fiduciary in accordance 116 with subdivision (b) and the tax shall be imposed, and shall be paid by the fiduciary in accordance with subdivision (c), except that there shall be allowed as an additional deduction in computing the net income of the estate or trust that part of its income of the class described in paragraph (4) of subdivision (a) which, pursuant to the instrument or order govern- ing the distribution, is distributable during its taxable year to the bene- ficiaries. In cases under this subdivision there shall be included, as pro- vided in subdivision (d) of this section, in computing the net income of each beneficiary, that part of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is dis- tributable during the taxable year to such beneficiary. (f) A trust created by an employer as a part of a stock bonus or profit-sharing plan for the exclusive benefit of some or all of his em- ployees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under this section, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him. Such distributees shall for the purpose of the normal tax be allowed as credits that part of the amount so distributed or made available as represents the items specified in sub- divisions (a) and (b) of section 216. Evasion of Surtaxes by Incorporation. Sec. 220. That if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of per- mitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 25 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax: Provided, That if all the stock- holders or members of such corporation agree thereto, the Commissioner may, in lieu of all income, war-profits and excess-profits taxes imposed upon the corporation for the taxable year, tax the stockholders or mem- bers of such corporation upon their distributive shares in the net income of the corporation for the taxable year in the same manner as provided in subdivision (a) of section 218 in the case of members of a partnership. The fact that any corporation is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax : but the fact that the gains and profits are in any case permitted tg accumulate and become surplus shall not be construed as evidence of a purpose to escape the tax in such case unless the Commissioner certifies that in his opinion such accumulation is unreasonable for the purposes of the business. When requested by the Commissioner, or any collector, every corporation shall forward to him a correct statement of such gains and profits and the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed, and of the amounts that would be payable to each. Payment of Individual's Tax at Source. Sec. 221. (a) That all individuals, corporations, and partnerships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or pay- ment of interest (except interest on deposits with persons carrying on the 117 banking business paid to persons not engaged in business in the United States and not having an office or place of business therein), rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, of any nonresident alien individual or partnership composed in whole or in part of nonresident aliens (other than income received as dividends of the class allowed as a credit by subdivision (a) of section 216) shall (except in the cases provided for in subdivision (b) and except as other- wise provided in regulations prescribed by the Commissioner under section 217) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to 8 per centum thereof : Provided, That the Com- missioner may authorize such tax to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent. (b) In any case where bonds, mortgages, or deeds of trust, or other similar obligations of a corporation contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee, or to reimburse the obligee for any portion of the tax, or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon, or to retain there- from under any law of the United States, the obligor shall deduct and withhold a tax equal to 2 per centum of the interest upon such bonds, mortgages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods and whether payable to a nonresident alien individual or to an individual citizen or resident of the United States or to a partnership : Provided, That the Commissioner may authorize such tax to be deducted and withheld in the case of in- terest upon any such bonds, mortgages, deeds of trust, or other obligations, the owners of which are not known to the withholding agent. Such deduc- tion and withholding shall not be required in the case of a citizen or resident entitled to receive such interest, if he files with the withholding agent on or before February 1 a signed notice in writing claiming the benefit of the credits provided in subdivisions (c) and (d) of section 216; nor in the case of a nonresident alien individual if so provided for in regulations prescribed by the Commissioner under subdivision (g) of section 217. (c) Every individual, corporation, or partnership required to deduct and withhold any tax under this section shall make return thereof on or before March 1 of each year and shall on or before June 15 pay the tax to the official of the United States Government authorized to receive it. Every such individual, corporation, or partnership is hereby made liable for such tax and is hereby indemnified against the claims and demands of any individual, corporation, or partnership for the amount of any pay- ments made in accordance with the provisions of this section. (d) Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return. (e) If any tax required under this section to be deducted and with- held is paid by the recipient of the income, it shall not be recollected from the withholding agent; nor in cases in which the tax is so paid shall any penalty be imposed upon or collected from the recipient of the income or the withholding agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment. Credit for Taxes in Case of Individuals. Sec. 222. (a) That the tax computed under Part II of this title shall be credited with : 118 (1) In the case of a citizen of the United States, the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country or to any possession of the United States ; and (2) In the case of a resident of the United States, the amount of any such taxes paid during the taxable year to any possession of the United States ; and (3) In the case of an alien resident of the United States, the amount of any such taxes paid during the taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country ; and (4) In the case of any such individual who is a member of a part- nership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid during the taxable year to a foreign country or to any possession of the United States, as the case may be. (5) The above credits shall not be allowed in the case of a citizen entitled to the benefits of section 262 ; and in no other case shall the amount of credit taken under this subdivision exceed the same proportion of the tax, against which such credit is taken, which the taxpayer's net in- come (computed without deduction for any income, war-profits and ex- cess-profits taxes imposed by any foreign country or possession of the United States) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year. (b) If accrued taxes when paid dififer from the amounts claimed as credits bv the taxpayer, or if anv tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax due under Part II of this title for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commis- sioner in such penal sum as the Commissioner may require, conditioned for the payment by the taxpayer of any amount of tax found due upon any such redetermination ; and the bond herein prescribed shall contain such further conditions as the Commissioner may require. (c) These credits shall be allowed only if the taxpayer furnishes evi- dence satisfactory to the Commissioner showing the amount of income derived from sources without the United States, and all other information necessary for the verification and computation of such credits. (d) If the taxpayer makes a return for a fiscal year beginning in 1920 and ending in 1921, the credit for the entire fiscal year shall, not- withstanding any provision of this Act, be determined under the provi- sions of this section ; and the Commissioner is authorized to disallow, in whole or part, any such credit which he finds has already been taken by the taxpayer. Individual Returns. Sec. 223. (a) That the following individuals shall each make under oath a return stating specifically the items of his gross income and the deductions and credits allowed under this title — (1) Every individual having a net income for the taxable year of $1,000 or over, if single, or if married and not living with husband or wife; 119 (2) Every individual having a net income for the taxable year of $2,000 or over, if married and living with husband or wife ; and (3) Every individual having a gross income for the taxable year of $5,000 or over, regardless of the amount of his net income. (b) If a husband and wife living together have an aggregate net income for the taxable year of $2,0()0 or over, or an aggregate gross income for such year of $5,000 or over — (1) Each shall make such a return, or (2) The income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income. (c) If the taxpayer is unable to make his own return, the return shall be made by a duly authorized agent or by the guardian or other person charged with the care of the person or property of such taxpayer. Partnership Returns. Sec. 224. That every partnership shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowed by this title, and shall include in the return the names and ad- dresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. The return shall be sworn to by any one of the partners. Fiduciary Returns. Sec. 225. (a) That every fiduciary (except a receiver appointed by authority of law in possession of part only of the property of an in- dividual) shall make under oath a return for any of the following in- dividuals, estates, or trusts for which he acts, stating specifically the items of gross income thereof and the deductions and credits allowed under this title— (1) Every individual having a aet income for the taxable year of $1,000 or over, if single, or if married and not living with husband or wife; (2) Every individual having a net income for the taxable year of $2,000 or over, if married and living with husband or wife; (3) Every individual having a gross income for the taxable year of $5,000 or over, regardless of the amount of his net income ; (4) Every estate or trust the net income of which for the taxable year is $1,000 or over; and (5) Every estate or trust of which any beneficiary is a nonresident alien. (b) Under such regulations as the Commissioner with the approval of the Secretary may prescribe a return made by one of two or more joint fiduciaries and filed in the ofiice of the collector of the district where such fiduciary resides shall be sufficient compliance with the above re- quirement. Such fiduciary shall make oath (1) that he has sufficient knowledge of the affairs of the individual, estate or trust for which the return is made, to enable him to make the return, and (2) that the return is, to the best of his knowledge and belief, true and correct. Any fiduciary required to make a return under this Act shall be subject to all the pro- visions of this Act which apply to individuals. Returns for a Period of Less than Twelve Months, Sec. 226. (a) That if a taxpayer, with the approval of the Com- missioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following 120 December 31. If the change is from calendar year to fiscal year, a sep- arate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. (b) In all cases where a separate return is made for a part of a taxable year the net income shall be computed on the basis of such period for which separate return is made, and the tax shall be paid thereon at the rate for the calendar year in which such period is included. (c) In the case of a return for a period of less than one year the net income shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by the number of months included in such period ; and the tax shall be such part of a tax computed on such annual basis as the number of months in such period is of twelve months. Time and Place for Filing Individual, Partnership, and Fiduciary Returns. Sec. 227. (a) That returns (except in the case of nonresident aliens) shall be made on or before the fifteenth day of the third month following the close of the fiscal year, or, if the return is made on the basis of the calendar year, then the return shall be made on or before the 15th day of March. In the case of a nonresident alien individual returns shall be made on or before the fifteenth day of the sixth month following the close of the fiscal year, or, if the return is made on the basis of the calendar year, then the return shall be made on or before the 15th day of June. The Commissioner may grant a reasonable extension of time for filing returns whenever in his judgment good cause exists and shall keep a record of every such extension and the reason therefor. Except in the case of taxpayers who are abroad, no such extension shall be for more than six months. (b) Returns shall be made to the collector for the district in which is located the legal residence or principal place of business of the person making the return, or, if he has no legal residence or principal place of business in the United States, then to the collector at Baltimore, Maryland. Understatement in Retiu^ns. Sec. 228. That if the collector or deputy collector has reason to be- lieve that the amount of any income returned is understated, he shall give due notice to the taxpayer making the return to show cause why the amount of the return should not be increased, and upon proof of the amount understated, may increase the same accordingly. Such taxpayer may furnish sworn testimony to prove any relevant facts and if dis- satisfied with the decision of the collector may appeal to the Commissioner for his decision, under such rules of procedure as may be prescribed by the Commissioner with the approval of the Secretary. Incorporation of Individual or Partnership Business. Sec. 229. That in the case of the organization as a corporation within four months after the passage of this Act of any trade or business in which capital is a material income-producing factor, and which was pre- viously owned by a partnership or individual, the net income of such trade or business from January 1, 1921, to the date of such organization may at the option of the individual or partnership be taxed as the net income of a corporation is taxed under Titles II and III; in which event the net income and invested capital of such trade or business shall be computed as if such corporation had been in existence on and after January 1, 1921, 121 and the undistributed profits or earnings of such trade or business shall not be subject to the surtaxes imposed in section 211, but amounts dis- tributed on and after January 1, 1921, from the earnings or profits of such trade or business accumulated after December 31, 1920, shall be taxed to the recipients as dividends ; and all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business : Provided, That this section shall not apply to any trade or business, the net income of which for the taxable year 1921 was less than 20 per centum of its invested capital for such year: Provided further. That any taxpayer who takes advantage of this section shall pay the tax imposed by section 1000 of the Revenue Act of 1918 as if such taxpayer had been a corporation on and after January 1, 1921. PART III.— CORPORATIONS. Tax on Corporations. Sec. 230. That, in lieu of the tax imposed by section 230 of the Revenue Act of 1918, there shall be levied, collected, and paid for each taxable year upon the net income of every corporation a tax at the following rates : (a) For the calendar year 1921, 10 per centum of the amount of the net income in excess of the credits provided in section 236; and (b) For each calendar year thereafter, 12y2 per centum of such excess amount. Conditional and Other Exemptions of Corporations. Sec. 231. That the following organizations shall be exempt from taxation under this title — (1) Labor, agricultural, or horticultural organizations; (2) Mutual savings banks not having a capital stock represented by shares ; (3) Fraternal beneficiary societies, orders, or associations, (a) oper- ating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system; and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents ; (4) Domestic building and loan associations substantially all the busi- ness of which is confined to making loans to members; and co-operative banks without capital stock organized and operated for mutual purposes and without profit ; (5) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit ; and any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private stockholder or individual; (6) Corporations, and any community chest, fund, or foundation, or- ganized and operated exclusively for religious, charitable, scientific, liter- ary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual ; (7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual; (8) Civic leagues or organizations not organized for profit but oper- ated exclusively for the promotion of social welfare; 122 (9) Clubs organized and operated exclusively for pleasure, recrea- tion, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or member; (10) Farmers' or other mutual hail, cyclone, or fire insurance com- panies, mutual ditch or irrigation companies, mutual or co-operative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses; (11) Farmers', fruit growers', or like associations, organized and op- erated as sales agents for the purpose of marketing the products of mem- bers and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them ; or organized and operated as purchasing agents for the purpose of purchasing supplies and equipment for the use of members and turning over such supplies and equipment to such members at actual cost, plus necessary expenses ; (12) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title ; (13) Federal land banks and national farm loan associations as pro- vided in section 26 of the Act approved July 17, 1916, entitled "An Act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes" ; (14) Personal service corporations. This subdivision shall not be in effect after December 31, 1921. Net Income of Corporations Defined. Sec. 232. That in the case of a corporation subject to the tax im- posed by section 230 the term "net income'' means the gross income as defined in section 233 less the deductions allowed by section 234, and the net income shall be computed on the same basis as is provided in sub- division (b) of section 212 or in section 226. In the case of a foreign corporation or of a corporation entitled to the benefits of section 262 the computation shall also be made in the manner provided in section 217. Gross Income of Corporations Defined. Sec. 233. (a) That in the case of a corporation subject to the tax imposed by section 230 the term "gross income" means the gross income as defined in sections 213 and 217, except that mutual marine insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance. (b) In the case of a foreign corporation, gross income means only gross income from sources within the United States, determined (except in the case of insurance companies subject to the tax imposed by section 243 or 246) in the manner provided in section 217. Deductions Allov/ed Corporations. Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as de- ductions : (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reason- 123 able allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity; (2) All interest paid or accrued within the taxable year on its in- debtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the tax- payer) the interest upon which is wholly exempt from taxation under this title ; (3) Taxes paid or accrued within the taxable year except (a) income, war-profits, and excess-profits taxes imposed by the authority of the United States, (b) so much of the income, war-profits and excess-profits taxes imposed by the authority of any foreign country or possession of the United States as is allowed as a credit under section 238, and (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed. In the case of obligors specified in subdivision (b) of section 221 no deduction for the payment of the tax imposed by this title, or any other tax paid pursuant to the contract or provision referred to in that subdivision, shall be allowed, nor shall such tax be included in the gross income of the obligee. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder or member of a corporation upon his interest as shareholder or member, which are paid by the corporation without reimbursement from the shareholder or member, but in such cases no deduction shall be allowed the shareholder or member for the amount of such taxes. For the purpose of this paragraph, estate, inheritance, legacy, and succession taxes accrue on the due date thereof except as otherwise provided by the law of the jurisdiction imposing such taxes; (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; unless, in order to clearly reflect the income, the loss should in the opinion of the Commissioner be accounted for as of a different period. No deduction shall be allowed for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities made after the passage of this Act where it appears that within 30 days before or after the date of such sale or other dispo- sition the taxpayer has acquired (otherwise than by bequest or inheri- tance) substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other dis- position, unless such claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of its business. If such acquisition is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. In case of losses arising from destruction of or damage to property, where the property so destroyed or damaged was acquired before March 1, 1913, the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913; (5) Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addi- tion to a reserve for bad debts) ; and when satisfied that a debt is re- coverable only in part, the Commissioner may allow such debt to be charged off in part ; (6) The amount received as dividends (a) from a domestic corpora- tion other than a corporation entitled to the benefits of section 262, or (b) from any foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the foreign corporation has been in ex- 124 istence) was derived from sources within the United States as determined under section 217; (7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the case of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March I, 1913; (8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German Government, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of such war, there shall be allowed, for any taxable year ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable year 1918, 1919, 1920, or 1921) a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. At any time before March 3, 1924, the Commissioner may, and at the request of the taxpayer shall, re-examine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the income, war-profits, and excess-profits taxes for the year or years affected shall be redetermined and the amount of tax due upon such redetermination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252; (9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted : Pro- vided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date : Provided fur- ther, That in the case of mines, oil and gas wells, discovered by the tax- payer, on or after March 1, 1913, and not acquired as a result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter: And provided further. That such depletion allowance based on discovery value shall not exceed the net income, computed without allowance for depletion, from the property upon which the discovery is made, except where such net income so computed is less than the depletion allowance based on cost or fair market value as of March 1, 1913; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee ; (10) In the case of insurance companies (other than life insurance companies), in addition to the above (unless otherwise allowed) : (a) The net addition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds) ; and (b) the sums other than dividends paid within the taxable year on policy and annuity contracts. After December 31, 1921, this subdivision shall apply only to mutual in- surance companies other than life insurance companies; (11) In the case of corporations (except those taxed under section 243) issuing policies covering life, health, and accident insurance combined 125 in one policy issued on the weekly premium payment plan continuing for life and not subject to cancellation, in addition to the above, such portion of the net addition (not required by law) made within the taxable year to reserve funds as the Commissioner finds to be required for the protection of the holders of such policies only. This subdivision shall not be in effect after December 31, 1921; (12) In the case of mutual marine insurance companies, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, and paragraph (14), unless otherwise allowed, amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof ; (13) In the case of mutual insurance companies (including inter- insurers and recriprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be al- lowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, and paragraph (14), unless otherwise allowed, the amount of premium deposits returned to their policyholaers and the amount of premium deposits retained for the payment of losses, expenses, and re- insurance reserves ; (14) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (a) its destruction in whole or in part, (b) theft or seizure, or (c) an exercise of the power of requisition or condemnation, or the threat or imminence thereof ; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary con- version of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax Acts. (b) In the case of a foreign corporation or of a corporation entitled to the benefits of section 262 the deductions allowed in subdivision (a) shall be allowed only if and to the extent that they are connected with income from sources within the United States ; and the proper apportion- ment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 217 under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Items Not Deductible by Corporations, Sec. 235. That in computing net income no deduction shall in any case be allowed in respect of any of the items specified in section 215. Credits Allowed Corporations. Sec. 236. That for the purpose only of the tax imposed by section 230 there shall be allowed the following credits : (a) The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is in- cluded in gross income under section 233 ; 126 (b) In the case of a domestic corporation the net income of which is $25,000 or less, a specific credit of $2,000; but if the net income is more than $25,000 the tax imposed by section 230 shall not exceed the tax which would be payable if the $2,000 credit were allowed, plus the amount of the net income in excess of $25,000; and (c) The amount of any war-profits and excess-profits taxes imposed by Act of Congress for the same taxable year. The credit allowed by this subdivision shall be determined as follows : (1) In the case of a corporation which makes return for a fiscal year beginning in 1920 and ending in 1921, in computing the income tax as provided in subdivision (a) of section 205, the portion of the war-profits and excess-profits tax computed for the entire period under clause (1) of subdivision (a) of section 335 shall be credited against the net income computed for the entire period as provided in clause (1) of subdivision (a) of section 205, and the portion of the war-profits and excess-profits tax computed for the entire period under clause (2) of subdivision (a) of section 335 shall be credited against the net income computed for the entire period as provided in clause (2) of subdivision (a) of section 205. (2) In the case of a corporation which makes return for a fiscal year beginning in 1921 and ending in 1922, in computing the income tax as provided in subdivision (b) of section 205, the war-profits and excess- profits tax computed under subdivision (b) of section 335 shall be credited against the net income computed for the entire period as provided in clause (1) of subdivision (b) of section 205. Payment of Corporation Income Tax at Source. Sec. 237. That in the case of foreign corporations subject to taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 221 a tax equal to 12y2 per centum thereof (but during the calendar year 1921 only 10 per centum), and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section: Provided, That in the case of interest described in subdivision (b) of that section the deduction and withholding shall be at the rate of 2 per centum. Credit for Taxes in Case of Corporations. Sec. 238. (a) That in the case of a domestic corporation the tax imposed by this title, plus the war-profits and excess-profits taxes, if any, shall be credited with the amount of any income, war-profits, and excess- profits taxes paid during the same taxable year to any foreign country, or to any possession of the United States : Provided, That the amount of credit taken under this subdivision shall in no case exceed the same pro- portion of the taxes, against which such credit is taken, which the tax- payer's net income (computed without deduction for any income, war- profits, and excess-profits taxes imposed by any foreign country or pos- session of the United States) from sources without the United States bears to its entire net income (computed without such deduction) for the same taxable year. In the case of domestic insurance companies subject to the tax imposed by section 243 or 246, the term "net income" as used in this subdivision means net income as defined in sections 245 and 246, respectively. (b) If accrued taxes when paid differ from the amounts claimed as credits by the corporation, or if any tax paid is refunded in whole or in part, the corporation shall at once notify the Commissioner, who shall re- determine the amount of the income, war-profits and excess-profits taxes for the year or years affected, and the amount of taxes due upon such redetermination, if any, shall be paid by the corporation upon notice and 127 demand by the collector, or the amount of taxes overpaid, if any, shall be credited or refunded to the corporation in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Com- missioner as a condition precedent to the allowance of this credit may require the corporation to give a bond with sureties satisfactory to and to be approved by him in such penal sum as he may require, conditioned for the payment by the taxpayer of any amount of taxes found due upon any such redetermination ; and the bond herein prescribed shall contain such further conditions as the Commissioner may require. (c) These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources without the United States, and all other information necessary for the verification and computation of such credit. (d) If a domestic corporation makes a return for a fiscal year begin- ning in 1920 and ending in 1921, the credit for the entire fiscal year shall, notwithstanding any provision of this Act, be determined under the pro- visions of this section; and the Commissioner is authorized to disallow, in whole or in part, any such credit which he finds has already been taken by the taxpayer. (e) For the purposes of this section a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends (not deductible under section 234) in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country or to any possession of the United States, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits : Provided, That the credit allowed to any domestic corporation under this subdivision shall in no case exceed the same proportion of the taxes against which it is credited, which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term "accumulated profits" when used in this subdivision in reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income ; and the Commissioner with the approval of the Secretary shall have full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corpora- tion, the income, war-profits, and excess-profits taxes of which are de- termined on the basis of an accounting period of less than one year, the word "year" as used in this subdivision shall be construed to mean such accounting period. (f) For the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation. Corporation Returns. Sec. 239. (a) That every corporation subject to taxation under this title and every personal service corporation shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice- president, or other principal officer and by the treasurer or assistant treas- urer. If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return shall be 128 made by the agent. In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations ih the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control. (b) Returns made under this section shall be subject to the provisions of sections 226 and 228. When return is made under section 226 the credit provided in subdivision (b) of section 236 shall be reduced to an amount which bears the same ratio to the full credit therein provided as the number of months in the period for which such return is made bears to twelve months. (c) There shall be included in the return or appended thereto a statement of such facts as will enable the Commissioner to determine the portion of the earnings or profits of the corporation (including gains, profits and income not taxed) accumulated during the taxable year for which the return is made, which have been distributed or ordered to be distributed, respectively, to its stockholders or members during such year. Consolidated Returns of Corporations. Sec. 240. (a) That corporations which are affiliated within the mean- ing of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a con- solidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner. (b) In any case in which a tax is assessed upon the basis of a con- solidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. There shall be allowed in computing the income tax only one specific credit computed as provided in subdivision (b) of sec- tion 236. (c) For the purpose of this section two or more domestic corpora- tions shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nomi- nees substantially all the stock of the other or others, or (2) if substan- tially all the stock of two or more corporations is owned or controlled by the same interests. (d) For the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation: Provided, That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, for the purpose of making an accurate distribution or apportionment of gains, profits, income, deduc- tions, or capital between or among such related trades or businesses. (e) Corporations which are affiliated within the meaning of this sec- tion shall make consolidated returns for any taxable year beginning prior to January 1, 1922, in the same manner and subject to the same conditions as provided by the Revenue Act of 1918. 129 Time and Place for Filing Corporate Returns. Sec. 241. (a) That returns of corporations shall be made at the same time as is provided in subdivision (a) of section 227, except that in the case of foreign corporations not having any office or place of business in the United States returns shall be made at the same time as provided in section 227 in the case of a nonresident alien individual. (b) Returns shall be made to the collector of the district in which is located the principal place of business or principal office or agency of the corporation, or, if it has no principal place of business or principal office or agency in the United States, then to the collector at Baltimore, Mary- land. Tax on Insurance Companies. Sec. 242. That when used in this title the term "life insurance com- pany" means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds. Sec. 243. That in lieu of the taxes imposed by sections 230 and 1000 and by Title III, there shall be levied, collected, and paid for the calendar year 1921 and for each taxable year thereafter upon the net income of every life insurance company a tax as follows : (1) In the case of a domestic life insurance company, the same per- centage of its net income as is imposed upon other corporations by section 230 ; (2) In the case of a foreign life insurance company, the same per- centage of its net income from sources within the United States as is imposed upon the net income of other corporations by section 230. Sec. 244. (a) That in the case of a life insurance company the term "gross income" means the gross amount of income received during the taxable year from interest, dividends, and rents. (b) The term "reserve funds required by law" includes, in the case of assessment insurance, sums actually deposited by any company or association with State or Territorial officers pursuant to law as guaranty or reserve funds, and any funds maintained under the charter or articles of incorporation of the company or association exclusively for the pay- ment of claims arising under certificates of membership or policies issued upon the assessment plan and not subject to any other use. Sec. 245. (a) That in the case of a life insurance company the term "net income" means the gross income less — (1) The amount of interest received during the taxable year which under paragraph (4) of subdivision (b) of section 213 is exempt from taxation under this title; (2) An amount equal to the excess, if any, over the deduction speci- fied in paragraph (1) of this subdivision, of 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, plus (in case of life insurance companies issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation) 4 per centum of the mean of such reserve funds (not required by law) held at the beginning and end of the taxable year, as the Commissioner finds to be necessary for the protection of the holders of such policies only; (3) The amount received as dividends (a) from a domestic corpora- tion other than a corporation entitled to the benefits of section 262, or 130 (b) from any foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the foreign corporation has been in existence) was derived from sources within the United States as determined under section 217; (4) An amount equal to 2 per centum of any sums held at the end of the taxable year as a reserve for dividends (other than dividends pay- able during the year following the taxable year) the payment of which is deferred for a period of not less than five years from the date of the policy contract ; (5) Investment expenses paid during the taxable year: Provided, That if any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 per centum of the book value of the mean of the invested assets held at the beginning and end of the taxable year; (6) Taxes and other expenses paid during the taxable year ex- clusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or better- ments made to increase the value of any property. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder or member of a company upon his interest as shareholder or member, which are paid by the company without reimbursement from the shareholder or member, but in such cases no deduction shall be allowed the shareholder or member for the amount of such taxes ; (7) A reasonable allowance for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence. In the case of property acquired before March 1, 1913, this deduction shall be com- puted upon the basis of its fair market price or value as of March 1, 1913; (8) All interest paid or accrued within the taxable year on its in- debtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the tax- payer) the interest upon which is wholly exempt from taxation under this title ; (9) In the case of a domestic life insurance company, the net income of which (computed without the benefit of this paragraph) is $25,000 or less, the sum of $2,000; but if the net income is more than $25,000 the tax imposed by section 243 shall not exceed the tax which would be pay- able if the $2,000 credit were allowed, plus the amount of the net income in excess of $25,000. (b) No deduction shall be made under paragraphs (6) and (7) of subdivision (a) on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied. (c) In the case of a foreign life insurance company the amount of its net income for any taxable year from sources within the United States shall be the same proportion of its net income for the taxable year from sources within and without the United States, which the reserve funds required by law and held by it at the end of the taxable year upon busi- 131 ness transacted within the United States is of the reserve funds held by it at the end of the taxable year upon all business transacted. Sec. 246. (a) That, in lieu of the taxes imposed by sections 230 and 1000, there shall be levied, collected and paid for the calendar year 1922, and for each taxable year thereafter, upon the net income of every in- surance company (other than a life or mutual insurance company) a tax as follows : (1) In the case of such a domestic insurance company the same percentage of its net income as is imposed upon other corporations by section 230; (2) In the case of such a foreign insurance company the same per- centage of its net income from sources within the United States as is imposed upon the net income of other corporations by section 230. (b) In the case of an insurance company subject to the tax imposed by this section — (1) The term "gross income" means the combined gross amount, earned during the taxable year, from investment income and from under- writing income as provided in this subdivision, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners; (2) The term "net income" means the gross income as defined in paragraph (1) of this subdivision less the deductions allowed by section 247; (3) The term "investment income" means the gross amount of in- come earned during the taxable year from interest, dividends and rents, computed as follows : To all interest, dividends and rents received during the taxable year, add interest, dividends and rents due and accrued at the end of the tax- able year, and deduct all interest, dividends and rents due and accrued at the end of the preceding taxable year; (4) The term "underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and ex- penses incurred ; (5) The term "premiums earned on insurance contracts during the taxable year" means an amount computed as follows : From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on out- standing business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year; (6) The term "losses incurred" means losses incurred during the taxable year on insurance contracts, computed as follows : To losses paid during the taxable year add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year, and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year. To the results so obtained add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year ; (7) The term "expenses incurred" means all expenses shown on the annual statement approved by the National Convention of Insurance Commissioners, and shall be computed as follows : To all expenses paid during the taxable year add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the net income subject to the tax imposed by this section there shall be deducted from expenses incurred as defined in this paragraph all expenses incurred which are not allowed as deductions by section 247. 132 Sec. 247. (a) That in computing the net income of an insurance com- pany subject to the tax imposed by section 246 there shall be allowed as deductions : (1) All ordinary and necessary expenses incurred, as provided in paragraph (1) of subdivision (a) of section 234; (2) All interest as provided in paragraph (2) of subdivision (a) of section 234; (3) Taxes as provided in paragraph (3) of subdivision (a) of sec- tion 234; (4) Losses incurred ; (5) Bad debts in the nature of agency balances and bills receivable ascertained to be worthless and charged off within the taxable year; (6) The amount received as dividends from corporations as provided in paragraph (6) of subdivision (a) of section 234; (7) The amount of interest earned during the taxable year which under paragraph (4) of subdivision (b) of section 213 is exempt from taxation under this title, and the amount of interest allowed as a credit under subdivision (a) of section 236; (8) A reasonable allowance, for the exhaustion, wear and tear of property, as provided in paragraph (7) of subdivision (a) of section 234; (9) In the case of such a domestic insurance company, the net in- come of which (computed without the benefit of this paragraph) is $25,000 or less, the sum of $2,000; but if the net income is more than $25,000 the tax imposed by section 246 shall not exceed the tax which would be pay- able if the $2,000 credit were allowed, plus the amount of the net income in excess of $25,000. (b) In the case of a foreign corporation the deductions allowed in this section shall be allowed to the extent provided in subdivision (b) of sec- tion 234. (c) Nothing in this section or in section 246, shall be construed to permit the same item to be twice deducted. PART IV.— ADMINISTRATIVE PROVISIONS. Payment of Taxes. Sec. 250. (a) That except as otherwise provided in this section and sections 221 and 237 the tax shall be paid in four installments, each con- sisting of one-fourth of the total amount of the tax. The first install- ment shall be paid at the time fixed by law for filing the return, and the second installment shall be paid on the fifteenth day of the third month, the third installment on the fifteenth day of the sixth month, and the fourth installment on the fifteenth day of the ninth month, after the time fixed by law for filing the return. Where an extension of time for filing a return is granted the time for payment of the first installment shall be postponed until the date of the expiration of the period of the extension, but the time for payment of the other installments shall not be postponed unless the Commissioner so provides in granting the extension. In any case in which the time for the payment of any installment is at the re- quest of the taxpayer thus postponed, there shall be added as part of such installment interest thereon at the rate of one-half of 1 per centum per month from the time it would have been due if no extension had been granted, until paid. If any installment is not paid when due, the whole amount of the tax unpaid shall become due and payable upon notice and demand by the collector. The tax may at the option of the taxpayer be paid in a single pay- ment instead of in installments, in which case the total amount shall be paid on or before the time fixed by law for filing the return, or, where an 133 extension of time for filing the return has been granted, on or before the expiration of the period of such extension. (b) As soon as practicable after the return is filed, the Commis- sioner shall examine it. If it then appears that the correct amount of the tax is greater or less than that shown in the return, the installments shall be recomputed. If the amount already paid exceeds that which should have been paid on the basis of the installments as recomputed, the excess so paid shall be credited against the subsequent installments ; and if the amount already paid exceeds the correct amount of the tax, the excess shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. If the amount already paid is less than that which should have been paid, the difference, to the extent not covered by any credits due to the taxpayer under section 252 (hereinafter called "deficiency"), together with interest thereon at the rate of one-half of 1 per centum per month from the time the tax was due (or, if paid on the installment basis, on the deficiency of each installment from the time the installment was due), shall be paid upon notice and demand by the collector. If any part of the deficiency is due to negligence or intentional disregard of authorized rules and regulations with knowledge thereof, but without intent to de- fraud, there shall be added as part of the tax 5 per centum of the total amount of the deficiency in the tax, and interest in such a case shall be collected at the rate of 1 per centum per month on the amount of such deficiency in the tax from the time it was due (or, if paid on the install- ment basis, on the amount of the deficiency in each installment from the time the installment was due), which penalty and interest shall become due and payable upon notice and demand by the collector. If any part of the deficiency is due to fraud with intent to evade tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or fraudulent returns willfully made, but in addition to other penalties provided by law for false or fraudulent returns, there shall be added as part of the tax 50 per centum of the total amount of the defi- ciency in the tax. In such case the whole amount of the tax unpaid, in- cluding the penalty so added, shall become due and payable upon notice and demand by the collector. (c) If the return is made pursuant to section 3176 of the Revised Statutes as amended, the amount of tax determined to be due under such return shall be paid upon notice and demand by the collector. (d) The amount of income, excess-profits, or war-profits taxes due under any return made under this Act for the taxable year 1921 or succeed- ing taxable years shall be determined and assessed by the Commissioner within four years after the return was filed, and the amount of any such taxes due under any return made under this Act for prior taxable years or under prior income, excess-profits, or war-profits tax Acts, or under section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other pur- poses," approved August 5, 1909, shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax ; and no suit or proceeding for the collection of any such taxes due under this Act or under prior income, excess-profits, or war-profits tax Acts, or of any taxes due under section 38 of such Act of August 5, 1909, shall be begun, after the expiration of five years after the date when such return was filed, but this shall not affect suits or pro- ceedings begun at the time of the passage of this Act: Provided. That in the case of income received during the lifetime of a decedent, all taxes due thereon shall be determined and assessed by the Coipmissioner within one year after written request therefor by the executor, admin- istrator, or other fiduciary representing the estate of such decedent: Pro- vided further, That in the case of a false or fraudulent return with in- 134 tent to evade tax, or of a failure to file a required return, the amount of tax due may be determined, assessed, and collected, and a suit or proceed- ing for the collection of such amount may be begun, at any time after it becomes due : Provided further, That in cases coming within the scope of paragraph (9) of subdivision (a) of section 214, or of paragraph (8) of subdivision (a) of section 234, or in cases of final settlement of losses and other deductions tentatively allowed by the Commissioner pending a de- termination of the exact amount deductible, the amount of tax or deficiency in tax due may be determined, assessed, and collected at any time; but prior to the assessment thereof the taxpayer shall be notified and given a period of not less than thirty days in which to file an appeal and be heard as hereinafter provided in this subdivision. If upon examination of a return made under the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, or this Act, a tax or a deficiency in tax is discovered, the taxpayer shall be notified thereof and given a period of not less than thirty days after such notice is sent bv registered mail in which to file an appeal and show cause or reason why the tax or deficiency should not be paid. Opportunity for hearing shall be granted and a final decision thereon shall be made as quickly as practicable. Any tax or deficiency in tax then determined to be due shall be assessed and paid, together with the penalty and interest, if any, applicable thereto, within ten days after notice and demand by the collector as hereinafter provided, and in such cases no claim in abate- ment of the amount so assessed shall be entertained : Provided, That in cases where the Commissioner believes that the collection of the amount due will be jeopardized by such delay he may make the assessment with- out giving such notice or awaiting the conclusion of such hearing. (e) If any tax remains unpaid after the date when it is due, and for ten days after notice and demand by the collector, then, except in the case of estates of insane, deceased, or insolvent persons, there shall be added as part of the tax the sum of 5 per centum on the amount due but unpaid, plus interest at the rate of 1 per centum per month upon such amount from the time it became due : Provided, That as to any such amount which is the subject of a bona fide claim for abatement filed within ten days after notice and demand by the collector, where the taxpayer has not had the benefit of the provisions of subdivision (d), such sum of 5 per centum shall not be added and the interest from the time the amount was due until the claim is decided shall be at the rate of one-half of 1 per centum per month on that part of the claim rejected. In the case of the first installment provided for in subdivision (a) the instructions printed on the return shall be sufficient notice of the date when the tax is due and sufficient demand, and the taxpayer's computa- tion of the tax on the return shall be sufficient notice of the amount due. In the case of each subsequent installment the collector may, within thirty days and not later than ten days before the installment becomes due, mail to the taxpayer notice of the amount of the installment and the date on which it is due for payment. Such notice of the collector shall be sufficient notice and sufficient demand under this section. (f) In the case of any deficiency (except where the deficiency is due to negligence or to fraud with intent to evade tax) where it is shown to the satisfaction of the Commissioner that the payment of such deficiency would result in undue hardship to the taxpayer, the Commissioner may, with the approval of the Secretary, extend the time for the payment of such deficiency or any part thereof for such period not in excess of eighteen months from the passage of this Act as the Commissioner may determine. In such case the Commissioner may require the taxpayer to furnish a bond with sufficient sureties conditioned upon the payment of the deficiency in accordance with the terms of the extension granted. There shall be added in lieu of other interest provided by law, as a part of such deficiency, interest thereon at the rate of two-thirds of 1 per 135 centum per month from the time such extension is granted ; except where such other interest provided by law is in excess of interest at the rate of two-thirds of 1 per centum per month. If the deficiency or any part thereof is not paid in accordance with the terms of the extension granted, there shall be added as part of the deficiency, in lieu of other interest and penalties provided by law, the sum of 5 per centum of the deficiency and interest on the deficiency at the rate of 1 per centum per month from the time it becomes payable in accordance with the terms of such exten- sion. (g) If the Commissioner finds that a taxpayer designs quickly to depart from the United States or to remove his property therefrom, or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly or partly ineffectual proceedings to collect the tax for the taxable year then last past or the taxable year then current unless such proceedings be brought without delay, the Commis- sioner shall declare the taxable period for such taxpayer immediately terminated and shall cause notice of such finding and declaration to be given the taxpayer, together with a demand for immediate payment of the tax for the taxable period so declared terminated and of the tax for the preceding taxable year or so much of said tax as is unpaid, whether or not the time otherwise allowed by law for filing return and paying the tax has expired ; and such taxes shall thereupon become immediately due and payable. In any action or suit brought to enforce payment of taxes made due and payable by virtue of the provisions of this subdivi- sion the finding of the Commissioner, made as herein provided, whether made after notice to the taxpayer or not, shall be for all purposes pre- sumptive evidence of the taxpayer's design. A taxpayer who is not in default in making any return or paying income, war-profits, or excess- profits tax under any act of Congress may furnish to the United States, under regulations to be prescribed by the Commissioner with the approval of the Secretary, security approved by the Commissioner that he will duly make the return next thereafter required to be filed and pay the tax next thereafter required to be paid. The Commissioner may approve and accept in like manner security for return and payment of taxes made due and payable by virtue of the provisions of this subdivision, provided the taxpayer has paid in full all other income, war-profits, or excess-profits taxes due from him under any act of Congress. If security is approved and accepted pursuant to the provisions of this subdivision and such further or other security with respect to the tax or taxes covered thereby is given as the Commissioner shall from time to time find necessary and require, payment of such taxes shall not be enforced by any proceedings under the provisions of this subdivision prior to the expiration of the time otherwise allowed for paying such respective taxes. In the case of a citizen of the United States about to depart from the United States the Commissioner may, at his discretion, waive any or all of the requirements placed on the taxpayer by this subdivision. No alien shall depart from the United States unless he first secures from the collector or agent in charge a certificate that he has complied with all the obligations imposed upon him by the income, war-profits, and excess-profits tax laws. If a taxpayer violates or attempts to violate this subdivision there shall, in addition to all other penalties, be added as part of the tax 25 per centum of the total amount of the tax or deficiency in the tax, together with interest at the rate of 1 per centum per month from the time the tax became due. (h) The provisions of subdivisions (e), (f) and (g) of this section shall apply to the assessment and collection of taxes which have accrued or may accrue under the Revenue Act of 1917, the Revenue Act of 1918 or this Act. 136 Receipts for Taxes. Sec. 251. That every collector to whom any payment of any tax is made under the provisions of this title shall upon request give to the person making such payment a full written or printed receipt, stating the amount paid and the particular account for which such payment was made ; and whenever any debtor pays taxes on account of payments made or to be made by him to separate creditors the collector shall, if requested by such debtor, give a separate receipt for the tax paid on account of each creditor in such form that the debtor can conveniently produce such receipts sep- arately to his several creditors in satisfaction of their respective demands up to the amounts stated in the receipts ; and such receipt shall be suffi- cient evidence in favor of such debtor to justify him in withholding from his next payment to his creditor the amount therein stated ; but the creditor may, upon giving to his debtor a full written receipt acknowl- edging the payment to him of any sum actually paid and accepting the amount of tax paid as aforesaid (specifying the same) as a further satis- faction of the debt to that amount, require the surrender to him of such collector's receipt. Refunds. Sec. 252. That if, upon examination of any return of income made pursuant to this Act, the Act of August 5, 1909, entitled "An Act to pro- vide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," the Act of October 3, 1913, entitled "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," the Revenue Act of 1916, as amended, the Revenue Act of 1917, or the Revenue Act of 1918, it appears that an amount of income, war-profits or excess-profits tax has been paid in excess of that properly due, then, notwithstanding the provisions of section 3228 of the Revised Statutes, the amount of the excess shall be credited against any income, war-profits or excess-profits taxes, or installment thereof, then due from the taxpayer under any other return, and any balance of such excess shall be immediately refunded to the taxpayer : Provided, That no such credit or refund shall be allowed or made after five years from the date when the return was due, unless before the expiration of such five years a claim therefor is filed by the taxpayer : Provided further, That if upon examination of any return of income made pursuant to the Revenue Act of 1917, the Revenue Act of 1918, or this Act, the invested capital of a taxpayer is decreased by the Commissioner, and such decrease is due to the fact that the taxpayer failed to take adequate deductions in previous years, with the result that an amount of income tax in excess of that properly due was paid in any previous year or years, then, notwith- standing any other provision of law and regardless of the expiration of such five-year period, the amount of such excess shall, without the filing of any claim therefor, be credited or refunded as provided in this sec- tion : And provided further, That nothing in this section shall be con- strued to bar from allowance claims for refund filed prior to the passage of the Revenue Act of 1918 under subdivision (a) of section 14 of the Revenue Act of 1916, or filed prior to the passage of this Act under section 252 of the Revenue Act of 1918. Penalties. Sec. 253. That any individual, corporation, or partnership required under this title to pay or collect any tax, to make a return or to supply information, who fails to pay or collect such tax, to make such return, or to supply such information at the time or times required under this title, shall be liable to a penalty of not more than $1,000. Any individual, corporation, or partnership, or any officer or employee of any corporation or member or employee of a partnership, who willfully refuses to pay 137 or collect such tax, to make such return, or to supply such information at the time or times required under this title, or who willfully attempts in any manner to defeat or evade the tax imposed by this title, shall be guilty of a misdemeanor and shall be fined not more than $10,000 or im- prisoned for not more than one year, or both, together with the costs of prosecution. Returns of Payments of Dividends. Sec. 254. That every corporation subject to the tax imposed by this title and every personal service corporation shall, when required by the Commissioner, render a correct return, duly verified under oath, of its payments of dividends, stating the name and address of each stockholder, the number of shares owned by him, and the amount of dividends paid to him. Returns of Brokers. ' Sec. 255. That every individual, corporation, or partnership doing business as a broker shall, when required by the Commissioner, render a correct return duly verified under oath, under such rules and regulations as the Commissioner, with the approval of the Secretary, may prescribe, showing the names of customers for whom such individual, corporation, or partnership has transacted any business, with such details as to the profits, losses, or other information which the Commissioner may require, as to each of such customers, as will enable the Commissioner to determine whether all income tax due on profits or gains of such customers has been paid. Information at Source. Sec. 256. That all individuals, corporations, and partnerships, in whatever capacity acting, including lessees or mortgagors of real or per- sonal property, fiduciaries, and employers, making payment to another in- dividual, corporation, or partnership, of interest, rent, salaries, wages, pre- miums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments described in sections 254 and 255), of $1,000 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations herein- after provided for, shall render a true and accurate return to the Com- missioner, under such regulations and in such form and manner and to such extent as may be prescribed by him with the approval of the Secre- tary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment. Such returns may be required, regardless of amounts, (1) in the case of payments of interest upon bonds, mortgages, deeds of trust, or other similar obligations of corporations, and (2) in the case of collections of items (not payable in the United States) of interest upon the bonds of foreign countries and interest upon the bonds of and dividends from foreign corporations by individuals, corporations, or partnerships, under- taking as a matter of business or for profit the collection of foreign pay- ments of such interest or dividends by means of coupons, checks, or bills of exchange. When necessary to make effective the provisions of this section the name and address of the recipient of income shall be furnished upon de- mand of the individual, corporation, or partnership paying the income. The provisions of this section shall applv to the calendar year 1921 and each calendar vear thereafter, but shall not apply to the payment of interest on obligations of the United States. 138 Returns to be Public Records. Sec. 257. That returns upon which the tax has been determined by the Commissioner shall constitute public records ; but they shall be open to inspection only upon order of the President and under rules and regu- lations prescribed by the Secretary and approved by the President : Pro- vided, That the proper officers of any State imposing an income tax may, upon the request of the governor thereof, have access to the returns of any corporation, or to an abstract thereof showing the name and income of the corporation, at such times and in such manner as the Secretary may prescribe: Proznded further. That all bona fide stockholders of rec- ord owning 1 per centum or more of the outstanding stock of any cor- poration shall, upon making request of the Commissioner, be allowed to examine the annual income returns of such corporation and of its sub- sidiaries. Any stockholder who pursuant to the provisions of this section is allowed to examine the return of any corporation, and who makes known in any manner whatever not provided by law the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any such return, shall be guilty of a misdemeanor and be punished by a fine not exceeding $1,000, or by imprisonment not exceeding one year, or both. The Commissioner shall as soon as practicable in each year cause to be prepared and made available to public inspection in such manner as he may determine, in the office of the collector in each internal-revenue dis- trict and in such other places as he may determine, lists containing the names and the post-office addresses of all individuals making income-tax returns in such district. Publication of Statistics. Sec. 258. That the Commissioner, with the approval of the Secretary, shall prepare and publish annually statistics reasonably available with re- spect to the operation of the income, war-profits and excess-profits tax laws, including classifications of taxpayers and of income, the amounts allowed as deductions, exemptions, and credits, and any other facts deemed pertinent and valuable. Collection of Foreign Items. Sec. 259. That all individuals, corporations, or partnerships under- taking as a matter of business or for profit the collection of foreign pay- ments of interest or dividends by means of coupons, checks, or bills of exchange shall obtain a license from the Commissioner and shall be sub- ject to such regulations enabling the Government to obtain the informa- tion required under this title as the Commissioner, with the approval of the Secretary, shall prescribe ; and whoever knowingly undertakes to col- lect such payments without having obtained a license therefor, or without complying with such regulations, shall be guilty of a misdemeanor and shall be fined not more than $5,000, or imprisoned for not more than one year, or both. Citizens of Possessions of the United States. Sec. 260. That any individual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States, shall be subject to taxation under this title only as to income derived from sources within the United States, and in such case the tax shall be computed and paid in the same manner and subject to the same conditions as in the case of other persons who are taxable only as to income derived from such sources. Nothing in this section shall be construed to alter or amend the pro- visions of the Act entitled "An Act making appropriations for the naval 139 service for the fiscal year ending June 30, 1922, and for other purposes," approved July 12, 1921, relating to the imposition of income taxes in the Virgin Islands of the United States. Porto Rico and Philippine Islands. Sec. 261. That in Porto Rico and the Philippine Islands the income tax shall be levied, assessed, collected, and paid as provided by law prior to the passage of this Act. The Porto Rican or Philippine Legislature shall have power by due enactment to amend, alter, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively. Income From Sources Within the Possessions of the United States. Sec. 262. (a) That in the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States — (1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section) for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States ; and (2) If, in the case of such corporation, 50 per centum or more of its gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States ; or (3) If, in the case of such citizen, 50 per centum or more of his gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own ac- count or as an employee or agent of another. (b) Notwithstanding the provisions of subdivision (a) there shall be included in gross income all amounts received by such citizens or cor- porations within the United States, whether derived from sources within or without the United States. (c) As used in this section the term "possession of the United States" does not include the Virgin Islands of the United States. Effective Date of Title. Sec. 263. That this title shall take eflfect as of January 1, 1921. TITLE III. — WAR-PROFITS AND EXCESS-PROFITS TAX FOR 192L PART L — GENERAL DEFINITIONS. Sec. 300. That when used in this title the terms "taxable year," "fiscal year," "personal service corporation," "paid or accrued," and "divi- dends" shall have the same meaning as provided for the purposes of in- come tax in sections 200 and 201. PART II. — IMPOSITION OF TAX. Sec. 301. (a) That in lieu of the tax imposed by Title III of the Revenue Act of 1918, but in addition to the other taxes imposed by this Act, there shall be levied, collected and paid for the calendar year 1921 140 upon the net income of every corporation (except corporations taxable under subdivision (b) of this section) a tax equal to the sum of the following : First Bracket. 20 per centum of the amount of the net income in excess of the excess- profits credit (determined under section 312) and not in excess of 20 per centum of the invested capital; Second Bracket. 40 per centum of the amount of the net income in excess of 20 per centum of the invested capital. (b) For the calendar year 1921 there shall be levied, collected, and paid upon the net income of every corporation which derives in such year a net income of more than $10,000 from any Government contract or con- tracts made between April 6, 1917, and November 11, 1918, both dates inclusive, a tax equal to the sum of the following: (1) Such a portion of a tax computed at the rates specified in sub- division (a) of section 301 of the Revenue Act of 1918, as the part of the net income attributable to such Government contract or contracts bears to the entire net income. In computing such tax the excess-profits credit and the war-profits credit which would be applicable to such calendar year under the Revenue Act of 1918 if it had been continued in force, shall be used ; (2) Such a portion of a tax computed at the rates specified in sub- division (a) of this section as the part of the net income not attribut- able to such Government contract or contracts bears to the entire net income. For the purpose of determining the part of the net income attributable to such Government contract or contracts, the proper apportionment and allocation of the deductions with respect to gross income derived from such Government contract or contracts and from other sources, respect- ively, shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary. (c) In any case where the full amount of the excess-profits credit is not allowed under the first bracket of subdivision (a), by reason of the fact that such credit is in excess of 20 per centum of the invested capital, the part not so allowed shall be deducted from the amount in the second bracket. Sec. 302. That the tax imposed by subdivision (a) of section 301 shall in no case be more than 20 per centum of the amount of the net income in excess of $3,000 and not in excess of $20,000, plus 40 per centum of the amount of the net income in excess of $20,000; and the limitations imposed by section 302 of the Revenue Act of 1918 (upon taxes computed under subdivision (c) of section 301 of that Act) are hereby made applic- able to taxes computed under subdivision (b) of section 301 of this Act. Nothing in this section shall be construed in such manner as to increase the tax imposed by section 301 of this Act. Sec. 303. That if part of the net income of a corporation is derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constitut- ing not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of "personal service corporations," then (under regu- lations prescribed by the Commissioner with the approval of the Secre- tary) the tax upon the first part of such net income shall be separately 141 computed (allowing in such computation only the same proportionate part of the credits authorized in section 312), and the tax upon the second part shall be the same percentage thereof as the tax so computed upon the first part is of such first part: Proinded, That the tax upon such second part shall in no case be less than 20 per centum thereof, unless the tax upon the entire net income, if computed without benefit of this section, would constitute less than 20 per centum of such entire net income, in which event the tax shall be determined upon the entire net income, with- out reference to this section, as other taxes are determined under this title. The total tax computed under this section shall be subject to tiie limitations provided in section 302. Sec. 304. (a) That the corporations enumerated in section 231 shall, to the extent that they are exempt from income tax under Title II, be ex- empt from taxation under this title. (b) Any corporation whose net income for the taxable year is less than $3,000 shall be exempt from taxation under this title. (c) In the case of any corporation engaged in the mining of gold, the portion of the net income derived from the mining of gold shall be exempt from the tax imposed by this title or any tax imposed by Title II of the Revenue Act of 1917, and the tax on the remaining portion of the net income shall be the same proportion of a tax computed without the benefit of this subdivision which such remaining portion of the net in- come bears to the entire net income. Sec. 305. That if a tax is computed under this title for a period of less than twelve months, the specific exemption of $3,000, wherever referred to in this title, shall be reduced to an amount which is the same proportion of $3,000 as the number of months in the period is of twelve months. PART III. — EXCESS-PROFITS CREDIT. Sec. 312. That the excess-profits credit shall consist of a specific exemption of $3,000 plus an amount equal to 8 per centum of the invested capital for the taxable year. A foreign corporation or a corporation entitled to the benefits of sec- tion 262 shall not be entitled to the specific exemption of $3,000. PART IV. — NET INCOME. Sec. 320. That for the purpose of this title the net income of a corporation shall be ascertained and returned for the taxable year upon the same basis and in the same manner as provided for income tax pur- poses in Title II of this Act. PART v. — INVESTED CAPITAL. Sec. 325. (a) That as used in this title — The term "intangible property" means patents, copyrights, secret proc- esses and formulae, good will, trade-marks, trade-brands, franchises, and other like property; The term "tangible property" means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property; The term "borrowed capital" means money or other property bor- rowed, whether represented by bonds, notes, open accounts, or otherwise ; The terra "inadmissible assets" means stocks, bonds, and other obliga- tions (other than obligations of the United States), the dividends or in- terest from which is not included in computing net income, but where the income derived from such assets consists in part of gain or profit derived 142 from the sale or other disposition thereof, or where all or part of the interest derived from such assets is in effect included in the net income because of the limitation on the deduction of interest under paragraph (2) of subdivision (a) of section 234, a corresponding part of the capital invested in such assets shall not be deemed to be inadmissible assets ; The term "admissible assets" means all assets other than inadmissible assets, valued in accordance with the provisions of subdivision (a) of section 326 and section 331. (b) For the purposes of this title the par value of stock or shares shall, in the case of stock or shares issued at a nominal value or having no par value, be deemed to be the fair market value as of the date or dates of issue of such stock or shares. Sec. 326. (a) That as used in this title the term "invested capital" for anv year means (except as provided in subdivisions (b) and (c) of this section) : (1) Actual cash bona fide paid in for stock or shares; (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus : Provided, That the Com- missioner shall keep a record of all cases in which tangible property is included in invested capital at a value in excess of the stock or shares issued therefor, containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, the value of the tangible property at the time paid in, the par value of the stock or shares specifically issued therefor, and the amount included under this paragraph as paid-in surplus. The Com- missioner shall furnish a copy of such record and other detailed informa- tion with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257; (3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year ; (4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3. 1917, whichever is lowest; (5) Intangible property bona fide paid in for stock or shares on or after March 3. 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, whichever is lowest: Provided, That in no case shall the total amount included under paragraphs (4) and (5) exceed in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year; but (b) As used in this title the term "invested capital" does not include borrowed capital. (c) There shall be deducted from invested capital as above defined a percentage thereof equal to the percentage which the amount of in- admissible assets is of the amount of admissible and inadmissible assets held during the taxable year. 143 (d) The invested capital for any period shall be the average invested capital for such period, but in the case of a corporation making a return for a fractional part of a year, it shall be the same fractional part of such average invested capital. Sec. 327. That in the following cases the tax shall be determined as provided in section 328 : (a) Where the Commissioner is unable to determine the invested capital as provided in section 326; (b) In the case of a foreign corporation or of a corporation entitled to the benefits of section 262 ; (c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively; (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6. 1917, and November 11, 1918, both dates inclusive. Sec. 328. (a) That in the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such year. In the case of a foreign corporation or of a corporation entitled to the benefits of section 262 the tax shall be computed without deducting the specific exemption of $3,000 either for the taxpayer or the representative corporations. In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily determined under section 326 and which are, as nearly as may be, similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances. (b) For the purposes of subdivision (a) the ratios between the average tax and the average net income of representative corporations shall be determined by the Commissioner in accordance with regulations prescribed by him with the approval of the Secretary. (c) The Commissioner shall keep a record of all cases in which the tax is determined in the manner prescribed in subdivision (a), containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, and the amount of invested capital as determined under such subdivision. The Commissioner shall furnish a copy of such record and other detailed 144 information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257. PART VI. — REORGANIZATIONS. Sec. 331. That in the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation. PART VII. — MISCELLANEOUS. Sec. 335. (a) That if a corporation (other than a personal service corporation) makes return for a fiscal year beginning in 1920 and ending in 1921, the war-profits and excess-profits tax for the taxable year 1921 shall be the sum of: (1) the same proportion of a tax for the entire period computed under the Revenue Act of 1918, which the portion of such period falling within the calendar year 1920 is of the entire period, and (2) the same proportion of a tax for the entire period com- puted under this title, which the portion of such period falling within the calendar year 1921 is of the entire period. Any amount heretofore or hereafter paid on account of the tax imposed for such taxable year by the Revenue Act of 1918 shall be credited towards the payment of the tax as above computed, and if the amount so paid exceeds the amount of such tax, the excess shall be credited or refunded to the corporation in accordance with the provisions of section 252 of this Act. (b) If a corporation (other than a personal service corporation) makes a return for a fiscal year beginning in 1921 and ending in 1922, the war-profits and excess-profits tax for the portion of the year falling within the calendar vear 1921 shall be an amount equivalent to the same proportion of a tax for the entire period computed under this title, which the portion of such period falling within the calendar year 1921 is of the entire period. Sec. 336. That every corporation, not exempt under section 304, shall make a return for the purposes of this title. Such returns shall be made, and the taxes imposed by this title shall be paid, at the same times and places, in the same manner, and subject to the same conditions, as is provided in the case of returns and payment of income tax by cor- porations for the purposes of Title II, and all the provisions of that title not inapplicable, including penalties, are hereby made applicable to the taxes imposed by this title. Sec. 337. That in the case of a bona fide sale of mines, oil or gas wells, or anv interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done bv the taxpayer, the portion of the tax imposed by this title attrib- utable to such sale shall not exceed 20 per centum of the selling price of such property or interest. 145 Effective Date of Title. Sec. 338. That this title shall take effect as of January 1, 1921. TITLE XIII. — GENERAL ADMINISTRATIVE PROVISIONS. Laws Made Applicable. Sec. 1300. That all administrative, special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act, and every person liable to any tax imposed by this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall comply with such regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe. Method of Collecting Tax. Sec. 1301. That whether or not the method of collecting any tax imposed by Titles V. VI, VII. VIII, IX. or X of this Act is specifically provided therein, any such tax may, under regulations prescribed by the Commissioner with the approval of the Secretary, be collected by stamp, coupon, serial-numbered ticket, or such other reasonable device or method as may be necessary or helpful in securing a complete and prompt col- lection of the tax. All administrative and penalty provisions of Title XI, in so far as applicable, shall apply to the collection of any tax which the Commissioner determines or prescribes shall be collected in such manner. , Penalties. Sec. 1302. (a) That any person required under Titles V, VI, VII, VIII, IX, X, or XII, to pay, or to collect, account for and pay over any tax, or required by law or regulations made under authority thereof to make a return or supply any information for the purposes of the com- putation, assessment, or collection of any such tax, who fails to pay, collect, or truly account for and pav over any such tax, make any such return or supply any such information at the time or times required by law or regulation shall in addition to other penalties provided by law be subject to a penalty of not more than $1,000. (b) Any person who willfully refuses to pay, collect, or truly account for and pay over any such tax, make such return or supply such informa- tion at the time or times required by law or regulation, or who willfully attempts in any manner to evade such tax shall be guilty of a misdemeanor and in addition to other penalties provided by law shall be fined not more than $10,000 or imprisoned for not more than one year, or both, together with the costs of prosecution. (c) Any person who willfully refuses to pay, collect, or truly account for and pay over any such tax shall in addition to other penalties provided by law be liable to a penalty of the amount of the tax evaded, or not paid, collected, or accounted for and paid over, to be assessed and collected in the same manner as taxes are assessed and collected : Provided, hozvever, That no penalty shall be assessed under this sub- division for anv offense for which a penalty may be assessed under authority of section 3176 of the Revised Statutes, as amended, or for any offense for which a penalty has been recovered under section 3256 of the Revised Statutes. (d) The term "person" as used in this section includes an officer or employee of a corporation or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs. 146 Rules and Regulations. Sec. 1303. That the Commissioner, with the approval of the Sec- retary, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act. The Commissioner, with such approval, may by regulation provide that any return required by Titles V, VI, VII, VIII, IX, or X to be under oath may, if the amount of the tax covered thereby is not in excess of $10, be signed or acknowledged before two witnesses instead of under oath. Overpayments and OvercoUectibns. Sec. 1304. That in the case of any overpayment or overcoUection of any tax imposed by section 602 or by Title V, Title VIII, or Title IX, the person making such overpayment or overcoUection may take credit therefor against taxes due upon any monthly return, and shall make refund of any excessive amount collected by him upon proper application by the person entitled thereto. Articles Exported. Sec. 1305. That under such rules and regulations as the Com- missioner with the approval of the Secretary may prescribe, the taxes imposed under the provisions of Titles VI, VII or IX shall not apply in respect to articles sold or leased for export and in due course so exported. Under such rules and regulations the amount of any internal- revenue tax erroneously or illegally collected in respect to exported articles may be refunded to the exporter of the article, instead of to the manufacturer, if the manufacturer waives any claim for the amount so to be refunded. Fractional Parts of a Cent. Sec. 1306. That in the payment of any tax under this Act not pay- able by stamp a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to 1 cent. Returns. Sec. 1307. That whenever in the judgment of the Commissioner necessary he may require any person, by notice served upon him, to make a return or such statements as he deems sufficient to show whether or not such person is liable to tax. Examinations of Books and Witnesses. Sec. 1308. That the Commissioner, for the purpose of ascertaining the correctness of any return or for the purpose of making a return where none has been made, is hereby authorized, by any revenue agent or inspector designated by him for that purpose, to examine any books, papers, records, or memoranda bearing upon the matters required to be included in the return, and may require the attendance of the person rendering the return or of any officer or employee of such person, or the attendance of any other person having knowledge in the premises, and may take his testimony with reference to the matter required by law to be included in such return, with power to administer oaths to such person or persons. Unnecessary Examinations. Sec. 1309. That no taxpayer shall be subjected to unnecessary examinations or investigations, and only one inspection of a taxpayer's 147 books of account shall be made for each taxable year unless the tax- payer requests otherwise or unless the Commissioner, after investigation, notifies the taxpayer in writing that an additional inspection is necessary. Jurisdiction of Courts. Sec. 1310. (a) That if any person is summoned under this Act to appear, to testify, or to produce books, papers, or other data, the district court of the United States for the district in which such person resides shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, or other data. (b) The district courts of the United States at the instance of the United States are hereby invested with such jurisdiction to make and issue, both in actions at law and suits in equity, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and process, and to render such judgments and decrees, granting in proper cases both legal and equitable relief together, as may be necessary or appropriate for the enforcement of the provisions of this Act. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such provisions. (c) Paragraph Twentieth of section 24 of the Judicial Code is amended by adding at the end thereof the following new paragraph : "Concurrent with the Court of Claims, of any suit or proceeding, commenced ^fter the passage of the Revenue Act of 1921, for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected, under the internal-revenue laws, even if the claim exceeds $10,000, if the collector of internal-revenue by whom such tax, penalty, or sum was collected is dead at the time such suit or proceeding is commenced." Amendments to Revised Statutes. Sec. 1311. That sections 3164, 3165, 3167, 3172, 3173, and 3176 of the Revised Statutes, as amended, are re-enacted, without change, as follows : "Sec. 3164. It shall be the duty of every collector of internal revenue having knowledge of any willful violation of any law of the United States relating to the revenue, within thirty days after coming into possession of such knowledge, to file with the district attorney of the district in which any fine, penalty, or forfeiture may be incurred, a state- ment of all the facts and circumstances of the case within his knowledge, together with the names of the witnesses, setting forth the provisions of law believed to be so violated on which reliance may be had for con- demnation or conviction. "Sec. 3165. Every collector, deputy collector, internal-revenue agent, and internal-revenue officer assigned to duty under an internal-revenue agent, is authorized to administer oaths and to take evidence touching any part of the administration of the internal-revenue laws with which he is charged, or where such oaths and evidence are authorized by law or regulation authorized by law to be taken. "Sec. 3167. It shall be unlawful for any collector, deputy collector, agent, clerk, or other officer or employee of the United States to divulge or to make known in any manner whatever not provided bv law to any person the operations, style of work, or apparatus of any manufacturer 148 or producer visited by him in the discharge of his oflficial duties, or the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any income return, or to permit any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as pro- vided by law ; and it shall be unlawful for any person to print or publish in any manner whatever not provided by law any income return, or any part thereof or source of income, profits, losses, or expenditures appear- ing in any income return ; and any offense against the foregoing pro- vision shall be a misdemeanor and be punished by a fine not exceeding $1,000 or by imprisonment not exceeding one year, or both, at the dis- cretion of the court ; and if the offender be an officer or employee of the United States he shall be dismissed from office or discharged from em- ployment. "Sec. 3172. Every collector shall, from time to time, cause his deputies to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any internal- revenue tax, and all persons owning or having the care and manage- ment of any objects liable to pay any tax, and to make a list of such persons and enumerate said objects. "Sec. 3173. It shall be the duty of any person, partnership, firm, association, or corporation, made liable to any duty, special tax, or other tax imposed by law, when not otherwise provided for, (1) in case of a special tax, on or before the thirty-first day of July in each year, and (2) in other cases before the day on which the taxes accrue, to make a list or return, verified by oath, to the collector or a deputy collector of the district where located, of the articles or objects, including the quantity of goods, wares, and merchandise, made or sold and charged with a tax, the several rates and aggregate amount, according to the forms and regulations to be prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, for which such person, partnership, firm, association, or corporation is liable : Provided, That if any person liable to pay any duty or tax, or owning, possessing, or haying the care or management of property, goods, wares, and mer- chandise, article or objects liable to pay any duty, tax, or license, shall fail to make and exhibit a list or return required by law, but shall con- sent to disclose the particulars of any and all the property, goods, wares, and merchandise, articles, and objects liable to pay any duty or tax, or any business or occupation liable to pay any tax as aforesaid, then, and in that case, it shall" be the duty of the collector or deputy collector to make such list or return, which, being distinctly read, consented to, and signed and verified by oath by the person so owning, possessing, or having the care and management as aforesaid, may be received as the list of such person : Provided further, That in case no annual list or return has been rendered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suitable age and discretion, if such be present, otherwise to deposit in the nearest post office, a note or memorandum addressed to such person, requiring him or her to render to such collector or deputy collector the list or return required by law within ten days from the date of such note or memorandum, verified by oath. And if any person, on being notified or required as aforesaid, shall refuse or neglect to render such list or return within the time required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax fails to do so at the time required, or delivers any return which, in the opinion of the collector, is erroneous, false, or fraudulent, 149 or contains any undervaluation or understatement, or refuses to allow any regularly authorized Government officer to examine the books of such person, firm, or corporation, it shall be lawful for the collector to summon such person, or any other person having possession, custody, or care of books of account containing entries relating to the business of such person or any other person he may deem proper, to appear before him and produce such books at a time and place named in the summons, and to give testimony or ansvi^er interrogatories, under oath, respecting any objects or income liable to tax or the returns thereof. The collector may summon any person residing or found within the State or Territory in which his district lies ; and when the person intended to be summoned does not reside and can not be found within such State or Territory, he may enter any collection district where such person may be found and there make the examination herein authorized. And to this end he may there exercise all the authority which he might lawfully exercise in the district for which he was commissioned : Provided, That 'person,' as used in this section, shall be construed to include any corporation, joint- stock company or association, or insurance company when such construc- tion is necessary to carry out its provisions. "Sec. 3176. If any person, corporation, company, or association fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, willfully or other- wise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes. "If the failure to file a return or list is due to sickness or absence, the collector may allow such further time, not exceeding thirty days, for making and filing the return or list as he deems proper. "The Commissioner of Internal Revenue shall determine and assess all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section. In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. In case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to the tax SO per centum of its amount. "The amount so added to anv tax shall be collected at the same time and in the same manner and as part of the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner as the tax." Final Determinations and Assessments. Sec. 1312. That if after a determination and assessment in any case the taxpayer has without protest paid in whole any tax or penalty, or accepted any abatement, credit, or refund based on such determination and assessment, and an agreement is made in writing between the tax- payer and the Commissioner, with the approval of the Secretary, that such determination and assessment shall be final and conclusive, then (except upon a showing of fraud or malfeasance or mispresentation of fact 150 materially affecting the determination or assessment thus made) (1) the case shall not be reopened or the determination and assessment modified by any officer, employee, or agent of the United States, and (2) no suit, action, or proceeding to annul, modify, or set aside such determination or assessment shall be entertained by any court of the United States. Administrative Review. Sec. 1313. That in the absence of fraud or mistake in mathematical calculation, the findings of facts in and the decision of the Commissioner upon (or in case the Secretary is authorized to approve the same, then after such approval) the merits of any claim presented under or authorized by the internal-revenue laws shall not be subject to review by any other administrative officer, employee, or agent of the United States. Retroactive Regxxlations. Sec. 1314. That in case a regulation or Treasury decision relating to the internal-revenue laws made by the Commissioner or the Secretary, or by the Commissioner with the approval of the Secretary, is reversed by a subsequent regulation or Treasury decision, and such reversal is not immediately occasioned or required by a decision of a court of com- petent jurisdiction, such subsequent regulation or Treasury decision may, in the discretion of the Commissioner, with the approval of the Secretary, be applied without retroactive effect. Refunds. Sec. 1315. That section 3220 of the Revised Statutes, as amended, is reenacted without change, as follows : "Sec. 3220. The Commissioner of Internal Revenue, subject to regu- lations prescribed by the Secretary of the Treasury, is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustlv assessed or excessive in amount, or in any manner wrongfully collected ; also to repay to any collector or deputy collector the full amount of such sums of money as may be recovered against him in any court, for any internal revenue taxes collected by him, with the cost and expenses of suit; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any suit brought against him by reason of anything done in the due performance of his official duty, and shall make report to Congress at the beginning of each regular session of Congress of all transactions under this section." Sec. 1316. That section 3228 of the Revised Statutes is amended to read as follows : "Sec. 3228. All claims for the refunding or crediting of any in- ternal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty alleged to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, must be presented to the Commissioner of Internal Revenue within four years next after payment of such tax, penalty, or sum." This section, except as modified by section 252, shall apply retro- actively to claims for refund under the Revenue Act of 1916, the Revenue Act of 1917, and the Revenue Act of 1918. Sec. 1317. That the paragraph of section 3689 of the Revised Statutes, as amended, reading as follows : "Refunding taxes illegally 151 collected (internal revenue) : To refund and pay back duties erroneously or illegally assessed or collected under the internal revenue laws," is repealed from and after June 30, 1920; and the Secretary of the Treasury shall submit for the fiscal year 1921, and annually thereafter, an estimate of appropriations to refund and pay back duties or taxes erroneously or illegally assessed or collected under the internal-revenue laws, and to pay judgments, including interest and costs, rendered for taxes or penalties erroneously or illegally assessed or collected under the internal- revenue laws. Limitations upon Suits and Prosecutions. Sec. 1318. That section 3226 of the Revised Statutes is amended to read as follows : "Sec. 3226. No suit or proceeding shall be maintained in any court for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pursuance thereof. No such suit or proceeding shall be begun before the expiration of six months from the date of filing such claim unless the Commissioner renders a decision thereon within that time, nor after the expiration of five years from the date of the payment of such tax, penalty, or sum." This section shall not affect any suit or proceeding instituted prior to the passage of this Act. but shall apply to all suits and proceedings instituted after the passage of this Act, whether or not barred by prior Acts of Congress. Sec. 1319. That section 3227 of the Revised Statutes is hereby repealed but such repeal shall not affect any suit or proceeding instituted prior to the passage of this Act. Sec. 1320. That no suit or proceeding for the collection of any internal revenue tax shall be begun after the expiration of five years from the time such tax was due, except in the case of fraud with intent to evade tax, or willful attempt in any manner to defeat or evade tax. This section shall not apply to suits or proceedings for the collection of taxes under section 250 of this Act, nor to suits or proceedings begun at the time of the passage of this Act. Sec. 1321. (a) That the Act entitled "An Act to limit the time within which prosecutions may be instituted against persons charged with violating internal-revenue laws," approved July 5, 1884, is amended to read as follows : "That no person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal-revenue laws of the United States unless the indictment is found or the information instituted within three years next after the commission of the offense: Provided, That the time during which the person committing the offense is absent from the district wherein the same is committed shall not be taken as any part of the time limited by law for the commencement of such proceedings : Provided further. That the provisions of this Act shall not apply to offenses committed prior to its passage : Provided further, That where a complaint shall be instituted before a commissioner of the United States within the period above limited, the time shall be extended until the discharge of the grand jury at its next session within the district: And provided further, That this Act shall not apply to offenses com- mitted by officers of the United States." 152 (b) Any prosecution or proceeding under an indictment found or information instituted prior to the passage of this Act shall not be affected in any manner by this amendment, but such prosecution or pro- ceeding shall be subject to the limitations imposed by law prior to the passage of this Act. Assessments. Sec. 1322. That all internal revenue taxes, except as provided in section 250 of this Act, shall, notwithstanding the provisions of section 3182 of the Revised Statutes or any other provision of law, be assessed within four years after such taxes became due, but in the case of fraud with intend to evade tax or willful attempt in any manner to defeat or evade tax, such tax may be assessed at any time. Fraudulent Returns, Sec. 1323. That section 3225 of the Revised Statutes of the United States, as amended, is re-enacted without change as follows : "Sec. 3225. When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or deputy collector was false or fraudulent, or contained any understatement or undervaluation, such assessment shall not be remitted, nor shall taxes collected under such assessment be refunded, or paid back, or recovered by any suit, unless it is proved that such list, statement, or return was not willfully false or fraudulent and did not contain any willful under- statement or undervaluation." Interest on Refunds and Judgments. Sec. 1324. (a) That upon the allowance of a claim for the refund of or credit for internal revenue taxes paid, interest shall be allowed and paid upon the total amount of such refund or credit at the rate of one-half of 1 per centum per month to the date of such allowance, as follows: (1) if such amount was paid under a specific protest setting forth in detail the basis of and reasons for such protest, from the time when such tax was paid, or (2) if such amount was not paid under protest but pursuant to an additional assessment, from the time such additional assessment was paid, or (3) if no protest was made and the tax was not paid pursuant to an additional assessment, from six months after the date of filing of such claim for refund or credit. The term "additional assessment" as used in this section means a further assess- ment for- a tax of the same character previously paid in part. (b) Section 177 of the Judicial Code is amended to read as follows : "Sec. 177. No interest shall be allowed on any claim up to the time of the rendition of judgment by the Court of Claims, unless upon a contract expressly stipulating for the payment of interest, except that interest may be allowed in any judgment of any court rendered after the passage of the Revenue Act of 1921 against the United States for any internal-revenue tax erroneously or illegally assessed or collected, or for any penalty collected without authority or any sum which was excessive or in any manner wrongfully collected, under the internal-revenue laws." Payment of Taxes by Check or United States Securities. Sec. 1325. That collectors may receive, at par with an adjustment for accrued interest, notes or certificates of indebtedness issued by the United States and uncertified checks in payment of income, war-profits 153 and excess-profits taxes and any other taxes payable other than by stamp, during such time and under such regulations as the Commissioner, with the approval of the Secretary, shall prescribe ; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tendered shall remain liable for the pay- ment of the tax and for all legal penalties and additions the same as if such check had not been tendered. Frauds on Purchasers. Sec. 1326. That whoever in connection with the sale or lease, or offer for sale or lease, of any article, or for the purpose of making such sale or lease, makes any statement, written or oral, (1) intended or calculated to lead any person to believe that any part of the price at which such article is sold or leased, or offered for sale or lease, con- sists of a tax imposed under the authority of the United States, or (2) ascribing a particular part of such price to a tax imposed under the authority of the United States, knowing that such statement is false or that the tax is not so great as the portion of such price ascribed to such tax, shall be guilty of a misdemeanor and upon conviction thereof shall be punished by a fine of not more than $1,000 or by imprisonment not exceeding one year, or both. Tax Simplification Board. Sec. 1327. (a) That there is hereby established in the Department of the Treasury a board to be known as the "Tax Simplification Board" (hereinafter in this section called the "Board"), to be composed as follows : (1) Three members who shall represent the public, to be appointed by the President ; and (2) Three members who shall represent the Bureau of Internal Revenue and shall be officers or employees of the United States serving in such Bureau, to be appointed by the Secretary. (b) Any vacancy in the Board shall be filled in the same manner as the original appointment. The members representing the public shall serve without compensation except reimbursement for travelling, sub- sistence, and other necessary expenses incurred in the performance of the duties vested in them by this section. The members representing the Bureau of Internal Revenue shall serve without compensation in addition to that received for their service in such Bureau. (c) The Secretary shall furnish the Board with such clerical assistance, quarters and stationery, furniture, office equipment, and other supplies as may be necessary for the performance of the duties vested in them by this section. (d) It shall be the duty of the Board to investigate the procedure of and the forms used by the Bureau in the administration of the internal revenue laws, and to make recommendations in respect to the simplifica- tion thereof. The Board shall make a report to the Congress on or before the first Monday of December in each year. (e) The expenditures of the Board shall be paid upon vouchers approved by the Board and signed by the chairman thereof. For the expenditures of the Board for the fiscal year ending June 30, 1922, there is authorized to be appropriated, out of any money in the Treasury not otherwise appropriated, the sum of $10,000. (f) The Board shall cease to exist on December 31, 1924. 154 Consolidation of Liberty Bond Tax Exemptions. Sec. 1328. That the various Acts authorizing the issues of Liberty Bonds are amended and supplemented as follows : (a) On and after January 1, 1921, 4 per centum and 4Vi per centum Liberty Bonds shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States upon the income or profits of individuals, partnerships, corporations, or associations, in respect to the interest on aggregate principal amounts thereof as follows : Until the expiration of two years after the date of the termination of the war between the United States and the German Government, as fixed by proclamation of the President, on $125,000 aggregate principal amount; and for three years more on $50,000 aggregate principal amount. (b) The exemptions provided in subdivision (a) shall be in addition to the exemptions provided in section 7 of the Second Liberty Bond Act, and in addition to the exemption provided in subdivision (3) of section 1 of the Supplement to the Second Liberty Bond Act in respect to bonds issued upon conversion of 3% per centum bonds, but shall be in lieu of the exemptions provided and free from the conditions and limitations imposed in subdivisions (1) and (2) of section 1 of the Supplement to Second Liberty Bond Act and in section 2 of the Victory Liberty Loan Act. Deposit of United States Bonds or Notes in Lieu of Surety. Sec. 1329. That wherever by the laws of the United States or regulations made pursuant thereto, any person is required to furnish any recognizance, stipulation, bond, guaranty, or undertaking, hereinafter called "penal bond," with surety or sureties, such person may, in lieu of such surety or sureties, deposit as security with the oflficial having authority to approve such penal bond, United States Liberty Bonds or other bonds or notes of the United States in a sum equal at their par value to the amount of such penal bond required to be furnished, together with an agreement authorizing such official to collect or sell such bonds or notes so deposited in case of any default in the performance of any of the conditions or stipulations of such penal bond. The acceptance of such United States bonds or notes in lieu of surety or sureties required by law shall have the same force and effect as individual or corporate sureties, or certified checks, bank drafts, post-office money orders, or cash, for the penalty or amount of such penal bond. The bonds or notes deposited hereunder, and such other United States bonds or notes as may be substituted therefor from time to time as such security, may be deposited with the Treasurer of the United States, a Federal reserve bank, or other depository duly designated for that purpose by the Secretary, which shall issue receipt therefor, describing such bonds or notes so deposited. As soon as security for the performance of such penal bond is no longer necessary, such bonds or notes so deposited, shall be returned to the depositor : Provided, That in case a person or persons supplying a contractor with labor or material as provided by the Act of Congress, approved February 24, 1905 (33 Stat. 811), entitled "An Act to amend an Act approved August thirteenth, eighteen hundred and ninety-four, entitled 'An Act for the protection of persons furnishing materials and labor for the construction of public works,' " shall file with the obligee, at any time after a default in the performance of any contract subject to said Acts, the application and affidavit therein pro- vided, the obligee shall not deliver to the obligor the deposited bonds or notes nor any surplus proceeds thereof until the expiration of the time limited by said Acts for the institution of suit by such person or persons, and, in case suit shall be instituted within such time, shall hold said bonds or notes or proceeds subject to the order of the court having 155 jurisdiction thereof : Provided further. That nothing herein contained shall affect or impair the priority of the claim of the United States against the bonds or notes deposited or any right or remedy granted by said Acts or by this section to the United States for default upon any obligation of said penal bond: Provided further, That all laws incon- sistent with this section are hereby so modified as to conform to the provisions hereof : And provided further. That nothing contained herein shall affect the authority of courts over the security, where such bonds are taken as security in judicial proceedings, or the authority of any admin- istrative officer of the United States to receive United States bonds for security in cases authorized by existing laws. The Secretary may pre- scribe rules and regulations necessary and proper for carrying this section into effect. Lost Stamps for Tobacco, Cigars, and so Forth. Sec. 1330. That section 3315 of the Revised Statutes, as amended, is re-enacted without change, as follows : "Sec. 3315. The Commissioner of Internal Revenue may, under regulations prescribed by him with the approval of the Secretary of the Treasury, issue stamps for restamping packages of distilled spirits, tobacco, cigars, snuff, cigarettes, fermented liquors, and wines which have been duly stamped but from which the stamps have been lost or destroyed by unavoidable accident." Consolidated Returns for Year 1917. Sec. 1331. (a) That Title II of the Revenue Act of 1917 shall be construed to impose the taxes therein mentioned upon the basis of consolidated returns of net income and invested capital in the case of domestic corporations and domestic partnerships that were affiliated dur- ing the calendar year 1917. (b) For the purpose of this section a corporation or partnership was affiliated with one or more corporations or partnerships (1) when such corporation or partnership owned directly or controlled through closely affiliated interests or by a nominee or nominees all or substantially all. the stock of the other or others, or (2) when substantially all the stock of two or more corporations or the business of two or more part- nerships was owned by the same interests : Proznded, That such corpora- tions or partnerships were engaged in the same or a closely related busi- ness, or one corporation or partnership bought from or sold to another corporation or partnership products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or one corporation or partnership in any way so arranged its financial rela- tionships with another corporation or partnership as to assign to it a disproportionate share of net income or invested capital. For the pur- poses of this section, public service corporations which (1) were operated independently, (2) were not physically connected or merged and (3) did not receive special permission to make a consolidated return, shall not be construed to have been affiliated ; but a railroad or other public utility which was owned by an industrial corporation and was operated as a plant facility or as an integral part of a group organization of affiliated corpora- tions which were required to file a consolidated return shall be construed to have been affiliated. (c) The provisions of this section are declaratory of the provisions of Title II of the Revenue Act of 1917. Alternative Tax on Personal Service Corporations. Sec. 1332. (a) That if either subdivision (e) of section 218 of the Revenue Act of 1918 or subdivision (d) of section 218 of this Act is 156 by final adjudication declared invalid, there shall, in addition to all other taxes, be levied, collected, and paid on the net income (as defined in section 232) received during the calendar years 1918, 1919, 1920, and 1921, by every personal service corporation (as defined in section 200) included within the provisions of such subdivisions, a tax equal to the taxes imposed by Titles II and III of the Revenue Act of 1918 and, in the case of income received during the calendar year 1921, by Titles II and III of this Act. (b) In such event every such personal service corporation shall, on or before the fifteenth day of the sixth month following the date of entry of decree upon such final adjudication, make a return of any income received during each of the calendar years 1918, 1919, 1920, and 1921 in the manner prescribed by the Revenue Act of 1918 (or in the manner prescribed by this Act, in the case of income received during the calendar year 1921). Such return shall be made and the net income shall be computed on the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in the manner provided for other corporations under the Revenue Act of 1918 and this Act. (c) If either subdivision (e) of section 218 of the Revenue Act of 1918 or subdivision (d) of section 218 of this Act is so declared invalid, claims for credit or refund of taxes paid under both such sections shall be allowed, if made within the time provided in subdivision (f) of this section. (d) In case the claims for credit or refund, filed within six months from such date of entry of decree, represent less than 30 per centum of the outstanding stock or shares in the corporation, the amount of taxes imposed by this section upon such corporation shall be reduced to that proportion thereof which the number of stock or shares owned by the shareholders or members making such claims bears to the total number of stock or shares outstanding. (e) The tax imposed by this section shall be assessed, collected, and paid upon the same basis, in the same manner, and subject to the same provisions of law, including penalties, as the taxes imposed by sections 230 and 301 of the Revenue Act of 1918 (or by sections 230 and 301 of this Act, in the case of income received during the calendar year (1921), but no interest or penalties shall be due or payable thereon for any period prior to the date upon which the return is by this section required to be made and the first installment paid. The amount of tax paid by any shareholder or member of a personal service corporation pursuant to the provisions of subdivision (e) of section 218 of the Revenue Act of 1918 or subdivision (d) of section 218 of this Act shall be credited against the tax due from such corporation under this section upon the joint written application of such corporation and such shareholder or member or his representatives, heirs, or assigns, if such application is filed with the Commissioner within six months from such date of entry of decree. (f) Notwithstanding any other provision of law, no claim for a credit or refund of taxes paid under subdivision (e) of section 218 of the Revenue Act of 1918 or subdivision (d) of section 218 of this Act, may be filed after the expiration of six months from such date of entry of decree : Provided, however. That a personal service corporation of which no shareholder or member has filed such claim within such period of six months, shall not be subject to the tax imposed by this section. 157 TITLE XIV.— GENERAL PROVISIONS. Repeals. Sec. 1400. (a) That the following parts of the Revenue Act of 1918 are repealed, to take effect (except as otherwise provided in this Act) on January 1, 1922, subject to the limitations provided in sub- division (b) : Title II (called "Income Tax") as of January 1, 1921 ; Title III (called "War-Profits and Excess-Profits Tax") as of January 1, 1921 ; * * * * Sections 1314. 1315, 1316, 1317. 1319, and 1320 of Title XIII (being certain administrative provisions) on the passage of this Act. (b) The parts of the Revenue Act of 1918 which are repealed by this Act shall (unless otherwise specifically provided in this Act) remain in force for the assessment and collection of all taxes which have accrued under the Revenue Act of 1918 at the time such parts cease to be in effect, and for the imposition and collection of all penalties or forfeitures which have accrued or may accrue in relation to any such taxes. In the case of any tax imposed by any part of the Revenue Act of 1918 repealed by this Act, if there is a tax imposed by this Act in lieu thereof, the provision imposing such tax shall remain in force until the corresponding tax under this Act takes effect under the provisions of this Act. The unexpended balance of any appropriation heretofore made and now available for the administration of any such part of the Revenue Act of 1918 shall be available for the administration of this Act or the cor- responding provision thereof. Saving Clause in Event of Unconstitutionality. Sec. 1403. That if any provision of this Act, or the application thereof to any person or circumstances, is held invalid, the remainder of the Act, and the application of such provision to other persons or circumstances, shall not be affected thereby. Effective Date of Act. Sec. 1404. That except as otherwise provided, this Act shall take effect upon its passage. 158 INDEX Pars. 1-166, Individuals; Pars. 167-210, Corporations; Pars. 211-267, General Provisions; Pars. 268-304, Administrative Provisions. Paragraphs Abatement, claims for 283-4 Accounting period 246-250 Accrual basis, returns on 251,253-4 Administrative provisions 268-304 Affiliated corporations. See "consolidated returns" Aliens Nonresident 265-7 Returns by 211-12,238,255,257,261,267 Withholding tax at source 235 Resident 1, 261, 266-7 Alimony not deductible 71 Not income - ^ «....«.«. ...^. .. 3 Amortization 62a, 194 Appeals on additional assessments 274 On understated returns ^. 274 Assessments, additional 271-276 Final by agreement 304 Fraudulent returns or failure to file. _. ^. . 268 Associations 167 Attorneys, registration with Internal Revenue Bureau 302 Bad debts, deductible 63-69, 141-2, 191 Income from charged off 128,185 Reserve for 68 Bank deposits, no withholding on interest from 257 Basis for return: See accrual, see cash For gains or losses on capital sales: See gains, see losses Beneficiaries under estate or trust Credits against net income 23 Deduction? for payments to ^_^ 143,165 Income to 20,166 Payment of taxes by 166 Returns by .__ 20,161 Bequests: See inheritance Bonds Bought between interest dates 13, 154 Tax-exempt ,. . . 12, 119-127, 175, 179 Tax-free covenant Taxes paid and interest from 12, 154, 190, 204 Withholding at source on interest from 260-264 Bonus stock, sale of 96 Bonuses, deductible when 45 Income when 8 Business, income from 32-40, 175-185 Expenses in ." 41-78,186-198 Loss in 79-80, 197 Capital accounts 30, 70, 162, 178, 185, 186 Capital net gain '.'. 153, 201 Cash basis, returns on _^ 251-2,254 Charitable contributions 139-140, 158, 159, 161, 186 Children: See dependents 159 Pars. 1-166, Individuals; Pars. 167-210, Corporations; Pars. 211-267, General Provisions; Peirs. 268-304, Administrative Provisions. Paragraphs Claims for abatement 283-4 Credit ^ 285-7 Refund ^ 288-92 Committee on appeals and review 301 Compromises 282 Computation of tax 145-153, 199-205, 208-210 Consolidated returns 172-3, 199, 208, 229 Contingent income 4 Contributions, charitable 1 . . . . 139-140, 158, 159, 161, 186 Copy of return 299 Copyrights, income from 30, 182 Corporations 167-210 Computation of tax 199-205 Deductions allowed to 186-198 Definition of 167 Formed from Nov. 23, 1921-March 23, 1921 168 Income of 175-185 Returns 170-174 Tax-exempt 169 Tax on 200 Cost of merchandise 36-7,177 Credit, claims for 285-7 Credits against net income 16, 18, 23, 147-150, 165, 199 Credits against the tax 154-5, 204 Credit, excess-profits 208 Date, effective, of Act 211 Death during year ISO, 226. 217>. 277 Deductions from gross income 130-144, 186-198 from business income 41-78 Dependents 148 Depletion 58a, 193 Depreciation ^ 26, 54-57, 83, 192 Destruction of property 59-62, 108-9, 135-138, 195, 196 Discounts 34, 36 Dividends Credit to individuals.. 112, 129, 147 Deduction to corporation 198 Income from 112-118,129,183,184 Liquidating 110 Scrip 116, 189 Stock 116-117, 97-99 Tax-exempt, when added to sale price 87 Estates and Trusts: In general 160-166 Income from 19-23 Returns 161, 163, 226-7, 239, 240-1 Evasion of surtaxes by corporation 202 Examination of books 276 Excess-profits tax 206-10 Exchanges: Gain or loss 101-5 Exemption Corporations, credit against net income 199 from tax 169 Estates and Trusts, credit 165 Liberty Bonds ^ 119-127.179 Personal 148-150 160 Pars. 1-166, Individuals; Pars. 167-210, Corporations; Pars. 211-267, General Provisions; Pars. 268-304, Administrative Provisions. Paragraphs Expenses Administration ^ 162 Business 41-78 Capital 70, 162, 186 Corporation 186-198 Organization 186 Personal 71, 144 Salaries 10. 186-7 Traveling .:.^ 10, 43, 77, 186 When deductible 72, 186 Extensions for filing returns 244, 171 For payment of taxes 269, 275 Fiduciaries: See Estates and Trusts Foreclosure sale, profit or loss on 107 Fiscal year 246-250 Foreign corporations, see in general 167, 175 Credit for tax paid at source 204 Dividends from, as credit ._^ 147 As deduction 198 Withholding at source from 256 Forms Abatement, claims for 284 Alien nonresident 211-12, 255, 257. 261, 267 Resident 261, 266-7 Corporation 170, 174-5 Resident foreign 261 Credit, claims for 285 Fiduciary 161, 163 Individual 4-5, 222-3 Information returns 230,234 Ownership Certificates on bond interest 261,263 Partnership 158, 174-5, 255 Personal service corporation 159 Refund, claims for 289 Withholding agent 264, 267 Gains from sales 81-111, 164, 195 Gifts Deduction, none on 82, 144 Income, none from 3, 6, 9 Sale of, profit or loss 91-95 Gross income 2, 3, 175, 216 Head of family 148-9 Husband and wife Personal exemption 148-150 Returns 214-15, 217, 223-^ Income Gross 2,175 Net 145, 199 Tax-exempt 3, 12, 121, 175, 179 Information at source, returns 230-237 Inheritance Income, none on 3 Sale of, profit or loss on ._. _. 91-2, 94-5 161 Pars. 1-166, Individualsj Pars. 167-210, Corporations; Pars. 211-267, General Provisions; Pars. 268-304, Administrative Provisions. Paragraphs Taxes deductible 51, 134, 190 Injunctions 297 Inspection of returns 299 Installments, sale on 81 Insurance Business 73, 186 Personal 71 Real estate 27 Insurance proceeds 3, 118, 128 Interest Deductions 28, 49-50, 130-2, 189 Income 11, 13, 180 Information returns 234 Paid by government 292,295 Paid to government 271, 277, 283 Tax-exempt 12, 180 Liberty Bonds 119-127,179 Withholding tax on 255-264 Inventories 38-40, 253-4 Invested capital 207 Legacies. See inheritance Liberty Bond interest 119-127, 179 Credit for normal tax ,_, 16,18,23,147,165 Credit for corporation income tax ^ 199 Loss, net, for year 79-80, 197 Fire, storms, etc., theft 59-60,135-8,196 Non-deductible 82, 85 Sales of capital assets 81-111, 195 Thirty-day clause: wash sales 86, 195 Year taken 61-62,81,136,195,196 Married person, credits 148 Returns 212-15, 217-224 Minor Earnings of, belong to parent 6, 42 Income of 225 Return 218 Net income 145, 158, 159, 160, 199, 220 Nonresident aliens. See aliens Notice Additional assessment 274 Payment of tax 278 Obsolescence ^_^ 58, 192 Ownership certificates .^.i. 263 Partner, income of .^ 14-16 Credits to \.^ 16,155 Partnership, in general «._.,^ ^ .^ 158 Returns 158, 239 Information 158 Sale of interest HI Withholding at source, from nonresident 255 Patents, income from 30, 182 Depreciation on . 30, 55, 81 162 Pars. 1-166, Individuals; Pars. 167-210, Corporations; Pars. 211-267, General Provisions; Pars. 268-304, Administrative Provisions. Paragraphs Payment of tax 156-7, 205 Extension 269-70, 275 Failure to pay tax 277-8 Penalties Additional assessment 271 Failure to file return (on time) 268 Failure to pay tax 277-8 Fraudulent returns 268 Pensions, as income 9 Deductible as expense 46, 75, 76, 186 Personal Service Corporation 159 Income from 17-18^^ 183 Returns , 170 Professional men Expenses 35, 48, 53, 55, 74 Income 33 Profit, see gain Protest Interest allowed on, additional 292 Suits, necessary for? 293 Rates 151-3, 200-203 Real estate, income from rent of 24-29, 181 Sales of 81-109 Receivers 171, 228 Refund, claims for 288-292 Regulations 298 Rent, income from 24-29, 181 Business expense 48, 186 Reopening of cases 303 Reorganizations; exchange of stock 101-2 Repairs 25, 53, 188 Replacement fund 108-9, 195, 196 Reserves for bad debts 68, 191 Returns Cash and accrual basis 251^ Collectors, returns by 268 Copy of 299 Corporation 170-4, 206 Dividend ^ 174 Failure to file 268 Fiduciary 161, 163 Filed, when and where 171, 238-244, 245 Forms: See heading forms Fraudulent 156, 268, 272, 279, 288, 293 Husband and wife, returns by 214-15, 217 Individuals 212-229 Information 230-237 Inspection of 299 Partnership 158 Personal Service Corporation 159 Period covered by 246-250 Less than year 146,203,242,250 Status for, how deterrnined 221 Withholding agent, returns by 264 Rights, income from sale of 100-lOOa Royalties 30, 182 163 Pars, 1-166, Individuals; Pars. 167-210, Corporations; Pars. 211-267, General Provisions; Pars. 268-304, Administrative Provisions. Paragraphs Salaries, as income 5-10 As deduction 41-45, 186-7 Non-taxable 7 Sale of capital assets 81-111, 164 Services , 33 Source, information at 230-237 Withholding at 255-264 Status for exemption 150 Return 221 Withholding 265 Stock dividends ^_^ 116-17 Sale of ,. 97-99 Suits By government 279-82 By taxpayer 293-297 None after final agreement 304 Taxes Computation of 145-53, 199-205, 208-10 Credits against 154-5, 204 Deductible ^ . . .29, 51-2, 133-4, 190 Payment of ". 156-7, 205, 269-70 Rates 151-3, 200-3 Withholding 255-64 Tax-free covenant bonds 12, 154, 190, 204, 260-4 Theft 59, 135, 196 Traveling expenses 10, 47, 77, 186 Trustees: See estates and trusts Understatement in return 272 United States obligations ^ 119-127, 179 Credits ^ ^16, 18, 23, 147, 161, 199 Waiver of limitation on additional assessment 272 Wife, return by 214-215, 217, 223 Salary of 6, 42 Withholding at source 255-264 Year to report income 4, 175 To deduct losses 61-2, 81, 136, 195, 196 expenses 72 164 n» Z' UC SOUTHERN REGIONAL LIBRARY FACILITY AA 000 853 815 9 c • -