T 
 356I4L 
 
 
 UNIVERSITY 
 
 OF CALIFORNIA 
 
 LOS ANGELES 
 
 SCHOOL OF LAW 
 LIBRARY
 
 A TREATISE 
 
 ON THE LAW OF 
 
 INCOME TAXATION 
 
 UNDER FEDERAL AND STATE LAWS 
 
 BY 
 
 HENRY CAMPBELL BLACK 
 
 HI 
 
 AUTHOR OF BLACK'S LAW DICTIONARY AND OF TREATISES ON JUDGMENTS, 
 
 BANKRUPTCY, CONSTITUTIONAL LAW, INTERPRETATION 
 
 OF LAWS, JUDICIAL PRECEDENTS, ETC. 
 
 VERNON LAW BOOK COMPANY 
 
 KANSAS CITY, MO. 
 
 1913
 
 COPYBIGHT, 1913 
 
 BY 
 HENRY CAMPBELL BLACK 
 
 (BL.INC.TAX.) 
 
 356/4; 
 19/3
 
 PREFACE 
 
 INCOME taxation as a source of public revenue has been in 
 successful operation in Great Britain for more than a century, 
 and today constitutes an important feature of the economic 
 policy of most of the countries of continental Europe. In 
 the United States it has been resorted to, experimentally or 
 to meet special public needs, at various times in our history. 
 But of late years it has so grown in favor with publicists 
 and legislative bodies that it appears likely to become a per- 
 manent institution in many jurisdictions, and eventually to 
 supersede all forms of taxation of personal property, as wit- 
 ness the Oklahoma statute of 1908, the elaborate and com- 
 prehensive enactment in Wisconsin in 1911, and, most im- 
 portant of all, the act of Congress of 1913. The economic 
 phases of the subject have received much attention, but hith- 
 erto no American writer has discussed in detail its legal as- 
 pects or the application of the rules of law to the solution 
 of the problems which inevitably arise in the administration 
 of an income tax, and the few English text-books afford little 
 or no assistance to the American lawyer. It has therefore 
 seemed opportune to the present writer to prepare a syste- 
 matic and comprehensive treatise on the law of Income Taxa- 
 tion, under both the federal statute and the laws of the va- 
 rious states, and the volume now offered to the public is the 
 fruit of his endeavors in that behalf. The applicable authori- 
 ties have been diligently collected, and it will be found that 
 the text is supported by an exhaustive citation of the extant 
 decisions, both of the federal and state courts, as well as by 
 references to many English, Scotch, Canadian, and other de- 
 cisions, with numerous rulings and decisions of the officers 
 of the Treasury Department of the United States, opinions of 
 Attorneys General, and other authorities, now for the first 
 time collected in one volume. An appendix contains the full 
 text of the act of Congress of 1913 and of the present income 
 
 ttii) 
 
 756484
 
 IV PREFACE 
 
 tax laws of Wisconsin, Virginia, North Carolina, South Caro- 
 lina, Oklahoma, and Hawaii, as well as the text of the fed- 
 eral income tax acts of 1862 to 1870, that of 1894, and the 
 corporation excise tax law of 1909. These statutes are of 
 the greatest importance for purposes of comparison and con- 
 struction, being all in a sense in pari materia, and it has been 
 thought well to give the reader an opportunity of studying 
 them at large and in detail. 
 
 The following pages include a detailed discussion of the na- 
 ture of income taxes in general, the constitutional and stat- 
 utory provisions applicable thereto, the various constitutional 
 objections to their validity and the decisions of the courts 
 thereon, the rules for the construction of income tax laws, 
 the various questions which arise in the practical determina- 
 tion of what constitutes taxable income, and concerning the 
 persons and corporations subject to the tax, also the matter 
 of exemptions and exceptions, deductions and allowances, the 
 depreciation of property and equipment, and the amortization 
 of bonds, and further, as to the time, form, and manner of 
 making income tax returns, publicity of returns, penalties 
 for delinquency, the assessment of the tax and appeals there- 
 from, the rate of taxation and its amount, the manner and 
 process of collecting the income tax, including the new and 
 important feature of collection "at the source," and the re- 
 funding and recovery of taxes illegally exacted. 
 
 It is hoped that the book will be found valuable not only 
 to individual taxpayers and their legal advisers, but also to 
 the financial officers of corporations, to local representatives 
 of foreign companies and business houses, to American com- 
 panies and firms doing business abroad, and to banks, bank- 
 ers, and trust companies collecting foreign interest or divi- 
 dends, all of whom have a direct interest in the taxation of 
 incomes, and who, at least under the present federal statute, 
 are in some measure charged with details in the administra- 
 tion of the law itself. 
 
 HENRY CAMPBELL BLACK. 
 WASHINGTON, D. C., 1913.
 
 TABLE OF CONTENTS 
 
 TABLE OF CASES CITED 
 (Page x) 
 
 CHAPTER I 
 
 NATURE OF INCOME TAXES 
 
 Section 
 
 1. Definitions and General Considerations. 
 
 2. Property Taxes Distinguished. 
 
 3. Excise, Franchise, License, and Occupation Taxes Distin- 
 
 guished. 
 
 4. Tax on Gross Receipts. 
 
 5. Income Tax as Direct Tax. 
 
 CHAPTER II 
 
 CONSTITUTIONAL AND STATUTORY PROVISIONS 
 
 6. Provisions of United States Constitution. 
 
 7. Provisions of State Constitutions. 
 
 8. History of Income Tax Laws. 
 
 9. Income Tax Laws in Force. 
 
 10. Economic Aspects of Income Taxation. 
 
 CHAPTER III 
 
 CONSTITUTIONAL VALIDITY OF INCOME TAX LAWS 
 
 11. Requirement of Due Process of Law. 
 
 12. Requirement of Equality and Uniformity. 
 
 13. Equal Protection of the Laws. 
 
 14. Discrimination Between Corporations, Partnerships, and In- 
 
 dividuals. 
 
 15. Discrimination Between Residents and Non-Residents. 
 
 16. Federal Taxation of Corporations Created by States. 
 
 17. Taxation of Income from Non-Taxable Property. 
 
 18. Taxing Salaries of Federal and State Officers. 
 
 19. Exemption of Incomes Below a Fixed Sum. 
 
 BL.INC.TAX. (v)
 
 Vi TABLE OF CONTENTS 
 
 Section 
 
 20. Exemption of Classes of Individuals or Corporations. 
 
 21. Allowance of Deduction for Other Taxes Paid. 
 
 22. Double Taxation. 
 
 23. Taxing Aggregate Income of Family. 
 
 24. Validity of Graduated or Progressive Tax. 
 
 25. Retrospective Operation of Statute. 
 
 26. Objections as to Title, Purpose, and Mode of Enactment of 
 
 Statute. 
 
 27. Objections to Administrative Provisions of Act. 
 
 28. Apportionment of Federal Income Tax. 
 
 CHAPTER IV 
 CONSTRUCTION OF STATUTES IMPOSING INCOME TAXES 
 
 29. Rule of Strict Construction. 
 
 30. Statutes in Pari Materia. 
 
 31. Associated Words and Phrases. 
 
 CHAPTER V 
 WHAT CONSTITUTES TAXABLE INCOME 
 
 32. General Definitions of "Income." 
 
 33. "Profits" and "Gains" Compared and Distinguished. 
 
 34. Change or Substitution of Capital Distinguished. 
 
 35. Rent of Land and Royalties. 
 
 36. Rental Value of Residence. 
 
 37. Salaries and Earnings from Professions and Trades. 
 
 38. Pensions, Gifts, Prizes, and Awards. 
 
 39. Legacies and Inheritances. 
 
 40. Products of Agriculture or Stock-Raising. 
 
 41. Produce of Mines and Oil and Gas Wells. 
 
 42. Profits of Mercantile Business. 
 
 43. Profits from Unauthorized Business. 
 
 44. Income from Partnership Business. 
 
 45. Profits on Sale of Real Estate. 
 
 46. Profits on Sales of Securities. 
 
 47. Increase in Value not Realized by Sale. 
 
 48. Uncollected Interest and Accounts. 
 
 49. Profit to Accrue on Uncompleted Contracts. 
 
 50. Profits from Sale or Lease of Patent Rights. 
 
 51. Annuities. 
 
 52. Interest on Government Bonds.
 
 TABLE OF CONTENTS Vll 
 
 Section 
 
 53. Dividends on Corporate Stock. 
 
 54. Same; Stock Dividends. 
 
 55. Accumulated Earnings or Undivided Profits of Corporations. 
 
 56. Right to Subscribe for New Stock of Corporation. 
 
 57. Sale and Distribution of Assets of Corporation. 
 
 CHAPTER VI 
 PERSONS AND CORPORATIONS SUBJECT TO TAX 
 
 58. Residents. 
 
 59. Residents Deriving Income from Abroad. 
 
 60. Domestic Corporations with Foreign Branches or Agencies. 
 
 61. Non-Residents and Aliens. 
 
 62. Carrying on of Business or Trade. 
 
 63. Carrying on Several Lines of Business. 
 
 64. Salaried Officers. 
 
 65. Bankrupt and Insolvent Persons and Companies. 
 
 66. Estates of Decedents and Dissolved Corporations. 
 
 67. Partnerships. 
 
 68. Limited Partnerships. 
 
 69. Corporations. 
 
 70. Public Sen-ice Corporations. 
 
 71. Unincorporated Associations. 
 
 72. Incorporated Clubs. 
 
 73. Inactive Corporations and Holding Companies. 
 
 74. Corporations of Philippines and Porto Rico. 
 
 75. Insurance Companies. 
 
 CHAPTER VII 
 
 EXEMPTIONS AND EXCEPTIONS 
 
 76. Revenues of United States. 
 
 77. States and Municipal Corporations. 
 
 78. Agricultural and Horticultural Organizations. 
 
 79. Labor Organizations. 
 
 80. Fraternal Orders and Benefit Societies. 
 
 81. Religious, Charitable, and Benevolent Associations. 
 
 82. Educational and Scientific Institutions. 
 
 83. Building and Loan Associations. 
 
 84. Savings Institutions. 
 
 85. Civic Organization and Chambers of Commerce.
 
 Vlll TABLE OF CONTENTS 
 
 Section 
 
 86. Income from Property Otherwise Taxed. 
 
 87. Proceeds of Life Insurance Policies. 
 
 88. Exemption of Fixed Amount of Income. 
 
 CHAPTER VIII 
 DEDUCTIONS AND ALLOWANCES 
 
 89. Expenses of Business. 
 
 90. Same; Wages and Salaries. 
 
 91. Same; Traveling Expenses. 
 
 92. Same ; Cost of Insurance. 
 
 93. Same; Rent of Land, Buildings, or Equipment. 
 
 94. Same; Mining Operations. 
 
 95. Same; Judgments. 
 
 96. Repairs, New Buildings, and Improvements. 
 
 97. Interest on Indebtedness. 
 
 98. Taxes Accrued or Paid. 
 
 99. Losses Uncompeusated. 
 
 100. Debts Written Off as Worthless. 
 
 101. Depreciation of Property. 
 
 102. Depletion of Ores or Other Natural Deposits. 
 
 103. Amortization of Bonds. 
 
 104. Dividends from Corporations Subject to Tax. 
 
 105. Special Rules as to Insurance Companies. 
 
 106. Rules as to Foreign Corporations. 
 
 CHAPTER IX 
 
 RETURN OF INCOME AND COLLECTION OF TAX 
 
 107. Taxpayers' Returns, Who Required to Make. 
 
 108. Returns by Guardians, Trustees, and Other Fiduciaries. 
 
 109. Form and Contents of Return. 
 
 110. Including Income of Wife and Children, 
 
 111. Time for Filing Returns. 
 
 112. Where Returns are to be Filed. 
 
 113. Publicity or Inspection of Returns. 
 
 114. Penalties for Divulging Information. 
 
 115. Proceedings in Case of Refusal or Neglect to File Return. 
 
 116. Same; Examination of Books, Papers, and Witnesses. 
 
 117. Assessment of the Tax. 
 
 118. Appeal and Review of Assessment. 
 
 119. Rate of Tax.
 
 TABLE OP CONTENTS IX 
 
 Section 
 
 120. When Tax is Payable. 
 
 121. Penalties for Delinquency and False Returns. 
 
 122. Lien of Tax. 
 
 123. Process for Recovery of Tax. 
 
 124. Compromise of Litigation. 
 
 125. Collection at the Source. 
 
 CHAPTER X 
 
 REFUNDING AND RECOVERY OF TAXES ILLEGALLY EX- 
 ACTED 
 
 126. Statutory Provisions. 
 
 127. Payment of Tax Under Protest. 
 
 128. Refund by Commissioner of Internal Revenue. 
 
 129. Suit to Enjoin Collection or Payment. 
 
 130. Suit for Recovery of Taxes Paid. 
 
 131. Same; Appeal to Commissioner as Pre-requisite. 
 
 132. Remission of Penalties. 
 
 APPENDIX 
 
 (Page 265) 
 
 INDEX 
 
 (Page 381)
 
 TABLE OF CASES CITED 
 
 [THE FIGURES REFEB TO SECTIONS] 
 
 Abbott v. City of St. John, 64. 
 Abrast Realty Co. v. Maxwell, 73, 
 
 127. 
 Academy of Fine Arts v. Philadel- 
 
 phia County, 82. 
 Adams Express Co. v. Schofield, 
 
 71. 
 
 Addie & Sons, In re, 94. 
 Aikin v. Macdonald's Trustees, 90. 
 Alderman v. Wells, 1, 11, 12, 13, 
 
 22, 24, 26. 
 
 Alianza Co. v. Bell, 41, 102. ' 
 Allen v. Long, 71. 
 Ambrosini v. United States, 16. 
 American Net & Twine Co. v. 
 
 Worthington, 29. 
 Andrews v. Boyd, 32. 
 Anglo-Continental Guano Works 
 
 v. Bell, 97. 
 
 Antoni v. Greenhow, 17. 
 Apthorpe v. Peter Schoenhofen 
 
 Brewing Co., 60. 
 Arizona Copper Co. v. Smiles, 41, 
 
 97. 
 
 Armitage v. Moore, 65. 
 Assets Co. v. Inland Revenue, 46. 
 Attorney General v. Borrodaile, 
 
 62. 
 
 Attorney General v. Ostrum, 37. 
 Attorney General v. Scott, 77. 
 
 B 
 
 Babbitt v. Selectmen of Savoy, 89. 
 Bangor v. Masonic Lodge, 81. 
 Barhydt v. Cross, 58. 
 Barrett v. Bloomfleld Sav. Inst, 
 
 84. 
 
 Bartholomay Brewing Co. v. Wy- 
 att, 60. 
 
 Bates v. Bank of Alabama, 45. 
 
 Bates v. Porter, 32, 33. 
 
 Bedford's Appeal, 35. 
 
 Bell's Gap R. Co. v. Pennsylvan- 
 ia, 13. 
 
 Benziger v. United States, 29. 
 
 Bettman v. Warwick, 18. 
 
 Betts v. Betts, 36. 
 
 Biddle's Appeal, 56. 
 
 Birmingham Corp., In re, 77. 
 
 Black v. State, 19. 
 
 Blake v. London, 81. 
 
 Bonaparte v. Tax Court, 17. 
 
 Bradey v. Dilley, 89. 
 
 Braun's Appeal, 96. 
 
 Brewers' Ass'n v. Attorney Gen- 
 eral, 5. 
 
 Bridge v. Bridge, 92. 
 
 Brinley v. Grou, 56. 
 
 Brown v. Burt, 58, 61. 
 
 Brown v. Watt, 63, 99. 
 
 Brown's Trustees v. Hay, 116. 
 
 Buckley v, Briggs, 45. 
 
 Burch v. Savannah, 22. 
 
 Burd Orphan Asylum v. School 
 Dist, 81. 
 
 Burnley Steamship Co. v. Aikiu, 
 101. 
 
 Burt v. Rattle, 33. 
 
 Butler v. Pennsylvania, 18. 
 
 Caledonian Ry. Co. T. Banks, 96. 
 California v. Central Pac. R. Co., 
 
 16. 
 Californian Copper Syndicate v. 
 
 Harris, 46. 
 
 BL.INC.TAX.
 
 CASES CITED 
 [The figures refer to sections] 
 
 Calvert v. Walker, 115. 
 
 Campbell v. Shaw, 24. 
 
 Carlisle & S. Golf Club v. Smith, 
 
 72. 
 
 Cass Farm Co. v. Detroit, 11. 
 Cawse v.. Nottingham Lunatic 
 
 Asylum, 81. 
 Central Nat. Bank v. United 
 
 States, 22. 
 Cesena Sulphur Co. v. Nicholson, 
 
 59. 
 
 Chapman v. Barney, 68. 
 Chester v. Buffalo Car Mfg. Co., 
 
 54. 
 
 Chisholm v. Shields, 22. 
 Christie-Street Commission Co. v. 
 
 United States, 130. 
 City Council v. Lee, 64. 
 City of Dublin Steam Packet Co. 
 
 v. O'Brien, 97. 
 City of Dubuque v. Northwestern 
 
 Life Ins. Co., 2. 
 City of London Contract Corp. v. 
 
 Styles, 89. 
 
 City of New Orleans v. Lea, 18. 
 Clark, In re, 33. 
 Clayton v. Newcastle-Under-Lyme 
 
 Corp., 96. 
 
 Cleveland Library Ass'n v. Pel- 
 ton, 81, 82. 
 Clifford v. State, 45. 
 Collector v. Day, 16, 18. 
 Collector v. Hubbard, 131. 
 Coltness Iron Co. v. Black, 94. 
 Colton v. Montpelier, 19. 
 Commissioners of Inland Revenue 
 
 v. Incorporated Council of Law 
 
 Reporting, 107. 
 Commissioners of Taxation v. 
 
 Teece, 89. 
 
 Commonwealth v. Brown, 3, 12. 
 Commonwealth v. Ocean Oil Co., 
 
 41, 102. 
 Commonwealth v. Philadelphia & 
 
 E. R. Co., 93. 
 Commonwealth v. Reading Sav. 
 
 Bank, 84. 
 Comstock v. Grand Rapids, 22. 
 
 Conner v. New York, 18. 
 Cook v. Knott, 91. 
 Cooper v. Blackiston, 38. 
 Cooper v. Cadwalader, 58, 61. 
 Co-operative B. & L. Ass'n v. 
 
 State, 27. 
 Coopersville Co-op. Creamery Co. 
 
 v. Lemon, 27. 
 Corke v. Fry, 36. 
 Cross v. Long Island Loan & Trust 
 
 Co., 46. 
 
 Crowell, In re, 65. 
 Cunard S. S. Co. v. Coulson, 101. 
 Curry v. Charles Warner Co., 33. 
 
 D 
 
 Daly, Matter of, 22. 
 Darnell v. Indiana, 59. 
 Delaware & H. Canal Co. v. Mahl- 
 
 enbrock, 62. 
 Doll v. Evans, 121. 
 Dooley v. United States, 130. 
 Dorsheimer v. United States, 124. 
 Dowd v. Krall, 91. 
 Drew v. Tifft, 24. 
 Drexel v. Commonwealth, 22, 25. 
 Dubuque v. Northwestern Life 
 
 Ins. Co., 2. 
 
 Dunwoody v. United States, 90. 
 Dyer v. Melrose, 18. 
 
 E 
 
 Earp's Appeal, 54, 55. 
 
 Edinburgh Southern Cemetery Co. 
 v. Kinmont, 81. 
 
 Eidman v. Martinez, 29. 
 
 Eley's Appeal, 35, 46. 
 
 Eliot v. Freeman, 71. 
 
 Emery, Bird, Thayer Realty Co. 
 v. United States, 5, 73, 130. 
 
 English Crown Spelter Co. v. Bak- 
 er, 100. 
 
 Erichsen v. Last, 61. 
 
 Excelsior Water & Min. Co. v. 
 Pierce, 41.
 
 xii 
 
 CASES CITED 
 [The figures refer to sections] 
 
 F 
 
 Fairchild v. Fail-child, 35. 
 Farrell v. Sunderland Steamship 
 
 Co., 63. 
 
 Field v. Clark, 27. 
 Finley v. Philadelphia, 18. 
 Flint v. Stone Tracy Co., 3, 8, 11, 
 
 12, 13, 14, 16, 17, 19, 20, 26, 27, 
 
 28, 62, 70, 113. 
 Forbes v. Scottish Provident 
 
 Inst, 60. 
 
 Forman v. Board of Assessors, 29. 
 Foster v. Goddard, 89, 90, 92. 
 Frank Jones Brewing Co. v. Ap- 
 
 thorpe, 60. 
 
 Freedman v. Sigel, 18. 
 Freeport v. Sidney, 35. 
 
 Galm v. United States, 18. 
 Galveston, H. & S. A. Ry. Co. v. 
 
 Davidson, 4. 
 
 Gehr v. Mont Alto Iron Co., 57. 
 Gelsthorpe v. Furnell, 19. 
 General Accident, etc., Co. v. Mc- 
 
 Gowan, 105. 
 Georgia v. Atkins, 77. 
 Gerke v. Purcell, 81, 82. 
 Gerry, In re, 47. 
 Gibbons v. Mahon, 55. 
 Gibson v. Cooke, 34. 
 Gihon's Estate, In re, 98. 
 Gilbertson v. Ferguson, 59. 
 GiUatt v. Colquhoun, 93. 
 Glasgow v. Rowse, 7, 12. 
 Glasgow Corp. Water Com'rs v. 
 
 Miller, 77. 
 Glasgow Corp. Waterworks, In 
 
 re, 77. 
 Goodhart v. Pennsylvania R. Co., 
 
 33. 
 
 Goodwin v. Clark, 45. 
 Graham's Estate, In re, 46. 
 Grainger v. Gough, 61. 
 Grant v. Hartford & N. H. R. Co., 
 
 96. 
 Gray v. Darlington, 46, 47. 
 
 Gresham Life Assur. Soc, v. 
 
 Bishop, 60. 
 Grove v. Eliots, 60. 
 Grove v. Young Men's Christian 
 
 Ass'n, 72. 
 Guest, Keen & Nettlefolds, Ltd. v. 
 
 Fowler, 89. 
 
 H 
 
 Hannon v. Williams, 69. 
 Harbeck's Will, In re, 29. 
 Harvard College v. Amory, 53. 
 Hastings v. Herold, 130. 
 Hastings v. Long, 81. 
 Hebrew Orphan Asylum v. New 
 
 York, 81. 
 
 Heighe v. Littig, 44. 
 Hennepin County v. Brotherhood 
 
 of Gethsemane, 81. 
 Hickok's Estate, In re, 19. 
 Highland Ry. Co. v. Balderstone, 
 
 96. 
 
 Hill v. Gregory, 35. 
 Kite v. Kite, 54. 
 Holmes v. Mitchell, 40. 
 Hooper v. Bradford, 98. 
 Hopkins' Appeal, 22. 
 Houston & T. C. R. Co. v. Texas, 
 
 17. 
 
 Hubbard v. Brainard, 131. 
 Hudson v. Gribble, 38. 
 Huggins, Ex parte, 38. 
 Humbird, Ex parte, 54. 
 Huntington v. Savings Bank, 69. 
 Huttman, In re, 27, 109, 113. 
 Hylton v. United States, 5. 
 
 Imperial Continental Gas Ass'n 
 
 v. Nicholson, 59. 
 Imperial Fire Ins. Co. v. Wilson, 
 
 105. 
 
 Income Tax Com'rs v. Pemsel, 81. 
 Ives, Ex parte, 55. 
 
 Jackson v. Northern Cent. Ry. 
 Co., 61.
 
 CASES CITED 
 [The figures refer to sections] 
 
 Xlll 
 
 Jennery v. Olmstead, 47. 
 
 John T. Sesnon Co. v. United 
 
 States, 29. 
 Jones, In re, 71. 
 Joseph Hargreaves, Ltd., In re, 
 
 113. 
 
 K 
 
 Kane v. Schuylkill Fire Ins. Co., 
 
 89. 
 
 Keniiard v. Manchester, 22. 
 Kimberley's Estate, In re, 29. 
 King v. Hunter, 18. 
 King v. Loxdale, 30. 
 Kingston v. Canada Life Assur. 
 
 Co., 32. 
 
 Knowles v. McAdarn, 39, 41, 102. 
 Knowlton v. Moore, 19, 24. 
 Kodak Limited v. Clark, 60. 
 Kossakowski v. People, 71. 
 
 Lamar Water & El. Co. v. Lam- 
 ar, 32. 
 
 Lane v. Albertson, 71. 
 
 Last v. London Assur. Corp., 63, 
 75. 
 
 Lauman v. Foster, 55, 56. 
 
 Lawless v. Sullivan, 32. 
 
 Lee v. Neuchatel Asphlate Co., 
 41. 
 
 Leith, Hull & Hamburg Steam 
 Packet Co. v. Inland Revenue, 
 101. 
 
 Leloup v. Port of Mobile, 17. 
 
 Leprohon v. Ottawa, 64. 
 
 Levi v. City of Louisville, L 
 
 Lindley's Appeal, 35. 
 
 Linsley v. Bogert, 47. 
 
 Lining v. Charleston, 29. 
 
 Liverpool Ins. Co. v. Massachu- 
 setts, 68. 
 
 Liverpool, L. & G. Ins. Co. v. Ben- 
 nett, 60. 
 
 Lloyd v. Sulley, 58. 
 
 Lockwood v. District of Colum- 
 bia, 30. 
 
 London Bank of Mexico v. Ap- 
 thorpe, 60. 
 
 London County Council v. Attor- 
 ney General, 125. 
 
 London County Council v. Ed- 
 wards, 101. 
 
 Lord v. Brooks, 53. 
 
 Lord Advocate v. McLaren, 121. 
 
 Lothian v. Macrae, 90. 
 
 Lott v. Hubbard, 22, 86, 115. 
 
 Lowry v. Farmers' L. & T. Co., 
 54. 
 
 Lyon v. Denison, 71. 
 
 M 
 
 Mackey v. Miller, 33. 
 
 McClintock v. Dana, 35. 
 
 McCoach v. Minehill & S. H. Ry. 
 Co., 73. 
 
 McCulloch v. Maryland, 16. 
 
 McDougall v. Sutherland, 36. 
 
 Magee v. Denton, 53, 129, 131. 
 
 Magoun v. Illinois Trust & Sav. 
 Bank, 13, 19. 
 
 Manchester v. McAdam, 82. 
 
 Mandell v. Pierce, 66. 
 
 Marquette, H. & O. R. Co. v. Unit- 
 ed States, 55. 
 
 Massachusetts Society v. Boston, 
 81. 
 
 Mayer v. Nethersole, 33. 
 
 Memphis v. Ensley, 22. 
 
 Mercantile Library Co. v. Phila- 
 delphia, 82. 
 
 Mersey Docks & Harbour Board 
 v. Lucas, 33, 97. 
 
 Mersey Loan & Discount Co. v. 
 Wootton, 97. 
 
 Michigan Cent. R. Co. v. Collector, 
 16, 61. 
 
 Michigan Cent. R. Co. v. Powers, 
 13. 
 
 Millar v. Douglass, 42. 
 
 Mills v. Britton, 55. 
 
 Minehill & S. H. Ry. Co. v. Mc- 
 Coach, 73. 
 
 Minot v. Paine, 54. 
 
 Minot v. Winthrop, 19.
 
 XIV 
 
 CASES CITED 
 
 [The figures refer to sections] 
 
 Missouri, K. & T. Ry. Co. v. Mey- 
 er, 29, 41. 
 
 Mixter's Estate, In re, 19. 
 
 Moore v. Miller, 19, 61. 
 
 Moorhead v. Seymour, 68. 
 
 Morton's Ex'rs v. Morton's Ex'r, 
 32. 
 
 Moss' Appeal, 54, 56. 
 
 Mosse v. Salt, 125. 
 
 Mundy v. Van Hoose, 32, 33. 
 
 Murphy, In re, 33. 
 
 Mutual Benefit Life Ins. Co. v. 
 Herold, 29, 48, 75, 89. 
 
 N 
 
 Needham v. Bowers, 81. 
 New England Trust Co. v. Eaton, 
 
 103. 
 
 New Orleans v. Fassman, 22, 32. 
 New Orleans v. Fourchy, 19, 86. 
 New Orleans v. Hart, 32. 
 New Orleans v. Lea, 18. 
 New York Life Ins. Co. v. Styles, 
 
 75. 
 Nobel Dynamite Trust Co. v. Wy- 
 
 att, 60. 
 
 Norris v. Commonwealth, 45. 
 Norwich Union Fire Ins. Co. v. 
 
 Magee, 60. 
 
 Northumberland v. Chapman, 18. 
 Nunnemacher v. State, 7. 
 
 Odell v. City of Atlanta, 62. 
 
 Opinion of Justices, 32. 
 
 Osborn v. Bank of United States, 
 
 16. 
 
 Ould v. Richmond, 3. 
 Overall v. Bezeau, 45. 
 
 Pacific B. & L. Ass'n v. Hartson, 
 
 83. 
 
 Pacific Ins. Co. v. Soule, 5. 
 Paddington Burial Board v. 
 
 Com'rs of Inland Revenue, 81. 
 Paisley Cemetery Co. v. Reith, 81. 
 
 Park's Estate, In re, 46. 
 
 Parker v. Mason, 54. 
 
 Parker v. North British Ins. Co., 
 
 4, 20. 
 
 Parkhurst v. Brock, 62. 
 Parkview B. & L. Ass'n v. Herold, 
 
 29, 83. 
 
 Partridge v. Mallandaine, 37. 
 Peacock y. Pratt, 13, 18, 19, 20, 
 
 27, 82. 
 
 Pearson v. Chace, 32. 
 
 Pennsylvania Steel Co. v. New 
 York City Ry. Co., 29, 65. 
 
 People v. Com'rs of Taxes, 62. 
 
 People v. Davenport, 97, 103. 
 
 People v. Koenig, 29. 
 
 People v. Niagara County Sup'rs, 
 32, 33. 
 
 People v. Purdy, 40. 
 
 People v. Roberts, 41, 43. 
 
 People v. San Francisco Sav. 
 Union, 33, 48. 
 
 People v. Sup'rs of New York, 32. 
 
 Perotz's Appeal, 35. 
 
 Philadelphia v. Pennsylvania Hos- 
 pital, 81. 
 
 Philadelphia & S. S. Co. v. Penn- 
 sylvania, 17. 
 
 Philadelphia Library Co. v. Don- 
 ohugh, 82. 
 
 Plumer v. Commonwealth, 64. 
 
 Plummer v. Cole, 17. 
 
 Poland v. Lamoille Valley R. Co., 
 32, 89. 
 
 Pollock v. Farmers' Loan & Trust 
 Co., 1, 3, 5, 6, 17, 18, 19, 20, 22, 
 
 28, 129. 
 
 Powers v. Barney, 29. 
 
 Proctor, In re, 47. 
 
 Providence Rubber Co. v. Good- 
 year, 33. 
 
 Pritchett v. Nashville Trust Co., 
 54. 
 
 Purnell v. Page, 18. 
 
 Railroad Co. v. Collector, 61. 
 Reed v. Head, 53.
 
 CASES CITED 
 [The figures refer to sections] 
 
 XV 
 
 Reid's Brewery Co. v. Male, 100. 
 Remington v. Field, 32, 40. 
 Revell v. Elworthy Bros., Ltd., 
 
 91. 
 
 Reynolds v. Hanna, 35. 
 Reynolds v. Williams, 34. 
 Rhymney Iron Co. v. Fowler, 41, 
 
 89. 
 
 Rice v. United States, 29. 
 Richardson v. State, 91. 
 Robertson v. Pratt, 14, 15, 18, 19, 
 
 40, 88, 110. 
 
 Robson v. Regina, 29, 64. 
 Rogers, In re, 44. 
 Rogers v. Inland Revenue, 58. 
 
 St Andrew's Hospital r. Shear- 
 smith, 81. 
 
 Salem Lyceum v. Salem, 82. 
 Salt Lake City v. Hollister, 43, 
 
 77. 
 
 San Paulo Ry. Co. v. Carter, 60. 
 Sandford v. Sup'rs of New York, 
 
 71. 
 
 Saunders v. Russell, 45. 
 Savings Bank v. New London, 69. 
 Scofield v. Moore, 89. 
 Scottish Inv. Trust Co. v. Forbes, 
 
 46. 
 Scottish Mortgage Co. v. McKel- 
 
 vie, 59. 
 Scottish Provident Inst. v. Allen, 
 
 60. 
 Scottish Union & N. Ins. Co. v. 
 
 Smiles, 63. 
 
 Shoemaker's Appeal, 35. 
 Sims' Appeal, 32. 
 Sioux City & P. R. Co. v. United 
 
 States, 33. 
 Slocum, In re, 44. 
 Smith v. Eastern R. Co.. 95. 
 Smith v. Hooper, 46, 55. 
 Smith v. New York, 18. 
 Smith v. Westinghouse Brake Co., 
 
 89. 
 
 Society of Writers to the Signet 
 
 v. Inland Revenue, 92. 
 Soehlein v. Soehlein, 54. 
 Sohier v. Eldredge, 35. 
 South Carolina v. United States, 
 
 70, 77. 
 
 Southern Ry. Co. v. McNeill, 30. 
 Southwell v. Savill Bros., Ltd., 
 
 89. 
 
 Sowards v. Taylor, 32. 
 Spooner v. Phillips, 55. 
 Spreckels Sugar Ref. Co. v. Mc- 
 
 Clain, 16, 29. 
 
 Springer v. United States, 5. 
 Standard Life Assur. Co. v. Allan, 
 
 60. 
 Stanley v. Gramophone, etc., Ltd., 
 
 60. 
 
 State v. Academy of Sciences, 81. 
 State v. Alston, 19. 
 State v. Barnes., 45. 
 State v. Bazille, 19, 24, 29. 
 State v. Bell, 18, 25. 
 State v. Board of Assessors, 81. 
 State v. Farmers' & Mechanics' 
 
 Mut Aid Ass'n, 80. 
 State v. Ferris, 19. 
 State v. Frear, 7, 9, 10, 13, 14, 
 
 15, 18, 19, 21, 22, 23, 24, 25, 27, 
 
 36, 129. 
 
 State v. Guilbert, 19. 
 State v. Lincoln Sav. Bank, 84. 
 State v. McCarty, 34. 
 State v. United States Fidelity & 
 
 Guaranty Co., 17. 
 State v. Vance, 19. 
 State v. Worth, 62. 
 State Tax on Foreign Held Bonds, 
 
 17.. 
 Stevens v. Durban-Roodepoort G. 
 
 M. Co., 22, 41, 98. 
 Stockdale v. Insurance Co.'s, 25. 
 Stratton's Independence v. How- 
 
 bert, 102. 
 
 Straus v. Abrast Realty Co., 129. 
 Strong, In re, 38. 
 Strong & Co. v. Woodifield, 95, 99. 
 Sun Insurance Office v. Clark, 105.
 
 XVI 
 
 CASES CITED 
 [The figures refer to sections] 
 
 Taxation of Salaries of Judges, In 
 
 re, 18. 
 
 Taylor v. Harwell, 33. 
 Tebrau Rubber Syndicate v. 
 
 Farmer, 45, 46. 
 Tenant v. Smith, 32, 36. 
 Texas Land & Mortgage Co. v. 
 
 Holtham, 97. 
 Thomson's Appeal, 35.. 
 Thomson's Estate, In re, 47, 53, 
 
 56, 57. 
 
 Thorn v. De Breteuil, 32, 33. 
 Tischler v. Apthorpe, 61. 
 Treat v. Farmers' Loan & Trust 
 
 Co., 130. 
 
 Tubb v. Fowler, 55. 
 Turner v. Cuxon, 38. 
 Turner v. Rickman, 61. 
 Turton v. Cooper, 38. 
 
 u 
 
 Union Bridge Co. v. United 
 
 States, 27. 
 
 Union County v. James, 64. 
 Union Pac. R. Co. v. Peniston, 16. 
 United States v. Acorn Roofing 
 
 Co., 107. 
 United States v. Baltimore & O. 
 
 R. Co., 16, 17, 77. 
 United States v. Barnes, 130. 
 United States v. Central Nat. 
 
 Bank, 99. 
 
 United States v. Collier, 30. 
 United States v. Erie R. Co., 16. 
 United States v. Finch, 130. 
 United States v. Frost, 48. 
 United States v. General Inspec- 
 tion & Loading Co., 66, 120. 
 United States v. Indianapolis & 
 
 St. L. R. Co., 48. 
 United States v. Mayer, 100. 
 United States v. Military Const. 
 
 Co., 107. 
 United States v. Nipissing Mines 
 
 Co., 41, 101, 102. 
 United States v. Ritchie. 18. 
 United States v. Schillinger, 48. 
 
 United States v. Smith, 30, 46, 
 
 109. 
 
 United States v. Watts, 29. 
 United States v. Wigglesworth, 
 
 29. 
 Universal Life Assur. Soc. v. 
 
 Bishop, 60. 
 
 V 
 
 Vassar, Matter of Will of, 29. 
 Vedder, In re, 47. 
 Vernon v. Manhattan Co., 45. 
 Vicksburg & M. R. Co. v. State, 
 
 29. 
 Vinton's Appeal, 57. 
 
 W 
 
 Walker v. Brisley, 115. 
 
 Waring v. Savannah, 2, 12. 
 
 Ward, In re, 37. 
 
 Warren, In re, 53. 
 
 Watchmakers' Alliance, In re, 
 125. 
 
 Watney v. Musgrave, 93. 
 
 Weaver v. Ewers, 131. 
 
 Webb v. Outriin, 64. 
 
 Wells v. Shook, 32. 
 
 Wentz's Appeal, 35. 
 
 Werle & Co. v. Colquhoun, 61. 
 
 White v. Koehler, 37. 
 
 Wilcox v. Middlesex County 
 Com'rs, 22, 32, 42. 
 
 Wilmerding's Estate, In re, 19. 
 
 Wiltbank's Appeal, 56. 
 
 Wingate v. Webber, 61. 
 
 Woodburn's Estate, In re, 41. 
 
 Woodruff v. Oswego Starch Fac- 
 tory, 22. 
 
 Worts v. Worts, 55. 
 
 Ystradyfodwg & Pontypridd Main 
 Sewerage Board v. Bensted, 77. 
 Young, In re, 58. 
 
 Zonne v. Minneapolis Syndicate. 
 73.
 
 INCOME TAXATION 
 
 CHAPTER I 
 NATURE OF INCOME TAXES 
 
 | 1. Definitions and General Considerations. 
 
 2. Property Taxes Distinguished. 
 
 3. Excise, Franchise, License, and Occupation Taxes Distin- 
 
 guished. 
 
 4. Tax on Gross Receipts. 
 
 5. Income Tax as Direct Tax, 
 
 1. Definitions and General Considerations 
 
 An income tax is distinguished from other forms of taxa- 
 tion in this respect, that it is not levied upon property, nor 
 upon the operations of trade and business or the subjects em- 
 ployed therein, nor upon the practice of a profession or the 
 pursuit of a trade or calling, but upon the acquisitions of the 
 taxpayer arising from one or more of these sources or from 
 all combined, annually or at other stated intervals, and gen- 
 erally, but not necessarily, only upon the excess of such ac- 
 quisitions over a certain minimum sum. It is not a tax upon 
 accumulated wealth, but upon its periodical accretions. It 
 is not a tax upon personal exertion for gain, whether com- 
 bined with the employment of capital or not, but upon the 
 fruits thereof. An income tax is in effect a tax upon earn- 
 ings, taking that term in its broadest sense, and irrespective of 
 the question whether the person whose income is taxed has 
 actively earned it or has merely profited by loaning his cap- 
 ital for active employment by another. 1 The definition of 
 
 i "There is no tax which, in its essence, is more just and equitable 
 than an income tax, if the statute imposing it allows only such ex- 
 emptions as are demanded by public considerations and are consist- 
 
 BL.INC.TAX. 1
 
 2 INCOME TAXATION (Ch. 1 
 
 an income tax as one which relates to the product or income 
 from property or from business pursuits, 2 is sufficient for the 
 purposes of a practical description, but is not scientifically 
 accurate, since the term "income" may include acquisitions 
 from other sources than those mentioned. For instance, mon- 
 ey coming to one by gift or bequest is undoubtedly "income," 
 though it is in the discretion of the taxing power to include it 
 within the incidence of the tax or to exempt it. In the sense 
 that it is imposed upon a limited and selected subject of tax- 
 ation, an income tax may also be regarded as a special tax,, 
 rather than a general tax. Thus, in South Carolina, a gen- 
 eral taxing act enacted in 1905 required the county auditors 
 and treasurers to collect the taxes levied under its provisions,, 
 and forbade them to collect any other tax except such "special 
 tax" as might be authorized under an act or joint resolution 
 of the legislature. It was contended that this operated as a 
 repeal of the income tax law of 1897. But the courts held 
 otherwise, declaring that the income tax was a "special tax'* 
 within the meaning of the general statute. 8 
 
 2. Property Taxes Distinguished 
 
 A tax on incomes is not a tax on property, -and a tax on 
 property does not embrace incomes. Hence a municipal cor- 
 poration which has authority by its charter to levy taxes for 
 its own purposes on all "taxable property" does not possess 
 
 ent wi-th the recognized principles of the equality of all persons be- 
 fore the law, and, while providing for its collection in ways that do 
 not unnecessarily irritate and annoy the taxpayer, reaches the earn- 
 ings of the entire property of the country, except governmental prop- 
 erty and agencies, and compels those, whether individuals or corpo- 
 rations, who receive such earnings, to contribute therefrom a reason- 
 able amount for the support of the common government of all." 
 Dissenting opinion of Harlan, J., in Pollock v. Farmers' Loan & 
 Trust Co., 158 U. S. 601, 15 Sup. Ct. 912, 39 L. Ed. 1108. 
 
 2 Levi v. City of Louisville, 97 Ky. 394, 30 S. W. 973, 28 L. R. A. 
 480. 
 
 s Alderman v. Wells, 85 S. C. 507, 67 S. E. 781, 21 Am. & Eng. 
 Ann. Cas. 193, 27 L. R. A. (N. S.) 864. 
 
 (2)
 
 Ch. 1) NATURE OF INCOME TAXES 3 
 
 the authority to lay a tax on incomes.* For the same reason 
 a tax laid on income is different from a tax laid on the prop- 
 erty out of which the income arises, and although a statute 
 may tax land at a different rate from that imposed on incomes, 
 it is not therefore in conflict with a constitutional provision 
 requiring that taxation on all species of property shall be uni- 
 form. As remarked by the Supreme Court of Georgia: 
 "Gross earnings and interest coming in from any source, 
 labor, capital, investment of any sort, or money loaned, are 
 not property in the sense of the constitution, but are merely 
 income. Certainly the gross earnings of a laboring man are 
 nothing but his income. So it would seem the earnings of a 
 salaried officer are income, and so the income from capital 
 employed in a bank or railroad or manufacture would seem 
 to be income only. The net income after the expenses are 
 paid becomes property, when invested, or if it be money lying 
 in a bank or locked up at home. The fact is, property is a 
 tree, income is the fruit; labor is a tree, income the fruit; 
 capital a tree, income the fruit. The fruit, if not consumed 
 as fast as it ripens, will germinate from the seed which it in- 
 closes, and will produce other trees, and grow into more prop- 
 erty ; but so long as it is fruit merely, and plucked to eat and 
 consumed in the eating, it is no tree and will produce itself no 
 fruit." 6 
 
 3. Excise, Franchise, License and Occupation Taxes 
 
 Distinguished 
 
 License and occupation taxes, which are payable in re- 
 spect to the privilege of engaging in or carrying on a par- 
 ticular business or vocation, are not income taxes, notwith- 
 standing the fact that the amount of tax payable by any in- 
 dividual may be measured by the amount of business which 
 he transacts or his earnings therefrom. And conversely, 
 
 * City of Dubuque v. Northwestern Life Ins. Co., 29 Iowa, 9. 
 B Waring v. City of Savannah, 60 Ga. 93. 
 
 (3)
 
 3 INCOME TAXATION (Ch. 1 
 
 although a person's entire income may be derived from a 
 particular pursuit or trade, a tax on the income as such is 
 not a license or privilege tax. Thus, a tax on sales of a 
 particular commodity, or a tax on the dealer measured by 
 the amount of his sales, is not an income tax. 6 So, in Vir- 
 ginia, it appeared that a city ordinance provided that law- 
 yers and others should be divided into six classes, and that 
 those in each class should pay a certain sum as a tax. The 
 committee on finance was to place each attorney in the class 
 to which he properly belonged, looking to all the circum- 
 stances. After the committee had completed their classifi- 
 cation, public notice was to be given, and any lawyer dissatis- 
 fied with his classification was to appear before the commit- 
 tee and have it corrected if erroneous. It was held that this 
 was not an income tax, and the ordinance was valid. 7 Hence 
 it appears that a person carrying on a certain business, as, 
 for instance, a dealer in intoxicating liquors, may be sub- 
 jected to a license tax for the privilege of pursuing that 
 avocation, to a state or municipal tax for general purposes 
 upon his stock in trade, and to a tax upon the income de- 
 rived from his business, and yet, as all these taxes relate to 
 different subjects and do not overlap or conflict, their im- 
 position affords no legal ground for complaint. 
 
 Excise taxes include license fees and also some other forms 
 of taxation, and these also are theoretically distinguishable 
 from income taxes, although the practical difference is very 
 slight in cases where the excise is measured by the income. 
 And indeed it has sometimes been thought that an income 
 tax should be classed as an excise tax, within the meaning 
 of the federal Constitution. In the decision which over- 
 threw the federal income tax law of 1894, one of the judges 
 remarked: "Excises are a species of tax consisting gen- 
 
 Commonwealth v. Brown, 91 Va. 762, 21 S. E. 357, 28 L. R. A. 
 110. 
 
 i Quid v. City of Richmond, 23 Gratt (Va.) 464, 14 Am. Rep. 139.
 
 Ch. 1) NATURE OF INCOME TAXES 3 
 
 erally of duties laid upon the manufacture, sale, or consump- 
 tion of commodities within the country, or upon certain 
 callings or occupations, often taking the form of exactions 
 for licenses to pursue them. The taxes created by the law 
 wider consideration, as applied to savings banks, insurance 
 companies, whether of fire, life, or marine, to building or 
 other associations, or to the conduct of any other kind of 
 business, are excise taxes, and fall within the requirement, 
 so far as they are laid by Congress, that they must be uni- 
 form throughout the United States." 8 
 
 But a franchise tax upon corporations is not an income 
 tax, though it may be called an excise tax. And this is so 
 whether the tax is laid by the state under whose laws the 
 corporation is organized, and is exacted annually for the 
 privilege of continuing its corporate existence, or is imposed 
 by a different state for the privilege of doing business with- 
 in its limits, or is imposed by an outside power, such as the 
 United States, upon the franchise of transacting business in 
 a corporate capacity. For this reason the tax on corpora- 
 tions imposed by the act of Congress of August 5, 1909, be- 
 ing laid specifically upon the carrying on or doing of busi- 
 ness in a corporate or quasi corporate capacity, was ad- 
 judged not to be an income tax, although the amount of 
 the tax in each instance was measured by the net annual in- 
 come of the corporation, but an excise tax, and therefore 
 not a direct tax, and therefore not invalid because not ap- 
 portioned among the several states according to popula- 
 tion. 8 Practically it makes but little difference to a corpo- 
 ration whether it is taxed upon its income or upon the value 
 of its corporate privileges as measured by its income. But 
 the theoretical distinction is valid, and its actual importance 
 
 s Per Field, J., concurring, in Pollock v. Farmers' Loan & Trust 
 Co., 157 U. S. 429, 15 Sup. Ct. 673, 39 L. Ed. 759. 
 
 " Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct 342, 55 L. Ed. 
 389. 
 
 (5)
 
 4 INCOME TAXATION (Ch. 1 
 
 is shown by the fact that it was this distinction alone which 
 ultimately saved the act of Congress of 1909 from the fate 
 which befell that of 1894. 
 
 4. Tax on Gross Receipts 
 
 In numerous states at the present time, various kinds of 
 corporations and particularly railroad companies are not 
 taxed directly upon their real and personal property, but 
 upon their gross receipts. Whether or not a tax of this 
 kind is to be regarded as an income tax is an unsettled ques- 
 tion. It has been held in Louisiana that the term "income 
 tax" includes a tax upon the gross receipts of a corporation 
 or business. 10 But there is a contrary decision in Texas. 11 
 Certainly such a tax is not a general income tax, being re- 
 stricted to corporations as distinguished from individuals, or 
 even to certain classes of corporations. And it may clearly 
 be regarded in the light of an excise tax, the subject of tax- 
 ation being the transaction of business in a corporate capac- 
 ity, and the receipts of the company serving only to measure 
 the tax. Or perhaps, having regard to the use of this form 
 of taxation as the sole means of assessing corporations, it 
 may be considerd as in reality a tax on their property hold- 
 ings, rather than an income tax, the amount being measured 
 not so much by the market value of the property as by its 
 profitableness, and its degree of profitableness being ascer- 
 tained from the amount of the gross earnings. 
 
 5. Income Tax as Direct Tax 
 
 In general usage, and according to the terminology of 
 political economy, a direct tax is one demanded of the per- 
 son who is expected to pay it and bear the expense of it 
 without recoupment, while an indirect tax is demanded from 
 one person in the expectation that he will indemnify him- 
 
 10 Parker v. North British Ins. Co., 42 La. Ann. 428, 7 South. 59f> 
 
 11 Galveston, H. & S. A. Ry. Co. v. Davidson (Tex. Civ. App.) 93 
 S. W. 436. 
 
 (6)
 
 Ch. 1) NATURE OF INCOME TAXES 5 
 
 self at the expense of others. 12 When the question of the 
 difference between direct and indirect taxes first came be- 
 fore the Supreme Court of the United States, in connection 
 with the constitutional provision that "representatives and 
 direct taxes shall be apportioned among the several states," 
 it was held that the term "direct," as here used, was to be 
 taken in a narrower sense than that above indicated; and it 
 was ruled that only two classes of taxes could be considered 
 as coming under this designation, namely, taxes on land and 
 capitation taxes. 18 But these decisions have been overruled, 
 and it is now held that income taxes, whether levied on the 
 issues and profits of real estate or on the gains and interest 
 from personal property, are also direct taxes within the 
 meaning of the constitution. 14 The celebrated case in which 
 this decision was made was twice before the Supreme Court, 
 and in the course of the opinion filed on the second hearing 
 it was said: "Our previous decision was confined to the 
 consideration of the validity of the tax on the income from 
 real estate, and on the income from municipal bonds. The 
 question thus limited was whether such taxation was direct 
 or not in the meaning of the Constitution; and the court 
 went no further, as to the tax on the income from real es- 
 tate, than to hold that it fell within the same class as the 
 source whence the income was derived, that is, that a tax 
 upon the realty and a tax upon the receipts therefrom were 
 alike direct; while, as to the income from municipal bonds, 
 that could not be taxed because of want of power to tax 
 the source, and no reference was made to the nature of the 
 
 12 Brewers' Ass'n v. Attorney General [1897] App. Cas. 231; Black, 
 Constitutional Law (3d edn.) p. 209. 
 
 is Springer v. United States, 102 U. S. 586, 26 L. Ed. 253; Pacific 
 Ins. Co. v. Soule, 7 Wall. 433, 19 L. Ed. 95 ; Hylton v. United States, 
 3 Ball. 171, 1 L. Ed. 556. 
 
 i* Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 15 Sup. Ct. 
 673, 39 L. Ed. 759. And see Emery, Bird, Thayer Realty Co. v. 
 United States, 198 Fed. 242. 
 
 (7)
 
 5 INCOME TAXATION (Ch. 1 
 
 tax, as being direct or indirect. We are now permitted to 
 broaden the field of inquiry, and to determine to which of 
 the two great classes a tax upon a person's entire income 
 whether derived from rents or products, or otherwise, of 
 real estate, or from bonds, stocks, or other forms of per- 
 sonal property belongs, and we are unable to conclude that 
 the enforced subtraction from the yield of all the owner's 
 real or personal property, in the manner prescribed, is so 
 different from a tax upon the property itself that it is not 
 a direct, but an indirect, tax in the meaning of the Constitu- 
 tion." 15 For this reason, and by this decision, the income 
 tax law of 1894 was pronounced unconstitutional. Since 
 that time the Sixteenth Amendment to the Constitution has 
 been adopted. But that amendment does not purport to de- 
 clare that an income tax shall not be a direct tax. It only 
 dispenses with the necessity of apportionment among the 
 several states, so far as concerns a tax on incomes from 
 whatever source derived. The decision of the Supreme 
 Court above referred to has never been overruled, and it 
 remains an authoritative declaration that a tax upon incomes 
 is as much a direct tax as one laid upon land or personal 
 property. 
 
 10 Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 15 Sup. 
 Ct. 912, 39 L. Ed. 1108. 
 
 (8)
 
 Ch. 2) CONSTITUTIONAL AND STATUTORY PROVISIONS 6 
 
 CHAPTER II 
 CONSTITUTIONAL AND STATUTORY PROVISIONS 
 
 6. Provisions of United States Constitution. 
 
 7. Provisions of State Constitutions. 
 
 8. History of Income Tax Laws. 
 
 9. Income Tax Laws in Force. 
 
 10. Economic Aspects of Income Taxation. 
 
 6. Provisions of United States Constitution 
 
 As originally adopted the Constitution of the United States 
 contained the following provisions with reference to national 
 taxation: "Representatives and direct taxes shall be appor- 
 tioned among the several states which may be included within 
 this Union, according to their respective numbers" (Art. 1, 
 2.) "The Congress shall have power to lay and collect taxes, 
 duties, imposts, and excises, to pay the debts and provide for 
 the common defense and general welfare of the United States ; 
 but all duties, imposts, and excises shall be uniform through- 
 out the United States" (Art. 1, 8.) "No capitation or other 
 direct tax shall be laid unless in proportion to the census or 
 enumeration herein before directed to be taken." (Art. 1, 
 9.) During the period of the Civil War and for some time 
 thereafter, that is, between the years 1861 and 1870, succes- 
 sive acts of Congress imposed general taxation upon incomes 
 derived from all sources, for the support of the federal gov- 
 ernment, without any attempt at apportionment among the 
 states. But it was held by the courts that an income tax is not 
 a direct tax and therefore does not require such apportion- 
 ment, while the question of the "uniformity" of such acts un- 
 der the constitutional provision above quoted does not appear 
 to have been raised. But a similar statute enacted in 1894 was 
 adjudged unconstitutional, in so far as it applied to incomes 
 derived from the renting of real property or from the invest- 
 ment of personal property, for lack of apportionment, the 
 
 (9)
 
 $ 6 INCOME TAXATION (Ch. 2 
 
 court now holding it to be a direct tax, and invalid so far as 
 it applied to income derived from state or municipal bonds, on 
 the ground that Congress had no rightful power to tax those 
 subjects. 1 In so deciding, the Supreme Court advanced the 
 suggestion that if the "ultimate sovereignty" desired to intrust 
 to Congress a general power to tax incomes, it could be done 
 by an amendment to the Constitution. Thereafter a consti- 
 tutional amendment was proposed by act of Congress, sub- 
 mitted to the legislatures of the several states, ratified by the 
 necessary majority, and proclaimed in 1913 as the Sixteenth 
 Amendment. It is as follows : "The Congress shall have pow- 
 er to lay and collect taxes on incomes, from whatever source 
 derived, without apportionment among the several states, and 
 without regard to any census or enumeration." 
 
 Is this amendment a grant of power or only the removal 
 of a constitutional restriction? From the use of the words 
 "from whatever source derived" it might be argued that it was 
 the intention to bring within the taxing power of Congress 
 certain subjects not previously included, such as income de- 
 rived from the bonded debt of states or municipalities and the 
 salaries of state officers. But this would appear to be a 
 strained construction, because the lack of authority in the fed- 
 eral government to tax the subjects mentioned does not arise 
 from any explicit provision of the Constitution, but from the 
 relation between the states and the Union and the necessity of 
 giving to each an entire immunity from possibly destructive 
 taxation on the part of the other. That this was also the un- 
 derstanding of Congress in enacting the law of 1913 is shown 
 by the fact that it expressly excludes "interest upon the obli- 
 gations of a state or any political subdivision thereof," and 
 also "the compensation of all officers and employees of a state 
 or any political subdivision thereof." 
 
 On the other hand, the decision of the court in the Pollock 
 
 i Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 15 Sup. Ct. 
 912, 39 L. Ed. 1108. 
 
 (10)
 
 Ch. 2) CONSTITUTIONAL AND STATUTORY PROVISIONS 7 
 
 case was confined to the question of the constitutionality of 
 the tax in so far as it bore upon income derived from real es- 
 tate and from invested personal property. It was not decided 
 that a tax upon income derived from business operations or 
 from the practice of a trade or profession or the receipt of a 
 salary was a direct tax, and this was explained by Mr. Justice 
 Harlan, in his dissenting opinion, as equivalent to a declara- 
 tion that no apportionment among the states would be necessary 
 in so far as a tax upon incomes might be laid upon those sub- 
 jects alone. It never was doubted that Congress possessed 
 the power to tax incomes in so far as it could be done without 
 infringing upon the rightful sovereignty of the states. The 
 only question was as to the necessity of apportionment. On 
 this question, the Supreme Court ruled that a tax on income 
 derived from certain specified sources would require appor- 
 tionment, while a tax on income derived from certain other 
 .sources would not. Now the Sixteenth Amendment, which 
 was prompted by the decision in the Pollock case, and which 
 need not have been proposed and adopted if it had not been 
 for that decision, declares that there shall be no necessity of 
 apportionment among the several states, nor any regard to the 
 census or enumeration, for the purposes of a federal tax on 
 incomes "from whatever source derived." It does not, there- 
 fore, enlarge the power of taxation previously possessed by 
 Congress, but merely repeals certain parts of the existing Con- 
 stitution which imposed a limitation upon the levying of one 
 form of direct taxation, namely, an income tax. 
 
 7. Provisions of State Constitutions 
 
 While it is probable that an express grant of authority in 
 the constitution is not necessary to empower the legislature 
 of a state to enact a general system of income taxation, 2 yet 
 the imposition of an income tax is expressly authorized by 
 
 a See Glasgow v. Rowse, 43 Mo. 479. 
 
 (11)
 
 7 INCOME TAXATION (Ch. 2 
 
 the constitutions of several of the states. 3 But in some cases 
 the power of the legislature is carefully restricted in this 
 regard, especially with a view to avoiding double taxation or 
 a burdensome accumulation of taxes, as in North Carolina, 
 where the constitution provides that "the general assembly 
 may tax trades, professions, franchises, and incomes, provided 
 that no income shall be taxed when the property from which 
 the income is derived is taxed." * In Wisconsin, the state 
 which now possesses the most complete and detailed system 
 of income taxation, it was at first doubted whether the orig- 
 inal provision of the constitution was sufficiently broad to 
 permit the levying of this kind of a tax. It was merely ex- 
 pressed as follows : "The rule of taxation shall be uniform, 
 and taxes shall be levied upon such property as the legislature 
 shall prescribe." This had been held as not expressly forbid- 
 ding excise taxation, and therefore as admitting of a collateral 
 inheritance tax, 5 but when a tax on incomes was proposed, 
 the legislature (in 1905 and 1907) passed a resolution recom- 
 mending an amendment to the section of the constitution 
 above quoted by the addition of the following words : "Taxes 
 may also be imposed on incomes, privileges, and occupations, 
 which taxes may be graduated, and progressive and reason- 
 able exemptions may be provided." This change was rati- 
 fied by the people of the state at a general election held in 
 1908, and three years later (1911) the legislature enacted a stat- 
 ute laying a tax upon incomes and intended eventually to su- 
 persede all forms of personal property taxation. 6 
 
 a See, for instance, Const. Cal., art. 13, 11 ; Const. Tenn., art. 2, 
 28 ; Const Texas, art. 8, 1 ; Const. Wis., art. 8, 1. 
 
 * Const. N. Car., art. 5, 3. 
 
 s Nunnemacher v. State, 129 Wis. 190, 108 N. W. 627, 9 L. R. A. 
 (N. S.) 121. 
 
 e Const. Wis., art. 8, 1. And see State v. Frear, 148 Wis. 456, 
 134 N. W. 673, 26 Am. & Eng. Ann. Cas. 1147. 
 
 (12)
 
 Ch. 2) CONSTITUTIONAL AND STATUTORY PROVISIONS 8 
 
 8. History of Income Tax Laws 
 
 In England, the first income tax law was proposed by Pitt, 
 and was enacted by act of Parliament, January 9, 1799 7 since 
 which time, with occasional short lapses, income taxation has 
 always formed a chief source of revenue in the United King- 
 dom. But the acts which have remained in force, with some 
 modifications and minor changes, to the present time, and 
 which have had a most important influence, by way of sug- 
 gestion and precedent, upon the frame-work of all income tax 
 laws in the United States, are the statutes of 1842 and 1853. 8 
 
 In America, many states have at different times experi- 
 mented with taxes of this kind, enacting, repealing, and some- 
 times re-enacting them, but few have continuously availed 
 themselves of this source of revenue until comparatively re- 
 cent times. Even as early as the colonial period statutes were 
 here and there in force which did practically and substantially 
 tax certain classes of incomes, though not by that name. 
 Again, in the years between 1840 and 1850, laws of this char- 
 acter were sporadically enacted, as also in the following dec- 
 ade, when income tax laws were put in force in Alabama, 
 Louisiana, and Missouri (among others), which are not now 
 in force. But for all practical purposes the interest of the 
 student of law and economics will center upon two foci, 
 namely, the period of the Civil War and what may be called 
 the period of present-day activity in income tax legislation, 
 the latter beginning about 1894. 
 
 The first attempt of Congress to levy a tax of this kind was 
 made in 1861, when it was sorely pressed with the burden of 
 providing revenue to carry on the pending war. This act 
 levied a tax upon practically all sources and kinds of income, 
 but at varying rates, viz., three per cent upon incomes gen- 
 erally, one and one-half per cent upon interest on treasury 
 notes and United States bonds, and five per cent on the in- 
 
 i Stat. 39 Geo. Ill, c. 13, 18 Stat. at L., p. 29. 
 
 s Stat. 5 & 6 Viet., c. 35 ; Stat. 16 & 17 Viet, c. 34. 
 
 (13)
 
 8 INCOME TAXATION (Ch. 2 
 
 comes of American citizens residing abroad. Annual incomes 
 below $800 were exempted. The tax was to be levied and 
 collected for only one year, that is, on the income of 1861, and 
 no elaborate system for its collection was provided, adminis- 
 trative details being left to the regulation of the officers of 
 the treasury department. In the following year, 1862, this act 
 was re-enacted, but with very important changes. The ex- 
 emption was now fixed at $600, and the tax was at the rate 
 of three per cent on incomes between that minimum and the 
 sum of $10,000, and five per cent on all incomes exceeding 
 the latter amount, as also upon the incomes (irrespective of 
 amount) of American citizens living abroad, except those in 
 the service of the government. Salaries of persons in the em- 
 ploy of the United States, including senators and representa- 
 tives in Congress, were exempted, and provision was also made 
 for the deduction from taxable income of other taxes paid 
 by the subject and also dividends received from corporations 
 subject to tax. The statute was to be in force until and in- 
 cluding the year 1866 and no longer, and taxable persons were 
 required to make returns of their income. In the next year 
 (1863) this act was amended by permitting the taxpayer to 
 deduct from his taxable income rent paid for the dwelling 
 house in which he resided. The income tax law of 1864, as 
 amended in 1865, materially increased the burden of taxation, 
 the exemption remaining as before, but the duty being now 
 fixed at five per cent on incomes up to $5,000, and ten per 
 cent on the excess over that sum. Several new features were 
 now introduced, as, for instance, a partial attempt at "col- 
 lection at the source" by taxing dividends declared by certain 
 kinds of corporations and then permitting the stockholder 
 to deduct the same from his estimate of income, and a like 
 provision as to persons paid by, the government. Now for the 
 first time also we meet the provision that only one deduction 
 of $600 shall be allowed from the aggregate incomes of the 
 members of a family. Salaries paid to persons in the em- 
 
 (14)
 
 Ch. 2) CONSTITUTIONAL AND STATUTORY PROVISIONS 8 
 
 ployment of the United States, including the members of Con- 
 gress, were now subjected to the tax, as also premiums on 
 gold. But the rental value of a homestead owned and occu- 
 pied by the taxpayer was not to be included. Special provi- 
 sions were made for estimating the income and the allowable 
 deductions of farmers and stock-raisers. The life of the act 
 was limited to the year 1870. It was amended in details in 
 1866 and 1867. Again in 1870 a statute was passed, to be in 
 force only for that year and the one following, which im- 
 posed a flat tax of two and one-half per cent on income from 
 all sources. These sources were elaborately defined and de- 
 scribed, and it may be remarked that they were made to in- 
 clude interest accrued within the year but unpaid, if collect- 
 ible, a stockholder's proportionate share of the undivided 
 profits of the corporation, interest on United $tates securi- 
 ties and premiums on gold, the salaries of federal officers in- 
 cluding members of Congress, and profits realized within the 
 year from sales of real estate purchased within two years 
 previous. The exemptions or deductions included the sum of 
 $2,000 of income and also pensions under the laws of the 
 United States, taxes paid, losses sustained and bad debts writ- 
 ten off within the year, "but excluding all estimated deprecia- 
 tion of values," interest paid, and rent and the expenses of 
 business. Consuls of foreign countries were exempted from 
 the payment of the tax, so far as concerned their official emolu- 
 ments and income from their property in foreign countries, 
 but only in case their governments reciprocated. It is a sig- 
 nificant fact that, during all this period, there was no attempt 
 to tax corporations as such, except that the acts of 1862, 1864, 
 and 1870 laid a tax on the dividends declared, and interest 
 paid, by banks, trust companies, savings institutions, insur- 
 ance companies, and railroads and other transportation com- 
 panies. 
 
 The period of modern activity in income tax legislation 
 was inaugurated by the enactment of the federal income tax 
 
 (15)
 
 8 INCOME TAXATION (Ch. 2 
 
 act of 1894. This statute was intended to expire by its own 
 limitation in 1900, but in the year following its passage it 
 was adjudged unconstitutional and therefore was not en- 
 forced. Allowing an exemption of $4,000, it imposed a tax 
 of two per cent on all income above that amount, from what- 
 ever source derived, and a like tax upon the net earnings 
 of all corporations doing business within the United States 
 (not including partnerships), except corporations for char- 
 itable, religious, or educational purposes, fraternal benefit so- 
 cieties, mutual insurance companies, and certain kinds of 
 building and loan associations and savings banks. It made 
 some provision for collection of the tax at the source, and 
 covered carefully the administrative features of such a tax, 
 in regard to returns, the method of collection, the imposition 
 and recovery of penalties, and conditions upon the publicity 
 of the returns. But in other respects it did not differ very 
 materially from the last and most elaborate of the earlier 
 acts, that of 1870. The corporation excise tax law of 1909 
 imposed a tax of one per cent upon the entire net income (over 
 and above $5,000) received in each year by "every corpora- 
 tion, joint stock company or association organized for profit 
 and having a capital stock represented by shares, and every 
 insurance company," whether organized under state or terri- 
 torial or federal laws, or organized under the laws of a for- 
 eign country and engaged in business in any state and terri- 
 tory of the United States. In its main features, this stat- 
 ute very closely resembled that act of 1894, in so far as the 
 latter was applicable to corporations. But the tax laid by the 
 act of 1909 was specifically denominated a "special excise 
 tax," and was declared to be imposed "with respect to the 
 carrying on or doing business by such corporation." This was 
 in reality an income tax very thinly disguised, and restricted 
 to corporations. But the theoretical distinction between a 
 tax on income and a tax on the privilege of doing business 
 in a corporate capacity, as measured by income, afforded suffi- 
 
 (16)
 
 Ch. 2) CONSTITUTIONAL AND STATUTORY PROVISIONS 8 
 
 cient ground for the courts to hold that it was not a direct tax 
 and therefore not in conflict with the constitution. 9 Finally, 
 as concerns the activity in this direction of the United States 
 government, the tariff act of 1913 contained a section im- 
 posing a tax upon the incomes of both individuals and cor- 
 porations. This statute will not now be discussed in detail, 
 as its provisions will form a principal subject for considera- 
 tion in the following pages. 
 
 The act of 1913, it should be remarked, supersedes and re- 
 peals the corporation excise tax law of 1909. But in order 
 that corporations may not escape taxation for any part of 
 the year 1913, that year is divided into two portions, as to 
 one of which the excise tax is to be assessed and collected, 
 and as to the other the income tax. The act provides that 
 "an excise tax upon the doing of business, equivalent to one 
 per centum upon their entire net income, shall be levied, as- 
 sessed, and collected upon corporations, joint stock companies 
 or associations, and insurance companies, of the character 
 described in section 38 of the act of August 5, 1909, for the 
 period from January first to February twenty-eighth, 1913, 
 both dates inclusive, which said tax shall be computed upon 
 one-sixth of the entire net income of said corporations, joint 
 stock companies or associations, and insurance companies, for 
 said year." And the provisions of the act of 1909, "relative to 
 the collection of the tax therein imposed, shall remain in force 
 for the collection of the excise tax herein provided." As to 
 the remainder of the year, the imposition of the income tax 
 upon any corporation subject to its terms is effected by a 
 requirement that "said tax shall be imposed upon its entire 
 net income accruing during that portion of said year (1913) 
 from March first to December thirty-first, both dates inclu- 
 sive, to be ascertained by taking five-sixths of its entire net 
 income for said calendar year." But for the year 1913 "it 
 
 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. 
 Ed. 389. 
 
 BL.INC.TAX. 2
 
 8 INCOME TAXATION (Ch. 2 
 
 shall not be necessary to make more than one return and 
 assessment for all the taxes imposed herein upon said cor- 
 porations, joint stock companies or associations, and insurance 
 companies, either by way of income or excise, which return 
 and assessment shall be made at the times and in the manner 
 provided in this act. But the repeal of existing laws or mod- 
 ifications thereof embraced in this act shall not affect any 
 act done, or any right accruing or accrued, or any suit or pro- 
 ceeding had or commenced in any civil case before the said 
 repeal or modification ; but all rights and liabilities under said 
 laws shall continue and may be enforced in the same manner 
 as if said repeal or modifications had not been made. Any 
 offenses committed and all penalties or forfeitures or liabil- 
 ities incurred prior to the passage of this act under any stat- 
 ute embraced in or changed, modified, or repealed by this 
 act may be prosecuted or punished in the same manner and 
 with the same effect as if this act had not been passed." 
 
 As regards the legislation of the states in the more recent 
 period, it may be mentioned that an income tax law, not very 
 complete or detailed, was enacted in North Carolina in 1907, 
 a somewhat similar act by South Carolina in 1902, an act 
 closely resembling that of North Carolina by Oklahoma in 
 1907, a short statute, but intended to include all kinds of in- 
 come, by Virginia in 1903 and amended in 1908, a compre- 
 hensive statute, modeled on the various acts of Congress, by 
 the territory of Hawaii in 1901, and a very long and detailed 
 income tax law by Wisconsin in 1911. In addition to these, 
 there are special and restricted income tax provisions in force 
 in Massachusetts and Tennessee, brought down from earlier 
 legislation in those states and included in their later codes or 
 revisions. 
 
 9. Income Tax Laws in Force 
 
 From the foregoing historical review it will be seen that 
 income tax laws are now in force not only for the United 
 
 (18)
 
 Ch. 2) CONSTITUTIONAL AND STATUTORY PSOVISIONS 9 
 
 States generally, by the legislation of Congress, but also in 
 and for the following states and territories: Wisconsin, Vir- 
 ginia, North Carolina, South Carolina, Massachusetts, Ten- 
 nessee, Oklahoma, and Hawaii. The text of all these stat- 
 utes, including the acts of Congress passed between 1861 and 
 1870 and the act of 1894 and the corporation tax law of 1909, 
 as well as the federal income tax law of 1913, will be found 
 printed in full in the appendix to this volume. 
 
 But it is not alone in America that taxation of incomes has 
 been resorted to as a rich source of governmental revenue. 
 On the contrary, in some cases only from recent times, 
 but in others for more than a century the income tax has 
 been, and is still, employed in England and several of her 
 colonies, in Norway, Sweden, and Denmark, in Prussia, Aus- 
 tria, and Italy, and in fact in practically all the great civilized 
 nations of the world, with the exception of France. As ob- 
 served by the court in Wisconsin, in considering the validity 
 of the statute* of that state : "It may be well to note that 
 income taxation is no new and untried experiment in the field 
 of taxation. It has been in use in various forms, and general- 
 ly with the progressive feature, by many of the civilized gov- 
 ernments of the world for decades, which in some instances 
 run into centuries. It has been used at various times by nearly 
 or quite twenty of our own states, and is now in use in sev- 
 eral of them. It was used for a brief period by the govern- 
 ment of the United States, and is now in successful operation 
 in practically all of the great nations of the civilized world, 
 except the United States." 10 As to the last sentence, it should 
 be remembered that this was written in 1912, and the excep- 
 tion then noted has now ceased to exist. 
 
 10 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 (19)
 
 10 INCOME TAXATION (Ch. 2 
 
 10. Economic Aspects of Income Taxation 
 
 Although we are here concerned rather with the legal 
 aspects of the income tax laws than with their economic justi- 
 fication, it may be well to add what has been said on this sub- 
 ject by one or two authorities. As to this method of raising 
 revenue, "the fundamental idea upon which its champions 
 rest their argument in its favor is that taxation should logi- 
 cally be imposed according to ability to pay, rather than upon 
 the mere possession of property, which for various reasons 
 may produce no revenue to the owner. It is argued that 
 there should be as nearly as practicable equality of sacrifice 
 among the various taxpayers, and that a tax levied at an uni- 
 form or proportional rate can rarely, if ever, produce equality 
 of sacrifice; that one per cent of a small income, which just 
 suffices to support its owner, is a far larger relative contribu- 
 tion to the public treasury than one per cent of an income so 
 large that it cannot be exhausted by the owner, except by 
 means of lavish and extravagant expenditures."" 11 "In theory 
 an income tax is an ideal one. Much property is necessarily 
 carried by citizens of a state that is unproductive, and hence 
 yields but little income out of which taxes may be paid; 
 while, on the other hand, if the state only demands a part of 
 the income actually earned, it works no hardship on its citi- 
 zens. If each man paid taxes according to his income, those 
 who have most would pay most, and those who have least 
 would pay least." 12 
 
 11 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 12 Report of Minnesota State Tax Commission, 1910. 
 
 (20)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 11 
 
 CHAPTER III 
 
 CONSTITUTIONAL VALIDITY OF INCOME TAX LAWS 
 
 11. Requirement of Due Process of Law. 
 
 12. Requirement of Equality and Uniformity. 
 
 13. Equal Protection of the Laws. 
 
 14. Discrimination Between Corporations, Partnerships, and In- 
 
 dividuals. 
 
 15. Discrimination Between Residents and Non-Residents. 
 
 16. Federal Taxation of Corporations Created by States. 
 
 17. Taxation of Income from Non-Taxable Property. 
 
 18. Taxing Salaries of Federal and State Officers. 
 
 19. Exemption of Incomes Below a Fixed Sum. 
 
 20. Exemption of Classes of Individuals or Corporations. 
 
 21. Allowance of Deduction for Other Taxes Paid. 
 
 22. Double Taxation. 
 
 23. Taxing Aggregate Income of Family. 
 
 24. Validity of Graduated or Progressive Tax. 
 
 25. Retrospective Operation of Statute. 
 
 26. Objections as to Title, Purpose, and Mode of Enactment of 
 
 Statute. 
 
 27. Objections to Administrative Provisions of Act 
 
 28. Apportionment of Federal Income Tax. 
 
 11. Requirement of Due Process of Law 
 
 As applied to the levy, assessment, and collection of taxes, 
 the constitutional requirement of due process of law does not 
 mean that either the validity of the tax or the liability of the 
 particular person or property should be adjudicated by a 
 court of justice. Nor does it mean that personal notice should 
 be given to the taxpayer of each or any step in the proceed- 
 ings. It is enough if he is informed of the amount for which 
 he is to be charged, and is afforded an opportunity to contest 
 the legality of the tax, the question of his liability to it, or 
 the amount of his assessment, before some board or tribunal 
 empowered to give him all the relief which justice may de- 
 mand, though it be a board of administrative officers in the 
 
 (21)
 
 11 INCOME TAXATION (Ch. 3 
 
 first instance, with a final appeal to the courts. 1 As this 
 method of procedure has commonly been prescribed by the 
 income tax laws, their constitutional validity has been upheld 
 as against the contention that they deprived the citizen of his 
 property without due process of law. 2 In one of the cases 
 dealing with this question it was said: "The claim that the 
 act deprives the plaintiff of his property without due process 
 of law, and denies him the equal protection of the laws, raises 
 questions under the federal constitution, upon which the de- 
 cisions of the Supreme Court of the United States are au- 
 thoritative and controlling. In solving these questions we 
 must therefore be guided by the decisions of that court. In 
 the Kentucky Railroad Tax Cases, 115 U. S. 321, 6 Sup. Ct. 
 57, 29 L. Ed. 414, the court considered a statute of the state 
 of Kentucky, which involved both these constitutional guar- 
 anties. Upon the question of what is due process of law, in 
 the matter of levying and collecting taxes, the court, by Mr. 
 Justice Matthews, said: 'It has been repeatedly decided by 
 this court that the proceedings to raise the public revenue by 
 levying and collecting taxes are not necessarily judicial, and 
 that due process of law, as applied to that subject, does not 
 imply or require the right to such notice and hearing as are 
 considered to be essential to the validity of the proceedings 
 and judgments of judicial tribunals. Notice by statute is gen- 
 erally the only notice given, and that has been held sufficient. 
 "In judging what is due process of law," said Mr. Justice 
 Bradley in Davidson v. New Orleans, 96 U. S. 97, 24 L. Ed. 
 616, "respect must be had to the cause and object of the 
 taking, whether under the taxing power, the power of eminent 
 domain, or the power of assessment for local improvements, or 
 none of these; and if found to be suitable or admissible in 
 
 1 Black, Const. Law (3d edn.) p. 580. 
 
 2 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. Ed. 
 389; Alderman v. Wells, 85 S. C. 507, 67 S. E. 781, 21 Am. & Eng. 
 Ann. Cas. 193, 27 L. R. A. (N. S.) 864. 
 
 (22)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 12 
 
 the special case, it will be adjudged to be due process of law, 
 but if found to be arbitrary, oppressive, and unjust, it may be 
 declared to be not due process of law." In its application to 
 proceedings for the levy and collection of taxes, it was said 
 in McMillen v. Anderson, 95 U. S. 37, 42, 24 L. Ed. 335, 
 that it "is not, and never has been, considered necessary to 
 the validity of a tax that the party charged should have been 
 present, or had an opportunity to be present, in some tribunal, 
 when he was assessed." This language, it is true, was used 
 in the decision of a case in reference to a license tax, where 
 all the circumstances of its assessment were declared by stat- 
 ute, and nothing was intrusted to the discretion of public offi- 
 cers ; but in the State Railroad Tax Cases, 92 U. S. 575, 610, 
 23 L. Ed. 663, where the ascertainment of the taxable value 
 of railroads was the duty of a board, as in the present case, 
 whose assessment was challenged for the reason that the pro- 
 ceedings were not due process of law, and for want of notice 
 and a hearing, it was said by Mr. Justice Miller, delivering 
 the opinion of the court: "This board has its time of sitting 
 fixed by law. Its sessions are not secret. No obstruction 
 exists to the appearance of any one before it to assert a right 
 or redress a wrong, and, in the business of assessing taxes, 
 this is all that can be reasonably asked." ' " 8 
 
 12. Requirement of Equality and Uniformity 
 
 "Property," as the term is used in reference to taxation, 
 means the corpus of an estate or investment, as distinguished 
 from the annual gain or revenue from it. Hence a man's in- 
 come is not "property" within the meaning of a constitu- 
 tional requirement that taxes shall be laid equally and uni- 
 formly upon all property within the state. 4 For this rea- 
 
 3 Alderman v. Wells, 85 S. C. 507, 67 S. E. 781, 21 Am. & Eng. 
 Ann. Cas. 193, 27 L. R. A. (N. S.) 864, citing also Cass Farm Co. v. 
 Detroit, 181 U. S. 396, 21 Sup. Ct. 644, 45 L. Ed. 914. 
 
 * Waring v. Savannah, 60 Ga. 93 ; Glasgow v. Rowse, 43 Mo. 479. 
 
 (23)
 
 13 INCOME TAXATION (Ch. 3 
 
 son, no valid objection to an income tax on constitutional 
 grounds can be based on the fact that it may exempt certain 
 classes of persons or corporations while taxing others, or 
 that it may be graduated or progressive, bearing with in- 
 creasing severity upon the citizen in proportion as his in- 
 come increases. Whatever force such objections might pos- 
 sess as applied to a general property tax, a tax on incomes 
 is not included in the constitutional requirement. 5 And 
 where the provision of the constitution is broader, as, that 
 "taxation shall be equal and uniform," still it is said, in 
 relation to income taxes, that this requirement is satisfied 
 by such regulations as will secure an equal rate and just 
 valuation, without reference to the method of valuation, 
 and in order to be uniform a tax need not be imposed and 
 assessed upon all property by the same agency or officers. 6 
 So, as regards the provision of the federal constitution that 
 taxes imposed by act of Congress shall be "uniform through- 
 out the United States," it is said that the uniformity here 
 required is a geographical uniformity, which does not re- 
 quire the equal application of the tax to all persons or cor- 
 porations who may come within its operation, and hence 
 taxing a business when carried on by a corporation, and ex- 
 empting a similar business when carried on by a partner- 
 ship or by a private individual, as was done by the corpora- 
 tion excise tax law of 1909, does not invalidate the tax. 7 
 
 13. Equal Protection of the Laws 
 
 Income tax laws have commonly contained provisions 
 classifying the subjects of taxation, discriminating between 
 individuals and corporations, or between residents and non- 
 
 B Alderman v. Wells, 85 S. C. 507, 67 S. E. 781, 21 Am. & Eng. 
 Ann. Cas. 193, 27 L. R. A. (N. S.) 864. 
 
 e Commonwealth v. Brown, 91 Va. 762, 21 S. E. 357, 28 L. R. A. 
 110. 
 
 7 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. 
 Ed. 389. 
 
 (24)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 13 
 
 residents, exempting certain classes of companies or those 
 engaged in certain pursuits, allowing deduction of some 
 items and not of others, and altogether releasing from taxa- 
 tion incomes below a certain minimum and imposing a 
 gradually increasing burden upon incomes above that sum. 
 On account of these features they have always been urgent- 
 ly assailed as denying the "equal protection of the laws." 
 But without avail. This provision, it is held, does not pre- 
 vent such reasonable classifications and distinctions as those 
 mentioned. Thus, in a decision sustaining the income tax 
 law of the territory of Hawaii, it was said that the clause 
 in the Fourteenth Amendment to which reference is made 
 does not require taxes to be levied by a uniform method and 
 at the same rate upon every class of property, but the man- 
 ner of taxation with respect to each class is left to the legisla- 
 tive discretion. 8 Again: "The provision in the Fourteenth 
 Amendment that no state shall deny to any person within 
 its jurisdiction the equal protection of the laws was not in- 
 tended to prevent a state from adjusting its system of taxa- 
 tion in all proper and reasonable ways. It may, if it chooses, 
 exempt certain classes of property from any taxation at all, 
 such as churches, libraries, and the property of charitable 
 institutions. It may impose different specific taxes upon 
 different trades and professions, and may vary the rates of 
 excise upon various products ; it may tax real estate and per- 
 sonal property in a different manner; it may tax visible 
 property only and not tax securities for payment of money ; 
 it may allow deductions for indebtedness or not allow them. 
 All such regulations and those of like character, so long as 
 they proceed within reasonable limits and general usage, are 
 within the discretion of the state legislature, or the people 
 of the state in framing their constitution. But clear and hos- 
 tile discriminations against particular persons and classes, 
 especially such as are of an unusual character, unknown to 
 
 s Peacock v. Pratt, 121 Fed. 722, 58 C. C. A. 48. 
 
 (25)
 
 13 INCOME TAXATION (Ch. 3 
 
 the practice of our government, might be obnoxious to the 
 constitutional prohibition. It would, however, be imprac- 
 ticable and unwise to attempt to lay down any general rule 
 or definition on the subject that would include all cases. 
 They must be decided as they arise. We think that we are 
 safe in saying that the Fourteenth Amendment was not in- 
 tended to compel the states to adopt an iron rule of equal 
 taxation. If that were its proper construction, it would 
 not only supersede all those constitutional provisions and 
 laws of some of the states whose object is to secure equality 
 of taxation, and which are usually accompanied with qualifi- 
 cations deemed material, but it would render nugatory those 
 discriminations which the best interests of society require, 
 which are necessary for the encouragement of needed and 
 useful industries, and the discouragement of intemperance 
 and vice, and which every state, in one form or another, 
 deems it expedient to adopt." 9 And again, "there is, no 
 general supervision on the part of the nation over state tax- 
 ation, and in respect to the latter the state has, speaking 
 generally, the freedom of a sovereign both as to the objects 
 and methods. It was well said in the opinion of the circuit 
 court in this case that there can at this time be no question, 
 after the frequent and uniform expressions of the federal 
 Supreme Court, that it was not designed by the Fourteenth 
 Amendment to the constitution to prevent a state from 
 changing its system of taxation in all proper and reasonable 
 ways, nor to compel the states to adopt an ironclad rule of 
 equality, to prevent the classification of property for purposes 
 of taxation, or the imposition of different rates upon differ- 
 ent classes. It is enough that there is no discrimination in 
 favor of one as against another of the same class, and the 
 method for the assessment and collection of the tax is not 
 
 Bell's Gap R. R. Co. v. Pennsylvania, 134 U. S. 232, 10 Sup. Ct 
 533, 33 L. Ed. 892. 
 
 (26)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 13 
 
 inconsistent with natural justice." 10 Particularly with ref- 
 erence to the progressive or graduated features of a tax law 
 (though the statute in question was an inheritance tax law 
 and not an income tax law) the Supreme Court of the United 
 States, sustaining the validity of the law, said : "What satis- 
 fies this equality has not been, and probably never can be, 
 precisely defined. Generally it has been said that it only re- 
 quires the same means and methods to be applied impar- 
 tially to all the constituents of each class, so that the law 
 shall operate equally and uniformly upon all persons in simi- 
 lar circumstances." X1 And the court in South Carolina re- 
 marks : "The right of the legislature of the state to make 
 reasonable classifications of persons and property for public 
 purposes has been so often affirmed by the courts that it can 
 no longer be questioned. If the classification is not ar- 
 bitrary, that is, if it bears reasonable relation to the pur- 
 poses to be effected, and if the constituents of each class 
 are all treated alike, under similar circumstances and condi- 
 tions, the rule of equality is satisfied." 12 So the Supreme 
 Court of Wisconsin declares: "The sum and substance of 
 it is that the Fourteenth Amendment never was intended to 
 lay upon the states an unbending rule of equal taxation. 
 The states may make exemptions, levy different rates upon 
 different classes, tax such property as they choose, and 
 make such deductions as they choose, and so long as they 
 obey their own constitutions and proceed within reasonable 
 limits and general usage, there is no power to say them 
 nay." 13 
 
 10 Michigan Cent. R. Co. v. Powers, 201 U. S. 245, 26 Sup. Ct. 459, 
 50 L. Ed. 744. 
 
 11 Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 18 Sup. 
 Ct 594, 42 L. Ed. 1037. 
 
 12 Alderman v. Wells, 85 S. C. 507, 67 S. E. 781, 21 Am. & Eng. 
 Ann. Cas. 193, 27 L. R. A. (N. S.) 864. 
 
 is State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. 
 Ann. Cas. 1147. 
 
 (27)
 
 13 INCOME TAXATION (Ch. 3 
 
 The same principles apply to the validity of any income 
 tax law enacted by Congress. Although the provision 
 against laws denying the equal protection of the law applies 
 only to the legislation of the states, it is probable that other 
 clauses of the Constitution could be found which would 
 stand in the way of any act of Congress containing arbi- 
 trary, invidious, or unreasonable discriminations against in- 
 dividuals or classes. But within reasonable limits, "we must 
 not forget that the right to select the measure and objects of 
 taxation devolves upon the Congress, and not upon the 
 courts, and such selections are valid unless constitutional 
 limitations are overstepped. It is no part of the function of 
 a court to inquire into the reasonableness of the excise, ei- 
 ther as respects the amount or the property upon which it 
 is imposed." 14 
 
 14. Discrimination Between Corporations, Partnerships, 
 
 and Individuals 
 
 The substantial difference between the rights, privileges, 
 duties, and business methods of corporations and those of in- 
 dividuals engaged in business has been thought to afford a 
 reasonable basis for placing them in different classes, for the 
 purposes of taxation. Hence an income tax law cannot be 
 adjudged invalid, as making unjust or illegal discriminations, 
 because it imposes a different rate of taxation upon the income 
 of corporations from that imposed on the income of individu- 
 als, or because it exempts the income of the individual be- 
 low a certain sum, but does not grant a similar exemption to 
 corporations. 15 As to the latter point, in particular, the 
 theory is that an exemption of a minimum income is granted 
 to the individual in lieu of a deduction for personal and 
 
 i* Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct 342, 55 L. 
 Ed. 389. 
 
 is state v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. 
 Ann. Cas. 1147 ; Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct 
 342, 55 L. Ed. 389 ; Robertson v. Pratt, 13 Hawaii, 590. 
 
 (28)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 15 
 
 family expenses, and that no rule of justice requires a similar 
 allowance to corporations, which have no such expenses, a de- 
 duction of other necessary expenses being granted in both 
 cases. 16 For similar reasons, there is a sufficient ground for 
 classification between individuals and partnerships in the im- 
 position of an income tax. And the Wisconsin statute was 
 sustained by the Supreme Court of that state, against the con- 
 tention that it made an unjust discrimination in allowing ex- 
 emptions to individuals which were denied to partnerships. It 
 was said: "A partnership ordinarily has certain distinct and 
 well-known advantages in the transaction of business over the 
 individual, arising from the fact that it allows a combination 
 of capital, brains, and industry, and thus makes it possible to 
 accomplish many things which an individual in the same busi- 
 ness cannot accomplish. Further than this, however, there is 
 another consideration. If the partner have individual income 
 from other sources than the partnership business (as many 
 do), his exemptions will be allowed to him out of the individual 
 income, and thus, if he were also allowed exemptions from the 
 partnership income, he would be allowed double exemptions. 
 Altogether there seems to be ample reason for the classifica- 
 tion." 17 
 
 15. Discrimination Between Residents and Non-Resi- 
 
 dents 
 
 Very serious objections have been urged against the various 
 income tax laws, on account of the discriminations which they 
 have ordinarily made as between residents and non-residents 
 or citizens and aliens. It has been adjudged that the legis- 
 lature may put foreign insurance companies in a class by 
 themselves, and tax them at the rate of one per cent on their 
 gross incomes, while other persons and corporations are taxed 
 
 is Robertson v. Pratt, 13 Hawaii, 590. 
 
 IT state v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 (29)
 
 15 INCOME TAXATION (Ch. 3 
 
 two per cent on their net incomes and one per cent on their 
 property. 18 But has a state any lawful power to tax the in- 
 come, or any part of the income, of a non-resident, or the 
 United States to tax the income of a person residing abroad, 
 whether a citizen or an alien? If so, is it an unlawful dis- 
 crimination to grant exemptions to residents and deny them to 
 non-residents? Or to tax the entire income of the resident 
 citizen, and to tax only so much of the income of the non- 
 resident as is derived from sources within the state? And in 
 the latter case, how is the validity of the law affected by the 
 fact that part of the_ non-resident's taxed income may be de- 
 rived from business or operations in the nature of interstate 
 commerce? Further, is it essential to the validity of the stat- 
 ute that its administrative features, in regard to the assess- 
 ment and collection of the tax, should be the same in the case 
 of residents and non-residents? 
 
 It cannot be said that these questions have, as yet, been au- 
 thoritatively settled by the courts. They were strongly urged 
 upon the Supreme Court of Wisconsin in the case which test- 
 ed and sustained the constitutionality of the income tax law of 
 that state. But as they were not necessarily implicated in the 
 case, and as the court held that, even conceding the invalidity 
 of the particular features of the law which were objected to, 
 that would not be sufficient ground for pronouncing it uncon- 
 stitutional as a whole, no positive decision was rendered. 19 
 But the opinion of the court contains so full a statement of 
 the questions referred to, and of the considerations which 
 might affect their decision, as to require quotation at some 
 length. Among other things, it was said : "It is argued that 
 the provisions which deny to non-residents the exemptions 
 which are allowed to residents, and which allow the board of 
 review to increase the assessment of a non-resident without 
 
 is Robertson v. Pratt, 13 Hawaii, 590. 
 
 i State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 (30)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 15 
 
 notice, while requiring notice to be given to a resident, violate 
 section 2 of article 4 of the federal Constitution, which pro- 
 vides that 'the citizens of each state shall be entitled to all 
 privileges and immunities of citizens in the several states.' 
 The question of the validity of the provision allowing exemp- 
 tions to residents of the state and denying them to non-resi- 
 dents is raised, and receives some attention in the briefs, but 
 was not mentioned in the oral arguments. We regard it as a 
 question involved in considerable doubt, and one not neces- 
 sary to be passed upon now. It cannot be imagined for a 
 moment that the legislature would have failed to pass the act 
 had it not contained this provision, and we prefer to wait un- 
 til the question is presented in a concrete case, at which time 
 there will be opportunity to fully consider it after compre- 
 hensive briefs and arguments. It seems that the Supreme 
 Court of the United States decided, in Ward v. Maryland, 12 
 Wall. 418, 20 L. Ed. 449, that one of the privileges and im- 
 munities protected by the section quoted is the right to be ex- 
 empt from any higher taxes or excises than are imposed by 
 the state upon its own citizens. Other decisions relied on 
 upon the same side are In re Stanford's Estate, 126 Cal. 112, 
 54 Pac. 259, 45 L. R. A. 788, and Sprague v. Fletcher, 69 Vt. 
 69, 37 Atl. 239, 37 L. R. A. 840, and the cases cited in the 
 latter case. On the other side reliance is placed on the analogy 
 of the laws providing for exemptions from execution seizure, 
 which confine their benefits to residents, and upon Travelers' 
 Insurance Co. v. Connecticut, 185 U. S. 364, 22 Sup. Ct. 673, 
 46 L. Ed. 949." 
 
 Again, in the same opinion, referring to certain sections of 
 the income tax law, it was said: "The first of these sections 
 provides, in substance, that a resident shall be taxed upon all 
 of his income arising from rentals, stocks, bonds, securities, or 
 evidences of debt, whether the same be derived from sources 
 within or without the state, but that the non-resident shall only 
 be taxed upon income derived from sources within the state or 
 
 (31)
 
 15 INCOME TAXATION (Ch. 3 
 
 within its jurisdiction, but that any person doing business both 
 within and without the state shall, as respects that part of his 
 income not derived from rentals, stock, bonds, and securities, 
 be taxed only on that proportion thereof which is derived from 
 business transacted and property located within the state, to 
 be determined in the manner specified in subdivision 'e' of sec- 
 tion 1770b, of the Statutes, as far as applicable. The gen- 
 eral purpose of the section is quite evident, namely, to tax a 
 resident upon his whole income, and a non-resident only upon 
 his income plainly derived from sources within the territorial 
 jurisdiction of the state, and to provide that, where either per- 
 son is engaged in a business interstate in its character, he shall 
 only be taxed on that portion of the income derived from busi- 
 ness transacted and property located within the state, according 
 to the rule prescribed in section 1770b for determining that 
 proportion of capital stock of a foreign corporation doing 
 business in this state, which must be reported to the Secretary 
 of State. The rule so imported into the statute is an arbitrary 
 rule, and need not be stated at length in the view we now take 
 of our duty with regard to this contention. Two fundamental 
 objections are made to this section: First, that the state can- 
 not tax the incomes of non-residents, no matter from what 
 source derived ; and second, that the attempt to tax a part of 
 the profits derived from an interstate business, under the rule 
 adopted, must necessarily result in a taxation of the receipts of 
 interstate commerce, and hence a regulation thereof, which is 
 in violation of that clause of the federal Constitution which 
 gives to Congress the power to regulate commerce between the 
 states. We shall decide neither of these questions now. If the 
 section be open to either or both of these objections, or any 
 others, we cannot regard that fact as fatal to the act. The 
 legislature evidently intended to avoid both of the objections 
 made. They had a difficult and delicate subject to deal with. 
 Had they been authoritatively informed that they could not 
 constitutionally tax a non-resident's income at all, and could 
 (32)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 15 
 
 not divide the income derived partially from state and par- 
 tially from interstate business, we have no idea that they would 
 on that account have abandoned their purpose to pass the law. 
 Again, if they provided an improper rule for the division (con- 
 ceding that a division can be made at all), there seems no rea- 
 son why the rule may not be rejected and the proper rule, 
 which will carry out the fundamental purpose of the provi- 
 sion, be used. In any event, we are fully satisfied that the re- 
 jection of any or all of the provisions objected to in this sec- 
 tion cannot reasonably be held to invalidate the whole act." 
 
 And again, it was remarked: "A strong argument is made 
 attacking the validity of section 1087, m, 22, which provides 
 in substance that the income of a resident derived from differ- 
 ent political subdivisions of the state shall be combined for the 
 purpose of determining the exemptions and the rate, while the 
 income of a non-resident is to be separately assessed and taxed 
 in each of the municipalities from which it is derived. A 
 table is submitted showing that under this rule if A., a resident, 
 derived $1,000 from each of 13 different towns or cities, he 
 will be required to pay a tax of $367, because his income is 
 aggregated, and consequently becomes in large part subject 
 to the higher rates, while if B., a non-resident, receives the 
 same income from the same sources, he will only pay the 
 smallest rate, i. e., one per cent of each $1,000, amounting to 
 only $130. This, it is said, is unjust discrimination against the 
 residents of the state, and deprives them of the privileges and 
 immunities which are granted to the citizens of other states, 
 in violation of the federal Constitution. This presents the 
 question whether such a discrimination can be made between 
 residents and non-residents, only this time the discrimination 
 seems to be against the resident and in favor of the- non-resi- 
 dent. This question, also, we deem one not necessary to be 
 decided now, and we intimate no opinion upon it. It does not 
 seem that the case will frequently arise, but if it does, it can 
 BL.INC.TAX. 3 (33)
 
 16 INCOME TAXATION (Ch. 3 
 
 be then treated. We do not regard it as in any respect im- 
 portant in considering the validity of the act as a whole." 
 
 16. Federal Taxation of Corporations Created by States 
 When the constitutionality of the federal corporation tax 
 law of 1909 was attacked before the Supreme Court of the 
 United States, the objection was very strongly urged that, for 
 the federal government to impose a tax on corporations which 
 received their franchises from the states was beyond its right- 
 ful authority, inasmuch as it was imposing a burden upon the 
 right of the several states to create corporations, which might 
 be pushed to such an extreme as to destroy that right, and 
 hence an invasion of their prerogatives, and the crippling of 
 a power rightfully belonging to them as separate governments. 
 The act of 1909 purported to lay a tax on the privilege of 
 engaging in or carrying on business in a corporate capacity, 
 the amount of the tax to be measured by the net income of the 
 corporation. The act of 1913 taxes the income of corpora- 
 tions directly and by name. But the same argument, if it had 
 prevailed against the one statute, would be equally potent as 
 against the other. Hence it becomes important to consider the 
 decision of the Supreme Court in which this argument was 
 tested and rejected. 20 The court said : "It is next contended 
 that the attempted taxation is void because it levies a tax upon 
 the exclusive right of a state to grant corporate franchises, 
 because it taxes franchises which are the creation of the state 
 in its sovereign right and authority. This proposition is rested 
 upon the implied limitation upon the powers of national and 
 state governments to take action which encroaches upon or 
 cripples the exercise of the exclusive power of sovereignty in 
 the other. It has been held in a number of cases that the state 
 cannot tax franchises created by the United States or the 
 
 20 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. 
 Ed. 389. 
 
 (34)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 16 
 
 agencies or corporations which are created for the purpose of 
 carrying out governmental functions of the United States. 
 An examination of these cases will show that in each case 
 where the tax was held invalid, the decision rested upon the 
 proposition that the corporation was created to carry into ef- 
 fect powers conferred upon the federal government in its 
 sovereign capacity, and the attempted taxation was an inter- 
 ference with the effectual exercise of such powers. 21 * * * 
 We must therefore enter upon the inquiry as to implied limi- 
 tations upon the exercise of the federal authority to tax be- 
 cause of the sovereignty of the states over matters within their 
 exclusive jurisdiction, having in view the nature and extent of 
 the power specifically conferred upon Congress by the Consti- 
 tution of the United States. We must remember, too, that the 
 revenues of the United States must be obtained in the same 
 territory, from the same people, and excise taxes must be col- 
 lected from the same activities, as are also reached by the 
 states in order to support their local government. While the 
 tax in this case, as we have construed the statute, is imposed 
 upon the exercise of the privilege of doing business in a cor- 
 porate capacity, as such business is done under the authority 
 of state franchises, it becomes necessary to consider in this 
 connection the right of the federal government to tax the ac- 
 tivities of private corporations which arise from the exercise 
 of franchises granted by the state in creating and conferring 
 powers upon such corporations. We think it is the result of 
 the cases heretofore decided in this court that such business 
 activities, though exercised because of state-created franchises, 
 are not beyond the taxing power of the United States. Taxes 
 upon rights exercised under grants of state franchises were 
 
 21 Citing McCulloch v. Maryland, 4 Wheat. 316, 4 L. Ed. 579; Os- 
 born v. Bank of United States, 9 Wheat. 738, 6 L. Ed. 204 ; Union 
 Pac. R. Co. v. Peniston, 18 Wall. 5, 21 L. Ed. 787; California v. 
 Central Pac. R. Co., 127 U. S. 1, 8 Sup. Ct. 1073, 32 L. Ed. 150. 
 
 (35)
 
 17 INCOME TAXATION (Ch. 3 
 
 sustained by this court. 22 * * * The cases unite in ex- 
 empting from federal taxation the means and instrumentali- 
 ties employed in carrying on the governmental operations of 
 the state. The exercise of such rights as the establishment 
 of a judiciary, the employment of officers to execute and ad- 
 minister the laws, and similar governmental functions, cannot 
 be taxed by the federal government. 23 But this limitation has 
 never been extended to the exclusion of the activities of a 
 merely private business from the federal taxing power, al- 
 though the power to exercise them is derived from an act of 
 incorporation by one of the states. We therefore reach the 
 conclusion that the mere fact that the business taxed is done 
 in pursuance of authority granted by a state in the creation of 
 private corporations does not exempt it from the exercise of 
 federal authority to levy excise taxes upon such privileges. 
 * * * Nor is the special objection tenable, made in some 
 of the cases, that the corporations act as trustees, guardians, 
 etc., under the authority of the laws or courts of the state. 
 Such trustees are not the agents of the state government in a 
 sense which exempts them from taxation because executing 
 the necessary governmental powers of the state. The trustees 
 receive their compensation from the interests served, and not 
 from the public revenues of the state." 
 
 17. Taxation of Income from Non-Taxable Property 
 
 In passing upon the constitutionality of the United States 
 income tax law of 1894, the Supreme Court held that, in so far 
 as the act levied a tax upon the income of persons or corpora- 
 tions derived from the bonds of municipal corporations, it was 
 
 22 Citing Michigan Cent. R. Co. v. Collector, 100 U. S. 595, 25 L. 
 Ed. 647 ; United States v. Erie R. Co., 106 U. S. 327, 1 Sup. Ct. 223, 
 27 L. Ed. 151 ; Spreckels Sugar Ref. Co. v. McClain, 192 U. S. 397, 
 24 Sup. Ct. 376, 48 L. Ed. 496. 
 
 2 s Citing Collector v. Day, 11 Wall. 113, 20 L. Ed. 122; United 
 States v. Baltimore & O. R. Co., 17 Wall. 322, 21 L. Ed. 597 ; Am- 
 brosini v. United States, 187 U. S. 1, 23 Sup. Ct 1, 47 L. Ed. 49. 
 
 (36)
 
 Ch. 3) CONSTITUTIONAL VALIDITY IT 
 
 invalid, because such a tax is a tax on the power of the states 
 and their instrumentalities to borrow money, and consequently 
 repugnant to the constitution. 24 A similar question arose un- 
 der the corporation excise tax law of 1909, but it was held 
 by the same court that the latter statute was not invalid be- 
 cause the income of a corporation subject to the tax might 
 consist in part, or even entirely, of interest on municipal bonds, 
 the ground of the distinction being that the act of 1909 did not 
 impose a tax on the income so derived, but on the franchise or 
 privilege of doing business in a corporate capacity, the income 
 being merely used as the measure of the amount of the tax 
 in the particular case. 25 The act of 1913 has reverted to the 
 principle of taxing incomes directly, but it meets the point in 
 question by excluding from taxable income "interest upon the 
 obligations of a state or any political subdivision thereof." 
 It had also been held in an earlier case that the act of Congress 
 of 1864, imposing an income tax, and containing a provision 
 for taxing the interest paid by railroads and some other corpo- 
 rations on their bonded debt, requiring them to pay the tax 
 and deduct the amount thereof from their periodical payments 
 to the holders of the bonds, could not be applied in the case 
 of a municipal corporation owning such bonds, since the mu- 
 nicipalities created by the states are entirely beyond the tax- 
 ing power of the federal government. 26 But whether a state 
 may indirectly affect the borrowing power of another state or 
 its municipalities, by taxing its own citizens upon so much of 
 their income as is derived from the bonded or other debt of 
 such other state or its municipalities, is a different question 
 altogether. But at least it has been decided that there is noth- 
 
 24 Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 15 Sup. 
 Ct. 673, 39 L. Ed. 759. 
 
 2 5 Flint v. Stone Tracy Co., 220 U. S. 107, 3i Sup. Ct. 342, 55 L. 
 Ed. 389. 
 
 26 United States v. Baltimore & O. R. Co., 17 Wall. 322, 21 L. Ed. 
 597. 
 
 (37)
 
 17 INCOME TAXATION (Ch. 3 
 
 ing in the Constitution of the United States to prevent such 
 taxation. 27 It seems clear, however, that a state cannot law- 
 fully tax either its own citizens or non-residents upon their 
 income derived from its own bonds, when such bonds were 
 not taxable at the time of their issuance, for this would im- 
 pair the obligation of the contract implied in the issue and sale 
 of the bonds, and more especially would this be true where the 
 legislature of the state had covenanted that the bonds should 
 be free from taxation. 28 It must also follow from the prin- 
 ciple of the necessary independence of the federal and state 
 governments that the income tax law of any state cannot in- 
 clude interest on the bonds or other public securities of the 
 United States. And state laws of this kind generally make 
 an express exception as to income derived from United States 
 securities, at least where such securities are declared to be tax- 
 exempt by act of Congress. But it has been held that the pos- 
 sible impairment of the borrowing power of the government, 
 as the remote effect of a state statute imposing a tax upon the 
 transfer of a decedent's property, when the statute is applied 
 to property consisting of United States bonds, is not sufficient 
 to render the statute unconstitutional. 29 It should also be re- 
 marked, in this connection, that a state tax upon the gross re- 
 ceipts or the net income of corporations or individuals cannot 
 validly be made to operate as a restraint upon or interference 
 with interstate commerce, and hence, in the case of carriers 
 and other companies engaged in interstate as well as domestic 
 business, only the receipts from domestic commerce can be 
 taxed by the state. 30 
 
 27 Bonaparte v. Tax Court, 104 U. S. 592, 26 L. Ed. 845. 
 
 2 s Houston & T. C. R. Co. v. Texas, 177 U. S. 66, 20 Sup. Ct. 545, 
 44 L. Ed. 673; State Tax on Foreign-Held Bonds, 15 Wall. 300, 21 
 L. Ed. 179 ; Anton! v. Greenhow, 107 U. S. 769, 2 Sup. Ct. 91, 27 L. 
 Ed. 468. 
 
 2 Plummer v. Cole, 178 U. S. 115, 20 Sup. Ct. 829, 44 L. Ed. 998. 
 
 so Philadelphia & S. S. S. Co. v. Pennsylvania, 122 U. S. 326, 7 
 Sup. Ct. 1118, 30 L. Ed. 1200 ; Leloup v. Port of Mobile, 127 U. S. 
 
 (38)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 18 
 
 18. Taxing Salaries of Federal and State Officers 
 
 The federal income tax law of 1913 exempts "the compen- 
 sation of all officers and employees of a state or any political 
 subdivision thereof, except when such compensation is paid 
 by the United States Government." It would not be compe- 
 tent for Congress to lay a tax upon the salary of an officer of 
 a state, and this by necessary implication from the constitution 
 and the mutual relation of the federal and state governments, 
 neither being authorized to tax the means or agencies em- 
 ployed by the other in carrying out its governmental functions ; 
 and hence it was held that a tax assessed, under the federal 
 income tax law of 1864, upon the salary of a state judge was 
 wrongfully imposed, and if paid under protest could be recov- 
 ered back. 31 And in a similar case it was held to be imma- 
 terial that the judge's salary was fixed by the authorities of a 
 county and payable out of the treasury of a city. 32 So, one's 
 compensation as state's attorney is not liable to the federal in- 
 come tax, nor can such compensation be applied to the satis- 
 faction of the monetary exemption ; it must be omitted alto- 
 gether from the computation of his income, and the taxpayer 
 must have his exemption out of his income from other sourc- 
 es. 33 And for similar reasons, it has been held that a stamp 
 tax imposed by the United States upon a bond required by a 
 state from an officer, as a prerequisite to the exercise of the 
 duties of his office, is, in necessary legal effect, a tax upon the 
 officer's right to qualify, and upon the exercise by the state of 
 its governmental functions, and therefore invalid, and the fact 
 that the tax is required to be paid before the officer has qual- 
 ified is not material. 34 Conversely, a state income tax cannot 
 be made to apply to the salary of any officer of the United 
 
 640, 8 Sup. Ct. 1380, 32 L. Ed. 311 ; State v. United States Fidelity 
 & Guaranty Co., 93 Md. 314, 48 Atl. 918. 
 
 si The Collector v. Day, 11 Wall. 113, 20 L. Ed. 122. 
 
 32 Freedman v. Sigel, 10 Blatchf. 327, Fed. Cas. No. 5,080. 
 
 ss United States v. Ritchie, Fed. Cas. No. 16,168. 
 
 34 Bettman v. Warwick, 108 Fed. 46, 47 C. C. A. 185. 
 
 (39)
 
 18 INCOME TAXATION (Cll. 3 
 
 States government. 35 "It is considered as settled that the 
 state has no power to tax an officer of the United States, or 
 vice versa, because the power to tax includes the power to 
 destroy, and if a state were allowed to tax a United States of- 
 ficer one dollar, it might tax him to the full amount of his sal- 
 ary, and thus arrest all the measures of the government. And 
 so the United States cannot tax a state officer for the same 
 reason." 36 The only state income tax law now in force which 
 explicitly recognizes this limitation is that of Wisconsin, which 
 allows a deduction from taxable income of "salaries or other 
 compensation received from the United States by officials 
 thereof." 37 But a similar exception must be read by neces- 
 sary implication into the laws of any other state where the 
 question might arise. Therefore all federal officers, such as 
 postmasters, internal revenue officers, district attorneys, offi- 
 cers of the land department, and United States judges resident 
 within the state, must be understood to be exempt from the 
 state income tax, in so far as relates to their salary or com- 
 pensation from the United States, though, if such officers have 
 an income derived from other sources, it is subject to the 
 tax, as there is nothing in their official character to exempt 
 their private means from state taxation. And it should be ob- 
 served that the licensing of a merchant under the United 
 States revenue laws does not render him an "officer" of the 
 federal government, nor withdraw him from the taxing power 
 of the state. 38 And although the salary of an officer in the 
 United States army cannot be taxed by a state or municipality, 
 yet his personal property, such as household furniture, is not 
 exempt from such taxation, 39 and of course the same prin- 
 ciple would apply to his investments or the income derived 
 
 86 Purnell v. Page, 133 N. C. 125, 45 S. E. 534. 
 36 King v. Hunter, 65 N. C. 603, 613. 
 
 T Wisconsin Income Tax Law, 1911, 1087in, 4, f. See this stat- 
 ute in full in the Appendix, 
 as State v. Bell, 61 N. C. 76. 
 39 Finley v. City of Philadelphia, 32 Pa. St. 381. 
 
 (40)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 18 
 
 therefrom. And it has been held in Massachusetts that money 
 which one has on deposit in a bank is not exempt from taxa- 
 tion because it was derived from his salary as a federal offi- 
 cer, for it loses its identity as salary when it has been paid to 
 him and come into his possession. 40 
 
 As to the incidence of federal taxation upon federal offi- 
 cers, it should be observed that there are some whose salary, 
 while it is to be fixed and appropriated by Congress, is safe- 
 guarded from change during their tenure of office by the con- 
 stitution itself. As to the President, he is to "receive a com- 
 pensation which shall neither be increased nor diminished dur- 
 ing the period for which he shall have been elected." (Const. 
 U. $., art. 2, 1.) And as to the federal judges, they shall 
 "receive a compensation which shall not be diminished during 
 their continuance in office." (Const. U. S., art. 3, 1.) The 
 income tax laws enacted by Congress during the period of the 
 Civil War contained no such exception. But the justices of 
 the Supreme Court, through Chief Justice Taney, addressed 
 a communication to the Secretary of the Treasury declaring 
 their conviction that their salaries were not legally subject to 
 the tax. Thereupon the Attorney General, to whom the com- 
 munication had been referred, gave an elaborate opinion, ad- 
 vising the Secretary of the Treasury that the income tax could 
 not lawfully be assessed upon and collected from the salaries 
 of those judicial officers of the United States who were in 
 office at the time of the enactment of the statute imposing the 
 tax. 41 No attempt was made thereafter to assess the tax upon 
 the salaries of the judges. But in the income tax law of 1894, 
 Congress again failed to make an exception in this particular, 
 and the statute was held unconstitutional and void in so far as 
 it attempted to tax the salaries of the judges of the United 
 States courts. 42 But the act of 1913 meets this point by pro- 
 
 40 Dyer v. City of Melrose, 197 Mass. 99, 83 N. E. 6. 
 
 41 13 Op. Atty. Gen. 161. 
 
 42 Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 15 Sup. 
 Ct 673, 39 L. Ed. 759, per Field, J., concurring. 
 
 (41)
 
 18 INCOME TAXATION (Ch. 3 
 
 viding that "in computing net income under this section there 
 shall be excluded * * the compensation of the present Pres- 
 ident of the United States during the term for which he has 
 been elected, and of the judges of the supreme and inferior 
 courts of the United States now in office," the evident inten- 
 tion being that the next President of the United States, and 
 all federal judges appointed after the enactment of the stat- 
 ute, shall be subject to the income tax in respect to their sal- 
 aries. 43 
 
 But as to all the other officers and employes of the United 
 States (including the members of Congress themselves) whose 
 salary or compensation may be fixed and changed in the ab- 
 solute discretion of Congress, there is no constitutional ob- 
 jection to the incidence of the income tax upon such salaries. 
 Such was the decision made under the act of 1862 in regard to 
 collecting the income tax from the salary of an officer in the 
 
 43 An interesting question might here be raised as to the effect of 
 this provision on the power of Congress hereafter to repeal the in- 
 come tax law or to change the rate of taxation under it. For if the 
 imposition of the income tax upon the salary of the President would 
 "diminish" it, within the meaning of the constitution (and that is 
 the only possible legal reason for excepting the present incumbent), 
 then the repeal of the act would as certainly "increase" the com- 
 pensation of any future President to whose salary it had attached at 
 the beginning of his term, which is equally forbidden by the consti- 
 tution. And if a President shall be elected while the present stat- 
 ute is in force, any change in the rate of taxation, effected by 
 amendment of the act, would either increase or diminish his com- 
 pensation, as the case might be. And the same considerations apply 
 to taxing the federal judges, except that their salaries may be in- 
 creased, but not diminished, during their continuance in office. It 
 would therefore appear to follow, as a perfectly logical conclusion, 
 though an almost absurd result, that if a future Congress should de- 
 sire to increase the rate of income taxation, it would have to make 
 an explicit exception as to the President and the federal judges, who 
 would then continue to be taxed at a different rate from other citi- 
 zens ; and if it were desired to repeal the act, the President alone 
 must be required to continue paying the tax until the expiration of 
 his term of office. Of course these complexities could have been 
 avoided by the simple means of absolutely excepting these officers 
 from the operation of the statute. 
 
 (42)
 
 <Jh. 3) CONSTITUTIONAL VALIDITY 18 
 
 United States army, 44 and the rule is equally applicable to all 
 others save those mentioned in the preceding paragraph. 
 
 We have next to consider the application of a state income 
 tax law to the salaries of the state officers. Here also the 
 principle applies that if the constitution of the state protects 
 such salaries from change during the incumbency of the par- 
 ticular officer, it prevents their being taxed as income. Thus 
 in North Carolina, "it is provided in the constitution that the 
 salaries of the most important officers shall not be altered dur- 
 ing their term of office, and this is understood to exempt their 
 salaries from taxation, because to tax is to diminish, or it may 
 be to destroy." 45 Hence if the local constitution provides 
 that the salaries of the judges of the state shall not be dimin- 
 ished during their continuance in office, such salaries are ex- 
 empt from the income tax. 46 "It may be that the restriction 
 in this article [of the constitution] upon the power of the leg- 
 islature refers principally to the diminution of the salaries 
 of the judges by a law fixing it at a less amount than that es- 
 tablished at the epoch of their entrance into office. The ob- 
 ject, however, of this article was to secure the independence 
 of the judiciary. If the legislature can tax the salaries, it 
 would be deprived of its plenary effect." 4T The only de- 
 cision to the contrary was made in an early case in Pennsyl- 
 vania, which, however much it may be respected at home, is 
 not entitled to much persuasive effect elsewhere, in view of its 
 opposition to the general current of authority. 48 But unless 
 
 44 Galm v. United States, 39 Ct. 01. 55. 
 
 * 5 King v. Hunter, 65 N. C. 603; In re Taxation of Salaries of 
 Judges, 131 N. C. 692, 42 S. E. 970. 
 
 46 Purnell v. Page, 133 N. C. 125, 45 S. E. 534; In re Taxation of 
 Salaries of Judges, 131 N. C. 692, 42 S. E. 970 ; Robertson v. Pratt, 
 13 Hawaii, 590. 
 
 47 City of New Orleans v. Lea, 14 La. Ann. 197. 
 
 48 Northumberland v. Chapman, 2 Rawle (Pa.) 73. In this case it 
 was said by Chief Justice Gibson: "As the constitution, like every 
 other instrument, is to have a reasonable interpretation, the prohibi- 
 tion in question is to be restrained to laws which have such a reduc- 
 
 (43)
 
 18 INCOME TAXATION (Ch. 3 
 
 thus restrained by some explicit provision of the state con- 
 stitution, it is within the lawful power of the state legislature 
 to make an income tax law apply to the salaries of the various 
 officers of the state and of its municipalities, 49 as is done in 
 Wisconsin in all cases where such taxation would not be "re- 
 pugnant to the constitution." It should be remembered that 
 public office is not a "contract," within the sense of the con- 
 stitutional prohibition against laws impairing the obligation 
 of contracts. And hence no contract is violated by the im- 
 position of an income tax upon the salary of an officer who 
 was in office and whose compensation was fixed by law, at the 
 time the income tax law came into effect ; for his right to the 
 compensation grows out of the rendition of services, and not 
 out of any contract between the government and the officer 
 that the services shall be rendered and the compensation paid. 50 
 Finally, an income tax law is not to be pronounced uncon- 
 
 tion for their object, and not for their consequence. On any other 
 principle of construction, a tax could not be constitutionally assessed 
 on property purchased with money drawn from a judge's salary, 
 which would, in reason, have as fair a claim to exemption as the sal- 
 ary itself. If we once get away from the plain inartificial import 
 of the prohibition, it is not easy to tell at what stage of refinement 
 we shall stop. The object of the legislature was to apportion the 
 public burden according to the ratio of property, and to produce in 
 detail a result approaching as near as possible to that of an income 
 tax, a measure of assessment more equable in the abstract than any 
 other that could be proposed. Now there is no reason to exempt a 
 judge from contribution which is not just as applicable to any other 
 officer who presents no tangible surface but his office to the revenue 
 laws, nor was the object of the prohibition to place him in this re- 
 spect on higher ground. The legislature could not constitutionally 
 retrench a part of a judge's salary under the pretext of assessing a 
 tax on it ; but, for the bona fide purpose of contribution, a reason- 
 able portion of it, like any other part of his property, may be ap- 
 plied to the public exigencies." 
 
 4 In re Taxation of Salaries of Judges, 131 N. C. 692. 42 S. E. 
 970. 
 
 so See Butler v. Pennsylvania, 10 How. 402, 13 L. Ed. 472 ; Smith 
 v. City of New York, 37 N. Y. 518; Conner v. City of New York, 5 
 N. Y. 285. 
 
 (44)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 19 
 
 stitutional and void in its entirety simply because it lays a tax 
 upon the salaries of certain officers who are constitutionally 
 exempt from such taxation, or fails to make an explicit ex- 
 ception in their favor. The protection of the constitution be- 
 cause of such an illegal provision can be invoked only by one 
 against whom it is sought to be enforced ; and even in such a 
 case, if the law in affirmative terms lays the tax on such an ex- 
 empt income, that portion of it can be exscinded without de- 
 stroying the rest, while, if it merely omits to make the neces- 
 sary exception, it can be construed as not applying in the par- 
 ticular case. 51 
 
 19. Exemption of Incomes Below a Fixed Sum 
 
 It has been held by a great many authorities that a statute 
 imposing taxes on inheritances, legacies, and successions is 
 not unconstitutional because it exempts from its operation 
 estates or inheritances below a certain minimum value, 52 pro- 
 vided only that the exemption is not so excessive as to be en- 
 tirely unreasonable. 53 On the same principle, an income tax 
 law is not unconstitutional because it wholly exempts from 
 
 01 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Gas. 1147 ; Peacock v. Pratt, 121 Fed. 772, 58 C. C. A. 48 ; Robert- 
 son v. Pratt, 13 Hawaii, 590. 
 
 62 Knowlton v. Moore, 178 U. S. 60, 20 Sup. Ct. 755, 44 L. Ed. 977 ; 
 Magoun v. Illinois Trust & Sav. Bank, 170 U. S. 283, 18 Sup. Ct. 594, 
 42 L. Ed. 1037; Colton v. Montpelier, 71 Vt 413, 45 Atl. 1039; In 
 re Hickok's Estate, 78 Vt. 259, 62 Atl. 724 ; In re Wilmerding's Es- 
 tate, 117 Cal. 281, 49 Pac. 181 ; State v. Vance, 97 Minn. 532, 106 N. 
 W. 98 ; State v. Bazille, 97 Minn. 11, 106 N. W. 93 ; Black v. State, 
 113 Wis. 205, 89 N. W. 522; State v. Guilbert, 70 Ohio St. 299, 71 
 N. E. 636 ; Gelsthorpe v. Furnell, 20 Mont. 299, 51 Pac. 267 ; State 
 v. Alston, 94 Tenn. 674, 30 S. W. 750, 28 L. R. A. 78 ; In re Mixter's 
 Estate, 10 Pa. Co. Ct. R. 409. 
 
 ss Minot v. Winthrop, 162 Mass. 113, 38 N. E. 512, 26 L. R. A. 259, 
 in which case it was held that an excise tax on inheritances was 
 not so clearly unreasonable, by reason of exempting estates under 
 $10,000, as to render it unconstitutional. But see State v. Ferris, 9 
 Ohio Cir. Ct. R. 298, holding void an inheritance tax law which ex- 
 empted property to the amount of $20,000. 
 
 (45)
 
 19 INCOME TAXATION (Ch. 3 
 
 taxation all incomes below a certain annual amount, and the 
 question where the tax shall begin, or where the exemption 
 shall end, is one exclusively for the decision of the legisla- 
 ture. 54 Such a tax law, making a reasonable exemption, is 
 not in violation of a constitutional provision that taxes shall 
 be equal and uniform. 55 And if it is at all within the power 
 of a court to adjudge that the exemption granted is so ex- 
 cessive as to invalidate the statute, at least no such decision 
 has ever yet been rendered. On the contrary, the decisions 
 have sustained the income tax laws in this particular. That 
 of Hawaii, exempting incomes to the amount of $1,000, was 
 sustained as against the objection that the allowance was 
 excessive. 56 That of Wisconsin was similarly held valid, al- 
 though it exempts life insurance to the amount of $10,000, 
 in favor of one legally dependent on the deceased. The court 
 called this a "striking exemption," but said: "While this is 
 somewhat large, we cannot say that it is unreasonable." 57 
 The income tax act of Congress of 1894 was sustained (by 
 an inferior court) as against objection that the exemption al- 
 lowed, $4,000, was unreasonably great. 58 The corporation ex- 
 cise tax law of 1909 was assailed on the ground that it exempt- 
 ed incomes of less than $5,000, but the Supreme Court of the 
 United States answered this objection with a mere reference 
 to certain of its earlier decisions concerning similar exemp- 
 tions in inheritance tax law. 59 
 
 Through no decision on this precise point was rendered in 
 the case before the United States Supreme Court involving 
 the validity of the act of Congress of 1894, yet some of the 
 
 s* Moore v. Miller, 5 App. D. C. 413 ; New Orleans v. Fourchy, 30 
 La. Ann. 910. 
 
 SB New Orleans v. Fourchy, 30 La. Ann. 910. 
 se Robertson v. Pratt, 13 Hawaii, 590. 
 
 57 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 58 Moore v. Miller, 5 App. D. C. 413. 
 
 59 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. 
 Ed. 389. 
 
 (46)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 19 
 
 separate opinions filed in that case contain valuable discussions 
 both of the general question of exempting small incomes and 
 of the limits of the authority of the courts in deciding upon 
 the reasonableness of the exemption. Thus, in one of the 
 opinions it was said : "A tax which is wanting in uniformity 
 among members of the same class is or may be invalid. But 
 this does not deprive the legislature of the power to make 
 exemptions, provided such exemptions rest upon some prin- 
 ciple, and are not purely arbitrary, or created solely for the 
 purpose of favoring some person or body of persons. Thus 
 in every civilized country there is an exemption of small in- 
 comes, which it would be manifest cruelty to tax, and, the' 
 power to make such exemptions once granted, the amount is 
 within the discretion of the legislature, and so long as that 
 power is not wantonly abused, the courts are bound to respect 
 it. In this law there is an exemption of $4,000, which indi- 
 cates a purpose on the part of Congress that the burden of 
 this tax should fall on the wealthy, or at least upon the well- 
 to-do. If men who have an income or property beyond their 
 pressing needs are not the ones to pay taxes, it is difficult to 
 say who are ; in other words, enlightened taxation is imposed 
 upon property and not upon persons. Poll taxes, formerly 
 a considerable source of revenue, are now practically obsolete. 
 The exemption of $4,000 is designed, undoubtedly, to cover 
 the actual living expenses of the large majority of families, 
 and the fact that it is not applied to corporations is explained 
 by the fact that corporations have no corresponding expenses. 
 The expenses of earning their profits are of course deducted 
 in the same manner as the corresponding expenses of a private 
 individual are deductible from the earnings of his business. 
 The moment the profits of a corporation are paid over to the 
 stockholders, the exemption of $4,000 attaches to them in the 
 hands of each stockholder." 60 And in another opinion in 
 
 eo Dissenting opinion of Brown, J., in Pollock v. Farmers' Loan & 
 Trust Co., 158 U. S. 601, 15 Sup. Ot. 912, 39 L. Ed. 1108. 
 
 (47)
 
 19 INCOME TAXATION ( Ch. 3 
 
 the same case it was said: "In this connection, and as a 
 ground for annulling the provisions taxing incomes, counsel 
 for the appellant refers to the exemption of incomes that do 
 not exceed $4,000. It is said that such an exemption is too 
 large in amount. That may be conceded. But the court can- 
 not for that reason alone declare the exemption to be invalid. 
 Every one, I take it, will concede that Congress, in taxing 
 incomes, may rightfully allow an exemption to some amount. 
 This was done in the income tax laws of 1861 and in subse- 
 quent laws and was never questioned. Such exemptions rest 
 upon grounds of public policy, of which Congress must judge, 
 and of which this court cannot rightfully judge; and that 
 determination cannot be interfered with by the judicial branch 
 of the government, unless the exemption is of such a char- 
 acter and is so unreasonably large as to authorize the court 
 to say that Congress, under the pretence merely of legislating 
 for the general good, has put upon a few persons burdens 
 that, by every principle of justice and under every sound view 
 of taxation, ought to have been placed upon all or upon the 
 great mass of the people. If the exemption had been placed 
 at $1,500, or even $2,000, few, I think, would have contended 
 that Congress, in so doing, had exceeded its powers. In view 
 of the increased cost of living at this day, as compared with 
 other times, the difference between either of those amounts 
 and $4,000 is not so great as to justify the courts in striking 
 down all of the income tax provisions. The basis upon which 
 such exemptions rest is that the general welfare requires that, 
 in taxing incomes, such exemptions should be made as will 
 fairly cover the annual expenses of the average family, and 
 thus prevent the members of such families becoming a charge 
 upon the public. The statute allows corporations, when mak- 
 ing returns of their net profits or income, to deduct actual 
 operating or business expenses. Upon like grounds, as I sup- 
 pose, Congress exempted incomes under $4,000." 61 In an- 
 
 ei Dissenting opinion of Harlan, J., in Pollock v. Farmers' Loan & 
 Trust Co., supra. 
 
 (48)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 20 
 
 other case, in construing a territorial income tax law, the 
 court observed: "It is contended that the exemption of in- 
 comes to the extent of $1,000 is an illegal discrimination. The 
 power of state legislatures to grant reasonable exemptions 
 from taxation is undisputed. It has been upheld on grounds 
 of enlightened public policy a public policy which seeks to 
 exclude from taxation the living expenses of the average 
 family, and thus to enable the poor man to escape becoming 
 a public burden. It rests upon the theory that the exemp- 
 tion results in ultimate benefit to the taxpayer, which compen- 
 sates him for the additional burden of taxation which he is 
 thereby called upon to bear. It does not apply to corporations, 
 for the reason that they have no corresponding expense. But 
 the exemption must be reasonable and impartial, and must be 
 extended to all who are similarly situated. It is urged that the 
 exemption in question is unreasonable. If the power to make 
 exemptions be once conceded, the amount of the exemption 
 is largely within the discretion of the legislature a discretion 
 which is not subject to review in the courts unless it be clearly 
 shown to have been abused." 62 
 
 20. Exemption of Classes of Individuals or Corporations 
 
 It is a conceded principle of taxation, applicable to income 
 taxes as well as to any others, that there is no constitutional 
 objection to an exemption in favor of those corporations or 
 institutions which serve important public purposes or confer 
 benefits upon the public at large, such as religious, educational, 
 and charitable organizations. Also it is clear that any corpo- 
 ration which bears its due share of the public burden, under 
 a special form of taxation, may lawfully be exempted from 
 the payment of any or all other taxes. Thus, the exemption 
 of insurance companies from an income tax law does not 
 render it invalid as to other corporations which are made 
 subject to the law, where the exemption is made expressly on 
 
 02 Peacock v. Pratt, 121 Fed. 772, 58 C. C. A. 48. 
 
 BL.INC.TAX. 4 (49)
 
 20 INCOME TAXATION (Ch. 3 
 
 the ground that such companies are required by another law 
 to pay a tax on the premiums received. 63 But beyond these 
 elementary principles, the subject is not free from doubt. It 
 would be obviously contrary to sound principles of constitu- 
 tional law to push the power of exemption so far as to make 
 the burden of the tax in reality fall upon a selected class of 
 individuals or corporations. On this point the Supreme Court 
 of Louisiana has said : "It is not necessary for us to decide 
 whether or not, under the constitution, the legislature has 
 power to levy an income tax. It suffices to say that, if the 
 legislature has such power, it would be an indispensable con- 
 dition of its exercise that the tax should embrace the incomes 
 ot all persons not exempted, and whatever power of classifi- 
 cation the legislature might possess as to the subject-matter 
 of taxation, that power could under no pretext be stretched 
 so as to embrace the right to single out a particular class of 
 taxpayers and to require them to pay such a tax, while ex- 
 empting all others." 64 No such sweeping exemptions have 
 been attempted in recent income tax laws. But they com- 
 monly contain exemptions in favor of labor organizations, 
 agricultural societies, savings banks, mutual building and loan 
 associations, mutual insurance companies, fraternal orders 
 and benefit societies (or some of the foregoing), as well as 
 charitable and educational institutions. The validity of such 
 exemptions has been severely criticized. Thus, in one of the 
 opinions filed in the Pollock case, it was said : "Exemptions 
 from the operation of a tax always create inequalities. Those 
 not exempted must, in the end, bear an additional burden or 
 pay more than their share. A law containing arbitrary exemp- 
 tions can in no just sense be termed uniform. In my judg- 
 ment, Congress has rightfully no power, at the expense of 
 others, owning property of the like character, to sustain pri- 
 es Peacock v. Pratt, 121 Fed. 772, 58 C. C. A. 48. 
 6* Parker v. North British & M. Ins. Co., 42 La. Ann. 428, 7 South. 
 599. 
 
 (50)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 21 
 
 vate trading corporations, such as building and loan associa- 
 tions, savings banks, and mutual life, fire, marine, and acci- 
 dent insurance companies, formed under the laws of the va- 
 rious states, which advance no national purpose or public 
 interest, and exist solely for the pecuniary profit of their 
 members." 65 But in a more recent case the Supreme Court 
 of the United States has apparently given its approval to 
 the validity of just such exemptions as those mentioned. In 
 refusing to hold unconstitutional the corporation tax law of 
 1909, on the ground that it taxed a business when carried on 
 by a corporation, and exempted a similar business when car- 
 ried on by a partnership or a private individual, it said : "In 
 levying excise taxes the most ample authority has been recog- 
 nized from the beginning to select some and omit other possi- 
 ble subjects of taxation, to select one calling and omit another, 
 to tax one class of property and to forbear to tax another." 
 And later in the same opinion it was said: "As to the objec- 
 tion that certain organizations, labor, agricultural, and hor- 
 ticultural, fraternal and benevolent societies, loan and build- 
 ing associations, and those for religious, charitable, or educa- 
 tional purposes, are excepted from the operation of the law, 
 we find nothing in it to invalidate the tax. As we have had 
 frequent occasion to say, the decisions of this court from an 
 early date to the present time have emphasized the right of 
 Congress to select the objects of excise taxation, and within 
 this power to tax some and leave others untaxed must be 
 included the right to make exemptions such as are found in 
 this act." 6e 
 
 21. Allowance of Deduction for Other Taxes Paid 
 
 The Wisconsin income tax law contains a provision that 
 "any person who shall have paid a tax upon his personal prop- 
 
 s Pollock v. Farmers' Loan & Trust Co., 157 IT. S. 429, 15 Sup. 
 Ct 673, 39 L. Ed. 759, per Field, J., concurring. 
 
 66 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct 342, 55 L. 
 Ed. 389. 
 
 (51)
 
 22 INCOME TAXATION (Ch. 3 
 
 erty during any year shall be permitted to present the receipt 
 therefor to, and have the same accepted by, the tax collector 
 to its full amount in the payment of taxes due upon the in- 
 come of such person during said year." 67 When the consti- 
 tutionality of the statute was under consideration by the Su- 
 preme Court of the state, an objection against its validity was 
 urged on the ground that this provision created an unjust and 
 unlawful discrimination between taxpayers all equally sub- 
 ject to the law, since one taxpayer might be required to pay 
 the whole of the income tax assessed against him, while anoth- 
 er, having an exactly equal income, could have the tax thereon 
 very materially reduced by taking advantage of this provision. 
 But the court held that the objection was without force and 
 overruled it. 68 
 
 22. Double Taxation 
 
 Vigorous objections to the validity of income tax laws have 
 been based on the ground that they impose, or at least result 
 in, double taxation. And it cannot be denied that this is usu- 
 ally the case. "It may safely be said that the payment of an 
 income tax almost necessarily involves, in some indirect and 
 limited sense, the payment of a double tax. For income, often- 
 er than otherwise, in some way, either directly or indirectly, is 
 derived from or grows out of property subject to taxation." 69 
 But though double taxation is vicious and unjust in principle, 
 and no statute will be so construed as to impose double taxes 
 if it can reasonably be avoided, 70 yet a statute which produces 
 this result cannot be adjudged invalid on economic principles, 
 nor unless it conflicts with some explicit provision of the con- 
 stitution. This important point is discussed, in relation to in- 
 
 * Wisconsin Income Tax Law, 1911, 1087m, 26. 
 88 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 e Lott v. Hubbard, 44 Ala. 593. 
 
 TO Black, Const Law (3d edn.) p. 464, 
 
 (52)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 22 
 
 come taxation, by the court in South Carolina, in the following 
 terms: "The next objection to the act is that it results in 
 double taxation. The contention is that plaintiff's income was 
 derived from dividends received upon his stock in corpora- 
 tions chartered and doing business under the laws of the state, 
 and as these corporations had paid taxes on their property, 
 and also on their franchises, a tax on plaintiff's income is 
 double taxation. There is much room for discussion and dif- 
 ference of opinion as to what really amounts to double taxa- 
 tion. But the weight of authority and reason sustains the 
 taxation of shares of stock in a corporation to the holder 
 thereof, notwithstanding the corporation has paid taxes on its 
 property and also on its franchises. The rents and profits de- 
 rived from real estate, and the products of the farm, may 
 be taxed, though the land from which they are derived has 
 also been taxed. The profits of a business may be taxed 
 though the property in the business, bought on credit, has been 
 taxed to the owner, and the debt he owes therefor has been 
 taxed to the creditor, and the property covered by mortgage 
 may be taxed to the owner, and the mortgage thereon to the 
 mortgagee. These may be instances of double taxation in one 
 sense, yet they are not within the rule of uniformity and 
 equality prescribed by the constitution, which forbids the tax- 
 ation twice of the same property for the same purpose, while 
 other property, under similar circumstances and conditions, is 
 taxed only once. There is no constitutional inhibition against 
 such taxation; and in the absence of constitutional restric- 
 tion, the power of the legislature to tax is limited only by its 
 own discretion and its responsibility to its constituents. It has 
 been said the power to tax is an inherent right of sovereignty, 
 necessary to its existence, and limited only by its necessities. 
 We make out no conclusive case against a tax when we show 
 that it reaches twice the same property for the same purpose. 
 This may have been intended, and, in many cases, at least is 
 
 (53)
 
 22 INCOME TAXATION (Ch. 3 
 
 admissible." T1 The general weight of authority undoubtedly 
 does sustain the principle that a tax may be levied on income 
 derived from property, in the shape of rent or otherwise, 
 although the property yielding the income is also subjected to 
 taxation, and that this does not violate the rule against double 
 taxation, because the two interests or species of property are 
 distinct and severable. 72 It must be admitted, however, that 
 this doctrine does not pass entirely unchallenged. 73 And in 
 at least one state this very result has been guarded against 
 by a clause in the constitution which provides that "the gen- 
 eral assembly may tax trades, professions, franchises, and in- 
 comes, provided that no income shall be taxed when the 
 property from which the income is derived is taxed." 7 * On 
 the other hand the constitution of another state having an 
 income tax law (Wisconsin) expressly makes a distinction 
 between "property" and "income" and authorizes the taxa- 
 tion of both. And the Supreme Court of that state, in sus- 
 taining the income tax, has remarked: "It is claimed with 
 much earnestness and ability that the act violates the provi- 
 sions of the fourteenth amendment to the federal Constitu- 
 tion. One of the contentions under this head is that the 
 progressive features of the act are discriminatory, if not abso- 
 lutely confiscatory. Another contention is that the act pro- 
 vides for double taxation, and for both reasons it is claimed 
 
 71 Alderman v. Wells, 85 S. C. 507, 67 S. E. 781, 27 L. R. A. (N. S.) 
 
 864, 21 Am. & Eng. Ann. Gas. 193. 
 
 72 Comstock v. Grand Rapids, 54 Mich. 641, 20 N. W. 623 ; Wood- 
 ruff v. Oswego Starch Factory, 177 N. Y. 23, 22 N. E. 994 ; Chisholm 
 v. Shields, 21 Ohio Cir. Ct R. 231; Memphis v. Ensley, 6 Baxt. 
 (Tenn.) 553, 32 Am. Rep. 532. 
 
 73 "We are of the opinion that it was not the intention of the leg- 
 islature to tax real property under the name of land, slaves, etc., 
 and then to tax under the term of incomes the profits realized from 
 such land, slaves, etc. It would be double taxation first to tax prop- 
 erty to the extent allowed by law, and then to tax the profits derived 
 from such property." City of New Orleans v. Fassman, 14 La. Ann. 
 
 865. And see Kennard v. Manchester (N. H.) 36 Atl. 553. 
 7* Const N. Car., art. 5, 3. 
 
 (54)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 22 
 
 that it denies to citizens the equal protection of the laws. It 
 is said in support of this contention that the United States 
 Supreme Court in the Pollock case 75 has held that taxation 
 of income derived from land is in fact taxation of the land 
 itself, hence that the act provides for double taxation, first 
 of the land in specie, and next of the income therefrom. It 
 seems that this claim may be very easily met. The question 
 in the Pollock case was whether the taxation of rentals of 
 land was direct taxation within the meaning of that term as 
 used in the Constitution of the United States, and it was held 
 to be the same, in substance, as a tax on the land itself, and 
 hence a direct tax. This may be admitted for the purposes 
 of the case, but it does not appear to in any way decide the 
 question here at issue, or even to be very persuasive. The 
 question there was of the power of Congress, under that clause 
 of the federal Constitution which forbids any direct federal 
 tax except one levied in proportion to the population. The 
 question here is primarily of the power of the legislature 
 of Wisconsin, under its constitution, to levy an income tax 
 in addition to a real estate tax, and secondarily whether such 
 tax denies to anyone the equal protection of the laws. The 
 inapplicability of the rule in the Pollock case to the case here 
 presented seems so plain as to require little comment. There 
 can be no doubt of the proposition that income taxation of 
 a progressive character, in addition to taxation of property, 
 is directly authorized by the constitution of Wisconsin as 
 amended in 1908. Words could hardly be plainer to express 
 that idea than the words used. From them it clearly appears 
 that taxation of property and taxation of incomes are rec- 
 ognized as two separate and distinct things in the state con- 
 stitution. Both may be levied, and lawfully levied, because 
 the constitution says so. However philosophical the argu- 
 ment may be that taxation of rents received from property 
 
 TO Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 15 Sup. Ct. 
 673, 39 L. Ed. 759. 
 
 (55)
 
 22 INCOME TAXATION (Ch. 3 
 
 is in effect taxation of the property itself, the people of Wis- 
 consin have said that 'property' means one thing and 'income' 
 means another; in other words, that income taxation is not 
 property taxation, as the words are used in the constitution 
 of Wisconsin." 76 
 
 On the same principle, a tax laid upon the receipts or in- 
 come arising from the conduct of a particular business, such 
 as that of a banker or broker, is not invalid because the law 
 of the state also requires persons engaging in such business 
 to take out a license and pay a fee therefor, nor is the im- 
 position of the tax on the income an unconstitutional inva- 
 sion of the right or privilege granted by the license. 77 And 
 so a merchant's income from his business is taxable under 
 the law, although he is taxed also on his stock in trade. 78 
 
 Questions of a somewhat different order may arise when 
 it is considered that the income tax laws of two different 
 states, or of a state and the United States, may bear upon 
 the same person in respect to the same income. But it seems 
 that no constitutional objection can be based on the fact that 
 two or more independent sovereignties subject the same prop- 
 erty (subject to the jurisdiction of both or all) to taxation for 
 their own separate purposes. Thus, it is held that a state 
 is none the less entitled to tax the transfer of an estate by 
 will or inheritance because some part of the property may 
 be in another state and be taxable there under the same kind 
 of a statute, or because the estate has already paid an in- 
 heritance tax to the United States. 79 So, the tax imposed by 
 the federal income tax law of 1864, upon all dividends de- 
 clared to stockholders "as part of the earnings, income, or 
 
 76 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 77 Drexel v. Commonwealth, 46 Pa. St. 31; Burch v. Savannah, 42 
 Ga. 596. 
 
 78 Wilcox v. County Com'rs of Middlesex, 103 Mass. 544. 
 
 7 Appeal of Hopkins, 77 Conn. 644, 60 Atl. 657; Matter of Daly, 
 100 App. Div. 373, 91 N. Y. Supp. 858. 
 
 (56)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 22 
 
 gain of any bank," was held to be assessable against the bank 
 for the whole amount of dividends so declared, notwithstand- 
 ing the fact that it had paid a sum to the state of New York, 
 under a statute of that state imposing a tax against the stock- 
 holders upon the value of their shares, and requiring the bank 
 to retain the amount thereof from the dividends due them, 
 until it was made to appear that their tax was paid. 80 And 
 that taxation of the same property by different governments 
 is neither unlawful nor uncommon may further be shown by 
 the following remarks of an English judge, made in an in- 
 come tax case: "There could be double taxation if the leg- 
 islature distinctly enacted it, but upon general words of tax- 
 ation, and when you have to interpret a taxing act, you can- 
 not so interpret it as to tax the subject twice over to the same 
 tax. But it all depends upon its being the same tax, and as 
 the Attorney General has said, there is nothing to prevent 
 either one legislature, or two legislatures if they have juris- 
 diction over the subject-matter, imposing different taxes upon 
 the same subject-matter. Double taxation in one sense is 
 common enough in the case of these companies which have 
 their head establishments in one country and their business 
 in another, although no doubt there is always a sort of griev- 
 ance felt in reference to it." 81 But although a cumulation 
 of taxes in this way may be constitutionally defensible, un- 
 doubtedly it sometimes results in very heavy burdens. Under 
 the laws as they stand at present, for example, a person en- 
 gaging in a certain line of business (as, for instance, a to- 
 bacconist) might be required to pay, first, a license tax or fee 
 to the United States, second, a license tax or fee to the mu- 
 nicipality where he does business, third, a tax on the building 
 in which his business is carried on, if he happens to own it, 
 fourth, a tax on his stock in trade as personal property, fifth, 
 
 so Central Nat. Bank v. United States, 137 U. S. 355, 11 Sup. Ct 
 126, 34 L. Ed. 703. 
 
 si Stevens v. Durban-Roodepoort Gold Min. Co., 5 Tax Cas. 402. 
 
 (57)
 
 23 INCOME TAXATION (Ch. 3 
 
 an income tax to the United States, sixth, a tax on the same 
 income to the state. 
 
 23. Taxing Aggregate Income of Family 
 
 Modern income tax laws have commonly provided that 
 only one deduction of the amount allowed by statute as ex- 
 empt shall be made from the aggregate income of all the 
 members of any family. And the practical construction has 
 been that this required the head of the family, in making his 
 return for taxation, to add the income of his wife and minor 
 children, if any, to his own. This has been objected to on 
 constitutional grounds as making an unjust and unlawful 
 discrimination. But the courts have not taken that view. 
 Thus, in Wisconsin, it was said: "Objection is also made 
 to the provision that the income of a wife living with her 
 husband shall be added to the income of the husband, and 
 the income of children under eighteen years of age living 
 with their parent or parents shall be added to that of the 
 parent or parents. This is another case of classification, 
 and it is only justifiable in case there is some substantial 
 difference of situation which suggests the advisability of dif- 
 ference of treatment. We think there clearly is such a dif- 
 ference, in this : That experience has demonstrated that oth- 
 erwise there will be many opportunities for fraud and eva- 
 sion of the law, which the close relationship of husband and 
 wife or parent and child make possible, if not easy. The 
 temptation to make colorable shifts and transfers of prop- 
 erty in order to secure double or even triple exemptions, if 
 there were not some provision of this kind in the law, would 
 unquestionably be very great. There is no such temptation 
 or opportunity in the case of the single man, or the man and 
 wife who are living separately." 82 
 
 82 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eug. Ann. 
 Gas. 1147. 
 
 (58)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 24 
 
 24. Validity of Graduated or Progressive Tax 
 
 The constitutions of both Wisconsin and South Carolina 
 contain provisions authorizing the graduation or progressive 
 increase of the income tax, and in both those states the 
 validity of this feature of the law has been sustained. 83 In 
 Wisconsin, it was also objected that such an arrangement 
 of the tax was in conflict with the provision of the fourteenth 
 amendment to the federal constitution securing to all citi- 
 zens the equal protection of the laws ; but the court ruled 
 otherwise. 8 * Moreover, in some of the states, the inherit- 
 ance tax laws are also progressive, and in at least one it 
 has been decided that there is no constitutional objection to 
 them on that ground, 85 thus furnishing at least an argument 
 from analogy to support the similar feature of the income 
 tax law. The only contrary decision was rendered in Ha- 
 waii, where the court decided against the constitutional valid- 
 ity of a graded income tax (enacted in 1896, and much re- 
 sembling the federal income tax law of 1894) on the ground 
 of its being in conflict with a provision of the constitution 
 that each citizen "shall be obliged to contribute his propor- 
 tion or share" of the expenses of government. The law in 
 question exempted all incomes below $2,000, allowed an 
 exemption of $2,000 on all incomes below $4,000, and taxed 
 all incomes above $4,000 without exemption. It was held 
 that this was not proportional taxation, but unjust discrim- 
 ination. 86 
 
 In regard to the United States law, where the ground of 
 objection, if any there be, must be found in the federal con- 
 
 ss Const. Wis., art. 8, 1, as amended in 1908; Const S. Car., art. 
 10, 1 ; Alderman v. Wells, 85 S. C. 507, 67 S. E. 781, 27 L. R. A. 
 (N. S.) 864, 21 Am. & Eng. Ann. Gas. 193. 
 
 s* State v. Frear, 148 Wis. 45(3, 134 N. W. 673, 26 Am. & Eng. 
 Ann. Cas. 1147. 
 
 ss Drew v. Tifft, 79 Minn. 175, 81 N. W. 830, 47 L. R. A. 525, 79 
 Am. St. Rep. 446 ; State v. Bazille, 97 Minn. 11, 106 N. W. 93. 
 
 se Campbell v. Shaw, 11 Hawaii, 112. 
 
 (59)
 
 25 INCOME TAXATION (Ch. 3 
 
 stitution and not elsewhere, it may be remarked that the in- 
 come tax laws of 1862 and 1864 were both graduated, in the 
 sense that they imposed a heavier tax upon incomes above 
 a certain figure than on incomes below it. But apparently 
 their validity on this account was never drawn in question. 
 The Supreme Court of the United States, however, has 
 held that no constitutional objection to a graduated inherit- 
 ance tax law can be drawn from the provision of the con- 
 stitution that taxes shall be "uniform throughout the United 
 States." For the uniformity in taxation required by this 
 clause is not an intrinsic but a geographical uniformity, and 
 the phrase is synonymous with the expression "to operate 
 generally throughout the United States." 87 Probably, there- 
 fore, a similar decision may be expected in regard to the 
 validity of the super-tax imposed by the present income tax 
 law. 
 
 25. Retrospective Operation of Statute 
 
 On general principles and irrespective of explicit constitu- 
 tional limitations, a statute imposing an income tax may sub- 
 ject to taxation the income of the citizen for the whole of the 
 current year in which the statute is passed, that is, not only 
 so much of the income as accrued from the date of the en- 
 actment of the law to the end of the year, but also that por- 
 tion which accrued or was earned from the beginning of the 
 year to the date of the law. For the year's income is treat- 
 ed and considered as one entire thing, not as made up of sev- 
 eral portions or items. And hence, although the statute 
 might be called retrospective in its operation upon a part of 
 the first year's income, it is not retrospective in such a sense 
 as to render it unconstitutional. 88 "It is clearly perfectly 
 constitutional as well as expedient, in levying a tax upon 
 
 ST Knowlton v. Moore, 178 TJ. S. 41, 20 Sup. Ct. 747, 44 L. Ed. 969. 
 ss State v. Bell, 61 N. C. 76; State v. Frear, 148 Wis. 456, 134 N. 
 W. 673, 26 Am. & Eng. Ann. Cas. 1147. 
 
 (60)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 25 
 
 profits or income, to take as the measure of taxation the 
 profits or income of a preceding year. To tax is legal, and 
 to assume as a standard the transactions immediately prior 
 is certainly not unreasonable, particularly when we find it 
 always adopted in exactly similar cases." 89 "The right of 
 Congress to have imposed this tax by a new statute, al- 
 though the measure of it was governed by the income of the 
 past year, cannot be doubted ; much less can it be doubted 
 that it can impose such a tax on the income of the current 
 year, though part of that year had elapsed when the statute 
 was passed." 90 So the Wisconsin statute was held not to 
 be invalid because it included, as part of the income to be 
 taxed in the year of its enactment, profits derived from the 
 sale of property purchased at any time within three years 
 previously. 91 
 
 But the case is different in regard to the federal income 
 tax. Until the adoption and promulgation of the Sixteenth 
 Amendment, Congress had no rightful power to tax incomes, 
 unless on condition that the tax should be apportioned 
 among the several states. Hence if the present statute had 
 attempted to tax the whole of the citizen's income for the 
 year 1913, it would have included some gains and profits 
 which, at the time they were acquired, and when alone they 
 could be described as "income," were not subject to the tax- 
 ing power of Congress, except on the condition mentioned. 
 Hence it is provided that "for the year ending December 
 thirty-first, 1913, said tax shall be computed on the net in- 
 come accruing from March first to December thirty-first, 
 1913, both dates inclusive, after deducting five-sixths only 
 of the specific exemptions and deductions herein provided 
 for." 
 
 8 Drexel v. Commonwealth, 46 Pa. St. 31. 
 
 so Stockdale v. Insurance Companies, 20 Wall. 323, 22 L. Ed. 348. 
 91 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 (61)
 
 26 INCOME TAXATION (Ch. 3 
 
 26. Objections as to Title, Purpose, and Mode of En- 
 actment of Statute 
 
 The constitution of South Carolina provides that no tax 
 shall be levied except in pursuance of a law which shall dis- 
 tinctly state the object of the same, to which object the tax 
 shall be applied. When the income tax law of that state 
 was adopted, in 1897, its validity was assailed on the ground 
 that it did not comply with this constitutional provision. But 
 as the title of the statute was "An act to raise revenue for 
 the support of the state government by the levy and collection 
 of a tax on income," the court had no difficulty whatever 
 in holding that it did distinctly state the object to which the 
 tax was to be applied. 92 In the same case it was further held 
 that this statute was not in violation of another provision of 
 the state constitution to the effect that the General Assembly 
 shall provide for an annual tax sufficient to defray the esti- 
 mated expenses of the state for a year. It was argued that 
 the income tax law attempted to provide for taxation for more 
 than one year, regardless of the estimated expenses of the 
 state for the years in which it should be collected. But the 
 court held otherwise, saying that the tax is levied annually, 
 and is applied to the expenses of the state in the year in which 
 it is collected, and the courts are bound to assume that the 
 legislature, in estimating the annual expenses of the state, 
 takes into consideration all the sources of income to the state, 
 including the income tax, and fixes the general levy accord- 
 ingly. 
 
 In regard to the federal corporation tax law of 1909, it ap- 
 peared that the bill, introduced in and passed by the House of 
 Representatives, was a general bill for the collection of 
 revenue, including, as one of its features, a plan of inheritance 
 taxation, and that this part was stricken out by the Senate 
 and the corporation tax substituted. And it was argued that 
 
 2 Alderman v. Wells, 85 S. C. 507, 67 S. E. 781, 27 L. R. A. (N. 
 S.) 864, 21 Am. & Eng. Ann. Cas. 193. 
 
 (62)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 27 
 
 this rendered the act invalid, since the Constitution provides 
 that all bills for the raising of revenue shall originate in the 
 House of Representatives. But the court held otherwise, in 
 view of the further provision of the Constitution that the 
 Senate may propose or concur with amendments to revenue 
 bills, as well as other bills. 83 
 
 27. Objections to Administrative Provisions of Act 
 
 Statutes providing for the taxation of incomes have often 
 been subjected to severe criticism on the ground that they 
 confide too much authority and discretion to executive and 
 administrative officers, in regard to the settlement of matters 
 of detail, to the construction of the machinery necessary for 
 the operation of the law, and to the making of rules and regu- 
 lations for its enforcement. But it may now be regarded 
 as a settled principle of constitutional law that, although 
 a legislative body cannot delegate its power to make laws, yet, 
 having enacted statutes, it may invest executive officers or 
 boards or commissions created for the purpose with authority 
 to make rules and regulations for the practical administra- 
 tion of such statutes in matters of detail and to enforce the 
 same, and also to determine the existence of the facts or 
 conditions on which the application of the law depends. And 
 "there is a marked and increasing tendency to leave more 
 and more of what may be called the detail of legislation to 
 such officers and commissions, the legislature settling the 
 general policy and outline of the laws on a given subject, 
 and confiding to administrative agencies the work of erecting 
 the machinery necessary for their practical operation and 
 their application in particular cases." 84 For this reason it 
 
 3 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct 342, 55 L. 
 Ed. 389. 
 
 * Black, Const. Law (3d edn.) pp. 96, 97, and cases there cited. 
 See. particularly, Union Bridge Co. v. United States, 204 U. S. 364. 
 27 Sup. Ct. 367, 51 L. Ed. 523 : Field v. Clark, 143 U. S. 649, 12 Sup. 
 Ct. 495, 36 L. Ed. 294; Coopersville Co-operative Creamery Co. v. 
 Lemon, 163 Fed. 145, 89 C. C. A. 595; In re Huttman, 70 Fed. 699. 
 
 (63)
 
 27 INCOME TAXATION (Ch. 3 
 
 is thought that no valid objection to the federal income tax 
 law can be based upon the authority which it intrusts to the 
 Commissioner of Internal Revenue, with respect to prescribing 
 forms and making rules and regulations on various matters 
 of administration, more especially as it does not go nearly 
 so far in this regard as some of the earlier acts of Congress 
 on the same subject, which were never successfully challenged 
 on this ground. For similar reasons, the Wisconsin statute 
 was upheld against the objection that it unconstitutionally au- 
 thorized the state tax commission to appoint the income tax 
 assessors. The court held that this was not invalid either as 
 a delegation of legislative power to the commission or as vio- 
 lating the constitutional guaranties of local self-government. 95 
 Objection is also made to those provisions commonly found 
 in income tax laws which require the citizen to disclose the 
 sources and amount of his income in sworn returns, which, 
 under certain conditions, are open to the inspection of the 
 public, or which require him to open his books and papers to 
 the examination of the revenue officers or submit to interro- 
 gation concerning his business affairs. Such provisions, it is 
 argued, amount to authorizing "unreasonable searches and 
 seizures," and moreover, in view of the possible use of in- 
 formation thus obtained, they may compel the individual to 
 furnish evidence against himself in a criminal proceeding. 
 But no decision sustaining such objections as these has been 
 found. On the contrary the courts hold that such provisions 
 cannot be brought within the reasonable intendment of the 
 constitutional guaranties referred to, that similar provisions 
 are already very common in the tax laws of various states 
 and have always been acquiesced in, or at least, not success- 
 fully attacked, and that, as to the matter of self-crimination, 
 even if such a result could follow from the enforcement of 
 any provision of an income tax law, it would be no ground 
 
 5 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eug. Ann. 
 Cas. 1147. 
 
 (64)
 
 Ch. 3) CONSTITUTIONAL VALIDITY 28 
 
 for adjudging the whole statute unconstitutional, but only a 
 matter to be pleaded by the individual in his own behalf 
 when a criminal proceeding shall actually be brought against 
 him and an attempt actually made to use against him evidence 
 thus extorted. 96 
 
 28. Apportionment of Federal Income Tax 
 
 The United States income tax law of 1894 was adjudged 
 unconstitutional on the ground that it was a "direct" tax with- 
 in the meaning of the Constitution of the United States and 
 yet was not "apportioned among the several states" as that 
 instrument requires. 97 The corporation tax law of 1909 was 
 also not apportioned among the states, but its validity was 
 sustained by the Supreme Court, on the ground that it was not 
 a direct tax upon the income of corporations, but an excise 
 tax upon the conducting or carrying on of business in a cor- 
 porate capacity, and that there is nothing in the Constitution 
 requiring excise taxes to be apportioned according to popula- 
 tion. 98 So far as regards the present income tax law, and any 
 future law of the same character, the necessity of apportion- 
 ment is dispensed with by the Sixteenth Amendment to the 
 Constitution, which provides that "the Congress shall have 
 power to lay and collect taxes on incomes, from whatever 
 source derived, without apportionment among the several 
 states, and without regard to any census or enumeration." 
 
 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. 
 Ed. 389; Peacock v. Pratt, 121 Fed. 772; Co-operative Building & 
 Loan Ass'n v. State, 156 Ind. 463. 60 N. E. 146. 
 
 7 Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 15 Sup. 
 Ct. 673, 39 L. Ed. 759 ; s. c., 158 U. S. 601, 15 Sup. Ct. 912, 39 L. Ed. 
 1108. 
 
 8 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. 
 Ed. 389. 
 
 BL.INC.TAX. 5 (65)
 
 29 INCOME TAXATION (Ch. 4 
 
 CHAPTER IV 
 
 CONSTRUCTION OF STATUTES IMPOSING INCOME TAXES 
 
 29. Rule of Strict Construction. 
 
 30. Statutes in Pari Materia. 
 
 31. Associated Words and Phrases. 
 
 29. Rule of Strict Construction 
 
 It is a rule sanctioned by many authorities, and particularly 
 with reference to the revenue laws of the United States, that a 
 statute imposing taxes is to be construed strictly against the 
 government and in favor of the taxpayer, and that no person 
 and no property is to be included within its scope unless ex- 
 plicitly placed there by the clear language of the statute, and 
 no heavier burdens imposed than the plain meaning of its 
 terms will warrant. 1 Thus, it has been said: "It is an old 
 and familiar rule of the English courts, applicable to all forms 
 of taxation and particularly special taxes, that the sovereign is 
 bound to express its intention to tax in clear and unambiguous 
 language, and that a liberal construction be given to words of 
 exception confining the operation of duty. * * * We have 
 ourselves had repeated occasion to hold that the customs rev- 
 
 i American Net & Twine Co. v. Worthington, 141 U. S. 468, 12 
 Sup. Ct 55, 35 L. Ed. 821 ; Benziger v. United States, 192 U. S. 38, 
 24 Sup. Ct. 189, 48 L. Ed. 331 ; Spreckels Sugar Co. v. McClain, 192 
 U. S. 397, 24 Sup. Ct. 376. 48 L. Ed. 496; Eidinan v. Martinez, 184 
 U. S. 578, 22 Sup. Ct. 515, 46 L. Ed. 697 ; Parkview Building & Loan 
 Ass'n v. Herold, 203 Fed. 876 ; Mutual Benefit Life Ins. Co. v. Her- 
 old, 198 Fed. 199 ; Missouri, K. & T. Ry. Co. v. Meyer, 204 Fed. 140 ; 
 United States v. Wigglesworth, 2 Story, 369, Fed. Cas. No. 16,690; 
 Rice v. United States, 53 Fed. 910, 4 C. C. A. 104; United States v. 
 Watts, 1 Bond, 580, Fed. Cas. No. 16,653; Powers v. Barney, 5 
 Blatchf. 202, Fed. Cas. No. 11,361 ; Vicksburg & M. R. Co. v. State, 
 62 Miss. 105 ; Matter of Will of Vassar, 127 N. T. 1, 12, 27 N. E. 394. 
 Compare John J. Sesnon Co. v. United States, 182 Fed. 573, 105 C. 
 C. A. 111. 
 
 (66)
 
 Ch. 4) CONSTRUCTION OF STATUTES 
 
 enue laws should be liberally interpreted in favor of the im- 
 porter, and that the intent of Congress to impose or increase a 
 tax upon imports should be expressed in clear and unambiguous 
 language." 2 "It is a general rule, in the interpretation of all 
 statutes levying taxes or duties upon subjects or citizens, not 
 to extend their provisions by implication beyond the clear im- 
 port of the language used, or to enlarge their operation so as 
 to embrace matters not specifically pointed out, although stand- 
 ing upon a close analogy. In every case, therefore, of doubt, 
 such statutes are construed most strongly against the govern- 
 ment and in favor of the subjects or citizens, because burdens 
 are not to be imposed, nor presumed to be imposed, beyond 
 what the statute expressly and clearly imports." 3 "If the con- 
 sideration thus given to the case still leaves the matter in doubt, 
 there should be applied the well-settled rule that the citizen is 
 exempt from taxation, unless the same is imposed by clear and 
 unequivocal language, and that, if there is a fair doubt as to 
 the construction of an act imposing taxation, the doubt should 
 be resolved in favor of those upon whom the tax is sought to 
 be laid." * And again, it is a "conceded principle that taxes 
 must be imposed by law, and that the law should be construed 
 favorably to the taxpayer and not extended by implication be- 
 yond its clear intent." 5 And so, "at the outset it may be re- 
 marked that a statute providing for the imposition of taxes is 
 to be strictly construed, and all reasonable doubts in respect 
 thereto resolved against the government and in favor of the 
 citizen. This principle is so well established that the citation 
 of any considerable number of authorities in its support is un- 
 necessary." 6 
 
 2 Eidman v. Martinez, 184 TL S. 578, 22 Sup. Ct. 515, 46 L. Ed. G97. 
 s United States v. Wigglesworth, 2 Story, 369, Fed. Gas. No. 16,- 
 690. 
 
 4 Parkview Building & Loan Ass'n v. Herold, 203 Fed. 876. 
 s Missouri, K. & T. Ry. Co. v. Meyer, 204 Fed. 140. 
 e Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199. 
 
 (67)
 
 29 INCOME TAXATION (Ch. 4: 
 
 Applying these principles to the specific case of income tax- 
 ation, the rule may be deduced that only those persons and 
 corporations are subject to the payment of the income tax who 
 are specially described in the statute authorizing it or clearly 
 within the meaning of the general terms which it employs, and 
 that if any substantial and reasonable doubt arises as to wheth- 
 er any particular fund or kind or class of gain or acquisition 
 constitutes taxable "income" within the meaning of the law, 
 it is to be resolved in favor of the taxpayer and not in favor 
 of the government. And so the authorities hold. 7 Thus, in 
 regard to the federal corporation tax law of 1909, it was said 
 that this statute, "levying as it does a tax upon the citizen, 
 must be strictly construed; it cannot be enlarged by con- 
 struction to cover matters not clearly within its import. 
 The question is not what Congress might have done or 
 should have done, but what it actually did do. When this 
 is ascertained, the duty of the court is accomplished." 8 
 And this view is further strengthened by the consideration 
 that the same rule has come to be accepted and applied 
 in the case of the laws taxing inheritances and successions, 
 which furnish the nearest analogy to an income tax law. 
 Such a statute, it is held, must be construed strictly against the 
 state or the government and in favor of the taxpayer, and a 
 doubt as to the taxability of a particular fund should be re- 
 solved in favor of the citizen. 9 
 
 f Forman v. Board of Assessors, 35 La. Ann. 825 ; Lining v. 
 Charleston, 1 McCord (S. C.) 345; Robson v. Regina, 4 Terr. Law 
 Rep. (Canada) 80. 
 
 s Pennsylvania Steel Co. v. New York City Ry. Co., 198 Fed. 774, 
 117 C. C. A. 556. 
 
 Eidman v. Martinez, 184 U. S. 578, 22 Sup. Ct. 515, 46 L. Ed. 697 ; 
 In re Harbeck's Will, 161 N. Y. 211, 55 N. E. 850 ; In re Kiinberly's 
 Estate, 27 App. Div. 470, 50 N. Y. Supp. 586 ; People v. Koenig, 37 
 Colo. 283, 85 Pac. 1129 ; State v. Bazille, 97 Minn. 11, 106 N. W. 93. 
 
 (68)
 
 Ch. 4) CONSTRUCTION OF STATUTES 30 
 
 30. Statutes in Pari Materia 
 
 It is a fundamental rule in the interpretation of statutes that 
 acts in pari materia are to be read and construed together. 
 The reasons for this rule have been explained by the present 
 writer in another volume, as follows: "All the enactments of 
 the same legislature on the same general subject-matter are 
 to be regarded as parts of one uniform system. Later stat- 
 utes are considered as supplementary or complementary to the 
 earlier enactments. In the course of the entire legislative 
 dealing with the subject we are to discover the progressive 
 development of a uniform and consistent design, or else the 
 continued modification and adaptation of the original design 
 to apply it to changing conditions or circumstances. In the 
 passage of each act, the legislative body must be supposed to 
 have had in mind and in contemplation the existing legisla- 
 tion on the same subject and to have shaped its new enact- 
 ment with reference thereto. Hence the same principle which 
 requires us to study the context for the meaning of a par- 
 ticular phrase or provision, and which directs us to compare 
 all the several parts of the same statute, only takes on a broad- 
 er scope when it bids us read together, and with reference to 
 each other, all statutes in pari materia. Whatever is ambig- 
 uous or obscure in a given statute will be best explained by a 
 consideration of analogous provisions in other acts relating 
 to the same subject, or by a study of the general policy which 
 pervades the whole system of legislation. Secondly, the rule 
 derives support from the principle which requires that the in- 
 terpretation of a statute shall be such, if possible, as to avoid 
 any repugnancy or inconsistency between enactments of the 
 same legislature. To achieve this result it is necessary to con- 
 sider all previous acts relating to the same matters, and to 
 construe the act in hand so as to avoid, as far as it may be pos- 
 sible, any conflict between them. Hence, for example, where 
 the legislature has used a word in a statute in one sense and 
 with one meaning, and subsequently uses the same word in 
 
 (69)
 
 30 INCOME TAXATION (Ch. 4 
 
 legislating on the same subject-matter, it will be understood 
 as using the word in the same sense, unless there is something 
 in the context or in the nature of things to indicate that it in- 
 tended a different meaning thereby." 10 And it is said that 
 the rule of construction by the aid of statutes in pari materia 
 is especially applicable in the case of revenue laws, which, 
 though made up of independent enactments, are regarded as 
 one system, in which the construction of any separate act may 
 be aided by the examination of other provisions which com- 
 pose the system. 11 And it is not necessary to the application 
 of this rule that the earlier act should still continue in force. 
 Although it may have expired by its own limitation, or though 
 it may have been expressly or impliedly repealed, still it is to 
 be considered and read as explanatory of the later enact- 
 ment. 12 It has been held, however, in one case, that where a 
 personal tax law imposes a tax on a certain occupation, with- 
 out defining it, it is doubtful whether the court, in construing 
 it, can look to old and repealed tax laws, which define such 
 occupation, to ascertain the legislative meaning. 13 
 
 Now it has been held that all the successive acts of Congress 
 from 1861 to 1867, imposing income taxes, are in pari materia, 
 and are to be construed as one continuous enactment. 14 And 
 of course this doctrine may be expanded so as to include the 
 acts of Congress of 1894, 1909, and 1913. (It is chiefly for 
 this reason that all these various enactments have been printed 
 in full in the appendix to this volume, where they may be 
 studied and compared at length.) And it follows that it will 
 be a legitimate method of construing the present income tax 
 law, in cases where its language in relation to a particular 
 point or subject is obscure, confusing, or unintelligible, to 
 
 10 Black, Interpretation of Laws (2d edn.) pp. 332-334. 
 
 11 United States v. Collier, 3 Blatchf. 325, Fed. Gas. No. 14,833. 
 
 1 2 King v. Loxdale, 1 Burr. 445 ; Southern Ry. Co. v. McNeill, 155 
 Fed. 756. 
 
 is Lockwood v. District of Columbia, 24 App. D. C. 569. 
 i* United States v. Smith, 1 Sawy. 277, Fed. Cas. No. 16,341. 
 
 (70)
 
 Ch. 4) CONSTBDCTION OF STATUTES 31 
 
 compare it with the corresponding provisions on the same point 
 in the earlier acts, which may be more clear and precise, and 
 to presume that Congress intended its words to be understood 
 in the same sense as before, unless there is such a distinct 
 change of language as to compel the inference that a change 
 in legislation was certainly intended. So likewise, the income 
 tax law of any given state is to be read and compared, not only 
 with previous income tax laws, if any, but also with all the 
 other revenue laws of the same state, each serving to illumi- 
 nate and explain the others, in cases where their provisions 
 touch or coincide, and where any substantial doubt arises from 
 the ambiguity of the language employed. 
 
 31. Associated Words and Phrases 
 
 It is another ancient and fundamental rule in the construc- 
 tion of statutes that the meaning of a doubtful word or phrase 
 may be ascertained by reference to the meaning of other words 
 or phrases with which it is associated, and that, where several 
 things are referred to, they are presumed to be of the same 
 class, when connected by a copulative conjunction, unless a 
 contrary intent plainly appears. 15 For example, all the acts 
 of Congress on the subject of income taxation, from 1862 to 
 the present time, have associated together the words "gains," 
 "profits," and "income" as descriptive of the subject taxed, 
 and the same is true of the income tax laws of some of the 
 states. These words may be traced far back in the history 
 of English taxation. The original income tax law of that 
 country, enacted in 1799, imposed a tax on "income" by that 
 name, but the acts of 1842 and 1853 introduced the associated 
 terms "profits and gains," whence they were apparently bor- 
 rowed by Congress in framing the act of 1862, and have since 
 persisted in use. Applying the rule above stated, we are jus- 
 tified in asserting the following principles as applicable to the 
 interpretation of the phrase in question: If it is doubtful 
 
 IB Black, Interpretation of Laws (2d edn.) p. 194. 
 
 (71)
 
 31 INCOME TAXATION (Ch. 4: 
 
 whether or not a particular fund or acquisition is taxable as 
 "income," under the statute, it is not taxable unless it is in- 
 come in the nature of "gain" or "profit." If any item is clear- 
 ly included in the description of "gains" yet it is not taxable 
 unless it is a gain in the nature of "income" or "profit." And 
 although the disputed item may be certainly a "profit," in one 
 sense of the word, yet it is not taxable unless it be a profit ac- 
 cruing by way of "gain" or "income." 
 
 (72)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 32 
 
 CHAPTER V 
 
 WHAT CONSTITUTES TAXABLE INCOME 
 
 32. General Definitions of "Income." 
 
 33. "Profits" and "Gains" Compared and Distinguished. 
 
 34. Change or Substitution of Capital Distinguished. 
 
 35. Rent of Land and Royalties. 
 
 36. Rental Value of Residence. 
 
 37. Salaries and Earnings from Professions and Trades. 
 
 38. Pensions, Gifts, Prizes, and Awards. 
 
 39. Legacies and Inheritances. 
 
 40. Products of Agriculture or Stock-Raising. 
 
 41. Produce of Mines and Oil and Gas Wells. 
 
 42. Profits of Mercantile Business. 
 
 43. Profits from Unauthorized Business. 
 
 44. Income from Partnership Business. 
 
 45. Profits on Sale of Real Estate. 
 
 46. Profits of Sales of Securities. 
 
 47. Increase in Value not Realized by Sale. 
 
 48. Uncollected Interest and Accounts. 
 
 49. Profit to Accrue on Uncompleted Contracts. 
 
 50. Profits from Sale or Lease of Patent Rights. 
 
 51. Annuities. 
 
 52. Interest on Government Bonds. 
 
 53. Dividends on Corporate Stock. 
 
 54. Same; Stock Dividends. 
 
 55. Accumulated Earnings or Undivided Profits of Corporation. 
 
 56. Right to Subscribe for New Stock of Corporation. 
 
 57. Sale and Distribution of Assets of Corporation. 
 
 32. General Definitions of "Income" 
 
 "Income" is defined as that gain which proceeds from labor, 
 business, property, or capital of any kind, as, the produce of a 
 farm, the rent of houses, the proceeds of professional busi- 
 ness, the profits of commerce or of occupation, or the interest 
 of money or stock in funds, etc. ; revenue ; salary ; especially 
 the annual receipts of a private person or a corporation from 
 
 (73)
 
 32 INCOME TAXATION (Ch. 5 
 
 property. 1 It means that which comes into or is received from 
 any business or investment of capital, without reference to the 
 outgoing expenditures ; " when applied to the affairs of indi- 
 viduals, the term expresses the same idea that "revenue" does 
 when applied to the affairs of a nation or state. 2 The term 
 "income," as used in a statute providing that no income de- 
 rived from property subject to taxation shall be taxed, "means 
 the income for the year and is the result of the year's business. 
 It is the net result of many conbined influences the use of the 
 capital invested; the personal labor and services of the mem- 
 bers of the firm, and the skill and ability with which they lay 
 in, and from time to time renew, their stock ; the carefulness 
 and good j udgment with which they sell and give credit ; and 
 the foresight and address with which they hold themselves pre- 
 pared for the fluctuations and contingencies affecting the gen- 
 eral commerce and business of the government. To express 
 it in a more summary and comprehensive form, it is the crea- 
 tion of capital, industry, and skill." 3 Again, as this term is 
 used in statutes relating to the nature and ownership of prop- 
 erty, it includes the rents and profits of real estate, interest on 
 money, dividends on stock, and other produce of personal 
 property. 4 Particularly, when applied to a sum of money, or 
 to money invested in public or corporate securities, income 
 means interest. 5 
 
 But an important distinction must be noted in the significa- 
 tion of this word, according as it is used in the ordinary busi- 
 
 1 Mundy v. Van Hoose, 104 Ga. 625, 30 S. E. 782 ; Sowards v. Tay- 
 lor, 42 111. App. 275; Remington v. Field, 16 R. I. 509, 17 Atl. 551; 
 Thorn v. De Breteull, 86 App. Div. 405, 83 N. Y. Supp. 849. 
 
 2 Bates v. Porter, 74 Cal. 224, 15 Pac. 732; People v. Board of 
 Sup'rs of Niagara County, 4 Hill (N. Y.) 20; Mundy v. Van Hoose, 
 104 Ga. 625, 30 S. E. 782. 
 
 3 Wilcox v. Middlesex County, Com'rs, 103 Mass. 544. 
 
 * Rev. Codes N. Dak. 1899, 3322; Civ. Code S. Dak. 1903, 238; 
 Civ. Code Cal. 1903, 748. 
 
 5 Sims' Appeal, 44 Pa. St. 345 ; Pearson v. Chace, 10 R. I. 455. 
 
 (74)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 32 
 
 ness affairs of the community (or in statutes relating thereto) 
 or in a tax statute. In the former case, it is understood to 
 mean "net" income or profit ; in the latter case, it is equivalent 
 to "gross" income or "gross receipts," unless otherwise speci- 
 fied in the statute. Thus, it is said that the word "income," as 
 used in commerce and trade, means the balance of gain over 
 loss in the fiscal year or other period of computation, or it is 
 the ultimate profit of a business or trade, ascertained by plac- 
 ing the sum total of gains over against the sum total of losses. 6 
 So, ''the income of an estate means nothing more than the 
 profit it will yield after deducting the charges of management, 
 or the rent which may be obtained for the use of it. The rents 
 and profits of an estate, the income, or the net income of it, 
 are all equivalent expressions." 7 So, in a statute providing 
 that a certain railroad company shall be required to make an 
 annual payment from its income to the sinking fund, to aid in 
 the construction of the road, the word "income" must be con- 
 strued as meaning the amount of money remaining to the cor- 
 poration on making up its annual account, after deducting 
 from all its receipts the necessary expense of repairs and man- 
 agement, and also the amount of interest on the debt of the 
 commonwealth which the corporation is bound to pay in behalf 
 of the commonwealth. 8 So in a railroad mortgage providing 
 that, until default, the mortgagor shall remain in possession 
 and operate the road and take the tolls, rents, and income, and 
 apply them to the payment of current expenses, the term "in- 
 come" means what is left after paying the expenses of earning 
 income. 9 
 
 But on the other hand, in a statute imposing taxes, "in- 
 come" means gross receipts, not net profits, unless it is so spec- 
 ified. Whenever the law means to tax the clear profits arising 
 
 6 City of Kingston v. Canada Life Assur. Co., 19 Ontario, 453. 
 
 t Andrews v. Boyd, 5 Me. 199. 
 
 s Opinion of Justices, 5 Mete. (Mass.) 596. 
 
 Poland v. Lainoille Valley R. Co., 52 Vt 144, 177. 
 
 (75)
 
 32 INCOME TAXATION (Ch. 5 
 
 from the employment of capital or otherwise, the expression 
 used is "net income" or "net annual income." 10 And espe- 
 cially the phrase "whole income" means the aggregate of all 
 receipts without any deduction for expenses or losses, that is, 
 it means gross receipts and not net profits. 11 But, as stated in 
 an earlier section, 12 if this word is associated with the term 
 "profits," as in the phrase "gains, profits, and income," it may 
 take color from the more restricted term and be limited by it. 
 That is to say, in the phrase quoted, the word "income" should 
 not be taken in its most extensive signification, but as meaning 
 income which is in the nature of a profit, in other words, net in- 
 come. But it must be admitted that there is some authority to 
 the contrary. 13 
 
 Unless limited by the context, however, the word "income" 
 is one of very broad and comprehensive meaning. Thus, in a 
 constitutional provision that no municipal corporation shall be- 
 come indebted in any one year for a greater amount than its 
 income, unless with the consent of two-thirds of the voters, 
 the word income means income derived from any and all 
 sources, and not that derived from taxation alone. 14 But it 
 cannot be too strongly insisted upon that the word "income," 
 when properly used, is applicable only to receipts in cash. 
 When a bond which was purchased at a discount reaches par 
 in the market, the owner cannot properly be said to have made 
 
 10 People v. Supervisors of New York, 18 Wend. (N. Y.) 605; Wells 
 v. Shook, Fed. Gas. No. 17,406. 
 
 11 Lawless v. Sullivan, 3 Can. Sup. Ct. 117. 
 
 12 Supra, 31. 
 
 is Morton's Ex'rs v. Morton's Ex'r, 112 Ky. 706, 66 S. W. 641. where 
 it was held that, in a statute relating to dower in the "rents and 
 profits" of a decedent's real estate, the phrase means gross rents, 
 without deduction for taxes, insurance, or repairs, and that the use 
 of the word "profits" cannot be deemed to be a limitation upon or 
 qualification of the preceding word "rents" so as to restrict that 
 word in meaning to "net rents." 
 
 i* Lamar Water & Electric Light Co. v. City of Lamar, 128 Mo.. 
 188, 26 S. W. 1025, 32 L. R. A. 157. 
 
 (76)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 32 
 
 a profit ; he is in a position where he can realize a profit if he 
 sells the bond, but not otherwise. If he sells, then the sum 
 gained may constitute a part of his income, but it cannot be 
 so described while he continues to hold the security. So, the 
 farmer's crop is not his income; it is the source from which 
 his income will be derived when it is converted into cash. So, 
 a sum which is due as interest on a note, but which remains 
 uncollected at the end of the year, may be reckoned as a part 
 of the year's income, as a matter of bookkeeping, but it is not 
 properly described as income until it is received, that is, it is 
 "income" when it comes in, but not while it remains outstand- 
 ing. This rule may perhaps be relaxed so far as to admit an 
 exception in the case of certain items which are received as the 
 equivalent of money and which are readily convertible into 
 cash. But the principle is, as ruled in an English case, that 
 nothing is to be considered as income except what represents 
 value in money, that is, either money or something that is 
 equivalent to money because it can be converted into money 
 and the proceeds expended in any way the recipient may 
 please. In this case, speaking of the income tax of that coun- 
 try, it was said : "It is a tax on income in the proper sense of 
 the word. It is a tax on what comes in, on actual receipts, not 
 on what saves his pocket, but on what goes into his pocket." 15 
 Of course it is entirely within the power of a legislature hav- 
 ing jurisdiction to lay an income tax to make the word "in- 
 come" include items which are not at all proper to be described 
 under that name. But then those items are taxed, not be- 
 cause they constitute income, but because the legislature has 
 said that they shall be taxed. And on the other hand, when 
 the word "income" is clearly defined in the act imposing the 
 tax, it cannot be taken to include anything which is not within 
 that definition. 16 
 
 is Tenant v. Smith [1892] App. Cas. 150, 61 Law Jour. P. C. 11. 
 is City of New Orleans v. Hart, 14 La. Ann. 803; City of New Or- 
 leans v. Fassman, 14 La. Ann. 865. 
 
 (77)
 
 32 INCOME TAXATION (Ch. 5 
 
 We conclude therefore that, for the purpose of an income 
 tax, a proper definition of the word "income" would be all 
 that a man receives in cash during the year, except such sums 
 as are merely capital or principal in a changed form, that is, 
 excluding sums which are merely the proceeds of some other 
 form of capital converted into cash. 
 
 33. "Profits" and "Gains" Compared and Distinguished 
 "Profit" is the gain made on any business or investment 
 when both the receipts and expenditures are taken into consid- 
 eration. 17 It is the amount of acquisition beyond expenditure, 
 the excess of value received for producing or selling over and 
 above cost. 18 It represents the net gain made from an invest- 
 ment, or from the prosecution of any business, after the pay- 
 ment of all expenses incurred. 19 In the common acceptation 
 of the term, "profit" is the benefit or advantage remaining 
 after all costs, charges, and expenses have been deducted, be- 
 cause until then, and while anything remains uncertain, it is 
 impossible to say whether or not there has been a profit. 20 Or, 
 according to a fuller description given by the Supreme Court 
 of California, the word "profits" signifies an excess of the 
 value of returns over the value of advances; the excess of 
 receipts over expenditures; that is, net earnings. In com- 
 merce it means the advance in the price of goods sold beyond 
 the cost of purchase. In distinction from the wages of labor, 
 it is well understood to imply the net return to the capital or 
 stock employed after deducting all the expenses, including not 
 
 IT Providence Rubber Co. v. Goodyear, 9 Wall. 788, 19 L. Ed. 566; 
 People v. San Francisco Sav. Union, 72 Cal. 199, 13 Pac. 498 ; Taylor 
 v. Harwell, 65 Ala. 1; Mayer v. Nethersole, 71 App. Div. 383, 75 N. 
 Y. Supp. 987. 
 
 is Mundy v. Van Hoose, 104 Ga. 292, 30 S. E. 783; Curry v. Charles 
 Warner Co., 2 Marv. (Del.) 98, 42 Atl. 425; Bates v. Porter. 74 Cal. 
 224, 15 Pac. 732; People v. Niagara County Sup'rs, 4 Hill (X. Y.) 20. 
 
 19 Goodhart v. Pennsylvania R. Co., 177 Pa. St. 1, 35 Atl. 191, 55 
 Am. St. Rep. 705. 
 
 20 Mackey v. Millar, 6 Phila. (Pa.) 527. 
 
 (78)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 33 
 
 only the wages of those employed by the capitalist, but the 
 wages of the capitalist himself for superintending the employ- 
 ment of his capital stock. Profits are divided by writers on 
 political economy into gross and net; the former being the 
 entire difference between the value of advances and the value 
 of returns, and the latter so much of this difference as arises 
 exclusively from the capital employed. Profits cannot consist 
 of earnings never yet received. 21 So, the term "profits" as 
 used in a statute imposing a tax of five per cent on all profits 
 of railroad and canal companies, refers to the profits arising 
 from the operation of the railroad or canal, but without deduc- 
 tion of interest paid to its bondholders or dividends paid to 
 its stockholders, that is, the excess of receipts over expenses 
 of operation. 22 But the surplus earnings of a corporation over 
 and above all expenses are taxable as "profits," notwithstand- 
 ing that it is required by law to appropriate all such surplus to 
 a particular purpose (as, to a sinking fund) and to no other. 23 
 It is said, and with truth, that this term is often used as 
 synonymous with "income" and as meaning the same thing, 
 and particularly where the two words are coupled in the same 
 phrase. 24 And one court has remarked that, when they are 
 thus joined together, there is no difference in the meaning of 
 the words, and the use of them both is only duetto a lawyer- 
 like fondness for using several words where one would be suf- 
 ficient. 25 But this is scarcely correct. There is a substantial 
 difference in the meaning of the two words. And it is more 
 accurate to say that, when they are joined together in the 
 same phrase, the word "profits" is used to particularize and 
 
 21 People v. San Francisco Sav. Union, 72 Cal. 199, 13 Pac. 498. 
 
 22 Sioux City & P. R. Co. v. United States, 110 U. S. 205, 3 Sup. 
 Ct. 565, 28 L. Ed. 120. 
 
 23 Mersey Docks & Harbour Board v. Lucas, 51 Law J. Q. B. 114,. 
 1 Tax Cas. 385, affirmed, L. R. 8 App. Cas. 891. 
 
 2* Bates v. Porter, 74 Cal. 224, 15 Pac. 732; Burt v. Rattle, 31 
 Ohio St. 116, 130. 
 
 25 in re Clark, 62 Hun (N. Y.) 275, 17 N. Y. Supp. 93. 
 
 (79)
 
 33 INCOME TAXATION (Ch. 5 
 
 point out one kind of income, or income derived from a par- 
 ticular source; and it will generally be found that their joinder 
 is easily explained from their correlation with other descriptive 
 words in the same sentence, as, for example, where "gains" 
 may be correlated with ''sales or dealings in property," "in- 
 come" with such words as "salaries" and earnings from "pro- 
 fessions and vocations," and "profits" with "business, trade, 
 and commerce." Besides, "income" is clearly a word of larger 
 import than "profits." The former term may very properly 
 include such items as the rent of houses, interest on invest- 
 ments, the earnings of a professional man, or the salary of an 
 officer of a corporation, but none of these could with any pro- 
 priety be called "profits." In effect, the latter term is more 
 appropriately confined to gains resulting from the "operations 
 of trade or commerce, and especially from mercantile or man- 
 ufacturing business or transportation. Moreover, it is im- 
 portant not to lose sight of the distinction that, while "income" 
 means that which comes in or is received from any business or 
 investment of capital, without reference to the outgoing ex- 
 penditures, "profit" means the gain which is made upon any 
 business or investment when both receipts and payments are 
 taken into account. 26 
 
 It is not quite so easy to account for the use of the word 
 "gain" in conjunction with the two other terms which we have 
 been considering. But it may probably be said that when a 
 tax law employs the phrase "gains, profits, and income," to 
 describe what is taxable, the term "gains" is inserted out of 
 abundant caution, and intended to include an acquisition of 
 the taxpayer which is not to be described as a "profit," and 
 which might not be included in the term "income" if that word 
 were taken in a narrow sense. Properly speaking, "gain" 
 means that which is acquired or comes as a benefit, 27 and in a 
 
 26 In re Murphy, 80 App. Div. 238, 80 N. T. Supp. 530. 
 
 27 Thorn v. De Breteuil, 86 App. Div. 405, 83 N. Y. Supp. 849. 
 
 (SO)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 34 
 
 statute laying an income tax it may mean money received 
 within the year which is not the fruit of a business transaction 
 nor of the labor or exertion of the individual, but something 
 arising from fortuitous circumstances or conditions which he 
 does not control. In this signification, the term would include 
 money received as a legacy or money won on a wager. 
 
 34. Change or Substitution of Capital Distinguished 
 
 Both in popular and legal parlance, "income" is distin- 
 guished from "capital" or "principal." Capital is the source 
 of income. Income is the fruit of capital. Capital may be 
 made very mobile and constantly changed from one form 
 of investment to another. Each time that it returns to the 
 owner it may or may not bring income with it. But it would 
 be a misnomer to reckon the whole of each such return as 
 "income" simply because it is so much money coming into 
 the possession of the owner. Out of the fund so returning 
 there must first be deducted, in case there has been no loss, a 
 sum sufficient to replace the capital originally invested, and 
 the balance, if any, will be income. Thus, when money is 
 loaned on a promissory note for one year at interest, and 
 the note is paid at maturity with the accumulated interest, 
 the sum received must be apportioned between capital and 
 interest. The receipt of so much of that sum as equals the 
 face of the note is not a receipt of income ; it is a replacement 
 or substitution of capital; only the money received as in- 
 terest constitutes income. So the income of a merchant 
 does not include his gross receipts, but only so much thereof 
 as represents the profits on his sales ; the remainder is capital 
 replaced. Again, a sum of money received from a railroad 
 company in payment of damages for a part of a person's 
 land taken by the railroad for its use, is not income; it is a 
 substituted capital. 28 And the mere change or transfer of 
 
 28 Gibson v. Cooke, 1 Mete. (Mass.) 75. 
 
 BL.INC.TAX. 6 (81)
 
 35 INCOME TAXATION (Ch. 5 
 
 a fund held in trust, from the hands of one trustee into the 
 hands of another or substituted trustee, does not make the 
 whole fund in the hands of the last trustee "gains, profits, 
 and income," within the meaning of the income tax law. 29 
 It is of course possible that the word "income" may be so 
 stretched as to include even capital returned, if the context 
 absolutely requires such a construction. In one case, on 
 the construction of a statute authorizing certain commis- 
 sioners to deposit the "income" of a certain fund, it was 
 held that the word had the same meaning as "money" or 
 "receipts," and that it was to be interpreted as embracing 
 all receipts of money, whether of principal or interest, from 
 the mortgages or other securities in which the fund had 
 been previously invested. 30 But this construction was 
 reached by reading the statute with reference to certain oth- 
 er statutes relating to the same subject-matter, and no such 
 necessity would ordinarily apply in the interpretation of in- 
 come tax laws, where, on the contrary, the rule of strict 
 construction in favor of the taxpayer would require a care- 
 ful distinction to be observed between capital and income. 
 
 35. Rent of Land and Royalties 
 
 Rent paid by a tenant for the use and occupation of real 
 estate, is always considered as "income" of the lessor, 31 and 
 this has been specified as one of the varieties of taxable in- 
 come in practically all of the income tax laws which have 
 hitherto been enacted. It should be noted, however, that 
 the statute of Virginia excepts "ground rents or rents 
 charge," which is entirely proper, since the annual payments 
 under a ground lease are not so much to be regarded as 
 lent, or a price paid for the use of the land, as in the nature 
 
 29 Reynolds v. Williams, 4 Bjss: 108, Fed. Gas. No. 11,734. 
 so State v. McCarty, 1 Wils. (Ind.) 205, 219. 
 si Perotz's Appeal, 102 Pa. St. 235, 256; Sohier v. Eldredge, 103 
 Mass. 345; Idndley's Appeal, 13 Wkly. Notes Gas. (Pa.) 65, 69. 
 
 (82)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 35 
 
 of periodical installments of purchase money. In a will or 
 a deed, the expression "yearly income" of real estate may 
 mean the balance of what is received in the way of rent, 
 after deducting taxes paid. 32 And the same result is ef- 
 fected under the income tax laws by the provisions allowing 
 a deduction from the total income of taxes paid within the 
 year and also an allowance either for depreciation of the 
 property from which income is derived or for its reasonable 
 repair. Where farming land is leased to be worked by a ten- 
 ant on shares, the income which the lessor derives from it is 
 his share or proportion of the produce, or rather, the sum 
 which he realizes from the sale of his part of the produce. 33 
 It is also held that rent reserved in a lease of land contain- 
 ing coal or other minerals, the mines to be worked by the 
 lessee, is income of the lessor, although it is stipulated to 
 be paid in the form of a royalty of so much for each ton of 
 coal or other mineral extracted. 84 But this may depend on 
 the intention of the parties as to making a lease proper or 
 a sale, and this in turn may be presumed from the form of 
 the contract which they make. For if the transaction takes 
 the form of a sale of the coal (or other mineral) in place, the 
 proceeds received will be a part of the corpus of the estate, 
 that is, capital or principal, but not income. 35 Thus, a de- 
 mise of all the coal under the surface of a specified piece of 
 land is a sale of the coal, not a lease, and the sums due and 
 paid by the lessee to the lessor as royalties are not rents, 
 and therefore not income, but purchase money of real es- 
 tate. 86 
 
 32 Inhabitants of Freeport v. Inhabitants of Sidney, 21 Me. 305. 
 
 ss Thompson's Appeal, 100 Pa. St. 478. 
 
 s* Eley's Appeal, 103 Pa. St. 300; Reynolds v. Hanna, 55 Fed. 783, 
 797; Wentz's Appeal, 106 Pa. St. 301; Bedford's Appeal, 126 Pa. 
 St 117, 17 Atl. 538; Shoemaker's Appeal, 106 Pa. St. 392; McClin- 
 tock v. Dana, 106 Pa. St. 386; Hill v. Gregory [1912] 2 K. B. 61. 
 
 35 Reynolds v. Hanna, 55 Fed. 783. 
 
 se Fairchild v. Fairchild (Pa.) 9 Atl. 255. 
 
 (83)
 
 36 INCOME TAXATION (Ch. 5 
 
 36. Rental Value of Residence 
 
 The Wisconsin income tax law of 1911 provides that the 
 term "income" shall include the estimated rental value of 
 residence property occupied by the owner thereof, and hence 
 the taxpayer who owns the house in which he lives must in- 
 clude in his return of his income the annual rent which he 
 could or would receive for the property if he chose to let 
 it and reside elsewhere. This provision is in accord with 
 the principles of income taxation in England and some other 
 foreign countries, but was not known in American legisla- 
 tion until introduced by the Wisconsin statute. Indeed, the 
 rental value of the taxpayer's residence, when owned by him, 
 was expressly directed to be excluded from the computation 
 of his income by the acts of Congress of 1864 and 1870. 
 The validity of this clause in the Wisconsin law was assailed 
 on the ground that, as such rental value is not income in any 
 proper sense of the word, it could not be made income by 
 the mere declaration of the legislature that it should be such. 
 But the Supreme Court of the state saw nothing in this pro- 
 vision to invalidate the statute. "It is said," observed the 
 court, "that this is not income, and that calling it income 
 does not make it income. It may be conceded that things 
 which are not in fact income cannot be made such by mere 
 legislative fiat, yet it must also be conceded, we think, that 
 income in its general sense need not necessarily be money. 
 Clearly it must be money or that which is convertible into 
 money." 87 But this is by no means a satisfactory way of 
 meeting the objection. The court would have taken up 
 much stronger ground if it had ruled that the rental value 
 of an owner's residence is not income at all, but yet that it 
 is subject to the tax because it is so declared in the statute 
 and because it is a thing of value which the legislature has 
 the power and authority to tax, whether or not it constitutes 
 
 37 state v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Gas. 1147. 
 
 (84)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 36 
 
 income. On economic grounds such a provision is more 
 easily defensible. And on this point the court in Wisconsin, 
 in the same connection, remarked : "The clause was doubt- 
 less inserted in an effort to equalize the situation of two men 
 each possessed of a house of equal rental value, one of whom 
 rents his house to a tenant, while the other occupies his 
 house himself. Under the' clause in question, the two men 
 with like property are placed upon an equal footing, and in 
 no other way apparently can that be done." 38 It is true 
 the English and Scotch courts hold that the annual rental 
 value of a house which a man owns and in which he lives, 
 and which he could rent to another if he chose, is a part of 
 his income for purposes of taxation. 39 But it is otherwise if 
 the house is provided for him by others, to be occupied dur- 
 ing his life, but without any power or authority on his part 
 to let it to another. 40 And the advantage gained, or the 
 saving effected, by having the right to occupy another per- 
 son's house as a residence free of rent, as in the case of a 
 manager of a bank who has the right, so long as he con- 
 tinues in his office, to reside in the building owned by the 
 bank and used for its banking purposes, is not income in 
 such sense as to be taxable. 41 
 
 Under the income tax laws elsewhere than in Wisconsin, 
 it is thought that this item could not be brought within the 
 definition of "income" by any reasonable or permissible 
 construction. Thus, it has been held (though not in connec- 
 tion with the subject of taxation) that neither the increased 
 value which would accrue to lands of a charitable institution 
 if they were used for other purposes than the charity, nor 
 their use for the purposes of the charity without realizing an 
 actual income, can be regarded as "annual income" within 
 
 ss State v. Frear, supra. 
 
 39 Corke v. Fry, 32 Scotch Law Rep. 341. 
 
 40 McDougall v. Sutherland, 31 Scotch Law Rep. 630. 
 
 41 Tennant v. Smith [1892] App. Cas. 150. 
 
 (85)
 
 37 INCOME TAXATION (Ch. 5 
 
 the meaning of a restriction in the charter of such an institu- 
 tion upon holding property which shall exceed a specified an- 
 nual income. Annual income, it was said, means annual 
 receipts, and is not the equivalent of annual value. And 
 even if the value of the use could be regarded as annual 
 income, it should be computed, not with reference to the 
 market value, but to the annual value to the corporation for 
 the special purpose to which the property was devoted. 42 
 
 37. Salaries and Earnings from Professions and Trades 
 A salary accruing to the taxpayer, whether payable annually 
 or at shorter intervals, is taxable as a part of his income, and 
 it is immaterial (except in so far as the statute makes express 
 exceptions) whether he earns it in the capacity of a public 
 officer or as an employe of a private corporation, or a part- 
 nership, or an individual. 43 Thus, the pay of an army officer 
 on the retired list is "income" and taxable as such. 44 Nor 
 does it make any difference that the amount of the salary 
 is uncertain or varies from time to time, or that it depends 
 on the extent of services actually rendered or the amount of 
 business transacted, or that it may include commissions on 
 sales. Whatever is received in the course of the year in the 
 way of salary, wages, or compensation constitutes a part of 
 that year's income. Thus, it is said in an English case that 
 "income" includes all gains and profits derived from personal 
 exertions, whether such gains and profits are fixed or fluctuat- 
 ing, certain or precarious, and whatever may be the principle 
 or basis of calculation. Hence a locomotive engineer, who 
 earns more than the statutory minimum, is taxable, although 
 he is not paid a salary but so much for every mile he runs 
 his engine. 45 
 
 42 Betts v. Betts, 4 Abb. New Gas. (N. Y.) 317. 
 
 43 White v. Koehler (N. J.) 57 Atl. 124. 
 ** In re Ward [1897] 1 Q. B. 266. 
 
 45 Attorney General v. Ostrum [1904] App. Gas. 144. 
 
 (86)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 38 
 
 So also the earnings of professional men, such as lawyers, 
 physicians, surgeons, clergymen, engineers, architects, authors, 
 and others, derived from their professional employment, con- 
 stitute taxable income, if sufficient in amount to come within 
 the terms of the statute, even though not specifically men- 
 tioned in it. And it is immaterial by what name such earn- 
 ings may be called, or whether they take the form of a fixed 
 periodical compensation or accrue in each instance in consider- 
 ation of particular services rendered. And the same is true of 
 the wages or earnings of mechanics and artisans, if sufficient 
 in annual amount to come within the purview of the statute, 
 as may easily be the case under some of the state laws. And 
 in all ordinary cases, whatever accrues to the taxpayer as 
 compensation for his personal exertion or endeavor will be 
 taxable as income, no matter what may be the nature of 
 the employment or pursuit which he follows, since the terms 
 of the statutes are broad enough to cover almost every con- 
 ceivable kind of activity. In an English case it was held that 
 betting on horse races, when carried on systematically and 
 annually and as the person's chief or only way of gaining 
 money, is a "vocation" within the income tax law, and he 
 must pay the tax on his winnings, if any. 46 
 
 38. Pensions, Gifts, Prizes, and Awards 
 
 Under the English law it is held that the pension of a re- 
 tired judge or other public officer, though voted annually by 
 the legislative authority, is taxable as income. 47 But a pen- 
 sion not granted by the government, but by a private individ- 
 ual or society, as a purely voluntary gift, and without any 
 legal claim upon the donor, in recognition of meritorious 
 past services or for other such reasons, is not a "profit or 
 gain arising from any kind of property" or from "any profes- 
 sion, trade, employment, or vocation," and is therefore not 
 
 46 Partridge v. Mallandaine, L. R. 18 Q. B. Div. 276. 
 4T Ex parte Huggins, L. R. 21 Ch. Div. 85. 
 
 (87)
 
 38 INCOME TAXATION (Ch. 5 
 
 assessable as income of the recipient. 48 On the other hand, it 
 was held that, where a corporation establishes a pension or 
 benefit fund for its employes, requiring each of them to be- 
 come a subscriber and to contribute a certain percentage of 
 his salary, but contributions are returnable (except where for- 
 feited for fraud or dishonesty) either by way of a superan- 
 nuation benefit, or in a lump sum with interest in case of death 
 or retirement, the full salaries of the employes accrue to 
 them and are assessable for the income tax, and not merely 
 the amount received after deducting such contributions. 49 On 
 similar principles it is held that a gift of money, raised by 
 voluntary subscriptions, and made annually to a minister of 
 religion by his congregation, is assessable as income, because 
 made to him as a minister and in respect to the discharge of 
 his duties in that office, which is an "employment" within the 
 meaning of the statute. 50 But where a curate receives from 
 a religious society a grant in money, renewable annually at 
 discretion and on certain conditions, and the grant is in recog- 
 nition of faithful services as a clergyman, but not in respect 
 of the particular curacy which he holds, it is held that it is not 
 taxable as income. 51 So where a portion of a collection made 
 in church was given by way of an "Easter offering" to the 
 incumbent of the parish by reason of his office, but the gift 
 would not have been made had not the recipient, besides be- 
 ing the incumbent, also been poor, it was held that the money 
 was not given as an additional remuneration for services, 
 but on account of personal poverty, and was therefore not 
 taxable. 52 
 
 Similar questions may arise in the administration of the 
 income tax laws of this country. Suppose, for example, that 
 
 48 Turner v. Cuxon, L. R. 22 Q. B. Div. 150. 
 4 Hudson v. Gribble [1903] 1 . B. 517, 4 Tax Cas. 522. 
 coin re Strong, 15 Scotch Law Rep. 704, 1 Tax Cas. 207. 
 BI Turner v. Cuxon, L. R. 22 Q. B. Div. 150. 
 
 52 Turton v. Cooper, 5 Tax. Cas. 138. But see Cooper v. Blakiston 
 [1909] App. Cas. 104, 5 Tax Cas. 347. 
 
 (88)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 38 
 
 one receives a gift of money from a relative, or draws a prize 
 in a lottery or in any form of competition, or wins a bet on a 
 race or at the gaming table, or (to take a worthier illustration) 
 receives an award in money, not as payment for services but 
 in recognition of meritorious conduct or achievement or dis- 
 covery, such as the Nobel prize it is clear that he makes a 
 "gain," though not a "profit," and that the sum received is 
 "income" as distinguished from "principal" or "capital." The 
 federal income tax law includes "the income from, but not the 
 value of, property acquired by gift, bequest, devise, or de- 
 scent." But aside from this specific exception, and as the 
 problem might arise under other taxing laws, the question 
 whether an acquisition of the kind supposed would be taxable 
 as income must depend upon the construction of the statutes. 
 They contain terms broad enough to cover all such cases, as, 
 where the act of Congress in force declares that the tax shall 
 be laid on "the entire net income received from all sources," 
 and upon "gains or profits and income derived from any 
 source whatever," and the Wisconsin statute, after enumerat- 
 ing certain items, taxes "all other income of any kind derived 
 from any source whatever." If these expressions are to be 
 construed as effective to the full extent of the language em- 
 ployed, they would undoubtedly include gifts, winnings, and 
 pecuniary awards or prizes. But if, following the usual rule 
 of statutory construction, the generality of these expressions 
 is to be restricted by a comparison with the more specific 
 terms used in the context, then they would include only gains 
 or income from sources similar to, or comparable with, those 
 already enumerated, such as salaries, professional earnings, 
 mercantile business, invested capital, and so on. In this case, 
 following the analogy of the English cases above cited, it 
 seems that such acquisitions as those we have instanced would 
 not be regarded as income. 
 
 The same remarks may apply to a judgment for money, the 
 account of which is paid to the creditor within the taxing 
 
 (89)
 
 39 INCOME TAXATION (Ch. 5 
 
 year. If the cause of action were an injury to property or 
 contract rights, it might be considered as, in some sense at 
 least, a replacement of capital. If it were for services ren- 
 dered, the amount of the judgment would clearly be "compen- 
 sation," or even "salary" or "fees," though recovered by suit. 
 But a judgment in an action of tort, as, for example, defama- 
 tion of character or negligence causing personal injuries, 
 would never be regarded as a part of one's income in the com- 
 mon acceptation of the term, and should not be brought within 
 even the most extensive terms of the statute, since a broad and 
 liberal construction in favor of the government is not the rule 
 in such cases, but the reverse. 
 
 39. Legacies and Inheritances 
 
 The income tax act of Congress of 1913 expressly excludes 
 from the taxpayer's income "the value of property acquired 
 by bequest, devise, or descent." The former act, that of 1894, 
 on the other hand, included "money and the value of all 
 personal property acquired by gift or inheritance." There 
 was no exception as to legacies or property acquired by 
 descent on which an inheritance tax had already been paid, 
 though probably such inheritance tax itself might be deducted 
 under the description of "taxes actually paid." The Wis- 
 consin statute of 1911 allows a deduction of "inheritances, 
 devises, and bequests received during the year upon which 
 an inheritance tax shall have been paid to this state." It 
 appears, therefore, that a resident of Wisconsin receiving a 
 legacy from a non-resident, on which the inheritance tax 
 had been paid in the state of the decedent's domicile, must 
 include the amount thereof in his income for the year. The 
 income tax law of Hawaii includes "money and the value of 
 all personal property acquired by gift or inheritance," but 
 with a proviso that there shall not be included in the income 
 of any person or corporation "any bequest or inheritance 
 otherwise taxed as such." In jurisdictions where the matter 
 (90)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 4:0 
 
 is not thus provided for by statute, the question of taxing 
 legacies or inheritances as income is not free from doubt, and 
 the authorities cast but little light upon it. There is, how- 
 ever, an English case, in which it was ruled that a sum of 
 money acquired as a legacy is not taxable under the de- 
 nomination of "income." It was said by Chief Baron Kelly : 
 "It would be something startling, and almost ludicrous, to 
 contend that, when a fortune is left to an individual, if it 
 happened to be in money, the whole fortune is to be taken 
 as a year's income." BS This was said arguendo, and is there- 
 fore strictly speaking obiter dictum, but the point was well 
 brought out and elaborated, and the quotation clearly ex- 
 presses the conviction of the court. 
 
 40. Products of Agriculture or Stock-Raising 
 
 The profit derived by a farmer or stock-raiser from the sale 
 of the products of the farm or ranch, that is, the amount re- 
 ceived on such sales less the cost of production, constitutes 
 income taxable under the statutes now in force. In one 
 state, Virginia, this is specially provided for by the statute, 
 which declares that "income" shall include "the amount of 
 sales of live stock and meat of all kinds, less the value assess- 
 ed thereon the previous year by the commissioner of the 
 revenue," and "the amount of sales of wood, butter, cheese, 
 hay, tobacco, grain, and other vegetable and agricultural pro- 
 ductions during the preceding year, whether the same was 
 grown during the preceding year or not, less all sums paid 
 for taxes and for labor, fences, fertilizers, clover and other 
 seed purchased and used upon the land upon which the vege- 
 table and agricultural productions were grown or produced, 
 and the rent of said land paid by said person, if he be not 
 the owner thereof." " Though the other state statutes do 
 
 ea Knowles v. McAdam, L. R. 3 Ex. Div. 23, 1 Tax Cas. 161. 
 54 Acts Virginia 1903, c. 148, p. 155, as amended by Acts 1908, c. 
 10, p. 20. See this statute in full in the appendix to this volume. 
 
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 40 INCOME TAXATION (Ch. 5 
 
 not contain such explicit provisions as these, still their terms 
 are broad enough to include the profits of agriculture and 
 also to allow such offsets- as those specified in the Virginia 
 act, in computing the net return. Thus, the Wisconsin law, 
 after enumerating certain sources of income, lays the tax 
 on "all other income of any kind derived from any source 
 whatever," and allows the deduction of "the ordinary and 
 necessary expenses actually paid within the year in carrying 
 on the profession, occupation, or business from which the in- 
 come is derived." 55 As to the federal statutes, the income 
 tax law of 1894 contained a specific provision on this subject, 
 following the example of the income tax laws of the Civil 
 War period. It directed that taxable income should include 
 "the amount of sales of live stock, sugar, cotton, wool, butter, 
 cheese, pork, beef, mutton, or other meats, hay, and grain, 
 or other vegetable or other productions, being the growth or 
 produce of the estate of such person, less the amount ex- 
 pended in the purchase or production of said stock or prod- 
 uce, and not including any part thereof consumed directly by 
 the family." 56 The act of Congress now in force omits these 
 particular provisions and reverts to the use of more general 
 language. But it cannot be doubted that it applies to the 
 subject under consideration, since it declares that "the net in- 
 come of a taxable person shall include gains, profits, and in- 
 come derived from * * * vocations, businesses, trade, 
 commerce, or sales or dealings in property * * * or the 
 transaction of any lawful business carried on for gain or 
 profit." 
 
 It is to be noted that so much of the produce of a farm as 
 is directly used and consumed by the farmer and his family 
 is not to be reckoned as a part of his income, even though it 
 
 ss Wisconsin Income Tax Law 1911, 1087m, par. 2, clause 2f ; Id., 
 1087m, par. 4a. See this statute in full in the appendix to this 
 volume. 
 
 SB Act Cong. Aug. 27, 1894, 28, 28 Stat 509. 
 
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 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 4:0 
 
 might have been sold, if not so used, and a profit derived from 
 it. 57 Unsold and consumed in the use by the producer, it 
 cannot possibly be brought within any definition of income, 
 nor even regarded as the source of income. Nor need this 
 rule be affected by the fact that the statute may expressly 
 forbid the deduction of "personal, family, or living expenses," 
 as this phrase obviously relates to money expended for such 
 purposes. 
 
 In the next place, grain or other crops or live stock remain- 
 ing in the producer's possession and unsold at the end of the 
 year are not to be reckoned as a part of the year's income. 
 This is to be inferred from the fact that those statutes which 
 have dealt specifically with this matter have not directed that 
 the term "income" should include the amount of crops raised, 
 etc., or the value of such productions, but only the "amount 
 of sales" thereof, after making the proper deductions. But 
 aside from this consideration, the rule is deducible from the 
 general principle that a law taxing income does not apply 
 to any thing of value which, if sold, is capable of producing 
 income, but which, remaining unsold, is to be regarded as 
 principal or at most as a source of income. In other con- 
 nections, it is true, the word has sometimes been stretched 
 to this extent. Thus, on the construction of a statute pro- 
 viding that a guardian should improve the estate frugally, and 
 apply the income to the maintenance of the ward, it was held 
 that this use of the word "income" did not require the guard- 
 ian to lease the real estate and so derive an income in cash 
 from it, but that he might farm the land himself. 58 So, an 
 early case in Maryland holds that, in a devise of real and 
 personal estate and negroes in trust, the income to be ap- 
 plied for the benefit of a certain beneficiary, the word "in- 
 
 57 Robertson v. Pratt, 13 Hawaii, 590; People v. Purdy, 58 Hun 
 <N. Y.) 386, 12 N. Y. Supp. 307. 
 
 58 Remington v. Field, 16 R. I. 509, 17 Atl. 551. 
 
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 41 INCOME TAXATION (Ch. 5 
 
 come" is broad enough to include the increase of the slaves. 59 
 But the rule of construction in regard to a tax law is not 
 the same as that which applies in the case of a testamentary 
 or other trust. Whatever latitude may be allowed in the lat- 
 ter case, to carry out the purpose of the trust, the rule for a 
 statute imposing taxes is that the construction is strictly in 
 favor of the taxpayer and nothing is included as taxable un- 
 less plainly and distinctly made so by the words of the act. 80 
 
 41. Produce of Mines and Oil and Gas Wells 
 
 The owners of mines producing coal, gold, silver, or other 
 minerals, or of nitrate beds or other similar natural deposits, 
 or of oil or natural gas wells, are assessable for the income tax 
 upon the net profits realized by the sale of their products in 
 each year. 61 The argument has sometimes been advanced that, 
 as minerals in place constitute a part of the realty, and as the 
 extraction of any given quantity leaves the investment of 
 the owner worth just so much the less, the sale of mineral 
 products should be regarded as a sale of capital assets, and 
 not as income. Thus, in a case in Pennsylvania, an oil com- 
 pany, having all its capital invested in oil-producing property, 
 and paying dividends entirely out of the products of its oil 
 wells, resisted payment of an income tax assessed against it, 
 claiming that it could have no taxable net income until the pro- 
 ceeds of its business had repaid all the capital invested, since, 
 in view of the depletion of its sources of revenue, its dividends 
 paid included not only earnings but also a portion of its capital 
 returned in this way to the stockholders. But the court re- 
 
 59 Holmes v. Mitchell, 4 Md. 532. 
 
 eo Supra, 29. 
 
 ei See Alianza Co. v. Bell [1906] App. Gas. 18; Rhymney Iron Co. 
 v. Fowler [1896] 2 Q. B. 79, 3 Tax Cas. 476; Knowles v. McAdam, 
 L. R. 3 Ex. Div. 23, 1 Tax Cas. 161;. Arizona Copper Co. v. Smiles, 
 29 Scotch Law Rep. 134, 3 Tax Cas. 149; Stevens v. Durban-Roode- 
 poort Gold Min. Co., 5 Tax Cas. 402; United States v. Nipissing- 
 Mines Co., 202 Fed. 803 ; Commonwealth v. Ocean Oil Co., 59 Pa. St. 
 61. See, also, Treasury Decisions Nos. 1754 and 1755. 
 
 (94)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 41 
 
 fused to accept this view, holding that all the income received 
 by the company from its works, after deducting the operating 
 expenses, was net income and taxable as such. 62 Moreover, 
 this doctrine is well within the analogy and the reason of the 
 well-known rule that in the case of mining companies, quarry 
 companies, and the like, which have what is called a "wasting 
 property," the payment of dividends to the stockholders out of 
 the amount realized on the sale of their products is not regard- 
 ed as an impairment of capital, nor are such companies required 
 to create a sinking fund, out of earnings, before declaring 
 dividends, to offset the gradual depletion of the property in 
 which the capital is invested. 63 So it has been held that the 
 income of a decedent's estate, as distinguished from the prin- 
 cipal, includes the proceeds of the sale of oil produced after the 
 testator's death, accruing as royalty under an oil lease of his 
 lands made by him before his death in consideration of a 
 royalty of part of the oil. 64 Further, the taxability of profits 
 derived from the sale of minerals is recognized in the federal 
 income tax law by the provision allowing a deduction "in the 
 case of mines," for "depletion of ores and all other natural de- 
 posits on the basis of their actual original cost in cash or the 
 
 62 Commonwealth v. Ocean Oil Co., 59 Pa. St. 61. 
 
 es People v. Roberts, 156 N. Y. 585; Excelsior Water & Mining Co. 
 v. Pierce, 90 Cal. 131, 27 Pac. 44 ; Lee v. Neuchatel Asphalte Co., L. 
 R. 41 Ch. Div. 1. In the case last cited it was said: "If a company 
 is formed to acquire and work a property of a wasting nature, for 
 example, a mine, a quarry, or a patent, the capital expended in ac- 
 quiring the property may be regarded as sunk and gone, and if the 
 company retains assets sufficient to pay its debts, it appears to me 
 that there is nothing whatever in the act to prevent any excess of 
 money obtained by working the property over the cost of working it 
 from being divided amongst the shareholders; and this, in my opin- 
 ion, is true although some portion of the property itself is sold, and 
 in some sense the capital is thereby diminished. But it is, I think, 
 a misapprehension to say that dividing the surplus after payment of 
 expenses of the produce of your wasting property is a return of cap- 
 ital in any such sense as is forbidden by the act." 
 
 e* In re Woodburn's Estate, 138 Pa. St. 606, 21 Atl. 16, 21 Am. St. 
 Rep. 932. 
 
 (95)
 
 41 INCOME TAXATION (Ch. 5 
 
 equivalent of cash." Naturally there must also be deducted 
 the cost of production, that is, of mining or extracting the ore, 
 and the taxable net income of the owner will be the price re- 
 ceived on the sale of his products less these deductions. 
 
 But here, as in the case of agricultural products discussed in 
 the preceding section, the measure of taxable net income is 
 not the amount or value of the products of the year's operation, 
 but the net proceeds of sales, and hence there should not be 
 included any ores or other products remaining unsold at the 
 close of the year. And conversely, the year's income is not 
 measured by the year's production. For irrespective of the 
 time when the particular ores were brought to the surface, their 
 proceeds are taxable as income of the year in which they are 
 sold. Nor should the estimate of income be made to include 
 any part of the products of mines or wells which is used by the 
 owner in the heating, lighting, or operation of his own plant, 
 or otherwise consumed in aid of production. There is one de- 
 cision which apparently contravenes this last statement. Under 
 a state statute imposing a percentage tax on the "gross receipts 
 from total production" of coal and other minerals, it was held 
 that a railroad company is subject to the tax on coal mined by 
 it on its properties, though the coal is not sold but used in the 
 operation of the road. 05 But the court felt compelled to adopt 
 this conclusion by a consideration of the context and the neces- 
 sity of bringing the different provisions of the act into harmony 
 and effective operation. It was said : "With respect to the con- 
 troversy as to the application of the law to coal mined and used 
 by the railway company, no receipts being realized from sales, 
 the rule of construction to be followed is that all the provisions 
 relative to the matter should be harmonized and given effect, 
 if that may be done consistently with the evident legislative in- 
 tent. The tax purports to be laid upon a per centum of the 
 'gross receipts from the total production of coal,' and from 
 these words standing alone a meaning might be extracted that 
 
 s Missouri, K. & T. Ry. Co. v. Meyer, 204 Fed. 140. 
 (96)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 42 
 
 only taxation based upon sales was contemplated. But the tax 
 is payable by all persons engaged in the mining or production 
 of coal, etc., and not in selling it. A sworn return is exacted 
 showing the location of the mine or well, the kind, the gross 
 production, actual cash value, and other information, and while 
 the auditor is, under the same section, authorized to ascertain 
 the gross receipts and compute the tax, the next section em- 
 powers him to ascertain the amount and value of production, 
 compute the tax, etc. And section 7708, in providing for a re- 
 bate of taxes when asphalt, ores, or petroleum, or other min- 
 erals, have been manufactured or refined, contemplates a tax 
 irrespective of sale of the natural product and not dependent 
 on the sale after it has been manufactured or refined. The in- 
 tent, from the several provisions taken together, seems there- 
 fore manifest to provide for the collection of a tax, whether 
 the mineral is put on the market or used by the producer, and 
 by the expression 'gross receipts from total production' to refer 
 to equivalents in either case, and accomplish the object of ob- 
 taining revenues from all production of mineral, regardless of 
 use. This conclusion appears to be necessary, notwithstanding 
 the conceded principles that taxes must be imposed by law, and 
 that the law should be construed favorably to the taxpayer and 
 not extended by implication beyond its clear intent." 
 
 42. Profits of Mercantile Business 
 
 In so far as the income tax falls upon the profits of a mer- 
 chant, the amount of it is not dependent on or estimated by the 
 amount of his gross sales or gross receipts, but the taxable in- 
 come is that derived from sales of goods made in excess of 
 their cost, after deducting from the income or profits the ex- 
 penses and other items allowed by the statute. 68 The deduc- 
 tions ordinarily allowed include interest on borrowed capital, 
 taxes paid, losses incurred which are not compensated by in- 
 surance or otherwise, bad debts written off, and depreciation 
 
 ee Millar v. Douglass, 42 Tex. 288. 
 
 BL.INC.TAX. 1 (97)
 
 43 INCOME TAXATION (Ch. 5 
 
 of property. Besides, the statutes allow a deduction of "neces- 
 sary expenses actually paid in carrying on the business," as in 
 the federal statute, or "the ordinary and necessary expenses 
 actually paid within the year in carrying on the business from 
 which the income is derived," as in the Wisconsin statute. 
 These expenses, in the case of ordinary mercantile business, 
 will include such items as the prime cost of goods, salaries and 
 wages of employes, freight, advertising, insurance, and the like. 
 But it must be observed that the income from a mercantile busi- 
 ness, under the tax law, is not merely the profit arising from 
 the sale of that particular stock of goods which the merchant 
 had on hand at the beginning of the tax year, but it is the net 
 profit arising from the whole year's commercial dealings in the 
 goods handled by the merchant, no matter how often, in the 
 course of the year, his stock may have been depleted, wholly 
 or in part, and renewed. 67 
 
 43. Profits from Unauthorized Business 
 
 It is held that where a state tax is laid upon the gross re- 
 ceipts or the net income of corporations, or upon the volume 
 of business transacted by them as measured by such receipts 
 or income, it may include and apply to receipts by the com- 
 pany derived from a business beyond its charter powers or in 
 which it had no authority to engage. 68 And so it was ruled 
 that a corporation cannot escape payment of United States 
 internal revenue taxes on the ground that the business in 
 which it is engaged, or from which its profits or income are 
 derived, is unauthorized by its charter or by the laws of the 
 state, or is otherwise ultra vires. 69 It is undoubtedly proper 
 to apply these rulings to the assessment of federal and state 
 income taxes. It is true the act of Congress refers to profits 
 
 67 Wilcox v. Middlesex County Com'rs, 103 Mass. 544. 
 
 es People v. Roberts, 32 App; Div. 113, 52 N. Y. Supp. 859, affirmed, 
 157 N. Y. 677, 51 N. E. 1093. 
 
 69 Salt Lake City v. Hollister, 118 U. S. 256, 6 Sup. Ct. 1055, 30 L. 
 Ed. 176. 
 
 (98)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 44 
 
 derived from the transaction of "lawful" business. But a busi- 
 ness may be none the less lawful because it is beyond the lim- 
 ited powers of a particular corporation engaging in it. And 
 it is probable that the word quoted was meant only to exclude 
 those occupations which are forbidden to all persons, as being 
 immoral or contrary to public policy, and the reason for ex- 
 cluding them was the apprehension that taxing them might 
 appear to legalize them. 
 
 44. Income from Partnership Business 
 
 The profit accruing from one's share in the business con- 
 ducted by a partnership is a part of his income. 70 The net 
 earnings of the partnership constitute income of the firm so 
 long as they remain in the possession or to the credit of the 
 firm as such. But when a proportionate part is drawn out 
 and paid over to an individual partner, it becomes and con- 
 stitutes a part of his private income. And although an in- 
 terest in the stock in trade of a partnership or in the business 
 which it conducts may represent an investment of capital, and 
 therefore be "principal" or "capital" of the partner, it does 
 not follow that his share of the earnings is impressed with the 
 same character. On the contrary, the dividends of a partner- 
 ship in which a decedent was interested, and which was con- 
 tinued after his death, have been held not to constitute a part 
 of the corpus of his estate, any more than interest on money 
 constitutes a portion of the principal invested ; but such divi- 
 dends are income and go to the life tenant or beneficiary un- 
 der a trust. 71 It is true, however, that it would be unjust and 
 double taxation to assess a partnership upon its income de- 
 rived from its business, and then to tax each partner for his 
 share of the profits as constituting his individual income. But 
 this matter has generally been provided for in the statutes. 
 
 TO in re Rogers, 37 Misc. Rep. (N. Y.) 54, 74 N. Y. Supp. 829; In re 
 Slocum, 169 N. Y. 153, 62 N. E. 130. 
 
 7i Heighe v. Littig, 63 Md. 301, 52 Am. Rep. 510. 
 
 (90)
 
 44 INCOME TAXATION (Ch. 5 
 
 The act of Congress does not tax partnerships at all. The 
 Wisconsin statute taxes partnerships as well as individuals 
 and corporations, but the individual is allowed to deduct from 
 his taxable income "dividends or income received" from an 
 "interest in any firm or copartnership, the income of which 
 shall have been assessed under the provisions of this act." If 
 the other existing statutes leave the subject in doubt, still it is 
 thought that no court would sustain the attempt to assess and 
 collect the tax twice upon the same income. 
 
 As to the undivided earnings of a partnership, it is true, as 
 above stated, that they properly constitute income of the firm 
 but not of the individual partners. Nevertheless, the act of 
 Congress subjects them to taxation in the names of the part- 
 ners. The provision is as follows : "Any persons carrying on 
 business in partnership shall be liable for income tax only in 
 their individual capacity, and the share of the profits of a 
 partnership to which any taxable partner would be entitled if 
 the same were divided, whether divided or otherwise, shall 
 be returned for taxation and the tax paid, under the provisions 
 of this section, and any such firm, when requested by the 
 Commissioner of Internal Revenue, or any district collector, 
 shall forward to him a correct statement of such profits and 
 the names of the individuals who would be entitled to the 
 same, if distributed." 
 
 45. Profits on Sale of Real Estate 
 
 Where a parcel of real estate is sold for a price above its 
 cost, the difference is not properly "income" of the vendor. 
 It is more correctly described as an increase of capital assets. 
 But it is certainly a "gain" or "profit," and falls within the 
 meaning of either of those terms as used in the income tax 
 laws. And it has always been the policy of such laws to as- 
 sess the tax on a profit thus .made, though it has been usual to 
 set a limitation upon the time elapsing between the purchase 
 and sale of the property, since land is often held for long pe- 
 riods and the increase in its value, in ordinary cases, may be 
 
 (100)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 45 
 
 supposed to have been gradually accruing during the entire 
 time. The federal income tax law of 1864 provided that "net 
 profits realized by sales of real estate purchased within the 
 year for which income is estimated shall be chargeable as in- 
 come." The act of 1870 included in the description of tax- 
 able income "profits realized within the year from sales of real 
 estate purchased within two years previous to the year for 
 which income is estimated." The act of 1894 taxed "profits 
 realized within the year from sales of real estate purchased 
 within two years previous to the close of the year for which 
 income is estimated." As to the state statutes, that of Wis- 
 consin expressly includes as taxable income "all profits de- 
 rived from the purchase and sale of any property acquired 
 within three years previous," and this is construed by the state 
 tax commission as referring to capital assets and not to or- 
 dinary stocks of merchandise, and therefore it would be ap- 
 plicable to real estate. The income tax law of Hawaii en- 
 umerates in the classes of taxable income "profits realized 
 within the year from sales of real estate, including leaseholds, 
 purchased within two years." The statutes of the other states 
 contain no specific provision as to the profits on sales of land, 
 but their general terms are broad enough to include this case. 
 The act of Congress of 1913 contains the following very 
 ambiguous clause : "The net income of a taxable person shall 
 include gains, profits, and income derived from * * * sales 
 or dealings in property, whether real or personal, growing out 
 of the ownership or use of or interest in real or personal prop- 
 erty." As to the latter part of this sentence, though it is dif- 
 ficult to discern any precise meaning in it, one may hazard the 
 guess that it was intended to apply to the purchase and sale 
 of leaseholds, life estates, undivided joint interests, and other 
 estates less than a fee. Another possible construction might 
 be suggested, and one which would give meaning and effect 
 to the whole sentence. This might be accomplished by read- 
 ing the word "or" into the clause between the words "per- 
 
 (101)
 
 45 INCOME TAXATION (Ch. 5 
 
 sonal" and "growing," as having been inadvertently omitted, 
 and by a slight transposition of some of the other terms. The 
 sentence would then read : "The net income of a taxable per- 
 son shall include gains, profits, and income derived from 
 * * * sales or dealings in property, whether real or personal, 
 or growing out of the ownership or use of real or personal 
 property or an interest therein." As thus reconstructed, the 
 provision would lay the tax on what is called the "unearned 
 increment" of land, that is, an increase in its market value, 
 accruing within the year from any other cause than its im- 
 provement by the owner, or the corresponding profit or ad- 
 vantage to the owner, in view of the fact that he could now 
 command a higher price for it than formerly, although he 
 does not actually realize his profit by selling the property, but 
 continues to hold it. But since this would greatly enlarge the 
 scope of the statute, and subject to taxation various items 
 which would be exempt under any other interpretation, it is 
 doubtful whether the courts would feel justified in taking this 
 course with it. 
 
 The term "dealings" has a definite meaning in law. It is 
 equivalent to "traffic." It does not apply to the operations of 
 one who buys to keep, though he may afterwards sell, but to 
 the buying of any kind of property or commodity for the pur- 
 pose of selling again at a profit, and that, not merely on a 
 single occasion, but as an occupation or pursuit; or in other 
 words, "dealing" in any article is making successive purchases 
 and sales of it as a business. 72 It appears therefore that where 
 one purchases a piece of real estate for residence purposes 
 or as an investment, and sells it for a higher price than he 
 paid, the profit must be included in his taxable income for that 
 
 72 See Clifford v. State, 29 Wis. 327; Saunders v. Russell, 10 Lea 
 (Term.) 293; Bates v. Bank of Alabama, 2 Ala. 451; Buckley v. 
 Briggs, 30 Mo. 452 ; Norris v. Commonwealth, 27 Pa. St 494 ; Over- 
 all v. Bezeau, 37 Mich. 506; State v. Barnes, 126 N. C. 1063, 35 S. 
 E. 605; Vernon v. Manhattan Co., 17 Wend. (N. Y.) 524; Goodwin 
 v. Clark, 65 Me. 280. 
 
 (102)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 4:5 
 
 year. It might be argued that the word "sales" should take 
 color from the word "dealings" with which it is associated. 
 But it seems more probable that the legislative intention was 
 to tax not only profits arising from dealing in real estate as a 
 business, but also the profit accruing on single or isolated 
 sales, not frequent enough to constitute dealing in it, and that 
 the words were placed in juxtaposition to mark this distinc- 
 tion. The term "dealings" may be applied to one who buys 
 and sells land as a speculation, or who buys vacant land and 
 builds houses on it for the purpose of selling the property as 
 so improved, or buys, opens up, and sells suburban property, 
 or otherwise derives his income or a considerable part of it 
 from traffic in real estate. 
 
 The construction which the English courts have put upon 
 the income tax law of that country excludes the profit arising 
 from a single sale of land, while including profits derived from 
 buying and selling realty as a business. In a leading case, it 
 appeared that a company was formed to buy land in the Ma- 
 lay Peninsula and there plant and cultivate rubber trees. It 
 bought two estates and planted a considerable acreage, but 
 did not produce or sell any rubber. Then, its capital being ex- 
 hausted, it sold the entire property to another company for a 
 price exceeding the amount of capital expended. It was held 
 that the profit arising from the sale was an appreciation of 
 capital, and not taxable as income. In delivering judgment, 
 Lord Salvesen said : "I am unable to distinguish the position 
 of the appellants from that of a person who acquires a prop- 
 erty by way of investment and who realizes it afterwards at 
 a profit. It is well settled that in such a case the profit is not 
 part of the person's annual income liable to be assessed for 
 income tax, but results from an appreciation of his capital. No 
 doubt if it is a part of his business to deal in lands or invest- 
 ments, any profits which in the course of that business he 
 realizes form part of his income; but the mere fact that a per- 
 son or company has invested funds in the purchase of an es- 
 
 (103)
 
 46 INCOME TAXATION ( Ch. 
 
 tate which has subsequently appreciated, and so has realized a 
 profit on his purchase, does not make that profit liable to as- 
 sessment." 73 
 
 46. Profits on Sales of Securities 
 
 In the general law (apart from matters of taxation) an 
 addition to one's wealth obtained by selling stocks, bonds, or 
 any other form of securities or investments at a price above 
 their cost is not "income" but an appreciation of capital. 
 Nor is it "profit" in the ordinary or commercial sense. Profit 
 is the acquisition of gain above expenditures arising from 
 some transaction or operation, and does not include premiums 
 received on the sale of securities. 74 A similar rule prevails 
 in the law of trusts and of wills. Thus, where a trustee in- 
 vests money of the trust estate in bonds, and subsequently 
 sells the bonds at an advance, and invests the proceeds in 
 other securities, the profit on the bonds is part of the prin- 
 cipal of the estate, and not income, as between the life tenant 
 and the remainderman. 75 So the words "dividends and in- 
 come" in a will devising property in trust, the dividends and 
 income thereof to be paid to the testator's daughter, with 
 remainder over after her death, do not include the increase 
 in the value of the corpus of the estate caused by the invest- 
 ment of the funds and stocks and their sale and investment 
 in other stocks at a profit. 76 But it seems that the "profits 
 and income" of an estate devised in trust for a named bene- 
 ficiary will include the profits made on land purchased by the 
 executor at a foreclosure sale of a mortgage to secure a loan 
 of the funds of the estate. 77 
 
 73 Tebrau Rubber Syndicate v. Farmer, 5 Tax Cas. 658. 
 i* Cross v. Long Island Loan & Trust Co., 75 Hun (N. T.) 533, 27 
 N. Y. Supp. 495. 
 
 TO in re Graham's Estate, 198 Pa. St. 216. 47 Atl. 1108. 
 
 76 Smith v. Hooper, 95 Md. 16, 51 Atl. 844; Eley's Appeal, 103 Pa. 
 St 300. 
 
 77 in re Park's Estate, 173 Pa. St. 190, 33 Atl. 884. 
 
 (104)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 46 
 
 In the English law of taxation, a profit realized from the 
 sale of securities is not reckoned as income, except in cases 
 where the person pursues the buying and selling of securi- 
 ties as a business or occupation. "It is quite a well-settled 
 principle in dealing with questions of assessment of income 
 tax, that where the owner of an ordinary investment chooses 
 to realize it, and obtains a greater price for it than he orig- 
 inally obtained it at, the enhanced price is not profit in the 
 sense of the income tax law. But it is equally well settled 
 that enhanced values obtained from realization or conversion 
 of securities may be so assessable, where what is done is not 
 merely a realization or change of investment, but an act 
 done in what is truly the carrying on, or carrying out, of a 
 business. The simplest case is that of a person or associa- 
 tion of persons buying and selling lands or securities spec- 
 ulatively, in order to make gain, dealing in such investments 
 as a business, and thereby seeking to make profits. There 
 are many companies which in their very inception are formed 
 for such a purpose, and in these cases it is not doubtful that, 
 where they make a gain by a realization, the gain they make 
 is liable to be assessed for income tax. What is the line that 
 separates the two classes of cases may be difficult to define, 
 and each case must be considered according to its facts, the 
 question to be determined being: Is the sum of gain that 
 has been made a mere enhancement of value by realizing a 
 security, or is it a gain made in the operation of business 
 in carrying out a scheme for profit-making?" 78 So where a 
 person buys a doubtful debt and recovers a larger sum than 
 he paid for it, the gain is not profit in the sense of the in- 
 come tax law, unless the purchaser is making a trade of buy- 
 ing such debts. 79 But on the other hand, where a company 
 is empowered by its charter to vary its investments, and gen- 
 
 78 Calif ornian Copper Syndicate v. Harris, 6 Fraser. 894, 5 Tax 
 Cas. 159 ; Tebrau Rubber Syndicate v. Farmer, 5 Tax Cas. 658. 
 i Assets Co. v. Inland Revenue [1897] W. N. 144. 
 
 (105)
 
 46 INCOME TAXATION (Ch. 5 
 
 erally to sell or exchange any of its assets, the net gain by 
 realizing investments at larger prices than were paid for 
 them constitutes profit chargeable with income tax. 80 
 
 In this country, however, under both the federal and state 
 income tax laws, dealing as they do with income or profit from 
 the "sale of property," it is difficult to see how the premium 
 obtained on even a single sale of stock, or of a bond or other 
 security, could escape assessment. Under the income tax laws 
 of 1861 to 1870, it was held that a bona fide exchange of 
 stocks for other property, however much to the apparent 
 advantage of the owner of the stocks, was not a sale thereof 
 from which a profit was derived liable to taxation as income. 
 But a transfer of stocks for a promissory note, which is 
 collectible, or an exchange thereof for land, followed by a 
 sale of such land within the year, whether for cash or collect- 
 ible promissory notes, was considered as equivalent to a sale 
 of such stock for so much cash. 81 But in view of the limi- 
 tation of time in those statutes, it was held that the profit made 
 upon bonds bought in one year and sold several years later 
 was not to be included in the estimate of the owner's income 
 for the year in which the sale was made. 82 It will be noticed, 
 however, that there is no limitation of time in the present 
 federal income tax law, while that prescribed by the Wisconsin 
 statute is three years. 
 
 47. Increase in Value Not Realized by Sale 
 
 In the law of trusts, an increase in the market value of 
 securities of any kind held as investments is not accounted a 
 part of the income of the same, nor is it to be added to the 
 stated interest which they return in computing the income. 
 Even if the securities are sold, and the increment of value 
 thus converted into money, it is not properly speaking a 
 
 so Scottish Investment Trust Co. v. Forbes, 31 Scotch Law Rep. 
 219, 3 Tax Cas. 231. 
 
 si United States v. Smith, 1 Sawy. 277, Fed. Cas. No. 16,341. 
 82 Gray v. Darlington, 15 Wall. 63, 21 L. Ed. 43. 
 
 (100)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 47 
 
 "profit," as we have shown in the preceding section. For 
 an even stronger reason, therefore, it cannot be either a 
 "profit" or a "gain" so long as not realized by sale. It is 
 merely an appreciation of capital. "The rule, as settled, may 
 be stated to be that an increase from natural causes in the 
 value of real and personal estate held as an investment does 
 not constitute profits, to go to a life tenant, but becomes 
 principal and goes to the remainderman." 83 Thus, a life ten- 
 ant entitled to the income of a certain legacy, which was in- 
 vested, was held not entitled to the gain over the original 
 amount invested, arising from an increase in the value of the 
 subject of the investment as it existed in the life-time of the 
 testator. 84 But a more direct authority for the application 
 of these principles to the subject of income taxation is found 
 in a decision of the United States Supreme Court, construing 
 the act of Congress of 1864 imposing taxes on "gains, profits, 
 and income." It was held that a mere increase in the market 
 value of securities does not come within the definition of 
 any one of those terms, and specifically, that the word "gains," 
 as used in the statute, means such gains or profits as may be 
 realized from a business transaction begun and completed 
 during the preceding year. The court said : "The mere fact 
 that property has advanced in value between the date of its 
 acquisition and sale does not authorize the imposition of the 
 tax on the amount of the advance. Mere advance in value 
 in no sense constitutes the gains, profits, or income specified 
 by the statute. It constitutes and can be treated merely as 
 increase of capital." 8B Notwithstanding this, the officers of 
 the treasury department applied a different construction to 
 the corporation excise tax law of 1909, which specified, as 
 
 ss in re Vedder, 2 Con. Sur. (N. Y.) 548, 15 N. Y. Supp. 798. And 
 see In re Gerry, 103 N. Y. 445, 9 N. E. 235; Jennery v. Olmstead, 
 36 Hun (N. Y.) 536 ; In re Proctor, 85 Hun (N. Y.) 572, 33 N. Y. Supp. 
 196; Linsly v. Bogert, 87 Hun (X. Y.) 137, 33 N. Y. Supp. 975. 
 
 s* Thomson's Estate, 11 Pa. Co. Ct. R. 198. 
 
 ss Gray v. Darlington, 15 Wall. 63, 21 L. Ed. 45. 
 
 (107)
 
 4:8 INCOME TAXATION (Ch. 5 
 
 the measure of taxation, the "net income" of the corporation, 
 above a certain amount, "received from all sources," a nar- 
 rower expression, it will be noticed, than that of the income 
 tax law. They ruled that a corporation must return, in its 
 estimate of net income, not only profits realized on the sale 
 of real estate during the year, but also an increase in the 
 value of unsold property, if taken up on the books of the 
 corporation; and that any increase in the value of the capi- 
 tal assets, as determined by a physical revaluation, and taken 
 cognizance of by the corporation in book entries, is gain and 
 must be accounted for as income for the year in which such 
 increase is so recognized and recorded. 86 And it must further 
 be remarked that, if the courts should eventually adopt such 
 a construction of the act of Congress of 1913 as would per- 
 mit the taxation of the "unearned increment" of land, as 
 suggested above (supra, 45), it is probable that the same 
 principle would have to be applied to the increase in value 
 of securities, since the statute, at this point, carefully speci- 
 fies both real and personal property as sources of gains, prof- 
 its, or income. 
 
 48. Uncollected Interest and Accounts 
 
 It is an unsettled question whether a person's income for a 
 given year should be held to include interest on securities 
 accruing within the year but remaining uncollected at its 
 close, and promissory notes and due-bills taken in discharge 
 of a pre-existing indebtedness, but not paid within the year 
 in which they are given, and the price of goods sold within 
 the year, evidenced by book entries, but not received in 
 cash. Some of the statutes have expressly included such 
 items ; others have not mentioned them. Thus, the act of 
 Congress of 1864 laid the tax, among other things, on "in- 
 terest received or accrued upon all notes, bonds, and mort- 
 gages, or other forms of indebtedness bearing interest, wheth- 
 
 se Treasury Decision No. 1742, pars. 43, 48, and 85. 
 (10S)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 48 
 
 er paid or not, if good and collectible." And the same lan- 
 guage was included in the act of 1870 and in that of 1894. 
 It will be noticed that this specified only "interest," and as 
 to notes and accounts, the courts did not agree. In one 
 case it was held that, within the meaning of the statute, the 
 word "income" must be taken to mean money, and not the 
 expectation of receiving it or the right to receive it at a fu- 
 ture time. And hence it was ruled that the amount of a 
 promissory note taken in 1871 on the sale of a patent right, 
 but not due until 1872, and paid in the latter year, was not 
 taxable as income of the former year. 87 But in another case 
 it was said that promissory notes, book accounts, and the 
 like, due during a given year, may or may not be income of 
 that year. This depends on their value intrinsically or their 
 convertibility into money, property, or available assets. If 
 they have only a nominal, and not a real value or converti- 
 ble quality, and a man has realized nothing from them, 
 and therefore does not return them as a part of his income, 
 because he honestly believes that they are not real gains or 
 profits, he cannot be convicted of making a false return. 88 
 And in construing the corporation excise tax law of 1909, 
 it was held that the word "income," as there used, meant that 
 which has "come in" or which has been already received, 
 and that the net income so taxable should be determined on 
 a cash basis, as distinguished from a revenue basis, and hence 
 (in the case of an insurance company) did not include un- 
 collected and deferred premiums and interest, accrued and 
 due, but not actually received. 89 
 
 The federal income tax law of 1913 makes no specific 
 mention of this point, and its intention in regard thereto is 
 not easy to discern. Yet it is a significant fact that, in 
 enumerating the deductions which the taxpayer is allowed to 
 
 87 United States v. Schillinger, 14 Blatchf. 71, Fed. Gas. No. 16,228. 
 ss United States v. Frost, 9 Int. Rev. Rec. 41, Fed. Cas. No. 15,172. 
 s a Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199. 
 
 (109)
 
 48 INCOME TAXATION (Ch. 5 
 
 make from his return of income for taxation, aside from 
 business losses, bad debts, and depreciation of property, only 
 those items are included which represent an outlay in cash, 
 such as "interest paid within the year," "necessary expenses 
 actually paid," and "taxes paid." Hence it may be argued 
 that if Congress did not allow the deduction of items falling 
 due within the year but not actually paid, it would not be 
 equitable to require the taxpayer to include in his income in- 
 terest and other items accrued and due within the year, 
 though not actually collected. This same argument (as re- 
 gards the propriety of looking to the one part of the statute 
 to ascertain the meaning of Congress in the other part) was 
 advanced by the court in deciding a leading case under the 
 corporation tax law of 1909. Since that statute allowed as 
 deductions only cash outlays, as, "expenses actually paid," 
 "interest actually paid," and "sums paid for taxes," it was 
 argued that "it would be strange indeed if, on the opposite 
 side of the account, the company were charged with what it 
 had not received during the current year." 90 
 
 And it cannot be denied that it is shocking to the common 
 sense of business men to call that "income" of the year 
 which has not been received or "come in," but which has 
 merely fallen due. And so the courts have ruled in several 
 cases. In one, it was held that interest accrued but not 
 payable, and interest accrued but not paid, secured by mort- 
 gages drawing interest, are not "surplus profits" of a cor- 
 poration. "It is not easy to comprehend," said the court, 
 "how profits or surplus profits can consist of earnings never 
 yet received. The term imports an excess of receipts over 
 expenditures, and without receipts there cannot properly be 
 said to be profits. Money earned as interest, however well 
 secured, or certain to be eventually paid, cannot, in fact, be 
 distributed as dividends to stockholders and does not con- 
 so Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199. 
 (110)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 48 
 
 stitute surplus profits within the meaning of the statute." 91 
 In another case, it was held that a tax directed to be levied 
 and collected for and during a certain year on the amount of 
 all interest or coupons paid on the bonds of certain corpora- 
 tions, "whenever and wherever the same shall be payable," did 
 not cover interest earned during the year, but payable after- 
 wards. 92 And in a third decision we find the court saying: 
 "It seems almost to border upon absurdity to speak of in- 
 come as including that which has not been received, and 
 which in the ordinary uncertainties of business may never 
 be received. How can it be affirmed of unpaid interest that 
 it will ever be paid, or, if so, when? The same is true of un- 
 collected and deferred premiums. It is manifestly impos- 
 sible to tell when, if ever, they will be paid. They are nei- 
 ther receipts nor income until paid." 98 
 
 Turning to the statutes of the various states, we find that 
 the Wisconsin income tax law does not mention this specific 
 point, but that it lays the tax on "income received," and 
 makes the term "income" include "interest derived from 
 money loaned or invested in bonds, mortgages, or other evi- 
 dences of debt of any kind whatsoever." And the statute of 
 South Carolina contains substantially the same language. 
 Under these laws, it seems a fair inference that there was 
 no intention to tax uncollected interest, since it could not be 
 described as "income received." The statute of Virginia is 
 most ambiguous on this point, inasmuch as it professes to 
 tax "income in excess of one thousand dollars, whether re- 
 ceived or due but not received, within the year," but at the 
 same time makes the term "income" include "interest upon 
 bonds, notes, or other evidences of debt collected or received 
 during the year." 
 
 i People v. San Francisco Sav. Union, 72 Cal. 199, 13 Pac. 498. 
 2 United States v. Indianapolis & St L. R. Co., 113 U. S. 711, 5 
 Sup. Ct. 716, 28 L,. Ed. 1140. 
 
 ss Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199. 
 
 (Ill)
 
 49 INCOME TAXATION (Ch. 5 
 
 49. Profit to Accrue on Uncompleted Contracts 
 
 In construing the corporation tax law of 1909, which laid 
 a tax measured by the "entire net income received from all 
 sources," the officers of the treasury department ruled that 
 "net income on uncompleted contracts may be estimated 
 on the basis of the percentage of the work completed as 
 compared with the contract price of the whole work." 94 
 But this ruling is believed to be wholly indefensible. First, 
 because it fails to distinguish between earnings and income. 
 The price to be paid for work done under a contract may be 
 considered to have been earned when the work is completed, 
 and it may be said to have been earned pro tanto as the 
 work progresses. But in neither case can it be described 
 as "income" until it has been actually paid over and received. 
 That term does not mean the right to receive, or the ex- 
 pectation of receiving, a payment in the future. Secondly, 
 no contractor can be absolutely certain of receiving the price 
 when the work is done. His expectation of so doing may be 
 more or less confident according to the circumstances, but 
 even at the best he cannot be sure that he will not have to 
 reckon with claims for offsets or deductions. And it would 
 seem clear that money which may or may not be paid in the 
 future, and, if paid, may be greater or less in amount, is in 
 no sense income. Further, the ruling in question would 
 be entirely inapplicable to those contracts which involve per- 
 sonal skill, personal confidence, professional services, or the 
 like, where the stipulated compensation is not apportionable. 
 
 50. Profits from Sale or Lease of Patent Rights 
 
 The Commissioner of Internal Revenue ruled, under the 
 corporation tax law of 1909, that receipts from the sale of 
 patent rights are to be included in taxable income, and also 
 that royalties received on patent rights (presumably either 
 on the sale or lease of such rights or on the use of the pat- 
 si Treasury Decisions, No. 1742, par. 88. 
 (112)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 51 
 
 ented article) are also to be reckoned and reported as in- 
 come, though an allowance would be made for depreciation 
 of patents expiring during the year. 96 And the Wisconsin 
 income tax law makes the term "income" include "all royal- 
 ties derived from the possession or use of franchises or 
 legalized privileges of any kind," which is construed by the 
 tax commission of that state as including royalties received 
 from patents. As to royalties on sale or lease the case is 
 clear, but not so as to receipts from the sale of patents or 
 patent rights. One who buys a patent or rights under a 
 patent, and then sells it at an advanced price, may be said to 
 have made a "profit" which should be taxable as a part of his 
 income. But where the patentee sells (for example) his 
 rights under the patent in foreign countries, it would rather 
 seem to be a conversion of capital assets into the form of 
 money than the receipt of income. 
 
 51. Annuities 
 
 The revenue law in Massachusetts provides that "personal 
 estate, for the purpose of taxation, shall include * * * the 
 income from an annuity." 9<J And the act of Congress of 1913 
 provides that "all persons, firms, copartnerships, companies, 
 corporations, * * * and insurance companies, * * * 
 having the control, receipt, custody, disposal, or payment, di- 
 rectly or indirectly, of * * * annuities * * * or other 
 fixed or determinable annual gains, profits, and income of an- 
 other person," exceeding the statutory minimum, shall not 
 only make the necessary return thereof, but also deduct and 
 withhold the income tax and pay it over to the United States. 
 From this it may plainly be seen that, at least under the two 
 statutes mentioned, an annuity is regarded and treated as 
 taxable income, whether it be created by grant, by testamen- 
 tary trust, or by the contract of an insurance company. 
 
 5 Treasury Decisions, No. 1742, pars. 46 and 61. 
 
 e Rev. Laws Mass. 1902, p. 206; Gen. Stat. Mass. c. 11, 4. 
 
 BL.INC.TAX. 8 (113)
 
 52 INCOME TAXATION (Ch. 5 
 
 52. Interest on Government Bonds 
 
 The federal statute now in force provides that, in computing 
 the net income of a taxpayer, for the purpose of the income 
 tax, there shall be excluded "interest upon the obligations of 
 the United States or its possessions." In former statutes of 
 the same kind Congress did not hesitate to include the obliga- 
 tions of the federal government. In the act of 1861, the tax 
 was imposed, among other things, upon "interest upon treasury 
 notes or other securities of the United States." The act of 
 1862 taxed "interest upon notes, bonds, or other securities of 
 the United States," as did also the act of 1864 and that of 
 1870. In the act of 1894, the provision was that "there shall 
 be included all income derived from interest upon notes, bonds', 
 and other securities, except such bonds of the United States 
 the principal and interest of which are by the law of their 
 issuance exempt from all federal taxation." Under the cor- 
 poration excise tax law of 1909, it was ruled that interest on 
 United States bonds must be included in estimating the net 
 income of corporations, because this statute imposed a tax, 
 not on the property of the corporation nor directly upon its 
 income, but upon the privilege of carrying on business in a 
 corporate capacity, the net income being used only as a meas- 
 ure of the tax in each particular case. 97 
 
 It is not competent for the several states to tax income 
 derived from the bonds or other obligations of the federal 
 government. This limitation might be inferred from general 
 principles of constitutional law. 98 But it is also expressly 
 provided by act of Congress that "all stocks, bonds, treasury 
 notes, and other obligations of the United States shall be 
 exempt from taxation by or under state or municipal or local 
 authority." 99 Some of the states having income tax laws 
 expressly recognize this restriction. Thus, in Wisconsin, the 
 
 7 28 Op. Att. Gen. 138; Treasury Decisions, No. 1742, par. 37. 
 
 98 See, supra, 17. 
 
 99 Rev. Stat. U. S., 3701, U. S. Comp. St. 1901, p. 24SO. 
 
 (114)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 53 
 
 taxpayer is allowed to deduct from his income as returned 
 for taxation "interest received from bonds or other securities 
 exempt from taxation under the laws of the United States." 10 
 In South Carolina, the provision is that, "in estimating the 
 gains, profits, and income, there shall not be included interest 
 upon such bonds or securities of this state, or of the United 
 States, the principal and interest of which are, by the law 
 of their issue, exempt from taxation.", 101 In two other 
 states, the law purports on its face specifically to tax income 
 derived from United States bonds. But to that extent, these 
 statutes must necessarily be held invalid in any case in which 
 the attempt was made to enforce such a provision. The states 
 intended are Virginia and Tennessee. In the former, the 
 law provides that "income shall include * * * interest 
 upon notes, bonds, or other evidences of debt, of whatever 
 description, of the United States or any other state or coun- 
 try." 102 In Tennessee, the statute reads : "The amount of 
 income derived from United States bonds, and all other stocks 
 and bonds not taxed ad valorem, shall be taxable" at the rate 
 of five per centum. 103 
 
 53. Dividends on Corporate Stock 
 
 Whatever the taxpayer may actually receive from a corpo- 
 ration, by way of dividends on the shares of its stock which 
 he owns, constitutes a part of his income and will be taxable 
 as such. 10 * This rule, however, is subject to two limitations. 
 First, a "dividend," properly so called, is a distribution to 
 stockholders of the whole or a part of the current earnings 
 or profits of the corporation, and not a distribution of capital 
 assets. When a portion of the capital is thus returned to 
 stockholders, it is not income, from their point of view, but a 
 
 100 Wisconsin Income Tax Law 1911, 1087m, 4, e. 
 
 101 Civ. Code S. Car. 1902, 325. 
 
 102 Acts Va. 1908, c. 10, p. 20, 10. 
 
 103 Code Tenn., 690, 710. 
 
 104 Magee v. Denton, 5 Blatchf. 130, Fed. Gas. No. 8,943. 
 
 (115)
 
 53 INCOME TAXATION ( Ch. 5 
 
 replacement of capital, except in the few exceptional cases 
 where it is permissible for a corporation to divide current 
 receipts among the stockholders, although the property in 
 which the capital is invested is correspondingly depleted, as in 
 the case of mining and quarry companies and some others. 105 
 Secondly, where a statute taxing incomes lays its burden 
 upon both individuals and corporations, it is usual to provide 
 that the individual taxpayer may deduct from his return of 
 income for taxation the amount of any dividends received by 
 him from corporations which are subject to the tax, or which 
 have been assessed for the tax or have paid it. This is a 
 just provision, introduced for the purpose of avoiding the 
 double taxation which would result if the corporation were 
 taxed on its profits and the stockholders on the same profits 
 when divided among them. 
 
 Subject to these provisions, the income tax laws quite com- 
 monly enumerate "dividends" among the specific sources of 
 taxable income. But on general principles of law, and even 
 when not so declared in the tax statute, revenue of this kind 
 is always classed as "income." And it is immaterial whether 
 a corporate dividend is declared and paid as a regular dividend 
 (that is, regular in respect either to its periodicity or its 
 amount) or as an extra dividend or a bonus in cash. 108 Thus, 
 where a testator bequeathed to his wife for her life the "use, 
 interest, and income" of his estate, part of which consisted 
 in stock in an incorporated bank, and the bank afterwards 
 reduced its capital, by returning to the stockholders one-half 
 of it with a premium of 40 per cent to be paid out of the sur- 
 plus, it was held that the word "income" included the 40 
 per cent premium returned to the testator"s estate, and that 
 it passed under the will to the widow. 107 And the rule is not 
 
 105 Supra, 41. And see Reed v. Head, 6 Allen (Mass.) 174; Har- 
 vard College v. Amory, 9 Pick. (Mass.) 446. 
 loe Lord v. Brooks, 52 N. H. 72. 
 lor In re Warren, 2 Con. Sur. (N. Y.) 411, 11 N. Y. Supp. 787. 
 
 (116)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 54 
 
 restricted to dividends declared and paid by corporations 
 truly so called, but extends also to any distribution of profits 
 among the members of an unincorporated society, syndicate, 
 pool, trust, or other joint enterprise. For instance, where 
 an investment is made in an unincorporated association or- 
 ganized to deal in land as a commodity, and profits are realized 
 from the business, which are divided among the members, 
 with no impairment of the principal, such profits are per- 
 sonalty, representing income, and go to the life tenant under 
 the will of one of the members. 108 And it has been ruled 
 that, when a dividend has been declared and is immediately 
 payable, so that the stockholder can have it on demand, it is 
 to be reckoned as a part of his income for the year, though 
 it has not actually come into his hands as yet in the form 
 of cash. It was said : "If the plaintiff's counsel is correct in 
 his position that the profits of an incorporated company, it- 
 self an artificial person, are not, in the contemplation of the 
 act of Congress, a portion of the gains, profits, or income of 
 the stockholders, until they are distributed as dividends, or 
 embraced in a dividend declared by the managers of the cor- 
 poration, I think it quite clear that, when a dividend has been 
 declared and has become payable, the mere omission of the 
 stockholder to receive or obtain the dividend subject to his 
 call would not excuse him from embracing the amount of 
 such dividend in his statement of his taxable income for the 
 year." 109 
 
 54. Same; Stock Dividends 
 
 It is a debatable and unsettled question whether a dividend 
 declared by a corporation, but not payable in cash but in the 
 form of new stock distributable among the present stock- 
 holders proportionally, the nominal capital being correspond- 
 ingly increased, is to be accounted "income" or "capital" in the 
 
 IDS in re Thomson's Estate, 153 Pa. St 333, 26 Atl. 652. 
 109 Magee v. Denton, 5 Blatchf. 130, Fed. Cas. No. 8,943. 
 
 (117)
 
 54 INCOME TAXATION (Ch. 5 
 
 hands of the stockholder. And this is immediately pertinent 
 to the subject in hand, because if the stockholder receives 
 such a dividend as an accretion to his capital, it is not sub- 
 ject to the income tax, while, on the other hand, if it is income, 
 he should include it in his return, and probably at its market 
 value. Probably it may be stated that the rule as stated by the 
 Court of Appeals of New York is sustained by a majority 
 of the decisions. It is this : Where a dividend is declared 
 by a corporation on its capital stock, payable in new stock 
 certificates based on accumulated but undivided profits, it is 
 received as "income" by the stockholders, and not as capital, 
 since the substance and intent of such a transaction is the dis- 
 tribution of earnings, and it does not result in any actual addi- 
 tion to capital, for although the nominal amount of the cor- 
 poration's capital stock is thereby increased, yet the corpora- 
 tion actually has neither more property nor more capital. 110 
 But in Massachusetts and some other states, a contrary rule 
 prevails. 111 In Maryland, the court has ruled that, in deter- 
 mining whether a stock dividend declared on stock constitut- 
 ing the corpus of a trust estate is a part of the corpus, so 
 as to pass to the remainderman, or income available for the 
 life beneficiary, the court is not governed by the form in which 
 the dividend has been declared, but the character of the fund 
 out of which the dividend is paid controls; and where the 
 dividend represents earnings, the dividend is income, while if 
 it is an appropriation of capital, it is a part of the corpus. 112 
 
 noLowry v. Farmers' Loan & Trust Co., 172 N. Y. 137, 64 N. E. 
 796. And see Soehlein v. Soehlein (Wis.) 131 N. W. 739; Earp's Ap- 
 peal, 28 Pa. St. 368; Hite's Devisees v. Kite's Ex'r, 93 Ky. 257, 20 S. 
 W. 778; Pritchett v. Nashville Trust Co., 96 Tenn. 472, 36 S. W. 1064, 
 33 L. R. A. 856; Moss' Appeal, 83 Pa. St. 264. 
 
 in Minot v. Paine, 99 Mass. 101, 96 Am. Dec. 705; Parker v. Ma- 
 son, 8 R. I. 427; Chester v. Buffalo Car Mfg. Co., 70 App. Div. 443, 
 75 N. Y. Supp. 428. 
 
 112 Ex parte Humbird (Md.) 80 Atl. 209. 
 
 (118)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 55 
 
 55. Accumulated Earnings or Undivided Profits of Cor- 
 porations 
 
 These are taxable under the act of Congress of 1913, as 
 income of the stockholder, but only in cases where the tax- 
 able income, including such items, is large enough to be 
 subject to the super-tax or additional tax, and only in cases 
 where the device of a corporation, accumulating its profits 
 instead of dividing them, is resorted to for the purpose of 
 evading the tax. The provision is that "for the purpose of 
 this additional tax, the taxable income of any individual shall 
 embrace the share to which he would be entitled of the gains 
 and profits, if divided or distributed, whether divided or 
 distributed or not, of all corporations, joint stock compan- 
 ies, or corporations however created or organized, formed or 
 fraudulently availed of for the purpose of preventing the im- 
 position of such tax through the medium of permitting 
 such gains and profits to accumulate instead of being divided 
 or distributed ; and the fact that any such corporation, joint 
 stock company, or association is a mere holding company, 
 or that the gains and profits are permitted to accumulate be- 
 yond the reasonable needs of the business shall be prima 
 facie evidence of a fraudulent purpose to escape such tax ; 
 but the fact that the gains and profits are in any case per- 
 mitted to accumulate and become surplus shall not be con- 
 strued as evidence of a purpose to escape the said tax in 
 such cases unless the Secretary of the Treasury shall certify 
 that in his opinion such accumulation is unreasonable for 
 the purposes of the business. When requested by the Com- 
 missioner of Internal Revenue, or any district collector of 
 internal revenue, such corporation, joint stock company, 
 or association shall forward to him a correct statement of 
 such profits and the names of the individuals who would be 
 entitled to the same if distributed." From the fact that this 
 applies only "for the purpose of the additional tax" it may 
 be inferred that Congress did not regard a stockholder's in- 
 
 (119)
 
 55 INCOME TAXATION (Ch. 5 
 
 terest in the undivided earnings or surplus of the corporation 
 as taxable income in ordinary cases or under ordinary con- 
 ditions. But the attempt has sometimes been made, under 
 other statutes, to tax such interest as income. Thus, the 
 United States income tax law of 1870 provided that, "in 
 estimating the gains, profits, and income of any person, 
 there shall be included * * * the share of any person 
 of the gains and profits, whether divided or not, of all com- 
 panies or partnerships." And there is a Canadian decision 
 to the effect that the undivided profits of a corporation, or 
 a portion of its profits derived from the employment of capi- 
 tal and annually carried into a reserve fund, may be "in- 
 come" for the purposes of a testamentary trust, by which 
 it was provided that the trustee might make advances to 
 the beneficiaries "out of income." 113 But this is contrary 
 to all the weight of authority. 114 In several of the cases on 
 the subject, it is said that the word "income" is not broad 
 enough to include things not separated in some way from 
 the principal. It is not synonymous with "increase." The 
 value of corporate stock may be increased by good manage- 
 ment, prospects of business, and the like, but such increase 
 is not income. It may also be increased by the accumulation 
 of a surplus fund. But so long as that surplus is retained 
 by the corporation, either as a surplus or as increased stock, 
 it can in no proper sense be called income. It may become 
 income-producing, but it is not income. 115 Thus, where the 
 profits of a manufacturing or banking corporation have been 
 accumulating for many years, until the market value of the 
 stock is more than double its original price, and the owner 
 dies, directing the "income" of his estate to be applied to 
 
 us Worts v. Worts, 18 Ontario, 332. 
 
 in Lauman v. Foster (Iowa) 135 N. W. 14; Tubb v. Fowler (Term.) 
 99 S. W. 988. 
 
 us Spooner v. Phillips, 62 Conn. 62, 24 Atl. 524, 16 L. R. A. 461; 
 Mills v. Britton, 64 Conn. 4, 29 Atl. 231, 24 L. R. A. 536; Smith v. 
 Hooper, 95 Md. 16, 51 Atl. 844. 
 
 (120)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 55 
 
 particular objects, these extraordinary accumulations are as 
 much a part of his capital as any other portion of his es- 
 tate, and must therefore be regarded, not as income, but as 
 part of the principal from which the future income is to 
 arise. 116 This subject has been fully and conclusively dis- 
 cussed by the United States Supreme Court in the follow- 
 ing terms : "Money earned by a corporation remains the 
 property of the corporation, and does not become the prop- 
 erty of the stockholders, unless and until it is distributed 
 among them by the corporation. The corporation may 
 treat it and deal with it either as profits of its business or as 
 an addition to its capital. Acting in good faith and for 
 the best interests of all concerned, the corporation may dis- 
 tribute its earnings at once to the stockholders as income ; 
 or it may reserve a part of the earnings of a prosperous 
 year to make up for a possible lack of profits in future years ; 
 or it may retain portions of its earnings, and allow them 
 to accumulate, and then invest them in its own works and 
 plant, so as to secure and increase the permanent value of 
 its property. Which of these courses shall be pursued is to 
 be determined by the directors, with due regard to the con- 
 dition of the company's property as a whole; and, unless in 
 case of fraud or bad faith on their part, their discretion in 
 this respect cannot be controlled by the courts, even at the 
 suit of owners of preferred stock, entitled by express agree- 
 ment with the corporation , to dividends at a certain yearly 
 rate in preference to the payment of any dividend on the 
 common stock, but dependent on the profits of each particu- 
 lar year, as declared by the board of directors. Reserved 
 and accumulated earnings, so long as they are held and in- 
 vested by the corporation, being part of its corporate prop- 
 erty, it follows that the interest therein, represented by each 
 share, is capital, and not income of that share, as between 
 
 us Earp's Appeal, 28 Pa. St. 368. 
 
 (121)
 
 55 INCOME TAXATION (Gh. 5 
 
 the tenant for life and remainderman, legal or equitable 
 thereof." 11T 
 
 But it is not only on general principles of law that this 
 result is reached, but decisions to the same effect have been 
 made under the earlier income tax laws. It was held that 
 undivided earnings of a corporation are not taxable as in- 
 come of the stockholders. 118 And the Supreme Court, con- 
 struing the provisions of the income tax act of 1870, laying 
 a tax on all undivided profits of corporations accrued and 
 earned and added to a surplus, contingent, or other fund, 
 held 'it to be plain that it was the intention of Congress not 
 to subject to that tax profits of a railroad corporation dur- 
 ing the year, which were not divided but used for construc- 
 tion. 119 
 
 56. Right to Subscribe for New Stock of Corporation 
 It is a familiar rule in the law of corporations that when 
 a company issues new stock (or stock previously held in re- 
 serve in the treasury), it must first be allotted to the ex- 
 isting stockholders, each being entitled to take his propor- 
 tionate share at a price fixed. This price is usually and 
 properly the par value of the stock, and if its market value 
 is greater, a considerable advantage may accrue to the share- 
 holder, who may either take his new stock and sell it at a 
 premium or sell his right of subscription for it, and indeed 
 the sale of these "rights" is a common occurrence on the 
 stock exchanges. The courts all hold that the gain realized 
 by a stockholder, either from a sale of the privilege or from 
 its exercise and the subsequent sale of the stock at a profit, 
 is capital or principal in his hands and not a part of his in- 
 
 H7 Gibbons v. Mahon, 136 U. S. 549, 10 Sup. Ct. 1057, 34 L. Ed. 
 525. 
 
 us Ex parte Ives, Fed. Gas. No. 7,114. 
 
 ii Marquette, H. & O. R. Co. v. United States, 123 U. S. 722, 8 
 Sup. Ct. 319, 31 L. Ed. 302. 
 
 (122)
 
 Ch. 5) WHAT CONSTITUTES TAXABLE INCOME 57 
 
 come. 120 Thus, in a case in Pennsylvania, it appeared that 
 a testator held stock in the B. railroad company, which, in 
 order to extend its line, organized another company, with 
 sufficient capital stock to build it, and the unbuilt line was 
 mortgaged for a sum sufficient to build it, and the B. com- 
 pany issued bonds for the amount secured by the mortgage, 
 and such bonds the stockholders of the B. company were 
 permitted to take at par, in proportion to their holdings, 
 and the capital stock of the new company was thrown in as 
 a bonus to those who subscribed for the bonds. It was held 
 that the premium at which the option to subscribe to the 
 stock of the new company was sold was principal, and not 
 income from stock of the B. company. 121 But under the in- 
 come tax laws it might be argued that the premium ob- 
 tained by the sale of a stockholder's subscription rights, 
 though it is not income, may be described as "gain" or 
 "profit," and so be taxable, especially where the statute, 
 like the act of Congress now in force, taxes gains and profits 
 arising from the sale of or dealing in personal property. 
 But in the absence of any decision on this point, the opinion 
 may be hazarded that such a transaction is not within the 
 spirit or the equity of a statute purporting to tax "incomes" 
 as its principal feature, though it might come within the lit- 
 eral meaning of the language employed. 
 
 57. Sale and Distribution of Assets of Corporation 
 
 A distribution among stockholders of the assets of a cor- 
 poration, upon its dissolution or preparatory to dissolution, 
 is a return of capital, at least to the extent of the original in- 
 
 120 Lauman v. Foster (Iowa) 135 N. W. 14; Brinley v. Grou, 50 
 Conn.' 66, 47 Am. Rep. 618; Moss' Appeal, 83 Pa. St. 264, 24 Am. Rep. 
 164; Biddle's Appeal, 99 Pa. St 278; In re Thomson's Estate, 153 Pa. 
 St. 333, 26 Atl. 652. But compare Wiltbank's Appeal, 64 Pa. St. 256, 
 3 Am. Rep. 585. 
 
 121 In re Thomson's Estate, 153 Pa. SL 333, 26 Atl. 652. 
 
 (123)
 
 57 INCOME TAXATION (Ch. 5 
 
 vestment, and not in any sense income in their hands. 122 
 Thus, a fund resulting from sales of materials, manufac- 
 tured articles, products from the land, or the general per- 
 sonal property of a corporation, all indicating a final wind- 
 ing up of its business, cannot be called income of the stock- 
 holders when apportioned among them. 123 And where a 
 corporation sells part of its original franchise and property, 
 and distributes the proceeds of the same as a dividend among 
 its stockholders, such dividend is to be regarded, as between 
 a life tenant and remainderman of part of the stock, as capi- 
 tal and not as income. 12 * 
 
 122 in re Thomson's Estate, 153 Pa. St. 333, 26 Atl. 652. 
 128 Gehr v. Mont Alto Iron Co., 174 Pa. St. 430, 34 Atl. 638. 
 124 Vinton's Appeal, 99 Pa. St. 434, 44 Am. Rep. 116. 
 
 (124)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 58 
 
 CHAPTER VI 
 PERSONS AND CORPORATIONS SUBJECT TO TAX 
 
 58. Residents. 
 
 59. Residents Deriving Income from Abroad. 
 
 60. Domestic Corporations with Foreign Branches or Agencies. 
 
 61. Non-Residents and Aliens. 
 
 62. Carrying on of Business or Trade. 
 
 63. Carrying on Several Lines of Business. 
 
 64. Salaried Officers. 
 
 65. Bankrupt and Insolvent Persons and Companies. 
 
 66. Estates of Decedents and Dissolved Corporations. 
 
 67. Partnerships. 
 
 68. Limited Partnerships. 
 
 69. Corporations. 
 
 70. Public Service Corporations. 
 
 71. Unincorporated Associations. 
 
 72. Incorporated Clubs. 
 
 73. Inactive Corporations and Holding Companies. 
 
 74. Corporations of Philippines and Porto Rico. 
 
 75. Insurance Companies. 
 
 58. Residents 
 
 Every person residing within the United States, whether 
 he is an American citizen or an alien, is subject to the fed- 
 eral income tax. And in the states where similar tax laws 
 are in force, they are generally made applicable to "residents" 
 of the state, without regard to whether such persons are citi- 
 zens of the United States or of the taxing state, although 
 in South Carolina the statute refers to "every citizen of this 
 state." Disputed questions chiefly arise in the case of per- 
 sons who maintain homes in two or more states (or in the 
 United States and also abroad) or who spend a large part 
 of their time in travelling. In such cases, the test of "resi- 
 dence" will be the location of that establishment which the 
 person regards as his home, and to which he has the inten- 
 tion of returning whenever absent, however protracted may 
 
 (125)
 
 58 INCOME TAXATION (Ch. 6 
 
 be his absence. Or, according to the circumstances, it will 
 be determined by the proportion between the time which the 
 person spends within the given jurisdiction and that which 
 he spends elsewhere, "residence" implying a more or less fixed 
 and permanent abode, as distinguished from a temporary so- 
 journ for business or other purposes. 
 
 These rules, as specially applicable to matters of taxation, 
 may be illustrated by the following cases : In a late case in 
 Iowa, it was held that one who, after living continuously for 
 many years in the same house, starts on a tour of the world, 
 leaving the house in charge of a care-taker, remains a "resi- 
 dent" of the state and city where his house is, for purposes 
 of taxation, during his absence from the country, even though 
 he may intend, on his return, to remove to another state. 1 In 
 England it is held that a master mariner, trading between 
 an English port and various foreign ports, who maintains 
 a home for his family in the English port, is liable for the 
 income tax on his salary, notwithstanding the fact that he is 
 abroad for much the greater part of the year, and that most 
 of his salary is earned on the high seas and not in England. 2 
 In another English case it appeared that an American citizen 
 had for the last twenty years lived on board his own yacht, 
 which was anchored in tidal navigable waters in England, 
 obtaining his provisions and necessaries from the nearest 
 village. The yacht had always been kept fully manned and 
 ready to go to sea at any moment. It was held that the 
 owner was a person "residing in the United Kingdom" within 
 the income tax act, and was assessable accordingly. 3 A sim- 
 ilar decision was made in the case of an American citizen, 
 having no place of business in Great Britain, but who rented 
 a house and shooting rights in Scotland, where he spent about 
 
 1 Barhydt v. Cross (Iowa) 136 N. W. 525. 
 
 2 In re Young, 12 Scotch Law Rep. 602, 1 Tax Cas. 57 ; Rogers v. 
 Inland Revenue, 16 Scotch Law Rep. 682, 1 Tax Cas. 225. 
 
 a Brown v. Burt, 81 Law J. K. B. 17. 
 
 (126)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 59 
 
 two months continuously in each year, accompanied by his 
 valet, as he had no family. His house in New York was al- 
 ways kept in readiness for his return, but so was the house 
 in Scotland, which was kept furnished and ready for his 
 occupation at any time. It was held that he was a person "re- 
 siding in the United Kingdom" for the purposes of the income 
 tax. 4 So also, where a merchant carried on business in Italy, 
 where he ordinarily resided, but also owned a place of resi- 
 dence in England, where he dwelt with his family for several 
 months in the year, it was held that he was a resident of Eng- 
 land, and was liable to taxation in respect to the profits of the 
 business carried on abroad. 5 
 
 59. Residents Deriving Income from Abroad 
 
 Under the act of Congress, persons residing within the 
 United States are required to pay the tax upon "the entire 
 net income received from all sources," which includes for- 
 eign investments and business as well as domestic. This is 
 further shawn by the provision that the amount of the tax 
 "shall be deducted and withheld from coupons, checks, or bills 
 of exchange for or in payment of interest upon bonds of for- 
 eign countries and upon foreign mortgages or like obligations, 
 not payable in the United States, and also from coupons, 
 checks, or bills of exchange for or in payment of any divi- 
 dends upon the stock or interest upon the obligations of for- 
 eign corporations, associations, and insurance companies en- 
 gaged in business in foreign countries." Under similar pro- 
 visions in the corporation tax law of 1909, it was ruled that 
 American corporations should include in their returns not 
 only the income derived from the business carried on within 
 the confines of the United States, but income received from 
 business transacted in any foreign country as well. 6 This is 
 
 < Cooper v. Cadwalader, 5 Tax Cas. 101. 
 
 s Lloyd v. Sulley, 21 Scotch Law Rep. 482, 2 Tax Cas. 37. 
 
 Treasury Decisions, No. 1742, par. 9. 
 
 (127)
 
 59 INCOME TAXATION (Ch. 6 
 
 also the law in England. Thus, a corporation organized in 
 that country and maintaining a head office there, where its 
 directors meet and administer its general affairs, and to which 
 its revenues are remitted, is assessable for the income tax 
 in England, though all its profits are derived from plantations, 
 mines, or other enterprises conducted in foreign countries. 7 
 And so, dividends declared by a foreign corporation and pay- 
 able at its agency in London, on shares owned by a British 
 citizen and resident, are taxable as part of his income. 8 
 
 It is also within the competence of the several states to 
 tax their resident citizens upon intangible personal property, 
 consisting, for example, of shares of stock in foreign corpo- 
 rations, and no constitutional provision is thereby violated. 9 
 Naturally, therefore, they also have the power to tax income 
 derived from such sources, and this has generally been pro- 
 vided for in the income tax laws of the states. In Hawaii, 
 it is true, the tax is levied on "income derived by every per- 
 son residing in the territory of Hawaii from all property 
 owned, and all business, trade, profession, employment, or 
 vocation carried on in the territory." 10 But this is excep- 
 tional. In South Carolina, the provision of the statute is 
 somewhat ambiguous. It lays the tax upon "income received 
 during the preceding calendar year by every citizen of this 
 state, whether such gains, profits, or income be derived from 
 any kind of property, rents, interests, dividends, or salaries, 
 or from any profession, trade, employment or vocation car- 
 ried on in this state, or from any other source whatever." X1 
 On the ordinary principles of statutory construction, the words 
 
 i Cesena Sulphur Co. v. Nicholson, L. R. 1 Ex. Div. 428 ; Imperial 
 Continental Gas Ass'n v. Nicholson, 37 Law T. 717, 1 Tax Cas. 138 ; 
 Scottish Mortgage Co. v. McKelvie, 24 Scotch Law Rep. 87, 2 Tax 
 Cas. 165. 
 
 s Gilbertson v. Fergusson, L. R. 7 Q. B. Div. 562, 1 Tax Cas. 501. 
 
 Darnell v. Indiana, 226 U. S. 390. 33 Sup. Ct. 120, 57 L. Ed. . 
 
 10 Session Laws Hawaii 1901, p. 31. 
 
 11 Civ. Code S. Car. 1902, 325. 
 
 (128)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 59 
 
 "carried on in this state" should be referred to the phrase 
 "profession, trade, employment or vocation," leaving the pro- 
 vision as to "property, rents, interests, dividends, or salaries" 
 entirely unrestricted. And even if this argument should fail, 
 the following clause, "from any other source whatever," is 
 broad enough to include income from foreign investments or 
 business. In Wisconsin a distinction is made between income 
 from foreign investments and income from foreign business. 
 It is provided that "so much of the income of any person 
 residing within the state as is derived from rentals, stocks, 
 bonds, securities or evidences of indebtedness shall be assessed 
 and taxed, whether such income is derived from sources 
 within or without the state," which is explained by the tax 
 commission of that state as being "in analogy to the rule that 
 intangible property follows the residence of the owner for pur- 
 poses of taxation." But the statute further provides that "any 
 person engaged in business within and without the state shall, 
 with respect to income other than that derived from rentals, 
 stocks, bonds, securities or evidences of indebtedness, be taxed 
 only upon that proportion of such income as is derived from 
 business transacted and property located within the state." 12 
 And a rule for determining the proportion is prescribed. 13 
 
 12 Wisconsin Income Tax Law 1911, 1087m, par. 2, cl. 3. 
 
 is The rule to be followed, as far as applicable, is that prescribed 
 for determining the proportion of a corporation's capital stock which 
 is employed in business within the state, and is as follows: "In de- 
 termining the proportion of capital stock employed in the state, the 
 same shall be computed by taking the gross business in dollars of the 
 corporation in the state and adding the same to the full value in 
 dollars of the property of the corporation located in the state. The 
 sum so obtained shall be the numerator of a fraction of which the 
 denominator shall consist of the total gross business in dollars of the 
 corporation, both within and without the state, added to the full 
 value in dollars of the entire property of the corporation both within 
 and without the state. The fraction so obtained shall represent the 
 proportion of the capital stock represented within the state." Stat. 
 Wis., 1770b, subd. e. 
 
 BL.INC.TAX. 9 (129)
 
 60 INCOME TAXATION (Ch. 6 
 
 60. Domestic Corporations with Foreign Branches or 
 
 Agencies 
 
 Where a domestic corporation has established branch offi- 
 ces or agencies for the transaction of its business in foreign 
 countries, the profits accruing at such branches or agencies are 
 part of the income of the corporation, and will be taxable at 
 its domicile, if the law of that jurisdiction taxes income from 
 foreign business as well as from foreign investments, as is 
 the case with the act of Congress now in force. But it is im- 
 portant to distinguish this case from the case where two com- 
 panies, one domestic and the other foreign, are really inde- 
 pendent of each other, though constituent members of a pool or 
 trust, or united in interest through one owning stock of the 
 other, interlocking directorates, and so on. Thus, in an Eng- 
 lish case, it appeared that a company was formed in England 
 for the purpose of bringing under a single control all the man- 
 ufacturers of a particular kind of photographic camera. To 
 do this, the company acquired 98 per cent, of the stock of an 
 American company, and retained the services of the manager 
 of the American business. The remaining shareholders of 
 the American company were independent of the English com- 
 pany. The English company by power of attorney appointed 
 the American manager its proxy to vote for it at meetings of 
 the American company. The two companies bought and sold 
 goods to each other in the ordinary way. On this state of facts 
 it was held that the business of the American company was 
 not the business of the English company, so as to be assessable 
 for income tax in England, the control exercised by the English 
 company being the control of the stockholders only. 1 * But on 
 the other hand, a contrary decision was made in the case of an 
 English company formed for the purpose of acquiring brewer- 
 ies in the United States, because it was shown that the Eng- 
 lish directors exercised effective and constant control over 
 
 i* Kodak Limited v. Clark [1901] 2 K. B. 879, 4 Tax Cas. 549. 
 (130)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 60 
 
 the business. The operations connected with the manufacture 
 and sale of the beer took place in the United States, and were 
 carried on by an American committee of management ap- 
 pointed by the company. This committee were in constant 
 correspondence with the board of directors in England, and 
 the general meetings of the company were held in England, 
 where the company's books were kept, except those relating to 
 business carried on in the United States. The dividends were 
 declared in England by the company in general meeting. Only 
 a portion of the profits made was remitted to England, the 
 amount needed for the dividends payable to American share- 
 holders being retained in America for distribution. It was 
 held that the business of the company was carried on in Eng- 
 land, and that the company was there assessable to income 
 tax upon the whole of the profits made, whether remitted to 
 England or not. 16 
 
 But in view of the fact that the income tax laws affect only 
 "income received" by the person or corporation, it is impor- 
 tant to inquire more closely whether profits earned at the for- 
 eign branches or agencies of a domestic corporation are tax- 
 able as a part of its income if they are not remitted in money 
 to the home office, but retained abroad for payment of divi- 
 dends, investment, or other purposes. On this question there 
 are no American decisions. The English cases are numerous 
 and instructive, but not entirely harmonious. At first, it was 
 the disposition of those courts to regard the tax as falling 
 only on profits actually received in cash. Thus, in a leading 
 case it appeared that a company was formed in England to ac- 
 quire certain brewing businesses in the state of New York, 
 and as the law of that state would not permit a foreign cor- 
 poration to own and carry on a brewery there, an American 
 company was formed, the whole of the shares of which were 
 taken by the English company, except seven shares which 
 
 is Frank Jones Brewing Co. v. Apthorpe, 4 Tax Cas. 6; Apthorpe 
 v. Peter Schoenhofen Brewing Co., 80 Law T. 395, 4 Tax Cas. 41. 
 
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 60 INCOME TAXATION (Ch. 6 
 
 were held by the directors of the American company. So 
 much of the profit was sent over to the English company in 
 London as was required for distribution in dividends to such 
 of its shareholders as resided in England, but the shareholders 
 resident in America received their dividends there out of prof- 
 its retained in America for that purpose. It was held that the 
 income tax was chargeable only on the profits received in 
 England by the English company. 16 Another case concerned 
 a life insurance company established in Scotland and carrying 
 on business abroad. The business was managed by directors, 
 who had the power of accepting risks, but all investments 
 abroad had to be sanctioned at the head office. Remittances 
 in cash of interest received abroad were not made, and remit- 
 tances out of the receipts abroad of interest and premiums 
 were made only as required by the general policy of the com- 
 pany. At a quinquennial valuation, and in the yearly state- 
 ments of accounts, the whole of the receipts abroad, includ- 
 ing the interest on investments abroad, was brought into ac- 
 count in the division of the profits of the company. It was 
 held that the interest received abroad and invested or applied 
 abroad was not "received" in Scotland, so as to be taxable 
 there. 17 
 
 But other cases, including some of the later decisions, have 
 evolved the rule that income may be "constructively received/' 
 so as to be taxable, if it is entered on the books of the com- 
 pany as cash, or locally applied or invested by direction of the 
 head office. Thus, an English insurance company with branch- 
 es in India was in the receipt of certain interest moneys, paid in 
 
 i Bartholomay Brewing Co. v. Wyatt [1893] 2 Q. B. 499, 3 Tax 
 Gas. 213. And see Stanley v. The Gramophone & Typewriter Lim- 
 ited [1908] 2 K. B. 89, 5 Tax Gas. 358 ; Gresham Life Assur. Soc. v. 
 Bishop [1902] App. Gas. 287, reversing [1901] 1 K. B. 153, 4 Tax Gas. 
 464 ; Nobel Dynamite Trust Co. v. Wyatt [1893] 2 Q. B. 499, 3 Tax 
 Gas. 224. 
 
 IT Standard Life Assur. Co. v. Allan, 38 Scotch Law Rep. 628, 4 
 Tax Cas. 446. 
 
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 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 60 
 
 India, from investments there and in the colonies. This in- 
 terest was applied in India towards the payment of the va- 
 rious obligations of the company arising for settlement in 
 India, including losses under its policies, and was not re- 
 mitted in money to England, but it was treated in the com- 
 pany's accounts as if it had been so remitted. It was held that 
 the interest was constructively received in England and was 
 therefore taxable. 18 In another case it appeared that an in- 
 surance company was organized in England, and had its head 
 office and directorate there, but also carried on business in cer- 
 tain foreign countries, and by the laws of those countries it 
 was required, as a condition to the right to do business there, 
 to deposit certain sums of money with government officials 
 and to invest the money in accordance with local laws. In ad- 
 dition to this, the company also voluntarily invested abroad 
 certain other sums representing accumulated profits of its 
 business. Both classes of investments yielded interest, which 
 was received by the company abroad, but was not remitted to 
 England. It was held that the company was taxable in Eng- 
 land on the income consisting of such interest from both 
 classes of investments. 19 Again, an English corporation had 
 its head office in London, where meetings of the directors and 
 shareholders were held, and from whence the affairs of the 
 company were directed and managed. The company carried 
 on the business of banking in London, Miexico, and Lima. At 
 the branch offices it transacted all ordinary banking business, 
 and in London it transacted the London business of the branch- 
 es, but not the business of current banking accounts. It was 
 held that the whole profits were chargeable for the income tax, 
 
 is Universal Life Assur. Soc. v. Bishop, 68 Law J. Q. B. 962, 4 Tax 
 Cas. 139. And see Scottish Provident Inst. v. Allan, 38 Scotch Law 
 Rep. 874, 4 Tax Cas. 409 ; San Paulo Ry. Co. v. Carter [1895] 1 Q. 
 B. 580, 3 Tax Cas. 344, affirmed [1896] App. Cas. 31 ; Grove v. El- 
 liots, 3 Tax Cas. 481. 
 
 i Liverpool, L. & G. Ins. Co. v. Bennett [1911] 2 K. B. 577. And 
 see Norwich Union Fire Ins. Co. v. Magee, 3 Tax Cas. 457. 
 
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 61 INCOME TAXATION ( Ch. 6 
 
 whether remitted to England or not. 20 But this doctrine has 
 not met with universal acceptance. In a case arising in Scot- 
 land, it was shown that a Scotch insurance company lent out 
 sums of money at interest in Australia, and that the interest 
 accruing was not remitted to Great Britain in forma specifica, 
 but was retained abroad and invested there, but it was entered 
 in the revenue account of the company as received. On this 
 state of facts it was held that interest not received in Great 
 Britain was not assessable for the income tax, and that the 
 facts in the case did not show a constructive remittance. 21 
 
 61. Non-Residents and Aliens 
 
 The federal income tax law provides for the taxation of the 
 income "received from all sources" of "every citizen of the 
 United States, whether residing at home or abroad." Hence 
 American citizens who take up a residence abroad, whether 
 temporary or permanent, and whether from choice or for busi- 
 ness purposes (including diplomatic and consular officers) re- 
 main liable for the income tax. Theoretically such persons are 
 taxable upon their entire income (above the statutory exemp- 
 tion) no matter how or whence derived. But practically, of 
 course, the tax could be collected only on so much of the in- 
 come as accrued and was payable within the United States ; so 
 that, while the language of the statute would apply, for ex- 
 ample, to the case of an American residing abroad and re- 
 ceiving a salary from a foreign government or from a foreign 
 corporation, the necessity of the case would restrict its applica- 
 tion. 
 
 The law also is made applicable to the case of an alien living 
 within the United States. For it includes "every person re- 
 siding in the United States, though not a citizen thereof," and 
 
 20 London Bank of Mexico v. Apthorpe [1892] 2 Q. B. Div. 378, 3 
 Tax Gas. 143. 
 
 21 Forbes v. Scottish Provident Inst, 33 Scotch Law Rep. 228, 3 
 Tax Cas. 443. 
 
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 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 61 
 
 resident aliens are taxed on exactly the same basis as citizens. 
 Such a provision is common in the income tax laws of other 
 countries, 22 and the authority of any government to tax, not 
 only the property, but also the income, of foreigners residing 
 within its territory cannot be doubted. Indeed it has been ex- 
 pressly decided that such a feature does not render an income 
 tax law unconstitutional or in any way invalid. 23 
 
 A further case is that of persons who are neither citizens 
 of the United States nor resident within its borders, but a part 
 of whose income is earned or gained in this country. As to 
 this, the act of Congress provides for the levy of the income 
 tax upon "the entire net income from all property owned and 
 of every business, trade, or profession carried on in the United 
 States by persons residing elsewhere." And the income tax 
 laws of the several states contain almost exactly similar pro- 
 visions, which of course are applicable not only to non-resi- 
 dent aliens, but also to residents and citizens of other states 
 owning property or doing business within the taxing state. In 
 Wisconsin, however, the provision is expressed in broader 
 terms, for the tax is made payable "by every non-resident of 
 the state upon such income as is derived from sources within 
 the state or within its jurisdiction." The earlier acts of Con- 
 gress on the subject made no attempt to tax income accruing in 
 America to non-resident aliens. That is to say, no such provi- 
 sion was found in the acts of 1861, 1862, or 1864, though it was 
 introduced in the statute of 1866 and continued in subsequent 
 enactments. And it was held, under the act of 1864, that a 
 non-resident alien was not subject to the income tax in respect 
 to his investments in American securities; and though that 
 act required corporations paying interest on their bonds to de- 
 
 2 2 For instances of American citizens held subject to the English 
 income tax, because more or less permanently "resident" in Great 
 Britain, see Brown v. Burt, 81 Law J. K. B. 17; Cooper v. Cadwal- 
 ader, 5 Tax Cas. 101. 
 
 23 Moore v. Miller, 5 App. D. C. 413. 
 
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 61 INCOME TAXATION ( Ch. 6 
 
 duct from the interest payments the amounts due as income 
 tax thereon from the several bondholders, this did not apply to 
 a non-resident alien owning such bonds, and if the corporation 
 deducted such tax from the interest due him, he could recover 
 it by suit. 24 This being changed by the explicit provisions of 
 the act now in force, it becomes important to notice a decision 
 of the Supreme Court of the United States under one of the 
 earlier statutes. It was held that an excise tax on corpora- 
 tions, laid on or measured by the amount paid out by them in 
 the form of dividends or interest, is not invalidated by a pro- 
 vision that the amount of such tax may be withheld from the 
 dividend or interest due or payable to a stockholder or bond- 
 holder, who is a citizen or subject of a foreign government 
 with no residence in this country. 25 
 
 As to a non-resident "doing business" within the jurisdic- 
 tion imposing the tax, the state laws may apply to the ordinary 
 case of a person residing in one state and conducting a busi- 
 ness in another, as well as to corporations organized under the 
 laws of one state, but having offices, branches, or agencies in 
 many others, and to railroads or other transportation companies 
 which traverse two or more states. Under the laws of the Unit- 
 ed States, the incidence of the income tax will chiefly affect cor- 
 porations, whose business is of an international character, for- 
 eign insurance companies writing risks in the United States, and 
 foreign corporations owning and operating mills, factories, or 
 mines in this country. As concerns this subject, no American 
 decisions have as yet been rendered. But upon the construction 
 of the corporation tax law of 1909, an opinion was given by the 
 Attorney General to the effect that foreign steamship com- 
 panies engaged in the business of transporting passengers, 
 goods, and merchandise between ports in this country and for- 
 
 2* Jackson v. Northern Cent. Ry., Chase, 268, Fed. Cas. No. 7,142. 
 20 Railroad Company v. Collector (Michigan Central R. Co. v. 
 Slack) 100 U. S. 595, 25 L. Ed. 647. 
 
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 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 61 
 
 eign ports, and maintaining freight and passenger agencies in 
 this country, were subject to the tax; and whereas it was con- 
 tended that a part of the business of such companies was the 
 transportation of articles of merchandise shipped from this 
 country for foreign trade, and that such business could not 
 constitutionally be taxed, the opinion was given that a tax im- 
 posed upon an exporter of merchandise, as an incident to his 
 business, is not a tax upon the exported article, as an export, 
 and hence not forbidden by the constitution. 26 But a foreign 
 steamship company having no office in the United States, and 
 whose vessels only occasionally touch at American ports, was 
 not regarded as doing business in this country, within the 
 meaning of that act. 27 
 
 The British income tax law includes non-resident aliens, in 
 so far as they "exercise a trade" in Great Britain. And it is 
 held when a foreign corporation or individual has an agency 
 for the sale of its products in England, the agent being charged 
 with the duty of procuring orders, which are then sent to the 
 head office abroad, and the goods are shipped either to the 
 agent for distribution or direct to the customers, and payment 
 is made either to the agent or direct to the foreign office, such 
 corporation or person "exercises a trade" in England and is 
 subject to the income tax on the profits thereof, collectible 
 from the agent. 28 So in a Scotch case, it appeared that a com- 
 pany registered in Norway, where its head office was maintain- 
 ed and its books kept and corporate meetings held, was under 
 the general management of two Norwegians, elected by the 
 stockholders. This company owned a ship, and all the busi- 
 ness of the chartering of the vessel, and all voyage receipts 
 
 26 28 Opin. Atty. Gen. 211. 
 
 27 Treasury Decisions, Xo. 1742, par. 21. 
 
 28 Werle & Co. v. Colquhoun, L. R. 20 Q. B. Div. 753, 2 Tax Gas. 
 402; Turner v. Rickman, 4 Tax Cas. 25; Tischler v. Apthorpe, 52 
 Law T. 814, 2 Tax Cas. 89. But see Grainger v. Gough [1896] App. 
 Cas. 325. 
 
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 62 INCOME TAXATION ( Ch. 6 
 
 and disbursements, were dealt with by a firm resident in Glas- 
 gow, who received and retained all the funds until required for 
 payment of expenses or dividends. It was held that, although 
 the company was not resident in Great Britain, t it exercised 
 a trade within the United Kingdom, for the profits of which 
 the Glasgow firm, as its agents, were assessable for the purpose 
 of the income tax. 29 In another case it was shown that a for- 
 eign corporation, domiciled abroad, had submarine cables in 
 connection with England and other foreign cables not so con- 
 nected. The company, under an agreement with the English 
 authorities, also had separate wires, worked by its own staff, 
 between several English towns and cities. No profits were de- 
 rived from the transmission of messages over these last-men- 
 tioned wires. It was held that the company exercised a trade 
 in Great Britain and was assessable on the net profits derived 
 from the receipts in England. 30 
 
 62. Carrying on of Business or Trade 
 
 In addition to the illustrations given in the preceding sec- 
 tion, which had to do only with the particular case of non-resi- 
 dents, we may here give some further account of what is 
 meant by "business" and "trade" in general, since these terms 
 are constantly used in describing the sources of taxable income 
 or the persons and corporations subject to the tax. The two 
 words quoted, when associated together, take color from each 
 other. But even as thus limited, the term "business" is a word 
 of very wide import and embraces every thing about which a 
 person can be employed or which he can pursue as an occupa- 
 tion and for profit. 31 It implies, however, continuity of action 
 or effort, and does not include an isolated act or operation, 
 when transactions of the same sort do not constitute the per- 
 
 2 Wingate v. Webber, 34 Scotch Law Rep. 699, 3 Tax Gas. 569. 
 
 so Erichsen v. Last, L. R. 7 Q. B. Div. 12, 1 Tax Cas. 351. 
 
 si People v. Commissioners of Taxes, 22 How. Prac. (N. Y.) 143. 
 
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 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 62 
 
 son's vocation, 32 and probably it should not be so extended as 
 to include illicit pursuits, such as keeping a gaming house or 
 selling liquor without a license. 33 In construing the corpora- 
 tion tax law of 1909, the Supreme Court of the United States, 
 not meaning to enumerate all possible kinds of "business," but 
 with reference to the facts in the group of cases before it, 
 said : "We think it clear that corporations organized for the 
 purpose of doing business, and actually engaged in such ac- 
 tivities as leasing property, collecting rents, managing office 
 buildings, making investments of profits, or leasing ore lands 
 and collecting royalties, managing wharves, dividing profits, 
 and in some cases investing the surplus, are engaged in busi- 
 ness within the meaning of this statute, and in the capacity 
 necessary to make such organizations subject to the law." 3 * 
 And in the same case it was specifically held that a company 
 owning and leasing taxicabs and collecting rents therefrom 
 was engaged in business within the meaning of the statute. 
 "Trade" is a term more particularly applied to the operations 
 of commerce, and especially to the buying and selling of com- 
 modities or the traffic, sale, or barter of goods. But it is legiti- 
 mately capable of a wider meaning, and may be so intended 
 when used in a tax statute and in connection with "business." 
 Thus, an English decision holds that the ownership and em- 
 ployment of vessels, which are employed in the transportation 
 of merchandise for hire, is a "trade" or concern in the nature 
 of a trade, within the meaning of an act imposing taxes. 35 So 
 in a case in North Carolina, construing a provision of the con- 
 stitution authorizing the legislature to tax "trades, professions, 
 
 32 People v. Commissioners of Taxes, 23 N. Y. 242; Parkhurst v. 
 Brock, 72 Vt. 355, 47 Atl. 1068 ; Delaware & H. Canal Co. v. Mah- 
 lenbrock, 63 N. J. Law, 281, 43 Atl. 978, 45 L. R. A. 538. 
 
 SB Odell v. City of Atlanta, 97 Ga. 670, 25 S. E. 173; Walsch v. 
 Call, 32 Wis. 159. 
 
 34 Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. 
 Ed. 389. 
 
 a 5 Attorney General v. Borrodaile, 1 Price, 148. 
 
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 63 INCOME TAXATION (Ch. 6 
 
 franchises, and income," it was said that the word "trade" is 
 employed in its broadest signification, and comprehends, not 
 only all who are engaged in buying and selling merchandise, 
 but all whose occupation or business it is to manufacture and 
 sell the products of their plants, and includes in this sense any 
 employment or business embarked in for gain or profit. 36 
 
 63. Carrying on Several Lines of Business 
 
 If a person or corporation carries on, at the same time, sev- 
 eral different lines or branches of business, the resulting in- 
 come is to be assessed and taxed as an entirety, and not as so 
 many separate incomes from the different kinds of business. 
 This is shown by the language of the act of Congress, which 
 imposes the tax, both in the case of individuals and of corpora- 
 tions, on "the entire net income received from all sources." 
 And under the corporation excise tax law of 1909, it was ruled 
 that railroad companies operating leased or purchased lines 
 must include all receipts derived therefrom in their return of 
 net income. 37 This is also the rule in England. Thus, where 
 an insurance company, being a single concern and having only 
 one body of stockholders, carries on the business of fire, marine, 
 and life insurance, and the funds and accounts of the several 
 branches of the business are kept separate, but the results of 
 the whole business are thrown into one profit and loss account, 
 and the dividends are declared out of the balance of that ac- 
 count, it is held that, for the purpose of the income tax, the 
 several branches must be treated as one business, and the net 
 profits from all are assessable as one undivided income. 38 
 There is, however, one decision of the Court of Session in 
 Scotland which is not easily to be reconciled with the general 
 
 ss State v. Worth, 116 N. C. 1007, 21 S. E. 204. 
 
 3? Treasury Decisions, No. 1742, par. 8. 
 
 38 Last v. London Assur. Corp., L. R. 12 Q. B. Div. 389, 2 Tax Cas. 
 100; Scottish Union & N. Ins. Co. v. Smiles, 26 Scotch Law Rep. 
 330, 2 Tax Cas. 551. 
 
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 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 64 
 
 rule as thus stated. It was there held that a seed-merchant, 
 taking a farm and working it in connection with his seed busi- 
 ness, cannot claim any deduction from the assessment on 
 his profits as seedsman in respect of losses incurred in the op- 
 eration of the farm, that is, profits arising from one branch of 
 the business cannot be offset by the expenses or losses of the 
 other. 39 
 
 . But the general rule applies only in cases where each branch 
 or department of the business is wholly owned and operated 
 by the taxable person or corporation. If any is owned and 
 operated jointly with another person or company, it must be 
 segregated and separately assessed. Thus, in an English case, 
 it appeared that the corporation in question originally owned 
 one steamship and derived its income from the operation of 
 the vessel as a carrier of freight. Afterwards it acquired a 
 very large interest, but not quite the entire ownership, in a 
 second steamship, taking over the management and keeping the 
 accounts thereof, and it claimed to be assessed on the average 
 of the profits derived from the two ships in one sum. But it 
 was held that the second ship was a concern carried on by two 
 or more persons jointly, and therefore its profits must be 
 separately assessed. 40 
 
 64. Salaried Officers 
 
 Attention was given in an earlier section of this volume to 
 the constitutional validity of income taxation as applied to the 
 salaries of federal and state officers. 41 And it was there shown 
 that, although the United States cannot tax the salary of a 
 state officer, or vice versa, yet, in the absence of explicit con- 
 stitutional restrictions, there is nothing to prevent Congress 
 from taxing the compensation of the officers of the federal 
 
 3 Brown v. Watt, 23 Scotch Law Rep. 403, 50 J. P. 583, 2 Tax 
 Cas. 143. 
 
 40 Farrell v. Sunderland Steamship Co., 88 Law T. 741, 4 Tax Cas. 
 005. 
 
 41 Supra, 18. 
 
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 64 INCOME TAXATION (Ch. 6 
 
 government, or to prevent a state from taxing the salaries 
 of its own officers or those of its municipalities. This is in 
 accordance with the rules prevailing in other countries where 
 income tax laws are in force. Thus, in Canada, a government 
 official or employe is taxable on his income received in the 
 form of a salary. 42 It was held in Ontario that the income 
 of an officer of the House of Commons of the Dominion of 
 Canada could not be taxed by a provincial legislature or by a 
 municipality of the province. 43 "But this was overruled by the 
 Supreme Court of Canada, which held that any civil or other 
 officer of the Dominion might be lawfully taxed in respect to 
 his income as such by the municipality in which he resides. 44 
 And the highest court in England has ruled that an officer of 
 the Commonwealth of Australia who resides in Victoria and 
 receives his salary in that state, is liable to be assessed in re- 
 spect of his official salary for an income tax imposed by the 
 legislature of Victoria. 45 
 
 But laws of this kind are construed with strictness, and the 
 salary attached to a public office is not to be brought within 
 the reach of the income tax without explicit language to that 
 effect. Thus it was ruled, in an early case in South Carolina, 
 that the salaries of public officers are not liable to be taxed 
 under an ordinance imposing a tax on all profit or income 
 arising from the "pursuit of any faculty, profession, occupa- 
 tion, trade, or employment." 46 And the court in Virginia 
 decided that, when the tax is laid upon salary or compensa- 
 tion for services, received by any person in the employment of 
 a corporation, it will be held not to include the salary paid to 
 a minister of the Gospel by the church or congregation of 
 
 42 Abbott v. City of St. John, 40 Can. Sup. Ct. 597, 12 Am. & Eng. 
 Ann. Cas. 821 ; Robson v. Regina, 4 Terr. L. R. 80. 
 
 43 Leprohon v. Ottawa, 2 Ont. App. 522. 
 
 4* Abbott v. City of St. John, 40 Can. Sup. Ct. 597, 12 Am. & Eng. 
 Ann. Cas. 821. 
 
 45 Webb v. Outrim [1907] App. Cas. 81, 7 Am. & Eng. Ann. Cas. 84. 
 4 City Council v. Lee, 1 Treadw. (S. C.) 57.
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 64 
 
 which he has charge, for it must be understood that the legis- 
 lature meant only secular employment. 47 But the modern 
 statutes employ language broad enough to cover all kinds of 
 remuneration for services rendered by employes, however 
 denominated. Thus, the act of Congress applies to "income 
 derived from salaries, wages, or compensation for personal 
 service of whatever kind and in whatever form paid." And 
 the Wisconsin statute, in defining "income," includes "all 
 wages, salaries, or fees derived from services." The tax com- 
 mission of that state explains that "fees derived from services 
 would not include the fees belonging to the state or any 
 political subdivision. For example, if a sheriff receives a 
 salary and turns over the fees received by him in his official 
 capacity to the county, they would not be reckoned as income. 
 If he receives the fees in lieu of salary, such fees would con- 
 stitute income." 48 In this connection it is also necessary to 
 remark that, although a corporation may be exempt from 
 taxation, in respect to its own income, as being a religious, 
 charitable, or educational institution, it does not follow that 
 its employes are likewise exempt. Thus, the salary of a 
 professor in a college is not exempt from the income tax, 
 though the revenue of the college may be exempt. 49 The act 
 of Congress of 1913 contains a provision that "nothing in this 
 section shall be held to exclude from the computation of the 
 net income the compensation paid any official by the govern- 
 ments of the District of Columbia, Porto Rico, and the Phil- 
 ippine Islands or any political subdivision thereof," in other 
 words, the salaries of these officers are subject to the income 
 tax. 
 
 47 Plumer v. Commonwealth, 3 Gratt. (Va.) 645. 
 <8 Wisconsin Income Tax Law, edition issued by State Tax Com- 
 mission, Madison, Wis., November 1911, pp. 9, 10. 
 49 Union County v. James, 21 Pa. St. 525. 
 
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 65 INCOME TAXATION (Ch. 6 
 
 65. Bankrupt and Insolvent Persons and Companies 
 
 It may seem an anomaly to speak of a bankrupt or insolvent 
 person being subject to the income tax, but it was evidently 
 in the contemplation of Congress, in enacting the law of 1913, 
 that such cases might arise, as witness the provision that the 
 penalty for non-payment shall not be exacted "from the es- 
 tates of insane, deceased, or insolvent persons." It is a gen- 
 eral rule of law that a bankrupt's estate is not withdrawn from 
 taxation by the proceedings in bankruptcy, but remains sub- 
 ject to taxation in the hands of his trustee. 80 And it was ruled 
 under the corporation excise tax law of 1909 that, where a 
 corporation subject to the tax had gone into bankruptcy, the 
 return of net income was to be made by the trustee in bank- 
 ruptcy. 51 So, where an assignee for the benefit of creditors 
 carries on the business of the assignor, and makes a profit, it 
 is subject to the income tax. For it is not necessary that a 
 business should be carried on for the purpose of making a 
 profit for the owner ; it is none the less carried on because the 
 object is to earn a larger dividend for creditors. 52 The same 
 principle would apply to a corporation in the hands of a re- 
 ceiver. It is true that a contrary doctrine prevailed under the 
 corporation tax law of 1909, but that was only because the 
 tax was not laid on the income of the corporation, but on the 
 privilege of doing business in a corporate capacity. Hence it 
 was held that receivers of an insolvent corporation, duly ap- 
 pointed by a court of equity, which corporation was not doing 
 business when the act was passed, and had done no business 
 since, were not within the act, and not required to make re- 
 turns or pay taxes on the income realized by them while acting 
 as officers of the court and under its direction. 53 But the act 
 
 so in re Crowell, 199 Fed. 659. 
 si Treasury Decisions, No. 1742, par. 7. 
 52 Armitage v. Moore [1900] 2 Q. B. 363, 4 Tax Cas. 199. 
 B3 Pennsylvania Steel Co. v. New York City Ry. Co., 198 Fed. 774. 
 117 C. C. A. 556. 
 
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 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 67 
 
 of Congress now in force imposes, not an excise tax on cor- 
 porate business, but a tax on all incomes. And it is somewhat 
 significant, in this connection, that it specially mentions "re- 
 ceivers" as among those persons administering the affairs of 
 others who are required to make returns for them and with- 
 hold and deduct the income tax. 
 
 66. Estates of Decedents and Dissolved Corporations 
 The death of a taxpayer does not exempt his income from 
 taxation for the current year, but his estate, in the hands of 
 the executor or administrator, is liable for the tax on so much 
 of the income of the year as accrued prior to the day of his 
 death, 54 the income for the remainder of the year being of 
 course taxable to the distributees of the estate. The same 
 principle applies upon the dissolution of a corporation. But 
 it was held that a corporation which had continued in business 
 through a calendar year could not evade liability for the tax 
 imposed by the act of Congress of 1909, by dissolving before 
 the time when it was required to make a return and have the 
 tax assessed, but that the officers of the corporation still had 
 the authority, and it was their duty, to make and render the 
 return. 5 * 
 
 67. Partnerships 
 
 It has never been the policy of the United States income 
 tax laws to lay the tax on partnerships, as distinct from the 
 individuals composing them. And in the statute now in force, 
 partnerships are carefully distinguished from corporations, as 
 in the section relating to the taxation of corporations, where 
 the tax is made payable by "every corporation, joint stock 
 company or association, and every insurance company, or- 
 ganized in the United States, no matter how created or or- 
 ganized, but not including partnerships." Under provisions 
 
 54 Mandell v. Pierce, 3 Cliff. 134, Fed. Gas. No. 9,008. 
 KG United States v. General Inspection & Loading Co., 192 Fed. 
 223. 
 
 BL.INC.TAX. 10 145
 
 67 INCOME TAXATION (Ch. 6 
 
 of this kind the individual taxpayer is chargeable with the 
 tax on so much of his income as is derived from the profits 
 of a firm in which he may be a member (after allowing the 
 statutory deductions and exemptions), but the firm, as such, 
 is neither required to make a return nor pay a tax. This was 
 expressly provided for in the act of 1864, and though omitted 
 in the present statute, the rule must be read into it by neces- 
 sary implication. 
 
 The laws of the states have generally pursued a contrary 
 policy. That of South Carolina, for instance, provides that 
 "the words 'citizen' and 'person,' as used in this article, shall 
 be deemed to include all natural persons, all copartnerships, 
 and all members of any incorporated association, and to ex- 
 clude, except as hereinafter included, all corporations duly 
 chartered by the laws of the United States or of this or any 
 other state." 56 Under this statute, it appears, both the 
 individual and the firm of which he is a member must make a 
 return and pay the tax. But if the partnership pays the tax 
 on its income, it would be inequitable, and double taxation, 
 to exact a tax from the individual upon his share of the firm's 
 profits, and such an exception should be held to be necessarily 
 implied. This point is more fully covered by the provisions 
 of the Wisconsin income tax law, which declares that the 
 term "person," as used in the act, shall include "any in- 
 dividual, firm, copartnership," etc., but also provides that the 
 individual taxpayer may deduct from his income as returned 
 for taxation "dividends or income received from stocks, or 
 interest in any firm, copartnership, corporation," etc. 57 
 
 68. Limited Partnerships 
 
 Under the laws of some of the states (for example, Pennsyl- 
 vania) limited partnership associations may be organized 
 
 66 Civ. Code S. Car. 1902, 327. 
 
 67 Wisconsin Income Tax Law 1911, 1087m, part 2, par. 1 ; Id., 
 1087m, part 4, subd. c. 
 
 (146)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 69 
 
 which possess all the essential privileges and powers of cor- 
 porations, including the right to transact business under a 
 name indicating rather a corporate existence than an associa- 
 tion of partners, as, by the use of the word "Company" in 
 the name, provided that the name shall also include the word 
 "Limited," the right to sue and be sued in that name, the 
 right to fix the limit of its own existence, within certain 
 bounds, and to have a capital stock divided into shares. The 
 members of such an association are not individually liable 
 for its debts, and the shares or interests in it are transfer- 
 able by the owner, provided that the transferee must either 
 be elected to membership by the remaining members or 
 bought out. Under the corporation excise tax law of 1909, 
 which required payment of the tax from "every corporation, 
 joint stock company or association," the opinion was given 
 by the Attorney General, and followed by the officers of the 
 treasury department, that such a limited partnership was 
 within the meaning of the act, and was liable to the tax if 
 organized for profit and having a capital stock represented 
 by shares, although no certificates of stock were issued. 58 
 It seems clear that such an association would also be included 
 within the scope of the income tax law of 1913, the language 
 of the law being the same, and the same reasons existing as 
 formerly for so holding. 
 
 69. Corporations 
 
 Corporations are subject to the income tax under the act of 
 Congress of 1913, which lays the tax, subject to certain 
 enumerated exceptions, upon "every corporation, joint stock 
 company or association, and every insurance company, organ- 
 ized in the United States, no matter how created or organiz- 
 ed," and also upon similar companies "organized, authorized, 
 
 B s 28 Opin. Atty. Gen. p. 189; Treasury Decisions, No. 1742, par. 
 36. And see Liverpool Ins. Co. v. Massachusetts, 10 Wall. 556. 19 
 L. Ed. 1029; Moorhead v. Seymour, 77 N. Y. Supp. 1050. Compare 
 Chapman v. Barney, 129 U. S. 677, 9 Sup. Ct. 426, 32 L. Ed. 800. 
 
 (147)
 
 70 INCOME TAXATION ( Ch. 6 
 
 or existing under the laws of any foreign country," in so far 
 as the latter transact business or have capital invested in the 
 United States. The income tax law of Hawaii taxes, subject 
 to specified exceptions, "all corporations doing business for 
 profit in the territory, no matter where created and organ- 
 ized." The law of Wisconsin taxes "persons," but declares 
 that the term "person" shall include "every corporation, joint 
 stock company or association organized for profit, and hav- 
 ing a capital stock represented by shares, unless otherwise 
 expressly stated." These terms were copied from the provi- 
 sions of the corporation excise tax law of 1909. And under 
 that statute it was ruled that mutual savings banks, such as 
 may be organized under the laws of some of the states, were 
 not subject to the tax. Such banks receive deposits, invest 
 the money deposited, and divide the profits among the de- 
 positors. But they have no capital stock, and the depositors 
 are not stockholders. And though they are in a certain sense 
 organized for profit, yet their organization and the transac- 
 tion of their business are not for the profit of those who 
 constitute the managing body, except in so far as they may 
 also be depositors. 59 And such banks are expressly except- 
 ed from taxability under the act of Congress of 1913. 
 
 70. Public Service Corporations 
 
 The various kinds of corporations now commonly classed 
 under this designation are not exempt from the income tax 
 unless specially released from it by statute. The attempt 
 was made to withdraw them from the operation of the cor- 
 poration tax law of 1909, on the ground that they exercised 
 a delegated authority from the states which created them and 
 bore such a relation to the general public as to make their 
 functions quasi-governmental in character. But the Supreme 
 Court of the United States ruled otherwise, saying : "In the 
 
 5 28 Opin. Atty. Gen. p. 189, citing Huntington v. Savings Bank, 
 96 U. S. 388, 24 L. Ed. 777 : Hannon v. Williams, 34 N. J. Eq. 255 ; 
 Savings Bank v. Town of New London, 20 Conn. 111. 
 
 (148)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 70 
 
 case of South Carolina v. United States, 60 this court held that 
 when a state, acting within its lawful authority, undertook to 
 carry on the liquor business, it did not withdraw the agencies 
 of the state, carrying on the traffic, from the operation of the 
 internal revenue laws of the United States. If a state may 
 not thus withdraw from the operation of a federal taxing law 
 a subject-matter of such taxation, it is difficult to see how the 
 incorporation of companies whose service, though of a public 
 nature, is nevertheless with a view to private profit, can have 
 the effect of denying the federal right to reach such properties 
 and activities for the purposes of revenue. It is no part of 
 the essential governmental functions of a state to provide 
 means of transportation, supply artificial light, water, and the 
 like. These objects are often accomplished through the 
 medium of private corporations, and though the public may 
 derive a benefit from such operations, the companies carrying 
 on such enterprises are nevertheless private companies, whose 
 business is prosecuted for private emolument and advantage. 
 For the purpose of taxation, they stand upon the same foot- 
 ing as other private corporations upon which special fran- 
 chises have been conferred. The true distinction is between 
 the attempted taxation of those operations of the states es- 
 sential to the execution of their governmental functions, and 
 which the state can only do itself, and those activities which 
 are of a private character. The former the United States 
 may not interfere with by taxing the agencies of the state 
 in carrying out its purposes; the latter, although regulated 
 by the state, and exercising delegated authority, such as the 
 right of eminent domain, are not removed from the field of 
 legitimate federal taxation." 61 
 
 The Wisconsin income tax law, however, explicitly exempts 
 
 so 199 TJ. S. 437, 26 Sup. Ct. 110, 50 L. Ed. 261, 4 Am. & Eng. Ann. 
 Cas. 737. 
 
 i Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct 342, 55 L. 
 Ed. 389. 
 
 (149)
 
 71 INCOME TAXATION (Ch. 6 
 
 "incomes derived from property and privileges by persons 
 now required by law to pay taxes or license fees directly into 
 the treasury of the state in lieu of taxes, and such persons 
 shall continue to pay taxes and license fees as heretofore." 
 And the state tax commission rules that this clause exempts 
 from the payment of the income tax railroad companies and 
 street railway companies, including, in the latter case, con- 
 nected electric light, heat, and power companies ; also palace 
 and sleeping car companies, freight line and equipment com- 
 panies, express companies, telegraph and telephone com- 
 panies, boom and improvement companies, plank road com- 
 panies, fire, life, and accident insurance companies and surety 
 companies, and title guaranty companies, but not water, light, 
 heat, and power companies and other public utilities which 
 are taxable locally. 62 
 
 71. Unincorporated Associations 
 
 The federal income tax law, as well as the statutes of some 
 of the states, couple with the word "corporations," in describ- 
 ing those subject to the tax, the term "joint stock companies 
 or associations." This term describes an anomalous kind of 
 body, a hybrid in the law, occupying a position midway be- 
 tween a corporation and a partnership. A joint stock com- 
 pany or association is a body of persons united and acting 
 together without a charter (or without being incorporated 
 under a general law), but upon the methods and forms used 
 by incorporated bodies, for the prosecution of some common 
 enterprise. Such an association possesses a common capital 
 contributed by the members composing it, such capital being 
 commonly divided into shares, of which each member possess- 
 es one or more, and which are transferable by the owner. 
 It usually transacts business under a company name, by 
 which, under the laws of some states, it may sue and be sued, 
 
 2 Wisconsin Income Tax Law 1911, edition published by State 
 Tax Commission, Madison, Wis., p. 21. 
 
 (150)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 71 
 
 and its affairs are generally administered by a board of 
 managers or directors. But it differs from a corporation 
 proper, both in the fact that it is not a legal entity separate 
 and distinct from the members composing it, and also in the 
 fact that all the members are personally liable for its debts. 63 
 A company or association of this kind may be formed and 
 exist at common law. But the statutory law of some of the 
 states (but not all) also authorizes the organization of such 
 associations, or confers upon them more or less of the char- 
 acteristics and privileges of a corporation. In some cases 
 these statutes go so far in this direction that the_only prac- 
 tical difference between a corporation, properly so called, 
 and a joint stock company organized under the state law is 
 that, in the latter case, the stockholders remain personally 
 liable for the debts. The federal corporation tax law of 
 1909 applied to "every corporation, joint stock company or 
 association organized for profit and having a capital stock 
 represented by shares, organized under the laws of the United 
 States or of any state or territory." And the federal supreme 
 court held that real estate trusts created by deed, for the 
 purpose of purchasing, improving, holding, or selling lands 
 and buildings for the benefit of the shareholders, which are 
 not organized under any statute of the state where they are 
 formed, and do not derive any benefit or privilege from any 
 such statute, and which are not intended to have perpetual 
 duration, but are limited by their terms to a fixed period, 
 were not subject to the federal tax. 64 But it is important 
 to notice that the act of 1913 is made applicable to "every 
 
 es See Allen v. Long, 80 Tex. 261, 16 S. W. 43, 26 Am. St. Rep. 
 735; Adams Express Co. v. Schotield, 111 Ky. 832, 64 S. W. 903; 
 Kossakowskl v. People, 177 111. 563, 53 N. E. 115 ; Lyon v. Denison. 
 80 Mich. 371, 45 N. W. 358, 8 L. R. A. 358 ; Sandford v. Board of 
 Sup'rs of New York, 15 How. Prac. (N. Y.) 172; In re Jones, 28 
 Misc. Rep. (N. Y.) 356, 59 N. Y. Supp. 983; Lane v. Albertson, 78 
 App. Div. 607, 79 N. Y. Supp. 947. 
 
 a* Eliot v. Freeman, 220 U. S. 178, 31 Sup. Ct 360, 55 L. Ed. 424. 
 
 (151)
 
 72 INCOME TAXATION (Ch. 6 
 
 corporation, joint stock company or association organized 
 in the United States, no matter how created or organized." 
 In view of the decision above referred to, this change of lan- 
 guage must be considered highly significant, and manifests 
 an intention on the part of Congress to apply the tax to all 
 kinds of joint stock companies or associations, whether or- 
 ganized in accordance with the law of any given state or 
 merely with such powers and characteristics as they may 
 possess at common law. 
 
 72. Incorporated Clubs 
 
 An incorporated club, organized for social purposes or for 
 sport, and not eleemosynary or educational in character nor 
 in the nature of a benefit or insurance society, is apparently 
 subject to the payment of the income tax imposed by the act 
 of Congress of 1913, if it derives a revenue from membrship 
 dues, rent of rooms, profits of restaurant or bar, etc., and 
 has any net income after paying expenses and deducting the 
 other items allowed by the statute. For it must be observed 
 that the act in question does not require that a corporation, 
 to be taxable, should be "organized for profit" or have "a 
 capital stock represented by shares," as was the case in earlier 
 statutes, but only (with reference to domestic corporations) 
 that it should be "organized within the United States." And 
 the provision exempting certain kinds of corporations specifi- 
 cally enumerates and describes those which Congress intended 
 to release from the tax, from which it follows, by a well- 
 known rule of statutory construction, that no other exceptions 
 can be implied. A similar rule prevails in England. Thus, 
 where a golf club (an ordinary bona fide members' club) al- 
 lowed members to introduce visitors and the visitors to play 
 golf on its links, but such visitors paid "green fees" for the 
 privilege, and the fees so collected amounted to a consider- 
 able sum every year, it was held that the club was carrying 
 on an enterprise which was beyond the scope of the ordinary 
 (152)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 73 
 
 functions of a club, and as to which it was possible to keep 
 separate accounts, so as to ascertain what profits it was mak- 
 ing, if any, and therefore such profits were liable to assess- 
 ment for the income tax. 65 And in another case, where a 
 society formed for the improvement, spiritual, mental, so- 
 cial, and physical, of young men, carried on a restaurant, as 
 well as educational classes, a gymnasium, and a publication 
 department, the restaurant being conducted on the usual 
 commercial principles and being open to the public, it was 
 held that the association was liable to pay the income tax on 
 the profits made by the restaurant. 68 
 
 But such clubs are not subject to taxation under the stat- 
 ute in Wisconsin, which describes, as subject to the tax, cor- 
 porations "organized for profit and having a capital stock 
 represented by shares," and which also specifically exempts any 
 "association of individuals not organized or conducted for 
 pecuniary profits." So also in Hawaii, where corporations 
 are taxed only when "doing business for profit in the terri- 
 tory." 
 
 73. Inactive Corporations and Holding Companies 
 
 The federal corporation tax law of 1909 imposed a tax on 
 all corporations organized for profit and having a capital 
 stock represented by shares, and the tax was levied "with 
 respect to the carrying on or doing business" by such cor- 
 porations. It was held that a corporation, to be subject to 
 the tax, must not only be organized for the purpose of doing 
 business, but must also be actually engaged in that business. 
 Hence a corporation organized solely for the purpose of tak- 
 ing over and holding the real estate and leasehold interests 
 owned by a mercantile company, leasing such property to 
 the company, collecting the rents and distributing them among 
 
 5 Carlisle & S. Golf Club v. Smith [1912] 2 K. B. 177. 
 66 Grove v. Young Men's Christian Ass'n, 88 Law T. 696, 4 Tax 
 Cas. 613. 
 
 (153)
 
 73 INCOME TAXATION (Ch. 6 
 
 its stockholders, and which had actually executed a long term 
 lease of such property to the mercantile company and sur- 
 rendered the management and control thereof, was held not 
 subject to the tax, although it was organized under a provi- 
 sion of law relative to the organization of business and man- 
 ufacturing corporations for profit, since, even though a cor- 
 poration be deemed to have been organized for business pur- 
 poses, it was not subject to the tax if it abstained from doing 
 business. 07 On the same principle, a corporation organized 
 for the purpose of owning and renting an office building, but 
 which had wholly parted with the management and control 
 of the property, and by the terms of a reorganization had 
 disqualified itself from any activity in respect to it, its sole 
 authority being to hold the title subject to a lease for 130 
 years, and to receive and distribute the rentals which might 
 accrue under the terms of the lease, or the proceeds of any 
 sale of the land, if it should be sold, was held not subject to 
 the tax, because not doing business within the meaning of 
 the law. 68 So also, a railroad company which had leased its 
 entire road and all its rights and privileges for a term of 
 years at an annual rental, the lessees operating the road and 
 agreeing to return it at the expiration of the lease, was held 
 not to be "engaged in business" with respect to the road, 
 within the meaning of the statute, although it retained a 
 franchise of corporate existence, and was ready to resume 
 possession at the expiration of the lease, and to exercise its 
 franchise of eminent domain when required by the lessee. 
 Also it was held in the same case that the receipt by a lessor 
 railroad of the income from its road and of interest and divi- 
 dends from invested funds, and the payment of expenses 
 incidental to the receipt of such moneys and their distribution 
 among stockholders, did not constitute a business taxable 
 
 67 Emery, Bird, Thayer Realty Co. v. United States, 198 Fed. 242. 
 
 es Zonne v. Minneapolis Syndicate, 220 TJ. S. 187, 31 Sup. Ct 361, 
 
 55 L. Ed. 428. And see Abrast Realty Co. v. Maxwell, 206 Fed. 333. 
 
 (154)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 73 
 
 under the federal statute. 69 And it was ruled by the treasury 
 department that so-called "holding companies," which do not 
 transact any business of their own, but merely receive and 
 disburse the dividends on the stock which they own in the 
 constituent companies, were not subject to the tax. 70 
 
 But in this particular, the act of Congress of 1913 differs 
 widely from that of 1909. It does not lay the tax on the 
 transaction of corporate business or on the privilege of doing 
 business in a corporate capacity, but on the income of the 
 corporation. As to domestic corporations, it does not require 
 that they should be organized for profit or for business, nor 
 that they should be engaged in business, but only that they 
 should have a net income. And as to that income, the tax 
 is not laid on income derived from business, but on "income 
 received from all sources." These changes are too signifi- 
 cant to have been made without intention. And since the de- 
 cisions of the Supreme Court above referred to must have been 
 within the cognizance of Congress in enacting the statute, 
 there is a very strong presumption that the law as now framed 
 was meant to include holding companies and inactive corpo- 
 rations, provided only that they are in receipt of an income 
 over and above expenses and the proper deductions. 
 
 And it is further to be noted that the present act of Con- 
 gress makes a very significant mention of holding companies 
 in the provision relating to the taxation of accumulated earn- 
 ings or undivided profits as part of the income of the stock- 
 holder. (Subsection A, subdivision 2.) The share to which 
 the individual stockholder would be entitled, if such earnings 
 or profits were divided, is taxable to him as income, though 
 no division or distribution is made, in case the company was 
 "formed or fraudulently availed of" for the purpose of es- 
 
 6 McCoach v. Minehill & S. H. R. Co., 228 U. S. 295, 33 Sup. Ct 
 
 419, 57 L. Ed. , affirming Minehill & S. H. R. Co. v. McCoach, 
 
 192 Fed. 670. 
 
 TO Treasury Decisions, No. 1742, par. 18. 
 
 (155)
 
 74 INCOME TAXATION (Ch. 6 
 
 caping the tax. And the fact that it is "a mere holding com- 
 pany" is made prima facie evidence of such fraudulent pur- 
 pose. 
 
 74. Corporations of Philippines, and Porto Rico 
 
 The corporation tax law of 1909 applied to corporations 
 "organized under the laws of the United States or of any 
 state or territory of the United States" or "organized under 
 the laws of any foreign country and engaged in business in 
 any state or territory of the United States." And an opinion 
 was rendered by the Attorney General that, as the Philippine 
 Islands are not a state or territory of the United States, and 
 not, on the other hand, a "foreign country," a corporation 
 created by the government of the Islands would not be subject 
 to the corporation tax at all. So also, he ruled, a corporation 
 "organized under the laws of a foreign country" would not 
 be subject to the income tax with respect to its business done 
 in the Philippines, because such business is not done "within 
 the United States or its territories." But a corporation or- 
 ganized under the laws of one of the states, and doing busi- 
 ness wholly within the Philippines, and operating under a 
 concessionary contract granted by the Philippine legislature, 
 would be liable to the tax. "The resulting discrimination 
 against American, and in favor of foreign, corporations as 
 to business carried on in the Philippines and Porto Rico can- 
 not serve to alter the construction of the act, although it may 
 invite to amendment." 71 And the officers of the treasury 
 department ruled that companies organized in Porto Rico 
 and not engaged in business in the United States were not 
 subject to the tax. 72 But this also has been changed by the 
 act of Congress of 1913, by the provision that "the provisions 
 of this section shall extend to Porto Rico and the Philippine 
 Islands; Provided, that the administration of the law and 
 
 TI 29 Opin. Atty. Gen. p. 164. 
 
 72 Treasury Decisions, No. 1742, par. 22. 
 
 (156)
 
 Ch. 6) PERSONS AND CORPORATIONS SUBJECT TO TAX 75 
 
 the collection of the taxes imposed in Porto Rico and the 
 Philippine Islands shall be by the appropriate internal-reve- 
 nue officers of those governments, and all revenues collected 
 in Porto Rico and the Philippine Islands thereunder shall 
 accrue intact to the general governments thereof, respectively." 
 
 75. Insurance Companies 
 
 The act of Congress of 1913 expressly applies to "every 
 insurance company" organized in the United States, or organ- 
 ized under the laws of a foreign country and doing business 
 in the United States. But as to mutual insurance companies, 
 special rules are provided for ascertaining their taxable net 
 income. In the case of mutual life insurance companies, it is 
 enacted that they "shall not include as income in any year such 
 portion of any actual premium received from any individual 
 policy holder as shall have been paid back or credited to such 
 individual policy holder, or treated as an abatement of pre- 
 mium of such individual policy holder, within such year." 
 This provision was doubtless inserted in the act in view of the 
 decisions which had been made on this point under the cor- 
 poration excise tax law of 1909. That statute allowed insur- 
 ance companies to deduct from their returns of income for 
 taxation "sums other than dividends paid within the year on 
 policy and annuity contracts." And it was held that the word 
 "dividends" was here used in its popular sense as represent- 
 ing profits, and that so-called dividends of a mutual com- 
 pany doing business on the level premium plan, consisting 
 merely of the portion of the loading of the premium charged 
 in excess of the cost of insurance and returned annually to 
 the policy holders after the first year, so far as the same were 
 used to reduce subsequent premiums, were not income re- 
 ceived and not subject to the tax. At the same time it was 
 held that this rule does not apply to a dividend declared in 
 the case of a full-paid participating policy, wherein the policy 
 holder has no further premium payments to make, which divi- 
 
 (157)
 
 75 INCOME TAXATION (Ch. 6 
 
 dend constitutes a participation in the profits and income of 
 the invested funds of the company. 73 
 
 In the case of mutual fire insurance companies "requiring 
 their members to make premium deposits to provide for losses 
 and expenses," it is provided that they "shall not return as 
 income any portion of the premium deposits returned to their 
 policy holders, but shall return as taxable income all income 
 received by them from all other sources plus such portions 
 of the premium deposits as are retained by the companies 
 for purposes other than the payment of losses and expenses 
 and reinsurance reserves." And in the case of mutual ma- 
 rine insurance companies, they "shall include in their return 
 of gross income gross premiums collected and received by 
 them less amounts paid for reinsurance, but shall be entitled 
 to include in deductions from gross income amounts repaid 
 to policy holders on account of premiums previously paid by 
 them and interest paid upon such amounts between the ascer- 
 tainment thereof and the payment thereof." 
 
 73 Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199, affirmed, 
 201 Fed. 918. And see New York Life Ins. Co. v. Styles, L. R. 14 
 App. Cas. 381, 59 Law J. Q. B. 291. But compare Last v. London 
 Assur. Corp., L. R. 10 App. Cas. 438. In the latter case it appeared 
 that a life insurance company issued "participating policies" at an 
 increased premium, according to the terms of which, at the end of 
 each five year period, the gross profits of such policies were dealt 
 with as follows: Two- thirds were returned by way of bonus of abate- 
 ment of premiums to the holders of such policies then in force, and 
 the remaining one-third went to the company, which bore the whole 
 expense of the business, the portion remaining after payment of ex- 
 penses constituting the only profit available for dividends among the 
 shareholders. It was held that the two-thirds returned to policy 
 holders were "annual profits or gains" and assessable for the income 
 tax. 
 
 (158)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 76 
 
 CHAPTER VII 
 
 EXEMPTIONS AND EXCEPTIONS 
 
 76. Revenues of United States. 
 
 77. States and Municipal Corporations. 
 
 78. Agricultural and Horticultural Organizations. 
 
 79. Labor Organizations. 
 
 80. Fraternal Orders and Benefit Societies. 
 
 81. Religious, Charitable, and Benevolent Associations. 
 
 82. Educational and Scientific Institutions. 
 
 83. Building and Loan Associations. 
 
 84. Savings Institutions. 
 
 85. Civic Organizations and Chambers of Commerce. 
 
 86. Income from Property Otherwise Taxed. 
 
 87. Proceeds of Life Insurance Policies. 
 
 88. Exemption of Fixed Amount of Income. 
 
 76. Revenues of United States 
 
 The legislature of Wisconsin, in enacting the income tax 
 law of that state, in 1911, was at pains to exempt from taxa- 
 tion under the statute "income received by the United 
 States." But a similar exception would be necessarily im- 
 plied in any tax law of any state. In the federal income tax 
 law of 1913 the precise point is not covered, but it is a fixed 
 principle of statutory construction that the sovereign or gov- 
 ernment is never included within the scope of a statute im- 
 posing taxes unless expressly named. Besides, the govern- 
 ment of the United States could not properly be described as 
 a "person," a "citizen of the United States," or a "corpora- 
 tion, joint stock company or association." This point might 
 be of practical importance in its application to the case of a 
 federal officer receiving fees for services or a postmaster 
 taking in money from the sale of stamps. If the receipts of 
 the office (or fees) constitute the officer's compensation, they 
 are a part of his private income, and may be taxable ; but if 
 he is paid a salary and required to turn in the fees or re- 
 
 (159)
 
 77 INCOME TAXATION (Ch. 7 
 
 ceipts of his office to the treasury, such moneys are public 
 revenues and not taxable. 1 
 
 77. States and Municipal Corporations 
 
 It is not within the constitutional authority of Congress 
 to lay the burden of federal taxation upon the revenues of 
 a state or a municipal corporation, at least in so far as the 
 same are raised by the ordinary methods of state and local 
 taxation, or accrue from property owned or money invested 
 by a state. Thus, it has been held that the word "corpora- 
 tion," in an internal revenue law, does not include a state, 
 so that a railroad wholly owned by a state, managed by 
 state agents, and the profits of which form a part of the 
 revenue of the state, is not liable to taxation under such 
 law. 2 So also, a municipal corporation is, at least in its po- 
 litical aspects, a portion of the sovereign power of the state, 
 or a depository thereof, and therefore is not subject to taxa- 
 tion by Congress upon its municipal revenues. 3 But the ex- 
 emption of a state from taxation extends no further than the 
 functions belonging to a state in its ordinary capacity, the 
 exemption of sovereignty being limited by the attributes of 
 sovereignty. Hence if a state unites in one undertaking an 
 exercise of the police power with a commercial business, 
 as in the case of the South Carolina dispensary law, where 
 regulation of the sale of intoxicating liquors was effected by 
 the state itself engaging in the business and monopolizing 
 the traffic, the United States cannot be compelled to aid 
 the operation of the police power by foregoing its right to 
 lay an impost or excise tax on the business part of the trans- 
 action. And hence, the agents of the state government em- 
 ployed in the operation of the dispensary law were held lia- 
 
 1 Supra, 64. 
 
 2 Georgia v. Atkins, 35 Ga. 315, 1 Abb. U. S. 22, Fed. Gas. No. 
 5,350. 
 
 s United States v. Baltimore & O. R. Co., 17 Wall. 322, 21 L. Ed. 
 597. 
 
 (160)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 77 
 
 ble to pay the internal revenue tax imposed by the act of 
 Congress. 4 And the Supreme Court of the United States 
 has also ruled that a municipal corporation engaged in the 
 business of distilling spirits is subject to internal revenue 
 taxation under the laws of the United States, whether its acts 
 in that respect are or are not ultra vires. 5 It was probably 
 with a view to just such cases as these that Congress, in the 
 income tax law of 1913, has expressly disclaimed the inten- 
 tion to apply the statute to the revenues of states or munici- 
 pal corporations. (Subsection G, clause "a," at the end. 
 See Appendix.) 
 
 It is undoubtedly within the power of a state to tax the 
 revenues of its own municipal corporations if it shall see fit 
 to do so. And so far as concerns income taxation, the prin- 
 ciple appears to be that profits derived by a municipality from 
 anything outside the scope of its ordinary and necessary 
 municipal functions, and in the nature of a business enter- 
 prise, will be subject to the income tax. Thus, in England, 
 a municipal corporation owning and operating its own sys- 
 tem of waterworks, for distribution to its inhabitants, is held 
 not taxable on the income derived therefrom, 6 but it is liable 
 to assessment in respect to surplus revenue derived from 
 supplying water beyond the area of compulsory supply and 
 from the sale of water for the purposes of trade or manu- 
 facture. 7 So also, a municipal corporation is subject to 
 taxation upon profits derived from the maintenance of a 
 market or a market hall. 8 And in a case where a quasi-mu- 
 
 * South Carolina v. United States, 199 U. S. 437, 26 Sup. Ct 110, 
 50 L. Ed. 261, 4 Am. & Eng. Ann. Gas. 737. 
 
 s Salt Lake City v. Hollister, 118 U. S. 256, 6 Sup. Ct. 1055, 30 L. 
 Ed. 176. 
 
 o In re Glasgow Corp. Waterworks, 12 Scotch Law Rep. 466, 1 Tax 
 Cas. 28. 
 
 7 Glasgow Corp. Water Com'rs v. Miller, 23 Scotch Law Rep. 285, 
 2 Tax Cas. 131. 
 
 s In re Birmingham Corp., 1 Tax Cas. 26 ; Attorney General v. 
 Scott, 28 Law T. 302, 1 Tax Cas/55. 
 
 BL.INC.TAX. 11 (161)
 
 77 INCOME TAXATION (Ch. 7 
 
 nicipal corporation had constructed and was maintaining a 
 sewer, the funds being raised by a public loan repayable in 
 annual installments, and the money for such repayment was 
 found partly by contributions levied from neighboring dis- 
 trict councils, whose sewage went through the sewer, and 
 partly from rates, and this was the only income, it was held 
 nevertheless that the corporation was liable to the income 
 tax. 8 It was ruled by the officers of the treasury depart- 
 ment that a municipal corporation which owns and operates 
 its own waterworks, or a plant for the production and dis- 
 tribution of gas or electric light to its citizens, was not sub- 
 ject to the corporation tax under the act of Congress of 
 1909, although it makes and collects fixed charges for the 
 service so rendered and derives a profit therefrom. But 
 this was on the explicit ground that a municipality is not a 
 corporation "organized for profit" or one "having a capital 
 stock represented by shares," within the language of that 
 statute. 10 Such questions are by no means free from doubt. 
 But they are not of great practical importance at the present 
 time, since the modern income tax laws generally exclude 
 municipal corporations, either expressly or by the use of 
 language which cannot be held to include them. Thus in 
 Wisconsin, the statute exempts "income received by the 
 state and all counties, cities, villages, school districts, or oth- 
 er political units of this state." In South Carolina, the stat- 
 ute is made applicable to "persons" and "citizens o! the 
 state," but expressly excludes all corporations. In Hawaii, 
 the phrase employed is more ambiguous ; but a municipality 
 could hardly be described as a "corporation doing business 
 for profit within the territory." 
 
 9 Ystradyfodwg & Pontypridd Main Sewerage Board v. Bensted 
 [1907] App. Cas. 264. 
 
 10 Treasury Decisions, No. 1634. 
 
 (162)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 78 
 
 78. Agricultural and Horticultural Organizations 
 
 Following the language of the act of 1909, the income tax 
 law of 1913 specifically exempts from its operation "agri- 
 cultural or horticultural organizations." The phrase has 
 not been judicially construed by the courts, but several rul- 
 ings of the treasury department have indicated its meaning, 
 as viewed by the officers charged with the administration of 
 the law. Agricultural organizations, it was ruled, do not 
 come within the statutory exemption, unless their chief ob- 
 ject is the promotion or advancement of agricultural in- 
 terests, and no part of the income inures to the benefit of 
 their stockholders. "A corporation engaged in agricultural, 
 horticultural, or similar pursuits, evidently for profit, is not, 
 within the meaning of the law, such an agricultural or hor- 
 ticultural association as is specifically enumerated as exempt 
 from the requirements of the act cited. Corporations, to 
 come within the exempted class, must be such associations 
 as, by means of exhibits, contests, awards, and premiums, are 
 designed to encourage better production of agricultural or 
 horticultural products, not themselves engaged in agricul- 
 tural or horticultural pursuits, such as county fairs and like 
 organizations of a quasi public character, whose income, 
 derived from gate receipts, entry fees, donations, etc., is used 
 to meet the necessary expenses of the association, 'the pay- 
 ment of premiums, making improvements, etc., no part of 
 which income inures to the benefit of any private stockhold- 
 er or individual. A corporation engaged in the business of 
 raising stock or poultry, or growing grain, fruits, or other 
 products of this character, is an agricultural or horticultural 
 society only in the sense that it indicates the kind of busi- 
 ness in which it is engaged. If the business of the corpora- 
 tion so engaged is so carried on that its income inures or 
 may inure to the benefit of its stockholders, it will be held to 
 be a corporation organized for profit, and, regardless of the 
 fact that it may be engaged in agricultural or horticultural 
 
 (163)
 
 79 INCOME TAXATION (Ch. 7 
 
 pursuits, it must make returns of annual net income for each 
 calendar year, and pay any special excise tax to which such 
 returns may show it to be liable." X1 Thus, fruit growers' 
 associations whose purpose is to promote the mutual benefit 
 of their members in growing, harvesting, and marketing 
 their products, and which are not organized for profit and 
 have no capital stock represented by shares, and whose in- 
 come is derived wholly from membership fees, dues, and as- 
 sessments to meet necessary expenses, are not liable to the 
 tax. 12 But on the other hand, corporations owning sugar or 
 other plantations and disposing of the products thereof, are 
 not entitled to the exemption simply in view of the nature 
 of their business. 13 And corporations engaged in growing 
 fruits, vegetables, and like products for profit, and which 
 distribute such profits among their members on the basis of 
 the capital invested, are liable to the statute, and must make 
 returns and pay the taxes if any are found to be due. 14 
 
 79. Labor Organizations 
 
 A specific exemption is made in the federal income tax 
 law in favor of "labor organizations." This phrase is not 
 elsewhere defined in the act, but the intention of Congress 
 in this behalf is plainly indicated by the events of political 
 history and the trend of legislation in recent years. The 
 term "labor," as here used, evidently cannot be taken in the 
 rather wide sense given to it in some other phrases familiar 
 in the law, such as "work and labor," "common labor," 
 "worldly labor," and the like. But the organizations refer- 
 red to are those associations of mechanics and artisans, and 
 even of unskilled laborers, which are formed for the pur- 
 pose of the mutual advantage and protection of their mem- 
 
 11 Treasury Decisions, No. 1737. 
 
 12 Treasury Decisions, No. 1742, par. 29. 
 is Treasury Decisions, No. 1742, par. 23. 
 i* Treasury Decisions, No. 1742, par. 30. 
 
 (164)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 80 
 
 bers, for enforcing the regulations which they prescribe 
 with reference to the conditions and hours of labor and the 
 rate of wages, and other such objects, and which are com- 
 monly called "trades unions" or "brotherhoods," "federa- 
 tions," "guilds," or "unions" of the mechanics employed in 
 any given trade or craft. Though such associations "are 
 not explicitly exempted in the income tax laws of the states, 
 they do not ordinarily come within the definition of the 
 kinds of corporations which shall be taxable, or else they 
 fall within the terms of a general exempting clause, as in 
 Wisconsin, where the statute exempts "associations of in- 
 dividuals not organized or conducted for pecuniary profit." 
 
 80. Fraternal Orders and Benefit Societies 
 
 There is also a specific exemption in the act of Congress 
 in favor of "fraternal and beneficiary societies, orders, or 
 associations operating under the lodge system, and provid- 
 ing for the payment of life, sick, accident, and other benefits 
 to the members of such associations and dependents of such 
 members." As here used, the word "lodge" means the meet- 
 ing place (and hence the meeting itself or the aggregate of 
 the members) of a secret society or fraternity. 15 Such bod- 
 ies are very numerous in the United States, and for the most 
 part they combine with their social, moral, or philanthropic 
 objects the grant of pecuniary relief to sick or disabled 
 members and to the families of deceased members. Many 
 are in fact but mutual insurance associations, their revenues 
 being derived from entrance fees, membership dues, and oc- 
 casional assessments levied on the members, and expended 
 (over and above the cost of management and other small 
 necessary expenses) in the payment of sick, accident, and 
 death benefits. The officers of the treasury department 
 have ruled that such an association, if it does not "oper- 
 
 15 State v. Farmers' & Mechanics' Mut Aid Ass'n, 35 Kan. 51, 9 
 Pac. 956. 
 
 (165)
 
 81 INCOME TAXATION (Ch. 7 
 
 ate under the lodge system," is simply an insurance com- 
 pany and subject to the tax, notwithstanding that all its 
 funds are derived from membership fees and assessments 
 and expended in the payment of such benefits. 16 
 
 81. Religious, Charitable, and Benevolent Associations 
 
 The act of Congress also exempts "any corporation or 
 association organized and operated exclusively for reli- 
 gious, charitable, scientific, or educational purposes, no part 
 of the net income of which inures to the benefit of any 
 private stockholder or individual." And the statute of 
 Wisconsin exempts any "association of individuals" or- 
 ganized for "religious or benevolent" purposes, and not 
 "organized or conducted for pecuniary profit." The rules 
 with reference to the exemption of such associations from 
 the burdens of ordinary taxation have been well worked 
 out by the courts, and will generally be found applicable 
 in the case of the special tax here under consideration. 
 Specifically with regard to the corporation excise tax of 
 1909, it was ruled that a charitable institution was exempt 
 whether it was supported by voluntary contributions or by 
 state appropriations. 17 In England, the rule has been stat- 
 ed that, in the income tax law, the words "charitable pur- 
 poses" are to be interpreted, not according to their popular 
 meaning, but according to their technical legal significa- 
 tion, though it was held in the same case that the phrase 
 would include a home or asylum for the maintenance of 
 single persons and widows belonging to the Moravian 
 brotherhood. 18 And it is a general rule, in the construc- 
 tion of exemptions from taxation that the word "charity" 
 is not to be restricted to the relief of the sick or poor, but 
 extends to any form of philanthropic endeavor or public 
 
 i e Treasury Decisions, No. 1738. 
 
 if Treasury Decisions, No. 1742, par. 4. 
 
 is Income Tax Com'rs v. Pemsel [1891] App. Cas. 531, 3 Tax Gas. 53. 
 
 (166)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 81 
 
 beneficence. 19 And even under the more restricted form 
 of exemption under the tax laws of some of the states, ex- 
 tending to "public" charities, or "institutions of purely pub- 
 lic charity," it is held that the term "public" is not equiva- 
 lent to "universal." The exemption would not apply to a 
 charity limited to a certain class of privileged individuals. 
 But on the other hand, it need not be open to all persons 
 alike, for the "public" to which it administers relief may be 
 limited to the inhabitants of a given city or other place, or 
 may be restricted to the sufferers from particular diseases 
 or forms of need, or with reference to nationality, color, or 
 religious connections. 20 Also it is a well-recognized rule 
 that an institution such as a hospital or asylum does not 
 lose its character as a "charitable institution" because it 
 receives pay patients, or in other words requires those of 
 sufficient pecuniary ability to pay for the accommodation 
 and treatment which they receive, if the income thus de- 
 rived is not distributed among the corporators or stock- 
 holders, but applied exclusively to the purposes of the in- 
 stitution, and if, at the same time, poor or indigent patients 
 are received and treated without charge. 21 But an English 
 decision holds that if a hospital takes paying patients at re- 
 munerative prices, and applies its surplus income to the ex- 
 tension and improvement of the hospital buildings, the sur- 
 
 i See Gerke v. Purcell, 25 Ohio St. 229; Cleveland Library Ass'n 
 v. Pelton, 36 Ohio St 253; State v. Academy of Science, 13 Mo. App. 
 213 ; Massachusetts Society v. Boston, 142 Mass. 24, 6 N. E. 840. 
 
 20 Bangor v. Masonic Lodge, 73 Me. 428; Burd Orphan Asylum 
 v. School Dist, 90 Pa. St. 21 ; Hebrew Orphan Asylum v. New York, 
 11 Hun (N. Y.) 116 ; Income Tax Com'rs v. Pemsel [1891] App. Cas. 
 531, 3 Tax Cas. 53 ; Hastings v. Long, 11 Pa. Dist. R. 70. 
 
 21 State v. Board of Assessors, 52 La. Ann. 223, 26 South. 872; 
 Hennepin County v. Brotherhood of Gethsemane, 27 Minn. 460, 8 
 N. W. 595, 38 Am. Rep. 298 ; Philadelphia v. Pennsylvania Hospital, 
 154 Pa. St. 9, 25 Atl. 1076; Cawse v. Nottingham Lunatic Asylum 
 [1891] 1 Q. B. 585, 60 Law J. Q. B. 485; Blake v. London, 18 Q. B. 
 Div. 437. But see Needham v. Bowers, L. R. 21 Q. B. Div. 437, 2 
 Tax Cas. 360. 
 
 (167)
 
 82 INCOME TAXATION (Ch. 7 
 
 plus is profit and assessable for the income tax. 22 The 
 business of maintaining a cemetery, from which revenues 
 are derived in the form of cash for the sale of grave-sites 
 or burial lots and annual dues or assessments upon lot- 
 owners for the care of the grounds, is not a charity, and a 
 corporation owning and conducting the cemetery is taxable 
 on the income derived from it. 23 But the federal income 
 tax law of 1913 contains a specific exception in favor of 
 "cemetery companies organized and operated exclusively 
 for the mutual benefit of their members." 
 
 82. Educational and Scientific Institutions 
 
 The act of Congress exempts corporations organized for 
 "scientific or educational purposes," and that of Wisconsin 
 "scientific and educational associations." It has been held 
 that a provision of an income tax law exempting from its 
 operation private schools, colleges, and other educational 
 institutions does not make an illegal discrimination such as 
 to render the law invalid as to other corporations or per- 
 sons upon whom the tax is imposed. 24 But it seems clear 
 that a private school, in which tuition fees are charged, and 
 from which a revenue is derived over and above the ex- 
 penses, would not be exempt under either of the provisions 
 quoted, since the federal statute applies only to educational 
 institutions "no part of the net income of which inures to 
 the benefit of any private stockholder or individual," and 
 the state law applies to such institutions only when "not 
 organized or conducted for pecuniary profit." On the 
 other hand, the exemption under these statutes is appar- 
 
 22 St. Andrew's Hospital v. Shearsmitb, L. R. 19 Q. B. Div. 624, 
 2 Tax Cas. 219. 
 
 23 Paddington Burial Board v. Com'rs of Inland Revenue, L. R. 
 13 Q. B. Div. 9, 2 Tax Cas. 46; Paisley Cemetery Co. v. Reith. 35 
 Scotch Law Rep. 947, 4 Tax Cas. 1; Edinburgh Southern Cemetery 
 Co. v. Kinmont, 2 Tax Cas. 516. 
 
 a* Peacock v. Pratt, 121 Fed. 772, 58 C. C. A. 48. 
 
 (168)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 83 
 
 ently broad enough to include various kinds of institutions 
 which derive their current revenues partly from endow- 
 ment funds and partly from small charges to the public for 
 admission to their buildings or for the use of their privi- 
 leges, such as art galleries, museums of curiosities or antiq- 
 uities, academies of the fine arts, institutions for the ex- 
 hibition of objects illustrating the natural sciences, public 
 libraries, and the like. In the general law of taxation, and 
 with reference to exemptions, there has been much doubt 
 as to whether such institutions could be classed as 
 "schools," "institutions of learning," "purely public chari- 
 ties," or the like. 25 But under the income tax laws, the 
 test is in the question whether or not they are conducted 
 for profit, or whether or not any part of the income is dis- 
 tributed to the proprietors, corporators, or shareholders 
 as a gain or profit. And on the analogy of many similar 
 cases, it would seem that the mere fact of admission fees 
 being charged would not make them institutions conducted 
 for profit, if the revenue so obtained is applied to the up- 
 keep or expansion of the institution, rather than to the 
 benefit of any private person interested in it. 
 
 83. Building and Loan Associations 
 
 Domestic building and loan associations are exempt under 
 the act of Congress of 1913 when "organized and operated 
 exclusively for the mutual benefit of their members," follow- 
 ing the language of the corporation tax law of 1909. And a 
 similar exemption is found in the Wisconsin statute. It was 
 ruled by the treasury department that "building and loan 
 associations are not exempt if they loan money to others than 
 
 26 Academy of Fine Arts v. Philadelphia County, 22 Pa. St. 496 ; 
 Gerke v. Purcell, 25 Ohio St. 229 ; Salem Lyceum v. Salem, 154 Mass. 
 15, 27 N. E. 672 ; Mercantile Library Co. v. Philadelphia, 14 Pa. Co. 
 Ct. R. 204; Cleveland Library Ass'n v. Pelton, 36 Ohio St. 253; 
 Philadelphia Library Co. v. Donohugh, 12 Phila. (Pa.) 284; Man- 
 chester v. McAdam [1896] App. Cas. 500. 
 
 (169)
 
 83 INCOME TAXATION (Ch. 7 
 
 their members, thus doing a business similar to that engaged 
 in by banks and trust companies. It is also held that building 
 and loan associations which receive sums of money on deposit, 
 which is not in payment of stock, and on which the depositor 
 receives a fixed rate of interest, regardless of the earnings 
 of the association, are conducting a business similar to a bank- 
 ing business, and are therefore subject to the special excise 
 tax on corporations and should be required to make a return 
 showing their net income." 26 It was likewise held that such 
 associations, providing for the loaning of funds to nonmem- 
 bers, for issuing preferred or guarantied interest-paying stock, 
 and allowing directors to cancel outstanding certificates of 
 general stock not borrowed upon, paying the holder the book 
 value of stock canceled, thereby being authorized to retire any 
 and all stock in their discretion, are not exempt from the 
 tax. 27 But it was held in a later case that, when a building 
 and loan association is organized under the New Jersey stat- 
 ute solely for the purpose of making building loans to its 
 members, who are entitled to vote in the management of the 
 association's affairs, according to membership and not by vir- 
 tue of stockholding, it is an association for the mutual benefit 
 of its members, within the meaning of the statute, although, 
 under its plan of operation, there may be inequality in the 
 returns to the prepaying stockholder, etc., since the word 
 "mutual" is not to be taken as synonymous with "equal." 
 Reference was made to the decision above cited, but it was 
 said: "That case does not appear to be applicable. The 
 shareholders in that association voted for the directors by the 
 share, thereby affording opportunity for a few individuals, by 
 the acquisition of shares, to control the policy of the associa- 
 tion. The funds of that association appear to have been a sub- 
 ject of loans to any borrower, without respect to member- 
 
 26 Treasury Decisions, No. 1655. 
 
 27 Pacific B. & L. Ass'n v. Hartson, 201 Fed. 1011. 
 
 (170)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 84 
 
 ship in the association ; and there was a provision for the can- 
 cellation of outstanding certificates of stock not borrowed 
 upon whenever the board of directors deemed advisable to 
 pay the holder the book value of the stock so canceled. In 
 almost every aspect the case cited on behalf of the collector 
 is not applicable to the present case." 28 
 
 84. Savings Institutions 
 
 In Wisconsin, "mutual savings associations" are exempt 
 from the payment of the income tax. Whether or not an 
 institution exercising some of the functions of a bank is to be 
 classed as a "savings bank," "savings institution," or "savings 
 association," must be determined not by the name which it 
 assumes or by which it is chartered, but by its organization, 
 powers, and mode of doing business, as provided in its articles 
 of incorporation. 29 And the phrases above quoted do not 
 apply to every bank merely because it receives deposits of 
 savings. The kind of associations intended by the law in Wis- 
 consin are those which are operated exclusively for the mutual 
 benefit of the depositors, who alone and not any stockhold- 
 ers or proprietors are entitled to participate in the profits. 
 Such associations are authorized under the laws of numerous 
 states, as for example, Massachusetts, where they are thus 
 described : A savings bank, as existing in this state, subject 
 to the general laws, is an institution for the purpose of receiv- 
 ing deposits for the benefit of depositors, investing the same, 
 accumulating the profits or interest thereof, paying such prof- 
 its or interest to the depositor, or retaining the same for his 
 greater security. There is no capital stock, and no stock- 
 holders who are entitled to receive profits from the business ; 
 but its affairs are administered by a board of trustees, the se- 
 curities in which the deposits shall be invested are prescribed 
 by law, and the conduct of its affairs is under the super- 
 
 zs Parkview B. & L. Ass'n v. Herold, 203 Fed. 876. 
 2 State v. Lincoln Sav. Bank, 14 Lea (Tenn.) 42. 
 
 (171)
 
 84 INCOME TAXATION (Ch. 7 
 
 vision of a public officer. 30 So, in New Jersey, it is said that 
 a savings bank is a quasi charitable and purely benevolent in- 
 stitution, its only object being the safe keeping and provident 
 investment of the funds of the depositors. The members of 
 the corporation have no property interest in its funds, of 
 which they are by law constituted the managers and guardians. 
 The depositors, who alone are beneficially interested, have no 
 voice in the management, nor even in the selection of the 
 persons to whom the management is intrusted. Savings banks 
 have no capital stock. They are incorporated and organized, 
 not for the benefit of the corporators, but solely for the ad- 
 vantage of their depositors. 31 
 
 Also under the federal income tax law of 1913 there is a 
 special exemption in favor of "mutual savings banks not hav- 
 ing a capital stock represented by shares." 
 
 85. Civic Organizations and Chambers of Commerce 
 
 It is specially provided in the federal income tax law that 
 its terms shall not apply to "business leagues, nor to chambers 
 of commerce or boards of trade, not organized for profit or no 
 part of the net income of which inures to the benefit of the 
 private stockholder or individual; nor to any civic league or 
 organization not organized for profit, but operated exclusively 
 for the promotion of social welfare." A board of trade, as the 
 term is used in America, is an organization of the principal 
 merchants, manufacturers, tradesmen, etc., of a city, for the 
 purpose of furthering its commercial interests, encouraging 
 the establishment of manufactures, promoting trade, securing 
 or improving shipping facilities, and generally advancing the 
 prosperity of the place as an industrial and commercial com- 
 munity. 32 Exactly similar organizations are sometimes called 
 
 so Commonwealth v. Reading Sav. Bank, 133 Mass. 13, 43 Am. 
 Rep. 495. 
 
 si Barrett v. Bloomfield Sav. Inst., 64 N. J. Eq. 425, 54 Atl. 543. 
 32 Black, Law Diet, voc. "Board." 
 
 (172)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 86 
 
 "chambers of commerce," and the two terms are frequently 
 stated to be synonymous. 33 But more strictly speaking, one 
 of the objects of a chamber of commerce is to promote con- 
 venience or facility in buying, selling, and exchanging com- 
 modities. If these commodities include stocks, bonds, and 
 other securities, the body practically fulfills the functions of a 
 stock exchange. And in fact, in some cities, the stock ex- 
 change is officially denominated the "chamber of commerce" 
 or the "board of trade." If, in this sense, it is organized 
 for profit, or has a net income which inures to the benefit of 
 the members, it is clearly not within the exemption, but is 
 subject to taxation under the act. 
 
 86. Income from Property Otherwise Taxed 
 
 In the several states, particularly Massachusetts, North Car- 
 olina, and Oklahoma, the law specifically exempts from the in- 
 come tax such income as fs derived from property which is it- 
 self subject to a tax or on which a tax has already been paid 
 for the current year. The Wisconsin statute contains the fol- 
 lowing provision: "Any person who shall have paid a tax 
 upon his personal property during any year shall be permitted 
 to present the receipt therefor to, and have the same accepted 
 by, the tax collector to its full amount in the payment of taxes 
 due upon the income of such person during said year." But 
 one who claims exemption from an income tax on the ground 
 that his income consists of or is derived from property not 
 liable to taxation, must affirmatively show that such is the 
 case, 34 and it is believed the same rule should apply to the 
 case of one who claims exemption on the ground that the 
 property which has yielded the income is subject to taxation 
 or has paid the tax. And income derived from an independent 
 source is not exempted from the income tax because it has 
 been applied to the payment of a debt due for real estate, pur- 
 
 33 Century Diet., voc. "Chamber," "Trade." 
 
 s* City of New Orleans v. Fourchy, 30 La. Ann. 910. 
 
 (173)
 
 87 INCOME TAXATION (Ch. 7 
 
 chased on credit, and upon which real estate a tax has been 
 assessed and paid for the same period within which such in- 
 come accrued. 36 
 
 87. Proceeds of Life Insurance Policies 
 
 Money received from a life insurance company in settlement 
 of a claim under a policy for the death of the assured would 
 probably have to be reckoned as part of the "income" of the 
 beneficiary or recipient, if not specifically exempted. But in 
 pursuance of a humane and wise policy, the income tax laws 
 have generally provided for the exemption of such funds. 
 The act of Congress excepts from the description of taxable 
 income the proceeds of life insurance policies paid upon the 
 death of the person insured, without any limitation as to the 
 amount. The statutes in Wisconsin exempts "insurance to the 
 total amount of ten thousand dollars received by any person 
 or persons legally dependent upon the decedent, in payment of 
 a death claim by any insurance company, fraternal benefit so- 
 ciety, or other insurer." It will be observed that insurance 
 money is not exempt in the hands of any beneficiary who was 
 not "legally dependent upon the decedent," and that any 
 amount of money so received above the sum of ten thousand 
 dollars is taxable as income of the year, without regard to the 
 relation between the decedent and the beneficiary. It may 
 also be remarked that, under either of these statutes, money 
 received by the assured himself, as in the case of accident in- 
 surance, will not be exempt, since in theory it merely takes 
 the place of what he would have earned during the period of 
 his disability. But as to life insurance proper, the act of 
 Congress also exempts "payments made by or credited to the 
 insured, on life insurance, endowment, or annuity contracts, 
 upon the return thereof to the insured at the maturity of the 
 term mentioned in the contract, or upon surrender of the 
 
 ss Lott v. Hubbard, 44 Ala. 593. 
 (174)
 
 Ch. 7) EXEMPTIONS AND EXCEPTIONS 88 
 
 contract." Money so returned, it is provided, "shall not be 
 included as income." 
 
 88. Exemption of Fixed Amount of Income 
 
 All income tax laws have wholly exempted incomes below 
 a certain fixed minimum, and allowed the deduction of a like 
 amount from incomes large enough to be subject to the tax. 
 The object is to relieve from the burden of this tax those per- 
 sons whose annual earnings or gains are no more than suffi- 
 cient to maintain a decently comfortable existence, and to 
 permit persons of larger means to deduct a sum which may 
 represent the ordinary living expenses of the average family, 
 so that the tax may not fall upon the necessaries of life or a 
 reasonable share of its comforts, but only upon superfluous 
 income. As corporations and partnerships have no corre- 
 sponding expenses, they are not entitled to the exemption of 
 a fixed sum. The amount of this fixed exemption has varied 
 enormously in different localities and at different times. In 
 the European countries deriving a revenue from this source, 
 it is very small, as, for instance, in Great Britain, $800; in 
 Prussia, $214; in Norway, $270; in Denmark, $540; in Aus- 
 tria, $250. Under the act of Congress of 1861, the exemption 
 was $800. This was reduced to $600 in the acts of 1862 and 
 1864, but was raised to $2,000 in the act of 1870. In the act 
 of 1894, it was fixed at $4,000. The income tax law of North 
 Carolina exempts incomes below $1,000; in South Carolina 
 the exemption is $2,500; in Oklahoma, $3,500; in Virginia, 
 $1,000; in Hawaii, $1,000. The Massachusetts statute taxes 
 "The excess above two thousand dollars of the income from a 
 profession, trade, or employment." The Wisconsin statute 
 allows exemptions as follows : (a) To an individual, income up 
 to and including $800; (b) To husband and wife, $1,200; (c) 
 For each child under the age of eighteen years, $200; (d) 
 For each additional person, for whose support the taxpayer 
 is legally liable and who is entirely dependent upon the tax- 
 
 (175)
 
 88 INCOME TAXATION (Ch. 7 
 
 payer for his support, $200. The provision of the act of 
 Congress of 1913 is that each taxable person shall be entitled 
 to an exemption of $3,000, with an additional exemption of 
 $1,000 in case the taxpayer is either a "married man with a 
 wife living with him" or a "married woman with a husband 
 living with her." But in no event shall this additional exemp- 
 tion be deducted by both a husband and wife, and only one 
 deduction of $4,000 shall be made from the aggregate income 
 of both husband and wife when living together. It is, in fact, 
 a common provision of income tax laws that only one de- 
 duction of the fixed amount is allowed to be made from the 
 aggregate income of a family, the husband and father, if he 
 makes the return, being required to include the separate in- 
 come of his wife and of any of his minor children who may 
 have independent sources of income. In the case of guard- 
 ians making the return for their wards, the deduction is 
 allowed to be made from the income of each ward, except 
 where two or more of them are included in the same family, in 
 which event only one deduction from the aggregate is allowed. 
 Objection has been made to the constitutional validity of such 
 a provision, but it has been sustained by the courts. 36 
 
 In regard to the federal income tax, special provision had 
 to be made with reference to taxing the income of the year 
 1913, since, prior to the adoption of the Sixteenth Amend- 
 ment, Congress had no constitutional authority to lay a tax 
 on incomes, unless the tax should be apportioned among the 
 several states. This point has been covered by the insertion 
 of the following proviso: "That for the year ending De- 
 cember thirty-first, nineteen hundred and thirteen, said tax 
 shall be computed on the net income accruing from March 
 first to December thirty-first, nineteen hundred and thirteen, 
 both dates inclusive, after deducting five-sixths only of the 
 specific exemptions and deductions herein provided for." 
 
 se Robertson v. Pratt, 13 Hawaii, 590. 
 (176)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 89 
 
 CHAPTER VIII 
 DEDUCTIONS AND ALLOWANCES 
 
 89. Expenses of Business. 
 
 90. Same ; Wages and Salaries. 
 
 91. Same; Traveling Expenses. 
 
 92. Same ; Cost of Insurance. 
 
 93. Same; Rent of Land, Buildings, or Equipment 
 
 94. Same; Mining Operations. 
 
 95. Same; Judgments. 
 
 96. Repairs, New Buildings, and Improvements. 
 
 97. Interest on Indebtedness. 
 
 98. Taxes Accrued or Paid. 
 
 99. Losses Uncompensated. 
 
 100. Debts Written Off as Worthless. 
 
 101. Depreciation of Property. 
 
 102. Depletion of Ores or Other Natural Deposits. 
 
 103. Amortization of Bonds. 
 
 104. Dividends from Corporations Subject to Tax. 
 
 105. Special Rules as to Insurance Companies. 
 
 106. Rules as to Foreign Corporations. 
 
 89. Expenses of Business 
 
 The income tax act of Congress of 1913 allows the indi- 
 vidual taxpayer to deduct from his return of net income "the 
 necessary expenses actually paid in carrying on any business, 
 not including personal, living, or family expenses." In the 
 case of domestic corporations, it allows the deduction of "all 
 the ordinary and necessary expenses paid within the year in 
 the maintenance and operation of its business and properties." 
 In the case of foreign corporations, the deduction may in- 
 clude "all the ordinary and necessary expenses actually paid 
 within the year out of earnings in the maintenance and opera- 
 tion of its business and property within the United States." 
 The Wisconsin income tax law allows a corporation to deduct 
 "ordinary and necessary expenses actually paid within the 
 year out of income in the maintenance and operation of its 
 BL.INC.TAX. 12 (177) '
 
 89 INCOME TAXATION (Ch. 8 
 
 business and property," and in the case of an individual, "the 
 ordinary and necessary expenses actually paid within the year 
 in carrying on the profession, occupation, or business from 
 which the income is derived." In South Carolina, the deduc- 
 tion includes "the necessary expenses actually incurred in 
 carrying on any business, occupation, or profession, not in- 
 cluding remuneration to the taxpayer for personal supervision 
 or the support and maintenance of his or her family." The 
 statute of Hawaii allows the deduction of "the necessary ex- 
 penses actually incurred in carrying on any business, trade, 
 profession, or occupation, or in managing any property." 
 The provision in Virginia is more restricted, as it relates only 
 to so much of the income as may be derived from farming or 
 other agricultural pursuits, and allows the deduction of "all 
 sums paid for taxes or for labor, fences, fertilizers, clover or 
 other seed purchased and used upon the land upon which the 
 vegetable and agricultural productions were grown or pro- 
 duced, and the rent of said land paid by said person, if he be 
 not the owner thereof." 
 
 It is the very evident purpose of all these statutes to lay the 
 tax only upon net income, that is to say, upon so much of the 
 gross income of the person or corporation as may remain 
 after deducting the expenses incurred directly in the produc- 
 tion or earning of the income. 1 At the same time, the indi- 
 vidual taxpayer is not allowed to deduct so much of his cur- 
 rent income as he has spent in the satisfaction of his personal 
 wants or desires or in the support and maintenance of his 
 family, because in the first place such expenditures have not 
 contributed directly to the production of the income to be tax- 
 ed, and in the second place, such expenses are supposed to be 
 covered, in the case of the ordinary or average family, by the 
 money exemption which the statutes also allow. But provi- 
 sions of this kind should be construed with some measure of 
 liberality. Thus it is held that, where a statute taxes a cer- 
 
 i Poland v. Lamoille Valley R. Co., 52 Vt 144, 177. 
 (ITS)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 89 
 
 tain class of corporations (such as insurance companies) only 
 upon income derived from one particular source (such as mort- 
 gages), and allows all taxpayers to deduct expenses incurred 
 "in the production of their income," such a company is en- 
 titled to deduct all the expenses incurred in the production, 
 not merely of its income from mortgages, but of its income 
 as a whole. 2 
 
 What may be comprehended in the general description of 
 "ordinary and necessary expenses" will depend greatly upon 
 the nature of the business, trade, or pursuit carried on. But 
 in all cases the prime distinction is to be taken between in- 
 vestment of capital assets and current expenses. Thus, in the 
 case of a manufacturing establishment, the purchase and re- 
 newal of the machinery necessary for the operation of the 
 plant would be regarded as an investment of capital, and could 
 not be deducted as an item of expense. This was brought out 
 in an English case, where a corporation, with a view to ex- 
 tending its business, opened a factory and installed machinery, 
 but subsequently closed it, removed a portion of the ma- 
 chinery, and re-opened the factory on a smaller scale, and 
 thereby lost a portion of the original expenditure. This was 
 held to be a loss of capital, and that no deduction could be al- 
 lowed therefor in assessing its income for taxation. 3 On the 
 other hand, where the business is one which is carried on in an 
 office, whatever constitutes permanent equipment might be 
 regarded as an investment of capital, but whatever is current- 
 ly consumed or used up in the ordinary business of the office 
 (stationery, for example) would come under the description 
 of expense. Thus it is held that ordinary expenditures made 
 by an insurance company for the renewal of office furniture 
 and other such perishable equipment does not constitute an ad- 
 dition to its assets, but is an expense of maintenance and oper- 
 ation, which it is entitled to deduct in computing net income 
 
 2 Commissioners of Taxation v. Teece [1899] App. Gas. 254. 
 a Smith v. Westinghouse Brake Co., 2 Tax Cas. 357. 
 
 (179)
 
 89 INCOME TAXATION (Ch. 8 
 
 for the purpose of the tax.* The cost of raw materials is 
 naturally an "expense" to the manufacturer, and the merchant 
 will reckon as an "expense" the prime cost of the goods which 
 he buys to sell again, including such items as freight or ex- 
 pressage. But in an English case, where part of the business 
 taken over by a company consisted of unexecuted contracts, 
 it was held that the price paid for such contracts was not a 
 proper deduction from the profits arising from their perform- 
 ance. 6 Wages and salaries paid to clerks, salesmen, oper- 
 atives, managers, and so on, are always an expense of operat- 
 ing any business in which their employment is necessary (see 
 the next section), and although the point has not been decided 
 with reference to tax laws, it can hardly be doubted that the 
 cost of advertising should be accounted an "ordinary and nec- 
 essary expense," in view of the conditions under which all 
 modern business is transacted. 6 And if the law of the state 
 or an ordinance of the municipality requires the payment of 
 an annual license fee or occupation tax, as a condition to the 
 right to carry on the particular business, it is a part of the 
 necessary and proper expense thereof. 7 But in England it is 
 held that brewers supplying "tied" houses (that is, public 
 houses for which the brewers procure and pay for the license, 
 on the condition that the house shall sell no other beer but 
 theirs) are not entitled to deduct from their profits, for the pur- 
 pose of the income tax, the expenses of unsuccessful ap- 
 plications for new licenses for such houses. 8 It appears also 
 though the question has more frequently arisen in other con- 
 nections that money paid to an attorney at law for his pro- 
 fessional services, in advising concerning legal problems which 
 arise in the course of the business conducted, and in drawing 
 
 * Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199. 
 City of London Contract Corp. v. Styles, 2 Tax Cas. 239. 
 See Foster v. Goddard, 1 Black (U. S.) 506, 17 L. Ed. 228. 
 T Kane v. Schuylkill Fire Ins. Co., 199 Pa. St. 205, 48 Atl. 989. 
 s Southwell v. Savill Brothers, Limited [1901] 2 K. B. 349, 4 Tax 
 Cas. 430. 
 
 (180)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 89 
 
 such papers as require legal skill and knowledge, may justly 
 be treated as a part of the "expenses" of the business, 9 and 
 similar decisions are to be found in regard to the costs and 
 expenses of prosecuting or defending suits at law, when litiga- 
 tion becomes a necessary incident of the business, either for 
 the recovery of debts or the repulse of unjust claims. 10 Many 
 other items of expenditure may present much more difficult 
 problems, but in general it may be said that the test is to de- 
 termine whether a particular outlay was an investment or an 
 expense of "maintenance or operation," and, in the latter case, 
 whether it was "necessary" and "ordinary." In an English 
 case, it appeared that a colliery company was a member of a 
 "coal owners' association," to which it paid an annual sub- 
 scription based on its output of coal. The object of the as- 
 sociation was to pay to its members an indemnity in the event 
 of deficiency or stoppage of output caused by strikes or other 
 such interferences. The company contended that the subscrip- 
 tion made for this purpose was a kind of insurance and there- 
 fore deductible as an expense of its business. But the court 
 held otherwise, and refused to permit it as a deduction in es- 
 timating the profits of the company for income taxation. 11 But 
 this decision was "distinguished" in a later case, not very easy 
 to reconcile with it. It appeared that the company in ques- 
 tion was a member of an association of manufacturers, which 
 was mainly formed for the purpose of keeping up prices. Un- 
 der the rules and pooling arrangements of the association, the 
 members were entitled each to a fixed proportion of all or- 
 ders received, and any member invoicing more than its pro- 
 portion must pay a fixed sum per ton on the excess to the pool 
 account, which was distributed among those members which 
 had invoiced less than their proportions. It was held that the 
 
 9 Brady v. Dilley, 27 Md. 570. 
 
 10 Babbitt v. Selectmen of Savoy, 3 Cush. (Mass.) 530 ; Scofield v. 
 Moore, 58 Hun (N. Y.) 601, 11 N. Y. Supp. 303. 
 
 11 Rhymney Iron Co. v. Fowler [1896] 2 Q. B. 79, 3 Tax Cas. 476. 
 
 (181)
 
 90 INCOME TAXATION (Ch. 8 
 
 net payments made by the company to the association (in- 
 cluding a- share of administration expenses) in excess of those 
 received from the association by the company, were an admis- 
 sible deduction for the purpose of arriving at the company's 
 taxable profits. 12 Under the corporation tax law of 1909, the 
 officers of the treasury department ruled that sales of stock 
 and bonds were to be regarded as sales of capital assets, and 
 should be so accounted for, but that the proceeds derived from 
 the sale of bonds, used in defraying ordinary and necessary 
 expenses, were a proper deduction in determining the compa- 
 ny's net income. 13 
 
 90. Same; Wages and Salaries 
 
 Wages and salaries paid to clerks, servants, agents, sales- 
 men, managers, superintendents, officers, and other employes 
 of the individual or corporate taxpayer are deductible from 
 income, either because specially mentioned, as they are in some 
 of the statutes, or as a necessary expense of conducting the 
 business. 14 But this applies only to the compensation of 
 those employes or agents who are engaged in the conduct of 
 the business from which the income is derived, as under the 
 Wisconsin statute, where a deduction is allowed for "pay- 
 ments made within the year for personal services of officers 
 and employes actually employed in the production of such in- 
 come." This might cover the compensation of a secretary, 
 amanuensis, or stenographer, if occupied in the work of a 
 profession or vocation carried on by his employer and from 
 which the latter's taxable income was derived. But the wages 
 of domestic servants would be classed as "family or living 
 expenses," for which no deduction is allowed. It is probably 
 immaterial whether the compensation of an employe is paid in 
 
 12 Guest, Keen, & Nettlefolds, Limited, v. Fowler [1910] 1 K. B. 
 713, 5 Tax Cas. 511. 
 
 is Treasury Decisions, No. 1742, par. 55. 
 
 i* See Dunwoody v. United States, 22 Ct. Cl. 269, 278 ; Foster v. 
 Goddard, 1 Black (U. S.) 506, 17 L. Ed. 228. 
 
 (182)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 90 
 
 the form of a fyced annual or monthly wage or in the form 01 
 a commission on sales or business transacted. But it must be 
 compensation for services rendered, and not a bonus or a pres- 
 ent. It was ruled under the corporation tax law of 1909 that 
 amounts paid for pensions to retired employes, or to their 
 families or others dependent upon them, or paid on account 
 of injuries received by employes, are proper deductions as 
 "ordinary and necessary expenses," but that gifts or gratuities 
 to employes in the service of a corporation are not properly 
 deductible in ascertaining its net income. 15 And in England 
 there is a decision that voluntary contributions made by a min- 
 ister towards the stipend of his assistant minister are not an 
 allowable deduction, although it was necessary for him to sup- 
 plement the stipend in this way in order to secure a compe- 
 tent assistant. 16 
 
 It should also be observed that an individual taxpayer can- 
 not escape paying the income tax, or reduce its burden, by 
 paying himself a salary for his own services in supervising 
 and conducting his own business, and then deducting the 
 amount of it from the income which the business yields. 
 Some statutes specially provide against this, as in South Car- 
 olina, where the deduction includes "the necessary expenses 
 actually incurred in carrying on any business, occupation, or 
 profession, not including remuneration to the taxpayer for 
 personal supervision." And under any such statute, it is be- 
 lieved, this would be regarded as a cheat or evasion which the 
 courts would not sanction. Thus, in a Scotch case, it was 
 ruled that, where testamentary trustees receive annually the 
 income of property and distribute it among the beneficiaries, 
 the whole of such income is taxable, without deduction of the 
 expenses incurred in the management or administration of the 
 trust. 17 And in the case of a corporation where practically 
 
 is Treasury Decisions, No. 1742, par. 64. 
 IB Lothian v. Macrae, 22 Scotch Law Rep. 219, 2 Tax Gas. 65. 
 IT Aikin v. Macdonald's Trustees, 32 Scotch Law Rep. 85, 3 Tax 
 Cas. 306. 
 
 (183)
 
 91 INCOME TAXATION (Ch. 8 
 
 the whole of the stock is owned by one person, or perhaps by 
 two former partners who have simply incorporated their busi- 
 ness, the same principle applies. It has been ruled that sal- 
 aries paid to an officer who is a stockholder, to constitute an 
 allowable deduction, must be a reasonable and fair compensa- 
 tion for the services rendered, without regard to the amount 
 of stock which such officer may hold, and must have been au- 
 thorized by the board of directors and made a matter of rec- 
 ord on the minute books of the corporation, 18 
 
 91. Same; Traveling Expenses 
 
 The expenses of a journey may be included in the "neces- 
 sary and ordinary expenses" of carrying on a given busi- 
 ness, where the journey is made as a .necessary incident of 
 the business or is otherwise undertaken directly for its expan- 
 sion or advantage, as, where a traveling salesman is allowed 
 his expenses on the road, where the business of an individual 
 necessarily requires him to move from place to place, where 
 a buyer for a store is sent to a distant market to replenish 
 the stock, or where an officer of a corporation travels on its 
 necessary and proper errands. But traveling expenses are 
 not deductible where they are incurred merely for the comfort 
 or convenience of the person concerned. Thus, a public offi- 
 cer, whose duties are to be performed in one place, but who 
 chooses to reside in another, is not entitled to deduct, for the 
 purpose of the income tax, his expenses incurred in going to 
 and fro between the two places. 19 And where the directors 
 of a corporation travel from their places of residence to the 
 place of meeting of the company, their traveling expenses 
 are not an allowable deduction. 20 But it is at least doubtful 
 whether hotel bills and other items of personal expenditure 
 can be brought under the description of "traveling expenses" 
 
 is Treasury Decisions, No. 1742, par. 81. 
 
 19 Cook v. Knott, 2 Tax Cas. 246. 
 
 20 Revell v. Directors of El worthy Bros., Limited, 3 Tax Cas. 12. 
 
 (184)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 92 
 
 in any case where such expenses might constitute a proper de- 
 duction from income. The precise question has not arisen 
 under the income tax laws, but analogous cases are not want- 
 ing. Thus, in a contract of employment of a traveling sales- 
 man for a certain salary per annum and an allowance for 
 expenses not to exceed a certain sum per day, the word "ex- 
 penses" was construed as not including the living expenses of 
 the salesman. 21 And a similar decision was made in a case 
 in Ohio, on the construction of a statute allowing to a county 
 commissioner his "reasonable and necessary expenses actually 
 paid in the discharge of his official duties." It was held that 
 this meant official expenses only, as distinguished from those 
 which pertained to the commissioner's personal comfort and 
 necessities. The court said that, for his personal expenses 
 of any kind, he could claim nothing beyond his per diem com- 
 pensation and mileage; and it was a fair inference that, if 
 it had been intended to reimburse him for board or traveling 
 expenses in addition to mileage, when traveling on county 
 business, the legislature would have expressed that intention 
 in plain terms. 22 
 
 92. Same; Cost of Insurance 
 
 Premiums paid for policies of fire insurance were allowed 
 to be deducted from the taxpayer's net income under the fed- 
 eral income tax act of 1894, and although this item is not 
 specified in the statute now in force, nor in the laws of the 
 states, it cannot be doubted that it should be allowed as a part 
 of the "necessary and ordinary" expense of conducting a 
 business, where the insurance is written on any building in 
 which the business is carried on, or on a stock in trade, or 
 on unfinished products of a factory, or on office furniture 
 and fixtures, though of course the cost of insuring one's dwell- 
 ing could not be so deducted. This is also the rule in Eng- 
 
 21 Dowd v. Krall, 32 Misc. Rep. (N. T.) 252, 65 N. Y. Supp. 797. 
 
 22 Richardson v. State, 66 Ohio St. 108, 63 N. E. 593. 
 
 (185)
 
 93 INCOME TAXATION (Ch. 8 
 
 land under the income tax law of that country, 23 and it is 
 a general principle of law that the cost of insurance is prop- 
 erly included under the head of "expenses" in almost any con- 
 nection in which that term can be used. 24 Thus, as between a 
 life beneficiary and a remainderman, premiums paid for fire 
 insurance on the premises are a proper expense of adminis- 
 tering the property and are therefore payable out of income. 25 
 
 93. Same; Rent of Land, Buildings, or Equipment 
 
 The act of Congress in force allows corporations to deduct 
 from net income, under the head of expenses, "rentals or other 
 payments required to be made as a condition to the contin- 
 ued use or possession of property," and although this is not 
 repeated in the provisions relating to individual taxpayers, it 
 seems clear that, in the case of any business conducted on 
 leased premises, the rent is a "necessary expense." of the busi- 
 ness. Rent is not specially mentioned in the statutes of the 
 several states, except Virginia, where the rent paid for agri- 
 cultural land is allowed to be deducted from the profit real- 
 ized on the crops. But only the actual rent paid, or the actual 
 rental value of the premises, can be thus deducted, and not 
 the additional expense which may be incurred in the purchase 
 of a lease for a term of years. Thus, the English courts hold 
 that where leasehold premises are purchased and used for 
 trade purposes, the deduction from the assessment on the 
 trade profits in respect to such premises must be limited to 
 the existing annual value thereof, whatever may have been 
 the premium originally paid, that is, the tenant is only enti- 
 tled to deduct the annual rent, and not to amortize the pre- 
 mium by distributing it over the years yet to run. 28 So they 
 hold that a brewer paying a premium for a lease of a public 
 
 23 Society of Writers to the Signet v. Inland Revenue, 24 Scotch 
 Law Rep. 27, 2 Tax Cas. 257. 
 
 24 See Foster v. Goddard, 1 Black (U. S.) 506, 17 L. Ed. 228. 
 
 25 Bridge v. Bridge, 146 Mass. 373, 15 N. E. 899. 
 
 26 Gillatt v. Colquhoun, 2 Tax Cas. 76. 
 
 (186)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 94 
 
 house, for the purpose of letting it to a tenant under a cove- 
 nant to buy beer brewed by him, is not entitled to a deduction 
 on account of the gradual exhaustion of the premium. 27 That 
 rent paid for personal property, as well as for land, may be 
 an expense of the business in which it is employed, appears 
 from a case in Pennsylvania, where it was held that compen- 
 sation for the use of rolling-stock or other equipment which 
 is hired, and not owned, by a railroad company, is certainly 
 a part of the expense of the business which it transacts, and 
 is therefore a part of the operating expenses of the road. 28 
 
 94. Same; Mining Operations 
 
 The rule is settled in England that the cost of sinking a pit 
 or shaft on a coal or iron mining property, to open up new 
 seams or deposits, is an expenditure of capital and properly 
 chargeable to that account, and cannot be regarded as an ordi- 
 nary expense of the business, so as to be deductible from in- 
 come for the purpose of estimating the taxable net income. 29 
 And a tenant of minerals, though he may be under a constant 
 vanishing expense in sinking new pits as the old ones become 
 exhausted, is not entitled, in computing his profits for the 
 assessment of the income tax, to deduct from the gross prof- 
 its a sum estimated as representing the amount of capital 
 expended in making bores and sinking pits which have be- 
 come exhausted by the year's work. 30 But in construing and 
 applying the corporation tax act of Congress of 1909, the 
 Commissioner of Internal Revenue made a regulation that 
 the cost of drilling wells, by natural-gas companies, might be 
 charged to expense account, rather than investment account, 
 and so allowed in their returns. It was said: "The cost of 
 drilling gas wells has been held by competent authorities as 
 
 27 Watney v. Musgrave, L. R. 5 Ex. Div. 241, 1 Tax Cas. 272. 
 zs Commonwealth v. Philadelphia & E. R. R., 164 Pa. St 252, 30 
 Atl. 145. 
 
 29 in re Addie & Sons, 12 Scotch Law Rep. 274, 1 Tax Cas. 1. 
 so Coltness Iron Co. v. Black, L. R. 6 App. Cas. 315. 
 
 (187)
 
 95 INCOME TAXATION (Ch. 8 
 
 properly chargeable to either investment or expense. While 
 it is preferred that the cost of drilling wells be charged to in- 
 vestment, the general custom of producers of natural gas in 
 charging the cost of drilling to expense will be recognized, 
 and returns of net income may be made in accordance there- 
 with. Each return of annual net income should in such case 
 state that the expense of drilling gas wells has been charged 
 to expense. All other expenditures in tangible property in 
 development work shall be chargeable to capital assets." 31 
 But the Commissioner also ruled that, in the case of petroleum 
 producing properties, the cost of drilling and equipping new 
 producing wells should be considered and treated as an addi- 
 tion to capital investment account, but that the expense of 
 drilling holes which proved to be dry might be charged to 
 profit and loss. 32 
 
 95. Same; Judgments 
 
 If a judgment is recovered against the taxpayer (whether an 
 individual or a corporation) and paid within the year for which 
 the return is to be made, the question whether it is deductible 
 as an "ordinary and necessary expense" should be determined 
 by reference to the cause of action on which it was recovered^ 
 If the claim was for goods sold, money had and received, serv- 
 ices rendered, or otherwise founded on contract or quasi con- 
 tract, it should be easy to determine whether the plaintiff's 
 demand arose out of or was incident to the conduct of the de- 
 fendant's business, and if so, the change in its form, from a 
 disputed claim to a judgment, should not affect the question of 
 its allowance as a deduction. But in the case of a judgment for 
 a tort, the matter is not so clear. So far as the authorities go, 
 they may be said to favor the rule that if the tort was com- 
 mitted directly in the course of the business operations of the 
 
 i Treasury Decisions, No. 1754. 
 2 Treasury Decisions, No. 1755. 
 
 (188)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 95 
 
 defendant, or the circumstances constituting it were such as 
 might ordinarily arise in the prosecution of that business, then 
 the payment of the damages (whether by settlement out of 
 court or after judgment) may be regarded as an "expense" of 
 the business. But if the tort had no connection with the busi- 
 ness carried on, and did not arise out of its usual or ordinary 
 conduct, it cannot be considered as an expense of that busi- 
 ness. And this would naturally apply also to torts having 
 also a criminal aspect, such as libel or slander or assault and 
 battery. Thus it was ruled, under the corporation tax law of 
 1909, that amounts paid on account of injuries received by em- 
 ployes in the course of their employment would be proper de- 
 ductions as ordinary and necessary expenses of the business. 33 
 And in an English case, the Lord Chancellor gave as an illus- 
 tration of an allowable deduction "losses sustained by a rail- 
 way company in compensating passengers for accidents in 
 traveling." 34 So again, a decision in Massachusetts holds that 
 the "operating expenses" of a railroad company should be 
 construed to include a claim for damages done to property by 
 the railroad company in negligently running a train at a high- 
 way crossing. 35 But on the other hand, where a brewery com- 
 pany owned an inn, which was carried on by a manager as 
 a part of its business, and a customer sleeping in the inn was 
 injured by the fall of a chimney, which accident was attributa- 
 ble to the negligence of the company's servants, and he re- 
 covered a judgment for damages, it was held that the amount 
 thereof could not be deducted in estimating the balance of 
 profits for the purpose of the income tax, the loss not being 
 connected with or arising out of the trade, and not being 
 money wholly or exclusively laid out for the purposes of the 
 trade. 38 And in the case in which this decision was made, a 
 
 33 Treasury Decisions, No. 1742, par. 64. 
 
 34 Strong & Co. v. Woodifield [1906] App. Cas. 448. 
 
 35 Smith v. Eastern R. Co., 124 Mass. 154. 
 
 * Strong & Co. v. Woodifield [1906] App. Cas. 448. 
 
 (189)
 
 96 INCOME TAXATION ( Ch. 8 
 
 further illustration was given, as follows: "If a man kept a 
 grocer's shop, for keeping which a house is necessary, and 
 one of the window shutters fell upon and injured a man walk- 
 ing in the street, the loss thereby arising to the grocer ought 
 not to be deducted" from net taxable income. 
 
 96. Repairs, New Buildings, and Improvements 
 
 The cost of repairs to property, such as may be necessary 
 to restore dilapidation or to keep it in serviceable and efficient 
 condition for the purpose of the business in which it is em- 
 ployed, is plainly deductible as an "ordinary and necessary ex- 
 pense" of the business or of "the maintenance and operation 
 of the business or property," as these terms are used in the 
 income tax laws. Thus, under the act of Congress of 1864, it 
 was said: "The object of the law was to impose a tax on net 
 income or profits only, and that cannot be regarded as net in- 
 come or profits which is required and expended to keep the 
 property up in the usual condition proper for operation. Such 
 expenditure is properly classed with repairs, which are a part 
 of the current expenses." 37 And it has been ruled that the 
 cost of erecting a building, if included in the terms of a lease 
 under which the property is held by a corporation, is a proper 
 deduction from its return of income for taxation, but should 
 be prorated according to the time fixed by the lease. 38 But if 
 a corporation has been allowed a deduction for repairs to, and 
 renewals of, its machinery and other appliances, sufficient to 
 cover the actual loss by wear and tear, it cannot be allowed 
 a further deduction for estimated depreciation of its plant ; in 
 other words, it cannot "get deduction for deterioration twice 
 over." 39 But "repairs" do not include new constructions. 
 And the income tax laws generally provide that no deduction 
 
 37 Grant v. Hartford & N. H. R. Co., 93 U. S. 225, 23 L. Ed. 878. 
 s s Treasury Decisions, No. 1742, par. 51. 
 
 39 Caledonain Ry. Co. v. Banks, 18 Scotch Law Eep. 85, 1 Tax 
 Cas. 487. 
 
 (190)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 96 
 
 shall be allowed to the taxpayer for money laid out in the 
 cost of new buildings, permanent improvements, or better- 
 ments, made to increase the value of his property or estate. 
 This is in accordance with general principles of law. Thus, in 
 estimating the profits of the business of a partnership, it is er- 
 ror to include among the expenditures such amounts as have 
 been expended in permanent improvements to the real estate 
 of the firm. Such improvements must be regarded as an in- 
 vestment of capital. 40 So, a corporation purchasing gas works 
 in a defective structural condition is not entitled to deduct, in 
 making its return of income for taxation, sums set aside an- 
 nually out of the profits to be expended in future years on re- 
 storing the plant and apparatus. 41 And a railway company 
 is not entitled to deduct from its profits sums expended in 
 improving a section of the line so as to bring it up to the stand- 
 ard of the main line, nor the cost of the extra weight of heavy 
 rails and other equipment substituted for lighter ones. 42 In 
 this connection, however, it is pertinent to remark that mod- 
 ern ideas of sound corporation finance require that only those 
 expenditures for improvements or betterments should be 
 charged to capital accounts which will bring in new income, in- 
 crease current income, or lessen the cost of production. Those 
 which do not increase the productivity of the plant, in one 
 way or the other, are charged against working expenses, repair 
 or replacement account, or profit and loss. In this view, if a 
 railroad company replaces a wooden bridge with a stone or 
 steel bridge, it would not be treated as an investment of capital 
 assets, unless, perhaps, it was part of a comprehensive system 
 of improvements undertaken with a view to running heavier 
 trains and handling a larger volume of traffic. 43 But in the 
 
 40 Braun's Appeal, 105 Pa. St. 414. 
 
 41 Clayton v. New Castle-Under-Lyme Corp., 2 Tax Cas. 416. 
 
 42 Highland Ry. Co. v. Balderstone, 26 Scotch Law Rep. 657, 2 
 Tax Cas. 485. 
 
 43 See Greene, Corporation Finance (3d edn., 1904) p. 86. 
 
 (191)
 
 97 INCOME TAXATION (Ch. 8 
 
 ligfit of the decisions above referred to, it seems clear that such 
 an expenditure could not be deducted (for the purpose of the 
 income tax) as a part of the expense of conducting the busi- 
 ness or maintaining the property, but must be treated as a new 
 building, improvement, or betterment. 
 
 97. Interest on Indebtedness 
 
 The income tax law of Wisconsin allows, in the case of 
 the individual only, the deduction of "interest paid within the 
 year on existing indebtedness." That of Hawaii provides for 
 the deduction of "all interest paid by such person or corpora- 
 tion on existing indebtedness." The act of Congress of 1913 
 discriminates between individuals and corporations. In the 
 case of the former, it allows a deduction of "all interest paid 
 within the year by a taxable person on indebtedness." But 
 in the case of a corporation, the deduction allowed is of "in- 
 terest accrued and paid within the year on its indebtedness to 
 an amount of such indebtedness not exceeding one-half of 
 the sum of its interest-bearing indebtedness .and its paid-up 
 capital stock outstanding at the close of the year, or if no 
 capital stock, the amount of interest paid within the year on 
 an amount of its indebtedness not exceeding the amount of 
 the capital employed in the business at the close of the year." 
 To this there is added a proviso that, "in case of indebtedness 
 wholly secured by collateral the subject of sale in ordinary 
 business of such corporation, joint stock company, or asso- 
 ciation, the total interest secured and paid by such company, 
 corporation, or association within the year on any such in- 
 debtedness may be deducted as a part of its expense of doing 
 business." And further it is provided that, "in the case of 
 bonds or other indebtedness, which have been issued with a 
 guaranty that the interest payable thereon shall be free from 
 taxation, no deduction for the payment of the tax herein im- 
 posed shall be allowed." But in the case of a bank, banking 
 association, or loan or trust company, the deduction may cov- 
 (192)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 97 
 
 er "interest paid within the year on deposits or on moneys 
 received for investment and secured by interest-bearing cer- 
 tificates of indebtedness issued by such bank, banking associa- 
 tion, loan or trust company." 
 
 Construing a similar provision in the act of 1909 (with 
 reference to the capital stock of a corporation as the measure 
 of the indebtedness for which it might claim a deduction with 
 respect to interest paid), it was ruled that the full amount of 
 stock as represented by the par value of the shares issued is 
 to be regarded as the paid-up capital stock, except when such 
 stock is assessable on account of deferred payments, in which 
 case the amount actually paid on such shares will constitute 
 the actual paid-up capital. Capital stock is also held to in- 
 clude both preferred and common stock, but surplus and un- 
 divided profits are not to be included. 44 There was also a 
 ruling that interest on portions of bonded or other indebted- 
 ness bearing different rates of interest may be deducted from 
 gross income, provided the aggregate amount of such indebt- 
 edness does not exceed the paid-up capital stock plus half 
 the bonded debt. 45 An opinion was given by the Attorney 
 General, on the construction of the same statute, that, in as- 
 certaining the net income of a corporation for taxation under 
 that act, the business of the corporation being holding and 
 dealing in real estate, interest on an indebtedness assumed by 
 the corporation and secured by mortgage on a property which 
 it acquires, can be deducted only to an amount not exceeding 
 interest at a corresponding rate on the amount of its paid-up 
 capital stock. For by assuming the indebtedness, the cor- 
 poration makes it "its" indebtedness, and the limitation of the 
 statute applies. But where such a corporation takes title to 
 real property subject to a mortgage, but does not assume the 
 indebtedness secured thereby, the interest on such indebted- 
 ness may be deducted from its gross income, without limita- 
 
 44 Treasury Decisions, No. 1742, pars. 15-17. 
 
 45 Treasury Decisions, No. 1742, par. 67. 
 
 BL.INC.TAX. 13 (193)
 
 97 INCOME TAXATION (Ch. 8 
 
 tion as to the amount of its paid-up capital stock, because the 
 indebtedness in this case is not "its" indebtedness, but the 
 interest payment is a "charge required to be made as a con- 
 dition to the continued use or possession of property." 46 
 In regard to interest payments in general, it has been held 
 that the amount paid for accrued interest on securities pur- 
 chased is properly chargeable to income account, 47 and there- 
 fore, on a parity of reasoning, should be deductible from the 
 return of income for taxation. Under the English law, money 
 paid in the form of interest on deposits by a company doing a 
 banking business or a loan and discount business, is not de- 
 ductible from its assessment for the income tax.* 8 But the 
 rule must be otherwise under the act of Congress now in 
 force, since it explicitly provides for the deduction, "in the 
 case of a bank, banking association, or trust company, of in- 
 terest paid within the year on deposits." As to the case of 
 bank discounts, it is held in England that where a mercantile 
 company, in order to be able to pay cash for goods purchased 
 and thereby secure them at a better price than if bought on 
 credit, borrows money on short time paper from bankers, the 
 interest on such banking loans is not a proper deduction for 
 the purpose of the income tax. 49 But the officers of the treas- 
 ury department, under the act of 1909, held that discounts, 
 other than bank discounts on notes executed by the corpora- 
 tion, should be segregated from the interest item on the re- 
 turn, and should be included under the heading of expenses. 60 
 In Wisconsin, the state tax commission rules that "discounts 
 on obligations incurred but not discharged within the year 
 would not come under the head of interest paid. When the 
 
 *e 28 Opin. Atty. Gen. p. 198. 
 4T People v. Davenport, 30 Hun (N. Y.) 177. 
 48 Mersey Loan & Discount Co. v. Wootton, 2 Tax Cas. 316. 
 4 Anglo-Continental Guano Works v. Bell, 70 Law T. (N. S.) 670, 
 3 Tax Cas. 239. 
 
 so Treasury Decisions, No. 1742, par. 90. 
 
 (194)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 98 
 
 interest is deducted from a loan in advance, such interest can- 
 not be said to be 'paid' until the note is paid." 51 
 
 But in any case, nothing can be deducted under this head 
 except what is strictly and properly to be described as "inter- 
 est." Thus, in an -English case, where a mining company 
 borrowed money to be employed in its business, and cove- 
 nanted to pay interest thereon annually and also to repay the 
 capital with an additional bonus of ten per cent, it was held 
 that the bonus paid could not be claimed as a deduction in 
 estimating the assessable profits of the company. 52 So where 
 a mortgage company raises money on an issue of debentures, 
 and lends the money at a higher rate of interest, a commis- 
 sion paid to brokers and other expenses incurred in raising 
 the money cannot be deducted from its assessment. 63 And 
 where a company is empowered by act of Parliament to raise 
 money upon mortgage for the purpose of carrying out a gov- 
 ernment contract, but is required by the same act to establish 
 a sinking fund for the extinction of the mortgage debt, and a 
 sum is to be set aside for payment into the sinking fund out 
 of each quarterly payment received under the contract or out 
 of other money belonging to the company, the sums so set 
 aside are not allowable as a deduction in arriving at the com- 
 pany's taxable profits. 54 
 
 98. Taxes Accrued or Paid 
 
 In the income tax law of Hawaii it is provided that "all 
 government taxes and license fees paid within the year shall 
 be deducted from the gains, profits or income of the person 
 who, or the corporation which, has actually paid the same, 
 
 51 Wisconsin Income Tax Law, edition published by State Tax 
 Commission, 1911, p. 17. 
 
 02 Arizona Copper Co. v. Smiles, 29 Scotch Law Rep. 134, 3 Tax 
 Gas. 149. 
 
 ss Texas Land & Mtg. Co. v. Holtham, 3 Tax Gas. 255. 
 
 6* City of Dublin Steam Packet Co. v. O'Brien, 6 Tax Gas. 101, 
 following Mersey Docks & Harbour Board v. Lucas, 2 Tax Gas. 25. 
 
 (195)
 
 98 INCOME TAXATION (Ch. 8 
 
 whether such person or corporation be owner, tenant, or 
 mortgagor." The concluding clause of this provision was 
 apparently copied from the act of Congress of 1894, which 
 in turn, derived it from the acts of 1864 and 1870. In all 
 these statutes, it is of course apparent that the use of the 
 word "mortgagor" is a legislative blunder for "mortgagee." 
 And although the other existing acts do not specially pro- 
 vide for this case, it can hardly be doubted that a mort- 
 gagee of realty paying the taxes thereon would be entitled to 
 deduct them from his return of income for taxation. The 
 statute in Wisconsin, however, is quite strict in this particu- 
 lar. In the case of corporations, it allows the deduction of 
 "sums paid by such person [corporation] within the year for 
 taxes imposed by any state of this Union or subdivisioo 
 thereof, or any territory or possession of the United States, 
 upon the source from which the income taxed by this act is 
 derived." This excludes any taxes assessed under the au- 
 thority of the federal government. As to individuals, it 
 provides for the deduction of "taxes paid by such persons 
 during the year, other than inheritance taxes, upon the 
 property or business from which the income hereby taxed 
 is derived." This would not allow the taxpayer to deduct 
 the amount paid by him under the federal income tax law, 
 since that is not a tax on his property or business, but upon 
 the income itself. 
 
 The act of Congress of 1913, in its application to individ- 
 ual taxpayers, allows the deduction of "all national, state, 
 county, school, and municipal taxes paid within the year, 
 not including those assessed against local benefits." In the 
 case of a corporation, it permits the deduction of "all sums 
 paid by it within the year for taxes imposed under the au- 
 thority of the United States or of any state or territory 
 thereof, or imposed by the government of any foreign coun- 
 try." The meaning is that a domestic corporation may de- 
 duct any and all taxes assessed against it, and paid, under 
 
 (196)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 98 
 
 federal, state, or municipal authority, and whether in the 
 nature of franchise or occupation taxes or taxes on prop- 
 erty, and that such a corporation, owning property or do- 
 ing business in foreign countries, may also deduct such tax- 
 es paid abroad as are imposed by the foreign government. 
 This was the practical construction placed on the correspond- 
 ing provision of the act of 1909 by the officers of the gov- 
 ernment who were charged with its administration. 55 This 
 is also in substantial accordance with the provisions of the 
 English income tax law, which permit an English company 
 doing business abroad to deduct from its assessment for in- 
 come tax any amount paid by it for taxes assessed by the 
 foreign government on the net profits of its business. 56 As 
 to foreign corporations doing business in America, the pro- 
 vision of the act of 1913 is that such a company may deduct 
 "all sums paid by it within the year for taxes imposed under 
 the authority of the United States or of any state or terri- 
 tory thereof or the District of Columbia." 
 
 Funds set aside by a corporation out of its current earn- 
 ings as a reserve for the payment of accruing taxes, or 
 taxes which have accrued but which have not yet been paid, 
 cannot be allowed as a deduction, since the statute specif- 
 ically provides that only such sums as are "paid" within the 
 year for taxes can be deducted. 57 And where the state law 
 provides that stockholders in banking corporations shall be 
 assessed and taxed upon the value of their shares of stock 
 therein, and that the bank shall collect the tax and pay over 
 the amount to the proper local authorities, this does not 
 convert the tax into a tax upon or against the bank itself. 
 Hence if a bank pays the taxes assessed upon its sharehold- 
 ers, but neglects or omits to collect the sums so paid from 
 the several stockholders, or to reimburse itself by deducting 
 
 55 Treasury Decisions, No. 1742, par. 73. 
 
 so Stevens v. Durban-Roodepoort Gold Min. Co., 5 Tax Cas. 402. 
 
 57 Treasury Decisions, No. 1742, par. 77. 
 
 (197)
 
 99 INCOME TAXATION (Ch. 8 
 
 such sums from their dividends, it will not be entitled to 
 claim a deduction thereof in its income-tax return under the 
 heading of taxes paid. 58 Customs duties paid on the im- 
 portation of goods from abroad may be classed as "taxes," 
 for the purposes of this statute, but if an importing merchant 
 has included such duties in estimating the cost of the goods, 
 for the purpose of computing his profits on their sale, he 
 will not be entitled to deduct them from his net income as 
 taxes paid. 69 As to legacy or inheritance taxes, they are 
 probably included under the broad general term "taxes" in 
 the federal statute, but the Wisconsin statute expressly for- 
 bids their deduction. In New York, it is held that the fed- 
 eral inheritance tax to be paid under the War Revenue Act 
 of 1898 is not to be deducted from the valuation of an estate 
 for the purpose of a state transfer or inheritance tax, for 
 it is not a tax upon property, but one against the legatee and 
 payable out of his legacy. 60 But a contrary decision has 
 been made in Massachusetts. 61 
 
 99. Losses Uncompensated 
 
 The federal income tax law allows the individual taxpayer 
 to deduct "losses actually sustained during the year, incurred 
 in trade or arising from fires, storms, or shipwreck, and not 
 compensated for by insurance or otherwise." In the case 
 of corporations, the deduction is to be for "all losses actual- 
 ly sustained within the year and not compensated by insur- 
 ance or otherwise." Under the statute in Wisconsin, a de- 
 duction is allowed, in both cases, for "losses actually sus- 
 tained within the year and not compensated for by insur- 
 ance or otherwise." The law in Hawaii provides for the 
 deduction of "all losses actually sustained during the year, 
 
 ss Treasury Decisions, No. 1763. 
 
 5 Treasury Decisions, No. 1742, par. 74. 
 
 60 in re Gihon's Estate, 169 N. Y. 443, 62 N. E. 561. 
 
 ei Hooper v. Bradford, 178 Mass. 95, 59 N. E. 678. 
 
 (198)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 99 
 
 incurred in trade or arising from losses by fire not covered 
 by insurance, or losses otherwise actually incurred." These 
 phrases, if taken in their widest sense, might include the loss 
 or impairment of capital assets by such causes as bad in- 
 vestments, the bankruptcy of a debtor, the failure of a 
 bank, the enforcement of one's liability as indorser, and the 
 like. But bearing in mind the purpose of the statutes in 
 which they occur to impose a tax on incomes, not on prop- 
 erty or capital and taking the context into consideration, 
 it seems probable that a more restricted meaning should be 
 given to them. Apparently the legislative purpose was to 
 include only those losses which are incident to the business 
 out of which the taxable income is produced, or such as in- 
 volve the destruction or impairment of property employed, 
 or capital invested, in that business. This is the doctrine 
 prevailing in England, where it is said: "Only such losses 
 can be deducted as are connected with, in the sense that they 
 are really incidental to, the trade itself. They cannot be de- 
 ducted if they are mainly incidental to some other vocation 
 or fall on the trader in some other character than that of 
 trader. The nature of the trade is to be considered," so 
 that a taxpayer is not allowed to deduct a loss which he has 
 sustained in being compelled to pay a judgment recovered 
 against him in an action of tort, where the circumstances of 
 the tort were not an incident of his business. 62 Under the 
 English law it is also held that one who carries on two lines 
 of business cannot deduct a loss sustained in one from the 
 profits made in the other. Thus a seed merchant, taking a 
 farm and working it in connection with his seed business, 
 cannot claim any allowance from the assessment on his 
 profits as seed merchant in respect of losses on the farm. 68 
 But on the other hand, a loss sustained by the embezzlement 
 of funds by an employe is incurred in trade, or sustained in 
 
 62 Strong & Co. v. Woodifield [1906] App. Cas. 448. 
 
 63 Brown v. Watt, 23 Scotch Law Rep. 403, 2 Tax Cas. 143. 
 
 (199)
 
 100 INCOME TAXATION (Ch. 8 
 
 connection with the income-producing business, and there- 
 fore may be deducted. 64 But mere shrinkage in value of 
 property or other assets is not properly to be described as 
 a "loss," within the meaning of the statutes, though an al- 
 lowance for it may be made under the head of '.'deprecia- 
 tion." And so, loss due to the voluntary removal of build- 
 ings, etc., incident to the making of improvements, is either 
 a proper charge to the cost of the new additions or to de- 
 preciation already provided, as the facts may indicate, but 
 in no case is it a proper deduction in determining net in- 
 come, except as it may be reflected in the reasonable amount 
 allowable as a deduction for depreciation. 65 It will be ob- 
 served that losses cannot be deducted if compensated for 
 by insurance or otherwise. But by a reasonable construction 
 of the statute we should conclude that a loss partially com- 
 pensated for by insurance or otherwise, if otherwise deduct- 
 ible, might be deducted to the extent of the excess of loss 
 over insurance or other compensation received. 
 
 100. Debts Written Off as Worthless 
 
 The federal income tax law of 1894 allowed the deduction 
 of "debts ascertained to be worthless." That of 1913 cop- 
 ies this phrase with some enlargement, as follows : "Debts 
 actually ascertained to be worthless and charged off during 
 the year." But this applies only in the case of individual 
 taxpayers. In that part of the law which relates to corpo- 
 rations there is no corresponding provision. This probably 
 results from the fact that those portions of the act of 1913 
 which relate to corporations were copied almost bodily from 
 the corporation tax law of 1909 (which made no provision 
 for the deduction of bad debts) without adverting to the re- 
 sulting discrimination between corporations and individuals. 
 But the act of 1909 did contain a provision for deducting 
 
 64 United States v. Central Nat. Bank, 10 Fed. 612. 
 6 Treasury Decisions, No. 1742, par. 93. 
 
 (200)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 100 
 
 uncompensated losses, and under this clause the officers of 
 the treasury department ruled that bad debts, if so charged 
 off on the company's books during the year, were proper 
 deductions, though, if such debts were subsequently collect- 
 ed, they must be accounted for as income. 66 It is reason- 
 able that a similar construction should be applied to the act 
 now in force. Under the former income tax laws it was held 
 that a merchant, in making his statement of income, was 
 entitled to deduct from his gross profits the bad debts made 
 during the year to which the statement related, or such as 
 appeared to be uncollectible at the end of that year, but not 
 debts which became worthless after the expiration of that 
 year, although before the date of the return. 67 
 
 The term "debts" should not be taken in its broadest 
 sense. It is a term capable of a wide variety of meanings. 
 But considering the connection in which it is found and the 
 general purpose of the statute, it is apparent that it includes 
 only such debts as arise in or are connected with the busi- 
 ness of the year, or, in other words, debts which, if they had 
 been paid, would have constituted a part of the year's tax- 
 able income. Money owing to one may constitute a part 
 of his capital, so that its payment would not swell his in- 
 come, but only change the form of the capital. In this case, 
 if it should prove uncollectible, it would not constitute a 
 proper deduction. Thus, in an English case, it appeared 
 that the company in question carried on the business of zinc 
 smelting, and for this purpose it required large quantities 
 of "blende." To supply the blende a new company was 
 formed, which from time to time received assistance from 
 the smelting company in the form of advances on loan. 
 The new company proving unsuccessful and going into liq- 
 uidation, the amount due from it to the smelting company 
 
 Treasury Decisions, No. 1742, par. 75. 
 
 67 United States v. Mayer, Deady, 127, Fed. Cas. No. 15,753. 
 
 (201)
 
 101 INCOME TAXATION (Ch. 8 
 
 was written off as a bad debt. But it was held that the ad- 
 vances were an investment of capital, and that the loss was 
 not deductible in estimating the profits of the company for 
 assessment under the income tax. 68 On the other hand, 
 where a brewing company made loans to its customers on 
 the security of public houses, and if the security did not 
 realize the amount of the loan, the company wrote off the 
 loss as a bad debt, it was held that, in arriving at its profits 
 for assessment to income tax, the company was entitled to 
 deduct the amount of such losses as worthless debts. 69 
 
 101. Depreciation of Property 
 
 The act of Congress of 1913 provides, in the case of an in- 
 dividual taxpayer, for a deduction from his return of income 
 for assessment of "a reasonable allowance for the exhaustion, 
 wear and tear of property, arising out of its use or employ- 
 ment in the business," and in the case of a corporation "a rea- 
 sonable allowance for depreciation by use, wear and tear of 
 property, if any." According to the plain import of these 
 terms, an allowance for depreciation can be claimed only in 
 respect to tangible property which is directly employed in 
 the production of the income taxed, such as buildings, ma- 
 chinery, furniture and fixtures, ships, vehicles, rolling stock 
 and roadbed, and the like. For the language of the act only 
 applies to property which is "used" or "employed" in busi- 
 ness, and which, in the process of such use, is subject to "ex- 
 haustion" or "wear and tear." In this respect the act exhibits 
 a departure, in the way of greater strictness, from the terms 
 of the corporation tax law of 1909, which allowed a deduc- 
 tion of "a reasonable allowance for depreciation of property, 
 if any." In accordance with the latter and broader phrase, 
 the Wisconsin statute, both in the case of individuals and cor- 
 es English Crown Spelter Co. v. Baker, 99 Law T. 353, 5 Tax Cas. 
 327. 
 
 e Reid's Brewery Co. v. Male [1891] 2 Q. B. 1, 3 Tax Cas. 279. 
 
 (202)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 101 
 
 porations, provides for "a reasonable allowance for deprecia- 
 tion of the property from which the income is derived." 
 
 Depreciation is a well-known and important item in all 
 modern corporation accounting. And in estimating the net 
 profits of any business, this item must be reckoned with, 
 either by figuring a corresponding reduction in the value of 
 capital assets, by the creation of a surplus or reserve fund for 
 the eventual replacement of the plant or such portions of it as 
 will become exhausted, or by the expenditure of current earn- 
 ings in the restoration of machinery or other property which 
 has been impaired or has deteriorated by use. In the latter 
 case, there is no shrinkage in the value of assets, but there is 
 an annual expenditure over and above the ordinary operating 
 expenses. And under the income tax law, it is ruled that 
 depreciation, to be an allowable deduction in the return of 
 annual net income of a corporation, must be charged off on 
 the ledger of the corporation, so as to show a reduction in 
 its capital assets to the extent of the depreciation claimed. 70 
 In other words, if a corporation expends money in repairing 
 or replacing depreciated property, it may claim an allowance 
 therefor under the head of repairs or expenses of the business, 
 but in that case will not be entitled to claim also for deprecia- 
 tion. The question of what is a "reasonable allowance" for 
 depreciation is one depending on the circumstances of each 
 particular case, and if the amount of the tax to be paid is 
 brought into litigation, it is to be determined as a question of 
 fact on the evidence. 71 The general rule prescribed by the 
 Commissioner of Internal Revenue under the corporation tax 
 law of 1909 was as follows : "The deduction for depreciation 
 should be the estimated amount of the loss, accrued during the 
 year to which the return relates, in the value of the property 
 in respect of which such deduction is claimed, that arises from 
 exhaustion, wear and tear, or obsolescence out of the uses 
 
 TO Treasury Decisions, No. 1742, par. 83. 
 
 7i United States v. Nipissing Mines Co., 202 Fed. 803. 
 
 (203)
 
 101 INCOME TAXATION (Ch. 8 
 
 to which the property is put, and which loss has not been made 
 good by payments for ordinary maintenance and repairs de- 
 ducted under the heading of expenses of maintenance and op- 
 eration or in the ascertainment of gross income. This esti- 
 mate should be formed upon the assumed life of the property, 
 its cost value, and its use. Expenses paid in any one year in 
 making good exhaustion, wear and tear, or obsolescence in 
 respect of which any deduction for depreciation is claimed 
 must not be included in the deduction for expenses of mainte- 
 nance and operation of the property or in the ascertainment 
 of gross income, but must be made out of accumulative allow- 
 ances deducted for depreciation in current and previous 
 years." 72 
 
 The application of a general rule of this kind to a concrete 
 case is well illustrated in a Scotch case, which concerned the 
 method of figuring the deduction to be allowed for annual 
 wear and tear of such a piece of property as a steamship. It 
 was said that the proper method is to take the average life 
 of such a property (here estimated at 22 years), and over that 
 period spread the whole original cost, allowing for each year 
 a deduction equal to the quotient obtained by dividing such 
 cost by such number of years, without taking into account the 
 value of the use of the money so annually allowed by way of 
 deduction, or considering what the owner may do with it. 
 The method pursued by the commissioners of inland revenue 
 in this case was to calculate the sum which, being allowed 
 annually and placed at interest, would amount to the original 
 cost of the vessel at the end of the 22 years, thus in effect 
 requiring the owrler to establish a sinking fund and keep it 
 invested, or to amortize the value of his property by the 
 growth of a fund for its replacement. But this the court held 
 to be incorrect. 78 
 
 72 Internal Revenue Regulations, No. 31, art. 4. 
 
 73 Leith, Hull & Hamburg Steam Packet Co. v. Inland Revenue, 1 
 Sess. Cas. Scotch (1899) 1117. Further as to the allowance for de- 
 
 (204)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 101 
 
 In the case of an income derived from the rent of a build- 
 ing such as a dwelling, an apartment house, a hotel, a store, 
 or an office building no decision has apparently yet been ren- 
 dered concerning the right of the owner to claim a deduction 
 for depreciation. But applying the principles established in 
 other cases, it may be stated in the first place, that a claim 
 should not be allowed both for repairs and for depreciation, 
 if the repairs make good the depreciation. But secondly, such 
 a property is clearly subject to "wear and tear," and diminishes 
 in value thereby, and its average life should be susceptible of 
 calculation to a fair degree of certainty, considering not only 
 its gradual physical impairment, but also the increasing diffi- 
 culty of continuing to obtain the same rent for it as it becomes 
 more and more old-fashioned or unsuited to modern require- 
 ments. On the question of obsolescence as an element of de- 
 preciation, however, we shall have more to say in a later par- 
 agraph. 
 
 If an allowance for depreciation can be applied to anything 
 else than tangible property employed in the business, then an 
 interesting question arises concerning shrinkage in the market 
 value of stocks, bonds, and other investments. As above stat- 
 ed, the act of Congress now in force would exclude such a 
 case, if read literally. But it was held otherwise under the 
 somewhat broader terms of the act of 1909. The treasury de- 
 partment ruled that premiums on stocks and bonds arbitrarily 
 charged off on the books of a corporation did not constitute 
 a proper deduction on account of depreciation, unless there 
 had been an actual shrinkage in value of such securities to the 
 extent of the reduction claimed during the year for which the 
 return was made. 74 The language of the Wisconsin statute, 
 in this particular, is practically the same as that of the act 
 of Congress of 1909. But its construction has not been ju- 
 
 preciation in the case of steamships, see Cunard S. S. Co. v. Coul- 
 son [1899] 1 Q. B. 865. 
 
 74 Treasury Decisions, No. 1742, par. 87. 
 
 (205)
 
 101 INCOME TAXATION (Ch. 8 
 
 dicially settled, and the revenue officers of that state tentatively 
 hold that it was not intended to apply to the case of diminish- 
 ing market value of intangible property such as corporate 
 stocks or bonds, while suggesting an amendment to the stat- 
 ute in the interest of greater clarity of expression. 75 
 
 The question of allowing for depreciation in the case of 
 property which, though not physically impaired, has become 
 obsolete is one of great difficulty. Undoubtedly, a business 
 property diminishes in value unless it is kept up to the standard 
 of efficiency set by new inventions, new appliances, and new 
 methods, since it cannot otherwise successfully compete with 
 its better-equipped rivals. And in a broad sense, this is clearly 
 "depreciation." But it is not depreciation by reason of "wear 
 and tear," or by reason of its use in the business. And so 
 
 "Deductions for losses under other income tax laws have gener- 
 ally been confined to damage to or destruction of physical property 
 of the taxpayer, and bad accounts which had previously been re- 
 ported as income. Losses resulting from fluctuation in market val- 
 ue have not been allowed. Various claims have been made for loss- 
 es under the paragraph quoted, including depreciation in the value 
 of corporate stocks and other like property resulting from change 
 in market value or destruction of or damage to the physical proper- 
 ty of the corporation issuing the stock. Considered as a whole, the 
 income tax act does not seem to contemplate the assessment of appre- 
 ciation in value until actually realized by sale or other disposition of 
 the property. It would seem to follow that depreciation should not 
 be allowed in such cases until the amount of the loss is determined in 
 like manner. Following the English decisions and the precedents 
 of the internal revenue department under the income tax of 1863, and 
 the rules prescribed for administration of the income tax of 1894, 
 the Commission felt compelled to deny deductions for depreciation 
 of this character while the property was still held by the taxpayer. 
 The soundness of this construction has been sharply challenged, and 
 the law on the subject is not entirely clear. If the purpose of the 
 legislature is to confine deductions for losses as above indicated, the 
 statute should be amended so as to more clearly express that in- 
 tention. If, on the other hand, a wider range of deduction is deemed 
 advisable, there is equal reason for making the statute more specific. 
 The subject is properly one for the consideration of the legislature 
 and attention is called to it for that reason." Report of Wisconsin 
 State Tax Commission, 1912, p. 49. 
 
 (206)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 102 
 
 the decisions under income tax laws, in so far as they have 
 adverted to this point, tend to the application of a stricter rule. 
 Thus, in an English case it was held that depreciation on ac- 
 count of wear and tear does not include the loss on apparatus 
 which is discarded because it has become old-fashioned or 
 obsolete, as in the case where a street railway company chang- 
 es its motive power from horse power to electric power, and 
 thereupon is obliged to take up and cast aside the rails in use, 
 which, though not worn out, cannot be used for the new 
 track. 76 So again, under the English statute, which allows a 
 deduction for "diminished value by reason of wear and tear 
 during the year of any machinery or plant," it was ruled that 
 the owners of a ship engaged in trade were not entitled to a 
 deduction for depreciation in the value of their vessel caused 
 by the building of ships of a better construction or better 
 equipped, though this circumstance rendered their own proper- 
 ty less desirable for the use of charterers and so diminished 
 its earning power. 77 
 
 Finally, it has been ruled that "good will" represents the 
 value attached to a business over and above the value of the 
 physical property, and is such an entirely intangible asset that 
 no claim for depreciation in connection therewith can be al- 
 lowed. 78 
 
 102. Depletion of Ores or Other Natural Deposits 
 
 It has 'been a vexed question whether or not a company en- 
 gaged in the business of mining coal, ores of gold or silver, or 
 other natural deposits, should be allowed to deduct from its 
 income as returned for assessment, under the head of depre- 
 ciation, an amount representing the diminution in the value of 
 its property caused by the extraction of ores during the year. 
 
 76 London County Council v. Edwards, 5 Tax Gas. 383. 
 " Burnley Steamship Co. v. Aikin, 31 Scotch Law Rep. 803, 3 Tax 
 Gas. 275. 
 
 78 Treasury Decisions, No. 1742, par. 82. 
 
 (207)
 
 102 INCOME TAXATION (Ch. 8 
 
 Two American decisions and one English case have ruled 
 that this was not admissible. 79 But other decisions (in both 
 countries) have maintained that such a deduction should be 
 allowed, on the ground that a mining property is valuable 
 only for the minerals which it contains, that its value constant- 
 ly decreases as the minerals are extracted, until it reaches the 
 vanishing point at the time when the mineral deposits are ex- 
 hausted, and that each year's operations causes a shrinkage 
 in the value of the property equal to the value (value in place) 
 of the ores taken out, which is properly described as a "de- 
 preciation." 80 And this rule was also adopted by the officers 
 of the internal revenue bureau. 81 So far as concerns taxation 
 under the federal statute, this question is set at rest by the 
 terms of the act of 1913, which includes under the head of 
 allowance for depreciation "in the case of mines, a reasonable 
 allowance for depletion of ores and all other natural deposits, 
 not to exceed five per centum of the gross value at the mine 
 of the output for the year for which the computation is made." 
 The same rule will apply to the case of natural gas companies 
 and those sinking oil wells. And under the corporation 
 tax law of 1909, the administrative officers ruled that natural 
 gas companies should be allowed to make deductions for de- 
 preciation on the basis of the gradual exhaustion of their de- 
 posits, and prescribed elaborate instructions for reckoning this 
 depreciation, 82 which was also done with reference to com- 
 
 7 Commonwealth v. Ocean Oil Co., 59 Pa. St. 61 ; Stratton's In- 
 dependence v. Howbert (U. S. Dist Ct. D. Colo., 1912) 207 Fed. , 
 
 reported in Treasury Decisions, No. 1796 ; Alianza Co. v. Bell [1906] 
 App. Gas. 18. 
 
 so United States v. Nipissing Mines Co., 202 Fed. 803; Knowles v. 
 McAdam, L. R. 3 Ex. Div. 23, 1 Tax Cas. 161. 
 
 si Treasury Decisions, No. 1742, par. 97. 
 
 82 "For the purpose of enabling corporations engaged in the pro- 
 duction and transportation of natural gas to properly gauge depre- 
 ciation of investment in the field and main line divisions on ac- 
 count of depletion to be deducted each year, in making their annual 
 return of net income, the following methods are recommended: 
 
 "First. That the producing gas area of said company be laid off 
 
 (208)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 102 
 
 panics operating petroleum producing properties. 88 Apparent- 
 ly the same principle might justly be applied to the case of 
 income derived from timber lands, if the property were not 
 
 in squares not exceeding one square mile, and that three months pri- 
 or to September 30 of each year, one or more representative wells 
 be shut in in each square or territory, and that as of September 30 
 an accurate gauge be taken of the rock pressure of said wells, and 
 the decline in the average rock pressure from year to year shall be 
 considered as the base of determining the exhaustion of deposit. For 
 instance, a corporation may have 80 square miles of territory, and 
 the average rock pressure September 30, 1909, may have been 600 
 pounds per square inch. On September 30, 1910, the average rock 
 pressure may have been 540 pounds, or a decline of 10 per cent, and 
 this percentage is to be applied as a basis of depreciation for the 
 year 1910 on the cost of the field and main line divisions, less depre- 
 ciation charged off prior to that date and any salvage value that 
 may remain in the property. 
 
 "Second. If by reason of lack of area or for any other good and 
 sufficient reason, any corporation engaged in the production of gas 
 shall prefer the 'volume basis' as more accurately reflecting the 
 rate of exhaustion of deposits, the amount of capital invested to be 
 returned out of the income of any given year may be determined on 
 that basis. In case the 'volume basis' is adopted, the volume of each 
 well must be taken with instruments generally recognized as relia- 
 ble for determining the daily volume produced by each well at 
 stated periods each year, and the percentage of loss in daily pro- 
 duction shall determine the percentage of the capital investment 
 which shall be returnable out of gross income and the proper de- 
 duction to be made each year in the return of annual net income 
 as return of capital invested. 
 
 "Any unreturned cash investment remaining when wells or terri- 
 tory have to be abandoned or lines taken up because of failure of 
 the supply of gas, less salvage, may be deducted as part of the rea- 
 sonable depreciation for the year in which such territory is aban- 
 doned, unless such values shall have been returned in the reduction 
 made because of loss of volume or decrease in rock pressure, which 
 in such case would be considered as having reached the vanishing 
 point" Treasury Decisions, No. 1754. 
 
 sa "In the ascertainment of net income deduction will be allowed 
 for depreciation arising from exhaustion of deposits and for depre- 
 ciation and obsolescence of improvements in accordance with the 
 general regulations respecting depreciation allowances, on the basis 
 of the original capital-investment cost, reduced to a cash basis, of 
 the properties concerned to the company reporting. Claims for de- 
 preciation on account of depletion of deposits based on any values 
 
 BL.INC.TAX. 14 (209)
 
 102 INCOME TAXATION (Ch. 8 
 
 otherwise valuable. The point seems not to have been ad- 
 judged. But the treasury department has ruled that the mere 
 removal of timber by cutting from timber lands, unless the 
 timber is disposed of through sales or plant operations, is to 
 be considered simply as a change in the form of assets ; but if 
 the timber is disposed of through sales or otherwise, it is to 
 be accounted for in accordance with the regulations govern- 
 ing the disposition of capital and other assets. 84 
 
 other than the cost of the property in cash or cash values (includ- 
 ing cost of development) will not be considered, 
 
 "In all producing oil fields an average value per barrel of the set- 
 tled daily production shall be adopted as the guide in determining 
 the value of the property, and the following method of depreciating 
 said values is recommended : 
 
 "Each corporation will fix this valuation per barrel as of January 
 1, 1909, or upon the date of commencement of production, if after 
 that date, for ascertaining the deductions for depreciation on the 
 basis of depletion of deposits. This valuation per barrel should 
 be based on the cost of the property to the corporation plus the 
 cost of the development thereof with a proper deduction from that 
 valuation for the number of years the property has been in opera- 
 tion, and the resulting proportioned decrease in daily production of 
 oil. With this basis per barrel fixed as of January 1, 1909, or at the 
 date of commencement of production, if after January 1, 1909, the 
 value of the property as a whole is to be determined by applying this 
 unit value per barrel to the daily average production for the month 
 of December, or other representative month, in the year for which 
 the return is made. The representative month chosen shall be the 
 same in each year. This unit valuation per barrel is to be retained 
 in arriving at all future depreciation deductions, except where an 
 additional production is secured by drilling or an additional pro- 
 duction is acquired by purchases, in which cases a new average rate 
 per barrel based upon the actual cash invested in such development, 
 or in the new properties and their development, may be adopted. 
 The amount of income each year to be applied to the return of 
 the cash investment shall be ascertained by multiplying the unit val- 
 uation ascertained as required above by the difference between the 
 daily average production in barrels during the representative month 
 of each year. The product of such multiplication will be the amount 
 deductible from gross income on account of return of cash invest- 
 ment based upon the rate of depletion of deposits." Treasury Deci- 
 sions, No. 1755. 
 
 s* Treasury Decisions, No. 1742, par. 91. 
 
 (210)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 103 
 
 103. Amortization of Bonds 
 
 Closely connected with the subject of depreciations is the 
 rule or principle of the amortization of various forms of se- 
 curities, and particularly corporate bonds. This principle is 
 well explained by a court in New York, as follows: "It is a 
 common matter with bankers and dealers in stocks to com- 
 pute, by the aid of tables, what the actual income is of a stock 
 running a certain definite time, for which a certain premium 
 is paid. The actual income is plainly less than the amount 
 yearly received, because the premium paid must be so dis- 
 tributed, in the calculation, over the time the stock has to run, 
 that the owner at the end of the time will have his original 
 investment unimpaired. Otherwise, though he may not no- 
 tice this, he will have been gradually impairing his capital, in 
 fact, using it up in the form of income. The rule is that so 
 much out of the moneys received annually on these bonds shall 
 be treated as income as, according to the computations and 
 tables above mentioned, they are found to produce. The res- 
 idue belongs to principal, and annually added thereto will make 
 up for the gradual depreciation which must come as the bonds 
 approach maturity, and will keep the fund unimpaired when 
 they are paid off." 86 Thus, if a trustee under a will, who 
 holds a fund in trust to pay the income to a person during his 
 life, with remainder over, makes an investment in bonds, which 
 are payable at a day certain and are bought at a premium, he 
 is not obliged to pay the entire net income to the tenant for 
 life, but is entitled to deduct such an amount from the actual 
 interest received on each bond as will, by successive deduc- 
 tions, make good to the capital the amount of the premium 
 paid upon the original purchase of the bond, without regard to 
 the market value of the bond at the time of making such de- 
 ductions. 88 And under the corporation tax law of 1909, the 
 
 85 People v. Davenport, 30 Hun (N. Y.) 177. 
 
 se New England Trust Co. v. Eaton, 140 Mass. 532, 4 N. E. 69, 54 
 Am. Rep. 493. 
 
 (211)
 
 104 INCOME TAXATION (Ch. 8 
 
 officers of the internal revenue bureau considered this gradual 
 diminution in the market value of a bond (originally bought 
 at a premium) as its maturity approaches, in the light of a 
 "depreciation" of property, and made the following ruling in 
 regard to it: "Relative to amortization of bonds, where a 
 corporation holds bonds which were purchased at a rate above 
 par, and said corporation shall proportionately reduce the val- 
 ue of those bonds on its books each year, so that the book 
 value shall be the redemption value of the bonds when such 
 bonds become due and payable, the return of annual net in- 
 come of the corporation holding such bonds may show the de- 
 preciation on account of amortization of such bonds. The 
 requirement is, however, that the amount carried to the amorti- 
 zation account each year shall be practically proportioned with 
 respect to the difference between the purchase price and the 
 maturing value and the number of years to elapse until the 
 bonds become due and payable. With respect to bond issues, 
 where such bonds are disposed of for a price less than par 
 and are redeemable at par, it is also held that, because of the 
 fact that such bonds must be redeemed at their face value, 
 the loss sustained by reason of their sale for less than their 
 face value may be prorated by the issuing corporation in ac- 
 cordance with the life of the bond." 87 
 
 104. Dividends from Corporations Subject to Tax 
 
 In order to avoid double taxation, it is customary for the 
 income tax laws to allow the deduction of dividends received 
 from corporations liable to the tax, or which have been 
 assessed for it. In the act of Congress of 1909, the deduction 
 was allowed of all amounts received within the year as divi- 
 dends on the stock of any corporation "subject to the tax." 
 And an opinion was given by the Attorney General that, in 
 
 *i Treasury Decisions, No. 1727. 
 (212)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 104 
 
 computing the income of a corporation for the purpose of 
 taxation under that act, the dividends received by it as a 
 stockholder in any other corporation of a character to which 
 the act applied should be deducted from its gross earnings, 
 although the dividend-paying corporation had not a sufficient 
 net income to be taxable itself, for if such corporation was 
 of the character described in the act (that is, not among those 
 exempted entirely), it was "subject to the tax imposed" al- 
 though its income for any given year might not reach the taxa- 
 ble limit. 88 The act of 1913, as applied to the individual tax- 
 payer, allows the deduction of "the amount received as divi- 
 dends upon the stock or from the net earnings of any corpora- 
 tion, joint stock company, association, or insurance company 
 which is taxable upon its net income as hereinafter provided." 
 But, whether from inadvertence or by design, there is no 
 similar provision in the case of corporations, so that corpora- 
 tions, as distinguished from individuals, will not be allowed 
 to deduct dividends received from other companies. This 
 bears with special rigor upon "holding" companies, and this 
 circumstance may have been influential in the mind of Con- 
 gress in framing the provision. 
 
 In the Wisconsin income tax law, the provision on this 
 subject is both more comprehensive and more explicit, and 
 applies alike to individual taxpayers and corporations. It au- 
 thorizes the deduction of "dividends or income received within 
 the year from stocks or interest in any firm, copartnership, 
 or corporation, joint stock company or association, the income 
 of which shall have been assessed under the provisions of this 
 act." In Hawaii, the provision is that "in assessing the income 
 of any person or corporation, there shall not be included the 
 amount received from any corporation, as dividends upon 
 the stock of such corporation, if the tax of two per cent 
 
 ss 28 Opin. Atty. Gen. 140. 
 
 (213)
 
 105 INCOME TAXATION ( Ch. 8 
 
 has been assessed upon its net profits by said corporation as 
 required by this act." 
 
 105. Special Rules as to Insurance Companies 
 
 The act of Congress of 1913 allows a deduction, in the case 
 of insurance companies of "sums other than dividends paid 
 within the year on policy and annuity contracts." This covers 
 the ordinary outgo of an insurance company in the way of 
 payments of losses under its policies and periodical payments 
 made to beneficiaries under annuity contracts. But special 
 provision is also made for companies doing business on the 
 mutual plan. In the case of mutual life insurance companies, 
 they "shall not include as income in any year such portion of 
 any actual premium received from any individual policy 
 holder as shall have been paid back or credited to such in- 
 dividual policy holder, or treated as an abatement of premium 
 of such individual policy holder, within such year." In the 
 case of mutual fire insurance companies, they are likewise en- 
 titled to deduct "any portion of the premium deposits returned 
 to their policy holders, but shall return as taxable income 
 all income received by them from all other sources plus such 
 portions of the premium deposits as are retained by the com- 
 panies for purposes other than the payment of losses and ex- 
 penses and reinsurance reserves." As to mutual- marine in- 
 surance companies, the direction is that they "shall include 
 in their return of gross income gross premiums collected and 
 received by them less amounts paid for reinsurance, but shall 
 be entitled to include in deductions from gross income 
 amounts repaid to policy holders on account of premiums 
 previously paid by them and interest paid upon such amounts 
 between the ascertainment thereof and the payment thereof." 
 This act also allows the deduction of "the net addition, if 
 any, required by law to be made within the year to reserve 
 funds," and provides that, "in the case of assessment insurance 
 
 (214)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 105 
 
 companies, whether domestic or foreign, the actual deposit of 
 funds with state or territorial officers, pursuant to law, as ad- 
 ditions to guarantee or reserve funds, shall be treated as 
 being payments required by law to reserve funds." 
 
 Aside from the matter of reserve funds required by law, 
 it has been a vexed question whether or not an insurance 
 company could claim a deduction in respect to premiums cov- 
 ering a risk which extends beyond the end of the fiscal year. 
 In an English case, a fire insurance company set up a claim 
 to deduct a portion of its premium receipts for the year, 
 representing the unearned or unexhausted portion of such 
 premiums, where it remained liable on the policies for one or 
 several years longer. The company contended that such a 
 deduction should be allowed to it either as a fixed percentage 
 of the total premium receipts (suggesting one-third as a proper 
 proportion), or else to the extent of the amount which it 
 would cost to reinsure its unexpired risks. But the court held 
 otherwise. Conceding that it would be impossible to ascer- 
 tain the true net profits of an insurance company in this situa- 
 tion with such mathematical accuracy as to do perfect and ab- 
 solute justice, it was held that the fair and proper method 
 is to take on the one side the whole receipts, and on the other 
 side the whole expenditure and disbursements, for the given 
 year, the balance remaining being, for the time at least, net 
 profits on which the income tax should be assessed. This 
 being done year by year, there is an absolute balancing of 
 accounts ; and if any wrong is done by losses afterwards oc- 
 curring in respect of premiums on which, as profits, the in- 
 come tax has been assessed and paid, it will be taken into 
 consideration in the ensuing year. 89 And later an exactly 
 similar decision was rendered by the Court of Appeal. 90 But 
 
 8 Imperial Fire Ins. Co. v. Wilson, 35 Law T. 271, 1 Tax Cas. 71. 
 o General Accident, etc., Co. v. McGowan [1908] App. Cas. 207, 5 
 Tax Cas. 308. 
 
 (215)
 
 106 INCOME TAXATION (Ch. 8 
 
 only four years afterwards, the same court ruled that the 
 profits of a fire insurance company, for the purpose of the 
 income tax, are not to be computed by merely deducting the 
 total of losses and disbursements for the year from the total 
 premium receipts for the same period, but allowance must 
 be made for outstanding policies at the end of the year, or 
 for the unearned portion of premiums received, which may be 
 done by deducting a fair and reasonable percentage of the 
 year's premium receipts. 91 Substantially the same view was 
 taken by the internal revenue officers in construing the act of 
 Congress of 1909, for it was ruled that unearned premiums 
 set aside by insurance companies as reserves should not be 
 included as income until earned, unless the same should be en- 
 tered on the ledger as income during the year in which they 
 were received. 82 
 
 106. Rules as to Foreign Corporations 
 
 As foreign corporations are taxed only upon so much of 
 their income as they receive from business transacted or 
 capital invested in the United States, under the federal stat- 
 ute, so their allowable deductions are correspondingly restrict- 
 ed. Thus, the item of "expenses" will cover only expenditures 
 in the maintenance and operation of the business and proper- 
 ty within the United States. So "losses" must be "actually 
 sustained within the year in business conducted by it within 
 the United States." And as to deducting interest paid by a 
 foreign company, the rule prescribed is that it may claim a 
 deduction for interest on its indebtedness, to an amount of 
 such indebtedness not exceeding that portion of its paid-up 
 capital stock (plus one half the sum of its bonded debt) which 
 may be regarded as invested or employed in this country, 
 which is to be ascertained by taking the ratio between "the 
 
 i Sun Insurance Office v. Clark [1912] App. Cas. 443. 
 2 Treasury Decisions, No. 1742, par. 70. 
 
 (216)
 
 Ch. 8) DEDUCTIONS AND ALLOWANCES 106 
 
 gross amount of its income for the year from business trans- 
 acted and capital invested within the United States" and "the 
 gross amount of its income derived from all sources within 
 and without the United States." As to taxes, a foreign com- 
 pany is allowed to deduct only "sums paid by it within the 
 year for taxes imposed under the authority of the United 
 States or of any state or territory thereof or the District of 
 Columbia." 
 
 (217)
 
 107 INCOME TAXATION ( Ch. 9 
 
 CHAPTER IX 
 
 RETURN OF INCOME AND COLLECTION OF TAX 
 
 107. Taxpayers' Returns, Who Required to Make. 
 
 108. Returns by Guardians, Trustees, and Other Fiduciaries. 
 
 109. Form and Contents of Return. 
 
 110. Including Income of Wife and Children. 
 
 111. Time for Filing Returns. 
 
 112. Where Returns are to be Filed. 
 
 113. Publicity or Inspection of Returns. 
 
 114. Penalties for Divulging Information. 
 
 115. Proceedings in Case of Refusal or Neglect to File Return. 
 
 116. Same; Examination of Books, Papers, and Witnesses. 
 
 117. Assessment of the Tax. 
 
 118. Appeal and Review of Assessment 
 
 119. Rate of Tax. 
 
 120. When Tax is Payable. 
 
 121. Penalties for Delinquency and False Returns. 
 
 122. Lien of Tax. 
 
 123. Process for Recovery of Tax. 
 
 124. Compromise of Litigation. 
 
 125. Collection at the Source. 
 
 107. Taxpayers' Returns, Who Required to Make 
 
 The act of Congress of 1913 requires a return to be made 
 by "each person of lawful age, except as hereinafter provided, 
 subject to the tax imposed by this section, and having a net 
 income of $3,000 or over for the taxable year." This includes 
 married women having an independent income of the required 
 amount, but not minors, the returns for the latter being made 
 by their guardians or trustees. It might be a debatable ques- 
 tion whether the phrase "net income" as here used, means 
 the income of the person before or after subtracting the items 
 specially allowed to be deducted, such as business expenses, 
 interest and taxes paid, losses incurred, bad debts, depreciation 
 of property, and dividends from corporations. But the leg- 
 islative history of the act shows that "net income" is intended. 
 
 (218)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 107 
 
 For the measure as originally passed by the House of Repre- 
 sentatives required returns to be made by persons "having a 
 net income" of the designated amount, and this was changed 
 by the Senate so as to read "having an income," etc. But 
 this amendment was rejected by the conference committee; 
 hence, the omission of the word "net" must be regarded as 
 significant. This part of the law applies to persons residing 
 abroad, as well as to residents of the United States. As to 
 corporations, the requirement is that a return shall be made 
 by "all corporations, joint stock companies or associations, and 
 insurance companies subject to the tax herein imposed," in- 
 cluding foreign corporations doing business in the United 
 States. 
 
 The Wisconsin statute requires a return from "every corpo- 
 ration, joint stock company or association, whether taxable 
 under this act or not." As to individuals, the provision is 
 that the assessor of incomes is to ascertain what persons in 
 his district are subject to the tax, and any person who, in his 
 judgment, is so subject shall be required by him to make a 
 report. The state tax commission rules that the fact that the 
 individual is not subject to the income tax will not relieve 
 him from the duty of making a return when so demanded; 
 and also that a person who is in fact subject to the tax is 
 not relieved from the obligation to make a return by the fact 
 that he has not been formally required to do so by the assessor, 
 and there is a penalty prescribed for failure or refusal to 
 make the return. 
 
 In South Carolina, the law provides that "all persons lia- 
 ble for the payment of any of the tax herein provided for," 
 including non-residents, shall make a return. In North Caro- 
 lina, the blank furnished to taxpayers for listing their real and 
 personal property shall contain the following question : "Was 
 your gross income from salaries, fees, trade, profession and 
 property not taxed, any or all of them, for the year ending 
 June first, in excess of one thousand dollars?" And if the 
 
 (219)
 
 107 INCOME TAXATION (Ch. 9 
 
 taxpayer answers this question in the affirmative, he is to 
 be furnished with another blank on which to make his return 
 of income for taxation. Provision is also made for reporting 
 the names of persons who have not made this return but are 
 believed to be liable for the income tax, and for requiring such 
 persons to make the return. In Oklahoma, the provision is 
 practically the same as in North Carolina, except that the 
 question relates to income in excess of $3,500. In Hawaii, 
 the statute provides that "it shall be the duty of all persons 
 of lawful age having an income of six hundred dollars or 
 more for the preceding year, from all sources, and of all cor- 
 porations made liable to income tax, to make and render a 
 list or return." All the statutes above referred to may be 
 seen in full in the appendix to this volume. 
 
 The English cases hold that a corporation which is spe- 
 cifically exempted from the operation of the income tax law 
 is not required to make any return. 1 But a contrary ruling 
 was made by the internal revenue department in construing 
 the act of Congress of 1909, for it was held that corporations 
 claiming a special exemption must nevertheless make a return 
 (which might be in blank, if desired) accompanied by a state- 
 ment setting forth the ground on which the exemption was 
 claimed. 2 It was also held by the courts that all corporations 
 must make the required return, whether or not they had a 
 sufficient income to be taxable, and if they omitted to do so, 
 they were liable to the penalty imposed by the statute, though 
 the only reas6n was the belief that no return was necessary 
 where there was no taxable income. 3 But these decisions were 
 based on the ground that the existence of a taxable income, 
 
 1 Commissioners of Inland Revenue v. Incorporated Council of 
 Law Reporting, 22 Q. B. Div. 291, 3 Tax Gas. 105. 
 
 2 Treasury Decisions, No. 1742, par. 3. 
 
 * United States v. Acorn Roofing Co., 204 Fed. 157; United States 
 v. Military Construction Co., 204 Fed. 153. See also 29 Opin. Atty. 
 Gen. p. 217. 
 
 (220)
 
 Gh. 9) RETURN OF INCOME AND COLLECTION OF TAX 108 
 
 above the statutory exemption, might often be a matter of 
 close calculation, and might depend on the allowance or re- 
 jection of many claims for deductions, under the headings of 
 expenses, interest paid, depreciation of property, and the like. 
 And it would obviously be improper to allow a corporation to 
 decide for itself whether or not it was liable to the tax and 
 to make or withhold a return accordingly. But these con- 
 siderations do not apply in the case of a corporation which is 
 expressly and entirely exempted from the payment of the tax. 
 And no language could be chosen more broad and sweeping 
 than the words employed in the act of Congress of 1913 in 
 regard to exempt corporations, viz., "nothing in this section 
 shall apply to" the companies thereafter specifically described. 
 Since the whole of the income tax law is contained within one 
 section of the tariff act in which it is found, it is evident that 
 the word "section" in the phrase quoted cannot be restricted 
 to the subdivision or paragraph in which the phrase occurs, 
 but means the entire act in so far as it relates to income taxa- 
 tion. Hence if given classes of corporations are expressly 
 exempted from the incidence of the tax, they are also ex- 
 pressly exempted from the duty of making a return. 
 
 108. Returns by Guardians, Trustees, and Other Fidu- 
 ciaries 
 
 The act of Congress of 1913 provides that "guardians, trus- 
 tees, executors, administrators, agents, receivers, conservators, 
 and all persons, corporations, or associations acting in any 
 fiduciary capacity, shall make and render a return of the net 
 income of the person for whom they act, subject to this tax, 
 coming into their custody or control and management." The 
 use of the word "agents" in this sentence is ambiguous, but 
 its scope should be limited by the terms with which it is as- 
 sociated, and so should be understood as meaning agents who 
 are charged with the collection of the whole or the chief part 
 of another person's income, as guardians, receivers, and con- 
 
 (221)
 
 108 INCOME TAXATION (Ch. 9 
 
 servators of lunatics are. The act also provides that all per- 
 sons, firms, and corporations, "in whatever capacity acting," 
 that is, whether acting in a fiduciary capacity or not, "having 
 the control, receipt, disposal or payment of fixed or deter- 
 minable annual or periodical gains, profits, and income of 
 another person subject to tax," and who are required to 
 withhold the tax from such income and pay it over to the 
 government, "shall in behalf of such person make and ren- 
 der a return, as aforesaid, but separate and distinct, of the 
 portion of the income of each person from which the normal 
 tax has been thus withheld." But in neither of these two 
 cases is a return required where the income concerned does 
 not exceed $3,000. There is also a provision that "any per- 
 son for whom return has been made and the tax paid, or to 
 be paid as aforesaid, shall not be required to make a return 
 unless such person has other net income." As regards guard- 
 ians, trustees, etc., almost identical terms are found in the 
 statutes of the various states, requiring them to make returns 
 for their wards or beneficiaries. 
 
 The federal statute also provides that "a return made by 
 one of two or more joint guardians, trustees, executors, ad- 
 ministrators, agents, receivers, and conservators, or other per- 
 sons acting in a fiduciary capacity, filed in the district where 
 such person resides, or in the district where the will or other 
 instrument under which he acts is recorded, under such reg- 
 ulations as the Secretary of the Treasury may prescribe, shall 
 be a sufficient compliance with the requirements of this par- 
 agraph." It is also to be noted that the act lays the duty of 
 making a return, and also of withholding the income tax, upon 
 "lessees" with respect to rent payable by them in excess of 
 $3,000 for any taxable year. 
 
 109. Form and Contents of Return 
 
 The federal income tax law provides that returns, both of 
 individuals and corporations, shall be "in such form as the 
 
 (222)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 109 
 
 Commissioner of Internal Revenue, with the approval of 
 the Secretary of the Treasury, shall prescribe." 4 But in 
 the case of the return of an individual taxpayer, the stat- 
 ute requires that it shall set forth specifically the gross 
 amount of income from all separate sources, and that, from 
 the total thereof, there shall be deducted the "aggregate 
 items or expenses and allowance herein authorized." In the 
 case of corporations, the directions as to what shall appear 
 on the face of the return are elaborate and detailed, and 
 will not be repeated here, since they seem to call for no 
 special comment, but may be seen at large in the appendix 
 to this volume. It is also the policy of the state income tax 
 laws to leave to the proper state officer or commission the 
 settlement of the details and form of the taxpayer's return, 
 except in North Carolina and Oklahoma, where the form 
 of the return is prescribed in the statute and consists of a 
 mere statement (under oath) that the person's income 
 from the sources mentioned, during the fiscal year, over 
 and above the statutory exemption, amounted to such and 
 such a sum. All the statutes require the return to be veri- 
 fied by the oath or affirmation of the person making it. 
 But the penalties for intentional falsehood in the state- 
 ments of the return vary greatly in the different jurisdic- 
 tions. 5 But it is believed that the penalties of perjury as 
 at common law would attach to such false swearing, unless 
 the statute expressly declares the offense to be a misde- 
 meanor or expressly prescribes a punishment in the nature 
 of a fine. For it has been decided that although an act im- 
 posing a tax on incomes makes no provision for compel- 
 ling a person to make oath to his return, yet if it permits 
 
 * Regulations made by the Commissioner pursuant to statutory au- 
 thority, with the approval of the Secretary of the Treasury, in re- 
 spect to the assessment and collection of internal revenue taxes, have 
 the force of statutes ; and the acts of the Commissioner are presum- 
 ed to be the acts of the Secretary. In re Huttman, 70 Fed. 699. 
 
 B See, infra, 121. 
 
 (223)
 
 110 INCOME TAXATION (Ch. 9 
 
 him to do so, and he avails himself of the privilege, and 
 makes a false return, he is guilty of perjury. 6 
 
 110. Including Income of Wife and Children 
 
 The Wisconsin statute provides that, in computing the 
 exemptions allowed and the amount of the tax payable, 
 "the income of a wife shall be added to the income of her 
 husband, and the income of each child under eighteen years 
 of age to that of its parent or parents, when said wife or 
 child is not living separately from said husband, parent, or 
 parents." In Virginia the corresponding provision is that 
 "only one deduction of one thousand dollars shall be made 
 from the aggregate income of any family." In Hawaii, the 
 act provides that "only one deduction of one thousand dol- 
 lars shall be made from the aggregate annual income of all 
 the members of one family composed of one or both parents 
 and one or more minor children, or husband and wife." 
 With the exception of Wisconsin, none of these statutes ex- 
 pressly requires a taxpayer who is a husband and head of 
 a family to include in his own return the separate income of 
 his wife and children. Yet such is their apparent intention. 
 And it is difficult to see in what other way the provision 
 could be made effective. It may be added that the consti- 
 tutional validity of provisions of this kind has been sustain- 
 ed by the courts. 7 
 
 On the other hand, the act of Congress of 1913 treats 
 husband and wife as separate and distinct taxpayers, each 
 of whom, without reference to the other, is required to 
 make a return and pay the tax if he or she has a sufficient 
 income. And the language of the statute shows that it 
 was within the contemplation of Congress that both a hus- 
 band and wife might be separately taxable, or that either, 
 without the other, might be taxable. But as to the matter 
 
 United States v. Smith, 1 Sawy. 277, Fed. Gas. No. 16,341. 
 i Robertson v. Pratt, 13 Hawaii, 590. 
 
 (224)
 
 Ch. 9) RETURN OP INCOME AND COLLECTION OP TAX 111 
 
 of exemptions, a married pair living together may claim an 
 exemption greater by $1,000 that that allowed to an un- 
 married person, presumably on account of the greater ex- 
 penses of family life. This additional exemption, however, 
 cannot be claimed by both the husband and the wife. It 
 may be claimed by a married man, living with and support- 
 ing his wife, provided that she herself has not a taxable in- 
 come. Or it may be claimed by a married woman, with a 
 husband living with her, where she has a taxable income 
 and he has not. But if both have taxable incomes, apparent- 
 ly one only can claim the additional exemption. So far the 
 statute is reasonably intelligible. But its meaning is much 
 clouded by the addition of the provision that "only one de- 
 duction of $4,000 shall be made from the aggregate in- 
 come of both husband and wife when living together." Ap- 
 parently the intention is that if either of the spouses 
 (whether the husband or the wife) has an income large 
 enough to be taxable, while the other has a separate and 
 independent income not large enough to be taxable, both 
 incomes shall be added together and included in the return 
 to be made by the taxable person, and thereupon a total 
 deduction of $4,000 may be made from the aggregate 
 amount of income so included. 
 
 111. Time for Filing Returns 
 
 The time for filing an income-tax return, under the fed- 
 eral statute, is the first day of March in each year, the re- 
 turn relating to the income of the preceding calendar year, 
 that is, the year ending on the thirty-first of December 
 preceding. This applies alike to individuals and corpora- 
 tions, except that the latter are permitted to designate a 
 fiscal year of their own, which may not be coterminous 
 with the calendar year, and be taxed upon the income of 
 such fiscal year, and in this case the return is to be made 
 within sixty days after the close of such fiscal year. It is 
 BL.INC.TAX. 15 (225)
 
 112 INCOME TAXATION (Ch. 9 
 
 also provided that when the neglect of any taxpayer (in- 
 dividual or corporate) to file the return at the time pre- 
 scribed is due to "sickness or absence," the collector of in- 
 ternal revenue "may allow such further time for making 
 and delivering such list or return as he may deem neces- 
 sary, not exceeding thirty days." The Wisconsin income 
 tax law contains similar provisions as to allowing corpo- 
 rations to base their returns on the business of their own 
 fiscal year, and as to an extension of time in case of the 
 "sickness or absence of an officer of any corporation, joint 
 stock company or association required to make said return, 
 or for other sufficient reason." But the time for filing re- 
 turns is not prescribed by the statute, but is left to the de- 
 termination of the state tax commission, which has appar- 
 ently designated the first of March in each year. 8 It was 
 ruled by the treasury department, under the act of 1909, 
 that where a corporation makes its return in due time, but 
 it is returned for corrections, and a correct return is after- 
 wards filed, though after the appointed day, the corporation 
 is not to be regarded as delinquent, and the penalty for 
 neglecting or refusing to make a return will not attach. 9 
 
 112. Where Returns are to be Filed 
 
 The federal statute requires the return of an individual 
 taxpayer to be filed with the collector of internal revenue 
 "for the district in which such person resides or has his 
 principal place of business, or, in the case of a person re- 
 siding in a foreign country, in the place where his principal 
 business is carried on within the United States." In the 
 case of a domestic corporation, the return is to be filed 
 with the collector "for the district in which it has its prin- 
 cipal place of business," and in the case of a foreign corpo- 
 
 Wisconsin Income Tax Law, edition published by State Tax Com- 
 mission, 1911, p. 32. 
 
 Treasury Decisions, No. 1711. 
 
 (226)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 112 
 
 ration, "in the place where its principal business is located 
 within the United States." Under similar provisions in the 
 corporation tax law of 1909, it was ruled that returns filed 
 with a deputy collector of internal revenue are regarded as 
 having been filed with the collector; 10 that the "principal 
 place of business" means the principal office where a cor- 
 poration keeps its books from which the required return is 
 to be prepared, and not necessarily the place where the 
 operating plant is located; 11 and that foreign corporations 
 having several branch offices in the United States should 
 each designate one of such branches as its principal office, 
 and should also designate the proper officers to make the 
 required return. 12 Under the law in Wisconsin an impor- 
 tant distinction is made between the returns of corporations 
 and those of individuals. The former are to be filed with 
 the state tax commission, the latter with the assessor of 
 incomes of the district. In the case of a guardian, trustee, 
 executor, etc., the district is that in which he resides, rath- 
 er than that in which the ward or beneficiary may reside. 
 In the case of a non-resident, the income is to be "assessed 
 and taxed in the town, city, or village from which such in- 
 come is derived," where apparently also the return should 
 be filed. In South Carolina, the return is to be rendered to 
 the auditor of the county in which the taxpayer resides, 
 whether he makes the return for himself or in the capacity 
 of a guardian, trustee, or other fiduciary. But in the case 
 of a non-resident, the return is to be filed with the auditor 
 or auditors of the county or counties where his taxable in- 
 come arises. In Oklahoma, the return is to be made to the 
 local assessor of taxes, and forwarded by him to the state 
 auditor; and in North Carolina, it is to be rendered to the 
 
 10 Treasury Decisions, No. 1742, par. 40. 
 
 11 Treasury Decisions, No. 1742, par. 13. 
 
 12 Treasury Decisions, No. 1742, par. 11. 
 
 (227)
 
 113 INCOME TAXATION (Ch. 9 
 
 list-taker, and forwarded to the state corporation commis- 
 sion. 
 
 113. Publicity or Inspection of Returns 
 
 The act of Congress of 1913, in so far as relates to corpora- 
 tions, provides that, when the assessment shall have been made, 
 the returns shall be filed in the office of the Commissioner of 
 Internal Revenue, "and shall constitute public records and be 
 open to inspection as such : Provided, that any and all such re- 
 turns shall be open to inspection only upon the order of the 
 President, under rules and regulations to be prescribed by the 
 Secretary of the Treasury and approved by the President." 
 It also contains a provision apparently intended to aid in the 
 administration of the revenue laws of such states as may lay a 
 tax on incomes, concurrently with the federal statute, by 
 throwing open to their officers, under proper restrictions, the 
 facts in the possession of the federal officers concerning tax- 
 able corporations. This provision is as follows : "That the 
 proper officers of any state imposing a general income tax 
 may, upon the request of the governor thereof, have access to 
 said returns or to an abstract thereof, showing the name and 
 income of each such corporation, joint stock company, associa- 
 tion, or insurance company, at such times and in such manner 
 as the Secretary of the Treasury may prescribe." The substan- 
 tive part of this enactment was taken from the corporation tax 
 law of 1909, and the proviso from an amendatory act of 1910. 
 In pursuance thereof, regulations were prescribed by the Sec- 
 retary of the Treasury November 25, 1910, and approved by 
 the President, and the latter issued an executive order of the 
 same date putting them in force. These regulations may be 
 epitomized as follows: The returns of all corporations shall 
 be open to the inspection of the proper officers and employes 
 of the Treasury Department, and of the officers and employes 
 of other departments of the government, but in the latter case 
 only on a written application, signed by the head of the depart- 
 
 (228)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 113 
 
 ment, setting forth the reasons for making it, and addressed to 
 the Secretary of the Treasury. But if inspection of the return 
 of any corporation is desired for the purpose of using the re- 
 turn (or information derived from it) in any legal proceeding, 
 or if inspection is desired by any official of any state or ter- 
 ritory, then the application must first be referred to the At- 
 torney General, and, if recommended by him, transmitted to 
 the Secretary of the Treasury. Any bona fide stockholder 
 may be permitted to inspect the return made by his own cor- 
 poration, on satisfactory proof of his ownership of stock in it, 
 and on application to the Secretary of the Treasury showing 
 good and sufficient cause. But the granting of such an appli- 
 cation is in the discretion of the Secretary, and permission 
 granted cannot be delegated or transferred to another person. 
 The returns of certain corporations may be inspected by any 
 person, on written application to the Secretary of the Treas- 
 ury, setting forth briefly and succinctly the facts necessary to 
 enable him to act upon the request. These are (a) companies 
 whose stock is listed upon any duly organized and recognized 
 stock exchange within the United States; (b) corporations 
 whose stock is advertised in the press or offered to the public 
 by the corporation itself for sale. 13 It will be observed that 
 there is no similar provision in the statute concerning the re- 
 turns made by individual taxpayers, and these apparently are 
 not public records nor open to inspection by any one or on any 
 conditions. 
 
 In the Wisconsin statute it is provided that "nothing herein 
 shall be construed as preventing the assessment roll, the tax 
 roll, and all proceedings had before the county board of review 
 and all evidence taken at such hearing from being open to pub- 
 lic inspection at such times and under such conditions as the 
 state tax commission may direct." This, as construed by the 
 
 13 These regulations may be seen in full in Treasury Decisions, 
 No. 1665. 
 
 (229)
 
 113 INCOME TAXATION (Ch. 9 
 
 revenue officers of the state, authorizes inspection by the public 
 of the roll or list of persons subject to the income tax and the 
 amount of their taxable income, as prepared by the assessors 
 of income, and also the proceedings before the board of review 
 to such an extent as the tax commission may authorize. 
 
 To the limited extent to which statutes of this character au- 
 thorize the publication or inspection of taxpayers' returns, it 
 is held that they do not violate the constitutional prohibitions 
 against unreasonable searches and seizures. 14 But aside from 
 statutory authorization, the courts have shown great reluctance 
 to force the disclosure of matters contained in such essentially 
 confidential documents, even when desired in the interests of 
 public justice. Thus, in England, it is held that a court will 
 not compel the tax officers to produce or exhibit documents in 
 their possession (such as a taxpayer's return) for use in litiga- 
 tion or for the use of a receiver, when it is stated that such a 
 course would be prejudicial and injurious to the public service 
 and interests. 15 And in the United States the rule is even 
 more strict. For a collector of internal revenue cannot be 
 compelled to testify, even in a criminal proceeding in a state 
 court, concerning statements made to him by an applicant for 
 a liquor dealer's tax-stamp, which statements were made for 
 the purpose of being reduced to writing and embodied in the 
 records of the internal revenue office; for, to divulge such 
 statements, would* be to divulge the contents of the records 
 themselves, and this is forbidden by the internal revenue regu- 
 lations. 16 
 
 114. Penalties for Divulging Information 
 
 To encourage frank and full disclosures by taxpayers, and 
 to remove as far as possible the inquisitorial features of such 
 
 i* Flint v. Stone Tracy Co., 220 TJ. S. 107, 31 Sup. Ct. 342, 55 L. 
 Ed. 389. 
 
 is In re Joseph Hargreaves, Ltd. [1900] 1 Ch. 347, 4 Tax Cas. 173. 
 ie In re Huttman, 70 Fed. 699. 
 
 (230)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 114: 
 
 a law, the income tax statutes denounce very heavy penalties 
 upon the officers charged with the assessment and collection of 
 the tax if they shall divulge or make known (except to the 
 limited extent authorized by the statute) the return of any 
 taxpayer or its items or details. The act of Congress also 
 forbids these officers to permit any person to see or examine 
 any return or any copy thereof or any book containing any ab- 
 stract or particulars thereof ; and also provides that 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 the amount or source of income, profits, losses, or 
 expenditures appearing in any income return. Any violation 
 of these provisions is declared a misdemeanor, and the punish- 
 ment prescribed is a fine not exceeding $1,000, or imprison- 
 ment not exceeding one year, or both, and in addition, if the 
 offender is an officer or employe of the United States, dis- 
 missal from office and perpetual incapacity for holding any 
 office under the government. 17 In Wisconsin, the prohibition 
 is substantially the same, except that the penalty, though of 
 the same character, is not so severe, and except that it applies 
 only to the officers and employes of the state or the assessment 
 districts, so that, if they violate their duty and disclose the con- 
 tents of returns, there is apparently nothing to forbid any per- 
 son from printing and publishing such information. 18 In Okla- 
 homa, on the other hand, the provision is that "it shall be un- 
 lawful for any person to print or publish in any manner what- 
 ever any income tax return, or any part thereof, or the taxes 
 due thereon, unless the tax herein becomes delinquent, and any 
 person violating the provisions of this section shall be deemed 
 guilty of a misdemeanor and shall be fined not to exceed fifty 
 dollars and imprisoned in the county jail not more than thirty 
 
 17 Rev. Stat. U. S., 3167 (TJ. S. Comp. St. 1901, p. 2058), as amend- 
 ed by Income Tax Act of 1913. 
 
 is Wisconsin Income Tax Law 1911, 1087m, subsec. 24, pars. 1-3. 
 
 (231)
 
 115 INCOME TAXATION (Ch. 9 
 
 days for each offense." 19 And in North Carolina, the provi- 
 sion is substantially the same as in Oklahoma, except that no 
 permission is given for the publication of the tax returns in 
 case of delinquency. 20 
 
 115. Proceedings in Case of Refusal or Neglect to File 
 Return 
 
 As a general rule, where a taxable person or corporation 
 refuses or omits to make the required return, or makes a false 
 and fraudulent return, it is made the duty of the assessor or 
 collector to make and compile the return on the best in- 
 formation he can obtain. Thus, under the act of Congress, 
 the return in such cases is to be made by the collector or 
 deputy collector of internal revenue on the best information 
 which he can obtain, including that elicited on his examina- 
 tion of witnesses and of books and papers, and "on his own 
 view and information." In Wisconsin, while penalties are 
 prescribed for the neglect or refusal to make a return, there 
 is no provision for the making of the return by the taxing offi- 
 cers, except that, if it is discovered that any taxable person 
 or corporation has failed to make a return in any one of the 
 three next previous years, the proper officer may "make such 
 additions or corrections to the assessment as is deemed true 
 and just, such correction to be made in the next tax levy." 
 In South Carolina, any person or corporation failing to make 
 the required return "shall be assessed by the auditor on ac- 
 count of the income tax, in such amount as appears to him 
 from the best information obtainable by him either by exam- 
 ination of the defaulting taxpayer or any other evidence, that 
 such taxpayer is liable for." In Hawaii, the provision of the 
 statute is that, in such cases, "the assessor may make such 
 assessments as he may consider just, and the same shall be 
 
 i Oklahoma Income Tax Law, 6; Laws Oklahoma 1907, p. 730. 
 20 Acts North Carolina 1907, c. 256, 23. 
 
 (232)
 
 Ch. 9) RETURN OP INCOME AND COLLECTION OF TAX 116 
 
 binding and conclusive upon all parties, and shall not be 
 subject to appeal." 
 
 As a general principle of law, it is held, if the taxpayer re- 
 fuses to give in his income to the assessor, it is the duty of 
 the assessor to ascertain its amount by inquiry or otherwise, 
 to the best of his information and judgment ; and if, in dis- 
 charging this duty, acting in good faith, the assessor fixes 
 the amount of such income at a larger sum than it in fact 
 amounted to, and assesses it at the sum thus ascertained by 
 him, such assessment is legal, notwithstanding the mistake 
 or overstatement, and the collection of the tax so assessed, 
 by the tax collector, is also legal. 21 And in making his es- 
 timate of the value of property for the purpose of the income 
 tax (as, for instance, in determining the rental value of the 
 taxpayer's residence) the assessor is not bound to accept and 
 follow the valuation placed on the same property by any other 
 assessor for the purposes of any other tax. 22 It should also 
 be observed that an assessment for the income tax cannot 
 be impeached collaterally or re-examined in any collateral 
 proceeding. It may be subject to appeal or review, but can- 
 not be revised in any other mode than the special statutory 
 mode provided for that purpose. Hence a proof in bank- 
 ruptcy by a collector of taxes, in .respect of arrears due un- 
 der an assessment for the income tax, cannot be expunged 
 on the ground that the debtor had not received the income 
 or made the profits so assessed. 23 
 
 116. Same; Examination of Books, Papers, and Wit- 
 nesses 
 
 It is provided in the Revised Statutes, as amended by the 
 act of Congress of 1913, that if any person shall refuse or 
 neglect to make the required return, on notice and demand, 
 
 2iLott v. Hubbard, 44 Ala. 593. 
 
 22 Walker v. Brisley, 4 Tax Cas. 254. 
 
 as Calvert v. Walker [1899] 2 Q. B. 145, 4 Tax Cas. 79.
 
 116 INCOME* TAXATION (Ch. 9 
 
 or shall render a return which, in the opinion of the collector, 
 is false or fraudulent or contains any undervaluation or un- 
 derstatement, "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 answer interrogatories, under oath, respecting any objects 
 liable to tax or the returns thereof. The collector may sum- 
 mon any person residing or found within the state in which 
 his district lies ; and when the person intended to be sum- 
 moned does not reside and cannot be found within such state, 
 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." And in another part of the statute, it is 
 provided that "jurisdiction is hereby conferred upon the dis- 
 trict courts of the United States for the district within which 
 any person summoned under this section to appear to testify 
 or to produce books shall reside, to compel such attendance, 
 production of books, and testimony by appropriate pro- 
 cess." 2 * And another federal statute provides that "every 
 collector, deputy collector, and inspector is authorized to ad- 
 minister 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 to be taken." * 5 
 
 In Wisconsin there are stringent provisions for requiring 
 the delinquent taxpayer or corporation to furnish the in- 
 formation necessary to make or complete the return, but 
 
 2* Rev. Stat. U. S., 3173 (U. S. Comp. St. 1901, p. 2065), and In- 
 come Tax Act 1913, subdivisions "J" and "L," amending the same. 
 25 Rev. Stat U. S., 3165 (U. S. Comp. St 1901, p. 2057). 
 
 (234)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 116 
 
 none for the examination of witnesses or of books and papers, 
 except when an appeal is taken to the board of review. In 
 South Carolina, the law seems to authorize an "examination 
 of the defaulting taxpayer," though it makes no explicit pro- 
 vision for compelling his attendance. In Oklahoma the state 
 auditor "may take such steps as he may deem necessary" 
 to compel any delinquent to make a proper return of his in- 
 come, and "to enable him to obtain such information, he or 
 anyone designated by him to obtain such information shall 
 have the power to summon witnesses within the county in 
 which such persons live," and may invoke the aid of the 
 courts to compel their attendance. In Hawaii, "it shall be 
 lawful for the assessor to summon such person, or any of the 
 officers of such corporation, or any person having possession, 
 custody, or care of books of account containing entries relat- 
 ing to the business of such person or corporation, or any oth- 
 er person he may deem proper, wherever residing or found, 
 to appear before him and produce such books at a time and 
 place named in the summons, and to give testimony or an- 
 swer interrogatories under oath, respecting any income liable 
 to tax or the returns thereof." 2e But as to the production of 
 records or other documents by public officers, the law is not 
 very clear, and the question has not often arisen. There is, 
 however, a Scotch decision in reference to compelling the 
 production of documents for the purpose of discovering tax- 
 able income, holding that a public department cannot be com- 
 pelled by a court of law to produce confidential documents in 
 its possession coming from third parties, if so to compel it 
 would be to discourage similar communications being made 
 in the future. 27 In the statute of Hawaii we find the following 
 severe and extraordinary provision : "It shall be the duty of 
 
 26 Session Laws Hawaii 1901, Act No. 20, 6, p. 31. 
 
 27 Brown's Trustees v. Hay, 35 Scotch Law Rep. 340, 3 Tax Gas. 
 598. 
 
 (235)
 
 117 INCOME TAXATION ( Ch. 9 
 
 every person or corporation doing business for profit to 
 keep full, regular, and accurate books of accounts upon which 
 all its transactions shall be entered from day to day in regu- 
 lar order, which books shall be open to the inspection of the 
 assessor of the division or any person authorized by him to 
 inspect the same, during business hours." It is perhaps 
 fortunate that no penalty for the violation of this provision 
 has been prescribed. 
 
 117. Assessment of the Tax 
 
 Under the act of Congress, returns are to be filed with the 
 collector or deputy collector, and it is also the duty of these 
 officers, as above stated, to require the making of returns, or 
 to make returns for delinquent persons or corporations upon 
 information. But the actual assessment of the tax is an act 
 required to be performed by the Commissioner of Internal 
 Revenue. And the statute also gives to this latter officer a 
 power and duty which appear to overlap those intrusted to the 
 collectors. For it is provided that, "in cases of refusal or neg- 
 lect to make such return, and in cases of false and fraudulent 
 returns, the Commissioner of Internal Revenue shall, upon 
 discovery thereof, at any time within three years after said 
 return is due, make a return upon information obtained as 
 provided for in this section or by existing law." 
 
 Under the Wisconsin statute, the assessment of the income 
 tax upon corporations, joint stock companies, and associations 
 is to be made by the state tax commission, but upon individual 
 taxpayers by the county assessor of incomes. In South Car- 
 olina, the income tax "shall be assessed, levied, and collected 
 in the same manner, at the same time, as other taxes, and by 
 the same county officials as are now charged with the assess- 
 ment, levy, and collection of state and county taxes." In 
 Oklahoma, the returns are to be forwarded to the state au- 
 ditor who "shall certify the amount of the tax due upon the in- 
 
 (236)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OP TAX 118 
 
 come so reported to the county clerk," and the latter shall ex- 
 tend the same on the tax rolls and deliver them to the county 
 treasurer. In North Carolina, the lists are to be forwarded to 
 the Corporation Commission, which "shall certify the amount 
 of the tax due upon the income so reported to the chairman 
 of the board of county commissioners of the county in which 
 said taxpayer resides, and the same shall be paid to the sher- 
 iff of said county, together with other taxes for that year." 
 
 118. Appeal and Review of Assessment 
 
 The federal income tax law provides that "if the collector 
 or deputy collector have reason to believe that the amount of 
 any income returned is understated, he shall give due notice 
 to the person making the return to show cause why the amount 
 of the return should not be increased, and upon proof of the 
 amount understated may increase the same accordingly." In 
 order to understand the force of this provision, it is permis- 
 sible to recur to the earlier acts of Congress on the same sub- 
 ject, where the idea was more clearly expressed. In the act 
 of 1864, it was provided that "if the list or return of any 
 party shall have been increased by the assistant assessor, such 
 party may exhibit his books and accounts, and be permitted to 
 prove and declare, under oath or affirmation, the amount of 
 annual income liable to be assessed, but such oaths and evi- 
 dence shall not be considered as conclusive of the facts." 
 This was repeated in the act of 1870. Under these earlier 
 statutes, the assessor (or collector) was to increase a return 
 which, according to his information and judgment, was under- 
 stated, after which the taxpayer might appear before him and 
 prove the true amount of his income. But under the present 
 act, the increase is not to be made until after a hearing. The 
 collector is first to give notice to the taxpayer and summon 
 him to show cause why his assessment should not be increased. 
 But probably the rule of evidence remains as before, namely, 
 
 (237)
 
 118 INCOME TAXATION (Ch. 9 
 
 that the taxpayer may present his affidavit to the collector 
 stating the amount of his assessable income, and exhibit his 
 books and accounts in support thereof, but neither the affi- 
 davit nor the exhibits shall be so far conclusive as to prevent 
 the collector from taking other evidence, if he is not convinced 
 of their correctness. Provision for an appeal to a higher of- 
 ficer of the revenue department is made, as follows : "If dis- 
 satisfied with the decision of the collector, such person may 
 submit the case, with all the papers, to the Commissioner of 
 Internal Revenue for his decision, and may furnish sworn 
 testimony of witnesses to prove any relevant facts." 
 
 Under the law in Wisconsin, the assessment of corporations, 
 joint stock companies and associations is made by the state 
 tax commission, and it is provided that any such company, 
 "feeling aggrieved by the decision of said commission regard- 
 ing the assessment of its income, shall be granted the same 
 rights of hearing and appeal as are now granted corporations 
 assessed by said commission." And the commission explains 
 that the remedy here referred to is found in a statute which 
 provides that any company claiming to be aggrieved by the 
 levy of a tax, and alleging facts showing substantial injustice 
 in the determination of the commission, may, within six 
 months from the payment of the tax, bring an action against 
 the state in the circuit court of Dane county to recover such 
 part of the tax as shall exceed the amount the company should 
 have paid. 28 But as to the review of assessments of income 
 tax upon individuals, as distinguished from corporations, the 
 provision is entirely different. For this purpose a board of 
 review is created in each county, to hold stated meetings, of 
 which notice is given, and having power to enforce the attend- 
 ance of witnesses and the exhibition of books, to hear com- 
 
 zs Wisconsin Income Tax Law 1911, edition published by State 
 Tax Commission, p. 38, citing Laws Wis. 1903, c. 315, 20, as amend- 
 ed by Laws Wis. 1905, c. 216, 5. 
 
 (238)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 119 
 
 plaints preferred by persons aggrieved or other persons, and 
 to increase or lessen the amount of any assessment of income. 
 Any person dissatisfied with the decision of the board of review 
 may appeal to the state tax commission within twenty days. 
 But, as is usually the case where statutes provide a special 
 tribunal for the review of tax assessments, the taxpayer must 
 exhaust his remedy thus provided before questioning the 
 amount of the assessment in any proceeding in a court of jus- 
 tice. 29 
 
 The only other income tax law making explicit provision 
 for a review of the assessment is that of Hawaii. Herein it 
 is provided that, if any person or corporation refuses or neg- 
 lects to make the required return, or refuses to verify it, the 
 assessor shall make such an assessment as he deems just, and 
 there shall be no appeal therefrom. But any person or cor- 
 poration which has made a legal return as required may ap- 
 peal, in respect to the amount assessed, to the Tax Appeal 
 Court, having first given the assessor written notice of his in- 
 tention to appeal and of the grounds of appeal, and having 
 deposited the costs of appeal. 30 
 
 119. Rate of Tax 
 
 In two states and one territory the laws levy a "flat" tax 
 on incomes. That is, the rate of the tax remains the same 
 whatever be the amount of the taxable income. In Virginia, 
 the rate of the tax is one per cent, as it is also in North Caro- 
 lina. In Hawaii, it is two per cent. The act of Congress of 
 1913 also imposes a flat tax of one per cent upon the income 
 of corporations. But as concerns individuals, it is graded 
 or progressive, the rate of taxation increasing as the amount 
 of taxable income increases, within or beyond certain fixed 
 limits. This progressive feature is also found in the income 
 
 2 Wisconsin Income Tax Law 1911, 1087m, subds. 14-19. 
 so Session Laws Hawaii 1901, Act No. 20, p. 31, 8, 9. 
 
 (239)
 
 119 INCOME TAXATION Ch. 9 
 
 tax laws of South Carolina, Wisconsin, and Oklahoma. The 
 act of Congress (as to individuals only) first levies a "normal 
 income tax" of one per cent on all incomes in excess of the 
 statutory exemption, and then provides that there shall also 
 be levied an "additional income tax" at the rate of "one per 
 centum per annum upon the amount by -which the total net 
 income exceeds $20,000, and does not exceed $50,000, and 
 two per centum per annum upon the amount by which the 
 total net income exceeds $50,000 and does not exceed $75,000, 
 and three per centum per annum upon the amount by which 
 the total net income exceeds $75,000 and does not exceed 
 $100,000, and four per centum per annum upon the amount by 
 which the total net income exceeds $100,000 and does not 
 exceed $250,000, and five per centum per annum upon the 
 amount by which the total net income exceeds $250,000 and 
 does not exceed $500,000, and six per centum per annum upon 
 the amount by which the total net income exceeds $500,000." 
 In Wisconsin, the rate for individuals is one per cent upon 
 the first thousand dollars of taxable income or part thereof, 
 and from this point the rate increases with each successive 
 thousand dollars of taxable income, advancing first by quar- 
 ters of one per cent and after the fifth thousand by halves 
 of one per cent, to the twelfth thousand, on which the rate 
 is five and one-half per cent, with a rate of six per cent on 
 any sum in excess of twelve thousand dollars. As to corpo- 
 rations, under the Wisconsin statute, the rate is determined 
 by the ratio between the taxable income of the company and 
 the "assessed value of the property used and employed in 
 the acquisition of such income." If this ratio is one per cent 
 or less, the rate of the tax is one-half of one per cent of 
 such income. From this point it advances "until the rate of 
 profits equals twelve per cent of such assessed value of the 
 property used and employed in the acquisition of such in- 
 come, when such rate shall continue as a proportional rate 
 
 (240)
 
 Ch. 9) RETURN OP INCOME AND COLLECTION OF TAX 119 
 
 of six per cent of such taxable income. In South Carolina, 
 the tax is at the rate of one per cent on incomes over and 
 above $2,500 and up to $5,000; one and one-half per cent 
 on $5,000 and over, up to $7,500; two per cent on $7,500 
 and over, up to $10,000; two and one-half per cent on $10,000 
 and over, up to $15,000; and three per cent on $15,000 and 
 over. In Oklahoma, the rate is five mills on the dollar on 
 the excess of income over $3,500 and less than $5,000; seven 
 and one-half mills on the excess of $5,000 and less than $10,- 
 000; twelve mills on the excess over $10,000 and less than 
 $20,000; fifteen mills on the excess over $20,000 and less than 
 $50,000 ; twenty mills on the excess over $50,000 and less than 
 $100,000; and thirty-three and one-third mills on all amounts 
 over $100,000. 
 
 For purposes of comparison a table is appended, showing the 
 amount of the tax payable by individuals and by corporations 
 under the federal statute and also the amount of the tax un- 
 der the progressive income tax laws of the three states men- 
 tioned. The reader will notice that -the "amount of taxable 
 income" in the first column does not mean gross income, but 
 the net income on which the tax will be payable after de- 
 ducting all exemptions and allowances. A glance at the table 
 will show that the progressive feature of the tax is applied 
 with the greatest severity under the act of Congress, but 
 with Wisconsin a close second in its application to very large 
 incomes. Attention may also be called to the striking dis- 
 parity between the taxes payable by individuals and those 
 payable by corporations under the federal statute, when the 
 income reaches large figures, which is entirely due to the fact 
 that, the tax on corporations is flat, while that on individuals 
 is progressive. 
 
 BL.INC.TAX. 16 (241)
 
 119 
 
 INCOME TAXATION 
 
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 Ch. 9) RETURN OP INCOME AND COLLECTION OF TAX 120 
 
 120. When Tax is Payable 
 
 The act of Congress provides that "all persons shall be 
 notified of the amount for which they are respectively liable 
 on or before the first day of June of each successive year, and 
 said assessments shall be paid on or before the thirtieth day 
 of June." But the penalty for delinquency applies only to 
 "sums due and unpaid after the thirtieth day of June in 
 any year, and for ten days after notice and demand thereof 
 by the collector." Under a similar provision in the corpora- 
 tion tax law of 1909, it was ruled that the taxes are due and 
 payable ten days after the date of the actual mailing of the 
 notice and demand. But where a notice so sent is not de- 
 livered in due time, by reason of delay in the mail, and sat- 
 isfactory evidence of that fact is furnished, the penalty will 
 not be collected, provided the full tax due is paid to the col- 
 lector within ten days after the actual receipt of the notice. 31 
 But if a notice from the collector was mailed to a delinquent 
 taxpayer in a franked envelope, properly addressed, bearing 
 the return address of the collector, and was not returned by 
 the post office department, the presumption is that it was 
 duly received. 32 Where a check is tendered in payment of 
 the tax, which is not accepted as payment by the collector, 
 and he deposits it in a bank for collection, the penalty for 
 non-payment must be exacted, unless the collection is made 
 and the tax turned over to the collector -within ten days after 
 mailing notice to the taxpayer. It is immaterial that the 
 check was deposited in due time for the collection to have been 
 made if the bank had been diligent. And the fact that the 
 particular bank is a government depository does not make it 
 an agency for the collection of internal revenue taxes, and 
 therefore laches on its part in the performance of business 
 
 31 Treasury Decisions, No. 1659. 
 
 32 United States v. General Inspection & Loading Co., 204 Fed. 657. 
 
 (243)
 
 120 INCOME TAXATION (Ch. 9 
 
 duties, outside of its functions as such depository, cannot be 
 imputed to the government or affect its interests. 33 
 
 Under the laws of the states, income taxes are generally 
 made payable at the same time with the general taxes for the 
 year on real and personal property. 
 
 121. Penalties for Delinquency and False Returns 
 
 Analyzing and comparing the various provisions of the act 
 of Congress of 1913 with reference to penalties, it appears 
 that the following rules may be stated : 
 
 1. Failure to pay the tax when due, and for ten days after 
 notice and demand thereof by the collector, will subject the 
 taxpayer, whether an individual or a corporation, to a penalty 
 of five per cent of the amount of the tax unpaid, which is to 
 be added to that amount, together with interest 'at the rate 
 of one per cent a month from the time the tax became due 
 until it is paid. But an exception is made in favor of the 
 estates of insane, deceased, and insolvent persons. 
 
 2. Neglect or refusal to make a return, or to verify a re- 
 turn, subjects the individual taxpayer to a fine of from $20 to 
 $1,000, and the Commissioner of Internal Revenue will add 
 fifty per cent to the amount of the tax as assessed by him. 
 But if the omission to make a return at the proper time was 
 due to the "sickness or absence" of the taxpayer, this addition 
 to the assessment will not be made, provided a return is made 
 within the further time allowed by the collector, not exceed- 
 ing thirty days. 
 
 3. Certain persons and corporations, having the manage- 
 ment of another person's property, or having fixed and deter- 
 minable payments to make to such person at stated intervals, 
 exceeding $3,000 for any taxable year, are required to make 
 a return for such person and to withhold and pay over to 
 the government the amount of the income tax thereon ; as, for 
 example mortgagors, employers paying salaries, testamentary 
 
 33 Treasury Decisions, No. 1651. 
 (244)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 121 
 
 and other trustees, executors, receivers, conservators, and dis- 
 bursing officers of the United States. And if any one sub- 
 ject to this provision, whether it be a "person, corporation, 
 joint stock company, association, or insurance company," 
 shall refuse or neglect to make a return at the proper time, 
 a penalty is imposed of not less than $20 nor more than $1,000. 
 
 4. If a corporation, joint stock company or association, or 
 insurance company, liable to the tax, shall neglect or refuse 
 to make its own return at the appointed time, it is liable to a 
 penalty of not more than $10,000, and in addition is liable to 
 have its assessment increased fifty per cent. 
 
 5. If an individual taxpayer "makes any false or fraudulent 
 return or statement with intent to defeat or evade the assess- 
 ment required" by the statute, he shall be guilty of a mis- 
 demeanor, and be punished by a fine not exceeding $2,000, or 
 imprisonment for not more than one year, or both, in the dis- 
 cretion of the court, with the costs of prosecution. And in 
 addition, the amount of the tax assessed upon him shall be 
 increased by the addition of one hundred per cent. 
 
 6. If the return made by or on behalf of a corporation is 
 false or fraudulent, as above defined, the officers of the cor- 
 poration signing and verifying it are liable to the same pun- 
 ishment as above prescribed for individuals, and the assess- 
 ment shall likewise be increased by the addition of one hun- 
 dred per cent of its amount, and further, by the explicit lan- 
 guage of the statute, the corporation itself shall be liable to a 
 penalty of not more than $10,000. 
 
 Under the Wisconsin statute, any individual taxpayer who 
 fails or refuses to make the required return, or who makes 
 a false or fraudulent return, is liable to a fine of not more than 
 $500, or imprisonment for not more than one year, or both. 
 In the case of a corporation, a penalty is denounced of not 
 less than $100 nor more than $5,000, at the discretion of the 
 court, for either failing to make its return or for rendering a 
 false or fraudulent return, and in the latter case, the officers 
 
 (245)
 
 121 INCOME TAXATION (Ch. 9 
 
 of the corporation signing and verifying the return are liable 
 to the same penalty as above prescribed for individuals. Fur- 
 thermore, both in the case of an individual and in that of a 
 corporation, and whether there was a failure to make the re- 
 turn or a false or fraudulent return was filed, if the revenue 
 officers discover an additional amount of taxable income, 
 "the amount so discovered shall be subject to twice the orig- 
 inal rate." In South Carolina, if the taxpayer neglects or 
 refuses to make a return, the auditor is to add fifty per cent 
 as a penalty to the amount of tax due, and one hundred per 
 cent in the case of a false or fraudulent return having been 
 made. In Oklahoma, non-payment of the income tax when 
 due subjects the taxpayer to the same penalties as are pro- 
 vided in the case of ad valorem taxes, and false swearing 
 in a return is declared to be perjury. In Hawaii, "in case of 
 any false or fraudulent return or valuation by any taxpayer, 
 the assessor shall add 200 per cent to the just valuation of the 
 income of such taxpayer, and the amount of the tax assessed 
 on such increase shall become part of the tax on the said 
 income." 
 
 In regard to the validity of these various penalties, there 
 can be little room for dispute. Courts have often sustained 
 them in the case of general taxes, and, specifically with refer- 
 ence to an income tax, it has been held that the imposition of 
 an addition of 100 per cent as a penalty for making a false 
 or fraudulent return is not unconstitutional. 34 In regard 
 to the manner of enforcing the penalties, it is ruled that the 
 penalty imposed on a corporation for failing to make the re- 
 quired return is to be recovered by a civil action (not by in- 
 dictment in a criminal proceeding), in which the amount 
 of the penalty will be determined by the court, within the 
 limits stated, after a verdict for the plaintiff. 35 But it is 
 not within the jurisdiction of a court to modify a penalty 
 
 s* Doll v. Evans, 9 Phila. 364, Fed. Gas. No. 3,969. 
 ss Treasury Decisions, No. 1740. 
 
 (246)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OP TAX 122 
 
 prescribed for making a false return, its discretion being 
 confined to the limits marked out for it by the law. 36 It has 
 also been held that an assessor of internal revenue, on ascer- 
 taining that the return made by a taxpayer was false and 
 fraudulent, has power to reassess the tax and add the pen- 
 alty, notwithstanding that the taxpayer has already paid the 
 amount first assessed against him on his original return. 37 
 
 122. Lien of Tax 
 
 In Oklahoma, it is expressly provided by statute that the 
 amount due for income tax shall be a lien upon the real and 
 personal property of the taxpayer. Elsewhere the matter is 
 left to be regulated by the laws relating to taxes in general. 
 As to the federal income tax, there is an act of Congress, 
 applicable to internal revenue taxes in general, which pro- 
 vides that "if any person liable to pay any tax neglects or 
 refuses to pay the same after demand, the amount shall be 
 a lien in favor of the United States from the time when 
 the assessment list was received by the collector, except 
 when otherwise provided, until paid, with the interest, pen- 
 alties, and costs that may accrue in addition thereto, upon 
 all property and rights belonging to such person." 38 And 
 the opinion was given by the Attorney General that this 
 statute was applicable to the special tax on corporations im- 
 posed by the act of 1909, and if so, it would, for the same 
 reasons, be applicable under the act of 1913. He ruled that 
 the assets of a corporation are subject to a lien for the pay- 
 ment of the tax, provided that the corporation has not been 
 dissolved and all its assets distributed prior to the time the 
 list of assessments came into the hands of the collector. 
 
 ae Lord Advocate v. McLaren, 42 Scotch Law Rep. 762, 5 Tax Gas. 
 110. 
 
 sr Doll v. Evans, 9 Phlla. 364, Fed. Cas. No. 3,969. 
 
 as Rev. Stat U. S., 3186 (U. S. Conip. St. 1901, p. 2073), as amend- 
 ed by Act Cong. March 1, 1879, 20 Stat. 331. 
 
 (247)
 
 123 INCOME TAXATION (Ch. 9 
 
 And even if a corporation is dissolved before the tax falls 
 due, so that the government cannot claim a lien on its as- 
 sets, still the tax imposed may be collected by the govern- 
 ment by pursuing the assets into the hands of the stockhold- 
 ers, in the same manner as any other creditor might obtain 
 satisfaction of his debt. 89 
 
 123. Process for Recovery of Tax 
 
 The federal income tax law of 1913 provides that "all ad- 
 ministrative, special, and general provisions of law, including 
 the laws in relation to the assessment, remission, collection, 
 and refund of internal revenue taxes not heretofore specifi- 
 cally repealed and not inconsistent with the provisions of 
 this section, are hereby extended and made applicable to all 
 the provisions of this section and to the tax herein im- 
 posed." The laws relating to the recovery or collection of 
 internal revenue taxes in general are elaborate and detailed, 
 and cannot be here set out in full. But it may be stated 
 that the duty of collecting these taxes is imposed upon the 
 several collectors of internal revenue, and that, if the taxes 
 are not paid after proper demand, they may proceed by dis- 
 traint, by seizure and sale of real property, or by suit against 
 the delinquent in the name of the United States, according 
 to the circumstances of the case. 40 
 
 124. Compromise of Litigation 
 
 An unrepealed act of Congress provides that "the Com- 
 missioner of Internal Revenue, with the advice and consent 
 of the Secretary of the Treasury, may compromise any civil 
 or criminal case arising under the internal revenue laws in- 
 stead of commencing suit thereon; and with the advice and 
 consent of the said Secretary and the recommendation of the 
 
 328 Opin. Atty. Gen. 241. 
 
 40 See Rev. Stat. U. S., 3183-3219 (U. S. Comp. St 1901, pp. 
 2072-2086), and particularly 3187, 3196, 3213. 
 
 (248)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 124 
 
 Attorney General, he may compromise any such case after 
 a suit thereon has been commenced." 41 This was held ap- 
 plicable to the penalties imposed by the corporation tax law 
 of 1909 for failure to file the return required of corporations. 
 But the Commissioner of Internal Revenue instructed the 
 collectors on this point as follows*: "Particular attention is 
 called to the fact that no solicitation of an offer should be 
 made, and no delinquent should be induced by threats to 
 invoke the power of the commissioner to compromise, and 
 no assurance should be given of the probable action of the 
 commissioner if an offer is made. But where the officers of 
 a corporation are ignorant of a provision of law providing 
 for a compromise of offenses against the revenues, and they 
 desire to make an appeal for clemency in the manner pro- 
 vided, it is the duty of the collector to give them suitable 
 instructions. The amount to be offered in each such case 
 must be left to the discretion of the corporation making the 
 offer, and in nowise should be suggested by the collector or 
 any other revenue officer. In connection with the corpora- 
 tion tax law, this right of compromise extends only to the 
 penalty prescribed under paragraph 8, and not to the tax it- 
 self, nor to the addition of fifty per cent assessed." * 2 And 
 on the application of this subject to the tax imposed by an 
 earlier statute, the Supreme Court of the United States 
 said: "The power intrusted by law to the Secretary was 
 not a judicial one, but one of mercy, to mitigate the severity 
 of the law. It admitted of no appeal to the Court of Claims, 
 or to any other court. It was the exercise of his discretion 
 in a matter intrusted to him alone, and from which there 
 could be no appeal." 43 
 
 41 Rev. Stat. U. S. t 3229 (U. S. Comp. St. 1901, p. 2089). 
 
 42 Treasury Decisions, No. 1692. 
 
 43 Dorsheimer v. United States, 7 Wall. 166, 174. 
 
 (249)
 
 125 INCOME TAXATION (Ch. 9 
 
 125. Collection at the Source 
 
 This feature of the federal income tax law of 1913, copied 
 in part from the English statute, presents many complexi- 
 ties and many provisions difficult to interpret in such a man- 
 ner as to make them practically effective. The subject can- 
 not be understood without a careful reading of the statute 
 itself, which is printed in full in the appendix to this volume. 
 But for the guidance of the reader, the following conclusions 
 may be stated as deducible from an analysis and comparison 
 of the various paragraphs of the act bearing upon it: 
 
 First. The provision for collection at the source applies only 
 to the "normal" income tax, that is, the tax of one per cent 
 imposed upon all incomes above the exempted amount, and 
 not to the super-tax or "additional tax" on incomes exceed- 
 ing $20,000. Hence the "source" for instance, an employer 
 paying a salary, a mortgagor paying interest, or a testamen- 
 tary trustee paying over the annual income of an estate is 
 required and authorized to withhold only one per cent on 
 the amount, no matter how great the income may be. 
 
 Second. Persons or corporations having the management 
 or control of another person's property, or having fixed and 
 determinable payments to make to such person at stated in- 
 tervals, exceeding $3,000 for any taxable year, are required 
 to make a return for such person, which shall include his name 
 and address, or state that his name and address are unknown, 
 if such is the case, and also to deduct and withhold from 
 payments so to be made a sum sufficient to pay the normal 
 income tax, and pay over the same to the proper federal offi- 
 cer, and they are moreover made personally liable for the 
 tax. 44 Those subject to this provision include "lessees or 
 
 4* If official liquidators, such as receivers, trustees in bankruptcy, 
 or assignees for creditors, pay away all the assets of the corporation 
 without making provision for a debt due the government in respect 
 of income tax, they are guilty of misapplying the assets, and are per- 
 sonally responsible for the debt, and payment of it may be enforced 
 by attachment. In re Watchmakers' Alliance, 5 Tax Gas. 117. 
 
 (250)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OF TAX 125 
 
 mortgagors of real or personal property, trustees acting in 
 any trust capacity, executors, administrators, agents, receiv- 
 ers, conservators, employers, and all officers and employes 
 of the United States" having to do with the disbursement of 
 funds. They may be either "persons, firms, copartnerships, 
 companies, corporations, joint-stock companies or associations, 
 or insurance companies." And the payments which they 
 have to make to the third person may be in the nature of 
 "interest, rent, salaries, wages, premiums, annuities, compen- 
 sation, remuneration, emoluments, or other fixed or determin- 
 able annual" or periodical "gains, profits, and income." 45 But 
 this does not apply to dividends on the capital stock, or paid 
 out of the net earnings, of corporations or other associations 
 subject to the tax, since the corporation pays the tax on its 
 own profits, and the stockholder is allowed to deduct from his 
 income for taxation what he receives in the way of divi- 
 dends. 46 
 
 Third. Corporations, joint stock companies, and insurance 
 companies which pay interest on their bonds, mortgages, deeds 
 of trust, or other obligations are required to deduct and with- 
 hold from such payments a sum sufficient to pay the normal 
 income tax assessable against the several payees, whether such 
 payments are made annually or at shorter or longer periods, 
 and although such interest, receivable by any one payee, does 
 not amount to $3,000 per annum. In the latter case, the re- 
 cipient of the income should clearly be entitled to the exemp- 
 tion provided by the statute. But the act omits to prescribe 
 
 45 In England, in respect to dealings between merchants, discount- 
 ing bills and the like, and in loans made for short periods, the in- 
 come tax is not deducted by the one having to make the payment. 
 Mosse v. Salt, 32 Beav. 269. 
 
 40 So in England, in paying dividends on its stock, a corporation 
 is bound to account to the Crown for the income tax which it de- 
 ducts from the dividends, only so far as the dividends are not paid 
 out of its income which has already been charged with the income 
 tax. London County Council v. Attorney General [1901] App. Cas. 
 26. 
 
 (251)
 
 126 INCOME TAXATION (Ch. 9 
 
 any method of claiming or securing the benefit of the exemp- 
 tion in this instance, since the only provision under which a 
 taxpayer whose tax has been collected at the source can secure 
 the benefit of the exemptions and deductions to which he may 
 be entitled is expressly confined to the case of a "person re- 
 ceiving such payment of more than $3,000 per annum." 
 
 Fourth. \Vhereas various obligations, and particularly bonds 
 of corporations, are often issued under a contract by which 
 they are made "tax free," that is, a contract by which the 
 obligor undertakes to pay all taxes which may be assessed on 
 the bonds, the act of Congress provides that no such contract 
 entered into after the taking effect of the act shall be valid 
 in regard to any federal income tax imposed upon a person 
 liable to such payment. 
 
 Fifth. Where the whole or part of a person's income con- 
 sists in interest on bonds of foreign countries, or interest upon 
 foreign mortgages or other like obligations, not payable in 
 the United States, or dividends upon the stock (or interest 
 upon the obligations) of foreign corporations engaged in busi- 
 ness in foreign countries, and where the payment of such in- 
 terest or dividends is made in the form of coupons, checks, 
 or bills of exchange, the amount of the income tax is to be 
 deducted and withheld therefrom by any banker or other 
 person who shall sell or otherwise realize such coupons, etc., 
 the same not being payable in the United States, or any per- 
 son who shall obtain payment, not in the United States, of 
 such interest or dividends in behalf of another person by 
 means of coupons, etc., or by "any dealer in such coupons 
 who shall purchase the same for any such dividends or in- 
 terest (not payable in the United States) otherwise than from 
 a banker or another dealer in such coupons." Persons, firms, 
 and corporations "undertaking as a matter of business or for 
 profit the collection of foreign payments by means of coupons, 
 checks, or bills of exchange" are required, under heavy penal- 
 ties, to obtain a license from the Commissioner of Internal 
 
 (252)
 
 Ch. 9) RETURN OF INCOME AND COLLECTION OP TAX 125 
 
 Revenue, and are made subject to regulations to be prescribed 
 by him. This part of the statute applies although the inter- 
 est or dividends so collected do not amount to more than $3,- 
 000, but in each case the benefit of the exemption and of the 
 deductions allowed under the act may be obtained as here- 
 inafter mentioned. 
 
 Sixth. If the person whose income is thus taxed at the 
 source is entitled to the various deductions specified in the 
 act, or any of them, and the effect of deducting such items 
 would be to entitle him to exemption from the normal in- 
 come tax, or to reduce the amount subject to the tax, he may 
 receive the benefit of such exemption or reduction either by 
 filing with the person required to withhold the tax and pay 
 it to the government, not less than thirty days prior to the day 
 on which the return of his income is due, a signed notice claim- 
 ing the benefit of such exemption, and a true and correct state- 
 ment of his annual income from all other sources, and of the 
 deductions claimed, which notice and statement shall become 
 a part of the return to be made in his behalf by the person 
 required to withhold and pay the tax, or by making the ap- 
 plication for the exemption to the collector of the district 
 in which return is made or to be made for him, and proving 
 to the satisfaction of the collector that he is entitled to the 
 same. Provision is also made for the case where the person 
 is a minor, insane, absent from the United States, or inca- 
 pacitated by "serious illness" from making the return and 
 application. In either of these cases, the return and applica- 
 tion may be made for him by the person required to withhold 
 and pay the tax; but the latter must then make oath that 
 he has sufficient knowledge of the affairs and property of his 
 beneficiary to enable him to make a full and complete return 
 for him, and that the return and application so made are 
 full and complete. 
 
 Seventh. Each taxable person, making his own return, is 
 entitled to deduct from his total income as shown thereon "the 
 
 (253)
 
 125 INCOME TAXATION (Ch. 9 
 
 amount of income, the tax upon which has been paid or with- 
 held from payment at the source; provided, that whenever 
 the tax upon the income of a person is required to be with- 
 held and paid at the source as herein required, if such annual 
 income does not exceed the sum of $3,000, or is not fixed or 
 certain, or is indefinite, or irregular as to amount or time of 
 accrual, the same shall not be deducted in the personal return 
 of such person." 
 
 Eighth. The provision requiring the normal tax of indi- 
 viduals to be withheld at the source of the income shall not 
 be construed to require any of such tax to be withheld prior 
 to the first day of November, 1913. 
 
 (254)
 
 Ch. 10) REFUNDING AND BECOVERY 126 
 
 CHAPTER X 
 
 REFUNDING AND RECOVERY OF TAXES ILLEGALLY EX- 
 ACTED 
 
 126. Statutory Provisions. 
 
 127. Payment of Tax Under Protest. 
 
 128. Refund by Commissioner of Internal Revenue. 
 
 129. Suit to Enjoin Collection or Payment. 
 
 130. Suit for Recovery of Taxes Paid. 
 
 131. Same; Appeal to Commissioner as Pre-requisite. 
 
 132. Remission of Penalties. 
 
 126. Statutory Provisions 
 
 As a general rule, the income tax laws make no specific 
 provision for the refund or recovery of taxes illegally exacted 
 or assessed to an excessive amount, the rights and remedies 
 of the taxpayer in these cases being governed by the ordinary 
 rules of law applicable in matters of taxation. In Wisconsin, 
 however, there is a provision applicable to corporations only, 
 which permits a company which is dissatisfied with the assess- 
 ment of its income by the state tax commission to bring an 
 action against the state for the recovery of so much of the 
 tax paid by it as is in excess of the amount which it admits 
 to have been legally chargeable upon it. This action must be 
 brought in the circuit court of Dane county, within six months 
 after the payment of the tax, and must be based on a petition 
 alleging facts showing substantial injustice in the determina- 
 tion of the tax commission. 1 The act of Congress of 1913 
 likewise provides that "all administrative, special, and general 
 provisions of law, including the laws in relation to the assess- 
 ment, remission, collection, and refund of internal revenue 
 taxes not heretofore specifically repealed and not inconsistent 
 
 i Wisconsin Income Tax Law 1911, 1087m, subd. 13 ; Laws Wis. 
 1903, c. 315, 20, as amended by Laws Wis. 1905, c. 216, 5. 
 
 (255)
 
 127 INCOME TAXATION (Ch. 10 
 
 with the provisions of this section, are hereby extended and 
 made applicable to all the provisions of this section and to the 
 tax herein imposed." 2 
 
 127. Payment of Tax Under Protest 
 
 It is a general principle of law, applicable to income taxes 
 as well as to any others, that after a taxpayer has exhausted 
 his lawful remedies to induce the administrative officers to 
 cancel or reduce an assessment which he considers illegal 
 or unjust in whole or in part, he must then pay the tax, but 
 may save his right to bring an action for its recovery by ac- 
 companying his payment with a protest, addressed to the offi- 
 cer charged with the collection of the tax. This rule was held 
 applicable to the corporation excise tax law of 1909, and a 
 ruling was made 'that, no particular form of protest having 
 been prescribed, any form would be sufficient if filed before 
 the payment of the tax, and the collectors of internal revenue 
 were specially warned that the right of protest must not be 
 denied. In a case arising under this statute, it appeared that, 
 the plaintiff corporation having failed to pay the tax assessed 
 against it, a writ of distraint was issued by the collector, and, 
 the corporation having been notified that the tax would be col- 
 lected by levy, the deputy collector took from a representa- 
 tive of the corporation the amount of the tax, against the 
 verbal protest of the corporate officer at the time, and a writ- 
 ten notice of protest then served, in which the corporation 
 denied that it was liable to the tax. It was held that the 
 protest was sufficient to entitle the corporation to recover the 
 amount from the collector, on its being determined that the 
 corporation was not within the law. The court said : "Where 
 the tax is paid under such circumstances that the terms of 
 protest are understood and sufficiently expressed to be brought 
 to the notice of the government, and where the levy is used 
 
 * Federal Income Tax Law 1913, 2, subd. "M." 
 (256)
 
 Ch. 10) REFUNDING AND BECOVEBY 129 
 
 merely to protect the government officer in acting under the 
 statute, an action may be maintained to recover the tax." 3 
 
 128. Refund by Commissioner of Internal Revenue 
 
 The general laws applicable to the collection of United 
 States internal revenue taxes contain a provision (not repealed 
 by the act of Congress of 1913) under which a taxpayer may 
 obtain a refund of taxes which he should not have been re- 
 quired to pay, without the necessity of an action at law. This 
 section reads as follows: "The Commissioner of Internal 
 Revenue, subject to regulations prescribed by the Secretary 
 of the Treasury, is authorized, on appeal to him made, to 
 remit, refund, and pay back all taxes erroneously or illegally 
 assessed or collected, all penalties collected without authority, 
 and all taxes that appear to be unjustly assessed or excessive 
 in amount, or in any manner wrongfully collected. Provided, 
 that where a second assessment is made in case of a list, 
 statement, or return which, in the opinion of the collector or 
 deputy collector, was false or fraudulent, or contained any 
 understatement or undervaluation, such assessment shall not 
 be remitted, nor shall taxes collected under such assessment 
 be refunded or paid back, unless it is proved that said list, 
 statement, or return was not false or fraudulent, and did not 
 contain any understatement or undervaluation." * 
 
 129. Suit to Enjoin Collection or Payment 
 
 As a general rule, if the assessment of a tax upon a per- 
 son's income is not made in legal form, or is otherwise dis- 
 puted, the remedy of the person aggrieved is at law, and not 
 in equity. 5 And the laws of the United States expressly pro- 
 vide that "no suit for the purpose of restraining the assess- 
 
 a Abrast Realty Co. v. Maxwell, 206 Fed. 333. And see Treasury 
 Decisions, No. 1742, par. 41. 
 
 4 Rev. Stat. U. S., 3220 (U. S. Cornp. St. 1901, p. 2086). 
 o Magee v. Denton, 5 Blatchf. 130, Fed. Cas. No. 8,943. 
 
 BL.INC.TAX 17 (257)
 
 129 INCOME TAXATION (Ch. 10 
 
 ment or collection of any tax shall be maintained in any 
 court." 6 Notwithstanding this, in the case in which the con- 
 stitutionality of the income tax act of Congress of 1894 was 
 assailed, the Supreme Court held that a federal court, as a 
 court of equity, may restrain a corporation, at the suit of one 
 of its stockholders, from voluntarily making returns for the 
 imposition of, and paying, an unconstitutional tax levied un- 
 der an act of Congress, on the ground of the breach of trust 
 or duty in such misapplication or diversion of the corporate 
 funds, and on allegations of threatened multiplicity of suits 
 and irreparable injury, where the objection of adequate reme- 
 dy at law is not raised, and the question of jurisdiction is 
 waived, so far as it is within the power of the government to 
 do so. 7 But since then it has been held, and apparently with 
 better reason, that a corporation had an adequate remedy at 
 law to recover an internal revenue tax assessed against its 
 income under the act of 1909, by paying the tax under protest 
 and then suing for its recovery, and hence a stockholder could 
 not maintain a suit to restrain the corporation from paying 
 the tax, on the ground that the corporation was not subject 
 to assessment. 8 A similar question was raised before the Su- 
 preme Court of Wisconsin, in the case in which the validity 
 of the income tax law of that state of 1911 was tested. But 
 it was held that where a state statute, creating an income 
 tax, works an important change in the general taxation policy 
 of the state, and is intended to supersede the taxation of per- 
 sonal property previously existing and to provide an income 
 tax in its stead, and such act is claimed to be unconstitutional, 
 this claim involves the interests of the whole people of the 
 state, so as to authorize the Supreme Court, at the instance of 
 
 e Rev. Stat. U. S., 3224 (U. S. Comp. St. 1901, p. 2088). 
 
 t Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 15 Sup. Ct. 
 673, 39 L. Ed. 759. But on this point there was an emphatic dissent 
 by Mr. Justice White, now Chief Justice, and Mr. Justice Harlan. 
 
 s Straus v. Abrast Realty Co., 200 Fed. 327. 
 
 (258)
 
 Ch. 10) BEFUNDING AND RECOVERY 130 
 
 a private relator, to take original jurisdiction to restrain the 
 officers of the state, charged with the enforcement of such 
 law, from taking steps to enforce the same, and from ex- 
 pending the public funds in such enforcement, until the ques- 
 tion of the constitutionality of the statute shall have been 
 determined. 9 
 
 130. Suit for Recovery of Taxes Paid 
 
 The general provisions of the United States internal reve- 
 nue laws do not explicitly authorize the maintenance of a 
 suit for the recovery back of such taxes when illegally or 
 improperly exacted, but they do so by clear and necessary 
 implication, since they provide for the reimbursement of a 
 collector for "sums of money recovered against him in any 
 court for any internal taxes collected by him;" prescribed 
 the burden of proof in suits for the recovery of taxes assess- 
 ed after the rendering of an alleged false return; forbid the 
 maintenance of such a suit until after an appeal shall have 
 been taken to the Commissioner of Internal Revenue; and 
 set up a limitation of two years against "any suit or proceed- 
 ing for the recovery of any internal tax." 10 And in accord- 
 ance with these general provisions, it is held that a United 
 States district court has jurisdiction of an action to recover 
 money paid to the United States under an erroneous assess- 
 ment as an internal revenue tax and penalty. 11 Besides 
 which, the Federal Judicial Code of 1911 ( 24) provides that 
 district courts of the United States shall have original juris- 
 diction of "all cases arising under any law providing for in- 
 ternal revenue." And under recent legislation of Congress, 
 
 State v. Frear, 148 Wis. 456, 134 N. W. 673, 26 Am. & Eng. Ann. 
 Cas. 1147. 
 
 10 Rev. Stat. U. S., 3220, 3225, 3226, 3227 (U. S. Comp. St. 1901, 
 pp. 2086, 2088, 2089). And see Hastings v. Herold, 184 Fed. 759; 
 United States v. Barnes, 222 U. S. 513, 32 Sup. Ct. 117, 56 L. Ed. 291. 
 
 11 Dooley v. United States, 182 U. S. 222, 21 Sup. Ct. 762, 45 L. Ed. 
 1074; United States v. Finch, 201 Fed. 95. 
 
 (259)
 
 131 INCOME TAXATION (Ch. 10 
 
 a suit to recover taxes alleged to have been wrongfully assess- 
 ed and collected under the internal revenue laws may be 
 brought directly against the United States, instead of against 
 the collector, 12 though the latter is more usually made the de- 
 fendant. In this case, if judgment goes against a collector of 
 internal revenue for taxes paid under protest, costs incurred 
 before judgment and before any certificate of probable cause 
 was granted are properly awarded against him and also the 
 judgment may properly include interest. 13 
 
 131. Same; Appeal to Commissioner as Pre-requisite 
 The internal revenue laws provide that ""no suit shall be 
 maintained in any court for the recovery of any internal tax 
 alleged to have been erroneously or illegally assessed or col- 
 lected, or of any penalty claimed to have been collected with- 
 out authority, or of any sum alleged to have been excessive 
 or in any manner wrongfully collected, until appeal shall have 
 been duly made to the Commissioner of Internal Revenue, 
 according to the provisions of law in that regard, and the reg- 
 ulations of the Secretary of the Treasury established in pur- 
 suance thereof, and a decision of the Commissioner has been 
 had therein : Provided, that if such decision is delayed more 
 than six months from the date of such appeal, then the said 
 suit may be brought, without first having a decision of the 
 Commissioner, at any time within the period limited in the 
 next section," that is to say, "within two years next after 
 the cause of action accrued" or within one year after a de- 
 cision rendered by the Commissioner. 14 This statute is 
 mandatory, and the party aggrieved must pursue the remedy 
 
 12 Emery, Bird, Thayer Realty Co. v. United States, 198 Fed. 242; 
 Christie-Street Commission Co. v. United States, 136 Fed. 326, 69 C. 
 C. A. 464. 
 
 is Treat v. Farmers' Loan & Trust Co., 185 Fed. 760, 108 C. C. 
 A. 98. 
 
 i* Rev. Stat. U. S., 3226, 3227 (U. S. Comp. St. 1901, pp. 20SS, 
 2089). 
 
 (260)
 
 Ch. 10) EEFUNDING AND RECOVERY 132 
 
 here prescribed before he can resort to a court either of law 
 or equity for relief. 15 It was at one time held in Connecticut 
 that this statute did not operate to prevent the maintenance 
 of such suits in the courts of the state. 16 But the Supreme 
 Court of the United States decided that it was applicable to 
 all courts, state as well as federal. 17 Where, after the assess- 
 ment of an internal revenue tax, alleged to be illegal, applica- 
 tion is made to the Commissioner of Internal Revenue for 
 review, and he overrules the application and refuses to abate 
 the tax, it is held that this is a sufficient compliance with the 
 statute, and the plaintiff is not bound, after paying the tax, 
 to appeal again to the Commissioner as a condition precedent 
 to his right to sue the collector for the recovery of the tax. 18 
 
 132. Remission of Penalties 
 
 The corporation excise tax law of 1909 was amended by an 
 act of Congress, March 3, 1913, providing that a corporation 
 which had been charged with an additional tax imposed as 
 a penalty for neglect to file its return in due season, might 
 apply to the Commissioner of Internal Revenue for a refund 
 of such additional tax, within a year after the passage of the 
 act or within a year after date of notice of the assessment. 
 "And the Commissioner of Internal Revenue, with the advice 
 and consent of the Solicitor of Internal Revenue, is hereby 
 directed to remit, abate, and pay back all such additional 
 taxes, in excess of $100 for any single year, whenever in any 
 case it appears to his satisfaction that the additional tax was 
 assessed or imposed solely because of a neglect to make a re- 
 turn at the time or times specified in said act, and without any 
 intention or design on the part of any officer of such corpora- 
 tion to hinder or delay the United States in the collection of 
 the tax originally assessed." 
 
 15 Magee v. Den ton, 5 Blatchf. 130, Fed. Cas. No. 8,943. 
 ic Hubbard v. Brainard, 35 Conn. 563. 
 IT Collector v. Hubbard, 12 Wall. 1, 20 L. Ed. 272. 
 is Weaver v. Ewers, 195 Fed. 247, 115 C. C. A. 219. 
 
 (261)
 
 132 INCOME TAXATION (Ch. 10 
 
 It is doubtful whether or not this supplementary or amend- 
 atory act is repealed by the act of 1913. But if it should be 
 so held, still the taxpayer has his remedy under the general 
 provisions of the internal revenue laws, which authorizes the 
 refund by the Commissioner (or the recovery by suit), not only 
 of the tax collected, but also of "all penalties collected with- 
 out authority." 19 
 
 i Rev. Stat. U. S., 3220, 3226, 3227 (U. S. Comp. St. 1901, pp. 
 2086, 2088, 2089). 
 
 (262)
 
 APPENDIX 
 
 (263)'
 
 Appdx.) INCOME TAX LAW OF 1913 
 
 UNITED STATES INCOME TAX LAW OF 1913 
 
 [This enactment constitutes the second section of the Tariff Act of 
 1913, the title of the whole statute being "An Act to Reduce Tariff 
 Duties and to Provide Revenue for the Government, and For Other 
 Purposes."] 
 
 Section II 
 A. Subdivision 1. That there shall be levied, assessed, col- Rat . e ? f nor - 
 
 mal tax. 
 
 lected, and paid annually upon the entire net income arising 
 or accruing from all sources in the preceding calendar year 
 to every citizen of the United States, whether residing at 
 home or abroad, and to every person residing in the United 
 States, though not a citizen thereof, a tax of 1 per centum 
 per annum upon such income except as hereinafter provided ; 
 and a like tax shall be assessed, levied, collected, and paid 
 annually upon the entire net income from all property owned 
 and of every business, trade, or profession carried on in the 
 United States by persons residing elsewhere. 
 
 Subdivision 2. In addition to the income tax provided un- Rates of ad- 
 der this section (herein referred to as the normal income tax) on 
 there shall be levied, assessed, and collected upon the net in- als ' 
 come of every individual an additional income tax (herein re- 
 ferred to as the additional tax) of 1 per centum per annum 
 upon the amount by which the total net income exceeds $20,- 
 000 and does not exceed $50,000, and 2 per centum per annum 
 upon the amount by which the total net income exceeds $50,- 
 000 and does not exceed $75,000, 3 per centum per annum 
 upon the amount by which the total net income exceeds $75,- 
 000 and does not exceed $100,000, 4 per centum per annum 
 upon the amount by which the total net income exceeds $100,- 
 000 and does not exceed $250,000, 5 per centum per annum 
 upon the amount by which the total net income exceeds $250,- 
 000 and does not exceed $500,000, and 6 per centum per an- 
 num upon the amount by which the total net income exceeds 
 
 (265)
 
 INCOME TAXATION (Appdx. 
 
 $500,000. All the provisions of this section relating to indi- 
 viduals who are to be chargeable with the normal income tax, 
 so far as they are applicable and are not inconsistent with this 
 subdivision of paragraph A, shall apply to the levy, assess- 
 ment, and collection of the additional tax imposed under this 
 
 Sditiona/ r section. Every person subject to this additional tax shall, for 
 the purpose of its assessment and collection, make a personal 
 return of his total net income from all sources, corporate or 
 otherwise for the preceding calendar year under rules and reg- 
 ulations to be prescribed by the Commissioner of Internal 
 
 jct m to S ad- R even ue and approved by the Secretary of the Treasury. For 
 
 ditionai tax. t h e purpose of this additional tax the taxable income of any in- 
 dividual shall embrace the share to which he would be entitled 
 of the gains and profits, if divided or distributed, whether divid- 
 ed or distributed or not, of all corporations, joint stock compa- 
 nies, or corporations however created or organized, formed or 
 fraudulently availed of for the purpose of preventing the im- 
 position of such tax through the medium of permitting such 
 gains and profits to accumulate instead of being divided or dis- 
 tributed; and the fact that any such corporation, joint stock 
 company, or association is a mere holding company, or that the 
 gains and profits are permitted to accumulate beyond the rea- 
 sonable needs of the business shall be prima facie evidence of a 
 fraudulent purpose to escape such tax; but the fact that the 
 gains and profits are in any case permitted to accumulate and 
 become surplus shall not be construed as evidence of a purpose 
 to escape the said tax in such case unless the Secretary of the 
 Treasury shall certify that in his opinion such accumulation is 
 unreasonable for the purposes of the business. When request- 
 ed by the Commissioner of Internal Revenue, or any district 
 collector of internal revenue, such corporation, joint stock 
 company, or association shall forward to him a correct state- 
 ment of such profits and the names of the individuals who 
 would be entitled to the same if distributed. 
 
 sources of B. That, subject only to such exemptions and deductions as 
 
 taxable in- . f , . , 
 
 come. are hereinafter allowed, the net income of a taxable person 
 
 (266)
 
 Appdx.) INCOME TAX LAW OP 1913 
 
 shall include gains, profits, and income derived from salaries, 
 wages, or compensation for personal service of whatever kind 
 and in whatever form paid, or from professions, vocations, 
 businesses, trade, commerce, or sales or dealings in property, 
 whether real or personal, growing out of the ownership or 
 use of or interest in real or personal property, also from in- 
 terest, rent, dividends, securities, or the transaction of any law- 
 ful business carried on for gain or profit, or gains or profits 
 and income derived from any source whatever, including the 
 income from but not the value of property acquired by gift, 
 bequest, devise, or descent: Provided, That the proceeds of 
 life insurance policies paid upon the death of the person in- 
 sured or payments made by or credited to the insured, on life 
 insurance, endowment, or annuity contracts, upon the return 
 thereof to the insured at the maturity of the term mentioned 
 in the contract, or upon surrender of the contract, shall not 
 be included as income. 
 
 That in computing net income for the purpose of the normal Deduction 
 tax there shall be allowed as deductions : First, the necessary tL n 
 expenses actually paid in carrying on any business, not includ- 
 ing personal, living, or family expenses; second, all interest 
 paid within the year by a taxable person on indebtedness; 
 third, all national, State, county, school, and municipal taxes 
 paid within the year, not including those assessed against local 
 benefits; fourth, losses actually sustained during the year, in- 
 curred in trade or arising from fires, storms, or shipwreck, and 
 not compensated for by insurance or otherwise; fifth, debts 
 due to the taxpayer actually ascertained to be worthless and 
 charged off within the year ; sixth, a reasonable allowance for 
 the exhaustion, wear and tear of property arising out of its 
 use or employment in the business, not to exceed, in the case 
 of mines, 5 per centum of the gross value at the mine of the 
 output for the year for which the computation is made : But 
 no deduction shall be made for any amount of expense of re- 
 storing property or making good the exhaustion thereof for 
 
 (267)
 
 INCOME TAXATION 
 
 (Appdx. 
 
 Income 
 from prop- 
 erty of non- 
 residents. 
 
 Exemptions. 
 
 Deductions 
 from 
 
 amount of 
 net Income. 
 
 which an allowance is or has been made : Provided, that no 
 deduction shall be allowed for any amount paid out for new 
 buildings, permanent improvements, or betterments, made to 
 increase the value of any property or estate; seventh, the 
 amount received as dividends upon the stock or from the net 
 earnings of any corporation, joint stock company, association, 
 or insurance company which is taxable upon its net income as 
 hereinafter provided; eighth, the amount of income, the tax 
 upon which has been paid or withheld for payment at the 
 source of the income, under the provisions of this section, pro- 
 vided that whenever the tax upon the income of a person is 
 required to be withheld and paid at the source as hereinafter 
 required, if such annual income does not exceed the sum of 
 $3,000 or is not fixed or certain, or is indefinite, or irregular 
 as to amount or time of accrual, the same shall not be deducted 
 in the personal return of such person. 
 
 The net income from property owned and business carried 
 on in the United States by persons residing elsewhere shall 
 be computed upon the basis prescribed in this paragraph and 
 that part of paragraph G of this section relating to the com- 
 putation of the net income of corporations, joint-stock and 
 insurance companies, organized, created, or existing under 
 the laws of foreign countries, in so far as applicable. 
 
 That in computing net income under this section there 
 shall be excluded the interest upon the obligations of a State 
 or any political subdivision thereof, and upon the obliga- 
 tions of the United States; also the compensation of the 
 present President of the United States during the term for 
 which he has been elected, and of the judges of the supreme 
 and inferior courts of the United States now in office, and 
 the compensation of all officers and employees of a State 
 or any political subdivision thereof except when such com- 
 pensation is paid by the United States Government. 
 
 C. That there shall be deducted from the amount of the 
 net income of each of said persons, ascertained as provided 
 
 (268)
 
 Appdx.) INCOME TAX LAW OF 1913 
 
 herein, the sum of $3,000, plus $1,000 additional if the per- 
 son making the return be a married man with a wife living 
 with him, or plus the sum of $1,000 additional if the per- 
 son making the return be a married woman with a husband 
 living with her; but in no event shall this additional exemp- 
 tion of $1,000 be deducted by both a husband and a wife: 
 Provided, That only one deduction of $4,000 shall be made 
 from the aggregate income of both husband and wife when 
 living together. 
 
 D. The said tax shall be computed upon the remainder Period for 
 
 . computation 
 
 of said net income of each person subject thereto, accruing of tax. 
 during each preceding calendar year ending December thir- 
 ty-first; Provided, however, that for the year ending De- 
 cember thirty-first, nineteen hundred and thirteen, said tax 
 shall be computed on the net income accruing from March 
 first to December thirty-first, nineteen hundred and thirteen, 
 both dates inclusive, after deducting five-sixths only of the 
 specific exemptions and deductions herein provided for. On Time and 
 or before the first day of March, nineteen hundred and four- '". 
 teen, and the first day of March in each year thereafter, a 
 true and accurate return, under oath or affirmation, shall be 
 made by each person of lawful age, except as hereinafter 
 provided, subject to the tax imposed by this section, and 
 having a net income of $3,000 or over for the taxable year, to 
 the collector of internal revenue for the district in which such 
 person resides or has his principal place of business, or, in 
 the case of a person residing in a foreign country, in the 
 place where his principal business is carried on within the 
 United States, in such form as the Commissioner of Inter- Form and 
 
 contents of 
 
 nal Revenue, with the approval of the Secretary of the Treas- return, 
 ury, shall prescribe, setting forth specifically the gross 
 amount of income from all separate sources and from the 
 total thereof, deducting the aggregate items or expenses 
 and allowance herein authorized ; guardians, trustees, execu- 
 tors, administrators, agents, receivers, conservators, and all 
 
 (269)
 
 INCOME TAXATION 
 
 (Appdx. 
 
 persons, corporations, or associations acting in any fiduciary 
 capacity, shall make and render a return of the net income 
 of the person for whom they act, subject to this tax, com- 
 ing into their custody or control and management, and be 
 subject to all the provisions of this section which apply to 
 individuals; Provided, that a return made by one of two or 
 more joint guardians, trustees, executors, administrators, 
 agents, receivers, and conservators, or other persons acting 
 in a fiduciary capacity, filed in the district where such per- 
 son resides, or in the district where the will or other in- 
 strument under which he acts is recorded, under such regu- 
 lations as the Secretary of the Treasury may prescribe, shall 
 be a sufficient compliance with the requirements of this para- 
 Returns by graph; and also all persons, firms, companies, copartner- 
 persons, . . . . . . 
 
 etc., having ships, corporations, joint stock companies or associations, 
 
 control, etc., ' J . 
 
 of income of and insurance companies, except as hereinafter provided, in 
 - whatever capacity acting, having the control, receipt, dis- 
 posal, or payment of fixed or determinable annual or period- 
 ical gains, profits, and income of another person subject to 
 tax, shall in behalf of such person deduct and withhold from 
 the payment an amount equivalent to the normal income tax 
 upon the same and make and render a return, as aforesaid, 
 but separate and distinct, of the portion of the income of 
 each person from which the normal tax has been thus with- 
 held, and containing also the name and address of such per- 
 son or stating that the name and address or the address, as 
 the case may be, are unknown ; Provided, that the provision 
 requiring the normal tax of individuals to be withheld at 
 the source of the income shall not be construed to require 
 any of such tax to be withheld prior to the first day of No- 
 vember, 1913 : Provided further, that in either case above 
 mentioned no return of income not exceeding $3,000 shall 
 Returns by be required: Provided further, that any persons carrying 
 partners. Qn jh) Usmess m partnership shall be liable for income tax only 
 in their individual capacity, and the share of the profits of 
 (270)
 
 Appdx.) 
 
 INCOME TAX LAW OF 1913 
 
 a partnership to which any taxable partner would be entitled 
 if the same were divided, whether divided or otherwise, shall 
 be returned for taxation and the tax paid, under the pro- 
 visions of this section, and any such firm, when requested 
 by the Commissioner of Internal Revenue, or any district 
 collector, shall forward to him a correct statement of such 
 profits and the names of the individuals who would be en- 
 titled to the same, if distributed: Provided further, that 
 persons liable for the normal income tax only, on their own 
 account or in behalf of another, shall not be required to 
 make return of the income derived from dividends on the 
 capital stock or from the net earnings of corporations, jc.int- 
 stock companies or associations, and insurance companies 
 taxable upon their net income as hereinafter provided. Any 
 person for whom return has been made and the tax paid, or 
 to be paid as aforesaid, shall not be required to make a re- 
 turn unless such person has other net income, but only one 
 deduction of $3,000 shall be made in the case of any such 
 person. The collector or deputy collector shall require 
 every list to be verified by the oath or affirmation of the 
 party rendering it. If the collector or deputy collector have 
 reason to believe that the amount of any income returned is 
 understated, he shall give due notice to the person making 
 the return to show cause why the amount of the return 
 should not be increased, and upon proof of the amount un- 
 derstated may increase the same accordingly. If dissatis- 
 fied with the decision of the collector, such person may sub- 
 mit the case, with all the papers, to the Commissioner of 
 Internal Revenue for his decision, and may furnish sworn 
 testimony of witnesses to prove any relevant facts. 
 
 E. That all assessments shall be made by the Commis- 
 sioner of Internal Revenue and all persons shall be notified 
 of the amount for which they are respectively liable on or 
 before the first day of June of each successive year, and said 
 assessments shall be paid on or before the thirtieth day of 
 
 (271) 
 
 Returns of 
 certain divi- 
 dends, etc., 
 not required. 
 
 Returns to 
 be verified. 
 
 Returns un- 
 derstating 
 Income. 
 
 Assessment 
 and pay- 
 ment.
 
 INCOME TAXATION (Appdx. 
 
 June, except in cases of refusal or neglect to make such re- 
 turn and in cases of false or fraudulent returns, in which 
 cases the Commissioner of Internal Revenue shall, upon the 
 discovery thereof, at any time within three years after said 
 return is due, make a return upon information obtained as 
 provided for in this section or by existing law, and the as- 
 sessment made by the Commissioner of Internal Revenue 
 thereon shall be paid by such person or persons immediate- 
 ly upon notification of the amount of such assessment; and 
 Penalty and to any sum or sums due and unpaid after the thirtieth day 
 
 interest on . T , . . . , * 
 
 uon-pay- of June in any year, and for ten days after notice and de- 
 mand thereof by the collector, there shall be added the sum 
 of 5 per centum on the amount of tax unpaid, and interest at 
 the rate of 1 per centum per month upon said tax from the 
 time the same became due, except from the estates of insane, 
 deceased, or insolvent persons. 
 
 Payment "ot All persons, firms, copartnerships, companies, corpora- 
 normal tax . . . , . . . , . 
 at source. tions, joint-stock companies or associations, and insurance 
 
 companies, in whatever capacity acting, including lessees or 
 mortgagors of real or personal property, trustees acting in 
 any trust capacity, executors, administrators, agents, receiv- 
 ers, conservators, employers, and all officers and employees 
 of the United States having the control, receipt, custody, dis- 
 posal, or payment of interest, rent, salaries, wages, premiums, 
 annuities, compensation, remuneration, emoluments, or oth- 
 er fixed or determinable annual gains, profits, and income 
 of another person, exceeding $3,000 for any taxable year, 
 other than dividends on capital stock, or from the net earn- 
 ings of corporations and joint-stock companies or associa- 
 tions subject to like tax, who are required to make and ren- 
 der a return in behalf of another, as provided herein, to the 
 collector of his, her, or its district, are hereby authorized and 
 required to deduct and withhold from such annual gains, 
 profits and income such sum as will be sufficient to pay the 
 normal tax imposed thereon by this section, and shall pay 
 
 (272)
 
 Appdx.) 
 
 INCOME TAX LAW OF 1913 
 
 to the officer of the United States Government authorized 
 to receive the same; and they are each hereby made person- 
 ally liable for such tax. 
 
 In all cases where the income tax of a person is withheld 
 and deducted and paid or to be paid at the source, as afore- 
 said, such person shall not receive the deduction and bene- 
 fit of the exemption allowed in paragraph C of this section 
 except by an application for refund of the tax unless he shall, 
 not less than thirty days prior to the day on which the re- 
 turn of his income is due, file with the person who is re- 
 quired to withhold and pay tax for him, a signed notice in 
 writing claiming the benefit of such exemption and there- 
 upon no tax shall be withheld upon the amount of such ex- 
 emption : Provided, That if any person for the purpose of 
 obtaining any allowance or reduction by virtue of a claim for 
 such exemption, either for himself or for any other person, 
 knowingly makes any false statement or false or fraudulent 
 representation, he shall be liable to a penalty of $300; nor 
 shall any person under the foregoing conditions be allowed 
 the benefit of any deduction provided for in subsection B 
 of this section unless he shall, not less than thirty days prior 
 to the day on which the return of his income is due, either 
 file with the person who is required to withhold and pay tax 
 for him a true and correct return of his annual gains, profits, 
 and income from all other sources, and also the deductions 
 asked for, and the showing thus made shall then become a 
 part of the return to be made in his behalf by the person re- 
 quired to withhold and pay the tax, likewise make applica- 
 tion for deductions to the collector of the district in which 
 return is made or to be made for him: Provided further, 
 That if such person is a minor or an insane person, or is ab- 
 sent from the United States, or is unable owing to serious 
 illness to make the return and application above provided for, 
 the return and application may be made for him or her by 
 the person required to withhold and pay the tax, he making 
 BL.INC.TAX. 18 (273) 
 
 Deduction 
 from 
 
 amount of 
 income, 
 where tax 
 paid at 
 source. 
 
 Penalty for 
 false state- 
 ment for de- 
 duction. 
 
 Deduction 
 for exempt 
 income, 
 where tax 
 paid at 
 source.
 
 INCOME TAXATION (Appdx. 
 
 oath under the penalties of this act that he has sufficient 
 knowledge of the affairs and property of his beneficiary to 
 enable him to make a full and complete return for him or 
 her, and that the return and application made by him are full 
 withholding and complete: Provided further, That the amount of the 
 m?rmai tax normal tax hereinbefore imposed shall be deducted and with- 
 on Interest, held from fixed and determinable annual gains, profits, and 
 than ^ooo. income derived from interest upon bonds, and mortgages, or 
 deeds of trust, or other similar obligations of corporations, 
 joint-stock companies or associations, insurance companies, 
 whether payable annually or at shorter or longer periods, 
 although such interest does not amount to $3,000, subject 
 to the provisions of this section requiring the tax to be 
 withheld at the source and deducted from annual income and 
 paid to the Government ; and likewise the amount of such tax 
 shall be deducted and withheld from coupons, checks, or bills 
 of exchange for or in payment of interest upon bonds of 
 foreign countries and upon foreign mortgages or like obliga- 
 tions (not payable in the United States), and also from cou- 
 pons, checks, or bills of exchange for or in payment of any 
 dividends upon the stock or interest upon the obligations of 
 foreign corporations, associations, and insurance companies 
 engaged in business in foreign countries ; and the tax in each 
 case shall be withheld and deducted for and in behalf of any 
 person subject to the tax hereinbefore imposed, although 
 such interest, dividends, or other compensation does not ex- 
 ceed $3,000, by any banker or person who shall sell or oth- 
 erwise realize coupons, checks, or bills of exchange drawn 
 or made in payment of any such interest or dividends (not 
 payable in the United States), and any person who shall ob- 
 tain payment (not in the United States), in behalf of another 
 of such dividends and interest by means of coupons, checks, 
 or bills of exchange, and also any dealer in such coupons 
 who shall purchase the same for any such dividends or in- 
 terest (not payable in the United States), otherwise than 
 
 (274)
 
 Appdx.) INCOME TAX LAW OF 1913 
 
 from a banker or another dealer in such coupons; but in 
 each case the benefit of the exemption and the deduction al- 
 lowable under this section may be had by complying with 
 the foregoing provisions of this paragraph. 
 
 All persons, firms, or corporations undertaking as a mat- License and 
 
 regulation 
 
 ter of business or for profit the collection of foreign pay- of collection 
 
 v J of foreign 
 
 ments of such interest or dividends by means of coupons, payments of 
 checks, or bills of exchange shall obtain a license from the 
 Commissioner of Internal Revenue, and shall be subject to 
 such regulations enabling the Government to ascertain and 
 verify the due withholding and payment of the income tax 
 required to be withheld and paid as the Commissioner of 
 Internal Revenue, with the approval of the Secretary of the 
 Treasury, shall prescribe; and any person who shall under- 
 take to collect such payments as aforesaid without having 
 obtained a license therefor, or without complying with such 
 regulations, shall be deemed guilty of a misdemeanor and 
 for each offense be fined in a sum not exceeding $5,000, or 
 imprisoned for a term not exceeding one year, or both, in 
 the discretion of the court. 
 
 Nothing in this section shall be construed to release a tax- Person tax- 
 able not to 
 able person from liability from income tax nor shall any con- be released. 
 
 tract entered into after this Act takes effect be valid in regard 
 to any Federal income tax imposed upon a person liable to 
 such payment. 
 
 The tax herein imposed upon annual gains, profits and in- Assessment 
 come not falling under the foregoing and not returned and paid Snder fofe- 
 by virtue of the foregoing shall be assessed by personal return !u>n! pr 
 under rules and regulations prescribed by the Commissioner ' 
 of Internal Revenue and approved by the Secretary of the 
 Treasury. 
 
 The" provisions of this section relating to the deduction and Payment at 
 
 source, of 
 
 payment of the tax at the source of income shall only apply normal tax, 
 to the normal tax hereinbefore imposed upon individuals. 
 
 (275)
 
 INCOME TAXATION 
 
 (Appdx. 
 
 Failure to 
 make re- 
 turn ; pen- 
 alty. 
 
 False, etc., 
 return ; 
 punishment. 
 
 Normal tax 
 on corpora- 
 tions, etc. 
 
 Exceptions 
 of certain 
 organiza- 
 tions, etc. 
 
 F. That if any person, corporation, joint-stock company, as- 
 sociation, or insurance company liable to make the return or pay 
 the tax aforesaid shall refuse or neglect to make a return at 
 the time or times hereinbefore specified in each year, such per- 
 son shall be liable to a penalty of not less than $20 nor more 
 than $1,000. Any person or any officer of any corporation re- 
 quired by law to make, render, sign, or verify any return who 
 makes any false or fraudulent return or statement with intent 
 to defeat or evade the assessment required by this section to 
 be made shall be guilty of a misdemeanor, and shall be fined 
 not exceeding $2,000 or be imprisoned not exceeding one year, 
 or both, at the discretion of the court, with the costs of prose- 
 cution. 
 
 G. (a) That the normal tax hereinbefore imposed upon in- 
 dividuals likewise shall be levied, assessed, and paid annually 
 upon the entire net income arising or accruing from all sources 
 during the preceding calendar year to every corporation, joint- 
 stock company or association, and every insurance company, 
 organized in the United States, no matter how created or or- 
 ganized, but not including partnerships ; but if organized, au- 
 thorized, or existing under the laws of any foreign country, 
 then upon the amount of net income arising or accruing by it 
 from business transacted and capital invested within the Unit- 
 ed States during such year: Provided, however, That nothing 
 in this section shall apply to labor, agricultural, or horticul- 
 tural organizations, or to mutual savings banks not having a 
 capital stock represented by shares, or to fraternal beneficiary 
 societies, orders, or associations operating under the lodge sys- 
 tem, or for the exclusive benefit of the members of a frater- 
 nity itself operating under the lodge system and providing for 
 the payment of life, sick, accident, and other benefits to the 
 members of such societies, orders, or associations and depend- 
 ents of such members, nor to domestic building and loan asso- 
 ciations, nor to cemetery companies, organized and operated 
 
 (276)
 
 Appdx.) INCOME TAX LAW OF 1913 
 
 exclusively for the mutual benefit of their members, nor to any 
 corporation or association organized and operated exclusively 
 for religious, charitable, scientific, or educational purposes, no 
 part of the net income of which inures to the benefit of any 
 private stockholder or individual, nor to business leagues, nor 
 to chambers of commerce or boards of trade, not organized 
 for profit or no part of the net income of which inures to the 
 benefit of the private stockholder or individual ; nor to any 
 civic league or organization not organized for profit, but op- 
 erated exclusively for the promotion of social welfare: Pro- 
 vided further, That there shall not be taxed under this section Exemption 
 
 i i r i i- -i- f ot lncom e 
 
 any income derived from any public utility or from the exer- from public 
 
 . , . , ... . utility, etc. 
 
 cise of any essential governmental function accruing to any 
 State, Territory, or the District of Columbia, or any political 
 subdivision of the State, Territory, or the District of Colum- 
 bia, nor any income accruing to the government of the Philip- 
 pine Islands or Porto Rico, or of any political subdivision of 
 the Philippine Islands or Porto Rico: Provided, That when- 
 ever any State, Territory, or the District of Columbia, or any 
 political subdivision of the State or Territory, has, prior to the 
 passage of this Act, entered in good faith into a contract with 
 any person or corporation, the object and purpose of which is 
 to acquire, construct, operate, or maintain a public utility, no 
 tax shall be levied under the provisions of this Act upon the 
 income derived from the operation of such public utility, so 
 far as the payment thereof will impose a loss or burden upon 
 such State, Territory, or the District of Columbia, or a po- 
 litical subdivision of a State or Territory ; but this provision is 
 not intended to confer upon such person or corporation any 
 financial gain or exemption or to relieve such person or corpo- 
 ration from the payment of a tax as provided for in this sec- 
 tion upon the part or portion of the said income to which such 
 person or corporation shall be entitled under such contract. 
 
 (277)
 
 INCOME TAXATION 
 
 (Appdx. 
 
 Deductions 
 by corpora- 
 tions, etc. 
 
 Expenses. 
 
 Losses. 
 
 Mutual fire 
 insurance 
 companies; 
 premium 
 deposits. 
 
 Mutual ma- 
 rine insur- 
 ance compa- 
 nies ; pre- 
 miums. 
 
 (&) Such net income shall be ascertained by deducting from 
 the gross amount of the income of such corporation, joint- 
 stock company or association, or insurance company, received 
 within the year from all sources, (first) all the ordinary and 
 necessary expenses paid within the year in the maintenance 
 and operation of its business and properties, including rentals 
 or other payments required to be made as a condition to the 
 continued use or possession of property; (second) all losses 
 actually sustained within the year and not compensated by in- 
 surance or otherwise, including a reasonable allowance for de- 
 preciation by use, wear and tear of property, if any; and in 
 the case of mines a reasonable allowance for depletion of ores 
 and all other natural deposits, not to exceed 5 per centum of 
 the gross value at the mine of the output for the year for 
 which the computation is made ; and in case of insurance com- 
 panies the net addition, if any, required by law to be made 
 within the year to reserve funds and the sums other than divi- 
 dends paid within the year on policy and annuity contracts: 
 Provided further, That mutual fire insurance companies re- 
 quiring their members to make premium deposits to provide 
 for losses and expenses shall not return as income any por- 
 tion of the premium deposits returned to their policyholders, 
 but shall return as taxable income all income received by them 
 from all other sources plus such portions of the premium de- 
 posits as are retained by the companies for purposes other 
 than the payment of losses and expenses and reinsurance re- 
 serves : Provided further, That mutual marine insurance com- 
 panies shall include in their return of gross income gross 
 premiums collected and received by them less amounts paid 
 for reinsurance, but shall be entitled to include in deductions 
 from gross income amounts repaid to policyholders on account 
 of premiums previously paid by them and interest paid upon 
 such amounts between the ascertainment thereof and the pay- 
 ment thereof and life insurance companies shall not include 
 
 (278)
 
 Appdx.) INCOME TAX LAW OF 1913 
 
 as income in any year such portion of any actual premium re- 
 ceived from any individual policyholder as shall have been paid 
 back or credited to such individual policyholder, or treated as an 
 abatement of premium of such individual policyholder, within 
 such year; (third) the amount of interest accrued and paid interest on 
 within the year on its indebtedness to an amount of such indebt- nest 
 edness not exceeding one-half of the sum of its interest-bearing 
 indebtedness and its paid-up capital stock outstanding at the 
 close of the year, or if no capital stock, the amount of interest 
 paid within the year on an amount of its indebtedness not ex- 
 ceeding the amount of capital employed in the business at the 
 close of the year: Provided, That in case of indebtedness 
 wholly secured by collateral the subject of sale in ordinary 
 business of such corporation, joint stock company, or associa- 
 tion, the total interest secured and paid by such company, cor- 
 poration, or association within the year on any such indebted- 
 ness may be deducted as a part of its expense of doing busi- 
 ness : Provided further, That in the case of bonds or other 
 indebtedness, which have been issued with a guaranty that 
 the interest payable thereon shall be free from taxation, no de- 
 duction for the payment of the tax herein imposed shall be 
 allowed ; and in the case of a bank, banking association, loan, 
 or trust company, interest paid within the year on deposits or 
 on moneys received for investment and secured by interest- 
 bearing certificates of indebtedness issued by such bank, bank- 
 ing association, loan or trust company ; (fourth) all sums paid Taxes, 
 by it within the year for taxes imposed under the authority 
 of the United States or of any State or Territory thereof, or 
 imposed by the Government of any foreign country: Pro- 
 vided, That in the case of a corporation, joint-stock company Foreign cor- 
 or association, or insurance company, organized, authorized, P ; rations ' 
 or existing under the laws of any foreign country, such net 
 income shall be ascertained by deducting from the gross 
 amount of its income accrued within the year from business 
 
 (279)
 
 INCOME TAXATION 
 
 (Appdx. 
 
 Expenses. 
 
 Losses. 
 
 Mutual fire 
 
 insurance 
 
 companies; 
 
 premium 
 
 deposits. 
 
 Mutual ma- 
 rine insur- 
 ance compa- 
 nies ; pre- 
 miums. 
 
 transacted and capital invested within the United States, (first) 
 all the ordinary and necessary expenses actually paid within 
 the year out of earnings in the maintenance and operation of 
 its business and property within the United States, including 
 rentals or other payments required to be made as a condition 
 to the continued use of possession of property; (second) all 
 losses actually sustained within the year in business conducted 
 by it within the United States and not compensated by insur- 
 ance or otherwise, including a reasonable allowance for depre- 
 ciation by use, wear and tear or property, if any, and in the 
 case of mines a reasonable allowance for depletion of ores and 
 all other natural deposits, not to exceed 5 per centum of the 
 gross value at the mine of the output for the year for which 
 the computation is made; and in case of insurance companies 
 the net addition, if any, required by law to be made within the 
 year to reserve funds and the sums other than dividends paid 
 within the year on policy and annuity contracts: Provided 
 further, That mutual fire insurance companies requiring their 
 members to make premium deposits to provide for losses and 
 expenses shall not return as income any portion of the premium 
 deposits returned to their policyholders, but shall return as 
 taxable income all income received by them from all other 
 sources plus such portions of the premium deposits as are re- 
 tained by the companies for purposes other than the payment 
 of losses and expenses and reinsurance reserves : Provided 
 further, That mutual marine insurance companies shall include 
 in their return of gross income gross premiums collected and 
 received by them less amounts paid for reinsurance, but shall 
 be entitled to include in deductions from gross income amounts 
 repaid to policyholders on account of premiums previously 
 paid by them, and interest paid upon such amounts between 
 the ascertainment thereof and the payment thereof and life 
 insurance companies shall not include as income in any year 
 such portion of any actual premium received from any indi- 
 
 (280)
 
 Appdx.) 
 
 INCOME TAX LAW OF 1913 
 
 vidual policyholder as shall have been paid back or credited to 
 such individual policyholder, or treated as an abatement of 
 premium of such individual policyholder, within such year; 
 (third) the amount of interest accrued and paid within the 
 year on its indebtedness to an amount of such indebtedness not 
 exceeding the proportion of one-half of the sum of its interest- 
 bearing indebtedness and its paid-up capital stock outstanding 
 at the close of the year, or if no capital stock, the capital 
 employed in the business at the close of the year, which the 
 gross amount of its income for the year from business trans- 
 acted and capital invested within the United States bears to 
 the gross amount of its income derived from all sources within 
 and without the United States : Provided, that in the case of 
 bonds or other indebtedness which have been issued with a 
 guaranty that the interest payable thereon shall be free from 
 taxation, no deduction for the payment of the tax herein im- 
 posed shall be allowed; (fourth) all sums paid by it within 
 the year for taxes imposed under the authority of the United 
 States or of any State, or Territory thereof, or the District of 
 Columbia. In the case of assessment insurance companies, 
 whether domestic or foreign, the actual deposit of sums with 
 State or Territorial officers, pursuant to law, as additions to 
 guarantee or reserve funds shall be treated as being payments 
 required by law to reserve funds. 
 
 The tax herein imposed shall be computed upon its entire 
 net income accruing during each preceding calendar year 
 ending December thirty-first : Provided, however, that for the 
 year ending December thirty-first, nineteen hundred and thir- 
 teen, said tax shall be imposed upon its entire net income 
 accruing during that portion of said year from March first to 
 December thirty-first, both dates inclusive, to b ascertained 
 by taking five-sixths of its entire net income for said calen- 
 dar year: Provided further, that any corporation, joint-stock 
 company or association, or insurance company subject to this 
 tax may designate the last day of any month in the year as 
 
 (281) 
 
 Interest on 
 indebted- 
 ness. 
 
 Taxes. 
 
 Assessment 
 
 insurance 
 
 companies. 
 
 Period for 
 computation 
 of tax on 
 corporation, 
 etc. 
 
 Computation 
 based on 
 fiscal year 
 of corpora- 
 tion, etc.
 
 INCOME TAXATION 
 
 (Appdx. 
 
 rime and 
 turns by re " 
 ti ons! ra etc. 
 
 Form and 
 
 capital. 
 
 indebted- 
 
 the day of the closing of its fiscal year and shall be entitled 
 to have the tax payable by it computed upon the basis of the 
 net income ascertained as herein provided for the year end- 
 ing on the day so designated in the year preceding the date of 
 assessment instead of upon the basis of the net income for the 
 calendar year preceding the date of assessment; and it shall 
 give notice of the day it has thus designated as the closing 
 of its fiscal year to the collector of the district in which its 
 principal business office is located at any time not less than 
 thirty days prior to the date upon which its annual return 
 shall be filed. All corporations, joint-stock companies or as- 
 sociations, and insurance companies subject to the tax herein 
 imposed, computing taxes upon the income of the calendar 
 year, shall, on or before the first day of March, nineteen 
 hundred and fourteen, and the first day of March in each year 
 thereafter, and all corporations, joint-stock companies or as- 
 sociations, and insurance companies, computing taxes upon 
 the income of a fiscal year which it may designate in the 
 manner hereinbefore provided, shall render a like return with- 
 in sixty days after the close of its said fiscal year, and within 
 sixty days after the close of its fiscal year in each year there- 
 after, or in the case of a corporation, joint-stock company or 
 association, or insurance company, organized or existing un- 
 der the laws of a foreign country, in the place where its 
 principal business is located within the United States, in such 
 form as the Commissioner of Internal Revenue, with the ap- 
 by proval of the Secretary of the Treasury, shall prescribe, shall 
 render a true and accurate return under oath or affirmation of 
 its president, vice president, or other principal officer, and 
 its treasurer or assistant treasurer, to the collector of in- 
 ternal revenue for the district in which it has its principal 
 place of business, setting forth (first) the total amount of 
 its paid-up capital stock outstanding, or if no capital stock, 
 its capital employed in business, at the close of the year; 
 (second) the total amount of its bonded and other indebted- 
 
 (282)
 
 Appdx.) 
 
 INCOME TAX LAW OF 1913 
 
 ness at the close of the year; (third) the gross amount of its 
 income, received during such year from all sources, and if 
 organized under the laws of a foreign country the gross 
 amount of its income received within the year from business 
 transacted and capital invested within the United States; 
 (fourth) the total amount of all its ordinary and necessary 
 expenses paid out of earnings in the maintenance and opera- 
 tion of the business and properties of such corporation, joint- 
 stock company or association, or insurance company within 
 the year, stating separately all rentals or other payments re- 
 quired to be made as a condition to the continued use or pos- 
 session of property, and if organized under the laws of a 
 foreign country the amount so paid in the maintenance and 
 operation of its business within the United States ; (fifth) the 
 total amount of all losses actually sustained during the year 
 and not compensated by insurance or otherwise, stating sepa- 
 rately any amounts allowed for depreciation of property, and 
 in case of insurance companies the net addition, if any, re- 
 quired by law to be made within the year to reserve funds and 
 the sums other than dividends paid within the year on policy 
 and annuity contracts: Provided -further, That mutual fire 
 insurance companies requiring their members to make pre- 
 mium deposits to provide for losses and expenses shall not 
 return as income any portion of the premium deposits re- 
 turned to their policyholders, but shall return as taxable in- 
 come all income received by them from all other sources plus 
 such portions of the premium deposits as are retained by the 
 companies for purposes other than the payment of losses and 
 expenses and reinsurance reserves: Provided further, That 
 mutual marine insurance companies shall include in their 
 return of gross income gross premiums collected and received 
 by them less amounts paid for reinsurance, but shall be en- 
 titled to include in the deductions from gross income ajnounts 
 repaid to policyholders on account of premiums previously 
 paid by them, and interest paid upon such amounts between 
 
 (283) 
 
 Gross In- 
 come. 
 
 Expenses. 
 
 Losses. 
 
 Mutual fire 
 
 insurance 
 
 companies. 
 
 Mutual ma- 
 rine insur- 
 anon com- 
 panies.
 
 INCOME TAXATION (Appdx. 
 
 the ascertainment thereof and the payment thereof, and life 
 Life insur- insurance companies shall not include as income in any year 
 
 ance com- , . - . ',.* i- 
 
 panics. such portion of any actual premium received from any indi- 
 
 vidual policyholder as shall have been paid back or credited to 
 such individual policyholder, or treated as an abatement of 
 premium of such individual policyholder, within such year; 
 
 Foreign cor- and in case of a corporation, joint-stock company or associa- 
 
 porations, 
 
 etc. tion, or insurance company, organized under the laws of a 
 
 foreign country, all losses actually sustained by it during the 
 year in business conducted by it within the United States, 
 .not compensated by insurance or otherwise, stating separately 
 any amounts allowed for depreciation of property, and in case 
 of insurance companies the net addition, if any, required by 
 law to be made within the year to reserve funds and the 
 sums other than dividends paid within the year on policy 
 msur!nce flre and annuity contracts: Provided further, That mutual fire 
 companies, insurance companies requiring their members to make premium 
 deposits to provide for losses and expenses shall not return as 
 income any portion of the premium deposits returned to 
 their policyholders, but shall return as taxable income all in- 
 come received by them from all other sources plus such por- 
 tions of the premium deposits as are retained by the companies 
 for purposes other than the payment of losses and expenses 
 
 Mutual ma- and reinsurance reserves : Provided further, That mutual ma- 
 rine insur- . i 11 , i , 
 ance com- rine insurance companies shall include in their return of gross 
 
 income gross premiums collected and received by them less 
 amounts paid for reinsurance, but shall be entitled to include 
 in deductions from gross income amounts repaid to policy- 
 holders on account of premiums previously "paid by them and 
 interest paid upon such amounts between the ascertainment 
 Life insur- thereof and the payment thereof, and life insurance compa- 
 
 ance com- . , , . , , 
 
 panics. nies shall not include as income in any year such portion 
 
 of any actual premium received from any individual policy- 
 holder as shall have been paid back or credited to such indi- 
 vidual policyholder, or treated as an abatement of premium of 
 (284)
 
 Appdx.) 
 
 INCOME TAX LAW OF 1913 
 
 such individual policyholder, within such year; (sixth) the intereat 
 amount of interest accrued and paid within the year on its 
 bonded or other indebtedness not exceeding one-half of the 
 sum of its interest-bearing indebtedness and its paid-up capi- 
 tal stock, outstanding at the close of the year, or if no cap- 
 ital stock, the amount of interest paid within the year on 
 an amount of indebtedness not exceeding the amount of cap- 
 ital employed in the business at the close of the year, and 
 in the case of a bank, banking association, or trust company, 
 stating separately all interest paid by it within the year on 
 deposits ; or in case of a corporation, joint-stock company Foreign cor- 
 or association, or insurance company, organized under the etc/ 1 lims ' 
 laws of a foreign country, interest so paid on its bonded or 
 other indebtedness to an amount of such bonded or other in- 
 debtedness not exceeding the proportion of its paid-up capital 
 stock outstanding at the close of the year, or if no capital 
 stock, the amount of capital employed in the business at the 
 close of the year, which the gross amount of its income for 
 the year from business transacted and capital invested within 
 the United States bears to the gross amount of its income de- 
 rived from all sources within and without the United States ; 
 (seventh) the amount paid by it within the year for taxes Taxes, 
 imposed under the authority of the United States and sepa- 
 rately the amount so paid by it for taxes imposed by the Gov- 
 ernment of any foreign country; (eighth) the net income of Net income, 
 such corporation, joint-stock company or association, or in- 
 surance company, after making the deductions in this subsec- 
 tion authorized. All such returns shall as received be trans- 
 mitted forthwith by the collector to the Commissioner of In- 
 ternal Revenue. 
 
 All assessments shall be made and the several corpora- Assessment 
 
 . . f , . ... , . and pay- 
 
 tions, joint-stock companies or associations, and insurance me nt. 
 companies shall be notified of the amount for which they 
 are respectively liable on or before the first day of June of 
 each successive year, and said assessment shall be paid on 
 
 (285)
 
 INCOME TAXATION 
 
 (Appdx. 
 
 Computation 
 based on 
 fiscal year 
 of corpora- 
 tion, etc. 
 
 Penalty and 
 interest on 
 tax unpaid. 
 
 Returns fil- 
 ed as rec- 
 ords. 
 
 Inspection 
 of or access 
 to returns. 
 
 or before the thirtieth day of June: Provided, That every 
 corporation, joint-stock company or association, and in- 
 surance company, computing taxes upon the income of the 
 fiscal year which it may designate in the manner herein- 
 before provided, shall pay the taxes due under its assess- 
 ment within one hundred and twenty days after the date 
 upon which it is required to file its list or return of income 
 for assessment; except in cases of refusal or neglect to 
 make such return, and in cases of false or fraudulent re- 
 turns, in which cases the Commissioner of Internal Revenue 
 shall, upon the discovery thereof, at any time within three 
 years after said return is due, make a return upon informa- 
 tion obtained as provided for in this section or by existing 
 law, and the assessment made by the Commissioner of In- 
 ternal Revenue thereon shall be paid by such corporation, 
 joint-stock company or association, or insurance company 
 immediately upon notification of the amount of such assess- 
 ment; and to any sum or sums due and unpaid after the 
 thirtieth day of June in any year, or after one hundred and 
 twenty days from the date on which the return of income is 
 required to be made by the taxpayer, and for ten days after 
 notice and demand thereof by the collector, there shall be 
 added the sum of 5 per centum on the amount of tax un- 
 paid and interest at the rate of 1 per centum per month 
 upon said tax from the time the same becomes due. 
 
 (d) When the assessment shall be made, as provided in 
 this section, the returns, together with any corrections 
 thereof which may have been made by the commissioner, 
 shall be filed in the office of the Commissioner of Internal 
 Revenue and shall constitute public records and be open to 
 inspection as such : Provided, That any and all such returns 
 shall be open to inspection only upon the order of the Pres- 
 ident, under rules and regulations to be prescribed by the 
 Secretary of the Treasury and approved by the President : 
 Provided further, that the proper officers of any State im- 
 
 (286)
 
 Appdx.) 
 
 INCOME TAX LAW OP 1913 
 
 posing a general income tax may, upon the request of the 
 governor thereof, have access to said returns or to an ab- 
 stract thereof, showing the name and income of each such 
 corporation, joint-stock company, association or insurance 
 company, at such times and in such manner as the Secre- 
 tary of the Treasury may prescribe. 
 
 If any of the corporations, joint-stock companies or as- 
 sociations, or insurance companies aforesaid, shall refuse or 
 neglect to make a return at the time or times hereinbefore 
 specified in each year, or shall render a false or fraudulent 
 return, such corporation, joint-stock company or associa- 
 tion, or insurance company shall be liable to a penalty of 
 not exceeding $10,000. 
 
 H. That the word "State" or "United States" when used 
 in this section shall be construed to include any Territory, 
 Alaska, the District of Columbia, Porto Rico, and the Philip- 
 pine Islands, when such construction is necessary to carry 
 out its provisions. 
 
 J. That sections thirty-one hundred and sixty-seven, thirty- 
 one hundred and seventy-two, thirty-one hundred and seventy- 
 three, and thirty-one hundred and seventy-six of the Revised 
 Statutes of the United States as amended are hereby amended 
 so as to read as follows: 
 
 "Sec. 3167. It shall be unlawful for any collector, deputy 
 collector, agent, clerk, or other officer or employee of the 
 United States to divulge or to make known in any manner 
 whatever not provided by law to any person the operations, 
 style of work, or apparatus of any manufacturer or producer 
 visited by him in the discharge of his official duties, or the 
 amount or source of income, profits, losses, expenditures, or 
 any particular thereof, set forth or disclosed in any income 
 return by any person or corporation, or to permit any income 
 return or copy thereof or any book containing any abstract 
 or particulars thereof to be seen or examined by any person 
 except as provided by law ; and it shall be unlawful for any 
 
 (287) 
 
 Failure to 
 make re- 
 turn, false, 
 etc., re- 
 turn ; pen- 
 alty. 
 
 Words 
 
 "State" 
 
 "United 
 
 States," 
 
 construed. 
 
 R. S. 
 3167, 3172, 
 3173, 3176, 
 amended. 
 
 Revenue of- 
 ficers dis- 
 closing op- 
 erations of 
 manufactur- 
 ers, Income 
 tax returns, 
 etc., pun- 
 ishable.
 
 INCOME TAXATION 
 
 (Appdx. 
 
 Canvass of 
 districts for 
 objects of 
 taxation. 
 
 Annual re- 
 turns of per- 
 sons liable 
 to tax. 
 
 person to print or publish in any manner whatever not pro- 
 vided by law any income return or any part thereof or the 
 amount or source of income profits, losses, or expenditures 
 appearing in any income return ; and any offense against the 
 foregoing provision shall be a misdemeanor and be punished 
 by a fine not exceeding $1,000 or by imprisonment not ex- 
 ceeding one year, or both, at the discretion of the court ; and 
 if the offender be an officer or employee of the United States 
 he shall be dismissed from office and be incapable thereafter of 
 holding any office under the Government. 
 
 "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 lia- 
 ble to pay any internal-revenue tax, and all persons owning 
 or having the care and management of any objects liable to 
 pay any tax, and to make a list of such persons and enumerate 
 said objects. 
 
 "Sec. 3173. It shall be the duty of any person, partnership, 
 firm, association, or corporation, made liable to any duty, 
 special tax, or other tax imposed by law, when not other- 
 wise provided for, in case of a special tax, on or before the 
 thirty-first day of July in each year, in case of income tax 
 on or before the first day of March in each year, and in 
 other cases before the day on which the taxes accrue, to make 
 a list or return, verified by oath or affirmation, to the col- 
 lector or a deputy collector of the district where located, of 
 the articles or objects, including the amount of annual in- 
 come charged with a duty or tax, the quantity of goods, wares, 
 and merchandise made or sold and charged with a tax, the 
 several rates and aggregate amount, according to the forms 
 and regulations to be prescribed by the Commissioner of 
 Internal Revenue, with the approval of the Secretary of the 
 Treasury, for which such person, partnership, firm, associa- 
 tion, or corporation is liable: Provided, That if any person 
 liable to pay any duty or tax, or owning, possessing, or hav- 
 
 (288)
 
 Appdx.) INCOME TAX LAW OF 1913 
 
 ing the care or management of property, goods, wares, and 
 merchandise, articles or objects liable to pay any duty, tax, 
 or license, shall fail to make and exhibit a list or return 
 required by law, but shall consent to disclose the particulars 
 of any and all the property, goods, wares, and merchandise, 
 articles, and objects liable to pay any duty or tax, or any busi- 
 ness 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 or affirma- 
 tion 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 mem- 
 orandum 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 or affirmation. And if any per- 
 son, 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 de- 
 liver 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 false or fraudulent, or contains 
 any undervaluation or understatement, it shall be lawful for 
 the collector to summon such person, or any other person hav- 
 ing possession, custody, or care of books of account contain- 
 ing entries relating to the business of such person, or any other 
 BL.INC.TAX. 19 (289)
 
 (Appdx. 
 
 When col- 
 lector may 
 
 make re- 
 turns. 
 
 person he may deem proper, to appear before him and produce 
 such books, at a time and place named in the summons, and to 
 give testimony or answer interrogatories, under oath, respect- 
 ing any objects liable to tax or the returns thereof. The col- 
 lector may summon any person residing or found within the 
 State in which his district lies ; and when the person intended 
 to be summoned does not reside and can not be found within 
 such State, he may enter any collection district where such per- 
 son may be found and there make the examination herein au- 
 thorized. And to this end he may there exercise all the au- 
 thority which he might lawfully exercise in the district for 
 which he was commissioned. 
 
 "Sec. 3176. When any person, corporation, company or 
 association refuses or neglects to render any return or list 
 required by law, or renders a false or fraudulent return or 
 list, the collector or any deputy collector shall make, accord- 
 ing to the best information which he can obtain, including 
 that derived from the evidence elicited by the examination of 
 the collector, and on his own view and information, such list 
 or return, according to the form prescribed, of the income, 
 property, and objects liable to tax owned or possessed or 
 under the care or management of such person or corpora- 
 tion, company or association, and the Commissioner of In- 
 ternal Revenue shall assess all taxes not paid by stamps, in- 
 cluding the amount, if any, due for special tax, income or 
 other tax, and in case of any return of a false or fraudulent 
 list or valuation intentionally he shall add 100 per centum to 
 such tax ; and in case of a refusal or neglect, except in cases 
 of sickness or absence, to make a list or return, or to verify 
 the same as aforesaid, he shall add 50 per centum to such tax. 
 In case of neglect occasioned by sickness or absence as afore- 
 said the collector may allow such further time for making and 
 delivering such list or return as he may deem necessary, not 
 exceeding thirty days. The amount so added to the tax 
 shall be collected at the same time and in the same manner 
 
 (290)
 
 Appdx.) 
 
 INCOME TAX LAW OF 1913 
 
 as the tax unless the neglect or falsity is discovered after the 
 tax has been paid, in which case the amount so added shall 
 be collected in the same manner as the tax; and the list or 
 return so made and subscribed by such collector or deputy 
 collector shall be held prima facie good and sufficient for all 
 legal purposes." 
 
 K. That it shall be the duty of every collector of internal 
 revenue, to whom any payment of any taxes other than the 
 tax represented by an adhesive stamp or other engraved 
 stamp is made under the provisions of this section, to give 
 to the person making such payment a full written or printed 
 receipt, expressing the amount paid and the particular ac- 
 count for which such payment was made ; and whenever such 
 payment is made such collector shall, if required, give a sepa- 
 rate receipt for each tax paid by any debtor, on account of 
 payments made to or to be made by him to separate creditors 
 in such form that such debtor can conveniently produce the 
 same separately to his several creditors in satisfaction of 
 their respective demands to the amounts specified in such re- 
 ceipts; and such receipts shall be sufficient evidence in fa- 
 vor of such debtor to justify him in withholding the amount 
 therein expressed from his next payment to his creditor; 
 but such creditor may, upon giving to his debtor a full writ- 
 ten receipt, acknowledging the payment to him of whatever 
 sum may be actually paid, and accepting the amount of tax 
 paid as aforesaid (specifying the same) as a further satisfac- 
 tion of the debt to that amount, require the surrender to him 
 of such collector's receipt. 
 
 L. That jurisdiction is hereby conferred upon the district 
 courts of the United States for the district within which any 
 person summoned under this section to appear to testify 
 or to produce books shall reside, to compel such attendance, 
 production of books, and testimony by appropriate process. 
 
 M. That all administrative, special, and general provi- 
 sions of law, including the laws in relation to the assessment, 
 
 (291) 
 
 Collectors' 
 receipts for 
 taxes ; ef- 
 fect as evi- 
 dence, etc. 
 
 Jurisdiction 
 of district 
 courts. 
 
 Administra- 
 tive, etc., 
 provisions 
 applicable.
 
 INCOME TAXATION 
 
 (Appdx. 
 
 Provisions 
 extended to 
 Porto Rico 
 and Philip- 
 pine Is- 
 lands. 
 
 Appropria- 
 tion for car- 
 rying provi- 
 sions into 
 effect. 
 
 remission, collection, and refund of internal-revenue taxes 
 not heretofore specifically repealed and cot inconsistent with 
 the provisions of this section, are hereby extended and made 
 applicable to all the provisions of this section and to the tax 
 herein imposed. 
 
 N. That the provisions of this section shall extend to 
 Porto Rico and the Philippine Islands: Provided, That the 
 administration of the law and the collection of the taxes im- 
 posed in Porto Rico and the Philippine Islands shall be by 
 the appropriate internal-revenue officers of those govern- 
 ments, and all revenues collected in Porto Rico and the Philip- 
 pine Islands thereunder shall accrue intact to the general 
 governments, thereof, respectively: And provided further, 
 That the jurisdiction in this section conferred upon the dis- 
 trict courts of the United States shall, so far as the Philip- 
 pine Islands are concerned, be vested in the courts of the first 
 instance of said islands : And provided further, that nothing 
 in this section shall be held to exclude from the computa- 
 tion of the net income the compensation paid any official by 
 the governments of the District of Columbia, Porto Rico, 
 and the Philippine Islands or the political subdivisions thereof. 
 
 O. That for the purpose of carrying into effect the provi- 
 sions of Section II of this Act, and to pay the expenses of 
 assessing and collecting the income tax therein imposed, 
 and to pay such sums as the Commissioner of Internal Reve- 
 nue, with the approval of the Secretary of the Treasury, may 
 deem necessary, for information, detection, and bringing to 
 trial and punishment persons guilty of violating the provi- 
 sions of this section, or conniving at the same, in cases where 
 such expenses are not otherwise provided for by law, there is 
 hereby appropriated out of any money in the Treasury not 
 otherwise appropriated for the fiscal year ending June thir- 
 tieth, nineteen hundred and fourteen, the sum of $800,000, 
 and the Commissioner of Internal Revenue, with the ap- 
 proval of the Secretary of the Treasury, is authorized to ap- 
 
 (292)
 
 Appdx.) 
 
 INCOME TAX LAW OF 1913 
 
 point and pay from this appropriation all necessary officers, 
 agents, inspectors, deputy collectors, clerks, messengers and 
 janitors, and to rent such quarters, purchase such supplies, 
 equipment, mechanical devices, and other articles as may be 
 necessary for employment or use in the District of Columbia 
 or any collection district in the United States, or any of the 
 Territories thereof : Provided, That no agent paid from this 
 appropriation shall receive compensation at a rate higher 
 than that now received by traveling agents on accounts in 
 the Internal Revenue Service, and no inspector shall receive 
 a compensation higher than $5 a day and $3 additional in 
 lieu of subsistence, and no deputy collector, clerk, messenger, 
 or other employe shall be paid at a rate of compensation 
 higher than the rate now being paid for the same or similar 
 work in the Internal Revenue Service. 
 
 In the office of the Commissioner of Internal Revenue at 
 Washington, District of Columbia, there shall be appointed 
 by the Commissioner of Internal Revenue, with the approval 
 of the Secretary of the Treasury, one additional deputy com- 
 missioner, at a salary of $4,000 per annum ; two heads of 
 divisions, whose compensation shall not exceed $2,500 per 
 annum ; and such other clerks, messengers, and employes, 
 and to rent such quarters and to purchase such supplies as 
 may be necessary : Provided, That for a period of two years 
 from and after the passage of this Act the force of agents, 
 deputy collectors, inspectors, and other employes not in- 
 cluding the clerical force below the grade of chief of division 
 employed in the Bureau of Internal Revenue in the city of 
 Washington, District of Columbia, authorized by this section 
 of this Act shall be appointed by the Commissioner of In- 
 ternal Revenue, with the approval of the Secretary of the 
 Treasury, under such rules and regulations as may be fixed 
 by the Secretary of the Treasury to insure faithful and com- 
 petent service, and with such compensation as the Commis- 
 sioner of Internal Revenue may fix, with the approval of the 
 
 (293) 
 
 Compensa- 
 tion of 
 agents, of- 
 ficers, etc., 
 limited. 
 
 Additional 
 officers, 
 clerks, etc., 
 in office of 
 Commis- 
 sioner of 
 Internal 
 Revenue. 
 
 Appoint- 
 ment of 
 agents, offi- 
 cers, etc.
 
 INCOME TAXATION 
 
 (Appdx. 
 
 force. 
 
 repealed. 
 
 affected. not 
 
 cise ci tax e on 
 corpora- 
 
 ja r n ^i ri t<f 
 Feb. 28.1913. 
 
 ofspea? 
 
 iaw i8 ap ^ca- 
 ble - 
 
 Secretary of the Treasury, within the limitations herein pre- 
 scr ^ e( ^ : Provided further, That the force authorized to carry 
 ou t the provisions of Section II of this Act, when not em- 
 ployed as herein provided, shall be employed on general in- 
 ternal-revenue work. 
 
 T. That, except as hereinafter provided, sections one to 
 forty-two, both inclusive, of an Act entitled "An Act to 
 provide revenue, equalize duties, and encourage the indus- 
 tries of the United States, and for other purposes," approv- 
 ed August fifth, nineteen hundred and nine, and all Acts 
 and parts of Acts inconsistent with the provisions of this 
 Act > are hereby repealed: Provided * * * that all 
 ex cise taxes upon corporations imposed by section thirty- 
 eight [of the Act of August 5, 1909] that have accrued or 
 have been imposed for the year ending December thirty- 
 first, nineteen hundred and twelve, shall be returned, assess- 
 ed, and collected in the same manner, and under the same 
 provisions, liens, and penalties as if section thirty-eight 
 continued in full force and effect: And provided further, 
 that a special excise tax with respect to the carrying on or 
 doing of business, equivalent to 1 per centum upon their 
 entire net income, shall be levied, assessed, and collected 
 upon corporations, joint stock companies or associations, 
 and insurance companies, of the character described in sec- 
 tion thirty-eight of the Act of August fifth, nineteen hun- 
 dred and nine, for the period from January first to February 
 twenty-eighth, nineteen hundred and thirteen, both dates 
 inclusive, which said tax shall be computed upon one-sixth 
 of the entire net income of said corporations, joint stock 
 companies or associations, and insurance companies, for 
 said year, said net income to be ascertained in accordance 
 with the provisions of subsection G of section two of this 
 Act: P ro d e d further, That the provisions of said sec- 
 ^ on thirty-eight of the Act of August fifth, nineteen hun- 
 dred and nine, relative to the collection of the tax therein 
 (294)
 
 Appdx.) 
 
 INCOME TAX LAW OF 1913 
 
 imposed shall remain in force for the collection of the ex- 
 cise tax herein provided, but for the year nineteen hundred 
 and thirteen it shall not be necessary to make more than 
 one return and assessment for all the taxes imposed herein 
 upon said corporations, joint stock companies or associa- 
 tions, and insurance companies, either by way of income or 
 excise, which return and assessment shall be made at the 
 times and in the manner provided in this Act ; but the re- 
 peal of existing- laws or modifications thereof embraced in Limitation 
 
 , . . of effect of 
 
 this Act shall not affect any act done, or any right accruing- repeal, etc., 
 
 * of existing 
 
 or accrued, or any suit or proceeding had or commenced in laws, 
 any civil case before the said repeal or modification ; but 
 all rights and liabilities under said laws shall continue and 
 may be enforced in the same manner as if said repeal or 
 modifications had not been made. Any offenses committed 
 and all penalties or forfeitures or liabilities incurred prior 
 to the passage of this Act under any statute embraced in or 
 changed, modified, or repealed by this Act may be prose- 
 cuted or punished in the same manner and with the same 
 effect as if this Act had not been passed. No Acts of linv 
 itation now in force, whether applicable to civil causes or 
 to the prosecution of offenses or for the recovery of pen- 
 alties or forfeitures embraced in or modified, changed, or 
 repealed by this Act shall be affected thereby, so far as 
 they affect any suits, proceedings, or prosecutions, whether 
 civil or criminal, for causes arising or acts done or com- 
 mitted prior to the passage of this Act, which may be com- 
 menced and prosecuted within the same time and with the 
 same effect as if this Act had not been passed. 
 
 (295)
 
 INCOME TAXATION (Appdx. 
 
 UNITED STATES CORPORATION EXCISE TAX 
 LAW OF 1909 
 
 Act of Congress, August 5, 1909, 36 Stat. 112, U. S. Comp. 
 
 Stat. Supp. 1909, p. 844 
 
 38. "That every corporation, joint stock company, or 
 association organized for profit and having a capital stock 
 represented by shares, and every insurance company now or 
 hereafter organized under the laws of the United States or 
 of any state or territory of the United States, or under the 
 acts of Congress applicable to Alaska or the District of Co- 
 lumbia, or now or hereafter organized under the laws of any 
 foreign country, and engaged in business in any state or ter- 
 ritory of the United States or in Alaska or in the District of 
 Columbia, shall be subject to pay annually a special excise 
 tax with respect to the carrying on or doing business by such 
 corporation, joint stock company, or association, or insurance 
 company, equivalent to one per centum upon the entire net 
 income over and above five thousand dollars, received by it 
 from all sources during such year, exclusive of amounts re- 
 ceived by it as dividends upon stock of other corporations, 
 joint stock companies or associations, or insurance companies 
 subject to the tax hereby imposed; or, if organized under 
 the laws of any foreign country, upon the amount of net in- 
 come over and above five thousand dollars received by it from 
 business transacted and capital invested within the United 
 States and its territories, Alaska, and the District of Columbia, 
 during such year, exclusive of amounts so received by it as 
 dividends upon stock of other corporations, joint stock com- 
 panies or associations or insurance companies subject to the 
 tax hereby imposed: Provided, however, that nothing in this 
 section contained shall apply to labor, agricultural or horti- 
 cultural organizations, or to fraternal beneficiary societies, 
 
 (296)
 
 Appdx.) CORPORATION EXCISE TAX LAW OF 1909 
 
 orders, or associations operating under the lodge system, and 
 providing for the payment of life, sick, accident, and other 
 benefits to the members of such societies, orders or associa- 
 tions, and dependents of such members, nor to domestic build- 
 ing and loan associations, organized and operated exclusively 
 for the mutual benefit of their members, nor to any corporation 
 or association organized and operated exclusively for religious, 
 charitable or educational purposes, no part of the net income 
 of which inures to the benefit of any private stockholder or 
 individual. 
 
 Second. Such net income shall be ascertained by deducting 
 from the gross amount of the income of such corporation, 
 joint stock company or association, or insurance company, 
 received within the year from all sources, (first) all the ordi- 
 nary and necessary expenses actually paid within the year out 
 of income in the maintenance and operation of its business 
 and properties, including all charges such as rentals or fran- 
 chise payments, required to be made as a condition to the con- 
 tinued use or possession of property; (second) all losses 
 actually sustained within the year and not compensated by in- 
 surance or otherwise, including a reasonable allowance for de- 
 preciation of property, if any, and in the case of insurance com- 
 panies the sums other than dividends, paid within the year on 
 policy and annuity contracts and the net addition, if any, re- 
 quired by law to be made within the year to reserve funds ; 
 (third) interest actually paid within the year on its bonded 
 or other indebtedness to an amount of such bonded and oth- 
 er indebtedness not exceeding the paid-up capital stock of 
 such corporation, joint stock company or association, or in- 
 surance company, outstanding at the close of the year, and in 
 the case of a bank, banking association, or trust company, all 
 interest actually paid by it within the year on deposits; (fourth) 
 all sums paid by it within the year for taxes imposed under 
 the authority of the United States or of any state or territory 
 thereof, or imposed by the government of any foreign country 
 
 (297)
 
 INCOME TAXATION (Appdx. 
 
 as a condition to carry on business therein ; (fifth) all amounts 
 received by it within the year as dividends upon stock of other 
 corporations, joint stock companies or associations, or insur- 
 ance companies, subject to the tax hereby imposed : Provided, 
 that in the case of a corporation, joint stock company or as- 
 sociation, or insurance company, organized under the laws of 
 a foreign country, such net income shall be ascertained by de- 
 ducting from the gross amount of its income received within 
 the year from business transacted and capital invested within 
 the United States and any of its territories, Alaska, and the 
 District of Columbia, (first) all the ordinary and necessary ex- 
 penses actually paid within the year out of earnings in the 
 maintenance and operation of its business and property within 
 the United States and its territories, Alaska, and the District 
 of Columbia, including all charges such as rentals or franchise 
 payments required to be made as a condition to the continued 
 use or possession of property; (second) all losses actually 
 sustained within the year in business conducted by it within 
 the United States or its territories, Alaska, or the District of 
 Columbia not compensated by insurance or otherwise, includ- 
 ing a reasonable allowance for depreciation of property, if 
 any, and in the case of insurance companies the sums other 
 than dividends, paid within the year on policy and annuity 
 contracts and the net addition, if any, required by law to be 
 made within the year to reserve funds ; (third) interest actually 
 paid within the year on its bonded or other indebtedness to an 
 amount of such bonded and other indebtedness, not exceeding 
 the proportion of its paid-up capital stock outstanding at the 
 close of the year which the gross amount of its income for 
 the year from business transacted and capital invested within 
 the United States and any of its territories, Alaska, and the 
 District of Columbia bears to the gross amount of its income 
 derived from all sources within and without the United States ; 
 (fourth) the sums paid by it within the year for taxes im- 
 posed under the authority of the United States or of any state 
 
 (298)
 
 Appdx.) CORPOBATION EXCISE TAX LAW OF 1909 
 
 or territory thereof; (fifth) all amounts received by it within 
 the year as dividends upon stock of other corporations, joint 
 stock companies or associations, and insurance companies, sub- 
 ject to the tax hereby imposed. In the case of assessment in- 
 surance companies the actual deposit of sums with state or 
 territorial officers, pursuant to law, as additions to guaranty 
 or reserve funds shall be treated as being payments required 
 by law to reserve funds. 
 
 Third. There shall be deducted from the amount of the 
 net income of each of such corporations, joint stock compa- 
 nies or associations, or insurance companies, ascertained as 
 provided in the foregoing paragraphs of this section, the sum 
 of five thousand dollars, and said tax shall be computed upon 
 the remainder of said net income of such corporation, joint 
 stock company or association, or insurance company, for the 
 year ending December thirty-first, nineteen hundred and nine, 
 and for each calendar year thereafter ; and on or before the 
 first day of March, nineteen hundred and ten, and the first 
 day of March in each year thereafter, a true and accurate re- 
 turn under oath or affirmation of its president, vice-president, 
 or other principal officer, and its treasurer or assistant treas- 
 urer, shall be made by each of the corporations, joint stock 
 companies or associations, and insurance companies, subject 
 to the tax imposed by this section, to the collector of internal 
 revenue for the district in which such corporation, joint stock 
 company or association, or insurance company has its prin- 
 cipal place of business, or, in the case of a corporation, joint 
 stock company or association, or insurance company, organized 
 under the laws of a foreign country, in the place where its 
 principal business is carried on within the United States, in 
 such form as the Commissioner of Internal Revenue, with the 
 approval of the Secretary of the Treasury, shall prescribe, 
 setting forth (first) the total amount of the paid-up capital 
 stock of such corporation, joint stock company or association, 
 or insurance company, outstanding at the close of the year; 
 
 (299)
 
 INCOME TAXATION (Appdx. 
 
 (second) the total amount of the bonded and other indebted- 
 ness of such corporation, joint stock company or association, 
 or insurance company at the close of the year; (third) the 
 gross amount of the income of such corporation, joint stock 
 company or association, or insurance company, received dur- 
 ing such year from all sources, and if organized under the 
 laws of a foreign country the gross amount of its income re- 
 ceived within the year from business transacted and capital 
 invested within the United States and any of its territories, 
 Alaska, and the District of Columbia; also the amount re- 
 ceived by such corporation, joint stock company or associa- 
 tion, or insurance company within the year by way of divi- 
 dends upon stock of other corporations, joint stock companies 
 or associations, or insurance companies, subject to the tax im- 
 posed by this section; (fourth) the total amount of all the 
 ordinary and necessary expenses actually paid out of earnings 
 in the maintenance and operation of the business and proper- 
 ties of such corporation, joint stock company or association, 
 or insurance company within the year, stating separately all 
 charges such as rentals or franchise payments required to be 
 made as a condition to the continued use or possession of prop- 
 erty, and if organized under the laws of a foreign country the 
 amount so paid in the maintenance and operation of its busi- 
 ness within the United States and its territories, Alaska, and 
 the District of Columbia ; (fifth) the total amount of all losses 
 actually sustained during the year and not compensated by in- 
 surance or otherwise, stating separately any amounts allowed 
 for depreciation of property, and in the case of insurance 
 companies the sums other than dividends paid within the year 
 on policy and annuity contracts and the net addition, if any, 
 required by law to be made within the year to reserve funds ; 
 and in the case of a corporation, joint stock company or as- 
 sociation, or insurance company, organized under the laws of 
 a foreign country, all losses actually sustained by it during 
 the year in business conducted by it within the United States 
 
 (300)
 
 Appdx.) CORPORATION EXCISE TAX LAW OF 1909 
 
 or its territories, Alaska, and the District of Columbia, not 
 compensated by insurance or otherwise, stating separately any 
 amounts allowed for depreciation of property, and in the case 
 of insurance companies the sums other than dividends paid 
 within the year on policy and annuity contracts and the net 
 addition, if any, required by law to be made within the year 
 to reserve fund; (sixth) the amount of interest actually paid 
 within the year on its bonded or other indebtedness to an 
 amount of such bonded and other indebtedness not exceeding 
 the paid-up capital stock of such corporation, joint stock com- 
 pany or association, or insurance company, outstanding at the 
 close of the year, and in the case of a bank, banking associa- 
 tion, or trust company, stating separately all interest paid by 
 it within the year on deposits ; or in case of a corporation, 
 joint stock company or association, or insurance company, or- 
 ganized under the laws of a foreign country, interest so paid 
 on its bonded or other indebtedness to an amount of such 
 bonded and other indebtedness not exceeding the proportion 
 of its paid-up capital stock outstanding at the close of the 
 year, which the gross amount of its income for the year from 
 business transacted and capital invested within the United 
 States and any of its territories, Alaska, and the District of 
 Columbia, bears to the gross amount of its income derived 
 from all sources within and without the United States ; 
 (seventh) the amount paid by it within the year for taxes 
 imposed under the authority of the United States or any 
 state or territory thereof, and separately the amount so 
 paid by it for taxes imposed by the government of any for- 
 eign country as a condition to carrying on business there- 
 in; (eighth) the net income of such corporation, joint stock 
 company or association, or insurance company, after mak- 
 ing the deductions in this section authorized. All such re- 
 turns shall as received be transmitted forthwith by the col- 
 lector to the Commissioner of Internal Revenue. 
 
 Fourth. Whenever evidence shall be produced before the 
 
 (301)
 
 INCOME TAXATION (Appdx. 
 
 Commissioner of Internal Revenue which in the opinion of 
 the Commissioner justifies the belief that the return made by 
 any corporation, joint stock company or association, or in- 
 surance company is incorrect, or whenever any collector shall 
 report to the Commissioner of Internal Revenue that any cor- 
 poration, joint stock company or association, or insurance com- 
 pany has failed to make a return as required by law, the Com- 
 missioner of Internal Revenue may require from the corpora- 
 tion, joint stock company or association, or insurance compa- 
 ny making such return, such further information with refer- 
 ence to its capital, income, losses, and expenditures as he 
 may deem expedient ; and the Commissioner of Internal Rev- 
 enue, for the purpose of ascertaining the correctness of such 
 return or for the purpose of making a return where none has 
 been made, is hereby authorized, by any regularly appointed 
 revenue agent specially designated by him for that purpose, 
 to examine any books and papers bearing upon the matters re- 
 quired to be included in the return of such corporation, joint 
 stock company or association, or insurance company, and to 
 require the attendance of any officer or employee of such cor- 
 poration, joint stock company or association, or insurance 
 company, and to take his testimony with reference to the mat- 
 ter required by law to be included in such return, with power 
 to administer oaths to such person or persons ; and the Com- 
 missioner of Internal Revenue may also invoke the aid of any 
 court of the United States having jurisdiction to require the 
 attendance of such officers or employees and the production 
 of such books and papers. Upon the information so acquired 
 the Commissioner of Internal Revenue may amend any re- 
 turn or make a return where none has been made. All pro- 
 ceedings taken by the Commissioner of Internal Revenue 
 under the provisions of this section shall be subject to the 
 approval of the Secretary of the Treasury. 
 
 Fifth. All returns shall be retained by the Commissioner 
 of Internal Revenue, who shall make assessments thereon; 
 
 (302)
 
 Appdx.) CORPORATION EXCISE TAX LAW OF 1909 
 
 and in case of any return made with false or fraudulent in- 
 tent, he shall add one hundred per centum of such tax, and 
 in case of a refusal or neglect to make a return or to verify 
 the same as aforesaid he shall add fifty per centum of such 
 tax. In case of neglect occasioned by the sickness or absence 
 of an officer of such corporation, joint stock company or as- 
 sociation, or insurance company, required to make said re- 
 turn, or for other sufficient reason, the collector may allow 
 such further time for making and delivering such return as 
 he may deem necessary, not exceeding thirty days. The 
 amount so added to the tax shall be collected at the same time 
 and in the same manner as the tax originally assessed, unless 
 the refusal, neglect, or falsity is discovered after the date 
 for payment of said taxes, in which case the amount so added 
 shall be paid by the delinquent corporation, joint stock com- 
 pany or association, or insurance company, immediately upon 
 notice given by the collector. All assessments shall be made 
 and the several corporations, joint stock companies or associa- 
 tions, or insurance companies, shall be notified of the amount 
 for which they are respectively liable on or before the first 
 day of June of each successive year, and said assessments 
 shall be paid on or before the thirtieth day of June, except in 
 cases of refusal or neglect to make such return, and in cases 
 of false or fraudulent returns, in which cases the Commis- 
 sioner of Internal Revenue shall, upon the discovery thereof, 
 at any time within three years after said return is due, make 
 a return upon information obtained as above provided for, 
 and the assessment made by the Commissioner of Internal 
 Revenue thereon shall be paid by such corporation, joint stock 
 company or association, or insurance company immediately 
 upon notification of the amount of such assessment; and to 
 any sum or sums due and unpaid after the thirtieth day of 
 June in any year, and for ten days after notice and demand 
 thereof by the collector, there shall be added the sum of five 
 per centum on the amount of tax unpaid and interest at the 
 
 (303)
 
 INCOME TAXATION (Appdx. 
 
 rate of one per centum per month upon said tax from the time 
 the same becomes due. 
 
 [NOTE. This subdivision of the section was amended by 
 Act of Congress, March 3, 1913, by providing as follows: 
 "Any corporation, joint stock company, association, or any 
 insurance company subject to the special excise tax provided 
 by section thirty-eight of the act of August fifth, nineteen 
 hundred and nine, known as the special excise corporation-tax 
 law, which has been or may be compelled to pay or become 
 liable for any additional tax within the provisions of subsec- 
 tion five of said section thirty-eight, which additional tax has 
 been or may hereafter be imposed for a neglect to file a re- 
 turn as provided in said corporation-tax law on or before the 
 first of March of any year, may, within one year after the 
 passage of this act, or within one year after the date of notice 
 of assessment where such notice is given after the passage of 
 this act, make application to the Commissioner of Internal 
 Revenue for a refund of such additional tax. And the Com- 
 missioner of Internal Revenue, with the advice and consent 
 of the Solicitor of Internal Revenue, is hereby directed to re- 
 mit, abate, or pay back all such additional taxes in excess of 
 $100 for any single year whenever in any case it appears to 
 his satisfaction that the additional tax was assessed or im- 
 posed solely because of a neglect to make a return at the time 
 or times specified in said act, and without any intention or 
 design on the part of any officer of such corporation, joint- 
 stock company, association, or insurance company to hinder 
 or delay the United States in the collection of the tax original- 
 ly assessed."] 
 
 Sixth. When the assessment shall be made, as provided in 
 this section, the returns, together with any corrections there- 
 of which may have been made by the commissioner, shall be 
 filed in the office of the Commissioner of Internal Revenue, 
 and shall constitute public records and be open to public in- 
 spection as such. 
 
 (304)
 
 Appdx.) CORPORATION EXCISE TAX LAW OP 1909 
 
 [NOTE. This subdivision of the section was amended by 
 Act of Congress of June 17, 1910, Stat. at L, 2d Sess. 61st 
 Cong. 494, chap. 297, by adding the following words "That 
 any and all such returns shall be open to inspection only upon 
 the order of the President, under rules and regulations to be 
 prescribed by the Secretary of the Treasury and approved by 
 the President."] 
 
 Seventh. It shall be unlawful for any collector, deputy 
 collector, agent, clerk, or other officer or employee of the 
 United States to divulge or make known in any manner what- 
 ever not provided by law to any person any information ob- 
 tained by him in the discharge of his official duty, or to divulge 
 or make known in any manner not provided by law any docu- 
 ment received, evidence taken, or report made under this sec- 
 tion except upon the special direction of the President; and 
 any offense against the foregoing provision shall be a mis- 
 demeanor and be punished by a fine not exceeding one thou- 
 sand dollars, or by imprisonment not exceeding one year, or 
 both, at the discretion of the court. 
 
 Eighth. If any of the corporations, joint stock companies 
 or associations, or insurance companies aforesaid, shall re- 
 fuse or neglect to make a return at the time or times herein- 
 before specified in each year, or shall render a false or fraudu- 
 lent return, such corporation, joint stock company or associa- 
 tion, or insurance company shall be liable to a penalty of not 
 less than one thousand dollars and not exceeding ten -thousand 
 dollars. 
 
 Any person authorized by law to make, render, sign, or 
 verify any return, who makes any false or fraudulent return, 
 or statement, with intent to defeat or evade the assessment 
 required by this section to be made, shall be guilty of a mis- 
 demeanor, and shall be fined not exceeding one thousand dol- 
 lars or be imprisoned not exceeding one year, or both, at the 
 discretion of the court, with the costs of prosecution. 
 
 All laws relating to the collection, remission, and refund 
 BL.INC.TAX. 20 (305)
 
 INCOME TAXATION (Appdx. 
 
 of internal-revenue taxes, so far as applicable to and not in- 
 consistent with the provisions of this section, are hereby ex- 
 tended and made applicable to the tax imposed by this section. 
 Jurisdiction is hereby conferred upon the circuit and dis- 
 trict courts of the United States for the district within which 
 any person summoned under this section to appear to testify 
 or to produce books as aforesaid, shall reside, to compel such 
 attendance, production of books, and testimony by appropri- 
 ate process. 
 
 FEDERAL INCOME TAX LAW OF 1894 
 
 Act of Congress, August 27, 1894, 28 Stat. 509, c. 349 
 
 Section 27. That from and after the first day of Janu- 
 ary, eighteen hundred and ninety-five, and until the first day 
 of January, nineteen hundred, there shall be assessed, lev- 
 ied, collected and paid annually upon the gains, profits, and 
 income received in the preceding calendar year by every 
 citizen of the United States, whether residing at home or 
 abroad, and every person residing therein, whether said 
 gains, profits, or income be derived from any kind of prop- 
 erty, rents, interest, dividends, or salaries, or from any pro- 
 fession, trade, employment, or vocation carried on in the 
 United States or elsewhere, or from any other source what- 
 ever, a tax of two per centum on the amount so derived 
 over and above four thousand dollars, and a like tax shall 
 be levied, collected, and paid annually upon the gains, prof- 
 its, and income from all property owned and of every busi- 
 ness, trade, or profession carried on in the United States by 
 persons residing without the United States. And the tax 
 herein provided for shall be assessed by the Commissioner 
 of Internal Revenue, and collected and paid, upon the gains, 
 profits, and income for the year ending the thirty-first day 
 of December next preceding the time for levying, collecting, 
 and paying said tax. 
 (306)
 
 Appdx.) INCOME TAX LAW OF 1894 
 
 Section 28. That in estimating the gains, profits,, and 
 income of any person there shall be included all income de- 
 rived from interest upon notes, bonds, and other securities, 
 except such bonds of the United States the principal and 
 interest of which are by the law of their issuance exempt 
 from all federal taxation; profits realized within the year 
 from sales of real estate purchased within two years pre- 
 vious to the close of the year for which income is estimated ; 
 interest received or accrued upon all notes, bonds, mort- 
 gages, and other forms of indebtedness bearing interest, 
 whether paid or not, if good and collectible, less the interest 
 which has become due from said person or which has been 
 paid by him during the year; the amount of all premium 
 on all bonds, notes, or coupons ; the amount of sales of 
 live stock, sugar, cotton, wool, butter, cheese, pork, beef, 
 mutton, or other meats, hay', and grain, or other vegetable 
 or other productions, being the growth or produce of the 
 estate of such person, less the amount expended in the pur- 
 chase or production of said stock or produce, and not in- 
 cluding any part thereof consumed directly by the family; 
 money and the value of all personal property acquired by 
 gift or inheritance; all other gains, profits, and income de- 
 rived from any source whatever, except that portion of the 
 salary, compensation or pay received for services in the 
 civil, military, naval, or other service of the United States, 
 including senators, representatives, and delegates in Con- 
 gress, from which the tax has been deducted, and except 
 that portion of any salary upon which the employer is re- 
 quired by law to withhold, and does withhold, the tax and 
 pays the same to the officer authorized to receive it. In 
 computing incomes the necessary expenses actually in- 
 curred in carrying on any business, occupation, or profession 
 shall be deducted and also all interest due or paid within 
 the year by such person on existing indebtedness. And all 
 national, state, county, school, and municipal taxes, not in- 
 
 (307)
 
 INCOME TAXATION (Appdx. 
 
 eluding those assessed against local benefits, paid within 
 the year shall be deducted from the gains, profits, or income 
 of the person who has actually paid the same, whether such 
 person be owner, tenant, or mortgagor; also losses actual- 
 ly sustained during the year, incurred in trade or arising 
 from fires, storms, or shipwreck, and not compensated for 
 by insurance or otherwise, and debts ascertained to be 
 worthless, but excluding all estimated depreciation of values 
 and losses within the year on sales of real estate purchased 
 within two years previous to the year for which income is 
 estimated: Provided, that no deduction shall be made for 
 any amount paid out for new buildings, permanent improve- 
 ments, or betterments, made to increase the value of any 
 property or estate : Provided, further, that only one de- 
 duction of four thousand dollars shall be made from the ag- 
 gregate income of all the members of any family, composed 
 of one or both parents, and one or more minor children, or 
 husband and wife ; that guardians shall be allowed to make 
 a deduction in favor of each and every ward, except that 
 in case where two or more wards are comprised in one 
 family, and have joint property interests, the aggregate de- 
 duction in their favor shall not exceed four thousand dol- 
 lars : and provided further, that in case where the salary or 
 other compensation paid to any person in the employment 
 or service of the United States shall not exceed the rate of 
 four thousand dollars per annum, or shall be by fees, or un- 
 certain or irregular in the amount or in the time during 
 which the same shall have accrued or been earned, such 
 salary or other compensation shall be included in estimating 
 the annual gains, profits, or income of the person to whom 
 the same shall have been paid, and shall include that por- 
 tion of any income or salary upon which a tax has not been 
 paid by the employer, where the employer is required by law 
 to pay on the excess over four thousand dollars: Provided 
 also, that in computing the income of any person, corpora- 
 
 (308)
 
 Appdx.) INCOME TAX LAW OF 1894 
 
 tion, company, or association, there shall not be included the 
 amount received from any corporation, company, or asso- 
 ciation as dividends upon the stock of such corporation, 
 company, or association, if the tax of two per centum has 
 been paid upon its net profits by said corporation, com- 
 pany, or association as required by this act. 
 
 Section 29. That it shall be the duty of all persons of 
 lawful age having an income of more than three thousand 
 five hundred dollars for the taxable year, computed on the 
 basis herein prescribed, to make and render a list or return, 
 on or before the day provided by law, in such form and man- 
 ner as may be directed by the Commissioner of Internal 
 Revenue, with the approval of the Secretary of the Treas- 
 ury, to the collector or a deputy collector of the district in 
 which they reside, of the amount of their income, gains, and 
 profits, as aforesaid ; and all guardians and trustees, exec- 
 utors, administrators, agents, receivers, and all persons or 
 corporations acting in any fiduciary capacity shall make and 
 render a list or return, as aforesaid, to the collector or a 
 deputy collector of the district in which such person or cor- 
 poration acting in a fiduciary capacity resides or does busi- 
 ness, of the amount of income, gains, and profits of any 
 minor or person for whom they act, but persons having less 
 than three thousand five hundred dollars income are not re- 
 quired to make such report; and the collector or deputy col- 
 lector shall require every list or return to be verified by the 
 oath or affirmation of the party rendering it, and may increase 
 the amount of any list or return if he has reason to believe that 
 the same is understated ; and in case any such person having a 
 taxable income shall neglect or refuse to make and render such 
 list and return, or shall render a wilfully false or fraudulent 
 list or return, it shall be the duty of the collector or deputy 
 collector to make such list according to the best information 
 he can obtain, by the examination of such person, or any 
 other evidence, and to add fifty per centum as a penalty to 
 
 (309)
 
 INCOME TAXATION (Appdx. 
 
 the amount of the tax due on such list in all cases of wilfull 
 neglect or refusal to make and render a list or return ; and 
 in all cases of a wilfully false or fraudulent list or return 
 having been rendered to add one hundred per centum as a 
 penalty to the amount of tax ascertained to be due, the tax 
 and the additions thereto as a penalty to be assessed and 
 collected in the manner provided for in other cases of will- 
 ful neglect or refusal to render a list or return, or of render- 
 ing a false or fraudulent return. Provided, that any person 
 or corporation in his, her, or its own behalf, or as such fidu- 
 ciary, shall be permitted to declare, under oath or affirma- 
 tion, the form and manner of which shall be prescribed by 
 the Commissioner of Internal Revenue, with the approval 
 of the Secretary of the Treasury, that he, she, or his or 
 her, or its ward or beneficiary, was not possessed of an in- 
 come of four thousand dollars, liable to be assessed accord- 
 ing to the provisions of this act; or may declare that he, 
 she, or it, or his, her, or its ward or beneficiary has been 
 assessed and has paid an income tax elsewhere in the same 
 year, under authority of the United States, upon all his, her, 
 or its income, gains, or profits, and upon all the income, 
 gains, or profits for which he, she, or it is liable as such 
 fiduciary, as prescribed by law ; and if the collector or dep- 
 uty collector shall be satisfied of the truth of the declara- 
 tion, such person or corporation shall thereupon be exempt 
 from income tax in the said district for that year ; or if the 
 list or return of any person or corporation, company, or as- 
 sociation shall have been increased by the collector or dep- 
 uty collector, such person or corporation, company, or as- 
 sociation may be permitted to prove the amount of income 
 liable to be assessed; but such proof shall not be consid- 
 ered conclusive of the facts, and no deductions claimed in 
 such cases shall be made or allowed until approved by the 
 collector or deputy collector. Any person or company, cor- 
 poration, or association feeling aggrieved by the decision 
 
 (310)
 
 Appdx.) INCOME TAX LAW OF 1894 
 
 of the deputy collector, in such cases, may appeal to the col- 
 lector of the district, and his decision thereon, unless revers- 
 ed by the Commissioner of Internal Revenue, shall be final. 
 If dissatisfied with the decision of the collector, such person 
 or corporation, company, or association may submit the 
 case, with all the papers, to the Commissioner of Internal 
 Revenue for his decision, and may furnish the testimony of 
 witnesses to prove any relevant facts, having served notice 
 to that effect upon the Commissioner of Internal Revenue, 
 as herein prescribed. 
 
 Such notice shall state the time and place at which, and 
 the officer before whom, the testimony will be taken; the 
 name, age, residence, and business of the proposed witness, 
 with the questions to be propounded to the witness, or a 
 brief statement of the substance of the testimony he is ex- 
 pected to give : Provided, that the Government may at the 
 same time and place take testimony upon like notice to re- 
 but the testimony of the witnesses examined by the person 
 taxed. 
 
 The notice shall be delivered or mailed to the Commis- 
 sioner of Internal Revenue a sufficient number of days pre- 
 vious to the day fixed for taking the testimony, to allow 
 him, after its receipt, at least five days, exclusive of the 
 period required for mail communication with the place at 
 which the testimony is to be taken, in which to give, should 
 he so desire, instructions as to the cross-examination of the 
 proposed witness. 
 
 Whenever practicable, the affidavit or deposition shall 
 be taken before a collector or deputy collector of internal 
 revenue, in which case reasonable notice shall be given to 
 the collector or deputy collector of the time fixed for tak- 
 ing the deposition or affidavit: Provided further, that no 
 penalty shall be assessed upon any person or corporation, 
 company, or association for such neglect or refusal or for 
 making or rendering a willfully false or fraudulent return, 
 
 (311)
 
 INCOME TAXATION (Appdx. 
 
 except after reasonable notice of the time and place of hear- 
 ing, to be prescribed by the Commissioner of Internal Rev- 
 enue, so as to give the person charged an opportunity to 
 be heard. 
 
 Section 30. The taxes on incomes herein imposed shall 
 be due and payable on or before the first day of July in 
 each year; and to any sum or sums annually due and un- 
 paid after the first day of July as aforesaid, and for ten days 
 after notice and demand thereof by the collector, there 
 shall be levied, in addition thereto, the sum of five per 
 centum on the amount of taxes unpaid, and interest at the 
 rate of one per centum per month upon said tax from the 
 time the same becomes due, as a penalty, except from the 
 estates of deceased, insane, or insolvent persons. 
 
 Section 31. Any non-resident may receive the benefit of 
 the exemptions hereinbefore provided for by filing with the 
 deputy collector of any district a true list of all his property 
 and sources of income in the United States and complying 
 with the provisions of section twenty-nine of this act as if 
 a resident. In computing income, he shall include all in- 
 come from every source, but unless he be a citizen of the 
 United States, he shall only pay on that part of the income 
 which is derived from any source in the United States. In 
 case such non-resident fails to file such statement, the col- 
 lector of each district shall collect the tax on the income de- 
 rived from property situate in his district, subject to in- 
 come tax, making no allowance for exemptions, and all 
 property belonging to such non-resident shall be liable to 
 distraint for tax: Provided, that non-resident corporations 
 shall be subject to the same laws as to tax as resident cor- 
 porations, and the collection of the tax shall be made in the 
 same manner as provided for collections of taxes against 
 non-resident persons. 
 
 Section 32. That there shall be assessed, levied, and 
 collected, except as herein otherwise provided, a tax of 
 
 (312)
 
 Appdx.) INCOME TAX LAW OF 1894 
 
 two per centum annually on the net profits or income above 
 actual operating and business expenses, including expenses 
 for materials purchased for manufacture or bought for re- 
 sale, losses, and interest on bonded and other indebtedness, 
 of all banks, banking institutions, trust companies, savings 
 institutions, fire, marine, life, and other insurance compan- 
 ies, railroad, canal, turnpike, canal navigation, slack wa- 
 ter, telephone, telegraph, express, electric light, gas, water, 
 street railway companies, and all other corporations, com- 
 panies, or associations doing business for profit in the 
 United States, no matter how created and organized, but 
 not including partnerships. 
 
 That said tax shall be paid on or before the first day of 
 July in each year; and if the president or other chief officer 
 of any corporation, company, or association, or in the case 
 of any foreign corporation, company, or association, the 
 resident manager or agent, shall neglect or refuse to file 
 with the collector of the internal revenue district in which 
 said corporation, company, or association shall be located 
 or be engaged in business, a statement verified by his oath 
 or affirmation, in such form as shall be prescribed by the 
 Commissioner of Internal Revenue, with the approval of 
 the Secretary of the Treasury, showing the amount of net 
 profits or income received by said corporation, company, or 
 association during the whole calendar year last preceding 
 the date of filing said statement as hereinafter required, the 
 corporation, company, or association making default shall 
 forfeit as a penalty the sum of one thousand dollars and 
 two per centum on the amount of taxes due, for each month 
 until the same is paid, the payment of said penalty to be 
 enforced as provided in other cases of neglect and refusal 
 to make return of taxes under the internal revenue laws. 
 
 The net profits or income of all corporations, companies, 
 or associations shall include the amounts paid to share- 
 holders, or carried to the account of any fund, or used for 
 
 (313)
 
 INCOME TAXATION (Appdx. 
 
 construction, enlargement of plant, or any other expendi- 
 ture or investment paid from the net annual profits made 
 or acquired by said corporations, companies, or associa- 
 tions. 
 
 That nothing herein contained shall apply to states, 
 counties, or municipalities; nor to corporations, compan- 
 ies, or associations organized and conducted solely for 
 charitable, religious, or educational purposes, including 
 fraternal beneficiary societies, orders, or associations op- 
 erating upon the lodge system and providing for the pay- 
 ment of life, sick, accident, and other benefits to the mem- 
 bers of such societies, orders, or associations and depend- 
 ents of such members; nor to the stocks, shares, funds, or 
 securities held by any fiduciary or trustee for charitable, 
 religious, or educational purposes; nor to building and loan 
 associations or companies which make loans only to their 
 shareholders ; nor to such savings banks, savings institu- 
 tions or societies as shall, first, have no stockholders or 
 members except depositors and no capital except deposits ; 
 secondly, shall not receive deposits to an aggregate 
 amount, in any one year, of more than one thousand dol- 
 lars from the same depositor; thirdly, shall not allow an 
 accumulation or total of deposits, by any one depositor, 
 exceeding ten thousand dollars; fourthly, shall actually 
 divide and distribute to its depositors, ratably to deposits, 
 all the earnings over the necessary and proper expenses of 
 such bank, institution, or society, except such as shall be 
 applied to surplus; fifthly, shall not possess, in any form, 
 a surplus fund exceeding ten per centum of its aggregate de- 
 posits; nor to such savings banks, savings institutions, or 
 societies composed of members who do not participate in 
 the profits thereof and which pay interest or dividends 
 only to their depositors; nor to that part of the business 
 of any savings bank, institution, or other similar associa- 
 tion having a capital stock that is conducted on the mutual 
 (314)
 
 Appdx.) INCOME TAX LAW OF 1894 
 
 plan solely for the benefit of its depositors on such plan, 
 and which shall keep its accounts or its business conducted 
 on such mutual plan separate and apart from its other 
 accounts. 
 
 Nor to any insurance company or association which con- 
 ducts all its business solely upon the mutual plan, and only 
 for the benefit of its policy holders or members, and having 
 no capital stock and no stock or shareholders, and holding 
 all its property in trust and in reserve for its policy hold- 
 ers or members; nor to that part of the business of any 
 insurance company having a capital stock and stock and 
 shareholders, which is conducted on the mutual plan, 
 separate from its stock plan of insurance, and solely for 
 the benefit of the policy holders and members insured on said 
 mutual plan, and holding all the property belonging to and 
 derived from said mutual part of its business in trust and 
 reserve for the benefit of its policy holders and members 
 insured on said mutual plan. 
 
 That all state, county, municipal, and town taxes paid 
 by corporations, companies, or associations, shall be in- 
 cluded in the operating and business expenses of such cor- 
 porations, companies, or associations. 
 
 Section 33. That there shall be levied, collected, and 
 paid on all salaries of officers, or payments for services to 
 persons in the civil, military, naval, or other employment 
 or service of the United States, including senators and rep- 
 resentatives and delegates in congress, when exceeding the 
 rate of four thousand dollars per annum, a tax of two per 
 centum on the excess above the said four thousand dollars ; 
 and it shall be the duty of all paymasters and all disburs- 
 ing officers under the government of the United States, or 
 persons in the employ thereof, when making any payment 
 to any officers or persons as aforesaid, whose compensation 
 is determined by a fixed salary, or upon the settling or ad- 
 justing the accounts of such officers or persons, to deduct 
 
 (315)
 
 INCOME TAXATION (Appdx. 
 
 and withhold the aforesaid tax of two per centum; and 
 the pay roll, receipts, or account of officers or persons pay- 
 ing such tax as aforesaid shall be made to exhibit the fact 
 of such payment. And it shall be the duty of the account- 
 ing officers of the treasury department, when auditing the 
 accounts of any paymaster or disbursing officer, or any 
 officer withholding his salary from moneys received by 
 him, or when settling or adjusting the accounts of any such 
 officer, to require evidence that the taxes mentioned in 
 this section have been deducted and paid over to the Treas- 
 urer of the United States, or other officer authorized to re- 
 ceive the same. Every corporation which pays to any em- 
 ploy6 a salary or compensation exceeding four thousand 
 dollars per annum shall report the same to the collector or 
 deputy collector of his district and said employ^ shall pay 
 thereon, subject to the exemptions herein provided for, the 
 tax of two per centum on the excess of his salary over four 
 thousand dollars ; Provided that salaries due to state, coun- 
 ty, or municipal officers shall be exempt from the income 
 tax herein levied. 
 
 Section 34. That sections thirty-one hundred and sixty-sev- 
 en, thirty-one hundred and seventy-two, thirty-one hundred 
 and seventy-three, and thirty-one hundred and seventy-six of 
 the Revised Statutes of the United States as amended are 
 hereby amended so as to read as follows : 
 
 Section 3167. That it shall be unlawful for any collector, 
 deputy collector, agent, clerk or other officer or employe of 
 the United States to divulge or to make known in any manner 
 whatever not provided by law to any person the operations, 
 style of work or apparatus of any manufacturer or producer 
 visited by him in the discharge of his official duties, or the 
 amount or source of income, profits, losses, expenditures, or 
 any particular thereof, set forth or disclosed in any income 
 return by any person or corporation, or to permit any income 
 return or copy thereof or any book containing any abstract or 
 
 (316)
 
 Appdx.) INCOME TAX LAW OF 1894 
 
 particulars thereof, to be seen or examined by any person ex- 
 cept as provided by law; and it shall be unlawful for any 
 person to print or publish in any manner whatever not pro- 
 vided by law any income return or any part thereof or the 
 amount or source of income, profits, losses, or expenditures 
 appearing in any income return; and any offense against 
 the foregoing provision shall be a misdemeanor and be pun- 
 ished by a fine not exceeding one thousand dollars or by im- 
 prisonment not exceeding one year, or both, at the discretion 
 of the court; and if the offender be an officer or employe of 
 the United States he shall be dismissed from office and be 
 incapable thereafter of holding any office under the Govern- 
 ment. 
 
 Section 3172. That every collector shall, from time to time, 
 cause his deputies to proceed through every part of his dis- 
 trict 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 management of any objects lia- 
 ble to pay any tax, and to make a list of such persons and 
 enumerate said objects. 
 
 Section 3173. It shall be the duty of any person, partner- 
 ship, firm, association, or corporation, made liable to any duty, 
 special tax, or other tax imposed by law, when not otherwise 
 provided for, in case of a special tax, on or before the thirty- 
 first day of July in each year, in case of income tax on or 
 before the first Monday of March in each year, and in other 
 cases before the day on which the taxes accrue, to make a 
 list or return, verified by oath or affirmation, to the collector 
 or a deputy collector of the district where located, of the 
 articles or objects, including the amount of annual income 
 charged with a duty or tax, the quantity of goods, wares, and 
 merchandise made or sold and charged with a tax, the several 
 rates and aggregate amount, according to the forms and reg- 
 ulations to be prescribed by the Commissioner of Internal 
 Revenue, with the approval of the Secretary of the Treasury, 
 
 (317)
 
 INCOME TAXATION (Appdx. 
 
 for which such person, partnership, firm, association, or cor- 
 poration is liable : Provided that if any person liable to pay 
 any duty or tax, or owning, possessing, or having the care 
 or management of property, goods, wares, and merchandise, 
 articles or objects liable to pay any duty, tax, or license, shall 
 fail to make and exhibit a list or return required by law, but 
 shall consent to disclose the particulars of any and all the 
 property, goods, wares, and merchandise, articles, and ob- 
 jects liable to pay any duty or tax, or any business or occupa- 
 tion 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, con- 
 sented to, and signed and verified by oath or affirmation by the 
 person so owning, possessing, or having the care and manage- 
 ment 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 col- 
 lector as required by law, and the person shall be absent from 
 his or her residence or place of business at the time the col- 
 lector or a deputy collector shall call for the annual list or 
 return, it shall be the duty of such collector or deputy col- 
 lector 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 mem- 
 orandum 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 or affirmation. 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 de- 
 liver 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 false or fraudulent, or con- 
 tains any undervaluation or understatement, it shall be lawful 
 
 (318)
 
 Appdx.) INCOME TAX LAW OF 1894 
 
 for the collector to summon such person, or any other per- 
 son 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 answer interrogatories, 
 under oath, respecting any objects liable to tax or the re- 
 turns thereof. The collector may summon any person resid- 
 ing or found within the state in which his district lies; and 
 when the person intended to be summoned does not reside and 
 cannot be found within such state, 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. 
 
 Section 3176. When any person, corporation, company, or 
 association refuses or neglects to render any return or list 
 required by law, or renders a false or fraudulent return or 
 list, the collector or any deputy collector shall make, accord- 
 ing to the best information which he can obtain, including 
 that derived from the evidence elicited by the examination of 
 the collector, and on his own view and information, such list 
 or return, according to the form prescribed, of the income, 
 property, and objects liable to tax owned or possessed or under 
 the care or management of such person or corporation, com- 
 pany or association, and the Commissioner of Internal Rev- 
 enue shall assess all taxes not paid by stamps, including the 
 amount, if any, due for special tax, income or other tax, and 
 in case of any return of a false or fraudulent list or valuation 
 intentionally he shall add one hundred per centum to such tax ; 
 and in case of a refusal or neglect, except in cases of sickness 
 or absence, to make a list or return, or to verify the same as 
 aforesaid, he shall add fifty per centum to such tax. In case 
 of neglect occasioned by sickness or absence as aforesaid the 
 collector may allow such further time for making and deliver- 
 
 (339)
 
 INCOME TAXATION (Appdx. 
 
 ing such list or return as he may deem necessary, not exceed- 
 ing thirty days. The amount so added to the tax shall be 
 collected at the same time and in the same manner as the 
 tax, unless the neglect or falsity is discovered after the tax has 
 been paid, in which case the amount so added shall be col- 
 lected in the same manner as the tax; and the list or return 
 so made and subscribed by such collector or deputy collector 
 shall be held prima facie good and sufficient for all legal pur- 
 poses. 
 
 Section 35. That every corporation, company, or associa- 
 tion doing business for a profit shall make and render to the 
 collector of its collection district, on or before the first Mon- 
 day of March in every year, beginning with the year eighteen 
 hundred and ninety-five, a full return, verified by oath or 
 affirmation, in such form as the Commissioner of Internal 
 Revenue shall prescribe, of all the following matters for the 
 whole calendar year last preceding the date of such return : 
 
 First. The gross profits of such corporation, company, or 
 association from all kinds of business of every name and na- 
 ture. 
 
 Second. The expenses of such corporation, company, or as- 
 sociation, exclusive of interest, annuities, and dividends. 
 
 Third. The net profits of such corporation, company, or 
 association, without allowance for interest, annuities, or divi- 
 dends. 
 
 Fourth. The amount paid on account of interest, annuities, 
 and dividends, stated separately. 
 
 Fifth. The amount paid in salaries of four thousand dollars 
 or less to each person employed. 
 
 Sixth. The amount paid in salaries of more than four 
 thousand dollars to each person employed and the name and 
 address of each of such persons and the amount paid to each. 
 
 Section 36. That it shall be the duty of every corporation, 
 company, or association doing business for profit to keep full, 
 regular, and accurate books of account, upon which all its 
 
 (320)
 
 Appdx.) INCOME TAX LAW OF 1894 
 
 transactions shall be entered from day to day, in regular or- 
 der, and whenever a collector or deputy collector of the dis- 
 trict in which any corporation, company, or association is as- 
 sessable shall believe that a true and correct return of the 
 income of such corporation, company, or association has not 
 been made, he shall make an affidavit of such belief and of 
 the grounds upon which it is founded, and file the same with 
 the Commissioner of Internal Revenue, and if said Commis- 
 sioner shall, on examination thereof, and after full hearing 
 upon notice given to all parties, conclude there is good ground 
 for such belief, he shall issue a. request in writing to such cor- 
 poration, company, or association to permit an inspection of 
 the books of such corporation, company, or association to 
 be made; and if such corporation, company, or association 
 shall refuse to comply with such request, then the collector or 
 deputy collector of the district shall make from such informa- 
 tion as he can obtain an estimate of the amount of such in- 
 come, and then add fifty per centum thereto, which said as- 
 sessment so made shall then be the lawful assessment of such 
 income. 
 
 Section 37. That it shall be the duty of every collector of 
 internal revenue, to whom any payment of any tax other 
 than the tax represented by an adhesive stamp or other en- 
 graved stamp is made under the provisions of this act, to give 
 to the person making such payment a full written or printed 
 receipt, expressing the amount paid and the particular ac- 
 count for which such payment was made ; and whenever such 
 payment is made such collector shall, if required, give a sep- 
 arate receipt for each tax paid by any debtor, on account of 
 payments made to or to be made by him to separate creditors 
 in such form that such debtor can conveniently produce the 
 same separately to his several creditors in satisfaction of their 
 respective demands to the amounts specified in such receipts; 
 and such receipts shall be sufficient evidence in favor of such 
 debtor, to justify him in withholding the amount therein ex- 
 BL.INC.TAX. 21 (321)
 
 INCOME TAXATION (Appdx. 
 
 pressed from his next payment to his creditor; but such 
 creditor may, upon giving to his debtor a full written receipt, 
 acknowledging the payment to him of whatever sum may be 
 actually paid, and accepting the amount of tax paid as afore- 
 said (specifying the same) as a further satisfaction of the debt 
 to that amount, require the surrender to him of such collector's 
 receipt. 
 
 [NOTE. By a joint resolution of February 21, 1895 (28 
 Stat. 971), the time for making returns of income for the year 
 1894 was extended, and it was provided that, "in computing 
 incomes under said act the amounts necessarily paid for fire in- 
 surance premiums and for ordinary repairs shall be deducted ;" 
 and that "in computing incomes under said act the amounts 
 received as dividends upon the stock of any corporation, 
 company, or association shall not be included in case such divi- 
 dends are also liable to the tax of two per centum upon the net 
 profits of said corporation, company, or association, although 
 such tax may not have been actually paid by said corporation, 
 company, or association at the time of making returns by the 
 person, corporation, or association receiving such dividends, 
 and returns or reports of the names and salaries of employes 
 shall not be required from employers unless called for by the 
 collector in order to verify the returns of employes."] 
 
 (322)
 
 Appdx.) CIVIL WAE INCOME TAX ACTS OF CONGBESS 
 
 CIVIL WAR INCOME TAX ACTS OF CONGRESS 
 
 Act of Congress August 5, 1861, ch. 45, 49-51, 12 Stat. 
 309 
 
 Section 49. From and after the first day of January next, 
 there shall be levied, collected, and paid, upon the annual in- 
 come of every person residing within the United States, wheth- 
 er such income is derived from any kind of property, or from 
 any profession, trade, employment, or vocation carried on in 
 the United States or elsewhere, or from any other source what- 
 ever, if such annual income exceeds the sum of eight hundred 
 dollars, a tax of three per centum on the amount of such ex- 
 cess of such income above eight hundred dollars: Provided, 
 that upon such portion of said income as shall be derived from 
 interest upon treasury notes or other securities of the United 
 States, there shall be levied, collected, and paid a tax of one 
 and one-half per centum. Upon the income, rents, or divi- 
 dends accruing upon any property, securities, or stocks owned 
 in the United States by any citizen of the United States re- 
 siding abroad, there shall be levied, collected, and paid a tax 
 of five per centum, excepting that portion of said income de- 
 rived from interest on treasury notes or other securities of the 
 Government of the United States, which shall pay one and 
 one-half per centum. The tax herein provided shall be as- 
 sessed upon the annual income of the persons hereinafter 
 named for the year next preceding the time for assessing said 
 tax, to wit, the year next preceding the first of January, eight- 
 een hundred and sixty-two, and the said taxes, when so as- 
 sessed and made public, shall become a lien on the property 
 or other sources of said income for the amount of the same, 
 with the interest and other expenses of collection until paid: 
 Provided, that, in estimating said income, all national, state, or 
 
 (323)
 
 INCOME TAXATION (Appdx. 
 
 local taxes assessed upon the property, from which the in- 
 come is derived, shall be first deducted. 
 
 Section 50. It shall be the duty of the President of the 
 United States, and he is hereby authorized, by and with the 
 advice and consent of the Senate, to appoint one principal 
 assessor and one principal collector in each of the States and 
 Territories of the United States, and in the District of Colum- 
 bia, to assess and collect the internal duties or income tax 
 imposed by this act, with authority in each of said officers to 
 appoint so many assistants as the public service may require, 
 to be approved by the Secretary of the Treasury. The said 
 taxes to be assessed and collected under such regulations as 
 the Secretary of the Treasury may prescribe. The said col- 
 lectors, herein authorized to be appointed, shall give bonds, to 
 the satisfaction of the Secretary of the Treasury, in such sums 
 as he may prescribe, for the faithful performance of their 
 respective duties. And the Secretary of the Treasury shall 
 prescribe such reasonable compensation for the assessment and 
 collection of said internal duties or income tax as may appear 
 to him just and proper; not, however, to exceed in any case 
 the sum of two thousand five hundred dollars per annum 
 for the principal officers herein referred to, and twelve hun- 
 dred dollars per annum for an assistant. The assistant col- 
 lectors herein provided shall give bonds to the satisfaction of 
 the principal collector for the faithful performance of their 
 duties. The Secretary of the Treasury is further authorized 
 to select and appoint one or more depositaries in each State 
 for the deposit and safe-keeping of the moneys arising from 
 the taxes herein imposed when collected, and the receipt of 
 the proper officer of such depository to the collector for the 
 moneys deposited by him shall be the proper voucher for such 
 collector in the settlement of his account at the Treasury De- 
 partment. And he is further authorized and empowered to 
 make such officer or depositary the disbursing agent of the 
 Treasury for the payment of all interest due to the citizens 
 
 (324)
 
 Appdx.) CIVIL WAR INCOME TAX ACTS OF CONGRESS 
 
 of such State upon the treasury notes or other government 
 securities issued by authority of law. And he shall also pre- 
 scribe the forms of returns to be made to the department by 
 all assessors and collectors appointed under the authority of 
 this act. He shall also prescribe the form of oath or obliga- 
 tion to be taken by the several officers authorized or directed 
 to be appointed and commissioned by the President under this 
 act, before a competent magistrate duly authorized to admin- 
 ister oaths, and the form of the return to be made thereon to 
 the Treasury Department. 
 
 Section 51. The tax herein imposed by the forty-ninth sec- 
 tion of this act shall be due and payable on or before the 
 thirtieth day of June in the year 1862, and all sums due and 
 unpaid at that day shall draw interest thereafter at the rate 
 of six per centum per annum; and if any person or persons 
 shall neglect or refuse to pay after due notice said tax assessed 
 against him, her, or them, for the space of more than thirty 
 days after the same is due and payable, it shall be lawful for 
 any collector or assistant collector charged with the duty of 
 collecting said tax, and they are hereby authorized, to levy the 
 same on the visible property of any such person, or so much 
 thereof as may be sufficient to pay such tax with the interest 
 due thereon and the expenses incident to such levy and sale, 
 first giving thirty days' public notice of the time and place of 
 the sale thereof ; and in case of the failure of any person or 
 persons authorized to act as agent or agents for the collection 
 of the rents or other income of any person residing abroad 
 shall neglect or refuse to pay the tax assessed thereon (hav- 
 ing had due notice) for more than thirty days after the thir- 
 tieth of June, 1862, the collector or his assistant, for the dis- 
 trict where such property is located, or rents or income is 
 payable, shall be and is hereby authorized to levy upon the 
 property itself, and to sell the same, or so much thereof as 
 may be necessary to pay the tax assessed, together with the 
 interest and expenses incident to such levy and sale, first giv- 
 
 (325)
 
 INCOME TAXATION (Appdx. 
 
 ing thirty days' public notice of the time and place of sale. 
 And in all cases of the sale of property herein authorized, the 
 conveyance by the officer authorized to make the sale, duly ex- 
 ecuted, shall give a valid title to the purchaser, whether the 
 property sold shall be real or personal. And the several col- 
 lectors and assistants appointed under the authority of this 
 act may, if they find no property to satisfy the taxes assessed 
 upon any person by authority of the forty-ninth section of 
 this act, and which such person neglects to pay as hereinbe- 
 fore provided, shall have power, and it shall be their duty, to 
 examine under oath the person assessed under this act, or any 
 other person, and may sell at public auction, after ten days' 
 notice, any stock, bonds, or choses in action, belonging to said 
 person, or so much thereof as will pay such tax and the ex- 
 penses of such sale ; and in case he refuses to testify, the said 
 several collectors and assistants shall have power to arrest 
 such person and commit him to prison, to be held in custody 
 until the same shall be paid, with interest thereon at the rate 
 of six per centum per annum, from the time when the same 
 was payable as aforesaid, and all fees and charges of such 
 commitment and custody. And the place of custody shall in 
 all cases be the same provided by law for the custody of per- 
 sons committed for any cause by the authority of the United 
 States, and the warrant of the collector, stating the cause of 
 commitment, shall be sufficient authority to the proper officer 
 for receiving and keeping such person in custody until the 
 amount of said tax and interest, and all fees and the expense 
 of such custody, shall have been fully paid and discharged; 
 which fees and expenses shall be the same as are chargeable 
 under the laws of the United States in other cases of commit- 
 ment and custody. And it shall be the duty of such collector 
 to pay the expenses of such custody, and the same, with his 
 fees, shall be allowed on settlement of his accounts. And the 
 person so committed shall have the same right to be discharged 
 from such custody as may be allowed by the laws of the State 
 
 (326)
 
 Appdx.) CIVIL WAR INCOME TAX ACTS OF CONGEE8S 
 
 or Territory, or the District of Columbia, where he is so held 
 in custody, to persons committed under the laws of such State 
 or Territory, or District of Columbia, for the non-payment of 
 taxes, and in the manner provided by such laws ; or he may be 
 discharged at any time by order of the Secretary of the Treas- 
 ury. 
 
 Act of Congress July 1, 1862, ch. 119, 89-93, 12 Stat. 
 432, 473 
 
 Sec. 89. And be it further enacted, that for the purpose 
 of modifying and re-enacting, as hereinafter provided, so 
 much of an act, entitled "An act to provide increased reve- 
 nue from imports to pay interest on the public debt, and for 
 other purposes," approved fifth of August, eighteen hundred 
 and sixty-one, as relates to income tax; that is to say, sec- 
 tions forty-nine, fifty (except so much as relates to the se- 
 lection and appointment of depositaries) and fifty-one, be, 
 and the same are hereby, repealed. 
 
 Sec. 90. ' And be it further enacted, That there shall be 
 levied, collected, and paid annually, upon the annual gains, 
 profits, or income of every person residing within the Unit- 
 ed States, whether derived from any kind of property, 
 rents, interest, dividends, salaries, or from any profession, 
 trade, employment, or vocation carried on in the United 
 States or elsewhere, or from any other source whatever, ex- 
 cept as hereinafter mentioned, if such annual gains, profits, 
 or income exceed the sum of six hundred dollars, and do not 
 exceed the sum of ten thousand dollars, a duty of three per 
 centum on the amount of such annual gains, profits, or in- 
 come over and above the said sum of six hundred dollars ; 
 if said income exceeds the sum of ten thousand dollars, a 
 duty of five per centum upon the amount thereof exceeding 
 six hundred dollars; and upon the annual gains, profits, or 
 income, rents, and dividends accruing upon any property, 
 securities, and stocks owned in the United States by any 
 
 (327)
 
 INCOME TAXATION (Appdx. 
 
 citizen of the United States residing abroad, except as here- 
 inafter mentioned, and not in the employment of the govern- 
 ment of the United States, there shall be levied, collected, 
 and paid a duty of five per centum. 
 
 Sec. 91. And be it further enacted that in estimating 
 said annual gains, profits, or income, whether subject to a 
 duty, as provided in this act, of three per centum or of five 
 per centum, all other national, state, and local taxes, law- 
 fully assessed upon the property or other sources of income 
 of any person as aforesaid, from which said annual gains, 
 profits, or income of such person is or should be derived, 
 shall be first deducted from the gains, profits, or income of 
 the person or persons, who actually pay the same, whether 
 owner or tenant, and all gains, profits, or income derived 
 from salaries of officers, or payments to persons in the civil, 
 military, naval, or other service of the United States, in- 
 cluding senators, representatives, and delegates in Congress, 
 above six hundred dollars, or derived from interest or divi- 
 dends on stock, capital, or deposits in any bank, trust com- 
 pany, or savings institution, insurance, gas, bridge, express, 
 telegraph, steamboat, ferry-boat, or railroad company or cor- 
 poration, or on any bonds or other evidences of indebtedness 
 of any railroad company or other corporation, which shall 
 have been assessed and paid by said banks, trust companies, 
 savings institutions, insurance, gas, bridge, telegraph, steam- 
 boat, ferry-boat, express, or railroad companies, as aforesaid, 
 or derived from advertisements, or on any articles manufac- 
 tured, upon which specific, stamp or ad valorem duties shall 
 have been directly assessed or paid, shall also be deducted ; 
 and the duty hereinbefore provided for shall be assessed and 
 collected upon the income for the year ending the thirty- 
 first day of December next preceding the time for levying 
 and collecting said duty, that is to say, on the first day of 
 May, eighteen hundred and sixty-three, and in each year 
 thereafter : Provided, that upon such portion of said gains, 
 
 (328)
 
 Appdx.) CIVIL WAR INCOME TAX ACTS OF CONGBESS 
 
 profits, or income, whether subject to a duty as provided in 
 this act of three per centum or of five per centum, which 
 shall be derived from interest upon notes, bonds, or other 
 securities of the United States, there shall be levied, collect- 
 ed, and paid a duty not exceeding one and one-half of one 
 per centum, anything in this act to the contrary notwith- 
 standing. 
 
 Sec. 92. And be it further enacted, That the duties on 
 incomes herein imposed shall be due and payable on or be- 
 fore the thirtieth day of June, in the year eighteen hundred 
 and sixty-three, and in each year thereafter until and includ- 
 ing the year eighteen hundred and sixty-six and no longer; 
 and to any sum or sums annually due and unpaid for thirty 
 days after the thirtieth of June as aforesaid, and for ten days 
 after demand thereof by the collector, there shall be levied 
 in addition thereto the sum of five per centum on the amount 
 of duties unpaid, as a penalty, except from the estates of de- 
 ceased and insolvent persons ; and if any person or persons, 
 or party, liable to pay such duty, shall neglect or refuse to 
 pay the same, the amount due shall be a lien in favor of the 
 United States from the time it was so due until paid, with 
 the interest, penalties, and costs that may accrue in addition 
 thereto, upon all the property, and rights to property, stocks, 
 securities, and debts of every description from which the in- 
 come upon which said duty is assessed or levied shall have 
 accrued, or may or should accrue; and in default of the pay- 
 ment of said duty for the space of thirty days, after the same 
 shall have become due, and be demanded, as aforesaid, said 
 lien may be enforced by distraint upon such property, rights 
 to property, stocks, securities, and evidences of debt, by 
 whomsoever holden; and for this purpose the Commissioner 
 of Internal Revenue, upon the certificate of the collector or 
 deputy collector that said duty is due and unpaid for the 
 space of ten days after notice duly given of the levy of such 
 duty, shall issue a warrant in form and manner to be pre- 
 
 (329)
 
 INCOME TAXATION (Appdx. 
 
 scribed by said Commissioner of Internal Revenue, under 
 the directions of the Secretary of the Treasury, and by vir- 
 tue of such warrant there may be levied on such property, 
 rights to property, stocks, securities, and evidences of debt, 
 a further sum, to be fixed and stated in such warrant, over 
 and above the said annual duty, interest, and penalty for 
 non-payment, sufficient for the fees and expenses of such 
 levy. And in all cases of sale, as aforesaid, the certificate 
 of such sale by the collector or deputy collector of the sale, 
 shall give title to the purchaser, of all right, titlej and inter- 
 est of such delinquent in and to such property, whether the 
 property shall be real or personal ; and where the subject of 
 sale shall be stocks, the certificate of said sale shall be law- 
 ful authority and notice to the proper corporation, com- 
 pany, or association, to record the same on the books or 
 records, in the same manner as if transferred or assigned by 
 the person or party holding the same, to issue new certifi- 
 cates of stock therefor in lieu of any original or prior cer- 
 tificates, which shall be void whether cancelled or not; and 
 said certificate of sale of the collector or deputy collector, 
 where the subject of sale shall be securities or other evi- 
 dences of debt, shall be good and valid receipts to the per- 
 son or party holding the same, as against any person or per- 
 sons, or other party holding or claiming to hold possession 
 of such securities or other evidences of debt. 
 
 Sec. 93. And be it further enacted, That it shall be the 
 duty of all persons of lawful age, and of all guardians and 
 trustees, whether such trustees are so by virtue of their of- 
 fice as executors, administrators, or other fiduciary capacity, 
 to make return in the list or schedule, as provided in this 
 act, to the proper officer of internal revenue, of the amount 
 of his or her income, or the income of such minors or per- 
 sons as may be held in trust, as aforesaid, according to the 
 requirements hereinbefore stated, and in case of neglect or 
 refusal to make such return, the assessor or assistant asses- 
 
 (330)
 
 Appdx.) CIVIL WAB INCOME TAX ACTS OF CONGRESS 
 
 sor shall assess the amount of his or her income, and pro- 
 ceed thereafter to collect the duty thereon in the same man- 
 ner as is provided for in other cases of neglect and refusal 
 to furnish lists or schedules in the general provisions of this 
 act, where not otherwise incompatible, and the assistant as- 
 sessor may increase the amount of the list or return of any 
 party making such return, if he shall be satisfied that the 
 same is understated : Provided, that any party, in his or her 
 own behalf, or as guardian or trustee, as aforesaid, shall be 
 permitted to declare, under oath or affirmation, the form and 
 manner of which shall be prescribed by the Commissioner of 
 Internal Revenue, that he or she was not possessed of an in- 
 come of six hundred dollars, liable to be assessed according 
 to the provisions of this act, or that he or she has been as- 
 sessed elsewhere and the same year for an income duty, un- 
 der authority of the United States, and shall thereupon be 
 exempt from an income duty ; or, if the list or return of any 
 party shall have been increased by the assistant assessor, in 
 manner as aforesaid, he or she may be permitted to declare, 
 as aforesaid, the amount of his or her annual income, or the 
 amount held in trust, as aforesaid, liable to be assessed, as 
 aforesaid, and the same so declared shall be received as the 
 sum upon which duties are to be assessed and collected. 
 
 [NOTE. This act was amended by Act Cong. March 3, 
 1863, 12 Stat. 713, 723, by adding the following: "In esti- 
 mating the annual gains, profits, or income of any person, 
 under the act to which this act is an amendment, the amount 
 actually paid by such person for the rent of the dwelling 
 house or estate on which he resides shall be first deducted 
 from the gains, profits, or income of such person."] 
 
 (331)
 
 INCOME TAXATION (Appdx. 
 
 Act of Congress June 30, 1864, 13 Stat. 223, 281, as amend- 
 ed by Act of Congress March 3, 1865, 13 Stat. 469, 479 
 
 Section 116. There shall be levied, collected, and paid an- 
 nually upon the annual gains, profits, and income of every per- 
 son residing in the United States, or of any citizen of the 
 United States residing abroad, and whether derived from any 
 kind of property, rents, interests, dividends, or salaries, or 
 from any profession, trade, employment, or vocation, carried 
 on in the United States or elsewhere, or from any other source 
 whatever, a duty of five per centum on the excess over six 
 hundred dollars and not exceeding five thousand dollars, and 
 a duty of ten per centum on the excess over five thousand dol- 
 lars ; and in ascertaining the income of any person liable to an 
 income tax, the amount of income received from institutions 
 whose officers, as required by law, withhold a per centum of 
 the dividends made by such institutions and pay the same to 
 the Commissioner of Internal Revenue or other officer author- 
 ized to receive the same, shall be included, and the amount so- 
 withheld shall be deducted from the tax which otherwise 
 would be assessed upon such person. And the duty herein 
 provided for shall be assessed, collected, and paid upon the 
 gains, profits, and income for the year ending on the thirty- 
 first day of December next preceding the time for levying, col- 
 lecting, and paying said duty : Provided, that incomes derived 
 from interest upon notes, bonds, and other securities of the 
 United States, and also all premiums on gold and coupons shall 
 be included in estimating incomes under this act. Provided 
 further, that only one deduction of six hundred dollars shall 
 be made from the aggregate incomes of all the members of any 
 family composed of parents and minor children, or husband 
 and wife: And provided further, that net profits realized by 
 sales of real estate purchased within the year for which income 
 is estimated, shall be chargeable as income ; and losses on sales 
 
 (332)
 
 Appdx.) CIVIL WAR INCOME TAX ACTS OF CONGRESS 
 
 of real estate purchased within the year for which income is 
 estimated shall be deducted from the income of such year. 
 
 Section 117. In estimating the annual gains, profits, and 
 income of any person, all national, state, county, and municipal 
 taxes paid within the year shall be deducted from the gains, 
 profits, or income of the person who has actually paid the 
 same, whether owner, tenant, or mortgagor; also the salary 
 or pay received for services in the civil, military, naval, or 
 other service of the United States, including senators, repre- 
 sentatives, and delegates in Congress, above the rate of six 
 hundred dollars per annum ; also the amount paid by any per- 
 son for the rent of the homestead used or occupied by himself 
 or his family, and the rental value of any homestead used or 
 occupied by any person or by his family, in his own right or in 
 the right of his wife, shall not be included and assessed as part 
 of the income of such person. In estimating the annual gains, 
 profits, or income of any person, the interest received or ac- 
 crued upon all notes, bonds, and mortgages, or other forms of 
 indebtedness bearing interest, whether paid or not, if good and 
 collectable, less the interest paid by or due from such person, 
 shall be included and assessed as part of the income of such 
 person for each year; and also all income or gains derived 
 from the purchase and sale of stocks or other property, real or 
 personal, and of live stock, and the amount of live stock, sugar, 
 wool, butter, cheese, pork, beef, mutton, or other meats, hay 
 or grain, or other vegetable or other productions, being the 
 growth or produce of the estate of such person sold, not in- 
 cluding any part thereof unsold or on hand during the year 
 next preceding the thirty-first of December, until the same 
 shall be sold, shall be included and assessed as part of the in- 
 come of such person for each year, and his share of the gains 
 and profits of all companies, whether incorporated or partner- 
 ship, shall be included in estimating the annual gains, profits, 
 or income of any person entitled to the same, whether divided 
 or otherwise. In estimating deductions from income, as afore- 
 
 (333)
 
 INCOME TAXATION (Appdx. 
 
 said, when any person rents buildings, lands, or other property, 
 or hires labor to cultivate land, or to conduct any other busi- 
 ness from which such income is actually derived, or pays in- 
 terest upon any actual incumbrance thereon, the amount actu- 
 ally paid for such rent, labor, or interest shall be deducted; 
 and also the amount paid out for usual or ordinary repairs, 
 not exceeding the average paid out for such purposes for the 
 preceding five year's shall be deducted, but no deduction shall 
 be made for any amount paid out for new buildings, perma- 
 nent improvements, or betterments, made to increase the value 
 of any property or estate : Provided, that in cases where the 
 salary or other compensation paid to any person in the em- 
 ployment or service of the United States shall not exceed the 
 rate of six hundred dollars per annum, or shall be by fees, 
 or uncertain or irregular in the amount or in the time during 
 which the same shall have accrued or been earned, such salary 
 or other compensation shall be included in estimating the an- 
 nual gains, profits, or income of the person to whom the same 
 shall have been paid, in such manner as the commissioner of 
 internal revenue, under the direction of the Secretary of the 
 Treasury, may prescribe. 
 
 Section 118. It shall be the duty of all persons of lawful 
 age to make and render a list or return, in such form and 
 manner as may be prescribed by the commissioner of internal 
 revenue, to the assistant assessor of the district in which 
 they reside, of the amount of thejr income, gains, and profits 
 as aforesaid ; and all guardians and trustees, whether as ex- 
 ecutors, administrators, or in any other fiduciary capacity, shall 
 make and render a list or return, as aforesaid, to the as- 
 sistant assessor of the district in which such guardian or trus- 
 tee resides, of the amount of income, gains, and profits of any 
 minor or person for whom they act as guardian or trustee; 
 and the assistant assessor shall require every list or return 
 to be verified by the oath or affirmation of the party render- 
 ing it, and may increase the amount of any list or return, 
 
 (334)
 
 Appdx.) CIVIL WAR INCOME TAX ACTS OF CONGRESS 
 
 if he has reason to believe that the same is understated ; and 
 in case any person, guardian, or trustee shall neglect or re- 
 fuse to make and render such list or return, or shall render 
 a false or fraudulent list or return, it shall be the duty of the 
 assessor or assistant assessor to make such list, according to 
 the best information he can obtain, by the examination of 
 such person, and his books and accounts, or any other evi- 
 dence, and to add twenty-five per centum as a penalty to the 
 amount of the duty due on such list in all cases of wilful 
 neglect or refusal to make and render a list or return, and, 
 in all cases of a false or fraudulent return having been ren- 
 dered, to add one hundred per centum, as a penalty, to the 
 amount of duty ascertained to be due, the duty and the addi- 
 tions thereto as penalty to be assessed and collected in the 
 manner provided for in other cases of wilful neglect or re- 
 fusal to render a list or return, or of rendering a false or 
 fraudulent return : Provided, that any party, in his or her 
 own behalf, or as guardian or trustee, shall be permitted to 
 declare, under oath or affirmation, the form and manner of 
 which shall be prescribed by the commissioner of internal 
 revenue, that he or she, or his or her ward or beneficiary, was 
 not possessed of an income of six hundred dollars, liable to 
 be assessed according to the provisions of this act; or may 
 declare that he or she has been assessed and paid an income 
 duty elsewhere in the same year, under the authority of the 
 United States, upon his or her gains and profits, as prescribed 
 by law, and if the assistant assessor shall be satisfied of the 
 truth of the declaration, shall thereupon be exempt from in- 
 come duty in said district ; or if the list or return of any party 
 shall have been increased by the assistant assessor, such party 
 may exhibit his books and accounts, and be permitted to 
 prove and declare, under oath or affirmation, the amount of 
 annual income liable to be assessed ; but such oaths and evi- 
 dence shall not be considered as conclusive of the facts, and 
 no deductions claimed in such cases shall be made or allowed 
 
 (335)
 
 INCOME TAXATION (Appdx. 
 
 until approved by the assistant assessor. Any person feel- 
 ing aggrieved by the decision of the assistant assessor in such 
 cases may appeal to the assessor of the district, and his deci- 
 sion thereon, unless reversed by the commissioner of inter- 
 nal revenue, shall be final, and the form, time, and manner 
 of proceedings shall be subject to rules and regulations to 
 be prescribed by the commissioner of internal revenue. 
 
 Section 119. The duties on incomes herein imposed shall 
 be levied on the first day of May, and be due and payable on 
 or before the thirtieth day of June, in each year, until and in- 
 cluding the year eighteen hundred and seventy, and no long- 
 er; and to any sum or sums annually due and unpaid after 
 the thirtieth of June, as aforesaid, and for ten days after 
 notice and demand thereof by the collector, there shall be 
 levied in addition thereto the sum of ten per centum on 
 the amount of duties unpaid, as a penalty, except from the 
 estates of deceased and insolvent persons. And if any per- 
 son liable to pay such duty shall neglect or refuse to pay the 
 same, after such demand, the amount due shall be a lien 
 in favor of the United States from the time it was due until 
 paid, with the interest, penalties, and costs that may accrue 
 in addition thereto, upon all the property and rights to prop- 
 erty belonging to such person ; and in default of the pay- 
 ment of the said duty aforesaid, such lien may be enforced 
 by distraint upon such property, rights to property, stocks, 
 securities, and evidences of debt, by whomsoever holden ; 
 and for this purpose, the collector, after demands duly giv- 
 en, as aforesaid, shall issue a warrant, in form and manner 
 to be prescribed by the commissioner of internal revenue, 
 under the directions of the Secretary of the Treasury, and 
 by virtue of such warrant there may be levied on such prop- 
 erty, rights to property, stocks, securities, and evidences of 
 debt, a further sum, to be fixed and stated in such warrant, 
 over and above the said annual duty, interest, and penalty for 
 non-payment, sufficient for the fees, costs, and expenses of 
 (336)
 
 Appdx.) CIVIL WAS. INCOME TAX ACTS OF CONQEESS 
 
 such levy. And in all cases of sale, as aforesaid, the certifi- 
 cate of such sale by the collector shall vest in the purchaser 
 all right, title, and interest of such delinquent in and to 
 such property, whether the property be real or personal; 
 and where the subject of sale shall be stocks, the certificate 
 of said sale shall be lawful authority and notice to the proper 
 corporation, company, or association, to record the same on 
 the books or records, in the same manner as if transferred or 
 assigned by the person or party holding the same, to issue 
 new certificates of stock therefor in lieu of any original or 
 prior certificates, which shall be void whether cancelled or 
 not. And said certificates of sale of the collector, when the 
 subject of sale shall be securities or other evidences of debt, 
 shall be good and valid receipts to the person holding the 
 same, as against any person holding, or claiming to hold, 
 possession of such securities or other evidences of debt. 
 
 Sections 120 and 121. (These sections imposed a tax of 
 five per cent on dividends declared by banks, trust companies, 
 savings institutions, and insurance companies, and also the 
 same tax on any undivided profits of such companies car- 
 ried during the year to surplus or contingent funds.) 
 
 Section 122. (This section made a similar provision as to 
 "railroad, canal, turnpike, canal navigation,, and slackwater 
 companies," in addition to taxing at the same rate the annual 
 payments of interest on their bonds.) 
 
 Section 123. There shall be levied, collected, and paid on 
 all salaries of officers, or payments for services to persons 
 in the civil, military, naval, or other employment or service 
 of the United States, including senators and representatives 
 and delegates in Congress, when exceeding the rate of six 
 hundred dollars per annum, a duty of five per centum on 
 the excess above the said six hundred dollars; and it shall 
 be the duty of all paymasters, and all disbursing officers, 
 under the government of the United States, or in the employ 
 thereof, when making any payments to officers and persons 
 BL.INC.TAX. 22 (337)
 
 INCOME TAXATION (Appdx. 
 
 as aforesaid, or upon settling and adjusting the accounts of 
 such officers and persons, to deduct and withhold the afore- 
 said duty of five per centum, and [they] shall, at the same 
 time, make a certificate stating the name of the officer or 
 person from whom such deduction was made, and the amount 
 thereof, which shall be transmitted to the office of the com- 
 missioner of internal revenue, and entered as part of the 
 internal duties; and the pay-roll, receipts, or account of 
 officers or persons paying such duty, as aforesaid, shall be 
 made to exhibit the fact of such payment. And it shall be the 
 duty of the several auditors of the Treasury Department, 
 when auditing the accounts of any paymaster or disbursing 
 officer, or when settling or adjusting the accounts of any such 
 officer, to require evidence that the duties or taxes mentioned 
 in this section have been deducted or paid over to the com- 
 missioner of internal revenue : Provided, that payments of 
 prize money shall be regarded as income from salaries, and 
 the duty thereon shall be adjusted and collected in like man- 
 ner. 
 
 [NOTE. For various amendments to the foregoing stat- 
 ute, see Act Cong. March 10, 1866, 14 Stat. 4; Act Cong. 
 July 13, 1866, 14 Stat. 98, 137-139; Act Cong. March 2, 1867, 
 14 Stat. 471, 477-480.] 
 
 Act of Congress, July 14, 1870, c. 255, 16 Stat. 256 
 
 Section 6. There shall be levied and collected annually, 
 as hereinafter provided, for the years eighteen hundred and 
 seventy and eighteen hundred and seventy-one, and no lon- 
 ger, a tax of two and one-half per centum upon the gains, 
 profits, and income of every person residing within the United 
 States, and of every citizen of the United States residing 
 abroad, derived from any source whatever, whether within or 
 without the United States, except as hereafter provided, and 
 a like tax annually upon the gains, profits, and income de- 
 (338)
 
 Appdx.) CIVIL WAE INCOME TAX ACTS Or CONGRESS 
 
 rived from any business, trade, or profession carried on in 
 the United States by any person residing without the United 
 States, and not a citizen thereof, or from rents of real estate 
 within the United States owned by any person residing with- 
 out the United States, and not a citizen thereof. 
 
 Section 7. In estimating the gains, profits, and income 
 of any person, there shall be included all income derived from 
 any kind of property, rents, interest received or accrued upon 
 all notes, bonds, and mortgages, or other forms of indebt- 
 edness bearing interest, whether paid or not, if good and 
 collectable, interest upon notes, bonds, or other securities 
 of the United States ; and the amount of all premium on gold 
 and coupons ; the gains, profits, and income of any business, 
 profession, trade, employment, office, or vocation, including 
 any amount received as salary or pay for services in the civil, 
 military, naval, or other service of the United States, or as 
 senator, representative, or delegate in Congress, except that 
 portion thereof from which, under authority of acts of Con- 
 gress previous hereto, a tax of five per centum shall have 
 been withheld ; the share of any person of the gains and 
 profits, whether divided or not, of all companies or partner- 
 ships, but not including the amount received from any corpo- 
 rations whose officers, as authorized by law, withhold and pay 
 as taxes a per centum of the dividends made, and of interest 
 or coupons paid by such corporations ; profits realized within 
 the year from sales of real estate purchased within two years 
 previous to the year for which income is estimated; the 
 amount of sales of live stock, sugar, wool, butter, cheese, pork, 
 beef, mutton, or other meats, hay and grain, fruits, vegetables, 
 or other productions, being the growth or produce of the es- 
 tate of such person, but not including any part thereof con- 
 sumed directly by the family; and all other gains, profits, 
 and income drawn from any source whatever, but not includ- 
 ing the rental value of the homestead used or occupied by any 
 person or by his family. 
 
 (339)
 
 INCOME TAXATION (Appdx. 
 
 Section 8. Military or naval pensions allowed to any per- 
 son under the laws of the United States, and the sum of two 
 thousand dollars of the gains, profits, and income of any 
 person, shall be exempt from said income tax, in the man- 
 ner hereinafter provided. Only one deduction of two 
 thousand dollars shall be made from the aggregate income 
 of all members of any family composed of one or both par- 
 ents and one or more minor children, or of husband and 
 wife; but when a wife has by law a separate income, be- 
 yond the control of her husband, and is living separate 
 and apart from him, such deduction shall then be made 
 from her income, gains, and profits ; and guardians and 
 trustees shall be allowed to make the deduction in favor of 
 each ward or beneficiary, except that in a case of two or 
 more wards or beneficiaries comprised in one family, hav- 
 ing joint property interest, only one deduction shall be 
 made in their favor. For the purpose of allowing such de- 
 duction from the income of any religious or social com- 
 munity holding all their property and the income thereof 
 jointly and in common, each five of the persons composing 
 such society, and any remaining fractional number of such 
 persons less than five over such groups of five, shall be held to 
 constitute a family, and a deduction of two thousand dol- 
 lars shall be allowed for each of such families. Any taxes 
 on the incomes, gains, and profits of such societies now 
 due and unpaid, shall be assessed and collected according 
 to this provision, except that the deduction shall be only 
 one thousand dollars for any year prior to eighteen hun- 
 dred and seventy. 
 
 Section 9. In addition to the exemptions provided in the 
 preceding section, there shall be deducted from the gains, 
 profits, and income of any. person all national, state, county, 
 and municipal taxes paid by him within the year, whether such 
 person be owner, tenant, or mortgager ; all his losses actually 
 sustained during the year arising from fires, floods, shipwreck, 
 
 (340)
 
 Appdx.) CIVIL WAB INCOME TAX ACTS OF CONGBESS 
 
 or incurred in trade, and debts ascertained to be worthless, but 
 excluding all estimated depreciation of values; the amount 
 of interest paid during the year, and the amount paid for rent 
 or labor to cultivate land, or to conduct any other business 
 from which income is derived ; the amount paid for the rent 
 of the house or premises occupied as a residence for himself 
 or his family, and the amount paid out for usual and ordinary 
 repairs. No deduction shall be made for any amount paid out 
 for new buildings, permanent improvements, or betterments 
 made to increase the value of any property or estate. 
 
 Section 10. The tax hereinbefore provided shall be as- 
 sessed upon the gains, profits, and income for the year ending 
 on the thirty-first day of December next preceding the time 
 for levying and collecting said tax, and shall be levied on the 
 first day of March, eighteen hundred and seventy-one, and 
 eighteen hundred and seventy-two, and be due and payable on 
 or before the thirtieth day of April in each of said years. And 
 in addition to any sum annually due and unpaid after the thir- 
 tieth day of April, and for ten days after notice and demand 
 therefor by the collector, there shall be levied and collected, 
 as a penalty, the sum of five per centum on the amount unpaid, 
 and interest on said amount at the rate of one per centum 
 per month from the time the same became due, except from 
 the estates of deceased, insane, or insolvent persons. 
 
 Section 11. It shall be the duty of every person of lawful 
 age, whose gross income during the preceding year exceeded 
 two thousand dollars, to make and render a return on or be- 
 fore the day designated by law, to the assistant assessor of the 
 district in which he resides of the gross amount of his income, 
 gains, and profits as aforesaid; but not including the amount 
 received from any corporation whose officers, as authorized by 
 law, withhold and pay as taxes a per centum of the dividends 
 made and of the interest or coupons paid by such corporations, 
 nor that portion of the salary or pay received for services in 
 
 (341)
 
 INCOME TAXATION (Appdx. 
 
 the civil, military, naval, or other service of the United States, 
 or as senator, representative, or delegate in Congress, from 
 which tax has been deducted, nor the wages of minor children 
 not received ; and every guardian and trustee, executor or ad- 
 ministrator, and any person acting in any other fiduciary ca- 
 pacity, or as resident agent for, or copartner of, any non-resi- 
 dent alien, deriving income, gains, and profits from any busi- 
 ness, trade, or profession carried on in the United States, or 
 from rents of real estate situated therein, shall make and ren- 
 der a return as aforesaid to the assistant assessor of the dis- 
 trict in which he resides of the amount of income, gains, and 
 profits of any minor or person for whom he acts. The as- 
 sistant assessor shall require every such return to be verified 
 by the oath of the party rendering it, and may increase the 
 amount of any return, after notice to such party, if he has 
 reason to believe that the same is understated. In case any 
 person having a gross income as above, of two thousand dol- 
 lars or more, shall neglect or refuse to make and render such 
 return, or shall render a false or fraudulent return, the as- 
 sessor or the assistant assessor shall make such return, accord- 
 ing to the best information he can obtain by the examination 
 of said person, or of his books or accounts, or by any other 
 evidence, and shall add, as a penalty, to the amount of the 
 tax due thereon, fifty per centum in all cases of willful neglect 
 or refusal to make and render a return, and- one hundred per 
 centum in all cases of a false or fraudulent return having been 
 rendered. The tax and the addition thereto as penalty shall be 
 assessed and collected in the manner provided for in cases of 
 willful neglect or refusal to render a return, or of rendering 
 a false or fraudulent return. But no penalty shall be assessed 
 upon any person for such neglect or refusal, or for making or 
 rendering a false or fraudulent return, except after reasonable 
 notice of the time and place of hearing, to be regulated by the 
 commissioner of internal revenue, so as to give the person 
 (342)
 
 Appdx.) CIVIL WAR INCOME TAX ACTS OF CONGBES8 
 
 charged an opportunity to be heard: Provided that no col- 
 lector, deputy collector, assessor, or assistant assessor shall 
 permit to be published in any manner such income returns, or 
 any part thereof, except such general statistics, not specifying 
 the names of individuals or firms, as he may make public, un- 
 der such rules and regulations as the commissioner of internal 
 revenue shall prescribe. 
 
 Section 12. When the return of any person is increased 
 by the assistant assessor, such person may exhibit his books 
 and accounts and be permitted to prove and declare, under 
 oath, the amount of income liable to be assessed; but such 
 oath and evidence shall not be conclusive of the facts, and no 
 deductions claimed in such case shall be allowed until approved 
 by the assistant assessor. Any person may appeal from the 
 decision of the assistant assessor, in such cases, to the assessor 
 of the district, and his decision thereon, unless reversed by the 
 commissioner of internal revenue, shall be final. The form, 
 time, and manner of proceedings shall be subject to regulations 
 to be prescribed by the commissioner of internal revenue. 
 
 Section 13. Any person in his own behalf, or as such fidu- 
 ciary or agent, shall be permitted to declare, under oath, that 
 he, or his ward, beneficiary, or principal, was not possessed of 
 an income of two thousand dollars, liable to be assessed ac- 
 cording to the provisions of this act ; or may declare that an 
 . income tax has been assessed and paid elsewhere in the same 
 year, under authority of the United States, upon his income, 
 gains, and profits, or those of his ward, beneficiary, or prin- 
 cipal, as required by law; and if the assistant assessor shall 
 be satisfied of the truth of the declaration, such person shall 
 thereupon be exempt from income tax in said district. 
 
 Section 14. Consuls of foreign governments who are not 
 citizens of the United States shall be exempt from any income 
 tax imposed by this act which may be derived from their offi- 
 cial emoluments, or. from property in foreign countries : Pro- 
 
 (343)
 
 INCOME TAXATION (Appdx. 
 
 vided that the governments which such consuls may represent 
 shall extend similar exemptions to consuls of the United States. 
 Section 15. There shall be levied and collected for and 
 during the year eighteen hundred and seventy-one a tax of 
 two and one-half per centum on the amount of all interest 
 or coupons paid on bonds or other evidences of debt issued 
 and payable in one or more years after date, by any of the 
 corporations in this section hereinafter enumerated, and on 
 the amount of all dividends of earnings, income, or gains here- 
 after declared, by any bank, trust company, savings institu- 
 tion, insurance company, railroad company, canal company, 
 turnpike company, canal navigation company, and slack-water 
 company, whenever and wherever the same shall be payable, 
 and to whatsoever person the same may be due, including non- 
 residents, whether citizens or aliens, and on all undivided 
 profits of any such corporation which have accrued and been 
 earned and added to any surplus, contingent, or other fund, 
 and every such corporation having paid the tax as aforesaid, 
 is hereby authorized to deduct and withhold from any pay- 
 ment on account of interest, coupons, and dividends an amount 
 equal to the tax of two and one-half per centum on the same ; 
 and the payment to the United States, as provided by law, 
 of the amount of tax so deducted from the interest, coupons, 
 and dividends aforesaid, shall discharge the corporation from 
 any liability for that amount of said interest, coupons, or 
 dividends, claimed as due to any person, except in cases where 
 said corporations have provided otherwise by an express con- 
 tract: Provided, that the tax upon the dividends of insur- 
 ance companies shall not be deemed due until such dividends 
 are payable, either in money or otherwise ; and that the money 
 returned by mutual insurance companies to their policy hold- 
 ers, and the annual or semi-annual interest allowed or paid 
 to the depositors in savings banks and savings institutions, 
 shall not be considered as dividends ; and that when any divi- 
 dend is made, or interest as aforesaid is paid, which includes 
 
 (344)
 
 Appdx.) CIVIL WAR INCOME TAX ACTS OF CONGRESS 
 
 any part of the surplus or contingent fund of any corporation 
 which has been assessed and the tax paid thereon, or which 
 includes any part of the dividends, interest, or coupons re- 
 ceived from other corporations whose officers are authorized 
 by law to withhold a per centum on the same, the amount 
 of tax so paid on that portion of the surplus or contingent 
 fund, and the amount of tax which has been withheld and 
 paid on dividends, interest, or coupons so received, may be 
 deducted from the tax on such dividend or interest. 
 
 Section 16. Every person having the care or management 
 of any corporation liable to be taxed under the last preceding 
 section shall make and render to the assessor or assistant 
 assessor of the district in which such person has his office 
 for conducting the business of such corporation, on or before 
 the tenth day of the month following that in which any divi- 
 dends or sums of money become due or payable as aforesaid, 
 a true and complete return in such form as the commissioner 
 of internal revenue may prescribe, of the amount of income 
 and profits and of taxes as aforesaid ; and there shall be an- 
 nexed thereto a declaration of the president, cashier, or treas- 
 urer of the corporation, under oath, that the same contains 
 a true and complete account of the income and profits and of 
 taxes as aforesaid. And for any default in the making or 
 rendering of such return, with such declaration annexed, the 
 corporation so in default shall forfeit, as a penalty, the sum 
 of one thousand dollars ; and in case of any default in mak- 
 ing or rendering said return, or of any default in the payment 
 of the tax as required, or of any part thereof, the assessment 
 and collection of the tax and penalty shall be in accordance 
 with the general provisions of law in other cases of neglect 
 and refusal. 
 
 (345)
 
 INCOME TAXATION (Appdx. 
 
 THE WISCONSIN INCOME-TAX LAW OF 1911 
 
 Laws of Wisconsin 1911, c. 658, page 984, July 15, 1911 
 
 Section 1. There are added to the statutes thirty new sec- 
 tions to read: Section 1087m 1. There shall be assessed, 
 levied, collected, and paid a tax upon incomes received during 
 the year ending December 31, 1911, and upon incomes received 
 annually thereafter, by such persons and from such sources 
 as hereinafter described ; provided, that firms, copartnerships, 
 corporations, joint stock companies and associations which 
 customarily close their annual accounts on a date other than 
 December 31, or which customarily estimate their income or 
 profits on a basis other than that of actual cash receipts and 
 disbursements, may, with the consent and approval of the 
 tax commission, return for assessment and taxation the in- 
 come or profits earned during the business year for which the 
 accounts of such person are customarily made up. 
 
 Section 1087m 2. 1. The term "person," as used in this 
 act, shall mean and include any individual, firm, copartnership, 
 and every corporation, joint stock company or association or- 
 ganized for profit and having a capital stock represented by 
 shares, unless otherwise expressly stated. 
 
 2. The term "income," as used in this act, shall include : 
 
 (a) All rent of real estate, including the estimated rental 
 of residence property occupied by the owner thereof. 
 
 (b) All interest derived from money loaned or invested in 
 notes, mortgages, bonds or other evidences of debt of any 
 kind whatsoever. 
 
 (c) All wages, salaries or fees derived from services; pro- 
 vided that compensation to public officers for public service 
 shall not be computed as a part of the taxable income in such 
 cases where the taxation thereof would be repugnant to the 
 constitution. 
 
 (346)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 (d) All dividends or profits derived from stock or from the 
 purchase and sale of any property or other valuable acquired 
 within three years previous or from any business whatever. 
 
 (e) All royalties derived from the possession or use of fran- 
 chises or legalized privileges of any kind. 
 
 (f) And all other income of any kind derived from any 
 source whatever except such as is hereinafter exempted. 
 
 3. The tax shall be assessed, levied, and collected upon all 
 income, not hereinafter exempted, received by every person 
 residing within the state, and by every non-resident of the 
 state upon such income as is derived from sources within the 
 state or within its jurisdiction. So much of the income of 
 any person residing within the state as is derived from rentals, 
 stocks, bonds, securities or evidences of indebtedness shall be 
 assessed and taxed, whether such income is derived from 
 sources within or without the state ; provided, that any person 
 engaged in business within and without the state shall, with 
 respect to income other than that derived from rentals, stocks, 
 bonds, securities or evidences of indebtedness, be taxed only 
 upon that proportion of such income as is derived from busi- 
 ness transactions and property located within [the] state, 
 which shall be determined in the manner specified is [in] sub- 
 division (e) of section 1770b, as far as applicable. 
 
 Section 1087m 3. Every corporation, joint stock com- 
 pany or association shall be allowed to make from its gross in- 
 come the following deductions : 
 
 (a) Payments made within the year for personal services of 
 officers and employes actually employed in the production of 
 such income; provided, there be reported the name, address, 
 and amount paid each such officer or employe to whom a com- 
 pensation of seven hundred dollars or more shall have been 
 paid during the assessment year. 
 
 (b) Other ordinary and necessary expenses actually paid 
 within the year out of income in the maintenance and opera- 
 tion of its business and property, including a reasonable allow- 
 
 (347)
 
 INCOME TAXATION (Appdx. 
 
 ance for depreciation of property from which the income is 
 derived. All bonds issued by a corporation shall be deemed an 
 interest in the property and business of such corporation ; and 
 so much of the interest payable on such bonds as is represent- 
 ed by the ratio between the property located and business 
 transacted within this state to he [the] total property and 
 business of such corporation as provided in subdivision 3, of 
 section 1087m 2, shall be subject to taxation under this act 
 at the same rate as the income of such corporation. Such tax 
 shall be assessed to the bondholders under the general desig- 
 nation "The Bondholders of " (inserting the name of the 
 
 corporation), but shall be a lien upon the property and business 
 of such corporation prior to all other liens, and unless paid by 
 the bondholders shall be enforced against the corporation. 
 When paid by the corporation the amount of such tax may be 
 deducted from the next interest payment on such bonds, un- 
 less otherwise provided by contract. 
 
 (c) Losses actually sustained within the year and not com- 
 pensated for by insurance or otherwise. 
 
 (d) Sums paid by such person within the year for taxes im- 
 posed by any state of this union or subdivision thereof, or any 
 territory or possession of the United States, upon the source 
 from which the income taxed by this act is derived. 
 
 (e) Dividends or income received within the year from 
 stocks or interest in any firm, copartnership or corporation, 
 joint stock company or association, the income of which shall 
 have been assessed under the provisions of this act; provided, 
 such firm, copartnership, corporation, joint stock company or 
 association report at the time of assessment the name and 
 address of each such person owning stocks or interest in the 
 same and the amount of dividends or income paid such person 
 during the assessment year. 
 
 (f) Interest received from bonds or other securities exempt 
 from taxation under the laws of the United States. 
 
 (348)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 Section 1087m 4. Persons other than corporations, joint 
 stock companies or associations, in reporting incomes for pur- 
 poses of taxation shall be allowed the following deductions : 
 
 (a) The ordinary and necessary expenses actually paid 
 within the year in carrying on the profession, occupation, or 
 business from which the income is derived, including a rea- 
 sonable allowance for depreciation of the property from which 
 the income is derived. But no deductions shall be made for 
 any amount paid for personal services unless these be report- 
 ed, the name, address, and the amount paid each such em- 
 ploye to whom a compensation of seven hundred dollars or 
 more shall have been paid during the assessment year. 
 
 (b) Losses during the year and not compensated for by in- 
 surance or otherwise. 
 
 (c) Dividends or incomes received by any person from 
 stocks, or interest in any firm, copartnership, corporation, joint 
 stock company or association, the income of which shall have 
 been assessed under the provisions of this act; provided, such 
 firm, copartnership, corporation, joint stock company or as- 
 sociation report at the time of assessment the name and ad- 
 dress of each such person owning stock or interest in the same 
 and the amount of dividends or income paid such person dur- 
 ing the assessment year. 
 
 (d) Interest paid within the year on existing indebtedness; 
 provided, the debtor reports the amount so paid, the form of 
 the indebtedness, together with the name and address of the 
 creditor. 
 
 (e) Interest received from bonds or other securities exempt 
 from taxation under the laws of the United States. 
 
 (f) Salaries or other compensation received from the Unit- 
 ed States by officials thereof. 
 
 (g) Pensions received from the United States. 
 
 (h) Taxes paid by such persons during the year other than 
 inheritance taxes upon the property or business from which 
 the income hereby taxed is derived. 
 
 (349)
 
 INCOME TAXATION (Appdx. 
 
 (1) All inheritances, devises and bequests received during 
 the year upon which an inheritance tax shall have been paid 
 to this state. 
 
 (j) Insurance to the total amount of ten thousand dollars 
 received by any person or persons legally dependent upon the 
 decedent, in payment of a death claim by any insurance com- 
 pany, fraternal benefit society or other insurer. 
 
 Section 1087m 5. 1. There shall be exempt from tax- 
 ation under this act income as follows, to-wit : 
 
 (a) To an individual, income up to and including eight 
 hundred dollars. 
 
 (b) To husband and wife, twelve hundred dollars. 
 
 (c) For each child under the age of eighteen years, two 
 hundred dollars. 
 
 (d) For each additional person, for whose support the 
 taxpayer is legally liable and who is entirely dependent up- 
 on the taxpayer for his support, two hundred dollars. 
 
 (e) The aforesaid exemptions shall not apply to incomes 
 derived from sources within the state by non-residents 
 thereof, nor to firms, copartnerships, corporations, joint 
 stock companies nor associations. In computing said ex- 
 .emptions and the amount of taxes payable under section 
 
 1087m 7 of this act, the income of a wife shall be added to 
 the income of her husband, and the income of each child 
 under eighteen years of age to that of its parent or par- 
 ents, when said wife or child is not living separately from 
 'said husband, parent or parents. 
 
 (2) Income of any mutual savings or loan and building 
 association, or of any religious, scientific, educational, be- 
 nevolent, or other association of individuals not organized 
 or conducted for pecuniary profit. 
 
 (3) Incomes derived from property and privileges by 
 persons now required by law to pay taxes or license fees 
 directly into the treasury of the state in lieu of taxes, and 
 
 (350)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 such persons shall continue to pay taxes and license fees 
 as heretofore. 
 
 (4) Incomes received by the United States, the state, 
 and all counties, cities, villages, school districts or other 
 political units of the state. 
 
 Section 1087m 6. 1. The tax to be assessed, levied, 
 and collected upon the incomes of all persons, except as 
 otherwise provided by law, after making such deductions 
 and exemptions as are hereinbefore allowed, shall be com- 
 puted at the following rates, to-wit: 
 
 (a) On the first one thousand dollars of taxable income 
 or any part thereof, at the rate of one per cent. 
 
 (b) On the second one thousand dollars or any part 
 thereof, one and one-fourth per cent. 
 
 (c) On the third one thousand dollars or any part there- 
 of, one and one-half per cent. 
 
 (d) On the fourth one thousand dollars or any part there- 
 of, one and three-fourths per cent. 
 
 (e) On the fifth one thousand dollars or any part there- 
 of, two per cent. 
 
 (f) On the sixth one thousand dollars or any part there- 
 of, two and one-half per cent. 
 
 (g) On the seventh one thousand dollars or any part 
 thereof, three per cent. 
 
 (h) On the eighth one thousand dollars or any part 
 thereof, three and one-half per cent. 
 
 (i) On the ninth one thousand dollars or any part there- 
 of, four per cent. 
 
 (j) On the tenth one thousand dollars or any part there- 
 of, four and one-half per cent. 
 
 (k) On the eleventh one thousand dollars or any part 
 thereof, five per cent. 
 
 (1) On the twelfth one thousand dollars or any part there- 
 of, five and one-half per cent. 
 
 (351)
 
 INCOME TAXATION (Appdx. 
 
 (m) On any sum of taxable income in excess of twelve 
 thousand dollars, six per cent. 
 
 2. Providing, however, that the tax to be assessed, levied, 
 and collected upon the incomes of corporations, joint stock 
 companies or associations, after making due allowance for 
 deductions as hereinbefore provided, shall be computed at 
 the following rates to-wit : 
 
 (a) If the taxable income equals one per cent or less of 
 the assessed value of the property used and employed in the 
 acquisition of such income, the rate of tax shall be one half 
 of one per cent of such income. 
 
 (b) If the taxable income equals more than one, but does 
 not exceed two per cent of the assessed value of the proper- 
 ty used and employed in the acquisition of such income, the 
 rate of tax shall be one per cent of such income. 
 
 (c) If the taxable income equals more than two, but does 
 not exceed three per cent of the assessed value of the prop- 
 erty used and employed in the acquisition of such income, 
 the rate of tax shall be one and one-half per cent of such 
 income. 
 
 (d) If the taxable income equals more than three, but 
 does not exceed four per cent of the assessed value of the 
 property used and employed in the acquisition of such in- 
 come, the rate of the tax shall be two per cent of such in- 
 come. 
 
 (e) If the taxable income equals more than four, but does 
 not exceed five per cent of the assessed value of the proper- 
 ty used and employed in the acquisition of such income, the 
 rate of the tax shall be two and one-half per cent of such 
 income. 
 
 (f) If the taxable income equals more than five, but does 
 not exceed six per cent of the assessed value of the property 
 used and employed in the acquisition of such income, the 
 rate of the tax shall be three per cent of such income. 
 
 (352)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 (g) And in like manner the tax upon the taxable income 
 shall continue to increase at the rate of one-half of one per 
 cent for each additional one per cent or fractional part there- 
 of that the taxable income bears to the assessed value of 
 the property used and employed in the acquisition of such 
 income, until the rate of profits equals twelve per cent of 
 such assessed value of the property used and employed in 
 the acquisition of such income, when such rate shall con- 
 tinue as a proportional rate of six per cent of such taxable 
 income. 
 
 Section 1087m 7. The legislature intends subsection 2, 
 of section 1087m 6 of this act, to be a separable part there- 
 of, so that said subsection may fail or be declared invalid 
 without adversely affecting any other part of the act : pro- 
 vided that in event of its failing or being declared invalid 
 the incomes of corporations, joint stock companies and as- 
 sociations shall be subject and shall be construed to have 
 been subject to taxation at the rates specified in subsection 
 1, of section 1087m 6, and said incomes shall be reassess- 
 ed by the tax commission and taxed for the years for which 
 the rates provided in subsection 2 of section 1087m 6, shall 
 have failed. 
 
 Section 1087m 8. 1. The state shall be divided into 
 assessment districts by the state tax commission, but in no 
 instance shall a county be divided. 
 
 2. Not less than thirty days prior to the first of March, 
 1912, there shall be selected and appointed by the state tax 
 commission an assessor of incomes for each assessment dis- 
 trict in the state, who shall hold office for the term of three 
 years unless sooner removed as hereinafter provided. Such 
 assessor shall be a citizen and an elector of this state, but 
 need not be a resident of the district in which he is appoint- 
 ed to serve ; provided, however, that so far as practicable 
 preference shall be given in making such appointments to 
 residents of the districts. 
 
 BL.INC.TAX. 23 (353)
 
 INCOME TAXATION (Appdx. 
 
 3. The tax commission may in its discretion transfer any 
 assessor of incomes from one district to another and may 
 remove any assessor of incomes or his deputy from office. 
 
 4. Before entering upon his duties such assessor of in- 
 comes shall subscribe to the constitutional oath and file the 
 same in the office of the secretary of state. 
 
 5. The state tax commission may authorize any assessor 
 of incomes to appoint such deputies and other assistants as 
 may be required for the proper performance of his duties. 
 Such deputies shall qualify in like manner and possess the 
 same powers as the assessor. 
 
 Section 1087m 9. The salaries of the assessors of in- 
 comes and their deputies and assistants shall be fixed by 
 the state tax commission, but such salaries, together with 
 the expenses of such assessors and their deputies and as- 
 sistants shall not in any year exceed in amount five cents 
 for every thousand dollars of the valuation of all property 
 as fixed by the tax commission in the state assessment of 
 the preceding year. The assessor shall be furnished all 
 necessary printing, stationery and postage, and he and his 
 deputies shall be entitled to receive their actual necessary 
 expenses while traveling in the performance of their duties. 
 The salaries of the assessor and his assistants, and all such 
 expenditures shall be audited and paid out of the state 
 treasury in the same manner as other similar salaries and 
 state expenses are audited and paid. 
 
 Section 1087m 10. 1. The state tax commission and the 
 assessors of incomes shall annually on the first day of Jan- 
 uary, or as soon thereafter as practicable, proceed to assess 
 as hereinafter provided every income received during the 
 preceding calendar year liable to taxation under the provi- 
 sions of this act. The assessment of corporations, joint 
 stock companies and associations shall be made by the state 
 tax commission, and the assessment of persons, other than 
 
 (354)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 corporations, joint stock companies and associations shall 
 be by the county assessor of incomes. 
 
 2. In the performance of such duty the state tax commis- 
 sion and the county assessors of incomes shall respectively 
 possess all powers now or hereafter granted by law to the 
 state tax commission or assessors in the assessment of per- 
 sonal property and also the power to estimate incomes. 
 
 3. Every corporation, joint stock company or association, 
 whether taxable under this act or not, shall furnish to the 
 tax commission a true and accurate statement at such time, 
 in such manner and form and setting forth such facts as 
 said commission shall deem necessary to enforce the provi- 
 sions of this act. Such statement shall be made upon the 
 oath or affirmation of the president, vice-president or other 
 principal officer and the treasurer of said corporation, joint 
 stock company or association. 
 
 4. Whenever in the judgment of the assessor of incomes 
 any person in his district other than a corporation, joint 
 stock company or association shall be subject to an income 
 tax under the provisions of this act, he shall require such 
 person to make report in such manner and form as the tax 
 commission may prescribe, specifying particularly among 
 other items the amount of income received from services, 
 unsecured notes, mortgages, bonds, stocks, real estate and 
 other such information as the commission may deem neces- 
 sary to enforce the provisions of this act. 
 
 5. Every guardian, trustee, executor, administrator, agent 
 or receiver, and every other person or corporation acting 
 in a fiduciary capacity, shall make and render to the asses- 
 sor of incomes of the district in which such representative 
 resides, a verified list or return as aforesaid of the amount 
 of income of any such person, ward, or beneficiary. The 
 return so made shall be signed by the person rendering it, 
 and by the president or secretary thereof, if a corporation. 
 
 6. For each question unanswered, the assessor or deputy 
 
 (355)
 
 INCOME TAXATION (Appdx. 
 
 assessor, failing to present satisfactory cause for such omis- 
 sion to the state tax commission, shall be subject to a pen- 
 alty of five dollars, and said penalty shall be deducted from 
 the compensation of said assessor or deputy assessor at the 
 time such compensation is paid. 
 
 Section 1087m 11. 1. Whenever evidence shall be pro- 
 duced before the state tax commission, which in the opinion 
 of the commission, justifies the belief that in any one or 
 more of the three next previous years the returns made by 
 any corporation, joint stock company or association are in- 
 correct, or are made with false or fraudulent intent, or 
 when any corporation, joint stock company or association 
 has failed or refused to make a return as required by law 
 the state tax commission may require from every such cor- 
 poration, joint stock company or association such further 
 information with reference to its capital, income, losses, ex- 
 penditures and business transactions as is deemed expedi- 
 ent. Upon the information so required the state tax com- 
 mission may make such additions or corrections to the as- 
 sessment as is deemed true and just, such corrections to be 
 made in the next tax levy. Whenever the state tax com- 
 mission shall so increase or make subject to tax any in- 
 come, it shall give notice in writing to the person liable for 
 the payment of the tax on said income of the amount of the 
 assessment. Such notice may be served by registered mail. 
 
 2. In case any return made by any corporation, joint 
 stock company or association is made with false or fraudu- 
 lent intent or in case of a refusal or neglect to make a re- 
 turn as required by law, and an additional amount is dis- 
 covered, the amount so discovered shall be subject to twice 
 the original rate. The amount so added to the tax shall be 
 collected at such time and in such manner as may be desig- 
 nated by the state tax commission. 
 
 3. In case of neglect occasioned by the sickness or ab- 
 sence of an officer of any corporation, joint stock company 
 
 (356)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 or association required to make said return, or for other 
 sufficient reason, the state tax commission may allow such 
 further time for making and delivering such return as it 
 may deem necessary, not to exceed thirty days. 
 
 4. If any of the corporations, joint stock companies or 
 associations aforesaid shall fail or refuse to make a return 
 at the time or times hereinbefore specified in each year, or 
 shall render a false or fraudulent return, such corporation, 
 joint stock company or association shall be liable to a pen- 
 alty of not less than one hundred dollars and not to exceed 
 five thousand dollars at the discretion of the court. 
 
 5. Any officer of a corporation, joint stock company or 
 association required by law to make, render, sign or verify 
 any return who makes any false or fraudulent return or 
 statement, with intent to defeat or evade the assessment 
 required by this act to be made, shall upon conviction be 
 fined not to exceed five hundred dollars or be imprisoned 
 not to exceed one year, or both, at the discretion of the 
 court, with the cost of prosecution. 
 
 Section 1087m 12. 1. Whenever the assessor of in- 
 comes or the county board of review herein provided for 
 shall have reason to believe that in any one or more of the 
 three next previous years the returns made by any person 
 other than a corporation, joint stock company or association 
 are incorrect or are made with false or fraudulent intent, 
 or when any such person has failed or refused to make a re- 
 turn as required by law, the assessor or county board of 
 review shall make such additions or corrections to the next 
 assessment as he or they shall deem true and just. When- 
 ever the assessor or the county board of review shall so in- 
 crease or make subject to tax any income he or they shall 
 give notice in writing to the person liable for the payment 
 of the tax on said income of the amount of the assessment. 
 Such notice may be served by registered mail. 
 
 2. In case any return made by any person other than a 
 
 (357)
 
 INCOME TAXATION 7 (Appdx. 
 
 corporation, joint stock company or association is made 
 with false or fraudulent intent, or in case of a refusal or 
 neglect to make a return as required by law, and an addi- 
 tional amount is discovered, the amount so discovered shall 
 be subject to twice the original rate. 
 
 3. Any person other than a corporation, joint stock com- 
 pany or association who fails or refuses to make a return 
 at the time hereinbefore specified in each year or shall ren- 
 der a false or fraudulent return shall upon conviction be 
 fined not to exceed five hundred dollars, or be imprisoned 
 not to exceed one year, or both, at the discretion of the 
 court, together with the cost of prosecution. 
 
 Section 1087m 13. Any corporation, joint stock com- 
 pany or association subject to assessment by the state tax 
 commission, feeling aggrieved by the decision of said com- 
 mission regarding the assessment of its income, shall be 
 granted the same rights of hearing and appeal as are now 
 granted corporations assessed by said commission. 
 
 Section 1087m 14. The state tax commission shall ap- 
 point three resident tax payers of each county to serve as 
 a county board of review, and shall fix their compensation, 
 which shall not be more than ten dollars per day, and shall 
 be audited and paid in the same manner as the salary of 
 assessors under this act is paid. 
 
 Section 1087m 15. The county clerk shall be clerk of 
 such board, and shall keep an accurate record of all pro- 
 ceedings thereof, including a correct record of all changes 
 in the assessment rolls made by the board. The county 
 clerk shall take full minutes of all evidence given before the 
 board ; provided, however, that the board, with the approv- 
 al of the assessor of incomes, may in cases where they 
 deem it advisable, employ a stenographic reporter to take 
 such evidence in shorthand, and extend the same in type- 
 written form. The county clerk shall preserve in his office 
 a record of all such proceedings, minutes and evidence tak- 
 
 (358)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 en, and all documentary evidence offered. The stenograph- 
 er shall be paid by the state, but the board may, in its dis- 
 cretion, charge the expenses to the complaining party or 
 parties appearing before the board. 
 
 Section 1087m 16. 1. The county board of review of 
 each county, constituting an assessment district, shall meet 
 annually on the last Monday of July at ten o'clock a. m. at 
 the court house in said county to hear complaints and to 
 review the assessments of income made by the assessor. A 
 majority shall constitute a quorum. 
 
 2. In assessment districts composed of more than one 
 county the board of review of the county designated by the 
 assessor of incomes shall meet as provided above and the 
 board of review of each remaining county of the district 
 shall meet as soon thereafter as is possible for the assessor 
 of incomes to be present. The date of such meeting shall 
 be fixed by the assessor of incomes. 
 
 3. Notice of the annual meeting of each county board of 
 review shall be published in a newspaper of the county at 
 least one week previous to such meeting. 
 
 4. The board may adjourn from day to day, and from 
 time to time, until its business is completed, but no ad- 
 journment other than from day to day shall be had except 
 upon written request and for satisfactory cause shown. 
 
 5. Attendance of witnesses and the production of books 
 and papers before said board may be compelled by sub- 
 poena, issued by the clerk thereof, a justice of the peace or 
 a court commissioner. 
 
 Section 1087m 17. 1. The board shall hear and exam- 
 ine, and permit the assessor to examine, any aggrieved or 
 other person upon oath who shall appear before it in rela- 
 tion to any assessment or commission [sic] of income, and 
 may increase or lessen the amount of any income assessed, 
 if satisfied from the evidence submitted and the statements 
 of the assessor, that such change should be made. 
 
 (359)
 
 INCOME TAXATION (Appdx. 
 
 2. The board shall not increase any assessments, nor as- 
 sess any income not on the roll without notice in writing to 
 the person liable for payment of the tax thereon, or his 
 agent, if either be resident of the county, of such intention 
 in time to appear and be heard before the board in relation 
 thereof. 
 
 Section 1087m 18. No person subject to assessment by 
 the county assessor shall be allowed in any action or pro- 
 ceeding to question any assessment of income, unless ob- 
 jections thereto shall first have been presented to the coun- 
 ty board of review in good faith and full disclosure made 
 under oath of any and all income of such party liable to as- 
 sessment. 
 
 Section 1087m 19. 1. Any person dissatisfied with any 
 determination of the county board of review may appeal 
 within twenty days to the state tax commission, to whom 
 a copy of the record of the board shall be certified, together 
 with all evidence or a copy thereof, relating to such assess- 
 ment. 
 
 2. The tax commission shall review such assessments 
 from the record thus submitted and shall make necessary 
 corrections and certify its conclusion to the county clerk, 
 who shall duly notify the person liable for the tax and en- 
 ter upon the assessment roll any change made by the com- 
 mission. 
 
 Section 1087m 20. 1. The state tax commission shall 
 complete the assessment of income for each corporation, 
 joint stock company, and association on or before the fif- 
 teenth day of October in each year and compute the tax 
 thereon, and shall thereupon forthwith certify to each coun- 
 ty clerk a statement of the assessment of each corporation, 
 joint stock company and association in his county and the 
 amount of tax levied against each. 
 
 2. The state tax commission shall submit in their bien- 
 nial report the amount of income tax collected for each county 
 
 (360)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 in the state, and shall designate the several general classes of 
 property from which the incomes were received, the cost 
 to the state and each county for the administration of the 
 law, and all such facts as shall be required to give a definite 
 understanding of the financial operations of the law. 
 
 Section 1087m 21. The tax upon the income of persons 
 other than corporations, joint stock companies and associa- 
 tions shall be computed by the county clerk, assisted by the 
 assessor of incomes, and said clerk shall on or before No- 
 vember first, certify to each town, city and village clerk the 
 names of all persons whose incomes are assessed in his own 
 town, city or village, and the amount of tax levied against 
 each such person, and such amount shall be entered by the 
 town, city and village clerks in a separate column designat- 
 ed "income tax" upon the tax roll of the year, and shall be 
 collected and paid as personal property taxes are now col- 
 lected and paid. 
 
 Section 1087m 22. The place at which the income tax 
 herein provided for shall be assessed, levied and collected 
 shall be determined as follows : 
 
 1. In their return for purposes of assessment persons de- 
 riving incomes from within and without the state, or from 
 more than one political subdivision of the state, shall make 
 a separate accounting of the income derived from without 
 the state and from each political subdivision of the state in 
 such form and manner as the tax commission may pre- 
 scribe. 
 
 2. The entire taxable income of every person deriving in- 
 come from within and without the state or from within dif- 
 ferent political subdivisions of the state, when such person 
 resides within the state, shall be combined and aggregated 
 for the purpose of determining the proper exemptions and 
 proper rate of taxation. The taxable income so computed 
 shall be assessed, and taxes at such rate shall be paid, in 
 the several towns, cities and villages in proportion to the 
 
 (361)
 
 INCOME TAXATION (Appdx. 
 
 respective amounts of income derived from each, counting 
 that part of income derived from without the state when 
 taxable as having been derived from the town, city or vil- 
 lage in which said person resides. 
 
 3. Income derived by non-residents of the state from 
 sources within the state or within its jurisdiction, shall be 
 separately assessed and taxed in the town, city or village 
 from which such income is derived, at a rate determined by 
 the total income derived from within any single town, city 
 or village. 
 
 4. All laws not in conflict with the provisions of this 
 act regulating the time, place and manner of payment of 
 taxes on personal property, the collection thereof by action, 
 distress or otherwise and the return of personal property 
 taxes unpaid, shall apply to the income tax herein provided 
 for. 
 
 Section 1087m 23. The revenue derived from such in- 
 come tax shall be divided as follows, to-wit : Ten per cent 
 to the state, twenty per cent to the county and seventy per 
 cent to the town, city or village in which the tax was as- 
 sessed, levied and collected, which shall be remitted and 
 accounted for in the same manner as the state and county 
 taxes collected from property are remitted and paid. 
 
 Section 1087m 24. 1. No commissioner, assessor of in- 
 comes, deputy, member of a county board of review, or 
 any other officer, agent, clerk or employe shall divulge or 
 make known to any person in any manner except as provid- 
 ed by law any information whatsoever obtained directly or 
 indirectly by him in the discharge of his duties or permit 
 any income return or copy thereof or any paper or book so 
 obtained to be seen or examined by any person except as 
 provided by law. 
 
 2. Any officer, clerk, agent or employe violating any of 
 the provisions of this section shall upon conviction thereof 
 be punished by fine of not less than one hundred dollars nor 
 (362)
 
 Appdx.) WISCONSIN INCOME-TAX LAW OF 1911 
 
 more than five hundred dollars, or by imprisonment in the 
 county jail for not less than one month nor more than six 
 months, or by imprisonment in the state prison for not 
 more than two years, at the discretion of the court. 
 
 3. Such officer, agent, clerk or employe upon such con- 
 viction shall also forfeit his office or employment and shall 
 be incapable of holding any public office in this state for a 
 period of three years thereafter. 
 
 4. Nothing herein shall be construed as preventing the 
 assessment roll, the tax roll and all proceedings had before 
 the county board of review and all evidence taken at such 
 hearing from being open to public inspection at such times 
 and under such conditions as the state tax commission may 
 direct. 
 
 Section 1087m 25. 1. On and after the first Monday in 
 January, 1912, the office of county supervisor of assessment 
 is hereby abolished. 
 
 2. The assessor of incomes shall on and after the first 
 Monday of January, 1912, in addition to the duties and 
 powers herein imposed and conferred upon him, perform 
 all the duties and possess all the powers heretofore imposed 
 and conferred by law upon the said county supervisor of 
 assessment. The assessor of incomes shall be under the 
 direction and control of the state tax commission, and shall 
 make such reports to the commission, to the county board 
 of review and the county board of supervisors, and perform 
 such other duties as the commission shall direct. 
 
 Section 1087m 26. Any person who shall have paid a 
 tax upon his personal property during any year shall be 
 permitted to present the receipt therefor to, and have the 
 same accepted by, the tax collector to its full amount in the 
 payment of taxes due upon the income of such person dur- 
 ing said year. Any bank which has paid taxes during any 
 year upon its shares assessed to the individual stockholders 
 thereof shall be entitled, under the provisions of this sec- 
 
 (363)
 
 INCOME TAXATION (Appdx. 
 
 tion, to present the receipt therefor, and have the same ac- 
 cepted by the tax collector to its full amount in the pay- 
 ment of taxes upon the income of such bank during said 
 year. 
 
 Section 1087m 27. Nothing contained in this act shall 
 be construed to affect the assessment or collection of taxes 
 assessed in the year 1911 or prior thereto, under present 
 laws, nor to limit the power of assessors and boards of re- 
 view relative to correcting assessment rolls, placing omit- 
 ted property thereon, and reassessing property whenever 
 such correction, insertion of omitted property, or reassess- 
 ment might be made under the laws as they now exist. 
 
 Section 1087m 28. The state tax commission is hereby 
 empowered to make such rules and regulations as it shall 
 deem necessary in order to carry out the foregoing provi- 
 sions. 
 
 . Section 1087m 29. The state tax commission is hereby 
 authorized to employ such clerks and specialists as are nec- 
 essary to carry into effective operation this act. 
 
 Section 1087m 30. There is hereby appropriated from 
 the general fund of the state, out of any money in the state 
 treasury not otherwise appropriated, a sum sufficient to 
 carry out the provisions of this act. 
 
 (364)
 
 App'dx.) SOUTH CAEOLINA INCOME TAX LAW 
 
 SOUTH CAROLINA INCOME TAX LAW 
 
 Civil Code South Carolina, 1902, Sections 325-331 
 
 Section 325. There shall be annually assessed, levied and 
 collected upon the gains, gross profits and income received 
 during the preceding calendar year by every citizen of 
 this state, whether such gains, profits or income be derived 
 from any kind of property, rents, interests, dividends, or 
 salaries, or from any profession, trade, employment, or vo- 
 cation carried on in this state, or from any other source 
 whatever, a tax of one per centum on the amount so derived 
 over and above $2,500 and up to $5,000; one and one-half 
 per centum on $5,000 and over, up to $7,500; two per cent- 
 um on $7,500 and over, up to $10,000; two and one-half per 
 centum on $10,000 and over, up to $15,000; three per centum 
 on $15,000 and over; and a like tax shall be assessed, levied 
 and collected annually upon the gains, profits and income 
 from all property owned, and every business, trade or pro- 
 fession carried on in this state by persons residing without 
 this state, excepting such corporations as are hereinafter 
 excepted : Provided that, in estimating the gains, profits 
 and income there shall not be included interest upon such 
 bonds or securities of this state, or of the United States, the 
 principal and interest of which are, by the law of their is- 
 sue, exempt from taxation. 
 
 Section 326. In computing incomes, the necessary ex- 
 penses actually incurred in carrying on any business, occu- 
 pation or profession, not including remuneration to the tax- 
 payer for personal supervision or the support and mainte- 
 nance of his or her family, shall be deducted from the gross 
 income or revenue ; and the word "income," as used in this 
 article, shall be deemed and taken to mean "gross profits :" 
 Provided, that no deduction shall be made or allowed for 
 
 (365)
 
 INCOME TAXATION (Appdx. 
 
 any amount paid or contracted for permanent improve- 
 ments or betterments made to increase the value of any 
 property or estate, or for the increase of capital, capital 
 stock or assets. 
 
 Section 327. The words "citizen" and "person," as used 
 in this article, shall be deemed to include all natural persons, 
 all copartnerships, and all members of any incorporated as- 
 sociation, and to exclude, except as hereinafter included, all 
 corporations duly chartered by the laws of the United States 
 or of this or any other state. 
 
 Section 328. The tax herein provided for shall be assess- 
 ed, levied, and collected in the same manner, at the same 
 time, as other taxes, and by the same county officials as are 
 now charged with the assessment, levy, and collection of 
 state and county taxes, and shall be paid into the state treas- 
 ury as other general state taxes. 
 
 Section 329. All persons liable for the payment of any 
 of the tax herein provided for shall, at the time now or here- 
 after provided for the making of returns of personal prop- 
 erty make, under oath, a full and complete list or return, in 
 such form and manner as may be directed by the Comptrol- 
 ler General, to the auditor of the county in which they re- 
 side ; or, in case of nonresidents, of the county or counties 
 where said gains, profits, or income arise, of the amount of 
 their income, gains, and profits as aforesaid, and the prop- 
 erty or investment, if any, upon which the same are com- 
 puted, and such other particulars as may be required by 
 the Comptroller General. All persons, whether natural or 
 corporations created by charter, acting as guardians, trus- 
 tees, executors, administrators, agents, receivers, or in any 
 other fiduciary capacity, shall make and render a list or re- 
 turn as aforesaid to the auditor of the county in which such 
 persons or corporations acting in a fiduciary capacity reside 
 or do business, of the income, gains and profits of any minor 
 or person for whom they act. 
 
 (366)
 
 Appdx.) VIRGINIA INCOME TAX LAW 
 
 Section 330. Any person or corporation failing or refus- 
 ing to make the list or return required by this act, or ren- 
 dering a willfully false or fraudulent list or return, shall be 
 assessed by the auditor on account of said income tax, in 
 such amount as appears to him from the best information 
 obtainable by him either by examination of the defaulting 
 taxpayer or any other evidence, that such taxpayer is liable 
 for; and in case of failure or neglect to make said list or 
 return, the said auditor shall add fifty per centum as a pen- 
 alty to the amount of tax due ; and in case of a willfully 
 false or fraudulent return or list having been rendered, the 
 auditor shall add one hundred per centum as a penalty to 
 said tax ; the tax and the additions thereto as a penalty to 
 be assessed and collected in the manner provided for in the 
 case of failure to make returns or lists of personal property. 
 
 Section 331. In every respect not herein specified, the 
 returns for and the levy and collection of the tax provided in 
 this act shall be subject to all the provisions of law relative 
 to the assessment and collection of taxes on personal prop- 
 erty. 
 
 VIRGINIA INCOME TAX LAW 
 
 Acts Virginia 1903, c. 148, p. 155, as amended by Acts 1908, 
 c. 10, p. 20 
 
 Section 3. The taxable subjects shall be classified by 
 schedules, as follows : 
 
 Section 10. The classification under schedule D shall be 
 as follows, to wit : The aggregate amount of income in ex- 
 cess of one thousand dollars, whether received or due but 
 not received, within the year next preceding the first of 
 February in each year. 
 
 Income shall include : 
 
 First. All rents, except ground rents or rents charge, 
 salaries, interest upon notes, bonds, or other evidences of 
 
 (367)
 
 INCOME TAXATION (Appdx. 
 
 debt, of whatever description, of the United States, or any 
 other state or country, or any corporation, company, part- 
 nership, firm, or individual, collected or received during the 
 year, less the interest due and paid during the year. 
 
 Second. The amount of all premiums on gold, silver, or 
 coupons. 
 
 Third. The amount of sales of live stock and meat of all 
 kinds, less the value assessed thereon the previous year by 
 the commissioner of the revenue. 
 
 Fourth. The amount of sales of wood, butter, cheese, 
 hay, tobacco, grain and other vegetable and agricultural 
 productions during the preceding year, whether the same 
 was grown during the preceding year or not, less all sums 
 paid for taxes and for labor, fences, fertilizers, clover or 
 other seed purchased and used upon the land upon which 
 the vegetable and agricultural productions were grown or 
 produced, and the rent of said land paid by said person, if 
 he be not the owner thereof. 
 
 Fifth. All other gains and profits derived from any 
 source whatever. 
 
 In addition to the sum of one thousand dollars as afore- 
 said, there shall be deducted from the income of the person 
 assessed, all losses sustained during the year: provided fur- 
 ther, that only one deduction of one thousand dollars shall 
 be made from the aggregate income of any family, except 
 that guardians may make a separate deduction of one thou- 
 sand dollars, in favor of each ward, out of income coming 
 to said ward. 
 
 Section 11. On income, as defined in this schedule, the 
 tax shall be one per centum. 
 
 (368)
 
 Appdx.) OKLAHOMA INCOME TAX LAW 
 
 OKLAHOMA INCOME TAX LAW 
 
 Laws Oklahoma 1907, p. 730 
 
 Section 1. At the time of making the assessment of real 
 and personal property for taxation in this state, the asses- 
 sor shall demand of each person a list of his income for the 
 year ending June thirtieth last preceding, in excess of three 
 thousand five hundred dollars. The blank for listing taxes 
 shall contain the question : "Was your gross income from 
 salaries, fees, trade, profession and property upon which a 
 gross receipt or excise tax has not been paid, any and all 
 of them, for the year ending June thirtieth last preceding, 
 in excess of three thousand five hundred dollars?" 
 
 Section 2. If the person answers the question in the af- 
 firmative, he shall be furnished by the assessor with a blank 
 in the following form, to-wit: 
 
 "To the Auditor of the State of Oklahoma: I hereby 
 certify that my income from salaries, fees, trade, profession 
 and property upon which a gross receipt or excise tax has 
 not been paid, any and all of them, for the year ending June 
 thirtieth, in excess of three thousand five hundred dollars 
 was $ " 
 
 "I, being duly sworn, do certify that the 
 
 foregoing certificate is true to the best of my knowledge 
 and belief. 
 
 "Subscribed and sworn to before me this day 
 
 of . 
 
 "Assessor." 
 
 Said person shall fill out, sign, and swear to said certificate 
 
 before the assessor or other officer authorized by law to 
 
 administer oaths, and such assessor shall forward the same 
 
 BL.INC.TAX. 24 (3G9)
 
 INCOME TAXATION (Appdx. 
 
 to the state auditor not later than July first of that year, 
 and said state auditor shall certify the amount of the tax 
 due upon the income so reported to the county clerk of the 
 county in which said person resides, who shall extend the 
 same on the tax rolls and shall at the same time and in the 
 same manner as is now, or may hereafter be, provided by 
 law relative to the tax lists of the real and personal proper- 
 ty, deliver the same to the county treasurer. 
 
 Section 3. It shall be the duty of the assessor of each 
 township to furnish the state auditor a list of all persons 
 whom he may find who are subject to the above tax and 
 who have filled out the list above required, together with 
 the names of other persons in his township not appearing 
 thereon, who, in his opinion, may be liable for an income 
 tax hereunder, and said state auditor may take such steps 
 as he may deem necessary to require any such person 
 whose name is added to make proper return of his said in- 
 come, and to enable him to obtain such information he or 
 anyone designated by him to obtain such information shall 
 have the power to summon witnesses within the county in 
 which such persons live. Provided, however, if any wit- 
 ness so subpoenaed fails and refuses to appear and give in- 
 formation as provided by this section, the state auditor 
 shall certify such fact to any court and said court shall 
 thereupon issue a subpoena requiring the person subpoenaed 
 to appear and give testimony as required by this section, 
 and if any such person subpoenaed shall fail or refuse to 
 obey said subpoena, such person shall be punished as pro- 
 vided by law in cases of contempt. 
 
 Section 4. There is hereby levied, for the benefit of the 
 available common school fund of the state, a tax of five 
 mills on the dollar on the excess over the amount of three 
 thousand five hundred dollars and less than five thousand, 
 and seven and one-half mills on the dollar on the excess of 
 five thousand dollars and less than ten thousand dollars, 
 
 (370)
 
 Appdx.) OKLAHOMA INCOME TAX LAW 
 
 and twelve mills on the dollar on the excess over the 
 amount of ten thousand dollars and less than twenty thou- 
 sand dollars, and fifteen mills on the dollar on the excess 
 over the amount of twenty thousand dollars and less than 
 fifty thousand dollars, and twenty mills on the dollar on 
 the excess over the amount of fifty thousand dollars and 
 less than one hundred thousand dollars, and thirty-three 
 and one-third mills on the dollar upon all amounts over one 
 hundred thousand dollars of all gross incomes. 
 
 Section 5. The above tax shall not be levied upon the 
 income derived from property upon which a gross receipt 
 or excise tax has been paid. 
 
 Section 6. It shall be unlawful for any person to print 
 or publish in any manner whatever any income tax return 
 or any part thereof, or the taxes due thereon unless the tax 
 herein becomes delinquent, and any person violating the 
 provisions of this section shall be deemed guilty of a mis- 
 demeanor and shall be fined not to exceed fifty dollars and 
 imprisoned in the county jail not more than thirty days for 
 each offense. 
 
 Section 7. If any of the taxes herein levied become de- 
 linquent they shall become a lien on all the property, per- 
 sonal and real, of such delinquent person and shall be sub- 
 ject to the same penalties and provisions as are all ad va- 
 lorem taxes. 
 
 Section 8. Any person making the affidavits required 
 herein, who shall knowingly swear falsely shall be guilty 
 of perjury. 
 
 Section 9. Any assessor who shall fail or refuse to per- 
 form the duties herein imposed shall be guilty of malfeas- 
 ance in office and shall forfeit the amount of taxes lost by 
 the state by such failure or refusal, to be collected in a civil 
 action in the name of the state against the assessor. 
 
 Section 10. All acts and parts of acts in conflict here- 
 with are hereby repealed. 
 
 (371)
 
 INCOME TAXATION (Appdx. 
 
 Section 11. An emergency is hereby declared to exist 
 by reason whereof this act shall take effect and be in force 
 from and after its passage and approval. 
 
 Approved May 26, 1908. 
 
 NORTH CAROLINA INCOME TAX LAW 
 
 Acts North Carolina, 1907, c. 256, 22-25, p. 298 
 
 Section 22. The tax payer shall list his income for the 
 year ending June first from any and all sources in excess of 
 one thousand dollars. 
 
 Section 23. The blank for listing taxes shall contain the 
 following question : "Was your gross income from salaries, 
 fees, trade, profession and property not taxed, any or all of 
 them, for the year ending June first, in excess of one thou- 
 sand dollars?" If the tax payer answers this question in the 
 affirmative, he shall be furnished by the list-taker with a 
 blank in the following form, to wit : 
 
 "To the Corporation Commission of the State of North 
 Carolina: I hereby certify that my income from salaries, 
 fees, trade, profession and property not taxed, any or all of 
 them, for the year ending June first, in excess of one thou- 
 sand dollars was $ 
 
 " being duly sworn, says that the foregoing 
 
 certificate is true to the best of his knowledge and belief. 
 "Subscribed and sworn to before me this .... day of 
 
 Said tax payer shall fill out, sign, and swear to said cer- 
 tificate before the list-taker or other officer authorized by 
 law to administer oaths, and the list-taker shall forward the 
 same to the Corporation Commission of the State not later 
 
 (372)
 
 Appdx.) NORTH CAROLINA INCOME TAX LAW 
 
 than July first of that year ; and said Corporation Commis- 
 sion shall certify the amount of the tax due upon the in- 
 come so reported to the chairman of the Board of County 
 Commissioners of the county in which said tax payer re- 
 sides, and the same shall be paid to the sheriff of said coun- 
 ty, together with other taxes for that year; and it shall be 
 unlawful for any person to print or publish in any manner 
 \vhatever any income, tax return or any part thereof, or 
 the amount or source of income appearing in any such re- 
 turn, or the taxes due thereunder, and any person offending 
 against the provisions of this section shall be guilty of a 
 misdemeanor and be punished by a fine not exceeding fifty 
 dollars, or be imprisoned not more than thirty days for each 
 offense. 
 
 At the time said tax payer states to the list-taker that he 
 is liable for a tax upon his income, as herein provided, said 
 list-taker shall note the same on a list to be kept by him for 
 that purpose, and on or before July fifth next he shall re- 
 turn such list to the chairman of the Board of Commission- 
 ers of that county, and said chairman shall within five days 
 thereafter furnish to said Corporation Commission a copy 
 of such list, and the names of any other persons in his coun- 
 ty not appearing thereon, who in his opinion may be liable 
 for an income tax hereunder, and said Corporation Commis- 
 sion may take such steps as he may deem necessary to re- 
 quire any such person whose name is so added to make 
 proper return of his said income. 
 
 Section 24. On all gross incomes as provided in the pre- 
 ceding section hereof, a tax shall be levied as follows : On 
 the excess over the amount legally exempted, one per cent. 
 The above tax shall not be levied upon the income derived 
 from property already taxed, nor upon income less than one 
 thousand dollars. The incomes subject to the above tax 
 are those derived from property not taxed; from salaries, 
 
 (373)
 
 INCOME TAXATION (Appdx. 
 
 fees and commissions, public or private; from annuities, 
 from trades or professions, and from any other sources the 
 incomes from which are not specifically exempted from tax- 
 ation by law. 
 
 Section 25. No city, town, township, or county shall 
 levy any inheritance or income tax. 
 
 HAWAIIAN INCOME TAX LAW 
 
 Session Laws Hawaii, 1901, Act No. 20, pp. 31-35 
 
 Section 1. From and after the first day of July, A. D. 
 1901, there shall be levied, assessed, collected and paid an- 
 nually upon the gains, profits, and income over and above 
 one thousand dollars, derived by every person residing in 
 the territory of Hawaii from all property owned, and all 
 business, trade, profession, employment or vocation carried 
 on in the territory, and by every person residing without 
 the territory from all property owned, and every business, 
 trade, profession, employment or vocation carried on in the 
 territory, and by every servant or officer of the territory, 
 wherever residing, a tax of two per cent, on the amount so 
 derived during the year preceding. 
 
 Section 2. There shall be levied, assessed, collected and 
 paid annually, except as hereinafter provided, a tax of two 
 per cent, on the net profit or income above actual operating 
 and business expenses, from all property owned, and every 
 business, trade, employment or vocation carried on in the 
 territory of Hawaii, of all corporations doing business for 
 profit in the territory, no matter where created and organ- 
 ized: Provided, however, that nothing therein [herein] 
 contained shall apply to corporations, companies or asso- 
 ciations conducted solely for charitable, religious, educa- 
 tional or scientific purposes, including fraternal beneficiary 
 
 (374)
 
 Appdx.) HAWAIIAN INCOME TAX LAW 
 
 societies, nor to insurance companies taxed on a percentage 
 of the premium under the authority of another act. 
 
 Section 3. In estimating the gains, profits, and income 
 of any person or corporation, there shall be included all in- 
 come derived from interest upon notes, bonds and other se- 
 curities, except such bonds of the territory of Hawaii, or of 
 municipalities hereafter created by the territory, the princi- 
 pal and interest of which are by the law of their issuance 
 exempt from all taxation; profits realized within the year 
 from sales of real estate, including leaseholds purchased 
 within two years, dividends upon the stock of any corpora- 
 tion; the amount of all premium on bonds, notes or cou- 
 pons ; the amount of sales of all movable property, less the 
 amount expended on the purchase or production of the 
 same, and in the case of a person not including any part 
 thereof consumed directly by him or his family ; money and 
 the value of all personal property acquired by gift or inher- 
 itance, and all other gains, profits and income derived from 
 any source whatsoever. 
 
 Section 4. The net profits or income of all corporations 
 shall include the amounts paid or payable to, or distributed 
 or distributable among shareholders from any fund or ac- 
 count, or carried to the account of any fund or used for con- 
 struction, enlargements of plant, or any other expenditure 
 or investment paid from the net annual profits made or ac- 
 quired by said corporation. In computing incomes, the nec- 
 essary expenses actually incurred in carrying on any busi- 
 ness, trade, profession, or occupation, or in managing any 
 property, shall be deducted, and also all interest paid by 
 such person or corporation on existing indebtedness. And 
 all government taxes and license fees paid within the year 
 shall be deducted from the gains, profits or income of the 
 person who, or the corporation which, has actually paid the 
 same, whether such person or corporation be owner, tenant 
 or mortgagor; also all losses actually sustained during the 
 
 (375)
 
 INCOME TAXATION (Appdx. 
 
 year incurred in trade or arising from losses by fire not cov- 
 ered by insurance, or losses otherwise actually incurred. 
 Provided, that no deduction shall be made for any amount 
 paid out for new buildings, permanent improvements or 
 betterments made to increase the value of any property or 
 estate. Provided, further, that no deduction shall be made 
 for personal or family expenses, the exemption of one thou- 
 sand dollars, mentioned in section 1, being in lieu of same. 
 Provided, further, that where allowable herein, only one 
 deduction of one thousand dollars shall be made from the 
 aggregate annual income of all the members of one family 
 composed of one or both parents and one or more minor 
 children, or husband and wife ; that guardians shall be al- 
 lowed to make a deduction in favor of each and every ward, 
 except where two or more wards are comprised in one fam- 
 ily, in which case the aggregate deduction in their favor 
 shall not exceed one thousand dollars. Provided, further, 
 that in assessing the income of any person or corporation 
 there shall not be included the amount received from any 
 corporation, as dividends upon the stock of such corpora- 
 tion, if the tax of two per cent, has been assessed upon its 
 net profits by said corporation as required by this act, nor 
 any bequest or inheritance otherwise taxed as such. 
 
 Section 5. Every corporation doing business for profit 
 in the Territory shall make and render to the assessor of 
 its tax division, between the first and thirty-first days of 
 July of each year, beginning in the year 1901, a full return 
 verified by oath or affirmation of its duly empowered offi- 
 cer, in such form as the Treasurer of the Territory may 
 prescribe, of all the following matters for the whole twelve 
 months ending June 30th last preceding the date of such 
 return : 
 
 First. The gross receipts of such corporation from sales 
 made at home or abroad, and from all kinds of business of 
 any name or nature; 
 
 (370)
 
 Appdx.) HAWAIIAN INCOME TAX LAW 
 
 Second. The expenses of such corporation, exclusive of 
 interest, annuities and dividends; 
 
 Third. The amount paid on account of interest, annui- 
 ties and dividends stated separately; 
 
 Fourth. The amount expended on permanent improve- 
 ments; 
 
 Fifth. The amount paid in salaries or compensation of 
 more than six hundred dollars to each person employed, 
 and the name and amount paid to each. 
 
 Section 6. It shall be the duty of all persons of lawful 
 age having an income of six hundred dollars or more for the 
 preceding year, from all sources, and of all corporations 
 made liable to income tax, to make and render a list or re- 
 turn, between the first and thirty-first days of July of each 
 year, in such form as the Treasurer of the Territory may 
 direct, to the assessor of the division in which such persons 
 or corporations reside, locate or do business, of the amount 
 of their or its income, gains and profits as aforesaid; and 
 all guardians, trustees, executors, administrators, agents, 
 receivers, and all corporations or persons acting in a fidu- 
 ciary capacity, shall make or render a list or return, as 
 aforesaid, to the assessor of the division in which such per- 
 son or corporation, acting in a fiduciary capacity, resides or 
 does business, of the amount of income, gains, and profits 
 of any minor or person for whom they act; and the assessor 
 shall require every list or return to be verified by the oath 
 or affirmation of the person or authorized officer of the cor- 
 poration making the same. If any person or corporation 
 refuse or neglect to render such return within the time re- 
 quired as aforesaid, or renders a return which in the opin- 
 ion of the assessor is false and fraudulent, or contains any 
 understatement, it shall be lawful for the assessor to sum- 
 mon such person, or any of the officers of such corporation, 
 or any person having possession, custody or care of books 
 
 (377)
 
 INCOME TAXATION (Appdx. 
 
 of account containing entries relating to the business of 
 such person, or corporation, or any other person he may 
 deem proper, wherever residing or found, to appear before 
 him and produce such books at a time and place named in 
 the summons, and to give testimony or answer interroga- 
 tions under oath, respecting any income liable to tax or the 
 returns thereof. False, willful testimony, given before such 
 assessor shall be deemed perjury and punished as such. 
 
 Section 7. It shall be the duty of every person or cor- 
 poration doing business for profit to keep full, regular and 
 accurate books of accounts upon which all its transactions 
 shall be entered from day to day in regular order, which 
 books shall be open to the inspection of the assessor of 
 the division or any person authorized by him to inspect the 
 same, during business hours. 
 
 Section 8. When any person or corporation having a 
 taxable income refuses or neglects to render any return or 
 list required by law, or declines to take oath or affirmation 
 thereto, the assessor may make such assessments as he 
 may consider just, and the same shall be binding and con- 
 clusive upon all parties and shall not be subject to appeal. 
 In case of any false or fraudulent return or valuation by 
 any taxpayer, the assessor shall add 200 per cent, to the 
 just valuation of the income of such taxpayer and the 
 amount of the tax assessed on such increase shall become 
 part of the tax on the said income. 
 
 Section 9. Any person or corporation who or which has 
 made a legal return as aforesaid may appeal from the 
 amount assessed to the Tax Appeal Court constituted un- 
 der Act 51 of the Session Laws of 1896, in like manner as 
 allowed in case of property tax appeals, and the said court 
 is hereby authorized to hear and determine such appeals 
 subject to the revision of the Supreme Court as provided in 
 the case of property taxes. Where the words "valuation of 
 
 (378)
 
 Appdx.) HAWAIIAN INCOME TAX LAW 
 
 property" or similar words occur in said act concerning 
 such appeals the words "amount of taxable income" shall 
 be understood in all proceedings in regard to appeals from 
 assessments or judgments in income tax matters. Any 
 person or corporation appealing from the assessment of the 
 assessor shall lodge with the assessor on or before the first 
 day of October of each year a notice in writing of his in- 
 tention to appeal and the grounds of such appeal, and de- 
 posit with him the costs of appeal as prescribed in case of 
 property taxes, which costs shall be subject to the regula- 
 tions prescribed in said act. The said Tax Appeal Court 
 shall sit for hearing of tax appeals under the authority of 
 this act between the fifth and twenty-fifth days of October 
 of each year. 
 
 Section 10. The taxes on income imposed shall be due and 
 payable on or before the fifteenth day of November of each 
 year; and any sum or sums annually due and unpaid after 
 the said fifteenth day of November shall have added thereto 
 ten per cent, on the amount which shall be and become a 
 part of such tax. Interest at the rate of nine per cent, per 
 annum shall be added to the amount of such tax and pen- 
 alty from the time same shall become due. 
 
 (379)
 
 INCOME TAXATION (Appdx. 
 
 INCOME TAX PROVISIONS IN STATUTES OF 
 
 OTHER STATES 
 Massachusetts 
 
 "Personal estate, for the purpose of taxation, shall in- 
 clude * * * the income from an annuity, or from ships 
 and vessels engaged in the foreign carrying trade within 
 the meaning of section seven, and the excess above two 
 thousand dollars of the income from a profession, trade or 
 employment accruing to the person to be taxed during the 
 year ending on the first day of May of the year in which 
 the tax is assessed. Incomes derived from property sub- 
 ject to taxation shall not be taxed." Rev. Laws Mass. 1902, 
 p. 206 (Gen. Stat. Mass. c. 11, 4.) 
 
 Tennessee 
 
 "The amount of income derived from United States 
 bonds, and all other stocks and bonds not taxed ad valor- 
 em, shall be taxable" at the rate of five per cent. Code 
 Tenn. 690, 710. 
 
 (380)
 
 INDEX 
 
 [THE FIGTTBES BEFEB TO SECTIONS] 
 
 A 
 
 ACCRUED INTEREST, 
 
 When taxable, though uncollected, 48. 
 When deductible from income, 97. 
 
 ACTIONS, 
 
 To enforce payment of income tax, 123. 
 
 Compromise of, 124. 
 
 To enjoin collection of income tax, 129. 
 To recover tax illegally collected, 130. 
 
 Appeal to Commissioner as pre-requisite, 131. 
 For recovery of penalties, 132. 
 
 ACTS OF CONGRESS, 
 
 Taxing incomes, history and description of, 8. 
 
 Text of, see Appendix. 
 Construction and interpretation of, 29-31. 
 
 ADMINISTRATORS, 
 
 Income tax returns to be made by, 108. 
 When to deduct and withhold income tax, 125. 
 
 ADVERTISING, 
 
 As "necessary expense" of business, 89. 
 
 AGENTS, 
 
 Income tax returns to be made by, for principals, 108. 
 When to deduct and withhold income tax, 125. 
 
 AGRICULTURAL SOCIETIES, 
 
 Validity of exemption of, from income tax, 20. 
 Exemption in favor of, 78. 
 
 AGRICULTURE, 
 
 Products of, as taxable income, 40. 
 
 ALABAMA, 
 
 Income tax law formerly in force in, 8. 
 
 ALIENS, 
 
 Resident, taxation of income of, 61. 
 
 Income from business or property in United States, taxation 
 
 of, 61. 
 Deductions and allowances in case of foreign corporations, 106. 
 
 BL.INC.TAX. (381)
 
 382 INDEX 
 
 [The figures refer to sections] 
 AMORTIZATION, 
 
 Of securities, allowance of deduction for, 103. 
 ANNUITIES, 
 
 Taxable as income, 51. 
 
 Collection of tax on, at the source, 125. 
 APPEAL AND REVIEW, 
 
 Of assessment for income tax, 118. 
 
 As pre-requisite to suit for recovery back of tax, 131. 
 APPORTIONMENT, 
 
 As requisite of federal income tax laws, 28. 
 
 Effect of Sixteenth Amendment, 28. 
 ART GALLERIES, 
 
 Income of, when exempt, 82. 
 ASSESSMENT, 
 
 Of income tax, 117. 
 
 Appeal and review of, 118. 
 
 Not impeachable collaterally, 115. 
 
 Illegal, refund of taxes on, 128. 
 
 Remission of penalties, 132. 
 
 ASSOCIATED WORDS AND PHRASES, 
 
 In income tax laws, construction of, 31. 
 ASSOCIATIONS, 
 
 Unincorporated and joint stock, liability to income tax, 71. 
 
 Certain, exempt from income tax, 78-85. 
 ASYLUMS, 
 
 Exempt from payment of income tax, 81. 
 ATTORNEYS, 
 
 Fees paid to, deductible as expense of business, 89. 
 AWARDS, 
 
 Of money, as taxable income, 38. 
 
 B 
 
 BAD DEBTS, 
 
 Allowance of deduction for, 100. 
 BANKRUPT, 
 
 Persons or corporations, taxation of income of, 65. 
 BANKS, 
 
 Collecting income from foreign investments, to deduct and pay 
 over tax, 125. 
 
 BENEVOLENT ASSOCIATIONS, 
 Exemption in favor of, 81. 
 
 BEQUESTS, 
 
 When taxable as income of legatee, 39.
 
 INDEX 383 
 
 [The figures refer to section!] 
 
 BETTERMENTS, 
 
 Cost of, not deductible as expenses, 96. 
 
 BOARDS OF TRADE, 
 
 Exempt from federal income tax, when, 85. 
 
 BONDS, 
 
 State and municipal, taxation of income from, 17. 
 Of United States, state taxation of income from, 17. 
 Profits on sale of, as income, 46. 
 Income from, when taxable, 52. 
 Interest on, deductible from income, 97. 
 Deduction on account of amortization of, 103. 
 Shrinkage in value of, as "depreciation," 101. 
 Tax on interest on, collected at the source, 125. 
 Foreign, collection of tax on interest on, 125. 
 "Tax free," collection of income tax on, 125. 
 
 BOOK ACCOUNTS, 
 
 Uncollected, when taxable as income, 48. 
 
 BOOKS AND PAPERS, 
 
 Oflicial examination of, to discover taxable income, 116. 
 
 BUILDING AND LOAN ASSOCIATIONS, 
 
 Validity of exemption of, from income tax, 20. 
 When exempt from tax, 83. 
 
 BUILDINGS, 
 
 New, cost of, not deductible, 96. 
 
 BUSINESS, 
 
 Mercantile, profits of, as income, 42. 
 
 Foreign, income from, 60. 
 
 Conducting or carrying on, what constitutes, 62. 
 
 Income from several lines of, how taxed, C3. 
 
 Expenses of, as allowable deduction, 89. 
 
 c 
 
 CALIFORNIA, 
 
 Constitutional provision as to income taxation in, 7. 
 
 CAPITAL, 
 
 Change in form of, or replacement of. not income, 34. 
 Accretion of, distinguished from income, 47. 
 
 CATTLE, 
 
 Profits on raising and sale of, as taxable income, 40. 
 
 CEMETERY COMPANIES, 
 
 When subject to income tax, 81. 
 
 CHAMBERS OF COMMERCE, 
 Exemption in favor of, 85.
 
 384 INDEX 
 
 [The figures refer to sections] 
 
 CHARITABLE ORGANIZATIONS, 
 
 Exemption of, constitutional validity of, 20. 
 Exempt, what are, 81. 
 
 CHILDREN, 
 
 Income of, when to be included in parent's return, 110. 
 
 CIVIC ORGANIZATIONS, 
 
 Exemption in favor of, 85. 
 
 CLASSIFICATION, 
 
 Of persons and property for income taxation, validity of, 12. 
 
 Equal protection of the laws, 13. 
 
 Corporations, partnerships, and individuals, 14. 
 
 Residents and non-residents, 15. 
 
 Validity of exemptions, 20. 
 CLUBS, 
 
 Incorporated, libility of, to income tax, 72. 
 
 COLLECTION, 
 
 Of income tax, 107-125. 
 
 Taxpayers' returns, 107-113. 
 
 Assessment of tax, 117. 
 
 Appeal and review of assessment, 118. 
 
 When tax is payable, 120. 
 
 Penalties for delinquency and false returns, 121. 
 
 Lien of tax, 122. 
 
 Process for recovery of tax, 123. 
 
 Compromise of litigation, 124. 
 
 Collection at the source, 125. 
 
 Injunction does not lie to prevent, 129. 
 
 COLLECTORS OF INTERNAL REVENUE, 
 
 Duties of, as to collection of income tax, 107-125. 
 To require the rendition of returns, 117. 
 Not to disclose taxpayers' returns, 114. 
 Duties of, where no return is filed, 115. 
 
 Examination of books and witnesses, 116. 
 Proceedings by, for recovery of tax, 123. 
 Duties of, in relation to compromising litigation, 124. 
 Protest to, on payment of tax, 127. 
 Suit against, for recovery of taxes paid, 130. 
 
 COLLEGES, 
 
 Exempt from income tax, 82. 
 
 COMMERCE, 
 
 Interstate, state taxation of income derived from, 17. 
 Profits of, as taxable income, 42. 
 
 COMMISSIONER OF INTERNAL REVENUE, 
 Authority to make rules and regulations, 27. 
 Assessment of income tax by, 117.
 
 INDEX 385 
 
 [The figures refer to sections] 
 
 COMMISSIONER OF INTERNAL REVENUE Continued, 
 
 To license persons collecting income from foreign sources, 125. 
 Refund by, of taxes illegally exacted, 128. 
 Appeal to, as pre-requisite to suit for taxes paid, 131. 
 Authority of, as to remission of penalties, 132. 
 
 COMPROMISE, 
 
 Of suits to collect income tax, 124. 
 
 CONDEMNATION PROCEEDINGS, 
 
 Damages paid under, are not income, 34. 
 
 CONGRESS, 
 
 Powers of, as to taxation of incomes, 6. 
 
 Effect of Sixteenth Amendment, 6. 
 Acts of, taxing incomes, history of, 8. 
 
 Text of, see Appendix. 
 Power of, to tax state corporations, 16. 
 
 To tax state and municipal bonds, 17. 
 
 To tax salaries of federal and state officers, 18. 
 
 CONSERVATORS, 
 
 To make income tax returns, 108. 
 
 When to deduct and withhold income tax, 125. 
 
 CONSTITUTIONAL LAW, 
 
 Provisions of federal constitution affecting income tax, 6. 
 
 Provisions of state constitutions, 7. 
 Adoption and construction of Sixteenth Amendment, 6. 
 Constitutionality of income tax laws, 11-28. 
 
 Requirement of due process of law, 11. 
 
 Requirement of equality and uniformity, 12. 
 
 Equal protection of the laws, 13. 
 
 Discrimination between corporations and individuals, 14. 
 
 Discrimination between residents and non-residents, 15. 
 
 Federal taxation of state corporations, 16. 
 
 Taxation of income from non-taxable property, 17. 
 
 Salaries of federal and state officers, 18. 
 
 Exemption of incomes below a fixed sum, 19. 
 
 Exemption of classes of individuals or corporations, 20. 
 
 Allowance of deduction for taxes paid, 21. 
 
 Double taxation, 22. 
 
 Taxing aggregate income of family, 23. 
 
 Validity of graduated or progressive tax, 24. 
 
 Retrospective operation of statute, 25. 
 
 Objections to title or mode of enactment, 26. 
 
 Objections to administrative provisions of act, 27. 
 Publicity features as "unreasonable search," 27. 
 Regulations made by administrative officers, 27. 
 
 Apportionment of federal income tax, 28. 
 
 BL.INC.TAX. 25
 
 386 INDEX 
 
 [The figures refer to pages] 
 CONSTRUCTION, 
 
 Of income tax laws, 29-31. 
 
 Rule of strict construction, 29. 
 
 Statutes in pari materia, 30. 
 
 Associated words and phrases, 31. 
 CONTRACTS, 
 
 Uncompleted, accruing profit on, as income, 49. 
 CORPORATIONS, 
 
 Franchise tax on, distinguished from income tax, 3. 
 
 Federal excise tax of 1909 on, 8. 
 
 Repeal of excise tax on, 9. 
 
 And individuals, discrimination between, validity of, 14. 
 
 Created by states, power of Congress to tax, 16. 
 
 Exemption of classes of, validity of, 20. 
 
 Mining, taxation of income of, 41. 
 
 Profits of, from unauthorized business, taxable as income, 43. 
 
 Dividends of, as income of stockholder, 53. 
 
 Stock dividends, 54. 
 
 Surplus or undivided profits, 55. 
 
 Right to subscribe for new stock, 56. 
 
 Sale and distribution of assets, 57. 
 Subject to income tax, 69. 
 
 Domestic, with foreign branches or agencies, 60. 
 
 Foreign, doing business in United States, 61. 
 
 Conducting several lines of business, 63. 
 
 Officers of, taxation of salaries of, 64. 
 
 Bankrupt and insolvent, 65. 
 
 Effect of dissolution on liability for tax, 66. 
 
 Public service companies, 70. 
 
 Unincorporated associations, 71. 
 
 Incorporated clubs, 72. 
 
 Inactive and holding companies, 73. 
 
 Of Philippines and Porto Rico, 74. 
 
 Insurance companies, 75. 
 Certain, exempt from income tax, 77-85. 
 Dividends on stock of, deductible from income, 104. 
 Foreign, deductions allowed in case of, 106. 
 To deduct and withhold income tax when, 125. 
 To make returns of income for taxation, 107. 
 
 COSTS, 
 
 In suits for recovery of taxes illegally collected, 130. 
 
 COURTS, 
 
 Jurisdiction of suit for recovery of taxes illegally collected, 130. 
 CROPS, 
 
 Profit on sale of, as taxable income, 40. 
 Products consumed by family, 40. 
 Crops unsold at end of year, 40.
 
 INDEX 387 
 
 [The figures refer to sections] 
 
 D 
 
 DEBTS, 
 
 Uncollected, when taxable as income, 48. 
 Interest on, when deductible, 97. 
 Worthless, deduction allowed for, 100. 
 
 DECEDENTS, 
 
 Liability of estates of, to income tax, 66. 
 Proceeds of life insurance exempt, 87. 
 Income-tax returns for estates of, 108. 
 
 DEDUCTIONS, 
 
 Constitutional validity of allowance for, 19. 
 
 Incomes below a fixed sum, 19. 
 
 Other taxes paid, 21. 
 
 Income from property otherwise taxed, 86. 
 Proceeds of life insurance, 87. 
 Fixed amount of income exempt, 88. 
 Expenses of business, 89. 
 
 Wages and salaries, 90. 
 
 Traveling expenses, 91. 
 
 Cost of insurance, 92. 
 
 Rent of land, buildings, or equipment, 93. 
 
 Mining operations, 94. 
 
 Judgments, 95. 
 
 Repairs, new buildings, and improvements, 96. 
 Interest on indebtedness, 97. 
 Taxes accrued or paid, 98. 
 Losses uncompensated, 99. 
 Debts written off as worthless, 100. 
 Depreciation of property, 101. 
 Depletion of ores and other natural deposits, 102. 
 Amortization of bonds, 103. 
 
 Dividends from corporations subject to tax, 104. 
 Special rules as to insurance companies, 105. 
 Rules as to foreign corporations, 106. 
 Method of claiming, in case of collection at the source, 125, 
 
 DEFINITIONS, 
 Income tax, 1. 
 Income, 32. 
 Gains, 33. 
 Profits, 33. 
 
 DEPRECIATION OF PROPERTY, 
 Allowance of deduction for, 101. 
 
 In case of mining companies, 102. 
 Amortization of bonds, 103.
 
 388 INDEX 
 
 [The figures refer to sections! 
 
 DIRECT TAXES, 
 Defined, 5. 
 Income taxes as, 5. 
 
 DISCOUNTS, 
 
 Allowance of deduction for, 97. 
 
 DISSOLUTION OF CORPORATION, 
 
 As affecting liability to income tax, 66. 
 As affecting lien of income tax, 122. 
 
 DISTRAINT, 
 
 Enforcing payment of income tax by, 123. 
 
 DISTRICT OF COLUMBIA, 
 
 Salaries of officers and employes of, taxable, 64. 
 
 DIVIDENDS, 
 
 On corporate stock, as taxable income, 53. 
 
 Stock dividends, 54. 
 
 Surplus or undivided profits, 55. 
 
 Right to subscribe for new stock, 56. 
 Deduction of, from return of income, 104. 
 Of foreign corporations, collection of income tax on, 125. 
 
 DOUBLE TAXATION, 
 
 Constitutional objections to, applied to income tax, 22. 
 
 DUE PROCESS OF LAW, 
 
 Requirement of, in income taxation, 11. 
 
 DWELLING HOUSE, 
 
 Occupied by owner, taxation of rental value of, 36. 
 
 E 
 
 EARNINGS, 
 
 From profession or trade, as taxable income, 37. 
 
 EDUCATIONAL INSTITUTIONS, 
 Validity of exemption of, 20. 
 When exempt from income tax, 82. 
 
 EMBEZZLEMENT, 
 
 Loss sustained by, deductible from income, 99. 
 
 EMINENT DOMAIN, 
 
 Land damages paid under, not income, 34. 
 
 ENGLAND, 
 
 Income tax laws of, 8, 9. 
 Fixed exemption in, 88. 
 
 EQUAL PROTECTION OF THE LAWS, 
 
 Guaranty of, as applied to income taxes, 13.
 
 INDEX 389 
 
 [The figures refer to sections] 
 
 EQUALITY, 
 
 Constitutional requirement of, applied to income taxes, 12. 
 Equal protection of the laws, 13. 
 
 Discrimination between persons and corporations, 14. 
 Discrimination between residents and non-residents, 15. 
 Validity of exemptions, 19, 20. 
 Graduated or progressive tax, 24. 
 
 ESTATES, 
 
 Of decedents, liability of, to income tax, 66. 
 Proceeds of life insurance exempt, 87. 
 Income-tax returns to be made for, 108. 
 
 EVIDENCE, 
 
 Taking of, to determine amount of taxable income, 116. 
 
 EXCISE TAXES, 
 
 Income tax distinguished from, 3. 
 
 EXECUTORS, 
 
 Paying income tax for decedent's estate, 66. 
 
 To make income tax returns, 108. 
 
 When to deduct and withhold income tax, 125. 
 
 EXEMPTIONS, 
 
 Constitutional validity of, 19, 20. 
 
 Incomes below a fixed sum, 19. 
 
 Classes of individuals or corporations, 20. 
 Revenues of United States, 76. 
 States and municipal corporations, 77. 
 Agricultural and horticultural societies, 78. 
 Labor organizations, 79. 
 Fraternal orders and benefit societies, 80. 
 Religious and charitable associations, 81. 
 Educational and scientific institutions, 82. 
 Building and loan associations, 83. 
 Savings institutions, 84. 
 
 Civic organizations and chambers of commerce, 85. 
 Income from property otherwise taxed, 86. 
 Proceeds of life insurance policies, 87. 
 Exemption of fixed amount of income, 88. 
 Specific deductions and allowances, 89-106. 
 Method of claiming, in case of collection at the source, 125. 
 
 EXPENSES, 
 
 Allowance of deduction for, 89, 
 Wages and salaries, 90. 
 Traveling expenses, 91. 
 Cost of insurance, 92. 
 Rent of land, buildings, or equipment, 93. 
 Mining operations, 94. 
 Judgments, 95.
 
 390 INDEX 
 
 .[The figures refer to sections] 
 
 F 
 
 FALSE RETURNS, 
 
 For income tax, penalty for making, 121. 
 
 FAMILY, 
 
 Taxing aggregate income of, validity of, 23. 
 Including income of, in taxpayer's return, 110. 
 
 FARMING, 
 
 Products of, as taxable income, 40. 
 Exemption of agricultural societies, 78. 
 
 FEDERAL CONSTITUTION, 
 See Constitutional Law. 
 
 FEDERAL OFFICERS, 
 
 Salaries of, not taxable by states, 18. 
 
 Disbursing officers to withhold and pay income tax of, 125. 
 
 FEDERAL STATUTES, 
 
 Taxing incomes, history of, 8. 
 
 Text of, see Appendix. 
 Construction and interpretation of, 29-31. 
 
 FEES, 
 
 As taxable income, 37, 64. 
 
 Paid to attorneys, deductible as expenses, 89. 
 
 FOREIGN COUNTRIES, 
 
 Taxation of income derived from property or investments in, 59. 
 Domestic corporations with branches or agencies in, 60. 
 Income from, method of collecting tax on, 125. 
 
 FOURTEENTH AMENDMENT, 
 
 Application of, to income taxation, 11, 13. 
 
 FRANCHISE TAX, 
 
 Income tax distinguished from, 3. 
 
 Laying income tax in addition to, as double taxation, 22. 
 
 FRATERNAL ORDERS, 
 
 Validity of exemption of, from income tax, 20. 
 When exempt from income tax, 80. 
 
 FRAUD, 
 
 In income-tax returns, penalty for, 121. 
 
 FRUIT-GROWERS ASSOCIATION, 
 
 When exempt from income tax, 78. 
 
 G 
 
 GAINS, 
 
 Defined, 33. 
 
 Change of capital or investment distinguished from, 34.
 
 INDEX 391 
 
 [The figures refer to sections] 
 
 GAMBLING, 
 
 Money won at, as taxable income, 38. 
 
 GAS WELLS, 
 
 Allowance for depreciation in, 102. 
 
 GIFTS, 
 
 Of money or property, as taxable income, 38. 
 Legacies and inheritances, 39. 
 
 GOOD-WILL, 
 
 No allowance for depreciation in, 101. 
 
 GRADUATED INCOME TAX, 
 Constitutional validity of, 24. 
 Rates of taxation, 119. 
 
 GROSS RECEIPTS, 
 
 Tax on, as an income tax, 4. 
 
 GROUND RENTS, 
 
 Not taxable as income, 35. 
 
 GUARDIANS, 
 
 To make income-tax returns for wards, 108. 
 
 H 
 
 HAWAII, 
 
 Adoption of Income tax law by, 8. 
 
 Text of income tax law of, see Appendix. 
 
 HOLDING COMPANIES, 
 
 Liability of, to income tax, 73. 
 
 Not entitled to deduct dividends from constituent companies, 104. 
 
 HOSPITALS, 
 
 Exempt from payment of income tax, 81. 
 
 HUSBAND, 
 
 When to include wife's income in his return, 110. 
 
 I 
 
 IMPROVEMENTS, 
 
 Cost of, not deductible as expense, 96. 
 
 INCOME, 
 
 Taxable, what constitutes, 32-57. 
 
 General definitions of, 32. 
 
 "Profits" and "gains" distinguished, 33. 
 
 Change or substitution of capital distinguished from,. 34. 
 
 Rent of land as, 35. 
 
 Royalties on oil or mining lease, 35. 
 
 Rental value of residence, 36.
 
 392 INDEX 
 
 [The figures refer to sections] 
 
 INCOME Continued, 
 
 Salaries and earnings from professions and trades, 37. 
 
 Pensions, gifts, prizes, and awards, 38. 
 
 Legacies and inheritances, 39. 
 
 Products of agriculture or stock-raising, 40. 
 
 Produce of mines and oil and gas wells, 41. 
 
 Profits of mercantile business, 42. 
 
 Profits from unauthorized business, 43. 
 
 Income from partnership business, 44. 
 
 Profits on sale of real estate, 45. 
 
 Profits on sale of securities, 46. 
 
 Increase in value not realized by sale, 47. 
 
 Uncollected interest and accounts, 48. 
 
 Profit to accrue on uncompleted contracts, 49. 
 
 Profits from sale or lease of patent rights, 50. 
 
 Annuities, 51. 
 
 Interest on government bonds, 52. 
 
 Dividends on corporate stock, 53. 
 
 Stock dividends, 54. 
 
 Stockholder's interest in surplus or undivided profits, 55. 
 
 Right to subscribe for new stock, 56. 
 
 Sale and distribution of corporate assets, 57. 
 
 From foreign investments, taxation of, 59. 
 
 Exemptions and exceptions, 76-88. 
 
 Deductions from, for taxation, what allowed, 89-106. 
 
 Taxpayer's return of, and collection of tax, 107-125. 
 
 INCOME TAX, 
 Nature of, 1. 
 
 Distinguished from taxes on property, 2. 
 Distinguished from license and franchise taxes, 3. 
 Tax on gross receipts as, 4. 
 Is a "direct" tax, 5. 
 Constitutional provisions as to, 6, 7. 
 History of, 8. 
 
 Enumeration of statutes in force, 9. 
 Economic aspects of, 10. 
 Constitutional validity of, 11-28. 
 Construction and interpretation of, 29-31. 
 What constitutes taxable income, 32-57. 
 Persons and corporations subject to, 58-75. 
 Corporations and associations exempt, 76-85. 
 Returns for purpose of, and collection of tax, 107-125. 
 Refund and recovery of taxes illegally exacted, 126-132. 
 
 INCREMENT, UNEARNED, 
 
 Taxation of, as income, 45. 
 INHERITANCES, 
 
 When taxable as income, 39.
 
 INDEX 393 
 
 [The figures refer to sections] 
 
 INJUNCTION, 
 
 To prevent payment or collection of income tax, 129. 
 
 INSOLVENT, 
 
 Persons or corporations, taxation of income of, 65. 
 Income-tax return for estate of, 108. 
 
 INSURANCE, 
 
 Life, proceeds of, exempt from income tax, 87. 
 Cost of, as allowable deduction, 92. 
 
 INSURANCE COMPANIES, 
 
 Validity of income tax law exempting, 20. 
 
 Liability of, to income tax, 75. 
 
 Deductions and allowances in case of, 105. 
 
 To deduct and pay over income tax of beneficiaries, 125. 
 
 INTEREST, 
 
 As taxable income, 32. 
 
 Uncollected, whether taxable as income, 48. 
 
 On government bonds, taxability of, 52. 
 
 Paid, deductible from income, 97. 
 
 Adding, as penalty for delinquency, 121. 
 
 From abroad, method of collecting income tax on, 125. 
 
 In suits for recovery of taxes illegally collected, 130. 
 
 INTERSTATE COMMERCE, 
 
 State taxation of income derived from, 17. 
 INTERPRETATION, 
 
 Of income tax laws, 29-31. 
 
 Rule of strict construction, 29. 
 Statutes in pari materia, 30. 
 Associated words and phrases, 31. 
 
 JOINT GUARDIANS AND TRUSTEES, 
 
 Income tax return by one of, when sufficient, 108. 
 
 JOINT OWNERS, 
 
 Income from property of, how taxed, 63. 
 
 JOINT STOCK COMPANIES, 
 
 Liability of, to income tax, 71. 
 
 JUDGES, 
 
 Taxation of salaries of, 18. 
 
 JUDGMENT, 
 
 For money, as taxable income, 38. 
 
 When allowable as a deduction, 95. 
 
 Against collector, for taxes illegally collected, 130.
 
 394 INDEX 
 
 [The figures refer to sections] 
 JURISDICTION, 
 
 Of suit for recovery of taxes illegally collected, 130. 
 
 L 
 
 LABOR UNIONS, 
 
 Validity of income tax law exempting, 20. 
 
 Exemption in favor of, 79. 
 LAND, 
 
 Rent of, as taxable income, 35. 
 
 Profit on sales of, taxable as income, 45. 
 
 Rent of, allowed as a deduction, 93. 
 
 LANDLORD AND TENANT, 
 
 Rent of land as income of landlord, 35. 
 
 Deduction of taxes paid by tenant, 98. 
 
 Who to make return of rent for taxation, 108, 125. 
 LEASED CORPORATIONS, 
 
 Taxability of income of, 73. 
 
 LEGACIES, 
 
 When taxable as income of legatee, 39. 
 LEGAL EXPENSES, 
 
 Deductible as expenses of business, 89. 
 
 LESSEES, 
 
 See Landlord and Tenant. 
 
 LIBRARIES, 
 
 Public, income of, when exempt, 82. 
 LICENSE TAX, 
 
 Income tax distinguished from, 3. 
 
 Laying income tax in addition to, as double taxation, 22. 
 
 Deductible as necessary expense of business, 89. 
 LIEN, 
 
 Of income tax, 122. 
 
 LIFE INSURANCE, 
 
 Proceeds of, exempt from income tax, 87. 
 LIVE STOCK, 
 
 Profits on raising or sale of, as taxable income, 40. 
 LOSSES, 
 
 Deduction allowed for, if not compensated, 99. 
 LOUISIANA, 
 
 Income tax law formerly in force in, 8. 
 
 M 
 
 MARRIED WOMEN, 
 
 When to make separate return of income, 110.
 
 INDEX 395 
 
 [The flgurea refer to sections] 
 
 MASSACHUSETTS, 
 
 Adoption of income tax law by, 8. 
 
 Text of income tax law of, see Appendix. 
 
 MERCHANDISE, 
 
 Profits on sales of, as income, 42. 
 
 MINING, 
 
 Royalty on lease of mining property, as income, 35. 
 Profits from sale of ore, as taxable income, 41. 
 Cost of development work as allowable deduction, 94. 
 Allowance for depletion of ores, 102. 
 
 MISSOURI, 
 
 Income tax law formerly in force in, 8. 
 
 MORTGAGES, 
 
 Deduction of taxes paid by mortgagee, 98. 
 Mortgagor to deduct and pay income tax, when, 125. 
 Foreign, method of collecting tax on income from, 125. 
 
 MUNICIPAL CORPORATIONS, 
 
 Taxation of income from bonds of, 17. 
 Revenues of, exempt from income tax, 77. 
 
 MUSEUMS, 
 
 Income of, when exempt, 82. 
 
 N 
 
 NON-RESIDENTS, 
 
 Discrimination against, in income tax laws, validity of, 15. 
 Having property or business in United States, taxation of, 61. 
 Foreign corporations, deductions allowed in case of, 106. 
 
 NORTH CAROLINA, 
 
 Constitutional provision as to income tax in, 7. 
 
 Adoption of income tax law by, 8. 
 
 Income taxation in force in, 9. 
 
 Text of income tax law of, see Appendix. 
 
 o 
 
 OBSOLESCENCE, 
 
 Depreciation by, allowance of deduction for, 101. 
 
 OCCUPATION TAX, 
 
 Distinguished from income tax, 3. 
 
 Laying income tax in addition to, as double taxation, 22, 
 
 Amount of, deductible as expense of business, 89. 
 
 OCCUPATIONS, 
 
 Earnings from, as taxable income, 37. 
 
 Earnings from several, taxable as one income, 63. 
 
 Certain, exempt from income tax, 78-85.
 
 396 INDEX 
 
 [The figures refer to sections] 
 
 OFFICERS, 
 
 Federal and state, taxation of salaries of, 18. 
 Tax regulations made by, validity of, 27. 
 Salaries of, taxable as income, 64. 
 Withholding and paying income tax on salaries, 125. 
 
 OIL WELLS, 
 
 Royalty on lease of, as income, 35. 
 Profits of, taxable as income, 41. 
 Cost of sinking, as allowable deduction, 94. 
 Allowance for depletion, 102. 
 
 OKLAHOMA, 
 
 Adoption of income tax law by, 8. 
 
 Text of income tax law of, see Appendix. 
 
 PARTNERSHIPS, 
 
 And corporations or individuals, validity of discrimination be- 
 tween, 14. 
 
 Profits of, as income of individual partner, 44. 
 Liability of, to income tax, 67. 
 Limited partnerships, 68. 
 
 PATENTS, 
 
 Profit on sale or lease of, as taxable income, 50. 
 PAYMENT, 
 
 Of income tax, time for, 120. 
 
 Penalties for delinquency, 121. 
 Process to enforce, 123. 
 Of income tax at the source, 125. 
 Of income tax under protest, 127. 
 
 PENALTIES, 
 
 For unlawfully divulging income tax returns, 114. 
 
 For failure to make income tax return, 121. 
 
 For non-payment of tax, 121. 
 
 For false or fraudulent return, 121. 
 
 Remission or refund of, 128, 132. 
 
 PENSIONS, 
 
 As taxable income, 38. 
 
 PHILIPPINES, 
 
 Corporations doing business In, liability to income tax, 74. 
 Officers and employe's of, taxable on salaries, 64. 
 
 PORTO RICO, 
 
 Corporations doing business in, liability to income tax, 74. 
 Officers and employe's of, taxable on salaries, 64.
 
 INDEX 397 
 
 [The figures refer to sections] 
 
 POSTMASTERS, 
 
 Salary of, not taxable by states, 18. 
 
 PRESIDENT OF THE UNITED STATES, 
 Taxation of salary of, 18. 
 
 PRINCIPAL PLACE OF BUSINESS, 
 
 Of corporation, meaning of, 112. 
 
 PRIZES, 
 
 Pecuniary, as taxable income, 38. 
 
 PROFESSIONS, 
 
 Earnings from, as taxable income, 37. 
 Expenses of, as allowable deduction, 89. 
 
 PROFITS, 
 
 Defined, 33. 
 
 Change or replacement of capital distinguished from, 34. 
 
 Of mercantile business, what taxable, 42. 
 
 From unauthorized business, taxable as income, 43. 
 
 On sale of land, as taxable income, 45. 
 
 On sale of securities, when taxable, 46. 
 
 Mere increase in value is not, 47. 
 On sale or lease of patent rights, 50. 
 To accrue on uncompleted contract, 49. 
 Of corporation, undivided, not income of stockholder, 55. 
 
 PROGRESSIVE TAXATION, 
 Constitutional validity of, 24. 
 Rates of taxation, 119. 
 
 PROPERTY, 
 
 Taxes on, distinguished from income tax, 2. 
 Profits on sale of, as income, 45, 46. 
 Taxed, income from, exempt, 86. 
 Rent of, an allowable deduction, 93. 
 Allowance for depreciation of, 101. 
 
 PROTECTION OF THE LAWS, 
 
 Equal, guaranty of, applied to income taxes, 13. 
 
 PROTEST, 
 
 Payment of income tax under, saving right to sue, 127. 
 
 PUBLIC SERVICE CORPORATIONS, 
 Liability of, to income tax, 70. 
 
 PUBLICITY, 
 
 Constitutional objections to publicity features of income tax 
 
 laws, 27. 
 
 Statutory provisions as to, 113. 
 Penalties for unlawfully divulging information, 114,
 
 398 INDEX 
 
 [The figures refer to sections] 
 
 T5 
 
 RAILROADS, 
 
 In Alaska, tax on income of, 74. 
 RANCHING, 
 
 Profits of, as taxable income, 40. 
 RATES, 
 
 Of assessment under income tax laws, 119. 
 REAL ESTATE, 
 
 Rent of, as taxable income, 35. 
 
 Profits on sale of, taxable as income, 45. 
 
 Rent of, an allowable deduction, 93. 
 
 Allowance for depreciation of, 101. 
 
 RECEIPTS, 
 
 Gross, tax on, as an income tax, 4. 
 
 RECEIVER, 
 
 Income from business or property in hands of, 65. 
 
 Returns to be made by, 108. 
 
 To withhold and pay over income tax, 125. 
 
 RECOVERY, 
 
 Of income taxes illegally collected, 126-132. 
 
 REFUND, 
 
 Of income taxes illegally exacted, 128. 
 Remission of penalties, 132. 
 
 REGULATIONS, 
 
 Authority of administrative officers to make, 27. 
 
 RELIGIOUS SOCIETIES, 
 
 Exemption of, constitutional validity of, 20. 
 Exemption in favor of, 81. 
 
 RENT OF LAND, 
 
 As taxable income, 35. 
 
 Royalties on mining or oil lease, 35. 
 Rental value of residence, when taxable, 36. 
 As allowable deduction, 93. 
 Tax on income from, how collected, 125. 
 
 REPAIRS, 
 
 Cost of, deductible from income, 96. 
 
 REPEAL, 
 
 Of corporation tax law of 1909, 9. 
 
 RESIDENCE, 
 
 Occupied by owner, taxation of rental value of, 36.
 
 INDEX 389 
 
 [The figures refer to sections] 
 
 RESIDENTS, 
 
 And non-residents, validity of discrimination between, 15. 
 Taxation of income of, 58. 
 
 Who are, 58. 
 
 Income from foreign property and investments, 59. 
 Tax on, how collected, 125. 
 
 RETROSPECTIVE LAWS, 
 
 Validity of income tax as applied to income of current year, 25. 
 
 RETURNS, 
 
 Of income, for taxation, 107. 
 Who required to make, 107. 
 
 By guardians, trustees, and other fiduciaries, 108. 
 Form and contents of, 109. 
 Including income of wife and children, 110. 
 Time for filing, 111. 
 Where to be filed, 112. 
 Publicity or inspection of, 113. 
 Proceedings where no return filed, 115. 
 Penalties for delinquency and false returns, 121. 
 
 ROYALTIES, 
 
 On mining or oil lease, taxable as income, 35. 
 
 RULES, 
 
 For return and collection of income tax, authority of officers 
 to make, 27. 
 
 s 
 
 SALARY, 
 
 Taxable as income, 37. 
 
 Of state and federal officers, 18. 
 Of officers generally, liability to tax, 64. 
 Deductible as expense of business, 90. 
 Income tax on, how collected, 125. 
 
 SALES, 
 
 Of merchandise, profits on, taxable as income, 42. 
 Of agricultural products, 40. 
 Of products of mining operations, 41. 
 Of real estate, 45. 
 Of securities and investments, 46. 
 Of patent rights, 50. 
 Of assets of corporation, 57. 
 
 SAVINGS BANKS, 
 
 Validity of exemption of, from income tax, 20. 
 
 Taxability of income of, 69. 
 
 When exempt from income tax, 84.
 
 400 INDEX 
 
 [The figures refer to sections] 
 
 SCHOOLS, 
 
 When exempt from income tax, 82. 
 
 SCIENTIFIC INSTITUTIONS, 
 Income of, exempt, 82. 
 
 SEARCHES AND SEIZURES, 
 
 Publicity features of income tax law as authorizing, 27. 
 
 SECURITIES, 
 
 Profits on sale of, as taxable income, 46. 
 
 Increase in value not realized by sale, 47. 
 Foreign, taxation of income from, 59. 
 Allowance for amortization of, 103. 
 Shrinkage in value of, as "depreciation," 101. 
 Foreign, method of collecting tax on income from, 125. 
 
 SELF-CRIMINATION, 
 
 Objections to income tax laws as requiring, 27. 
 
 SIXTEENTH AMENDMENT, 
 Adoption of, 6. 
 Not a grant of new powers, 6. 
 
 SOUTH CAROLINA, 
 
 Adoption of income tax law by, 8. 
 
 Text of income tax law of, see Appendix. 
 
 SPECIAL TAX, 
 
 Income tax as a, 1. 
 
 STATES, 
 
 Constitutional provisions in, affecting income tax, 7. 
 Adoption of income tax by various, 8. 
 Text of income tax laws of, see Appendix. 
 Constitutionality of income tax laws of, 11-28. 
 Corporations created by, power of Congress to tax, 16. 
 Officers of, taxation of salaries of, 18. 
 Duplication of taxes between state and United States, 22. 
 Taxation by, of income from United States bonds, 17. 
 Tax laws of, construction of, 29-31. 
 Income of, not subject to tax, 77. 
 
 STATUTES, 
 
 Taxing incomes, history of, 8. 
 
 Enumeration of those in force, 9. 
 
 Text of, see Appendix. 
 
 Construction and interpretation of, 29-31. 
 
 Rule of strict construction, 29. 
 
 Statutes in pari materia, 30. 
 
 Associated words and phrases, 31. 
 Repeal of 1909 excise tax law, 9.
 
 INDEX 401 
 
 [The figures refer to sections] 
 
 STEAMSHIP COMPANIES, 
 
 Foreign, taxable on business done in United States, 61. 
 Allowance for depreciation of property of, 101. 
 
 STOCK RAISING, 
 
 Profits on, as taxable income, 40. 
 
 STOCKHOLDERS, 
 
 Dividends to, taxable as income, 53. 
 
 Stock dividends, 54. 
 
 Surplus or undivided profits, 55. 
 Right of, to subscribe for new stock, is not income, 56. 
 
 STOCKS, 
 
 Shrinkage in value of, as "depreciation," 101. 
 
 STRICT CONSTRUCTION, 
 
 Applied to income tax laws, 29. 
 SUITS, 
 
 To enforce payment of income tax, 123. 
 
 Compromise of, 124. 
 To recover taxes illegally exacted, 126-132. 
 
 Payment under protest, 127. 
 
 Suit to enjoin collection, 129. 
 
 Suit for recovery of taxes, 130. 
 
 Appeal to Commissioner as pre-requisite, 131. 
 
 Remission of penalties, 132. 
 
 SUPER-TAX, 
 
 Constitutional validity of, 24. 
 Rates of taxation, 119. 
 
 SURPLUS, 
 
 Stockholder's interest in, not income, 55. 
 
 SYNDICATES, 
 
 Liability of, to income tax, 71. 
 
 T 
 
 TAXES, 
 
 Accrued or paid, deduction allowed for, 98. 
 In case of foreign corporations, 106. 
 
 TENNESSEE, 
 
 Constitutional provision as to income taxation in, 7. 
 
 Income taxation in force in, 8, 9. 
 
 Text of income tax law in, see Appendix. 
 
 TEXAS, 
 
 Constitutional provision as to income tax in, 7. 
 
 TIME, 
 
 For filing income-tax returns, 111. 
 For payment of income tax, 120. 
 BL.INC.TAX. 26
 
 402 INDEX 
 
 [The figures refer to sections] 
 
 TRADES, 
 
 Earnings from, as taxable income, 37. 
 Trades unions exempt, 79. 
 
 TRAVELING EXPENSES, 
 
 When deductible as expense of business, 91. 
 
 TRUSTEES, 
 
 To make income-tax returns for beneficiaries, 108. 
 To withhold and pay over income tax, 125. 
 
 TRUSTS, 
 
 Liability of, to income tax, 73. 
 
 u 
 
 ULTRA VIRES, 
 
 Taxation of income from unauthorized business, 43. 
 
 UNDIVIDED PROFITS, 
 
 Stockholder's interest in, not income, 55. 
 
 UNEARNED INCREMENT, 
 Taxation of, as income, 45. 
 
 UNIFORMITY, 
 
 Constitutional requirement of, applied to income taxes, 12. 
 
 UNINCORPORATED ASSOCIATIONS, 
 Liability of, to income tax, 71. 
 
 UNIONS, 
 
 Labor, exempt from income tax, 79. 
 
 UNITED STATES, 
 
 State tax on income from bonds of, 17. 
 
 Revenue of, not subject to income tax, 76. 
 
 Suit against, for recovery of taxes illegally collected, 130. 
 
 UNIVERSITIES, 
 
 Exempt from income tax, 82. 
 
 V 
 
 VIRGINIA, 
 
 Adoption of income tax law by, 8. 
 
 Text of income tax law of, see Appendix. 
 
 VOCATIONS, 
 
 Earnings from, as taxable income, 37. 
 
 w 
 
 WAGERS, 
 
 Winnings on, as taxable income, 38.
 
 INDEX 403 
 
 [The figures refer to sections] 
 
 WAGES, 
 
 Paid, deductible as expense of business, 90. 
 Deduction of income tax from, 125. 
 
 WATERWORKS, 
 
 Municipal, whether subject to income tax, 77. 
 
 WEAR AND TEAR, 
 
 Allowance of deduction for depreciation by, 101. 
 
 WIFE, 
 
 Including income of, in husband's return, 110. 
 When to make separate return, 110. 
 
 WISCONSIN, 
 
 Constitutional provision as to income tax in, 7. 
 
 Adoption of income tax by, 8. 
 
 Income tax in force in, 9. 
 
 Text of income tax law of, see Appendix. 
 
 WITNESSES, 
 
 Examination of, to fix amount of taxable income, 116. 
 
 WORDS AND PHRASES, 
 
 In income tax laws, construction of, 29-31. 
 
 [END OF VOLUME]
 
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