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) ^^ ^^ ^5 ^^ ^^ *~^ 000 o * i" OtoOtoOOOO rHrHCMC^toOOO o 5 ^ rH H 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 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] LAW LIBRARY > UNIVERSITY OF CALIFORNIA 3 LOS ANGELES UC SOUTHERN REGIONAL LIBRARY FACILITY A 000 703 756 7