.M\. ' ‘, I > A'W' N ' ‘ Vrv»Vv* T ‘>1 V\‘»i o f. ‘ yX -x '/■:'y;Vi., ■,y^: .,>:':y''‘ 4 '.\' '^VS :■;:■<*. ^';'.^^.;:'V■xy'■'^■?x■ 'C: • o . ' ; ^ ' \' ' ' \ ' . V > ' ;\’ f,;' - 'C: "''rnyy:' ;.x- , ', ' ''' -.xt x'' " X V'-,' -' ■' v’\‘V' '■''"■\ y'-.“ ■ 4 M 'o' ■' ^ ;!'o;',>\il>v V'' >aV;a.V>'VxV^^^^^ ' ; ", \ .:'7 , vv ' ;•:• y>A\V';" ■■ ' 'i’-.o', ' x'lXi,-; ,s * ■. ^ > ;.% V 'S ', 'i>A,,f xv-f/As -;- '> , '.Jy'-'y r :A\\'A,S X.\\.\.j'.i, ■)■ /A «• ^^ ' ¥ 1^/ - vj s ,> * 'i < X '/is’'*' >1? "% ) '■ ; ’AA '..’i A'.’/ vv ’X i‘;'-'.-x’,x-''.A *-'^''''' -'^'’A.Xas „ ’''- A X;' x-'i'X, k'A'>>f'''<)XXi' ’''A'' y-XXk.yyvXXv.v- V -X ' VV,.'/ ■, ' u: ;v; AVXr A 3 :>J; 0 \x;XX;xAVX-f - '('• \ ^ /'">* i/ ^ ' '> 7 \ ''s; 5'- i f' v,>‘i\:.'’' V- ' .'• ' 'A 'i v;XiVl^XX?v^'V^v•'''!XX'X'X>'^/XV:AXW:■''.' ■ -'A iVxy;.,;, ‘ .} / . ' X •' / ^ V *. 'V X :'\, 1 / /'* '» A/', ' 1 ^ “V ^ x xV . > AVv/ ' '*/h‘, >!.;" A/X'A'..‘.‘‘i;-s'-'')i'.‘'-' -Au'I'JlA'i; /■ '■ i , , ' ^ ‘ I \ \ t'' i- ’ f ‘ j \' y j K\f’' '■f ' ' y* A ' i\. ’*''V 1 /* '■?' /V ■;■ ■ '■'■ 'yyyoyj \ *'i; '. ;X,XXvl/X''v''’y'VkXX.;yxxxA;^^^^ ;■ i ■•-•■' ' - ' ,' / k .' yyxjr. 7y y7i^yy/Xyyx0y^^^^:yy:fiy PROM :T,HE i'iREGQHpS, 10 te|'#SMS«;SSg^^ i ■ ; / ’ ''t''' ' ' ■'■* . ' - ‘i .' /., , r. \ y' / FrROM'.THEk-'/i ■X'aX'A fyX'rXkX akri 'rgsth\i>pniijanf THIS BOOK sent out contains the law and all of subscription. o 2. It is kept up to date by the insertion of new pages as often “as new rulings, regulations or decisions appear. 3. New pages are sent out under first-class postage, accompanied by instructions for proper insertion. , 4. All pages are numbered consecutively; all para- graphs are numbered consecutively in bold figures. ^^^5. On new pages, under the bold face paragraph numbers, in small type, are back references to preceding paragraphs. Corresponding forward .references to the new paragraph numbers should be made each time new pages are received, thus making the book fully cross ref- erenced at all times. 6, The pages and pariagraphs are numbered con- secutively. |f, when new pages are received, corres- ponding intej^ediate pages are found to be missing, notice thereof shoul®^ sent us at once, so that we may for- ward duplicates. THE CORPORATiON TRUST COMPANY t . B' ' a mi 37 W&Il Street, NEW YORK, N. y; a Return this book on or before the Latest Date stamped below. University of Illinois Library OCT L161— H41 Suppietnentary Matters Supplementary Matters i; The President’s Message: re Taxation. Mr. Wilson, in his message to Congress, December 2, 1919, said: “I trust that the Congress will give its immediate consideration to the problem of future taxation. Simplification of the income and profits taxes has become an immediate necessity. These taxes performed indis- pensable service during the war. They must, however, be simplified, not only to save the taxpayer inconvenience and expense, but in order that his liability may be made certain and definite. “With reference to the details of the revenue law, the Secretary of the Treasury and the Commissioner of Internal Revenue will lay before you for your consideration certain amendments necessary or desirable in con- nection with the administration of the law — ^recommendations which have my approval and support. It is of the utmost importance that in dealing with this matter the present law should not be disturbed so far as regards taxes foi the calendar year 1920, payable in the calendar year 1921. The Congress might well consider whether the higher rates of income and profits taxes can in peace times be effectively productive of revenue, and whether they may not, on the contrary, be destructive of business activity and pro- ductive of waste and inefficiency. “There is a point at which in peace times high rates of income and profits taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures and produce industrial stagnation, with consequent unemployment and other attendant evils. “The problem is not an easy one.” The Corporation Trust Company 37 Wall Street, New York. December 3, 1919. ' s./ s .M V 'j r '} { . i; h : ~ t i /.*’!’ i:.^ .C; -i'v ... .v:;A ' ‘v r .' ' - r-.V * '■ ■ - - V 5 .,;,; .,= v • f • ■.■■:,-. - ; i- ''; -Aif <• •■■,!.,:./■ vj /.'s' I .-. . _. ..y. . ,'>ii . ! .-_■; m; {vibnr' ' •■! Ar/. r!(>n;'[u^oH f><.c bsi^oVnunsfi Hiw ?9Si;ri v^tin Oils f'l r:irii nj iuq blfjorie bns oo; "i .> ’ 'll.': -cno'j . ovbj^i Lro\^ {;■ ) '.7/ J . ,'bv^’ ; rc ‘t >bnid ■;'.ir. i'iV; J; liOJ^sIiq /{'n:i yjt)V ^‘i: <' .YHAaivKU 'L^UHi AOir/^Hi}^JHi:XJ MIIT «• ^ s The Law Corporation Croat Companp'a 1913-1919 INCOME TAX SERVICE IN THREE PARTS PART 1.-1913-1918. The Income Tax Law of The Revenue Act of 1918 {Public — No. 254 — 55th Congress.) Approved February 24, 1919 Compiled with Interpreting and Administrative Regulations Issued Under the Acts of October 3, 1913, September 8, 1916, and October 3, 1917. PART II.— 1919. Regulations Issued Since February 12, 1919. PART III. Supplementary Matters Including a Table of Forms and A General Index. COPYRIGHT 1919, BY 37 V/all Street, New York Affiliated with 0Jfp (Eorporation ®r«Ht Olomtiatiy g>{} 0 tpm 15 Exchange Place, .Jersey City Organized 1892. Boston, 53 State Street Washington, D. C., 501 Colorado Bldg. (Corporation Registration Company) Philadelphia, 1428 Land Title Bldg. Chicago, 112 W. Adams Street Portland, Me., 281 St. John Street Los Angeles, Title Insurance Bldg. St. Louis, Federal Reserve Bank Bldg. J The Corporation Company^ Wilmington, 4168 duPont Bldg. Mttsburgh, 1202 Oliver Bldg. (Corporation Trust Co. of America) TABLE OF CONTENTS. PART I. Page The Income Tax Law, as a unit 5 THE COMPILATION.— 1913-1918. Paragraph Individuals 470, 736 Nonresident aliens 492 Corporations 1662 Foreign corporations 2279 Insurance companies. 2225 Returns in general 1434 Returns by individuals ' 1142 Returns by corporations 1398 Payment of the tax 2339 Fiduciaries 1158 Partnerships and personal service corporations 1269 Information at the source 1314 Paym.ent of tax at the source .'C. . 553 Administrative 2472' Supreme Court cases 2667 PART II.— 1919. Regulations, etc., officially issued since February 12, 1919 2824 PART III.— MISCELLANY. See Supplementary Pages at the back of the book. ®ijp*(!Iorjnn:atintt ®r«0t (Sompattg’a 1913-1919 INCOME TAX SERVICE PART I. 1913-1918 The Income Tax Law . of The Revenue Act of 1918 Compiled with Interpreting and Administrative Regulations Issued Under the Acts of October 3, 1913, September 8, 1916, and October 3, 1917. The Income Tax Law of 1918 (Title II of the Revenue Act of 1918) repeals the Income Tax Titles of the Acts of September 8, 1916, and October 3, 1917. The new law imposes higher rates than heretofore but contains numerous alleviating provisions, including exemption from income taxation to personal service corporations per se, restricted allowance for net losses, amortization allowance for special war equipment investments, adjustment of losses sustained in 1919 by virtue of depreciated 1918 inventory or of 1919 rebate payments on 1918 contracts and sales, more equitable depletion allowances, limited taxation of income derived from sales of mining and oil properties by the prospector or wild-catter, and credits against the tax for income and excess-profits taxes paid to other jurisdictions. The new law specifically authorizes inventories, calls for consolidated returns by affiliated corporations, allows to individuals full losses in transactions entered into for profit outside of the trade or business, permits all interest on strictly business indebtedness to be deducted by corporations, allows as a deduction to corporation, dividends received (as did the War-income-tax Act of October 3, 1917), and does away with all withholding on dividends in con- sequence, provides for a specific exemption of $2,000 to corporations, grants the specific personal exemption to nonresident aliens, does away with the allocation, for the purpose of applying the tax rates, of dividends from funds earned since March 1, 1913 (other than certain stock dividends), changes the date for filing returns to the fifteenth day of the third month after the close of the taxpayer’s taxable year, permits individuals to file returns on a fiscal year basis, provides for regular annual returns of income by partner- ships, calls for the payment of one-quarter (or all, if the taxpayer so elects) of the tax on or before the time specified for filing the return, the remaining three-quarters to be paid in equal thirds at three-month intervals thereafter, makes the supplying of information at the source in connection with payments of corporate-obligation interest and foreign items dependent on the Commissioner’s calling for it, in his discretion, increases the minimum amount paid on account of salary, etc., during the calendar year necess- itating a return of information in connection therewith, to $1,000, and ma- terially changes certain administrative features. There are other modifica- tions of prior laws, but, in general, except as noted above, the law remains as it was. INC. 3 TAX COMMENT In the copy of the law printed herein, the official wording, punc- tuation and capitalization have been carefully followed. However, it has been considered advisable to introduce a scheme of spacing and indentation, numbering the arbitrary paragraphs consecutively, which it is hoped will make the various provisions more accessible. When the law paragraphs are repeated in their proper places among the regulations, they are given, in addition to the Law-paragraph num- bers which they bear, bold face general paragraph numbers to fit them in properly with the paragraphs of the regulations which precede and follow them. This will be found to be an advantage in utilizing the cross references and the general index. The date and designation of each ruling or regulation appearing in the compilation are given. Some of the old regulations have been edited by cutting out matters that applied solely to repealed provi- sions of prior Acts (shown by asterisks ***), or by inserting in brackets [ ] words or figures to be read in making the particular sentence applicable to the new law. These regulations, decisions, special letters, etc., explaining, enlarg- ing or giving specific directions for the enforcement of the provisions of the law in a particular paragraph or group of paragraphs of the law, are printed immediately following such law paragraph or group of paragraphs. Any regulation, part of a regulation, letter or other matter contained in our 1914, 1915, 1916, 1917 and 1918 Services not found in this compilation, either has no application to the present provisions or was repealed, amended, superseded, or otherwise annulled, or v/as repeated in a subsequent regulation which has been used as being the latest ruling. It must be remembered that the compilation was prepared, by necessity, before any regulations, based on the Revenue Act of 1918, were issued by the Government. INC. 4 TAX THE FEDERAL INCOME TAX LAW. BEING TITLE II of the REVENUE ACT OF 1918 To Which Have Been Added Title I — General Definitions and Parts of Title XIII — General Administrative Provisions and Title XIV — General Provisions of the Revenue Act of 1918 The arbitrary paragraphs are numbered consecutively on the left. Each paragraph will be found repeated, followed by the provisions of the regulations, if any, relating to it, in the body of the book, beginning on page 55 at the running paragraph the number of which has been placed on the right opposite that particular paragraph in the reprint below. The headings are a part of the Act as passed, except when shown in' brackets. (See Law and Regulations, Page 55.) Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. Law ragraph TITLE I.— GENERAL DEFINITIONS. Section. 1. That when used in this Act — ■ Repeated at If The term “person” includes partnerships and corporations, as well 762 as individuals; ‘ 1686 The term “corporation” includes associations, joint-stock com- 1685 panics, and insurance companies; The term “domestic” when applied to a corporation or partner- 2331 ship means created or organized in the United States; The term “foreign” when applied to a corporation or partnership 2280 means created or organized outside the United States; The term “United States” when used in a geographical sense in- 2281 eludes only the States, the Territories of Alaska and Hawaii, and the District of Columbia; The term “Secretary” means the Secretary of the Treasury; 751 The term “Commissioner” means the Commissioner of Internal 752 Revenue; The term “collector” means collector of internal revenue; 5 753 THE INCOME TAX LAW. t Law Repeated Paragraph at If 1[10 The term “Revenue Act of 1916’V means the Act entitled “An 480 Act to increase the revenue, and for other purposes,^’ approved September 8, 1916; mi The term “Revenue Act of 1917” means the Act entitled “An Act 482 to provide revenue to defray war expenses, and for other purposes,” approved October 3, 1917; ^12 The term “taxpayer” includes any person, trust or estate subject 761 to a tax imposed by this Act; 1[13 The term “Government contract” means (a) a contract made with 1313 the United States, or with any department, bureau, officer, commission, board, or agency, under the United States and acting in its behalf, or with any agency controlled by any of the above if the contract is for the benefit of the United States, or (b) a subcontract made with a con- tractor performing such a contract if the products or services to be furnished under the subcontract are for the benefit of the United States, The term “Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive” when applied to a contract of the kind referred to in clause (a) of this paragraph, includes all such contracts which, although entered into during such period, were originally not enforceable, but which have been or may become enforce- able by reason of subsequent validation in pursuance of law; ^14 The term “military or naval forces of the United States” includes 1007 the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, and the Navy Nurse Corps, Female, but this shall not be deemed to exclude other units otherwise included within such term; 1115 The term “present war” means the war in which the United States 1008 is now engaged against the German Government. 1116 For the purposes of this Act the date of the termination of the 1009 present war shall be fixed by proclamation of the President. TITLE II.— INCOME TAX. Part I. — General Provisions. Definitions. ^17 Sec. 200. That when used in this title — 476 1fl8 The term “taxable year” means the calendar year, or the fiscal 477 year ending during such calendar year, upon the basis of which the 1663 net income is computed under section 212 or section 232. ^19 The term “fiscal year” means an accounting period of twelve 478 months ending on the last day of any month other than December. 1664 ^20 The first taxable year, to be called fthe taxable year 1918, shall be 479 the calendar year 1918 or any fiscal year ending during the calendar 1665 year 1918; THE INCOME TAX LAW. Law Repeated Paragraph at ^ . 1[21 The term “fiduciary*’ means a guardian, trustee, executor, ad- 1169 ministrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate; ^22 The term “withholding agent” means any person required to 584 deduct and withhold any tax under the provisions of section 221 or section 237; f • • ’ ^23 The term “personal service corporation” means ^ a corporation 1308 whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged ^ in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income- producing factor; If 24 '^but does not include any foreign corporation, 13Q9 1f25 nor any corporation 50 per centum or more of whose gross income con- 1310 sists either 1f26 (1) of gains, profits or income derived from trading as a principal, 131 1 or Tf27 (2) of gains, profits, commissions, or other income, derived from 1312 a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive; Tf28 The term “paid,” for the purposes of the deductions and credits 1923 under this title, means “paid or accrued” or “paid or incurred,” and the terms “paid or incurred” and “paid or accrued” shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212. rr1 ■' ' ■’ Dividends. 1f29 Sec. 201. (a) That the term “dividend” when used in this title 770 (except in paragraph (10) of subdivision (a) of section 234) means ^30 (1) any distribution made by a corporation, other than a personal 771 service corporation, to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, or ^31 (2) any such distribution made by a personal service corporation out 772 of its earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918. 1[32 (b) Any distribution shall be deemed to have been made from 800 earnings or profits unless all earnings and profits have first been distributed. 1133 Any distribution made in the year 1918 or any year thereafter shall SOl be deemed to have been made from earnings or profits accumulated since February 28, 1913, or. 7 THE INCOME TAX LAW. Law Repeated Paragraph at ^ ^34 in the case of a personal service corporation, from the most 803 recently accumulated earnings or profits; 1[35 but any earnings or profits accumulated prior to March 1, 1913, may 810 be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. 1(36 (c) A dividend paid in stock of the corporation shall be consid- 811 ered income to the amount of the earnings or profits distributed. ^37 Amounts distributed in the liquidation of a corporation shall be 828 treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. ^38 (d) If any stock dividend (1) is received by a taxpayer between 831 January 1 and November 1, 1918, both dates inclusive, or Tf39 (2) is during such period bona fide authorized or declared, and 832 entered on the books of the corporation, and is received by a taxpayer after November 1, 1918, and before the expiration of thirty days after passage of this Act, Tf40 then such dividend shall, in the manner provided in section 206, be 833 taxed to the recipient at the rates prescribed by law for the years in which the corporation accumulated the earnings or profits from which such dividend was paid, but the dividend shall be deemed to have been paid from the most recently accumulated earnings or profits. 1[41 (e) Any distribution made during the first sixty days of any tax- 845 able year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; ^42 but any distribution made during the remainder of the taxable year 846 shall be deemed to have been made from earnings or profits accumu- lated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated jatably during such period. Basis for Determining Gain or Loss. ^43 Sec. 202. (a) That for the purpose of ascertaining the gain 1854 derived or loss sustained from the sale or other disposition of prop- erty, real, personal, or mixed, the basis shall be — ‘^44 ( 1 ) In the case of property acquired before March 1, 1913, the 1855 fair market price or value of such property as of that date; and ^45 (2) In the case of property acquired on or after that date, the 1860 cost thereof; or the inventory value, if the inventory is made in accordance with section 203. 8 THE INCOME TAX LAW. Law Repsated Paragraph at ^ 1[46 (b) When property is exchanged for other property, the property 1909 received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; ^47 but when in connection with the reorganization, merger, or consolida- 1910 tion of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, U48 no gain or loss shall be deemied to occur from the exchange, and the 1911 new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged. 1[49 When in the case of any such reorganization, merger or consolida- 1912 tion the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock or securities exchanged, a like amount in par or face value of the new stock or securities received shall be treated as taking the place of the stock or securities exchanged, and the amount of the excess in par or face value shall be treated as a gain to the extent that the fair market value of the new stock or securities is greater than the cost (or if ac- quired prior to March 1, 1913, the fair market value as of that date) of the stock or securities exchanged. Inventories. T[50 Sec. 203. That whenever in the opinion of the Commissioner 1861 the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the incom.e. Net Losses. ^51 Sec. 204. (a) That as used in this section the term “net loss” 1913 refers only to net losses resulting from either T[52 (1) the operation of any business regularly carried on by the 1914 taxpayer, or 1[53 (2) the bona fide sale by the taxpayer of plant, buildings, 1915 machinery, equipmient or other facilities, constructed, in- stalled or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war; ^54 and when so resulting means the excess of the deductions allowed 1916 by law (excluding in the case of corporations amounts allowed as a deduction under paragraph (6) of subdivision (a) of section 234) over the sum of the gross income plus any interest received free from taxation both under this title and under Title III. 9 THE INCOME TAX LAW. PK Law Repeated Paragraph at ^ T[55 (b) If for any taxable year beginning after October 31, 1918, and 1917 ending prior to January 1, 1920, it appears upon the production of evi- dence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; 1[56 and the taxes imposed by this title and by Title III for such pre- 1918 ceding taxable year shall be redetermined accordingly. 1f57 Any amount found to be due to the taxpayer upon the basis of such 1919 redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. T[58 If such net loss is in excess of the net income for such preceding tax- 1920 able year, the amount of such excess shall under regulations pre- scribed by the Commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the suc- ceeding taxable year. ^59 (c) The benefit of this section shall be allowed to the members 1921 of a partnership and the beneficiaries of an estate or trust under regu- lations prescribed by the Commissioner with the approval of the Secretary. Fiscal Year with Different Rates. ^60 Sec. 205. (a) That if a taxpayer makes return for a fiscal year 1666 beginning in 1917 and ending in 1918, his tax under this title for the first taxable year shall be the sum of: Tf61 ^ (1) the same proportion of a tax for the entire period compu;ted 1667 under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 and under Title I of the Revenue Act of 1917, which the portion of such period falling within the calen- dar year 1917 is of the entire period, and Tf62 (2) the same proportion of a tax for the entire period com- 1668 puted under this title at the rates for the calendar year 1918 which the portion of such period falling within the calendar year 1918 is of the entire period; Tf63 Provided, That in the case of a personal service corporation the amount 1669 to be paid shall be only that specified in clause (1). ^64 Any amount heretofore or hereafter paid on account of the tax 1670 imposed for such fiscal year by Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, and by Title I of the Revenue Act of 1917, shall be credited towards the payment of the tax imposed for such fiscal year by this act, and if the amount so paid exceeds the amount of such tax imposed by this act, or, in the case of a personal service corporation, the amount specified in clause (1), the excess shall be credited or refunded in accordance with the provisions of section 252. 10 THE INCOME TAX LAW. Law Repeated Paragraph at ^ Tf65 (b) If a taxpayer makes a return for a fiscal year beginning in 1918 1671 and ending in 1919, the tax under this title for such fiscal year shall be the sum of: Tf66 (1) the same proportion of a tax for the entire period com- 1672 puted under this title at the rates specified for the calendar year 1918 which the portion of such period falling within the calendar year 1918 is of the entire period, and 1f67 (2) the same proportion of a tax for the entire period com- 1673 puted under this title at the rates specified for the calendar year 1919 which the portion of such period falling within the calendar year 1919 is of the entire period. 1f68 (c) If a fiscal year of a partnership begins in 1917 and ends in 1918 1674 or begins in 1918 and ends in 1919, then notwithstanding the pro- visions of subdivision (b) of section 218, ]f69 (1) the rates for the calendar year during which such fiscal 1675 year begins shall apply to an amount of each partner’s share of such partnership net income (determined under the law applicable to such year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and ^70 (2) the rates for the calendar year during which such fiscal 1676 year ends shall apply to an amount of each partner’s share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year: T[71 Provided j That in the case of a personal service corporation with 1677 respect to a fiscal year beginning in 1917 and ending in 1918, the amount specified in clause (1) shall not be subject to normal tax. Parts of Income Subject to Rates for Different Years. ^[72 Sec. 206. That whenever parts of a taxpayer’s income are 1678 subject to rates for different calendar years, the part subject to the rates for the most recent calendar year shall be placed in the lower brackets of the rate schedule provided in this title, the part subject to the rates for the next preceding calendar year shall be placed in the next higher brackets of the rate schedule applicable to that year, and so on until the entire net income has been accounted for. ^73 In determining the income, any deductions, exemptions or credits 1679 of a kind not plainly and properly chargeable against the income taxable at rates for a preceding year shall first be applied against the income subject to rates for the most recent calendar year; 1[74 but any balance thereof shall be applied against the income subject 1680 to the rates of the next preceding year or years until fully allowed. 11 Law Paragraph THE INCOME TAX LAW. Repeated at t Part II. — Individuals. ' Normal Tax. ^75 Sec. 210. That, in lieu of the taxes imposed by subdivision (a) 471 of section 1 of the Revenue Act of 1916 and by section 1 of the Revenue 497 Act of 1917, there shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax at the following rates: ^76 (a) For the calendar year 1918, 12 per centum of the amount 472 of the net income in excess of the credits provided in section 216: 498 lf77 Provided^ That in the case of a citizen or resident of the United 473 States the rate upon the first $4,000 of such excess amount shall he 6 per centum; ^78 (b) For each calendar year thereafter, 8 per centum of the 474 amount of the net income in excess of the credits provided in section 499 216: If 79 Provided, That in the case of a citizen or resident of the United 475 States the rate upon the first $4,000 of such excess amount shall be 4 per centum. Surtax. 180 Sec. 211. (a) That, in lieu of the taxes imposed by sub- 736 division (b) of section 1 of the Revenue Act of 1916 and by section 500 2 of the Revenue Act of 1917, but in addition to the normal tax imposed by section 210 of this Act, there shall be levied, collected, and paid for each taxable year upon the net income of every in- dividual, a surtax equal to the sum of the following: ^81 1 per centum of the amiount by which the net income exceeds 737 $5,000 and does not exceed $6,000; 2 per centum of the amount by which the net income exceeds $6,000 and does not exceed $8,000; 3 per centum of the amount by which the net income exceeds $8,000 and does not exceed $10,000; 4 per centum of the amount by which the net income exceeds $10,000 and does not exceed $12,000; 5 per centum of the amount by which the net income exceeds $12,000 and does not exceed $14,000; 6 per centum of the amount by which the net income exceeds $14,000 and does not exceed $16,000; 7 per centum of the amount by which the net income exceeds $16,000 and does not exceed $18,000; 8 per centum of the amount by which the net income exceeds $18,000 and does not exceed $20,000; 9 per centum of the amount by which the net income exceeds $20,000 and does not exceed $22,000; 10 per centum of the amount by which the net income ex- ceeds $22,000 and does not exceed $24,000; 11 per centum of the amount by which the net income ex- ceeds $24,000 and does not exceed $26,000; 12 THE INCOME TAX LAW. Law Paragraph (^81) 12 per centum of ceeds $26,000 and 13 per centum of ceeds $28,000 and 14 per centum of ceeds $30,000 and 15 per centum of ceeds $32,000 and 16 per centum of ceeds $34,000 and 17 per centum of ceeds $36,000 and 18 per centum of ceeds $38,000 and 19 per centum of ceeds $40,000 and 20 per centum of ceeds $42,000 and 21 per centum of ceeds $44,000 and 22 per centum of ceeds $46,000 and 23 per centum of ceeds $48,000 and 24 per centum of ceeds $50,000 and 25 per centum of ceeds $52,000 and 26 per centum of ceeds $54,000 and 27 per centum of ceeds $56,000 and 28 per centum of ceeds $58,000 and 29 per centum of ceeds $60,000 and 30 per centum of ceeds $62,000 and 31 per centum of ceeds $64,000 and 32 per centum of ceeds $66,000 and 33 per centum of ceeds $68,000 and 34 per centum of ceeds $70,000 and 35 per centum of ceeds $72,000 and 36 per centum of ceeds $74,000 and 37 per centum of ceeds $76,000 and 38 per centum of ceeds $78,000 and the amount by which the does not exceed $28,000; the amount by which the does not exceed $30,000; the amount by which the does not exceed $32,000; the amount by which the does not exceed $34,000; the amount by which the does not exceed $36,000; the amount by which the does not exceed $38,000; the amount by which the does not exceed $40,000; the amount by which the does not exceed $42,000; the amount by which the does not exceed $44,000; the amount by which the does not exceed $46,000; the amount by which the does not exceed $48,000; the amount by which the does not exceed $50,000; the amount by which the does not exceed $52,000; the amount by which the does not exceed $54,000; the amount by which the does not exceed $56,000; the amount by which the does not exceed $58,000; the amount by which the does not exceed $60,000; the amount by which the does not exceed $62,000; the amount by which the does not exceed $64,000; the amount by which the does not exceed $66,000; the amount by which the does not exceed $68,000; the amount by which the does not exceed $70,000; the amount by which the does not exceed $72,000; the amount by which the does not exceed $74,000; the amount by which the does not exceed $76,000; the amount by which the does not exceed $78,000; the amount by which the does not exceed $80,000; Repeated net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- 13 THE INCOME TAX LAW. lK>|Law Repeated Paragraph at t (1f81) 39 per centum of the amount by which the net income ex- (737) ceeds $80,000 and does not exceed $82,000; 40 per centum of the amount by which the net income ex- ceeds $82,000 and does not exceed $84,000; 41 per centum of the amount by which the net income ex- ceeds $84,000 and does not exceed $86,000; 42 per centum of the amount by which the net income ex- ceeds $86,000 and does not exceed $88,000; 43 per centum of the amount by which the net income ex- ceeds $88,000 and does not exceed $90,000; 44 per centum of the amount by which the net income ex- ceeds $90,000 and does not exceed $92,000; 45 per centum of the amount by which the net income ex- ceeds $92,000 and does not exceed $94,000; 46 per centum of the amount by which the net income ex- ceeds $94,000 and does not exceed $96,000; 47 per centum of the amount by which the net income ex- ceeds $96,000 and does not exceed $98,000; 48 per centum of the amount by which the net income ex- ceeds $98,000 and does not exceed $100,000; 52 per centum of the amount by which the net income ex- ceeds $100,000 and does not exceed $150,000; 56 per centum of the amount by which the net income ex- ceeds $150,000 and does not exceed $200,000; 60 per centum of the amount by which the net income ex- ceeds $200,000 and does not exceed $300,000; 63 per centum of the amount by which the net income ex- ceeds $300,000 and does not exceed $500,000; 64 per centum of the amount by which the net income ex- ceeds $500,000 and does not exceed $1,000,000; 65 per centum of the amount by which the net income ex- ceeds $1,000,000. ^82 r (b) In the case of a bona fide sale of mines, oil or gas wells, or''any 738 interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest. Net Income Defined Tf83 ^ Sec. 212. (a) That in the case of an individual the term “net J.754 income” means the gross income as defined in section 213, less the^501 deductions allowed by section 214. 1184 (b) The net income shall be computed upon the basis of the tax- 755 payer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; 1f85 but if no such method of accounting has been so employed, 756 or if the method employed does not clearly reflect the in- come, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. 14 THE INCOME TAX LAW. Law Repeated Paragraph at ^ ^86 If the taxpayer’s annual accounting period is other than a fiscal year 757 as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. 1f87 If a taxpayer changes his accounting period from fiscal year to 758 calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of section 226. Gross Income Defined. Tf88 bee. 213. That for the purposes of this title (except as other- 763 wise provided in section 233) the term “gross income” — Tf89 (a) Includes gains, profits, and income derived from salaries, 764 wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Suprem.e and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the com- pensation received as such), of whatever kind and in whatever form paid, or Tf90 from professions, vocations, trades, businesses, commerce, or sales, 765 or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; 1[91 also from interest, rent, dividends, securities, [or the transaction 766 of any business carried offifor gain or profit, or ^92 gains'or profits and income derived from any source whatever. 767 ^93 The amount of all such items shall be included in the gross income 768 for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; but Tf94 (b) Does not include the following items, which shall be exempt 944 from taxation under this title: Tf95 (1) The proceeds of life insurance policies paid upon the death 945 of the insured to individual beneficiaries or to the estate of the Insured; Tf96 (2) The amount received by the Insured as a return of premium 946 or premiums paid by him under life insurance, endowment, or an- nuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; 1(97 (3) The value of property acquired by gift, bequest, devise, or 961 descent (but the income from such property shall be Included in gross income); 15 THE INCOME TAX LAW. Law Repeated Paragraph at ^ ^98 (4) Interest upon (a) the obligations of a State, Territory, or 963 any political subdivision thereof, or the District of Columbia; or ^99 (b) securities issued under the provisions of the Federal 964 Farm Loan Act of July 17, 1916; or IflOO (c) the obligations of the United States or its possessions; or 965 ^[101 (d) bonds issued by the War Finance Corporation: 966 1[102 Provided^ That every person owning any of the obligations, securities or 967 bonds enumerated in clauses {a),{b), (c) and {d) shall, in the return re- quired by this title, submit a statement showing the number and amount of such obligations, securities and bonds owned by him and the income received therefrom, in such form and with such information as the Commis- sioner may require. ^103 In the case of obligations of the United States issued after September 975 1, 1917, and in the case of bonds issued by the War Finance Corpora- tion, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under this title and under Title III; If 104 (5) The income of foreign governments received from invest- 996 merits in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments, or from any other source within the United States; 1[105 (6) Amounts received, through accident or health insurance 998 or under workmen’s compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness; lfl06 (7) Income derived from any public utility or the exercise of any 1004 essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the government of any possession of the United States, or any political subdivision thereof. 11107 Whenever any State, Territory, or the District of Columbia, or any 1005 political subdivision of a State or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, District of Columbia, or political subdivision; but this provision is not intended to confer upon such person any financial gain or exempton or to relieve such person from the payment of a tax as provided for in this title upon the part or 16 THE INCOME TAX LAW.. Law Repeated Paragraph at ^ portion of such income to which such person is entitled under such contract; ^108 (8) So much of the amount received during the present war by a person 1006 in the military or naval forces of the United States as salary or com- pensation in any form from the United States for active services in such forces, as does not exceed $3,500. ^109 (c) In the case of nonresident alien individuals, gross income 503 includes only the gross income from sources within the United States, ^[110 including interest on bonds, notes, or other interest-bearing obliga- 505 tions of - residents, corporate or otherwise, dividends from resident corporations, and 1[111 including all amounts received (although paid under a contract for 508 the sale of goods or otherwise) representing profits on the manu- facture and disposition of goods within the United States. Deductions Allowed. T[112 Sec. 214. (a) That in computing net income there shall be allowed 1019 as deductions: ^113 (1) All the ordinary and necessary expenses paid or incurred 1020 during the taxable year in carrying on any trade or business, 1fll4 including a reasonable allowance for salaries or other compensation 1021 for personal services actually rendered, and ^115 including rentals or other payments required to be made as a con- 1022 dition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity; (2) All interest paid or accrued within the taxable year on in- 1049 debtedness, except on indebtedness incurred or continued to purchase or 1050 carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or, in the case of a nonresident alien individual, the proportion of such 531 interest which the amount of his gross income from sources within the United States bears to the amount of his gross income from all sources within and without the United States; (3) Taxes paid or accrued within the taxable year imposed 1052 (a) by the authority of the United States, except income, war- 1053 profits and excess-profits taxes; or (b) by the authority of any of its possessions, except the amount of 1054 income, war-profits and excess-profits taxes allowed as a credit under section 222; or 11116 mu 1fll8 mi9 i;i2o 11121 17 THE. INCOME TAX LAW. Law Repeated Paragraph at ^ ^122 (c) by the authority of any State or Territory, or any county, 1055 school district, municipality, or other taxing subdivision of any State or Territory, 1[123 not including those assessed against local benefits of a kind tending 1056 to increase the value of the property assessed; or 1[124 (d) in the case of a citizen or resident of the United States, by 1057 the authority of any foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 222; or 1(125 (e) in the case of a nonresident alien individual, by the authority of 533 any foreign country (except income, war-profits and excess-profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon property or busi- ness; 1(126 (4) Losses sustained during the taxable year and not compen- 1066 sated for by insurance or otherwise, if incurred in trade or business; 1(127 (5) Losses sustained during the taxable year and not compensated 1084 for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; 1(128 but in the case of a nonresident alien individual only as to 534 such transactions within the United States; 1(129 (6) Losses sustained during the taxable year of property not 1085 connected with the trade or business 1(130 (but in the case of a nonresident alien individual only prop- 535 erty within the United States) K131 if arising from fires, storms, shipwreck, or other casualty, or from 1086 theft, and if not com.pensated for by insurance or otherwise; 1(132 (7) Debts ascertained to be worthless and charged off within 1088 the taxable year; 1(133 (8) A reasonable allowance for the exhaustion, wear and tear of 1089 property used in the trade or business, including a reasonable allowance for obsolescence; 1(134 (9) In the case of buildings, machinery, equipment, or other 1093 facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the tax- payer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. 18 THE INCOME TAX LAW. Law Repeated Paragraph at ^ ifl35 At any time within three years after the termination of the present 1094 war, the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was in- correct, the taxes imposed by this title and by Title III for the year or years affected shall be redetermined; and 1fl36 the amount of tax due upon such redetermination, if any, shall be 1095 paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252; TI137 (10) In the case of mines, oil and gas wells, other natural de- 1096 posits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: 1fl38 Provided, That in the case of such properties acquired prior 1097 to March 1, 1913, the fair market value of the property {or the taxpayers interest therein) on that date shall be taken in lieu of cost up to that date: Tfl39 Provided further. That in the case of mines, oil and gas wells, 1098 discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially dis- proportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; If 140 such reasonable allowance in all the above cases to be made under 1099 rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. ^141 In the case of leases the deductions allowed by this paragraph shall be 1100 equitably apportioned between the lessor and lessee; 1(142 (11) Contributions or gifts made within the taxable year to 1102 corporations organized and operated exclusively for religious, charit- able, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to the special fund for vocational rehabilitation authorized by section 7 of the Vocational Rehabilitation Act, to an amount not in excess of 15 per centum of the taxpayer’s net income as computed without the benefit of this paragraph. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary. 1fl43 In the case of a nonresident alien individual this deduction 536 shall be allowed only as to contributions or gifts made to domestic corporations, or to such vocational rehabilitation fund; 19 THE INCOME TAX LAW. Law Repeated Paragraph at ^ ^144 (12) (a) At the time of filing return for the taxable year 1918 a 1119 taxpayer may file a claim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year, 1fl45 or from the actual payment after the close of such taxable year of re- 1120 bates in pursuance of contracts entered into during such year upon sales made during such year. ^146 In such case payment of the amount of the tax covered by such claim 1121 shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallowed then the remain- der of the tax due shall on notice and demand by the collector be paid by the taxpayer with interest at the rate of 1 per centum per month from the timie the tax would have been due had no such claim been filed. ^147 If it is shown to the satisfaction of the Commissioner that such sub- 1122 stantial loss has been sustained, then in computing the tax imposed by this title the am^ount of such loss shall be deducted from the net income. 1[148 (b) If no such claim is filed, but it is shown to the satisfaction of the 1123 Commissioner that during the taxable year 1919 the taxpayer has sustained a substantial loss of the character above described then the amiount of such loss shall be deducted from the net incom.e for the taxable year 1918 and the tax imposed by this title for such year shall be redetermined according!]/. Any amiount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. ^149 (b) In the case of a nonresident alien individual the deductions 529 allowed in paragraphs (1), (4), (7), (8), (9), (10), (12), and clause (e) of paragraph (3), of subdivision (a) shall be allowed only if and to the extent that they are connected with income arising from a source within the United States; lfl50 and the proper apportionment and allocation of the deductions with 530 respect to sources of income within and without the United States shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Items Not Deductible. ^151 Sec. 215. That in computing net income no deduction shall in 1023 any case be allowed in respect of— ^152 (a) Personal, living, or family expenses; 1024 ^153 (b) Any amount paid out for new buildings or for permanent 1025 improvements or betterments made to increase the value of any property or estate; 20 THE INCOME TAX LAW. Law Repeated Paragraph at ^ If 154 (c) Any amount expended in restoring property or in making 1027 good the exhaustion thereof for which an allowance is or has been made; or Tfl55 (d) Premiums paid on any life insurance policy covering the life of 1028 any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. Credits Allowed. 1fl563 Sec. 216. That for the purpose of the normal tax only there 1124 shall be allowed the following credits: ^157 (a) The amount received as dividends from a corporation which 1125 is taxable under this title upon its net income, and amounts received as dividends from a personal service corporation out of earnings or profits upon which income tax has been imposed by Act of Congress; If 158 (b) The amount received as interest upon obligations of the 1127 United States and bonds issued by the War Finance Corporation, which is included in gross income under section 213; If 159 (c) In the case of a single person, a personal exemption of 1128 $1,000, or ^160 in the case of the head of a family or a married person living with 1129 husband or wife, a personal exemption of $2,000. 3fl61 A husband and wife living together shall receive but one personal 1134 exemption of $2,000 against their aggregate net income; 1fl62jand in case they make separate returns, the personal exemption of 1136 $2,000 may be taken by either or divided between them; Tfl63 (d) $200 for each person (other than husband or wife) dependent 1138 upon and receiving his chief support from the taxpayer, if such de- pendent person is under eighteen years of age or is incapable of self- support because mentally or physically defective .'J ^164 J''(e) In the case of a nonresident alien individual who is a citizen 537 or subject of a country which imposes an income tax, the credits allowed in subdivisions (c) and (d) shall be allowed only if such country allows a similar credit to citizens of the United States not .residing in such country. Nonresident Aliens — Allowance ofjDeductions and Credits .j If 165] Sec. 217. That a nonresident alien individual shall receive the 538 benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received from all sources corporate or otherwise in the United States, in the manner prescribed by this title, including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits: 21 THE INCOME TAX LAW. Law Repeated Paragraph at ^ Tfl66 Provided, That the benefit of the credits allowed in subdivisions 541 {c) and (d) of section 216 may, in the discretion of the Com- missioner, and except as otherwise provided in subdivision {e) of that section, be received by filing a claim therefor with the zvithholding agent. 1[167 In case of failure to file a return, the collector shall collect the tax 542 on such income, and all property belonging to such nonresident alien individual shall be liable to distraint for the tax. Partnerships and Personal Service Corporations. T[168 Sec. 218. (a) That individuals carrying on business in partner- 1269 ship shall be liable for income tax only in their individual capacity. T[169 There shall be included in computing the net income of each partner 1280 his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, 1[170 if his net income for such taxable year is computed upon the basis 1281 of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partner- ship ending within the fiscal or calendar year upon the basis of which the partner’s net income is computed. 1[171 The partner shall, for the purpose of the normal tax, be allowed 1289 as credits, in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the partnership. 11172 (b) If a fiscal year of a partnership ends during a calendar year 1290 for which the rates of tax differ from those for the preceding calendar year, then 1[173 (1) the rates for such preceding calendar year shall apply 1291 to an amount of each partner’s share of such partnership net incom^e equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and If 174 (2) the rates for the calendar year during which such fiscal 1292 year ends shall apply to the remainder. If 175 (c) In the case of an individual member of a partnership which 1294 makes return for a fiscal year beginning in 1917 and ending in 1918, his proportionate share of any excess-profits tax imposed upon the part- nership under the Revenue Act of 1917 with respect to that part of such fiscal year falling in 1917, shall, for the purpose of determining the tax imposed by this title, be credited against that portion of the net income embraced in his personal return for the taxable year 1918 to which the rates for 1917 apply. 1fl76 (d) The net income of the partnership shall be computed in the 1295 samie manner and on the same basis as provided in section 212 except 22 THE INCOME TAX LAW. Law Repeated Paragraph at that the deduction provided in paragraph (11) of subdivision (a) of section 214 shall not be allowed. 1[177 (e) Personal service corporations shall not be subject to taxation 1305 under this title, but the individual stockholders thereof shall be taxed in the same manner as the members of partnerships. 1[178 All the provisions of this title relating to partnerships and the mem- 1306 bers thereof shall so far as practicable apply to personal service cor- porations and the stockholders thereof: If 179 Provided, That for the purpose of this subdivision amounts dis~ 1307 tributed by a personal service corporation during its taxable year shall be accounted for by the distributees ; and any portion of the net income remaining undistributed at the close of its taxable year shall be accounted for by the stockholders of such corpora- tion at the close of its taxable year in proportion to their re- spective shares. Estates and Trusts. IflSO Sec. 219. (a) That the tax imposed by sections 210 and 211 1217 shall apply to the income of estates or of any kind of property held in trust, including — lfl81 (1) Income received by estates of deceased persons during the 1218 period of administration or settlement of the estate; •Tfl82 (2) Incom.e accumulated in trust for the benefit of unborn or 1227 unascertained persons or persons with contingent interests; ^183 (3) Income held for future distribution under the terms of the 1231 will or trust; and Tfl84 (4) Income which is to be distributed to the beneficiaries period- 1207 ically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct. Ifl85 (b) The fiduciary shall be responsible for making the return of 1179 income for the estate or trust for which he acts. 1[186 The net income of the estate or trust shall be computed in the same 1247 manner and on the same basis as provided in section 212, 1[187 except that there shall also be allowed as a deduction (in lieu 1248 of the deduction authorized by paragraph (11) of subdivision (a) of section 214) any part of the gross income which, pur- suant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any State, Territory, or any political subdivi- sion thereof, or the District of Columbia, or any corporation or- ganized and operated exclusively for religious, charitable, scien- tific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; 23 THE INCOME TAX LAW. Law Parasraph Repeata4 atl 1[188 and in cases under paragraph (4) of subdivision (a) of this section 1260 the fiduciary shall include in the return a statement of each bene- ficiary’s distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made. 1[189 (c) In cases under paragraph (1), (2), or (3) of subdivision (a) 1244 the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, 1[190 except that in determining the net income of the estate of 1249 any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary. 1[191 In such cases the estate or trust shall, for the purpose of the nor- 1258 mal tax, be allowed the same credits as are allowed to single per- sons under section 216. \\92 (d) In cases under paragraph (4) of subdivision (a), 1208 ^193 and in the case of any income of an estate during the period of ad- 1209 ministration or settlement permitted by subdivision (c) to be de- ducted from the net income upon which tax is to be paid by the fiduciary. 1fl94 the tax shall not be paid by the fiduciary, but there shall be included 1210 in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, ^195 if his net income for such taxable year is computed upon the basis 1211 of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary’s net income is computed. 1fl96 In such cases the beneficiary shall, for the purpose of the normal 1214 tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust. Profits of Corporations Taxable to Stockholders. 1[197 Sec. 220. That if any corporation, however created or organ- 746 ized, is formed or availed of for the purpose of preventing the im- position of the surtax upon its stockholders or members through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, such corporation shall not be subject to the tax imposed by section 230, but the stockholders or members thereof shall be subject to taxation under this title in the same manner as provided in subdivision (e) of section 218 in the case of stockholders 24 THE INCOME TAX LAW. L«w Repeated Paragraph at t of a personal service corporation, except that the tax imposed by Title III shall be deducted from the net income of the corporation before the computation of the proportionate share of each stockholder or member. ^198 The fact that any corporation is a mere holding company, or that 747 the gains and profits are permitted to accumulate beyond the reas- onable needs of the business, shall be prima facie evidence of a pur- pose to escape the surtax; ^199 but the fact that the gains and profits are in any case permitted to 748 accumulate and become surplus shall not be construed as evidence of a purpose to escape the tax in such case unless the Commissioner certifies that in his opinion such accumulation is unreasonable for the pur- poses of the business. TI200 When requested by the Commissioner, or any collector, every cor- 749 poration shall forward to him a correct statement of such gains and profits and the namies and addresses of the individuals or share- holders who would be entitled to the samie if divided or distributed, and of the amounts that would be payable to each. Payment^of|Tax^at ^Source . 1[201 Sec. 221. (a) That all individuals, corporations and partner- 553 ships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States, TI202 having the control, receipt, custody, disposal, or paym.ent, of interest, 554 rent, salaries, wages, prem-iumiS, annuities, compensations, remuner- ations, emoluments, or other fixed or determinable annua or period- ical gains, profits, and income, T[203 of any nonresident alien individual 555 1f204 (other than incom.e received as dividends from a corporation which 556 taxable under this title upon its net income) 1[205 shall (except in the cases provided for in subdivision (b) and except 557 as otherwise provided in regulations prescribed by the Commissioner under section 217) 1[206 deduct and withhold from such annuaUor periodical gains, profits,®|; 558 and income If 207 a tax equaljto 8 per centum thereof: 559 If 208 Provided^ That the Commissioner may authorize such tax 602' to be deducted and withheld from the interest upon any securi- ties the owners of which are not known to the withholding agent . 1f209 (b) In any case where bonds, mortgages, or deeds of trust, or 604 other similar obligations of a corporation contain a contract or pro- vision by which the obligor agrees 25 THE INCOME TAX LAW. Law Repeated Paragraph at ^ ^[210 to pay any portion of the tax imposed by this title upon the^obligee, 605 or 1[211 to reimburse the obligee^for any portion_^of the tax, or 606 ^212 to pay the interest without deduction for any tax which the obligor 607 may be required or permitted to pay thereon or to retain therefrom under any law of the United States, Tf213 the obligor shall deduct and withhold a tax equal to 2 per centum 608 of the interest upon such bonds, mortgages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods and ^214 whether payable to a nonresident alien individual or to an individual 609 citizen or resident of the United States or to a partnership: T[215 Provided y That the Commissioner may authorize such tax to 612 be deducted and withheld in the case of interest upon any such bonds y mortgages, deeds of trust or other obligations , the owners of which are not known to the withholding agent. ^216 Such deduction and withholding shall not be required in the case 638 of a citizen or resident entitled to receive such interest, if he files with the withholding agent on or before February 1, a signed notice in writing claiming the benefit of the credits provided in subdivisions (c) and (d) of section 216; 1|217 nor in the case of a nonresident alien individual if so provided for 641 in regulations prescribed by the Commissioner under section 217. 1[218 (c) Every individual, corporation, or partnership required to 698 deduct and withhold any tax under this section shall make return thereof on or before March first of each year ^219 and shall on or before June fifteenth pay the tax to the official of the 720 United States Government authorized to receive it. 1f220 Every such individual, corporation, or partnership is hereby made 728 liable for such tax and 1[221 is hereby indemnified against the claims and demands of any in- 729 dividual, corporation, or partnership for the amount of any pay- ments made in accordance with the provisions of this section. ^222 (d) Income upon which any tax is required to be withheld at the 730 source under this section shall be included in the return of the recipient of such income, 11223 but any amount of tax so withheld shall be credited against the 731 amount of income tax as computed in such return. 11224 (e) If any tax required under this section to be deducted and with- 734 held is paid by the recipient of the income, it shall not be re-collected from the withholding agent; 26 THE INCOME TAX LAW. I^aw Repeated Paragraph at H 1[225 nor in cases in which the tax is so paid shall any penalty be imposed 735 upon or collected from the recipient of the income or the withholding agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment. Credit for Taxes. 11226 Sec. 222. (a) That the tax computed under Part II of this title 1059 shall be credited with: 1f227 (1) In the case of a citizen of the United States, the amount 1060 of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States; and 1[228 (2) In the case of a resident of the United States, the amount 1061 of any such taxes paid during the taxable year to any possession of the United States; and 1[229 (3) In the case of an alien resident of the United States who is a 1062 citizen or subject of a foreign country, the amount of any such taxes paid during the taxable year to such country, upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country; and 1f230 (4) In the case of any such individual who is a member of a part- 1063 nership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid during the taxable year to a foreign country or to any possession of the United States, as the case may be, 1f231 (b) If accrued taxes when paid differ from the amounts claimed 1064 as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner who shall redetermine the amount of the tax due under Part II of this title for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the tax- payer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such penal sum as the Commissioner may require, conditioned for the payment by the taxpayer of any amount of tax found due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require. ^ 232 ^' (c) These credits shall be allowed only if the taxpayer furnishes 1065 evidence satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, and all other information necessary for the computation of such credits. 27 THE INCOME TAX LAW. Law Repeated Paragraph at H Individual Returns. n 1[233 Sec. 223. That every individual having a net income for the 1142 taxable year of $1,000 or over if single or if married and not living with husband or wife, ^[234 or of $2,000^or over^if married and living' withj husband or wife, 1143 1f235 shall make under oath a return stating specifically the items of his 1144 gross income and the deductions and credits allowed by this title. 1[236 If a husband and wife living together have an aggregate net income 1150 of $2,000 or over, each shall make such a return unless the income of each is included in a single joint return. 1f237 [If the taxpayer is unable to make his own return, the return 1158 shall be made by a duly authorized agent or by the guardian or other person charged with the care of the person or property of such tax- payer. Partnership^^ Returns . T[238 Sec. 224. That every partnership shall make a return for each 1298 taxable year, stating specifically the items of its gross income and to the deductions allowed by this title, and shall include in the return 1304 the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the dis- tributive share of each individual. The return shall be sworn to by any one of the partners. Fidu ciary I Returns . ^239 Sec. 225. That"" every fiduciary (except receivers appointed by 1168 authority of law in possession of part only of the property of an individual) Tf240 shall make under oath a return^for the' individual, "estate' or trust for 1175 which he acts ^241 (1) if the net income of such individual is $1,000 or over if single or 1196 if married and not living with husband or wife, or $2,000 or over if mar- ried and living with husband or wife, or ^242 (2) if the net income of such estate or trust is $1,000 or over or if any 1215 beneficiary of such estate or trust is a nonresident alien, ^243 stating specifically the items of the gross income"'and the deductions 1259 and credits allowed by this title. ^244 Under such regulations as the Commissioner with the approval of the 1265 Secretary may prescribe, a return made by one of two or more joint fiduciaries and filed in the office of the collector of the district where such fiduciary resides shall be a sufficient compliance with the above requirement. ^245 The fiduciary shall make oath that he has sufficient knowledge of the 1176 affairs of such individual, estate or trust to enable him to make the 28 3-10-19. THE INCOME TAX LAW. Law Repeated Paragraph at ^ return, and that the same is, to the best of his knowledge and belief, true and correct. ^246 Fiduciaries required to make returns under this Act shall be 1267 subject to all the provisions of this Act which applies [apply] to individuals. Returns When Accounting Period Changed. 1[247 Sec. 226. That if a taxpayer, with the approval of the Com- 1479 missioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December thirty-first. ^248 If the change is from calendar year to fiscal year, a separate return 1480 shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. ^1249 If the change Is from one fiscal year to another fiscal year a separate 1481 return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. ^250 If a taxpayer making his first return for income tax keeps his accounts 1482 on the basis of a fiscal year he shall make a separate return for the period between the beginning of the calendar year in which such fiscal year ends and the end of such fiscal year. 1|251 In all of the above cases the net income shall be -Computed on the 148v' basis of such period for which separate return is miade, and the tax shall be paid thereon at the rate for the calendar year in which such period is included; ^252 and the credits provided in subdivisions (c) and (d) of section 216 1484 shall be reduced respectively to amounts which bear the sam.e ratio to the full credits provided in such subdivisions as the number of months in such period bears to twelve months. Time and Place for Filing Returns. ^253 Sec. 227. (a) That returns shall be made on or before the 1472 fifteenth day of the third month following the close of the fiscal year, or, 1i254 if the return Is made on the basis of the calendar year, then the re- 1473 turn shall be made on or befor^ the fifteenth day of March. ^[255 The Commissioner may grant a reasonable extension of time for 1507 filing returns whenever in his judgment good cause exists and shall keep a record of every such extension and the reason therefor. Except in the case of taxpayers who are abroad, no such extension shall be for more than six months. 29 THE INCOME tAX LAW. Law Repeated Paragraph at % 1[256 (b) Returns shall be made to the collector for the district in 1526 which is located the legal residence or principal place of business of the person making the return, or, ^257 if he has no legal residence or principal place of business in the United 1527 States, then to the collector at Baltimore, Maryland. Understatement in Returns. ^258 Sec. 228. That if the collector or deputy collector has reason to 1538 believe that the amount of any income returned is understated, he shall give due notice to the taxpayer making the return to show cause why the amount of the return should not be increased, and upon proof of the amount understated, may increase the same ac- cordingly. ^259 Such taxpayer may furnish sworn testimony to prove any relevant 1539 facts and if dissatisfied with the decision of the collector may appeal to the Commissioner for his decision, under such rules of procedure as may be prescribed by the Commissioner with the approval of the Secretary. PART III, — Corporations. Tax On Corporations. %260 Sec. 230. (a) That, in lieu of the taxes imposed by section 10 1662 of the Revenue Act of 1916, as am.ended by the Revenue Act of 1917, and by section 4 of the P.evenue Act of 1917, there shall be levied, collected, and paid for each taxable year upon the net in- come of every corporation 1f261 a tax at the following rates: 1681 ^262 (1) For the calendar year 1918, 12 per centum of the amount of 1682 the net income in excess of the credits provided in section 236; and ^263 (2) For each calendar year thereafter, 10 per centum of such 1683 excess amount. 11264 (b) For the purposes of the Act approved March 21, 1918, en- 1684 titled “An Act to provide for the operation of transportation systems while under Federal control, for the just compensation of their owners, and for other purposes,” five-sixths of the tax imposed by paragraph (1) of subdivision (a) and four-fifths of the tax imposed by paragraph (2) of subdivision (a) shall be treated as levied by an Act in amendment of Title I of the Revenue Act of 1917. Conditional and Other Exemptions. 11265 Sec. 231. That the following organizations shall be exempt 1739 from taxation under this title — 1f266 (1) Labor, agricultural, or horticultural organizations; 30 1740 THE INCOME TAX LAW. Law Repeated Paragraph at ^ 1[267 (2) Mutual savings banks not having a capital stock represented 1741 by shares; ^268 (3) Fraternal beneficiary societies, orders, or associations, (a) 1742 operating under the lodge sj^stem or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their de- pendents; ^269 (4) Domestic building and loan associations and cooperative 1743 banks without capital stock organized and operated for mutual purposes and without profit; 1(270 (5) Cemetery companies owned and operated exclusively for the 1744 benefit of their members; 1(271 (6) Corporations organized and operated exclusively for re- 1745 ligious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earn- ings of which inures to the benefit of any private stockholder or individual; 1(272 (7) Business leagues, chambers of commerce, or boards of trade, 1746 not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual; 1(273 (8) Civic leagues or organizations not organized for profit but 1747 operated exclusively for the promotion of social welfare; K274 (9) Clubs organized and operated exclusively for pleasure, recrea- 1748 tion, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or mxember; 1(275 (10) Farm.ers’ or other mutual hail, cyclone, or fire insurance 1749 companies, miutual ditch or irrigation companies, mutual or co- operative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from miembers for the sole purpose of meeting expenses; 1(276 (11) Farmers’, fruit growers’, or like associations, organized and 1750 operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce fur- nished by them; 1(277 (12) Corporations organized for the exclusive purpose of holding 1751 title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title; 1(278 (13) Federal land banks and national farm-loan associations as 1752 provided in section 26 of the act approved July 17, 1916, entitled “An Act to provide capital for agricultural development, to create 31 THE INCOME TAX LAW. ^Law Repeated Paragraph at *[[ Standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes”; ^279 (14) Personal service corporations. 1753 Net Income Defined. 1(280 Sec. 232. That in the case of a corporation subject to the tax 1787 imposed by section 230 the term “net income” means the gross 2285 income as defined in section 233 less the deductions allowed by sec- tion 234, and the net income shall be computed on the same basis as is provided in subdivision (b) of section 212 or in section 226. Gross Income Defined. 1(281? Sec. 233. (a) That in the case of a corporation subject to the 1788 tax imposed by section 230 the term “gross income” means the gross 2286 income as defined in section 213, except that: 1(282 (1) In the case of life insurance companies there shall not be 2256 included in gross income such portion of any actual premium re- ceived from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year. 1(283 (2) Mutual marine insurance companies shall include in gross 2264 income the gross premiums collected and receivedi by them less amounts paid for reinsurance. 1(284 (b) In the case of a foreign corporation gross income includes^ 2287 only the gross income from sources within the United States, 1(285 including the interest on bonds, notes, or other interest- 2296 bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and K286 including all amounts received (although paid under a 2298 contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States. DeductionsjAUowed . K287 Sec. 234. (a) That in computing the net income of a corpora- 1922 tion subject to the tax imposed by section 230 there shall be allowed 2300 as deductions: K288 (1) All the ordinary and necessary expenses paid or incurred 1943 during the taxable year in carrying on any trade or business, K289 including a reasonable allowance for salaries or^other' compensation 1978 for personal services actually rendered, and 32 THE INCOME TAX LAW. Law Repeated Paragraph at 1[290 including rentals or other payments required to be made as a con- 2016 dition to the continued use or possession of property to which the cor- poration has not taken or is not taking title, or in which it has no equity; 11291 (2) All interest paid or accrued within the taxable year on its 2027 indebtedness, 1[292 except on indebtedness incurred or continued to purchase 2028 or carry obligations or securities (other than obligations of the United States issued after September 24, 1917) the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or, 1f293 in the case of a foreign corporation, the proportion of such interest 2302 which the amount of its gross income from sources within the United States bears to the amount of its gross income from all sources within and without the United States; 1f294 (3) Taxes paid or accrued within the taxable year imposed 2036 1[295 (a) by the authority of the United States, except income, war-profits 2037 and excess-profits taxes; or 1[296 (b) by the authority of any of its possessions, except the amount of 2039 income, war-profits and excess-profits taxes allowed as a credit under section 238; or 11297 (c) by the authority of any State or Territory, or any county, school 2040 district, municipality, or other taxing subdivision of any State or Territory, 11298 not including those assessed against local benefits of a kind 2041 tending to increase the value of the property assessed; or %299 (d) in the case of a domestic corporation, by the authority of any 2060 foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 238; or 1[300 (e) in the case of a foreign corporation, by the authority of any 2303 foreign country (except income, war-profits and excess-profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon the property or business: If 301 Provided^ That in the case of obligors specified in subdivision {b) 2061 of section 221 no deduction for the payment of the tax imposed \ by this title or any other tax paid pursuant to the contract or provision referred to in that subdivision, shall be allowed; 1f302 (4) Losses sustained during the taxable year and not compen- 2063 sated for by insurance or otherwise, 1f303 (5) Debts ascertained to}be worthless and charged off within the 2090 taxable year; 33 THE INCOME TAX LAW. Law Repeated Paragraph at If ^304 (6) Amounts received as dividends from a corporation which is 2102 taxable under this title upon its net income, and 1f305 amounts received as dividends from a personal service corporation 2103 out of earnings or profits upon which income tax has been imposed by Act of Congress; 1f306 (7) A reasonable allowance for the exhaustion, wear and tear of 2105 property used in the trade or business, including a reasonable allow- ance for obsolescence; ^307 (8) In the case of buildings, machinery, equipment, or other 2164 facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. 1[308 At any time within three years after the termination of the present 2165 war the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was in- correct, the taxes imposed by this title and by Title III for the year or years affected shall be redetermined and 1f309 the amount of tax due upon such redetermination, if any, shall be 2166 paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252; ^310 (9) In the case of mines, oil and gas wells, other natural deposits, 2167 and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise ducted: 1[311 Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property {or the taxpayers interest therein) on that date shall he taken in lieu of cost up to that date: 1[312 Provided further , That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially dis- proportionate to the cost, the depletion allowance shall he based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; 1[313 such reasonable allowance in all the above cases to be made under 2170 rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. de- 2168 2169 34 THE INCOME TAX LAW. Law Repeated Paragraph 1[314 In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee; 1[315 (10) In the case of insurance companies, in addition to the above: (a) The net addition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds); and (b) the sums other than dividends paid within the taxable year on policy and annuity contracts; 1[316 (11) In the case of corporations issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan continuing for life and not subject to cancellation, in addition to the above, such portion of the net addition (not required by law) made within the taxable year to reserve funds as the Commissioner finds to be required for the protection of the holders of such policies only; 1[317 (12) In the case of mutual marine insurance companies, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof: 1[318 (13) In the case of mutual insurance companies (other than mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, (unless otherwise allowed under such paragraphs) the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves; 1f319 (14) (a) At the time of filing return for the taxable year 1918 a tax- 2215 payer may file a claim in abatement based on the fact that he has sus- tained a substantial Joss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year, 1f320 or from the actual payment after the close of such taxable year of 2216 rebates in pursuance of contracts entered into during such year upon sales made during such year. 1f321 In such case payment of the amount of the tax covered by such 2217 claim shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallowed then the remainder of the tax due shall on notice and demand by the collector be paid by the taxpayer with interest at the rate of 1 per centum per month from the time the tax would have been due had no such claim been filed 35 at If 2171 2248 2254 2265 2267 THE INCOME TAX LAW. Law Repeated Paragraph at ^ 1f322 If it is shown to the satisfaction of the Commissioner that such sub- 2:^18 stantial loss has been sustained, then in computing the taxes imposed by this title and by Title III the amount of such loss shall be deducted from the net income. 1[323 (b) If no such claim is filed, but it is shown to the satisfaction of the 2219 Commissioner that during the taxable year 1919 the taxpayer has sus- tained a substantial loss of the character above described then the amount of such loss shall be deducted from the net income for the tax- able year 1918 and the taxes imposed by this title and by Title III for such year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. 1|324 (b) In the case of a foreign corporation the deductions allowed 2304 in subdivision (a), except those allowed in paragraph (2) and in clauses (a), (b), and (c) of paragraph (3), shall be allowed only if and to the extent that they are connected with income arising from a source within the United States; ^325 and the proper apportionment and allocation of the deductions with 2305 respect to sources of income within and without the United States shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary. ItemslNot Deductible. T[326 Sec. 235. That in computing net income no deduction shall in 1944 any case be allowed in respect of any of the items specified in section 215. Credits Allowed. Tf327 Sec. 236. That for the purpose only of the tax imposed by section 2325 230 there shall be allowed the following credits: lf328 (a) The amount received as interest upon obligations of the 2326 United States and bonds issued by the War Finance Corporation, which is included in gross income under section 233; lf329 (b) The amount of any taxes imposed by Title III for the same 2327 taxable year: 11330 Provided^ That in the case of a corporation which makes return 2328 for a fiscal year beginning in 1917 and ending in 1918, in com- puting the tax as provided in subdivision (a) of section 205, the tax computed for the entire period under Title II of the Revenue Act of 1917 shall be credited against the net income computed for the entire period under Title I of the Revenue Act of 1916 as amended by the Revenue Act o/ 1917 and under Title I of the Revenue Act of 1917, and the tax computed for the entire period under Title III of this Act at the rates prescribed for the calendar year 1918 shall be credited against the net income computed for the entire period under this title; and (c) Infthe case of a domestic corporation, $2,000. 36 11331 2330 r ' I^aw Paragraph THE INCOME TAX LAW. Repeated at If Payment of Tax at Source. 1f332 Sec. 237. That in the case of foreign corporations subject to 572 taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, • ^[333 there shall be deducted and withheld at the source in the same 573 manner and upon the same items of income as is provided in section 221 ^334 a tax equal to 10 per centum thereof, 574 11335 and such tax shall be returned and paid in the same manner and 575 subject to the same conditions as provided in that section: •f336 Provided; That in the case of interest described in subdivision 610 {b) of that section the deduction and withholding shall be at the rate of 2 per centum. Credit for Taxes. 1[337 Sec. 238. (a) That in the case of a domestic corporation the total 2332 taxes imposed for the taxable year by this title and by Title III shall be credited with the amount of any income, war-profits and excess- profits taxes paid during the taxable year 1[338 to any foreign country, upon income derived from sources therein, or 2333 1i339 to' any possession of the United States. 2334 1|340 If accrued taxes when paid differ from the amounts claimed as 2335 credits by the corporation, or if any tax paid is refunded in whole or in part, the corporation shall at once notify the Commissioner who shall redetermine the amount of the taxes due under this title and under Title III for the year or years affected, and the amount of taxes due upon such redetermination, if any, shall be paid by the corporation upon notice 'and demand by the collector, or the amount of taxes over- paid, if any, shall be credited or refunded to the corporation in accord- ance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the corporation to give a bond with sureties satisfactory to and to be approved by him in such penal sum as he may require, conditioned for the payment by the taxpayer of any amount of taxes found due upon any such redetermination; and the bond herein' prescribed shall contain such further conditions as the Commissioner may require. 1|341 (b)This credit shallbeallowedonlyifthe taxpayer furnishes evidence 2336 satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, as the case may be, and all other information necessary for the computation of such credit. •f342 (c) If a domestic corporation makes a return for a fiscal year begin- 2337 ning in 1917 and ending in 1918, only that proportion of this credit shall be allowed which the part of such period within the calendar year 1918 bears to the entire period. 37 Law Paragraph THE INCOME TAX LAW. Repeated at If Corporation Returns. ^[343 Sec. 239. That every corporation subject to taxation under this 1398 title and every personal service corporation shall make a return, stat- ing specifically the items of its gross income and the deductions and credits allowed by this title. ^344 The return shall be sworn to by the president, vice president, or 1451 other principal officer and by the treasurer or assistant treasurer. ^345 If any foreign corporation has no office or place of business in the 2314 United States but has an agent in the United States, the return shall be made by the agent. 1[346 In cases where receivers, trustees in bankruptcy, or assignees are 1429 operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control. 1[347 Returns made under this section shall be subject to the provisions 1399 of sections 226 and 228. ^348 When return is made under section 226 the credit provided in sub- 1485 division (c) of section 236 shall be reduced to an amount which bears the same ratio to the full credit therein provided as the number of months in the period for which such return is made bears to twelve months. Consolidated Returns. ^349 Sec. 240. (a) That corporations which are affiliated within 1405 the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the pur- poses of this title and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return: Tf350 Provided^ That there shall he taken out of such consolidated net 1406 income and invested capital^ the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business^ 50 per centum or more of whose gross income consists of gains, profits, commis- sions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income and the remainder of such affiliated group shall be assessed on the basis of the remaining consolidated invested capi- tal and net income, 1[351 In any case in which a tax is assessed upon the basis of a con- 1407 solidated return, the total tax shall be computed in the first instance 38 8 - 1049 , THB mCOMS TAX LAW. Law Repaatad Paragraph at If as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. ^352 There shall be allowed in computing the income tax only one specific 1408 credit of $2,000 (as provided in section 236); in computing the war- profits credit (as provided in section 311) only one specific exemption of $3,000; and in computing the excess-profits credit (as provided in section 312) only one specific exemption of $3,000. ^353 (b) For the purpose of this section two or more domestic corpora- 1409 tions shall be deemed to be affiliated ^354 (1) if one corporation owns directly or controls through closely 1410 affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or ^355 (2) if substantially all the stock of two or more corporations is 1411 owned or controlled by the same interests. ^356 (c) For the purposes of section 238 a domestic corporation which 1412 owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any income, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States, which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: 1f357 Provided, That in no such case shall the amount of the credit for 1413 such taxes exceed the amount of such dividends {not deductible under section 234) received by such domestic corporation during the taxable year. Time and Place for Filing Returns, ^358 Sec. 241. (a) That returns of corporations shall be made at the 1471 same time as is provided in subdivision (a) of section 227. 1|359 (b) Returns shall be made to the collector of the district in which 1530 is located the principal place of business or principal office or agency 2313 of the corporation, or, ^360 if it has no principal place of business or principal office or agency in 1531 the United States, then to the collector at Baltimore, Maryland. 2315 39 Law Paragraph THE INCOME TAX LAW, Repeated at ^ PART IV. — ^Administrative Provisions. Payment of Taxes. ^361 Sec. 250. (a) That except .as otherwise provided in this section 2339 and sections 221 and 237 the tax shall be paid in four installments, each consisting of one-fourth of the total amount of the tax. 1[362 The first installment shall be paid at the time fixed by law for filing 2340 the return, and T[363 the second installment shall be paid on the fifteenth day of the third 2341 month, ^364 the third installment on the fifteenth day of the sixth month, and 2342 ^365 the fourth installment on the fifteenth day of the ninth month, 2343 lf366 after the time fixed by law for filing the return. 2344 lf367 Where an extension of time for filing a return is granted the time for 2345 payment of the first installment shall be postponed until the date of the expiration of the period of the extension, but the time for payment of the other installments shall not be postponed unless the Commis- sioner so provides in granting the extension. 11368 In any case in which the time for the payment of any installment is 2346 at the request of the taxpayer thus postponed, there shall be added as part of such installment interest thereon at the rate of of 1 per centum per month from the time it would have been due if no extension had been granted until paid. 11369 If any installment is not paid when due, the whole amount of the tax 2347 unpaid shall become due and payable upon notice and demand by the collector. 1[370 The tax may at the option of the taxpayer be paid in a single pay- 2348 ment instead of in installments, in which case the total amount shall be paid on or before the time fixed by law for filing the return, or, where an extension of time for filing the return has been granted, on or before the expiration of the period of such extension, 11371 (b) As soon as practicable after the return is filed, the Commissioner 2349 shall examine it. If it then appears that the correct amount of the tax is greater or less than that shown in the return, the installments shall be recomputed. 1f372 If the amount already paid exceeds that which should have been paid 2352 on the basis of the installments as recomputed, the excess so paid shall be credited against the subsequent installments; and if the amount already paid exceeds the correct amount of the tax, the excess shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. 1f373 If the amount already paid is less than that which should have 2354 been paid, the difference shall, to the extent not covered by anv 40 THE INCOME TAX LAW. Law Repeated Paragraph at credits then due to the taxpayer under section 252, be paid upon notice and demand by the collector. ^374 In such case if the return is made in good faith and the understate- 2356 ment of the amount in the return is not due to any fault of the tax- payer, there shall be no penalty because of such understatement. ^375 If the understatement is due to negligence on the part of the tax- 2357 payer, but without intent to defraud, there shall be added as part of the tax 5 per centum of the total amount of the deficiency, plus interest at the rate of 1 per centum per month on the amount of the deficiency of each installment from the time the installment was due. 11376 If the understatement is false or fraudulent with intent to evade 2358 the tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or fraudulent returns will- fully made, but in addition to other penalties provided by law for false or fraudulent returns, there shall be added as part of the tax 50 per centum of the amount of the deficiency. •[377 (c) If the return is made pursuant to section 3176 of the Revised 2359 Statutes as amended, the amount of tax determined to be due under such return shall be paid upon notice and demand by the collector. 11378 (d) Except in the case of false or fraudulent returns with intent to 2360 evade the tax, the amount of tax due under any return shall be de- termined and assessed by the Commissioner within five years after the return was due or was made, and no suit or proceeding for the collection of any tax shall be begun after the expiration of five years after the date when the return was due or was made. In the case of such false or fraudulent returns, the amount of tax due may be deter- mined at any time after the return is filed, and the tax may be col- lected at any time after it becomes due. 1[379 (e) If any tax remains unpaid after the date when it is due, and for 2397 ten days after notice and demand by the collector, then, except in the case of estates of insane, deceased, or insolvent persons, there shall be added as part of the tax the sum of 5 per centum on the amount due but unpaid, plus interest at the rate of 1 per centum per month upon such amount from the time it became due: 1|380 Provided^ That as to any such amount which is the subject of a 2398 bona fide claim for abatement such sum of 5 per centum shall not be added and the interest from the time the amount was due until the claim is decided shall be at the rate of }/2 of i per centum per month. 11381 In the case of the first installment provided for in subdivision (a) the 2423 instructions printed on the return shall be deemed sufficient notice of the date when the tax is due and sufficient demand, and the tax- payer’s computation of the tax on the return shall be deemed suffi- cient notice of the amount due. 1(382 (f) In any case in which in order to enforce payment of a tax it is 2424 necessary for a collector to cause a warrant of distraint to be served, there shall also be added as part of the tax the sum of $5. 41 THE INCOME TAX LAW. Law Repeated Paragraph at If 1[383 (g) If the Commissioner finds that a taxpayer designs quickly to 2425 depart from the United States or to remove his property therefrom, or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly or partly ineffectual pro- ceedings to collect the tax for the taxable year then last past or the taxable year then current unless such proceedings be brought without delay, the Commissioner shall declare the taxable period for such taxpayer terminated at the end of the calendar month then last past and shall cause notice of such finding and declaration to be given the taxpayer, together with a demand for immediate payment of the tax for the taxable period so declared terminated and of the tax for the preceding taxable year or so much of said tax as is unpaid, whether or not the time otherwise allowed by law for filing return and paying the tax has expired; and such taxes shall thereupon become im- mediately due and payable. In any action or suit brought to enforce payment of taxes made due and payable by virtue of the provisions of this subdivision the finding of the Commissioner, made as herein provided, whether made after notice to the taxpayer or not, shall be for all purposes presumptive evidence of the taxpayer’s design. A taxpayer who is not in default in making any return or paying in- come, war-profits, or excess-profits tax under any Act of Congress may furnish to the United States, under regulations to be prescribed by the Commissioner with the approval of the Secretary, security approved by the Commissioner that he will duly make the return next thereafter required to be filed and pay the tax next thereafter required to be paid. The Commissioner may approve and accept in like manner security for return and payment of taxes made due and payable by virtue of the provisions of this subdivision, provided the taxpayer has paid in full all other income, war-profits, or excess- profits taxes due from him under any Act of Congress. If security is approved and accepted pursuant to the provisions of this subdivision and such further or other security with respect to the tax or taxes covered thereby is given as the Commissioner shall from time to time find necessary and require, payment of such taxes shall not be en- forced by any proceedings under the provisions of this subdivision prior to the expiration of the time otherwise allowed for paying such respective taxes. Receipts for Taxes. ^384 Sec. 251. That every collector to whom any payment of any 2465 tax is made under the provisions of this title shall upon request give to the person making such payment a full written or printed receipt, stating the amount paid and the particular account for which such payment was made; 1[385 and whenever any debtor pays taxes on account of payments made 2471 or to be made by him to separate creditors the collector shall, if re- quested by such debtor, give a separate receipt for the tax paid on account of each creditor in such form that the debtor can conveniently produce such receipts separately to his several creditors in satisfaction of their respective demands up to the amounts stated in the receipts; and such receipt shall be sufficient evidence in favor of such debtor to justify him in withholding from his next payment to his creditor the amount therein stated; but the creditor may, upon giving to 42 THE INCOME TAX LAW. Law Repeated Paragraph at % his debtor a full written receipt acknowledging the payment to him of any sum actually paid and accepting the amount of tax paid as aforesaid (specifying the'isame) as a further satisfaction of the debt to that amount, require the surrender to him of such collector’s receipt. Refunds. ^386 Sec. 252. That if, upon examination of any return of income 2488 made pursuant to this Act, the Act of August 5, 1909, entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” the Act of October 3, 1913, entitled “An Act to reduce tariif duties and to provide revenue for the Government, and for other purposes,” the Revenue Act of 1916, as amended, or the Revenue Act of 1917, it appears that an amount of income, war-profits or excess-profits tax has been paid in ex- cess of that properly due, then, notwithstanding the provisions of section 3228 of the Revised Statutes, the amount of the excess shall be credited against any income, war-profits or excess-profits taxes, or installment thereof, then due from the taxpayer under any other return, and any balance of such excess shall be immediately refunded to the taxpayer: 1[387 Provided^ That no such credit or refund shall he allowed or 2489 made after five years from the date when the return was due, unless before the expiration of such five years a claim therefor is' filed by the taxpayer. Penalties. 1[388 Sec. 253. That any individual, corporation, or partnership re- 1572 quired under this title to pay or collect any tax, to make a return or to supply information, who fails to pay or collect such tax, to make such return, or to supply such information at the time or times required under this title, shall be liable to a penalty of not more than $1,000. Any individual, corporation, or partnership, or any officer or employee of any corporation or member or employee of a partnership, who willfully refuses to pay or collect such tax, to make such return, or to supply such information at the time or times required under this ' title, or who willfully attempts in any manner to defeat or evade the tax im- posed by this title, shall be guilty of a misdemeanor and shall be fined not more than $10,000 or imprisoned for not more than one year, or both, together with the costs of prosecution. Returns of Payments of Dividends. 1[389 Sec. 254. That every corporation subject to the tax imposed 1393 by this title and every personal service corporation shall, when re- quired by the Commissioner, render a correct return duly verified under oath, of its payments of dividends, stating the name and address of each stockholder, the number of shares owned by him, and the amount of dividends paid to him. 43 THE INCOME TAX LAW. Repeated ^ at n Returns of .Brokers. 1[390 Sec. 255. That every individual, corporation, or partnership doing 1396 business as a broker shall, when required by the'Commis^oner* repder a correct return duly verified under oath, under such rules^and regula- tions as the Commissioner, with the approval of the Secretary, may prescribe, showing the names of customers for whom such individual, corporation, or partnership has transacted any business, with such details as to the profits, losses, or other information which the Com- missioner may require, as to each of such custoniers, as will enable the Commissioner to determine whether all income tax due on profits or gains of such customers has been paid. Information at Source. 11391 Sec. 256. That all individuals, corporations, and partnerships, ^in .1314 whatever capacity acting, including lessees or mortgagors of real qr ' personal property, fiduciaries, and employers, 11392 making payment to another individual, corporation, or ^partnership, ,*1315 11393 of Interest, rent, salaries, wages, premiums, annuities, compensations, 1316 remunerations, emoluments, or other fixed, or determinable gains, profits, and income 11394 (other than payments described in sections 254 and 255), 1317 11395 of $1,000 or more in any taxable year, 1318 11396 or, in the case of such payments m.ade by the United States, the i;3,19 officers or employees of the United States having information as ^tp such payments and required to make returns in regard thereto , by , the regulations hereinafter provided for, 11397 shall render a true and accurate return to the Commissioner, under 1321 such regulations and in such form and manner and to such e;?tent as may be prescribed by him with the approval of the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment. 11398 Such returns may be required, regardless of amounts, (1) in the 1350 case of payments of interest upon bonds, mortgages, deeds of trust, or other similar obligations of corporations, and 11399 (2) in the case of collections of items (not payable in the United 1352 States) of interest upon the bonds of foreign countries and interest upon the bonds of and dividends from foreign corporations by in- dividuals, corporations, or partnerships, undertaking as a matter of business or for profit the collection of foreign payments of such interest or dividends by means of coupons, checks, or bills of exchange. 11400 When necessary to make effective the provisions of this section the 1371 name and address of the recipient of income shall be furnished upon demand of the individual, corporation, or partnership paying the income. Law Paragraph 44 THE INCOME TAX LAW. Law Repeated Paragraph at t 1f4Gl The provisions of this section shall apply to the calendar year 1375 1918 and each calendar year thereafter, If 402 but shall not apply to the payment of interest on obligations of the 1376 _ United States. ; Returns to be Public Records. ^403 ' Sec. 257. That returns upon which the tax has been determined 1636 by the Commissioner shall constitute public records; lf404 but they shall be open to inspection only upon order of the President 1637 and under rules and regulations prescribed by the Secretary and approved by the President: 1(405 Provided, That the proper officers of any State imposing an 1638 income tax may, upon the request of the governor thereof, have access to the returns of any corporation, or to an abstract thereof showing the name and income of the corporation, at such times and in such manner as the Secretary may prescribe: If 406 Provided further, That all bona fide stockholders of record 1639 owning 1 per centum or more of the outstanding stock of any corporation shall, tipon making request of the Commissioner, be allowed to examine the annual income returns of such corpora- tion and of its subsidiaries . 1(407 Any stockholder who pursuant to the provisions of this section 1640 is allowed to examine the return of any corporation, and who makes known in any manner whatever not provided by law the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any such return, shall be guilty of a misdemeanor and be punished by a fine not exceeding $1,000, or by imprisonment not exceeding one year, or both. 1(408 The Commissioner shall as soon as practicable in each year 1641 cause to be prepared and made available to public inspection in such manner as he may determine, in the office of the collector in each internal-revenue district and in such other places as he may determine, lists containing the names and the post-office addresses of all individuals making income-tax returns in such district. Publication of Statistics. 1(409 Sec. 258. That the Commissioner, with the approval of the 1661 Secretary, shall prepare and publish annually statistics reasonably available w'ith respect to the operation of the income, war-profits and excess-profitS;tax laws. Including classifications of taxpayers and of income, the amounts allowed as deductions, exemptions, and credits, and any Other facts deemed pertinent and valuable. Collection of Foreign Items. 1(410 Sec. 259. That all individuals, corporations, or partnerships under- 1378 taking as a matter of business or for profit the collection of foreign payments of interest or dividends by means of coupons^ checks, or bills of exchange shall obtain a license from the Commissioner and 45 THE INCOME TAX LAW. Law Paragraph Repeated at1 lf411 shall be subject to such regulations enabling the Government to 1389 obtain the information required under this title as the Commissioner, with the approval of the Secretary, shall prescribe; 1[412 and whoever knowingly undertakes to collect such payments without 1391 having obtained a license therefor, or without complying with such regulations, shall be guilty of a misdemeanor and shall be fined not more than $5,000, or imprisoned for not more than one year, or both. Citizens of United States Possessions. ^413 Sec. 260. That any individual who is a citizen of any possession 509 of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States, shall be subject to taxation under this title only as to income derived from sources within the United States, ^414 and in such case the tax shall be computed and paid in the same 510 manner and subject to the same conditions as in the case of other persons who are taxable only as to income derived from such sources. Porto Rico and Philippine Islands. ^415 Sec. 261. That in Porto Rico and the Philippine Islands the 511 income tax shall be levied, assessed, collected, and paid in accord- ance with the provisions of the Revenue Act of 1916 as amended. 1[416 Returns shall be made and taxes shall be paid under Title I of 512 such Act in Porto Rico or the Philippine Islands, as the case may be, by ^417 (1) every individual who is a citizen or resident of Porto Rico or the 513 Philippine Islands or derives income from sources therein, and ^418 (2) every corporation created or organized in Porto Rico or the 514 Philippine Islands or deriving income from sources therein. ^419 An individual who is neither a citizen nor a resident of Porto Rico or 515 the Philippine Islands but derives income from sources therein, shall be taxed in Porto Rico or the Philippine Islands as a nonresident alien individual, and ^420 a corporation created or organized outside Porto Rico or the Philippine 516 Islands and deriving income from sources therein shall be taxed in Porto Rico or the Philippine Islands as a foreign corporation. ^421 For the purposes of section 216 and of paragraph (6) of subdivision 517 (a) of section 234 a tax imposed in Porto Rico or the Philippine Islands upon the net income of a corporation shall not be deemed to be a tax under this title. 1(422 The Porto Rican or Philippine Legislature shall^have'power by due 518 enactment to amend, alter, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively. 46 Law Paragraph THE INCOME TAX LAW. Repeated at ^ TITLE XIII. — General Administrative Provisions. (Of the Revenue Act of 1918.) [Advisory Tax Board.] 1(423 Sec. 1301. (Revenue Act of 1918.) (a) . (b) . (c) . 2652 (d) (1) There is hereby created a board to be known as the “Advisory Tax Board,” hereinafter called the Board, and to be composed of not to exceed six members to be appointed by the Commissioner with the approval of the Secretary. The Board shall cease to exist at the expira- tion of two years after the passage of this Act, or at such earlier time as the Commissioner with the approval of the Secretary may designate. ^424 Vacancies in the membership of the Board shall be filled in the 2653 same manner as an original appointment. Any member shall be subject to removal by the Commissioner with the approval of the Secretary. The Commissioner with the approval of the Secretary shall designate the chairman of the Board. Each member shall re- ceive an annual salary of $9,000, payable monthly, together with actual necessary expenses when absent from the District of Columbia on official business. 1(425 (2) The Commissioner may, and on the request of any taxpayer 2654 directly interested shall, submit to the Board any question relating to the interpretation or administration of the income^ war-profits or excess-profits tax laws, and the Board shall report its findings and recommendations to the Commissioner. 1(426 (3) The Board shall have its office in the Bureau of Internal Revenue 2655 in the District of Columbia. The expenses and salaries of members of the Board shall be audited, allowed, and paid out of appropriations for collecting internal revenue, in the same manner as expenses and salaries of employees of the Bureau of Internal Revenue are audited, allowed, and paid. 1(427 (4) The Board shall have the power to summon witnesses, take 2656 testimony, administer oaths, and to require any person to produce books, papers, documents, or other data relating to any matter under investigation by the Board. Any member of the Board may sign subpoenas and members and employees of the Bureau of Internal Revenue designated to assist the Board, when authorized by the Board, may administer oaths, examine witnesses, take testimony and receive evidence. [Leaves of Absence to Internal-Revenue Men.] 1(428 Sec, 1302. (Revenue Act of 1918.) That all internal-revenue 2657 agents and inspectors shall be granted leave of absence with pay, which shall not be cumulative, not to exceed thirty days in any calendar year, under such regulations as the Commissioner, with the approval of the Secretary, may prescribe. THE INCOME TAX LAW. I^aw Repeated Paragraph at H [RECORDS TO BE KEPT; RETURNS TO BE MADE; BOOKS TO BE OPEN TO INSPECTION BY GOVERNMENT OFFICERS.] ^429 Sec. 1305. (Revenue Act of 1918.) That all administrative, 1620 special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act, and every person liable to any tax imposed by this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall comply with such regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe. 1[430 Whenever in the judgment of the Commissioner necessary he may 1630 require any person, by notice served upon him, to make a return or such statements as he deems sufficient to show whether or not such person is liable to tax. ^431 The Commissioner, for the purpose of ascertaining the correctness 1631 of any return or for the purpose of making a return where none has been made, is hereby authorized, by any revenue agent or inspector designated by him for that purpose, to examine any books, papers, records or memoranda bearing upon the matters required to be included in the return, and may require the attendance of the person rendering the return or of any officer or employee of such person, or the attendance of any other person having knowledge in the premises, and may take his testimony with reference to the matter required by law to be included in such return, with power to administer oaths to such person or persons. [TAX TO BE COLLECTED AS COMMISSIONER MAY PRESCRIBE IF NO METHOD IS SPECIFICALLY PROVIDED.) 1[432 Sec. 1307. (Revenue Act of 1918.) That in all cases where the 592 method of collecting the tax imposed by this Act is not specifically pro- vided in this Act, the tax shall be collected in such manner as the Com- missioner, with the approval of the Secretary, may prescribe. . • ;• . [THE COMMISSIONER AUTHORIZED TO MAKE RULES AND REGULATIONS.] ^433 Sec. 1309. (Revenue Act of 1918.) That the Commissioner, with 2591 the approval of the Secretary, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act. * * * [FRACTIONAL PARTS OF A CENT IN PAYMENT OF TAX.] 1(434 Sec. 1313. (Revenue Act of 1918.) That in the payment of any 2426 tax under this Act not payable by stamp a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to 1 cent. [TREASURY CERTIFICATES OF INDEBTEDNESS AND UNCERTIFIED CHECKS IN PAYMENT OF TAXES.] K435 Sec. 1314. (Revenue Act of 1918.) That collectors may receive, 2428 at par with an adjustment for accrued interest, certificates of in- debtedness issued by the United States and uncertified checks in pay- 48 THE INCOME TAX LAW. Law Repeated Paragraph at ^ (1[4-35) merit » of income, war-profits and excess-profits taxes and any other ( 2428 ) taxes payable other than by stamp, during such time and under such regulations as the Commissioner, with the approval of the Secretary, shall prescribe; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tendered shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been tendered. 1 [AMENDED SECTIONS OF THE REVISED STATUTES.] [Comment; The following sections of the Revised Statutes, having directly to do with the administration of the Income Tax Law, arc reprinted here because of the fact that they were amended by the Revenue Act of 1918. These sections, with the exception of section 3220 and sections 3164 and 3165, were carried into the Income Tax Title of the R.evenue Act of 1916 as amended by the Revenue Act of 1917. They are no longer em^bodled in the Income Tax Law. Section 3173, Revised Statutes, heretofore carried In the Income Tax Law, was so amended by the Revenue Act of 1918, (Sec. 1317), as to make it Inapplicable to the Income tax, and for that reason it is not incorporated here.] [REMISSION AND REFUNDING OF TAXES AND PENALTIES.] ^436 Sec. 1316. (Revenue Act of 1918.) (a) That section 3220 of 2497 the Revised Statutes Is hereby amended to read as follows: “Sec. 3220. The Commissioner of Internal Revenue, subject to regulations prescribed by the Secretary of the Treasury, is author- ized 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; also to repay to any collector or deputy collector the full amount of such sums of money as may be recovered, against him in any court, for any Internal revenue taxes collected, by him, with the cost and expenses of suit; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any. suit brought against him Ip^ reason of anything done in the due performance of his official duty, and shall make report to Congress at the beginning of each regular session of Congress of all transactions under this section.” [BURDEN OF PROOF AS TO FRAUD IN CONNECTION WITH SUITS TO RECOVER TAXES ON SECOND ASSESSMENT.] 11437 (b) Section 3225 of the Revised Statutes of the llnitcd States Is 2590 hereby amended to read as follows: “Sec. 3225. When a second assessment is made In case of any list, sta,tement, or return, which In the opinion of the collector or deputy collector was false or fraudulent, or contained any under- statement or undervaluation, such assessment shall not be remitted, nor shall taxes collected under such assessment be refunded, or paid back, or recovered by any suit, unless it Is proved that such list, statement, or return was not willfully false or fradulcnt and did not contain any willful understatement or undervaluation.” 49 THE INCOME TAX LA#. Law Repeated Paragri ph at ^ ^438 Sec. 1317. (Revenue Act of 1918.) That sections 3164, 3165, 3167, 3172, 3173, and 3176 of the Revised Statutes as amended are hereby amended to read as follows; [Duty of Collectors to Report Violations of Law.] If 439 “Sec. 3164. It shall be the duty of every collector of internal 2651 revenue having knowledge of any willful violation of any law of the United States relating to the revenue, within thirty days after com- ing into possession of such knowledge, to file with the district attorney of the district in which any fine, penalty, or forfeiture may be in- curred, a statement of all the facts and circumstances of the case within his knowledge, together with the names of the witnesses, setting forth the provisions of law believed to be so violated on which reliance may be had for condemnation or conviction. [Revenue Officers Who May Administer Oaths.] ^440 “Sec. 3165. Every collector, deputy collector, internal-revenue 1452 agent, and internal-revenue officer assigned to duty under an internal- revenue agent, is authorized to administer oaths and to take evidence touching any part of the administration of the internal-revenue laws with which he is charged, or where such oaths and evidence are authorized by law or regulation authorized by law to be taken. [Disclosiure of Information Made Available to Internal Revenue Officers.] 1[441 “Sec. 3167. It shall be unlawful for any collector, deputy col- 2645 lector, 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, 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 person to print or publish in any manner whatever not provided by law any income return, or any part thereof or source of income, profits, losses, or expenditures appearing in any income return; and any offense against the foregoing provision shall be a mis- demeanor and be punished by a fine not exceeding $1,000 or by imprisonment not exceeding 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 or discharged from employ- ment. [Canvass of Districts by Collectors.] 1[442 “Sec. 3172. Every collector shall, from time to time, cause his 1621 deputies to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any internal-revenue tax, and all persons owning or having the care and management of any objects liable to pay any tax, and to make a list of such persons and enumerate said objects. “Sec. 3173. 50 8 - 10 - 19 . THE INCOME TAX LAW. Law Repeated Paragraph at H [Penalties for Failure to Make Return and for False Returns.] ^443 ‘‘Sec. 3176. If any person, corporation, company, or associa- 1549 tion fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, will- fully or otherwise, a false or fraudulent return or list, 1[444 the collector or deputy collector shall make the return or list from 1550 his own knowledge and from such information as he can obtain through testimony or otherwise. 11445 In any such case the Commissioner may, from his own knowledge 1551 and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. 1|446 Any return or list so made and subscribed by the Commissioner, or 1552 by a collector or deputy collector and approved by the Commis- sioner, shall be prima facie good and sufficient for all legal purposes. 1[447 “If the failure to file a return or list is due to sickness or absence, 1501 the collector may allow such further time, not exceeding thirty days, for making and filing the return or list as he deems proper. 1[448 “The Commissioner of Internal Revenue shall determine and 1553 assess all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section. 1l449 In case of any failure to make and file a return or list within the 1554 time prescribed by law, or prescribed by the Commissioner of In- ternal Revenue or the collector in pursuance of law, the Commis- sioner of Internal Revenue shall add to the tax 25 per centum of its amount, 1(450 except that when a return is filed after such time and it is shown that 1555 the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. 1(451 In case a false or fraudulent return or list is willfully made, the 1556 Commissioner of Internal Revenue shall add to the tax 50 per centum of its amount. 1(452 “The amount so added to any tax shall be collected at the same 1557 time and in the same manner and as part of the tax 1(453 unless the tax has been paid before the discovery of the neglect, 1558 falsity, or fraud, in which case the amount so added shall be collected in the same manner as the tax.’’ [Jurisdiction of U. S. District Courts.] 1(454 Sec. 1318. (Revenue Act of 1918.) That if any person is sum- 1632 moned under this Act to appear, to testify, or to produce books, papers or other data, the district court of the United States for the district in which such person resides shall have jurisdiction by ap- 51 THE INCOME TAX LAW. Law Repeated Paragraph at If propriate process to compel such attendance, testimony, or produc- tion of books, papers, or other data. If 455 The district courts of the United States at the instance of the United 1633 States are hereby invested with such jurisdiction to make and issue, both in actions at law and suits in equity, writs and orders of injunction and of ne exeat republica, orders appointing receivers, and such other orders and process, and to render such judgments and decrees, granting in proper cases both legal and equitable relief together, as may be necessary or appropriate for the enforcement of the provisions of this Act. The remedies hereby provided are in addition to and not exclu- sive of any and all other remedies of the United States in such courts or otherwise to enforce such provisions. [UIHTED STATES BONDS IN LIEU OF SECUiaTIES, IN CONNECTION WITH “PENAL BONDS.»] . 1[456 Sec. 1320. (Revenue Act of 1918.) That wherever by the laws of 2220 the United States or regulations made pursuant thereto, any person is required to furnish any recognizance, stipulation, bond, guaranty, or undertaking, hereinafter called “penal bond’’, with surety or sureties, such person may, in lieu of such surety or sureties, deposit as security with the official having authority to approve such penal bond. United States Liberty bonds or other bonds of the United States in a sum equal at their par value to the amount of such penal bond required to be furnished, together with an agreement authorizing such official to collect or sell such bonds so deposited in case of any default in the performance of any of the conditions or stipulations of such penal bond. The acceptance of such United States bonds in lieu of surety or sureties required by law shall have the same force and effect as individual or corporate sureties, or certified checks, bank drafts, post-office money orders, or cash, for the penalty or amount of such penal bond. The bonds deposited hereunder, and such other United States bonds as may be substituted therefor from time to time as such security, may be deposited with the Treasurer, or an Assistant Treasurer of the United States, a Government depository. Federal Reserve bank, or member bank, which shall issue receipt therefor, describing such bonds so deposited. As soon as security for the per- formance of such penal bond is no longer necessary, such bonds so deposited, shall be returned to the depositor: Provided^ * * * ^ 1[457 Provided further^ That nothing herein contained shall affect or 2221 impair the priority of the claim of the U nited States against the p -:• ii bonds deposited or any right or remedy granted by said Acts or ^ section to the United States for default upon any obliga- ^ 35: 1 tion of said penal bond: 1f458 Provided further^ That all laws inconsistent with this section are 2222 hereby so modified as to conform to the provisions hereof: 1f459 And provided further^ That nothing contained herein shall affect 2223 the authority of courts over the security^ where such bonds are taken as security in judicial proceedings, or the authority of any 52 Law Parag^raph THE INCOME TAX LAW. Repeated at H administrative officer of the United States to receive United States bonds for security in cases authorized by existing laws, 1f460 The Secretary may prescribe rules and regulations necessary and 2224 proper for carrying this section into effect. TITLE XIV.— GENERAL PROVISIONS. (Of the Revenue Act of 1918.) [Repeal of Prior Laws.] ^461 Sec. 1400. (Revenue Act of 1918.) (a) That the following 2361 parts of Acts are hereby repealed, subject to the limitations provided in subdivision (b): (1) The following titles of the Revenue Act of 1916: Title I (called “Income Tax”); (2) The following parts of the Act entitled “An Act to provide increased revenue to defray the expenses of the increased appropria- tions for the Army and Navy and the extensions of fortifications, and for other purposes,” approved March 3, 1917: Section 402 (called “Returns of Dividends”). (3) The following titles of the Revenue Act of 1917: Title I (called “War Income Tax”); Title X (called “Administrative Provisions”) ; Title XII (called “Income-Tax Amendments”). 1[462 (b) Such parts of Acts shall remain in force for the assessment 2362 and collection of all taxes which have accrued thereunder, and for the imposition and collection of all penalties or forfeitures which have accrued and may accrue in relation to any such taxes, and except that the unexpended balance of any appropriation heretofore made and now available for the administration of any such part of an Act shall be available for the administration of this Act or the corresponding provision thereof: Provided^ That, except as otherwise provided in this Act, no taxes shall be collected under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, or Title I or II of the Revenue Act of 1917, in respect to any period after December 31, 1917: ******** ^463 In the case of any tax imposed by any part of an Act herein re- 2363 pealed, if there is a tax imposed by this Act in lieu thereof, the pro- vision imposing such tax shall remain in force until the corresponding tax under this Act takes effect under the provisions of this Act. ^464 Title I of the Revenue Act of 1916 as amended by the Revenue 519 Act of 1917 shall remain in force for the assessment and collection of the income tax in Porto Rico and the Philippine Islands, except as may be otherwise provided by their respective legislatures. 53 Law Paragraph THE INCOME TAX LAW. Repeated at ^ [Invalidating Clause.] 1f465 Sec. 1402. (Revenue Act of 1918.) That if any clause, sen- 2667 fence, paragraph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder of this Act, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment has been rendered. [Short Titles.] If466 Sec. 1403. (Revenue Act of 1918.) That the Revenue Act of 481 1916 is hereby amended by adding at the end thereof a section to read as follows: “Sec. 903. That this Act may be cited as the ‘Revenue Act of 1916’.” 1f467 Sec. 1404. (Revenue Act of 1918.) That the Revenue Act of 483 1917 is hereby amended by adding at the end thereof a section to read as follows: “Sec. 1303. That this Act may be cited as the ‘Revenue Act of 1917’.” ^468 Sec. 1405. (Revenue Act of 1918.) That this Act may be cited 484 as the “Revenue Act of 1918.” [Effective Date.] ^469 Sec. 1409. Revenue Act of 1918.) That unless otherwise 2823 herein specially porvided, this Act shall take effect on the day fol- lowing its passage. Comment . — [The provisions of Title XIII and Title XIV, so far as reproduced above, there being no specific provision to the con- trary, became effective on the day following “the passage” o;f the Act, that is on February 25, 1919, the day after approval by the President.] Approved by the President, February 24. 1919, at 6.55 P. M. ^470 For 11470 see page 55, 54 THE INCOME TAX LAW. Law Paragraph administrative officer of the United States to receive United States bonds for security in cases authorized by existing laws. Repeated at Tf460 The Secretary may prescribe rules and regulations necessary and 2224 proper for carrying this section into effect. TITLE XIV.— GENERAL PROVISIONS. (Of the Revenue Act of 1918.) [Repeal of Prior Laws.] •|461 Sec. 1400. (Revenue Act of 1918.) (a) That the following 2361 parts of Acts are hereby repealed, subject to the limitations provided in subdivision (b) : (1) The following titles of the Revenue Act of 1916; Title I (called “Income Tax”); (2) The following parts of the Act entitled “An Act to provide increased revenue to defray the expenses of the increased appropria- tions for the Army and Navy and the extensions of fortifications, and for other purposes,” approved March 3, 1917: Section 402 (called “Returns of Dividends”). (3) The following titles of the Revenue Act of 1917: Title I (called “War Income Tax”); He*** ***** Title X (called “Administrative Provisions”); Title XII (called “Income-Tax Amendments”). ^462 (b) Such parts of Acts shall remain in force for the assessment 2362 and collection of all taxes which have accrued thereunder, and for the imposition and collection of all penalties or forfeitures which have accrued and may accrue in relation to any such taxes, and except that the unexpended balance of any appropriation heretofore made and now available for the administration of any such part of an Act shall be available for the administration of this Act or the corresponding provision thereof: Provided^ That, except as otherwise provided in this Act, no taxes shall be collected under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, or Title I or II of the Revenue Act of 1917, in respect to any period after December 31, * * * * * * He * 1f463 In the case of any tax imposed by any part of an Act herein re- 2363 pealed, if there is a tax imposed by this Act in lieu thereof, the pro- vision imposing such tax shall remain in force until the corresponding tax under this Act takes effect under the provisions of this Act. 1(464 Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 shall remain in force for the assessment and collection of the income tax in Porto Rico and the Philippine Islands, except as may be otherwise provided by their respective legislatures. 53 519 I>aw Paragraph THE INCOME TAXfLAW. Repeated at [Invalidating Clause.] ^465 Sec. 1402. (Revenue Act of 1918.) That if any clause, sen- 2667 t-ence, paragraph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder of this Act, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment has been rendered. [Short Titles.] ^466 Sec. 1403. (Revenue Act of 1918.) That the Revenue Act of 481 1916 is hereby amended by adding at the end thereof a section to read as follows: “Sec. 903. That this Act may be cited as the ‘Revenue Act of 1916’.” - ^467 Sec. 1404. (Revenue Act of 1918.) That the Revenue Act of 483 1917 is. hereby amended by adding at the end thereof a section to read as follows: “Sec. 1303. That this Act may be cited as the ‘Revenue Act of 1917’.” ^468 Sec. 1405. (Revenue Act of 1918.) That this Act may be cited 484 as the “Revenue Act of 1918.” [Effective Date.] ^469 Sec. 1409. Revenue Act of 1918.) That unless otherwise 2823 herein specially porvided, this Act shall take effect on the day fol- lowing its passage. Comment . — [The p rovisions of Title XIII and Title XIV, so far as reproduced above, there being no specific provision to the con- trary, became effective on the day following “the passage” of the Act, that is on February , 1919, the day after approval by the President.] Approved by the President, February , 1919. ^470 For ^470 see page 55. 54 INCOME TAX LAW AND REGULATIONS. INDIVIDUALS. 470 Persons Paying Income Taxes to Other Countries. — American citizens, whether residing at home or abroad, resident aliens, and non-resident aliens receiving income from property owned and from business, trade, or profession carried on within the United States, all of whom are subject to the income-tax law of October 3, 1913, are not relieved from tax liability under that act by reason of the fact that they are also subject to the in- come-tax laws of other countries. [See credit for such taxes at ^1059.] (T. D. 2152, February 12, 1915.) 471 Law ^75. Normal Tax. — “Sec. 210. That, in lieu of the taxes imposed by sub- division (a) of section 1 [Normal tax on individuals] of the Revenue Act of 1916 and by section 1 [War-normal tax on individuals] of the Revenue Act of 1917, there shall be levied, collected, and paid for each taxable year upon the net income [for “net losses” read at 1[1913] of every individual a normal tax at the following rates:” [Read at ^282S] 472 Law ^76. Rates for 1918. — “(a) For the calendar year 1918, 12 per centum of the amount of the net income in excess of the credits provided in section 216 [^[1124]:” 473 Law ^77. Special 1918 Rate for Citizens and Residents. — ''Provided, That in the case of a citizen or resident of the United States the rate upon the first $^,000 of such excess amount shall be 6 per centum;” Application of Rates for Fiscal Year Embracing Parts of Calendar Years with Dif- fering Rates. — [Read at ^1678.] 474 Law ^78. Rates for 1919. — “(b) For each calendar year thereafter, 8 per centum of the amount of the net income in excess of the credits provided in section 216 [111124]:” 475 Law 1|79. Special 1919 Rate for Citizens and Residents. — "Provided, That in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 4 per centum.” 476 Law 1fl7. “Taxable Year” Defined.—“Sec. 200. That when used In this title — ” 477 Law 1[18. “The term “taxable year” means the calendar year, or the fiscal'year ending during such calendar year, upon the basis of which the net income is com- puted under section 212 [individuals, 1[754] or section 232 [corporations, 1[1787].” 478 Law ^19. “Fiscal Year” Defined. — “The term “fiscal year” means an accounting period of twelve months ending on the last day of any month other than December.” 479 Law 1[20. The Taxable Year 1918. — “The first taxable year, to be called the tax- able year 1918, shall be the calendar year 1918 or any fiscal year ending during the calendar year 1918;” 480 Law UlO. “Revenue Act of 1916” Identified. — “The term’/Revenue Act of 1916’ means the Act entitled ‘An Act to increase the revenue, and for other purposes,' approved September 8, 1916;” 481 Law 1f466. “Sec. 1403. That the Revenue Act of 1916 is hereby amended by adding at the end thereof a section to read as follows;” “Sec. 903. That this Act may be cited as the ‘Revenue Act of 1916’.” 482 Law 1111. “Revenue Act of 1917” Identified. — “The term ‘Revenue Act of 1917* means the Act entitled ‘An Act to provide revenue to defray war expenses, and for other purposes,’ approved October 3, 1917;” 483 Law ^467. “Sec. 1404. That the Revenue Act of 1917 is hereby amended by adding at the end thereof a section to read as follows;” “Sec. 1303. That this Act may be cited as the ‘Revenue Act of 1917’.” INC. 55 TAX INDIVIDUALS. 484 Law U468. “Revenue Act of 1918” Identified. — “Sec. 1405. That this Act may be cited as the ‘Revenue Act of 1918’.” 485 Citizenship. — Determination by State Department of right to registry is not con- clusive upon the Treasury in fixing citizenship for income tax purposes. Held that native and naturalized status remains unless changed by affirmative action or forfeited by overt'act. (T. D. 2135, January 23, 1915.) 486 Non-Resident Citizens Against Whom the Presumption of Expatriation Has Arisen. — The Department has received several inquiries concerning the payment of the income tax under the provision of Section 2 of the Act of October 3, 1913, by persons residing abroad who claim American Citizenship. These inquiries involve particularly two questions: (1) Whether a naturalized American citizen who has brought upon him- self the presumption of expatriation, under the provision of the second paragraph of Section 2 of the Act of March 2, 1907, by protracted residence abroad, and has failed to overcome such presumption under the established rules is required to pay the Income tax as an American citizen, and (2) whether a naturalized American citizen residing abroad can over- come the presumption of expatriation by payment of the income tax. 487 The question as to the liability of a particular person to pay the income tax must be determined not by this Department but by the Treasury Department, under which the income tax law is administered. Persons making inquiry concerning this point should, therefore, be advised to apply to the Treasury Department for information. 488 With reference to the second inquiry mentioned above your attention is called to the fact that naturalized citizens of the United States who have brought upon them- selves the presumption of expatriation, under the provision of the second paragraph of Section 2 of the Act of March 2, 1907, by protracted residence abroad, may overcome such presumption only upon presenting “satisfactory evidence to a diplomatic or consular officer of the United States, under such rules and regulations as the Department of State may prescribe.” The Department has not prescribed a rule that the presumption of expatriation arising under the law mentioned may be overcome by showing that the person concerned has paid, or is ready to pay, the income tax of the United States. However, if a person against whom the presumption of expatriation has arisen presents, in connection with an application for a passport, or for registration in a consulate or for actual protection, evidence that he has paid the income tax, this fact will receive due consideration in connection with other evidence submitted to overcome the presumption of expatriation under the established rules, and particularly with regard to the question of the intent to return to this country to reside. The payment of the income tax will also be duly considered in deciding the question of the right to the continued protection of this Government In cases of native American citizens who have resided abroad for a period so long that the natural presumption may be held to have arisen that they have abandoned this country. (Letter to the Ameri- can Diplomatic and Consular Officers, signed by W. J. Bryan, Secretary of State, and dated March 18, 1914.) 489 Resident Aliens. — “Residence,” as used in Subdivision 1, Paragraph A of the Act of October 3, 1913 * * * , is held to be — “That place where a man has his true, fixed and permanent home and principal estab- lishment, and to which whenever he is absent, he has the intention of returning; and indi- cates permanency of occupation as distinct from lodging or boarding, or temporary occu- pation.’* 490 For the purposes of the income tax, — it is held that where for business purposes or otherwise, an alien is permanently located in the United States; has there his principal business establishment and Is there permanently occupied or employed, even though his domicile may be without the United States he will be held to be within the definition of — “Every person residing in the United States, though not a citizen thereof ♦ * ♦ ” (T. D. 2242, September 17, 1915.) 491 Aliens Coming to the United States with the Intention of Becoming Permanent Residents Thereof. — Aliens coming to the United States with the intention of becoming residents thereof within the meaning and intent of the income tax statute, may establish that fact and have the privilege of resident aliens under the statute by filing with withholding agents a certificate in the following form [Form 1078] under oath, and which certificate shall be filed by said withholding agents with Collectors of Internal Revenue as justification for withholding on the basis of “residence” in the United States. ,(T. D. 2242, September J7, 1915.) [Read at ^[2828 and 112973.1 INC. 56 TAX NONRESIDENT ALIEN INDIVIDUALS. 492 American Wife of a Nonresident Alien. — An American woman who marries a for- eigner takes the nationality of her husband * ♦ * . (t. D. 2090, December 14, 1914.) 493 Aliens Temporarily Living in the United States. — “Residence,” as used in Sub- division 1, Paragraph A of the Act of October 3, 1913, is held to be — “That place where a man has his true, fixed and permanent home and principal estab- lishment, and to which whenever he is absent, he has the intention of returning; and indi- cates permanency of occupation as distinct from lodging or boarding, or temporary occu- pation.” 494 For the purposes of the income tax, — it is held that * * * aliens who are physi- cally present in the United States, but only temporarily resident or employed therein (as for a season or other similarly definite term, and with the expectation or intention of leaving the United States upon the termination of employment or accomplishment of the purpose which necessitated presence in the United States), are within the class of — “Persons residing elsewhere * ♦ * [Read 1[490.] (T. D. 2242, September .17, 1915.) 495 Liability of Nonresident Aliens Under the Law. — Income derived by nonresident aliens from sources in the United States Is subject to the normal or additional tax, or both, as the case may be * * * . (Art. 32, 1[219, Reg. 33, Rev., January 2, 1918.) 496 Nonresident aliens are held to be subject to the liabilities and requirements of all administrative, special, and general provisions of law in relation to the assessment, remission, collection, and refund of the income tax imposed by the act of October 3, 1913, and collectors of internal revenue will make collection of the tax by distraint, garnishment, execution, or other appropriate process provided by law. (T. D. 2313, March 21, 1916.) 497 Law ^75. Normal Tax on Nonresident Aliens. — “Sec. 210. That, in lieu of the taxes imposed by subdivision (a) of section 1 of the Revenue Act of 1916 [Normal income tax on individuals] and by section 1 of the Revenue Act of 1917 [War-normal tax on individuals: did not apply to nonresident aliens], there shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax at the following rates:” 498 Law ^76. For the Calendar Year 1918. — “(a) For the calendar year 1918, 12 per centum of the amount of the net income in excess of the credits provided in section 216 [111124]:” 499 Law 1[78. For Calendar Years Subsequent to 1918. — “(b) For each calendar year thereafter, 8 per centum of the amount of the net income in excess of the credits provided in section 216 [1[1124]:” 500 Law 1f80. Surtax on Nonresident Aliens. — “Sec. 211. (a) That, In lieu of the taxes imposed by subdivision (b) of section 1 of the Revenue Act of 1916 [Surtax on individuals] and by section 2 of the Revenue Act of 1917 [Surtax on Individuals], but in addition to the normal tax imposed by section 210 [1[497] of this Act, there shall be levied, collected, and paid for each taxable year upon the net Income of every individual, a surtax equal to the sum of the following: [Rates same as for citizens and residents, for which see 1[737.]” 501 Law 1[83. Net Income of Nonresident Aliens Defined. — “Sec. 212. (a) That in the case of an individual the term “net Income” means the gross income as defined in section 213 [11763], less the deductions allowed by section 214 [1[1019].” 502 Law 1184. Annual Accounting Period for Nonresident Aliens (Fiscal Year or Calendar Year as the Case May Be). — Sec. 212. (b). [Same as for citizens and residents for which see 11754.] 503 Law 1[ 109. Gross Income of Nonresident Aliens. — Sec. 213. (a), (b). [Sameas for citizens and residents for which see 11763, except that] — “(c) In the case of non- resident alien individuals, gross income includes only the gross income from sources within the United States,” 504 Royalties Received by Nonresident Aliens. — Royalties paid to nonresident alien under an agreement of purchase of certain patent rights, the payment bein^ based upon the quantity of goods produced by the use of such patents, are held to be income 57 INC. TAX NONRESIDENT ALIENS. accruing to nonresident aliens by reason of property ov/ned or business carried on within the United States; and * * * ^ (X. D. 2137, January 30, 1915.) 605 Law If 110. Interest on Domestic Securities and Dividends on Domestic Stock as Gross Income of Nonresident Aliens. — “including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and” 506 Under the decision of the Supreme Court of the United States in the case of Brush- aber v. Union Pacific Railway Co., decided January 24, 1916 [^2685], it is hereby held that income accruing to nonresident aliens in the form of interest from the bonds and divi- dends on the stock of domestic corporations is subject to the income tax imposed by the Act of October 3, 1913 [which provided in the case of nonresident aliens that the income tax was to be assessed “upon the entire net income from all property owned and of every business, trade, or profession carried on in the United States”]. (T. D. 2313, March 21, 1916.] 507 The individual liability of nonresident aliens for tax on interest from bonds and divi- dends on stock of domestic corporations, and for return and payment thereof to the Government under Section 2 of the Act of October 3, 1913, will be held effective as of January 1, 1916. (T. D. 2317, April 4, 1916.) 508 Lawful. Profits on the Manufacture and Disposition of Goods Within the United States as Gross Income of Nonresident Aliens. — “including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.” [^2876] 509 Law 1f413. The Income of a Citizen of Any Possession of the United States Who Is Not a Resident of the United States, is Taxed Under This Title on Income Derived From United States Sources Only, the Tax Being Computed and Paid in the Same Manner and Subject to the Same Conditions as in the Case of Other Persons Liable on Such Income Only. — “Sec. 260. That any individual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States, shall be subject to taxation under this title only as to incom.e derived from sources within the United States,” [^3069.] 510 Law 1f414. “and in such case the tax shall be computed and paid in the same manner and subject to the same conditions as in the case of other persons who are taxable only as to income derived from such sources.” 511 Law 1[415. Income Taxes in Porto Rico and the Philippine Islands. — “Sec. 261. That in Porto Rico and the Philippine Islands the income tax shall be levied, as- sessed, collected, and paid in accordance with the provisions of the Revenue Act of 1916 as amended.” [^3070.] 612 Law ^416. “Returns shall be made and taxes shall be paid under Title I of such Act in Porto Rico or the Philippine Islands, as the case may be, by” 513 Law 1f417. “(1) every individual who is a citizen or resident of Porto Rico or the Philippine Islands or derives income from sources therein, and” 514 Law ^418. “(2) every corporation created or organized in Porto Rico or the Philippine Islands or deriving income from sources therein.” 515 Law ^419. “An individual who is neither a citizen nor a resident of Porto Rico or the Philippine Islands but derives income from sources therein, shall be taxed in Porto Rico or the Philippine Islands as a nonresident alien individual,” 516 I .aw ^420. “and a corporation created or organized outside Porto Rico or the Philippine Islands and deriving income from sources therein shall be taxed in Porto Rico or the Philippine Islands as a foreign corporation.” 517 Law ^421. “For the purposes of section 216(^1125] and of paragraph (6) [^2102] of subdivision (a) of section 234 a tax imposed in Porto Rico or the Philippine Islands upon the net income of a corporation shall not be deemed to be a tax under this title.” 518 Law ^422. “The Porto Rican or Philippine Legislature shall have power by due enactm.ent to amend, alter, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively.” 58 INC. TAX NONRESIDENT ALIENS. 619 Law 1[464. “Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 shall remain in force for the assessment and collection of the income tax in Porto Rico and the Philippine Islands, except as may be otherwise provided by their respective legislatures.” 520 Sale of Stock. — When a nonresident alien who owns stock in an American corpora- tion disposes of same by sale, the sale and delivery being made within the United States, the profit will be held to have been derived from sources within the United States and is to be included for the purposes of income tax. (Art. 4, ^62, Reg. 33, Rev., Jan. 2, 1918.) 521 Income From United States Sources Received through Foreign Partnership. — • The income received by a nonresident alien partnership from sources within the United States does not lose its identity as to source when distributed to a nonresident alien member of the firm. Therefore, the nonresident alien member will be required to file a return on Form 1040 or 1040A, as the case may be, and shall include therein his distribu- tive share of the taxable profits from sources within the United States. (Part of letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated October 1, 1918.) 522 Profits Accruing to Nonresident Alien Partnerships on Sale of Stock Negotiated Through Domestic Bankers. — This office has before it your letter of October 28, 1916. It appearing from paragraph (f) of your letter that the foreign banking house referred to is a copartnership, the following answers are returned to your several inquiries: “A foreign banking house buys through a domestic banking house 1,000 523 shares of stock and sells the stock with a profit of $30,000. {a) Is this profit taxable? (Answer) Yes. 524 (b) Should the domestic firm retain the normal tax? (Answer) No. (c) How can a foreign firm be made to render a tax return and pay the tax, 525 it being assumed that the domestic firm or agent holds no property for account ] of the foreign firm after the transaction is completed? (Answer) The Govern- ment will proceed, under the general provisions of the law, to take all steps necessary to secure a required return, or to itself prepare one, and a collection of the amount of tax assessed against that return. (d) If the foreign firm does not render a return, will the domestic firm be held ' 526 responsible for the tax and supertax, if any? (Answer) The foreign firm itself j is not required [under the law as it then was] to render an income tax return covering its own net income unless specifically requested to do so by the Commissioner of Internal Revenue or a. Collector of Internal Revenue. Whether or not the domestic firm which has acted as agent for the foreign firm would be required to render a return in the event that the latter refused to do so, would be determined by the facts in the case. (e) The foreign firm has several partners. Is the $30,000 to be considered 527 an entity for the purpose of supertax or may the several partners declare their proportionate shares in the amount?” (Answer) Income Tax is not computed upon the amount of net income derived by a foreign partnership from sources within the United States, but upon the individual share of each member in such net income. (Letter to The Corporation Trust Company, signed by Commissioner W. H. Osborn, and dated Dec. 6, 1916.) 528 Exempt Income. — Nonresident aliens will not be required to make return of any of the classes of income specified by section 4, act of September 8, 1916, as amended, and received by them from sources in the United States. (Art. 32, 11220, Reg. 33, Rev., Jan. 2, 1918.) [ 1 [ 2877 .] 629 Lav/ 1[ 149. Deductions Allowed to Nonresident Aliens. — “Sec. 214. (b) In the case of a nonresident alien Individual the deductions allowed in paragraphs (1) nfl020|, (4) nfl066], (7) 1[1088], (8) [1fl089], (9) [1fl093l, (10) [1[1096], 02) [1[1119], and clause (e) of paragraph (3) [1[533], of subdivision (a) shall be allowed only if and to the extent that they are connected with income arising from a source within the United States;” 630 I ^aw If 150. Apportionment and Allocation of Deductions. — “and the proper appor- tionment and allocation of the deductions with respect to sources of income within and without the United States shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary.” [1f2964.] 531 Law lfll8. Interest Deductible by a Nonresident Alien. — “Sec. 214. (a) (2) [1fI049] — or, in the case of a nonresident alien individual, the proportion of such interest which the amount of his gross income from sources within the United States 59 INC. TAX NONRESroENT ALIENS. bears to the amount of his gross income from all sources within and without the United States;” Second. The proportion of interest paid by him within the year applicable in 632 . ascertaining his net income from all sources within the United States, ascertained ^ in accordance with rule prescribed in this paragraph (except interest on indebted- ness incurred for purchase of obligations or securities, the interest on which is exempt from income tax), viz.: Multiply interest paid on entire indebtedness from all sources by quoient arising from dividing gross income from sources within the United States by gross income from all sources within and without the United States, but this deduction shall be allowed only if such person shall include in his return all the information necessary for its calculation. (Art. 10, 11131, Reg. 33, Rev., Jan. 2, 1918.) 633 Law 1 [ 125 . Taxes Deductible by a Nonresident Alien. — “Sec. 214. (a) (3) [Taxes set forth in 1 [ 1053 , 1 [ 1054 , and 1 [ 1055 , and in addition thereto] (e) in the case of a nonresident alien individual, by the authority of any foreign country (except income, war-profits and excess-profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon property or business;” 634 Law 1]128. Losses Incurred in Transactions Entered Into for Profit Outside of Business Deductible by Nonresident Aliens. — “Sec. 214 (5) [1]1084] — but in the case of a nonresident alien individual only as to such transactions within the United States;” 636 Law ^130. Property" Losses Outside of Business Deductible by Nonresident I jg Aliens. — “Sec.214(a)(6) [If 1085] — (but in the case of a nonresident alien individual only property within the United States)” 636 Law If 143. Contributions to Religious, Charitable, Educational, etc.. Activities are Deductible to a Limited Amount. — “Sec.214(b)(l 1) [1fll02] — In the case of a non- resident alien individual this deduction shall be allowed only as to contributions or gifts made to domestic corporations, or to such vocational rehabilitation fund;” 637 Law If 164. Specific Exemption Allowed to Nonresident Aliens. — “Sec. 216 (e) — In the case of a nonresident alien individual who is a citizen or subject of a country which imposes an income tax, the credits allowed in subdivisions (c) [1f]1128 and (d) [1fll38] shall be allowed only if such country allows a similar credit to citizens of the United States not residing in such country.” [1f2972.] 638 Law If 165. Deductions and Credits Allowed Conditionally. — “Sec. 217. That a nonresident alien individual shall receive the benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received from all sources corporate or otherwise in the United States, in the manner prescribed by this title, including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits;” [Read at 1f2973.] 6391^ A nonresident alien may have the benefit of the deductions and credits above pro- , vided only by filing or causing to be filed with the collector of internal revenue a true and accurate return of his total income received from all sources, corporate or other- wise, in the United States. In case of failure to file return the tax is to be collected on the gross income from all sources in the United States. (Art. 12, If 141, Reg. 33, Rev., Jan. 2, 1918.) 640 Returns should be rendered to the collector of internal revenue for the district in which a nonresident alien carries on his principal business within the United States or, in the absence of a principal business within the United States and in all cases of doubt, to the collector of internal revenue at Baltimore, Md., in whose district Wash- ington is situated. (T. D. 2313, Mar. 21, 1916.) 641 Law If 166. Specific Exemption May be Claimed at the Source. — ''Provided, That the benefit of the credits allowed in subdivisions (c) [If 1128] and (d) [1[1138] of section 216 may, in the discretion of the Commissioner, and except as otherwise provided in subdivision (e) [1f537] of that section, be received by filing a claim therefor with the withholding agent.” [Privilege not granted, see 1f2977.] 642 Law If 167. Propel^ of Nonresident Alien Subject to Distraint for the Tax. “Sec. 217. — In case of failure to file a return, the collector shall collect the tax on such income, and all property belonging to such nonresident alien individual shall be liable to distraint for the tax.” INC. 60 TAX NONRESIDENT ALIENS. 543 When all Income tax to which income of a nonresident alien Is subject is not wlth- [held at the source, a return of income will be required to be filed by or on behalf of ? said nonresident alien, and penalty for failure to make return in time will attach. All property in the United States of a nonresident alien will be subject to distraint for collection of tax and penalty. (Art. 13, 1[142, Reg. 33, Rev., Jan. 2, 1918.) 544 Nonresident Alien Beneficiary. — Where a fiduciary In the United Stateslis the recipient of trust income for which there is but one beneficiary and that beneficiary a nonresident alien, the fiduciary will be required to make full and complete return on Income Tax Form 1040 or 1040 A, as the case may be, for this trust income on behalf of the nonresident alien and pay any and all tax found by such return to be due. Where there are two or more beneficiaries, one or all of whom are nonresident aliens, the fiduciary shall render a return on Form 1041, and a personal return on Form 1040 or 1040 A for each nonresident alien beneficiary. (Art. 29, 1(200, Reg. 33, Rev., Jan. 2, 1918.) 545 Where the beneficiary is a nonresident alien individual the tax imposed by the act of Sept. 8, 1916, as amended, and the act of Oct. 3, 1917, is to be accounted for by such fiduciary on a return of income for such nonresident alien beneficiary on Income Tax Form 1040 or 1040 A, as the case may be. (Art. 28, Kl87, Reg. 33, Rev., Jan. 2, 1918.) 546 Liability of Foreign Fiduciaries for Non-Resident Alien Beneficiaries in Connection iiwith Income Received from Sources Within the United States. — Receipt is ac- knowledged of your letter of December 1, 1916, reading as follows; “A trust company In Canada holds certain bonds of American corporations for estates, trusteeships, etc. Is it necessary for the corporation to file the annual return Form No. 1041, Revised? If so, what deductions will it be allowed against income received from the United States * * *? What form of ownership certificates shall such corporation file in order to obtain exemption from deduction at the source if it stipulates and agrees to file the annual return and account for the tax annually on payments made to beneficiaries?” In reply you are advised that if the foreign trust company has charge of an estate 547 or trust, the net income of which is distributed annually or periodically among nonresident alien beneficiaries, the fiduciary should execute a return on Form 1041, Revised, covering the total income of the estate or trust derived from sources within the United States, and a personal return on Form 1040 ( * * * * ) in behalf of each non- resident alien beneficiary, * ♦ ♦ , If the fiduciary has charge of an estate in process of administration or settlement, 548 or an estate or trust the net income of which is held in trust for the benefit of unborn or unascertained persons, or for future distribution under the terms of a will or trust, the estate or trust will be considered a taxable entity and the fiduciary required to render a return on Form 1040 ( ♦ ♦ ♦ ) covering so much of its total income as is derived from sources within the United States, * * ♦ Whether the return of the total income derived by the estate or trust from sources 549 within the United States is made on Form 1040 ( * * * ) or 1041, Revised, the benefit of such of the deductions enumerated in Section 6 of the Act of Sept. 8, 1916, as the estate or trust is entitled to may be claimed. No form of exemption certificate has been prescribed for the use of a foreign 650 fiduciary, as it is not permitted, under the law, that such a fiduciary may assume liability for payment of the income tax found to be due on income derived by the estate or trust from sources within the United States and subject to withholding of normal tax at the source. Interest coupons detached from domestic bonds should be accompanied by ownership certificates. Form [1000], Revised, when presented for pay- ment or collection by a fo cign fiduciary, and the interest paid on such coupons will be subject to withholding of normal tax at the source, * * * . (Letter to The Cor- poration Trust Company, signed by Commissioner W. H. Osborn, and dated Dec. 28, 1916.) When a Broker is not the Agent, for Income Tax Purposes, of a Nonresident Alien 551 Client. — This office Is in receipt of your letter of Mar. 7, 1918, in which you ask what constitutes an agent or representative in this country in charge of property of a nonresident alien, and by way of illustration you submit the following statement; “I have in mind the ordinary relation of broker and client. The non-resident alien client maintains an account with a broker, occasionally buying some securities on margin and selling some from time to time; interest is charged on balances due and dividends as paid on the stocks carried are credited to the account. All dealings are in response to direction from the customer. Is the broker in such case, agent or representative of the alien so that he must make a return in behalf of the customer and become responsible for normal taxes and sur-taxes on all income and profits passing through his hands?” Kin reply you are advised that the facts set forth in this statement do not constitute the relationship of agency between these parties to an extent which will make the broker responsible for filing the return for the non-resident client. The broker in such case, however, for the 61 INC. TAX PAYMENT OF TAX AT SOURCE. purposes of the income tax is considered the withholding agent and should withhold the 2% [8%] normal tax and the nonresident alien should file a return on Form 1040 B, including all income received from sources in the United States. (Letter to Henry W. Beal, Boston, Mass., signed by Deputy Commissioner L. F. Speer, and dated April 17, 1918.) Maimer of Payment of Tax by Nonresident Aliens. — [For payment by uncertified 552 checks and Treasury Certificates of Indebtedness, see ^2428]. Your letter of the 28th instant has been received, in which you ask whether the Collector at Baltimore in the case of nonresident aliens having no agents or representatives in the United States, is authorized (a) To accept drafts of foreign banks on banks in Baltimore, (b) To accept drafts on national banks only, and not on state or private institutions. (c) To accept drafts of foreign banks on national banks of New York City. (d) To accept drafts of New York City national banks on national banks in Baltimore. (e) To accept cashiers’ checks to his order issued by New York City national banks. In reply you are advised that this office can not authorize any departure fro n the require- ments of the law, which^are that internal-revenue taxes are payable in cash, certified checks drawn in favor of collectors on national or State banks or trust companies located in cities where the respective collectors deposit their collections, or such “out-of-town” certified checks as can be cashed without expense to the Government. * * * ♦ There would be no objection to the collector’s accepting such drafts and checks if the depositaries will accept them “without recourse” and issue therefor regular certificates of deposit on Form 15, as the responsibility would then appear to be shifted from the collector to the depositary; and there would be no objection to the collector’s accepting them for collection only — that is, he would issue no receipt for the payment of taxes until such drafts and checks had been paid and he had been notified thereof. * * * * ^ copy of this letter is being sent to Collector Miles, District of Maryland, for his information. (Letter to The Corporation Trust Company, signed by Deputy Commissioner G. E. Fletcher, and dated Mar. 31, 1917.) 653 Law ^201. Payment of Tax at the Source on Account of Nonresident Aliens. — “Sec. 221. (a) That all individuals, corporations and partnerships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States,” [^2996.] 654 Law lf202. “having the control, receipt, custody, disposal, or payment, of interest,* rent, salaries, wages, premiums, annuities, compensations, remunerations, emolu- ments, or other fixed or determinable annual or periodical gains, profits, and income,” ♦ Payment at the source, of tax on interest on corporate obligations. — [Read at ^601.] 556 Law ^203. “of any nonresident alien individual” 556 Law ^204. “(other than income received as dividends from a corporation which is taxable under this title upon its net income)” 557 Law 1[205. “shall (except in the cases provided for in subdivision (b) [1[604] and except as otherwise provided in regulations prescribed by the Commissioner under section 217 l1[541])” 558 Law 1[206. “deduct and withhold from such annual or periodical gains, profits, and income” 559 Law ^207. “a tax equal to 8 per centum thereof:” 560 No Deduction at the Source on Dividends. — This office is in receipt of your letter of April 8, 1916. You state a case as follows: “Banks and bankers in the United States hold as depositary shares of stock of cor- porations organized in the United States and which shares are owned by nonresident foreign banks and bankers, and in many cases it so happens that the shares of stock held by the United States bankers for the account of foreign banks and bankers are owned by a third nonresident party. You ask: “Will it be necessary for the American banker to withhold the tax on these dividends and will it be necessary for the United States bankers to render a return for the fiscal year in which these disbursements are made?” * * * Dividends paid from the net earnings of corporations, joint stock coni- 561 panics or associations and insurance companies taxable upon their net income, as provided in the Income Tax Law are taxable to individuals only for the “additional tax.” It, therefore, follows* INC. 62 TAX PAYIylENT OF TAX AT SOURCE. (1) Dividends, such is above described, are not subject to the withholding provisions of the Income Tax Law ♦ ♦ ♦ , * * * The nonresident alien individual * * * owning the stock aforesaid 562 will be chargeable with such tax as may be assessable upon the dividends on said stock. They will be subject to all the provisions of the law and regulations for making return and paying tax and for failure to comply with the requirements of the law and regulations, the stock and any other property they may have in the United States will be subject to distraint, garnishment, execution or other appropriate process provided by law. (Letter to The Corporation Trust Company, signed by Acting Commissioner David A. Gates, and dated April 10, 1916.) 563 No Deduction at Source on Salaries for Service Rendered Abroad or on Rent on Property Located Abroad. — It is held that salaries, wages, commissions, and rents paid by domestic corporations, resident individuals, or partnerships to non- resident alien employees for services rendered entirely in a foreign country and for property located in a foreign country are not subject to deduction and withholding of the normal tax and such payments of incomm will not be subject to the income tax in the hands of the recipient as from a source within the United States. (Art. 32, ^[221, Reg. 33, Rev., Jan. 2, 1918.) 11|2877.] 5641. Other Items Upon V/hich Tax Is Not To Be Withheld at the Source. — [The tax shall not be withheld at the source on the] Proceeds of life insurance policies paid upon the death of the person insured, or payments made by or credited to the insured, on life insurance, endowment, or annuity contracts, upon the return thereof to the insured at the maturity of the term mentioned in the contract, or upon the surrender of contract — all of which shall not be included as income under this law — but this shall not be construed to exempt said insurance companies from withholding and paying the normal tax of 1 [8] per cent on interest income paid by insurace companies to beneficiaries of policies * * * . (T. D. 1890, Oct. 31, 1913.) 565j. Income of an individual which is not fixed or certain and not payable at stated periods, or is indefinite or irregular as to amount or time of accrual, shall not be withheld at the source, but shall be listed in the annual return of the individual, and the tax shall be paid thereon by him. (T. D. 1890, Oct. 31, 1913.) 566 Agents compensated on the commission basis, lawyers, doctors, authors, inventors, and other professional persons whose income is irregular and indefinite. (Art. 32, Reg. 33, Jan. 5, 1914.) 567 When indefinite as to amount and time of accrual, they [commissions to salesmen] are not subject to withholding. (T. D. 2090, Dec. 14, 1914.) 668 The value of property acquired by gift, bequest, devise, or descent. Interest upon the obligations of a State or any political subdivision thereof, and 569 upon the obligations of the United States or its possessions; * * * ^ 1890, Oct. 31, 1913.) 570 Payments in connection with (1) quarters, (2) heat and light, (3) mileage, (4) re- imbursement for actual expenses, and (5) per diem allowances in lieu of subsistence while traveling under orders are indefinite and irregular as to right of possession, amount, and time of accrual; and are not, therefore, subject to withholding as “fixed or determinable annual or periodical gains, profits, and income” under the requirements of the Income Tax Law. (T. D. 2079, Nov. 24, 1914.) 57 1 Receipt is acknowledged of your letter of March 2, 1916, and in reply you are advised that the office holds that in all cases where rental or royalties accrue under the terms of a lease or agreement which grants to the lessee the use of certain lands and a right to mine or produce and remove therefrom any natural deposit, upon payment of rental fixed and determinable as to amount and time of payment, or of royalties based on a certain fixed sum, or certain fixed percentage of value, per ton, barrel, or other unit of measure, payments of such rental or royalties, when they, in part, represent a partial return of the capital originally invested in the lands, will not be subject to withholding of the normal tax at the source. (Letter to The Corporation Trust Company, signed by Commissioner W. 11. Osborn, and dated Mar. 10, 1916.) 672 Law ^332. Payment of Tax at the Source on Account of Certain Foreign Corpo- rations. — “Sec. 237. That in the case of foreign corporations subject to taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein,” [Read at ^2996.] 63 INC. TAX PAYMENT OF TAXIAT SOURCE. 673 Law ^[333, “there shall be deducted and withheld at the source in the same manner ^ and upon the same items of income* as is provided in section 221 [11553]” ^ 574 Law 1[334. “a tax equal to 10 per centum thereof,” 575 Law 1[335. “and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section:” ♦Payment at the Source of Tax, on Interest on Corporate Obligations. — [Read at 11601.] 576 Foreign Corporations Engaged in Business in the United States to file Certificate Establishing That Fact. — [In the case of bond interest, see 11651. The following is included here because of its possible application in connection with the withholding of the tax on miscellaneous income payments to foreign corporations.] Under the Act of September 8, 1916, the normal Income tax is to be withheld at 577 sources of income in the United States, from the income of [foreign] corporations, “not engaged in trade or business within the United States and not having any office or place of business therein.” [One form of] income of such nonresident alien corporations, etc., which Is subject 578 to the withholding provisions of the law is that derived from “interest on bonds | and mortgages or deeds of trust or similar obligations of domestic or other resident corporations, joint stock companies or associations, and Insurance companies,” regardless of amount. To enable debtor corporations, etc., in the United States to distinguish between 579 nonresident alien corporations, etc., which have and those which do not have “any office or place of business” in the United States and also to enable such non- resident alien corporations, etc., as have an “office or place of business” in the United States, to claim exemption from withholding of the normal income tax at the source on their income from sources within the United States as specified by the statute, a certificate will be provided in the following form: (Form 1086.) [Form 1001 has been used for making this disclosure in connection with bond interest, 1[658.] The certificate herein provided for shall be printed on yellow paper and shall be in 580 size 8 by 33^ inches, and shall be printed to read from left to right along the 8-Inch dimension. (( 58lliThe paper upon which the certificate is to be printed shall correspond in weight and texture to white writing paper 21 by 32, about 40 pounds to the ream of 500 sheets. Individuals or organizations desiring to print their own certificates may do so, 582 but certificates so printed must conform in size and be printed in similar type and upon the same color, shade and weight of paper as used by the Government. ♦ **♦♦♦**♦** 583 The normal income tax on the character of income herein specified and payable to nonresident ♦ * * corporations, etc., will be deducted, withheld and paid to the proper officer of the United States Government authorized to receive it, unless the corpo- ration, etc., entitled to the payment shall file a certificate (under penalty for false claim), in form and as herein provided, and only those nonresident * * * corporations, etc., which have an “office or place of business” in the United States can use the certificate herein provided to be used. The corporations, etc., which are permitted to use the cer- tificate herein provided, are required to make and render a return of income to the Collector of Internal Revenue for the district in which they have their office or place of business, as provided by the Act of September 8, 1916. (T. D. 2374, Sept. 28, 1916.) 584 Law 1f22. Definition of the Term “Withholding Agent.” — “The term "withholding agent’ means any person required to deduct and withhold any tax under the provis- ions of section 221 [11553] or section 237 [1[572];” 585 Guardians, trustees, executors, administrators, receivers, conservators, and all persons, corporations, or associations acting in any fiduciary capacity hereinafter referred to as fiduciary agents, who hold in trust an estate of another person or persons, shall be designated the “source” for the purpose of collecting the income tax. (T. D. 2231, July 16, 1915.) 586 An effort has been made to meet the views of certain departments that withholding should occur from the aggregate amounts received by an individual from the various disbursing officers within a department; but, after further and careful consideration of both the law and the administrative features involved, it has been determined that each disbursing officer must be governed by the amounts paid by him alone, and that it is not incumbent upon him to ascertain and take into consideration amounts that may have been paid by other disbursing officers. INC. 64 TAX PAYMENT OF TAX AT SOURCE. This view is in full accord with the provision of the income-tax law which makes 687 “all officers and employees of the United States having the control, receipt, custody, disposal, or payment,” etc., personally liable for the normal tax of 1 [8] per cent on amounts passing through their hands, subject to the character and amount of income and the exemptions fixed by law. All rulings heretofore made on the subject, by letter or otherwise, thaUare in con- 588 flict herewith, are hereby overruled and superseded. (T. D. 2135, Jan. 23, 1915.) 589 All persons, firms, etc., mentioned above are referred to in these regulations as “debtors” or “withholding agents,” and the word “source” is to apply to the place where the income originated and is payable. (Art. 31, Reg. 33, Jan. 5, 1914.) 590 Tax-Exempt Corporations Required to Withhold. — While the organizations enumerated in section 11 of this title are themselves exempt from the tax on any income received by them, they are not exempt from the requirements of the title with respect to the withholding of the normal tax on bond interest * * * paid to foreign corpora- tions or bond interest paid to individuals on bonds having a tax free covenant or from furnishing information in accordance wdth the provisions of this title as amended by section 1205 of Title XII of the act of October 3, 1917. (Art. 81, ^336, Reg. 33, Rev., Jan. 2, 1918.) 591 Intent of the Law. [The provision of the 1916-1917 Act of which the first and last sentences of the herein following paragraph are quotations, practically, is not carried into the present law. To what extend the “intent and purpose” of the present law will be considered to be similar to the “intent and purpose” of the old law will un- doubtedly be a matter of regulation.] The intent and purpose of the income-tax law is that all gains, profits, and income of a taxable class shall be charged and assessed with the corresponding income tax, normal and additional, and such tax shall be paid by the owner of such income or the proper representative thereof having the receipt, custody, control, or disposal of the same. In any case where the conditions which obtain do not appear to fall within the law and regulations for the assessment and collection of the income tax, the proper tax shall be assessed in the particular case by the Commissioner of Internal Revenue upon his findings concerning the same. Ownership of income and liability for tax thereon shall be determined as of the year for which the return is required to be rendered. (Art. 49, p77, Reg. 33, Rev., Jan. 2, 1918.) 592 Law ^432. “Sec. 1307. That in all cases where the method of collecting the tax imposed by this Act is not specifically pro/ided in this Act, the tax shall be collected in such manner as the Commissioner, with the approval of the Secretary, may prescribe.” 593 Record to be Kept. — Every individual, partnership, corporation, or association liable to any tax imposed under the internal revenue laws of the United States or for the collection thereof shall keep such records and render such statements and returns, under oath, as shall be prescribed by the Commissioner of Internal Revenue. (Art. 50, ^278, Reg. 33, Rev., Jan. 2, 1918.) 594 Miscellaneous Income Defined, — [For interest on corporate obligations read at ^601, et seq.J — The above [1[554] includes all income derived from salaries, wages, rents, royalties, interest, taxable annuities, emoluments, or other fixed and determinable annual gains, profits, and income of another person — such as the payment of interest upon the obligations of individuals. (T. D. 2135, Jan. 23, 1915.) 595 The person, firm, company, co-partnership, corporation, joint stock company or association, and insurance company in the United States, citizen or resident alien, in whatever capacity acting, having the control, receipt, disposal, or payment of fixed or determinable annual or periodic gains, profits, and income of whatever kind, to a nonresident alien, under any contract or otherwise, which payment shall represent [taxable] income of a nonresident alien ♦ ♦ ♦ [or foreign corporation, subject to taxation under the Act, not engaged in trade or business within the United States and not having any office or place of business therein] shall deduct and withhold from such annual or periodic gains, profits, and income, regardless of amount and pay to the officer of the United States Govern- ment authorized to receive the same such sum as will be sufficient to pay the normal tax of [8 or 10] per cent imposed by law, and shall make an annual return on Form 1042. (T. D. 2109, Dec. 28, 1914.) (T. D. 2313, Mar. 21, 1916.) 598 Withholding on Salaries Based on Calendar Year. — The salary of an individual is subject to withholding at the source only on the basis of the calendar year. Corporations which have a fiscal year other than the calendar year * * * ^ ^JH required to withhold on the basis of the calendar year. (T. D. 2090, Dec. 14, 1914.) 597 Notes Given in Lieu of Cash Payments- — Where notes are given in payment of rent, the lessee’s obligation to withhold is not altered. The lessee’s obligation is the INC. 65 TAX PAYMENT OF TAX AT SOURCE. same as in the case of cash rental, withholding occurring at the time the notes are given, and not at maturity. Real estate agents are not required to deduct and withhold the normal tax from rents collected. * * * * agent stands in the place of the landlord and receives money from tenants in exactly the same capacity as the landlord would receive such moneys and should be treated as such. A real estate agent does not act as an agent of the debtor. Therefore the duty of withholding the tax can not be transferred from the debtor to such agent, because such transfer would simply be transferring the duty of v/ith- holdlng to the landlord himself. (T. D. 2090, Dec. 14, 1914.) 598 Interest on Bank Deposits. — Nonresident alien individuals and corporations 'are required to pay tax on all income received in the calendar year from sources within the United States, except exempt sources. Interest received from deposits in banks located within the United States constitutes income received from sources within the United States and is subject to the withholding provisions of the Act of September 8, 1916, as amended by the Act of October 3, 1917. Banks are therefore required to withhold the normal tax of [8] per cent upon interest paid to nonresident alien individuals and the normal tax of [iO] per cent * * upon interest paid to a nonresident alien corporation “not engaged in business or trade within the United States and not having any office or place of business therein.” (T. D. 2623, Dec. 28, 1917.) 599 Interest received from deposits in banks located within the United States constitutes income received from sources within the United States and is subject to the with- holding provisions of the Act of September 8, 1916, as amended by the Act of October 3, 1917, as to nonresident alien Individuals. Banks are, therefore, required to withheld the normartax of [8] per cent on such interest paid to nonresident alien individuals. Though nonresident alien corporations are liable to incomm tax on interest received 600 from deposits in banks located within the United States, that portion of Treasury Decision 2623 authorizing withholding of such tax against such corporations is hereby revoked. [The law under which this T. D. was issued made no provision for with- holding the tax against miscellaneous income paid to certain foreign corporations, as does the present law, 11572.] (T. D. 2652, Feb. 6, 1918.) Return of Taxes Withheld. — [Read at 1l698.] Payment of the Taxes Withheld. [Read at 11720.] TAX TO BE DEDUCTED AT THE SOURCE ON INCOME FROM INTEREST ON DOMESTIC OBLIGATIONS. 601 Tax Withheld in Case of Interest on Obligations Not Containing Tax-Free Covenants. — [Applies only to nonresident alien individual owners (Law provision at 11553) and to foreign corporations not engaged in trade or business within the United States and not having any office or place of business therein (Law provision at 1[572). The regulations follow.] 602 Law 11208. Owner to be Known to Withholding Agent or Tax is Withheld in Any Case. — ’‘^Provided, That the Commissioner may authorize such tax [8%, 1[559, although the rate of tax against corporations Is 10%, 1[574.? Read1[2996.] to be deducted and withheld from the interest upon any securities the owners of which are not knowm to the withholding agent.” 603 No Withholding Against Known Citizens or Residents in the Case of Interest on Corporate Obligations Not Containing Tax-Free Covenants. — Income paid to citizens or residents of the United States is subject to withholding of normal tax at the source only when derived from interest on bonds and mortgages, or deeds of trust, or other similar obligations of corporations, joint stock companies, etc., containing a so-called “tax-free” or “no deduction” clause. (Mimeograph letter to Collectors, No. 1663, Nov. 1, 1917.) Information Relative to Ownership to be Disclosed by Means of Ownership Certificates in the Case of Coupon Interest. — [Read at 1[651.] 604 Law 11209. Tax Withheld in Case of Interest on Obligations Containing Tax-Free Covenants. — “(b) In any case where bonds, mortgages, or deeds of trust, or other similar obligations of a corporation contain a contract or provision by which the obligor agrees [1[2996]’? INC. 66 TAX PAYMENT OF TAX AT SOURCE. 605 Law 11210. “to pay any portion of the tax imposed by this title upon the obligee, or” 606 Law 1f211. “to reimburse the obligee for any portion of the tax, or” 607 Law 1f212. “to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the United States,” 608 Law 11213. 2% to be Withheld in Case of Interest on Tax-Free Covenant Obli- gations. — “the obligor shall deduct and withhold a tax equal tj 2 per centum of the interest upon such bonds, mortgages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods and” 609 Law 1[214. Withholding of 2% in Case of Interest on Tax-Free Covenant Obli- gations Applies Against Nonresident Alien Individuals, Citizens and Residents, and Partnerships. — “whether payable to a nonresident alien individual or to an individual citizen or resident of the United States or to a partnership:” 610 Law 1[336. Withholding of 2% in Case of Interest on Tax-Free Covenant Obliga- tions Applies Against Foreign Corporations Not Engaged in Trade or Business Within the United States and Not Having Any Office or Place of Business Therein. — Sec. 237 [11572]: Provided^ That in the case of interest described in subdivision (b) [1f604] of that section the deduction and withholding shall be at the rate of 2 per centum.” 611 Liability of Debtor Corporation, When No Exemption is Claimed, in Case of Bond Bearing Covenant to Pay Old 1% Rate Only. — Sec. 9-C, Act of September 8, 1916, as amended [11604 and 1[609 above], provides that normal tax of 2% shall be deducted and withheld from interest payments upon bonds owned by citizens or residents of United States, if such bonds contain contract or provision whereby obligor agrees to pay any portion of tax imposed by that title upon obligee. Debtor corporation will, in such cases, be held liable for 2% tax, although the portion of tax guaranteed is only 1%. (Telegram to S. W. Straus & Co., New York, N. Y., dated Feb. 18, 1918, and signed by Commissioner Daniel C. Roper.) 612 Law 1[215. Owner to be Known to Withholding Agent or Tax is Withheld in Any Case. — Provided, That the Commissioner may authorize such tax [2%, 1[608] to be deducted and withheld in the case of interest upon any such bonds, mortgages, deeds of trust or other obligations, the owners of which are not known to the withholding agent.” Information Relative to Ownership to be Disclosed by Means of Ownership Certi- ficates in the Case of Coupon Interest. — [Read at 11651.] 613 Coupon Interest Accruing Prior to Incidence of Tax. — Where coupons bear a date prior to March 1, 1913, but have not been presented for payment until 1915, al- though funds have been on hand to meet them since maturity, no withholding is required for the reason that such coupons represent income that was due and payable and could have been reduced to possession, on demand, prior to the incidence of the income tax. Where coupons were due and payable in 1911, and have been in default since that 614 year, funds to meet them having been deposited with the withholding agent since January 1, 1915, it Is held that the income represented by such coupons accrued to the owners of the bonds prior to the incidence of the tax, and hence does not constitute taxable and returnable income. (Extract from letter to the Central Trust and Safe Deposit Company of Cincinnati embodying a decision by Commissioner W. H. Osborn, signed by Collector A. C. Gilligan, and dated Mar. 16, 1915.) 615 Obligations of Corporations Defined. — Obligations of corporations similar to bonds, mortgages, deeds of trust, etc,, for income-tax purposes are held to be those obliga- tions of corporations which, though not bonds, mortgages, or deeds of trust, arc similar in form, purpose, or in being extended beyond the time of ordinary, bankable, commercial paper. (T. D. 2090, Dec. 14, 1914.) 616 Equipment Trust Notes. — Equipment trust notes secured by mortgage issued by a corporation are subject to withholding. Temporary receipts issued pending prep- aration and issue of the notes themselves stand in the place of the notes, and where an interest period intervenes and receipts are to be presented for indorsement thereon of a pay- ment of interest, requisite certificates of ownership claiming or not claiming of exemption should be filed, (T. D. 2090, Dec. 14, 1914.) 617 Investment Certificates. — Investment securities issued by a corporation for a term of years are corporate obligations within the meaning of the income-tax law. (T. D. 2090, Dec. 14, 1914.) INC. 67 TAX PAYMENT OF TAX AT SOURCE. 618 Scrip. — [See ^928.] Scrip certificates issued by a corporation to its stockholders in lieu of dividends, such scrip certificates bearing interest and redeemable at a specified time not longer than one year from date of issue, are not corporate obligations ^ similar to bonds, mortgages, or deeds of trust * * * ^ Payment in scrip is held to be equivalent to payment in cash. * * * ^ P)^ 2090, as amended by T. D. 2152, Feb. 12, 1915.) 619 Interest on Obligations of United States or of State or Political Subdivision Thereof is Exempt from the Withholding Provisions. — Income derived from the interest upon the obligations of a State, county, city, or any other political subdivision thereof, and upon the obligations of the United States or its possessions, is not subject to the income tax, and certificates of ownership in connection with coupons or registered interest orders for such interest will not be required. (Art. 37, Reg. 33, Jan. 5, 1914.) 620 Where a municipality purchases a public utility subject to a mortgage, the mortgage retains its original character, even though the municipality assumes the mortgage indebtedness and pays the interest thereon. Therefore, the indebtedness secured by such mortgage is not an obligation of the municipality within the meaning of Paragraph B [^963] of the income-tax law. (T. D. 2090, Dec. 14, 1914.) 621 One Form of a Qualified Tax-Free Covenant which Relieves the Debtor from i Withholding the Amount of the Normal Tax from Bond Interest Payments to Citizens and Residents. — With further reference to your letter of Oct. 27, 1917, herein quoted, “Please advise us at the earliest possible moment whether bonds bearing the covenant that ‘Both principal and interest of this bond are payable without deductions for any taxes, assessments or other governmental charges which the company may be required to pay thereon or authorized to retain therefrom under any present or future law or requirement of the United States of America (except any Federal Income Tax) or any State, county, municipality or other governmental sub- division thereof,’ come within the provisions of subsection (c) of Section 9 of the Federal Income Tax Law requiring the debtor corporation to withhold the amount of the normal tax at the source.” ^ / you are advised that interest from bonds containing the covenant quoted will not be ^ subject to withholding as provided in subsection (c), [1f604] Section 9 of the Act of Sept. 8, 1916, as amended by Section 1205 of the War Revenue Act of Oct. 3, 1917. (Letter to Simpson, Thatcher & Bartlett, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Nov. 21, 1917.) 622 Federal Income Tax being a Tax on Income and not a Tax on the Interest on a Bond, per se, a Tax-Free Covenant in a Bond does not Obligate the Debtor to Pay the Interest Free of Income Tax. [This was the decision (April 2, 1917) of the Supreme Court of Arkansas in the Urquhart v. Marion Hotel Company case (194 S. W. 1).] 623 The Term “Debtor” Defined. — The term “debtor,” as hereinafter used [in con- nection with bond interest] shall apply to all corporations, joint-stock companies or associations, and insurance companies. (Art. 38, Reg. 33, Jan. 5, 1914.) ^ 624 Withholding and Paying Agents may be Appointed by Debtors. — [and] Such “debtor” may appoint withholding and paying agents to act for it in matters pertaining to the collection of this tax, upon filing with the collector of internal revenue for the district a proper notice of the appointment of such agent or agents. (Art. 38, Reg. 33, Jan. 5, 1914.) 625 Filing Notice of Appointment of Paying Agent. — This notice of appointment should be placed on file in the office of the collector of internal revenue for the district ^ in which the debtor corporation is located or has its principal place of business, and the said collector should notify the collector of internal revenue for the district in which the duly authorized withholding agent is located. (T. D. 2135, Jan. 23, 1915.) 626 Where Returns and Certificates are to be Filed by Paying Agents Appointed by Debtors. — Where such withholding agent is so authorized by the debtor corpora- tion, he may file with the collector of his district the required returns and accompanying certificates in which case the assessment of the tax withheld by him will be made in that - district. Unless such authority be given, such reports, etc., will be furnished by the debtor corporation to the collector of its district (i. e., the district in which its principal financial or business office is located), where, in such case, assessment will be made. (Art. 38, Reg. 33, Jan. 5, 1914.) INC. 68 TAX PAYMENT OF TAX AT SOURCE. 627 The duly authorized withholding agent is required to file its return with the col- lector of internal revenue for the district in which the said withholding agent is located, and is not required to file a return with the collector for the district in which the debtor corporation is located. (T. D. 2135, Jan, 23, 1915.) 628 The Debtor Corporation only Deducts the Tax, if Any. — In reply you are advised that this office holds that the normal tax, to be withheld under the Act of Sept. 8, 1916, as amended by Section 1205, subdivision (c). Act of Oct. 3, 1917, is required to be deducted only by the debtor corporation and should not be withheld by the bank by whose agency collection is made. (Letter to Sackett, Chapman & Stevens, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Nov. 13, 1917.) 629 Substitute Certificates. — Collecting agents, responsible banks and bankers receiv- ing coupons for collection with ownership certificates attached may present the coupons W'ith the original certificates to the debtor corporation or its duly authorized withholding agent for collection or the original certificates may be detached and forwarded direct to the Commissioner of Internal Revenue, provided such collecting agent shall substitute for such certificate its own certificate [Form 1058 exemption claimed and Form 1059 exemption not claimed] and shall keep a complete record of each transaction showing — 1. Serial number of item, received. 630 2. Date received. 3. Name and address of person from whom received. 4. Name of debtor corporation. 5. Class of bonds from v/hich coupons were cut. 6. Face amount of coupons. For the purpose of identification the substitute certificates shall be numbered 63 1 consecutively and corresponding numbers given the original certificates of ownership. Substitute certificates by collecting agents, banks, and bankers, in lieu of original 632 certificates of ownership accompanying coupons presented for collection shall be discontinued with respect to ownership certificates presented with coupons for collection by nonresident alien individuals, firms, corporations, organizations, etc. In all such cases the original certificates of ownership shall be forwarded to the 633 debtor corporation without substitution. (Art. 43, *[[265-269, Reg. 33, Rev., Jan. 2, 1918.) [^[3001.] 634 No License Required of Collecting Agents for Substituting Their Own Certificates for Ownership Certificates. — Until the further ruling by this department, the banks, bankers, and other collecting agents who may substitute their certificates of owners under the foregoing plan will not be required to secure a license from the Treasury Depart- ment for being permitted to make such substitutions of their own certificate for those of the owners, provided these regulations are strictly complied with. (T. D. 1903, Nov. 28, 1913.) 635 Permission to Substitute Own Certificates for Ownership Certificates Extended to Collecting Agents in Foreign Countries. — The permission here granted [para- graph 629] will extend to responsible banks, bankers, and collecting agents in foreign countries, through whom collection of such interest coupons is made. [Privilege dis- continued in certain cases, ^[633.] (Art. 40, Reg. 33, Jan. 5, 1914.) 636 Endorsement by Collecting Agent Required on Certificates of Ownership for Which Own Certificate is Substituted. — The certificate of the owner, for which the foregoing certificate of the collecting agent may be thus substituted by the collecting agent first receiving said coupons for collection must be given the following indorsement by the collecting agents and should be made preferably with a rubber stamp. Owner’s certificate No (Name of collecting agency.) 191-. (Give date of certificate.) The counterpart of the within certificate bearing like number was attached to the coupons within mentioned for delivery to the debtor or withholding agent, by whom the coupons are payable. (T. D. 1903, Nov. 28, 1913.) 637 Fac-simile Signature May be Used by Collecting Agents in Signing Their Own Certificates Substituted for Ownership Certificates. — You are advised that as a convenience to banks and collecting agents who desire to substitute their certificates Form 1058 and 1059 for the owner’s certificate accompanying the coupons deposited for collection, it is hereby provided that the name of the bank or collecting agent may be INC. 69 TAX PAYMENT OF TAX AT SOURCE. printed or stamped, and that a fac-simlle of the signature of the person authorized to sign the substitute certificate for the bank or collecting agent may also be printed or stamped on the certificate: Provided, that in all cases the bank shall first file with the Commissioner of Internal Revenue a certificate of its authorization in substantially the form following: (City) (Date) The Commissioner of Internal Revenue: Washington, D. C. The undersigned hereby authorizes the use of the fac-simile signature shown below upon all substitute income tax certificates issued in its name until this authorization is revoked by written notice to you. (Name of bank or collecting agent.) By ; (Signature of person authorized to sign.) (Fac-simile signature of person (Official position.) authorized to sign.) (T. D. 1986, May 29, 1914.) 638 Law ^[216. Tax of Two Per Cent Not to be Withheld Apinst Citizens and Residents in the Case of Interest on Tax-Free Covenant Obligations if Personal Specific Exemption be Claimed. — “Such deduction and v/ithholding shall not be required in the case of a citizen or resident entitled to receive such interest, if he files with the withholding agent on or before February 1, a signed notice in writing claiming the benefit of the credits provided in subdi\isions (c) [^1128] and (d) [^1138] of section 216;” 639 The withholding provisions of the income-tax law apply — (b) To the normal income tax of citizens and resident aliens, only when derived from interest on bonds and mortgages, deeds of trust, or other similar obligations of cor- porations, associations, etc., which have a “tax-free” covenant clause (i, e., a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee or to reimburse the obligee in any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the United States), regardless of the amount and period of payment. The amount to be withheld is 2 [8] per cent on the amount of payment, unless 640 the person entitled to receive such interest shall file v/ith the withholding agent, on or before Feb. 1, a signed notice in writing claiming the benefit of an allowable exemption under section 7, act of September 8, 1916, as amended. (Art. 43, ^254, 256-257, Reg. 33, Rev., Jan. 2, 1918.) 641 Law 1[217. Tax of Two Per Cent Not to be Withheld Against Nonresident Aliens in the Case of Interest on Tax-Free Covenant Obligations, if Claim for Personal Specific Exemption at the Source has been Authorized by Regulations, and such Claim be made. — “nor in the case of a nonresident alien individual if so provided for in regulations prescribed by the Commissioner under section 217 [*[[541].” [^2997.] Claiming Exemption at Source by Citizens or Residents on Interest on Tax-Free 642 Covenant Bonds. — How may a citizen or resident of the United States secure the benefit of personal exemption to which he is entitled when receiving a payment of interest on bonds containing a so-called “Tax-Free” or “No Deduction” clause? (Answ^er.) By attaching to the interest coupons an income tax exemption certificate and claiming thereon the amount of exemption desired. The amount of personal exemption claimed on such certifiptes during any one calendar year is not to exceed the total amount of personal exemption to which he is entitled. (Question 104, 1918 Income Tax Primer.) 643 Ownership Certificates. — The owners of bonds of domstic and resident corporations shall, when presenting interest coupons for payment, file a certificate of ownership for each issue of bonds, showing the name and address of the debtor corporation, the name and address of the owner of the bonds, whether the payee is m.arried or the head of a family, and the amount of interest. (Art, 43, *lf261, Reg. 33, Rev., Jan. 2, 1918.) [For list and copies of forms see back of book.] [^2998.] 644 This office has received several letters with reference to a letter addressed to the Old Colony Trust Company of Boston, Massachusetts, under date of May 10, 1915, in which the office acquiesced in the contention of various debtor corporations that the actual facts of the relation of firms, organizations and fiduciaries to the withholding 70 INC. TAX PAYMENT OF TAX AT SOURCE. provisions of the Income Tax Law, once established to their satisfaction, may be accepted by this office upon the proper showing of debtor corporations and withholding agents, for their own convenience, the interest of the Government being safeguarded by the personal liabilities imposed upon them by law. In view, however, of the confusion created in the matter of the certificates required to be furnished with coupons or interest orders showing ownership of bonds and the exemption claimed, you are advised that the office holds that certificates of this character must be obtained by debtor corporations and withholding agents in all cases as required by the Regulations. (Mimeograph letter No. 1242 to Col- lectors, July 8, 1915.) 645 Registered Interest on Registered Bonds. — Certificates of ownership are not re- quired to accompany interest orders of checks in payment of interest on fully registered bonds, as information as to ownership of bonds will be furnished by debtor organizations on monthly list returns, Form 1012; but claim for exemption [if exemption may be claimed] must be filed with debtors, or the tax must be withheld; and the form of certificate provided for use of owners of coupon bonds, may be used by owners of registered bonds for the purpose of claiming this exemption. (T. D. 1974, April 21, 1914.) 646 Where such certificates are so filed, the said debtors shall stamp or write on the inter- est orders or checks, as the case may be, Exemption claimed by Certificate filled with debtor r (T. D. 1974, April 21, 1914.) 647 Where prescribed certificates are not so filed, said debtor shall deduct and withhold the normal tax of one [two] per cent from the amount of such payment, and shall stamp or write on the interest order or check, as the case may be, 'income tax withheld by debtor:* (T. D. 1974, April 21, 1914.) 648 Responsible banks, bankers, or collecting agents receiving for collection interest orders or checks bearing the aforesaid endorsements, may present said interest orders or checks for collection without requiring that certificates of ownership be filed therewith. (T. D. 1974, April 21, 1914.) 649 Where because of failure to file certificates claiming exemption, in compliance with above regulations, a part of the income from interest on registered bonds has been withheld for the payment of the normal income tax, debtors may, upon the filing of the proper certificates as provided in Article 42, Income Tax Regulations, to the extent of exemp- tion claimed, release and pay to the persons entitled thereto the amount of such income so withheld. (T. D. 1974, April 21, 1914.) 650 Comment. — [It should be remembered that the law under which the following regulations on the use of ownership certificates were promulgated, nonresident aliens were not privileged to make claim for specific exemption, under any circumstances, and further that there was no withholding against partnerships in any case. Now, non- resident alien individuals may have the benefit of the personal specific exemption and the Commissioner is authorized ('^641), In his discretion, to grant to nonresident alien indivldu- als^the privilege of claiming such exemption at the source. If permission is granted then, presumably. Form 1000 (or some similar form) will be used if no exemption is claimed, and Form 1001 (or some similar form) will be used if exemption is claimed. Now, a tax of 2% is to be withheld at the source on payments of interest on tax-free-covenant obliga- tions to partnerships, whether foreign or domestic. No tax is to be withheld at the source on any other character of income payments to partnerships, including interest on corporate obligations not having tax-free covenants. Naturally, no provision is made for claiming personal specific exemption in the case of partnerships. Therefore, presum- ably, Form 1000 will be used by partnerships when presenting coupons from tax-free-cov- enant bonds, whereas in presenting coupons from bonds not carrying the covenant. Form 1001 will continue to be used.] [Read at ^2996 and at ^2977.] 651 Form 1000 to be Used Whea Tax is to be Paid at the Source [read ^650 above]. — Form 1000, revised, shall be used (a) when no personal exemption is claimed against interest on bonds containing a “tax-free” covenant by citizens or residents of the United States [read 1[638]; (b) by nonresident alien individuals, foreign corporations having no office or place of business in the United States whether or not such bonds contain a “tax- free” covenant; and [When Status of Bondholder is Unknown] (c) in the case where coupons are received not accompanied by certificates of ownership. The first bank receiving coupons not accompa- nied by ownership certificates will make a certificate crossing out “owner” and inserting “payee” and will enter the amount of interest on line 4. (Art. 43, ^262, Reg. 33. Rev., Jan. 2, 1918.) INC. 71 TAX PAYMENT OF TAX AT SOURCE. 662 This office has before it your letter dated January 7, 1918, in which you request to be informed as to the rate of tax which should be withheld when coupons from bonds of American corporations, owned by nonresident aliens are presented for payment in the United States, accompanied by income tax certificate form 1002 and no information as to the owner can be obtained. ^In reply you are advised that if it is impossible to as- certain the information necessary to determine whether the tax should be withheld, and the rate which applies, tax should be withheld at the rate of 6 % [8%, unless tax-free-covenant bond and then 2 % as that is the maximum to be deducted in any event in such cases}. If an excess amount of tax should be paid to the Government, the matter may be adjusted later through a claim for refund. (Letter to Lee, Higginson & Co., Boston, Mass., signed by Commissioner Daniel C. Roper, and dated Jan. 30, 1918.) 653 Form Ten Hundred Two now obsolete. If coupons are not accompanied by certi- ficates disclosing ownership, Form One Thousand revised January, 1918, must be made by first bank which will enter amount of interest on line four and debtor corporation will withhold tax from that amount. (Telegram to Lee, Higginson & Co., Boston, Mass., signed by Commissioner Daniel C. Roper, and dated Jan. 28, 1918.) 654 Form 1001 to be Used When Tax is Not to be Paid at the Source [read 1f650 above]. — Form 1001, revised, shall be used (a) when personal exemption is claimed against interest on bonds containing a “tax-free” covenant by citizens or residents of the United States [read 1[638], also when presenting coupons from bonds not containing a “tax-free” covenant; (b) by domestic partnerships, corporations, or associations; (c) by nonresident alien partnerships; and (d) by foreign corporations having an office or place of business in the United States, whether or not such bonds contain a “tax-free” covenant. (Art. 43, 1[263, Reg. 33, Rev., Jan. 2, 1918.) 655 Where bonds of foreign countries, or bonds or stocks of foreign corporations, are owned by citizens or residents of the United States, individual or fiduciary, or by domestic or resident corporations, joint stock companies, associations, insurance companies or partnerships, ownership certificate 1001 A shall be executed by the actual owner, or by his duly authorized agent, when presenting the item for collection, whether such item is a dividend or an interest payment, except in the case of a foreign country or a foreign corpo- ration having a paying agent in this country and issuing bonds which contain a ‘tax-free* covenant clause. In such cases the paying agent is required to withhold the normal tax upon the interest on such bonds; and ownership certificate. Form 1000, properly modified to show that the debtor has a paying agent in this country, should be used, unless the owner desires to claim exemption; in which case Form lOOlA should be filed. ^ Where bonds of foreign countries, or bonds or stock of foreign corporation8,*'are 656 owned by nonresident alien individuals, or foreign corporations, associations or partnerships, ownership certificate. Form 1071, Revised, shall be used for andjon behalf of such owners by any responsible bank or banker, either foreign or domestic. (Part of Art. 35, Ree. 33, Rev., Jan. 2, 1918, as amended by T. D. 2759, Oct. 2, 1918. )i^^ 667 In case a citizen or resident individual receives interest on bonds containing a "tax- free” covenant in excess of the amount of personal exemption which the individual may claim, any such excess must be reported on Form 1000, revised. (Art. 43, ^264, Reg. 33, Rev., Jan. 2, 1918.) 658 ♦ ♦ ♦ Interest on bonds of domestic corporations, joint stock companies’^or associations, and insurance companies, payable to nonresident alien corporations. Is subject to deduction of tax at the source at the rate of [8] per cent. Foreign corporations will file ownership certificate Form 1000 in presenting coupons for payment. If a foreign cor poration has an office, agent, or place of business in the United States, certificate Form 1001 shall be filed establishing such fact and relieving the corporation for deduction of the tax at the source. (Art. 202, ^603, Reg. 33, Rev., Jan. 2, 1918.) 659 Certificates of Ownership for Each Separate Issue of Bonds of Each Debtor. — These certificates shall be made on the prescribed forms and shall be made out by each owner of bonds for the coupons or interest orders for each separate issue of bonds or obligations of each debtor. (Art. 39, Reg. 33, Jan. 5, 1914.) 660 One Certificate of Ownership may be Used with Coupons of More Than One Maturity of the Same Issue of Bonds. — Also that coupons of more than one maturity from the same issue of bonds may be covered by one ownership certificate. (Letter to the Columbia Trust Company, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Mar. 26, 1918.) 661 One Ownership Certificate Will Suffice in Case of Joint Owners. — 1. Where fiduciaries have the control and custody of more than one estate or trust, and said estates and trusts have as assets bonds of corporations, etc., this office will hereafter require 72 INC. TAX PAYMENT OF TAX AT SOURCE. that a certificate of ownership be executed for each estate or trust regardless of the fact that the bonds are of the same issue. When bonds are owned jointly by several persons,' one of thebwners may execute an ownership certificate in behalf of the other owners and endorse on the back thereof their names and addresses, and proportion of ownership of each, 2. Treasury Decision 1987, dated May 29, 1914, and instructions on ownership 662 certificates Forms 1000, and 1001, Revised, which provide for the filing of a separate certificate by each joint owner, are hereby superseded’and^repealed. (T. D. 2709.. May 2, 1918.) * 663 Numbers of Bonds; Waiver of Requirement for Filling in on Certificates.— Notice is hereby given that Regulation requiring the filling in on^ certificates of numbers of bonds, or other like obligations of corporations, etc., from which Interest coupons are detached or upon which registered Interest is to be paid — which was extended to Oct^ 31, 1914, by T. D. 1985, issued May 28, 1914— is hereby waived until further notice. (T, D. 2022, Oct. 3, 1914.) 664 Full Post Office Address on Certificates. — Replying to your letter of April 15, 1914, relative to street address on certificates you are advised that banks should care in securing full post office address on certificates. Where no street address is given, ^i^ office will assume that same is not necessary in addressing mail, and certificates will NOT be returned for correction. (Letter to National Park Bank, signed by Deputy Commis- sioner L. F. Speer, and dated April 23, 1914.) 666 Address may be Omitted from Certificates in Certain Cases.^ — Address may be omitted from ownership certificates in case prominent corporation and in its place description bond issue inserted. (Telegram to Lee, Higginson & Co., Boston, Mass.;^ signed by Commissioner Daniel C. Roper, dated Feb. 11, 1918.) 666 Banks and Trust Companies May Use Facsimile Signatures.^ — You are advised''. that as a convenience to Banks and Trust Companies having a large number of ownership certificates to execute in the collection of interest on bonds, it is hereby provided that the name of the Bank or Trust Company may be printed or stamped, and the fac- simile of the signature of the person authorized to sign for the Bank or Trust Company in executing the said ownership certificates may be printed or stamped on the certificate:: Provided, that in all cases the Bank or Trust Co.npany shall first file with the Comrnis- sioner of Internal Revenue a certificate of its authorization in substantially the following form: The Commissioner of Internal Revenue, Washington, D. C. fCity) (Date) The undersigned hereby authorizes the use of the facsimile signature shown befovr upon all income tax ownership certificates issued in its name until this authorization ia- rsvoked by written notice to you. (Name of Bank or Trust Co.) By (Signature of person authorized to sign) (Official position.) Facsimile signature of person authorized to sign.) (T. D. 2258, Nov. 1, 1915.) 667 Use of Initials on Certificates Authorized. — Replying to your telegram of the 6tb instant, you are advised that in writing the name at top of certificate initials may be used.* 668 Married Woman in Executing Certificate Should Use Her Own Christian Name. — A married woman should sign her own Christian name and not the name of her husband.* *[Comment: The answers embodied in paragraphs above, are reproduced, by courtesy, from a letter to the Central Trust Company of New York, dated Jan. 7, 1914, signed by Deputy Commissioner L. F. Speer. These are printed now as there still seem* to be confusion on the points covered.] INC. 73 TAX PAYMENT OF TAX AT SOURCE. 669 Ownership Certificates Should not be Accepted unless All Information Called fof Thereon is Shown. — Can certificates one thousand and one thousand otje be accepted if questions regarding marital status and head of family are not answered? Wire collect. (Answer.) Certificates should not be accepted unless all information called for thereon is shown. (Telegram from M. F. Frej^ Guaranty Trust Co., New York, N. Y., the reply thereto signed by Commissioner Daniel C. Roper, and dated Feb. 28, 1918.) 670 The Marital Status Interrogatory on Ownership Certificates. — Your inquiry fts to whether “an income tax certificate of the new form, executed by the owner, must indicate whether he is married and the head of a family” is answered in the affirmative. (Letter to the Columbia Trust Company, New York, N. Y., signed by Deputy Com- missioner L. F. Speer, and dated Mar. 26, 1918.) 671 Refer letter March twenty-sixth IT:PA-CEK [1[670]. If bondholder answers “yes” to first question on revised Forms 1000 or 1001 must second question be answered? Wire collect. (Answer.) If bondholder married and answer to question relative marital status is “yes” then not necessary to answer question as to whether or not head of family. (Telegram of inquiry from the Columbia Trust Company, New York, N. Y., and the reply thereto signed by Commissioner Daniel C. Roper, and dated March 30,1918.) 672 Interrogatories as to marital status on ownership certificates need not be answered when certificates are executed by nonresident alien individuals. (Telegram to The Corporation Trust Company, signed by Commissioner Daniel C. Roper and dated May 23, 1918.) 673 Total Exemption Allowed may be Prorated Beftween Husband and Wife.— You are advised that the specific exemption of * * * from the aggregate income of husband and wife, allowed by * * * the Income Tax Law, may be claimed by either, or may be prorated between them, in any proportion that may be agreed upon. Under these circumstances, certificate Form [1001], showing the amount of exemp- 674 tion claimed, as agreed upon between husband and wife, should be accepted by debtor corporations. (Part of letter to The National Bank of Commerce in St. Louis, signed by Deputy Commissioner L. F. Speer, and dated April 7, 1915.) 675 Stamp Indicating “Satisfied as to Identity of Agent” not Required.— Receipt is acknowledged of your letter of February 20, 1918, and in reply you are advised that it is not necessary for the first collecting agent receiving coupons accompanied by an ownership certificate which was executed by an agent on behalf of the owner to affix a stamp containing the words “Satisfied as to identity and responsibility of agent.” (Letter to the Columbia Trust Company, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated March 26, 1918.) 67 6 Person First Receiving Coupons or Interest Orders for Collection Need not Endorse on the Back of the Certificate. — This office is in receipt of your letter of September 18, 1914, inquiring whether the provision in T. D. 1887, October 25, 1913, requiring that, “the person or corporation first receiving coupons or interest orders for collection shall write or stamp his or its name and address and date on the back of said certificates,” is still in force. You are advised that this requirement appearing in the first draft of the Regulations- 677 was omitted in the subsequent draft of the Regulations, and as they now appear in permanent form in Regulations No. 33 adopted January 5, 1914. The foregoing endorsement is not now required. (Letter to The Corporation 678 Trust Company, signed by Deputy Commissioner L. F. Speer, and dated September 18,1914.) 679 “You are advised that the endorsement provided in Treasury Decision 1887, dated October 25, 1913, it no longer required^ (Extract from a letter to the National Park Bank, signed by Internal Revenue Collector Anderson, New York, and dated Decem- ber 23, 1914.) 680 Proper Ownership Certificates to be Used by Fiduciaries, Whether Corporate or Individual. — Should a corporate fiduciary acting for ar individual beneficiary use form of ownership certificate and line thereon designated for a corporation or that designated for an individual? In general are discriminations between the form of owner- ship certificates and line thereon to be used by fiduciaries to be based upon the status, corporate or individual, of the fiduciary, or on the status, corporate or individual, of the beneficiary? IfFiduciary, whether corporate or individual, must use lines on ownership certificates provided for use of fiduciary. Citizens or resident fiduciary should use Form 1000, line 1; and Form 1001, line 1 or line 2. Nonresident alien fiduciary should use Form 74 INC. TAX PAYMENT OF TAX AT SOURCE. 1000, line 2. (Telegram of inquiry from the First National Bank, Cleveland, Ohio, and the reply thereto signed by Commissioner Daniel C. Roper, and dated May 20, 1918.) 681 Exchange of Interest Coupons for Funding Bonds. — The exchange of interest coupons for funding bonds is a payment of interest on the bonds and the income tax should be imposed and paid upon such interest as income for the year in which il matures and such payment is made, and in the absence of proper claim for exemption the tax should be deducted and withheld on the amount represented bv the coupons. (T. D. 2090, Dec. 14, 1914.) 682 Advance Retirement of Bonds within an Interest Period. — Where bonds, under contract provisions in the bonds, are retired within an interest period and prior to the expiration of the full term of the bond, ownership certificates will be required and should cover that part of the interest period affected between the beginning of such period and the date of the retirement of the bonds. (T. D. 2090, Dec. 14, 1914.) 683 Receipt is acknowledged of your letter of March 17, 1916, wherein you make reference to certain rulings of the office relative to the filing of certificates of ownership in cases where bonds are purchased by the debtor corporation and retired between interest dates. In reply you are advised that after a careful consideration of the matter the ruling contained in office letter of January 5, 1916, addressed to Messrs. White & Case, 14 Wall Street, New York City, has been annulled, and it is now required that in a case wdierein the corporation which issued the bond, or its receiver or trustee, is the purchaser, and the bond is retired and all its coupons cancelled, the seller of the bond shall execute a certi- ficate of ownership, claiming or not claiming exemption, to cover such coupons as are due and payable at date of sale, but are still attached to the bond, and the coupon covering the interest which had accrued from last interest date to date of sale. In short, in all cases where bonds are retired within an interest period and prior to the expiration of the full term of the bond, whether under contract or not, ownership certificates will be required, which certificates should cover that part of the interest period affectedbetween the beginning of such period and the date of the retirement of the bonds. (Letter to one of our sub- scribers, signed by Deputy Commissioner L. F. Speer, and dated April 11 , 1916.) 684 Purchase and Sale of Bonds Between Interest Dates. — This office acknowledges receipt of your letter of December 20, 1915, and in reply you are advised that, as stated in office letter of December 18, 1915, it is held that where a bond Is purchased be- tween interest-bearing dates, the seller is not required to execute, for Federal Income Tax purposes, an ownership certificate to accompany the interest coupon which is not due and payable and is not detached from the bond, but such a certificate will be required from the purchaser of the bond, when, at a later date, the coupon is detached and presented for payment or collection. (Letter to White & Case, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Jan. 5, 1916.) 685 Usufruct of Foreign-Owned Bonds Belonging to an American Citizen or Resident. — This office is in receipt of your letter dated November 9, 1914, stating that you had received a letter from one of your foreign correspondents containing the following inquiry: “We have on our accounts certain American bonds which are the property of Swiss citizens, but the usufruct of which belongs to an American citizen; when collecting the coupons of these bonds, can we sign the ownership certificates on behalf of the Swiss owners, or is it necessary to state thereon the name of the American beneficiary?” In reply to your request for a ruling based on the facts given above, you are advised 686 that the coupons should be accompanied by a certificate of ownership signed by, or in behalf of, the person entitled to receive the income from the bonds. The revised form of certificates of ownership should be altered to show that such person is entitled to receive the interest on the bonds. For example, if Form 1000, Revised, is used, there should be inserted in the first line of the declaration on the certificate the words “interest on the” between the words “the” and the word “above-described,” so that the certificate will read, “I do solemnly declare that I am a citizen or resident of the Upited States and am the owner of the interest on the above-described bonds, etc.” (Special letter of Nov. 23, 1914.) 687 When Coupons from Foreign-Owned Bonds Belong to Domestic Corporations. — This office is in receipt of your letter of April 5, 1916, in which you ask, “A bank in New York purchased, since January 1, a number of coupons in Paris and London. These coupons are now in transit and will be presented for payment when they arrive. The bank cannot certify that it is the owner of the bonds, although it is the owner of the coupons for which it paid in full. Will the amount of such coupons be subject to taxation? If so, what recourse will the bank have to obtain a refund of the amount?” [Answer.] INC. 75 TAX PAYMENT OF TAX ATiSOURCE., The case should be handled in accordance with existing regulations, viz., the bank should use Form 1001 and strike out in line 2, of the certificate, the words “bonds from which were detached the accompanying * * * or,” so that the declaration will be for ownership of the coupons. (Letter to The Corporation Trust Company, signed by Acting Commissioner David A. Gates, and dated April 5, 1916.) • 688 Bonds Purchased by Trustee Under the Mortgage Deed of Trust But Not Retired.— With reference to the ruling contained in office letter of November 18, 1916, wherein it was held, in a case where corporate bonds are purchased “by the trustee under the mort- gage deed of trust out of the money from a sinking fund when the bonds are not retired or cancelled but held alive by the trustee and interest is continued on the coupons, the interest 80 paid to the trustee being held for the account of the corporation issuing the bond”' that the trustee merely acts as agent for the debtor corporation and that the corporation itself, or the trustee if duly authorized to act as agent for the corporation, should execute income tax certificates, Form 1001, Revised, to accompany the interest coupons detached from the bonds so purchased and held when such cbupons are presented for payment or collection, you are advised as follows: The office now holds that if legal title to the bonds rests with the trustee, he should execute * * * certificates * * * to accompany the coupons detached from the bonds when they are presented for payment or collection. (Letter to The Corporation Trust Company, signed by Commissioner W. H. Osborn, and dated Dec. 6, 1916.) 689 Size, Color, etc., of Certificates. — All certificates shall be, in size, 8 by inches, and shall be printed to read from left to right along the 8-inch dimension. 690 All paper upon which certificates shall be printed shall correspond in weight and texture to white writing paper 21 by 32, about 40 pounds to the ream of 500 sheets. 691 Certificates will be printed by the Government and furnished without cost for the use of bond owners. 692 Individuals or organizations desiring to print their own certificates may do so, but certificates so printed must conform in size and be printed in similar type, upon the same color, shape, and weight of paper as used by the Government. 693 Sample certificates showing size of type and color of paper can be secured from col- lectors of internal revenue in their several districts or from the Commissioner of Internal Revenue at Washington, D. C. (T. D. 1976, May 2, 1914.) 694 The department will furnish blank forms of certificates to be used in connection with the collection of the income tax by such parties as may make application for the same. Private corporations and others desiring to have these certificates printed for them- selve.s may do so if they will strictly observe the requirements of the department as to size, print, form, color, and contents. (T. D. 1939.) (T. D. 2090, Dec. 14, 1914.) 695 Ownership Certifica?tes for Use by Foreigners May Be Printed in Two Languages. — Certificates of ownership required to be filed with interest coupons or orders for registered interest by non-resident foreigners * * * and by foreign organizations, shall be printed, as prescribed by regulations, in the English language, and directly under each line of the English text, on each of the above-mentioned certificates, there may be printed the text of said certificate in a foreign language. 696 la executing these certificates, however, all blanks to be filled in, with amounts, shall be filled in using United States dollar values. 697 These certificates shall be of the same size as prescribed by regulations for all certificates of ownership. (T. D. 1926, Dec. 30, 1913.) 698 Law ^218. Returns of Taxes Withheld at the Source.— “(c) Every individual, corporation, or partnership required to deduct and withhold any tax under this section shall make return thereof on or before March first of each year and [shall pay, ^720]” 699 Return is to be made for the tax withheld in manner and on a form to be prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury. This return is to be made after February 1 and on or before March 1 annually. The return shall show the nameand address of the withholding agent, character of income, and the name and address of the recipient or his agent, amount of income, exemption claimed, and the amount of tax ♦ * * withheld thereon. (Art. 46, ^273, Reg. 33, Rev., Jan. 2, 1918.) 700 Return of Taxes Withheld on Miscellaneous Income. — Tax withheld from income other than bond interest will be accounted for on income-tax Form 1042, and separ- ate reports of the payments entered on Form 1042 will be made on Form 1098. (Art 43, ^260, Reg. 33, Rev., Jan. 2, 1918.) INC. 76 TAX PAYMENT OF TAX AT SOURCE. Withholding agents shall make an annual list return (Form 1042) in duplicate, 701 to the collector of internal revenue for the district in which the withholding agent • resides or has his principal place of business — which should be filed with the collector of- internal revenue for the district in which the debtor or withholding agent is located, (T. D. 2135) on or before the 1st day of March in each year, showing the names and addre^ of persons who have received incomes *- '* * , on which the normal tax' of 1 [8 or 10] per cent has been deducted and withheld during the preceding year.' (Art. 69, Reg. 3'3, Jan. 5, 1914.) ; ' ' .... . 702 Return of Taxes Withheld on Bond Interest — Tax withheld from bond interest will be accounted for monthly on income-tax Form 1012, and an annual summary of'these will be made on income-tax Form 1013. The annual return only will be verified. (Art. 43, 11260, Reg. 33, Rev., Jan. 2, 1918.) 703 Where a debtor corporation, or its duly authorized withholding agent has made ho payments of interest to non-resident alien individuals, or foreign corporations, having no office or place of business in the United States, or has withheld no tax from citizens or residents of the United States, whether or not the bonds upon which such interest accrued contain a tax free covenant clause, the exemption certificates filed in connection with such interest payments shall not hereafter be forwarded to Collectors of Internal Revenue, accompanied by a return on Form 1012, Revised, but shall be transmitted direct to the Commissioner of Internal Revenue, (Sorting Division), Washington, D. C., accompanied by a return on Form 1096. When used in this connection. Form 1096 shall be filed monthly, and in such cases, this office will not require that the return be sworn to. The number of exemption certificates thus transmitted, and the total amount of interest paid shall be entered on line 1 of the return. In all cases, however, where a debtor corporation or its duly authorized withholding 704 agent has withheld the tax and is therefore required to render a return on Form 1012, Revised, all certificates received shall be accounted for on such monthly return, as directed by the instructions thereon.^ 705 All instructions issued by this office in conflict herewith, are hereby superseded and repealed. (T. D. 2687, April 1, 1918.) 706 Income tax Forms 1012, 1012A, 1012B, 1012C, and 1012D, as provided by T. D. 1914 of December 9, 1913 [Art. 50, Reg. 33], and as required to be used prior to the date of this regulation, are hereby superseded and from and after the date of this regulation the monthly list return of normal income tax withheld from interest paid on bonds and mortgages or deeds of trust or other similar obligations of corporations, etc., shall be in the following form (Form 1012 Revised); While certificates are required to be listed alphabetically where the volume of busi- 707 ness is sufficiently large to require or make advisable a dally listing of certificates, in all such cases alphabetical listing will not be insisted upon, but all certificates must be packed and forwarded to this office in the order in which listed. 708 Where an extension sheet is required it shall be in the following form: United States Internal Revenue. CONTINUATION SHEET FORM 1012A (revised) Name of payee. Address in full Amount of in- come on which withholding agent is liable for tax. Amount of tax liability. Totals brought forward. . . $ $ Totals carried forward. . . . Return on this form shall be made monthly on or before the 20th day of the month 709 for income tax withheld in the preceding month. 710 The use of Forms 1012 A, 1012B, 1012C, and 1012D are discontinued. A summary of monthly list returns as herein provided and made during a calendar 711 year will be listed on income-tax Form 1013, and this annual list will be filed with the collector of internal revenue on or before March 1 of each year and will consti- tute the annual withholding return of debtor corporations or their withholding agents for normal income tax withheld from interest paid on bonds and mortgages or deeds of trust or other similar obligations of corporations, etc. 77 INC. TAX PAYMENT OF TAX AT SOURCE. This return shall be printed on white paper, on sheets in size 16 by lOj/^ inches and 712 shall be printed to read along the 103 ^-Inch dimension, with horizontal and column lines and headings as shown by the form herein provided. These forms will be furnished by the Government. Monthly list returns made on forms In use prior to the date of this regulation will be 713 accepted by the Government up to and including April 20, 1917, but all monthly list returns for April and subsequent months shall be made on the form here prc- cribed. (T. D. 2468, Mar. 26, 1917.) 714 Withholding agents who are required to make monthly returns will, on or before the 20th day of each month, file with the collector for their respective districts such returns for the preceding month. (Art. 35, Reg. 33, Jan. 5, 1914.) 716 Such reports, etc., will be furnished by the debtor corporation to the collector of its district (i. e., the district in which its principal financial or business office is located), where, in such case, assessment will be made. (Art. 38, Reg. 33, Jan. 5 1914.) 716 The return should be filed with the collector of internal revenue for the district in which the debtor corporation is located or has its principal place of business. provided the said debtor corporation has not filed with the said collector of interna! revenue a notice of the appointment of a duly authorized withholding agent in which case the debtor corporation is not required to file a monthly list return. Form 1012, or the corre- sponding annual list return. Form 1013. (T. D. 2135, Jan. 23, 1915.) 717 [Monthly list returns shall be] accompanied by all certificates relating thereto, and there shall also accompany said returns all certificates claiming exemptions * * ♦ which are not required to be listed thereon. (Art. 35, Reg. 33, Jan. 5, 1914.) 718 How to Enter Substitute Certificates of Collecting Agents on Monthly List Returns. — [For substitute certificates read at 11629.] All substitute certificates of collecting agents, authorized by regulations that are received by debtors or withholding agents will be considered the same as certificates of owners, and in entering same in making monthly list returns debtors or withholding agents will enter the name and address of the collecting agent and the number of the substitute certificate issued In lieu of the original certificate containing the name and address of the owner of the bonds. (Art. 51, Reg. 33, Jan. 5, 1914.) 719 Notice of Failure to File Return Served on Withholding Agent. — Where the required returns are not filed within the prescribed time, either by individuals or corporations, notice on Form 1045 should in each case be sent to the delinquent. (Art. 196, Reg. 33, Jan. 5, 1914.) 720 Law 1[219. Taxes Withheld to be Paid to the Government. — [Every withholding agent] “shall on or before June fifteenth pay the tax to the official of the United States Government authorized to receive it.” [i[3002.] 721 The normal tax of [8 or 10] per cent, shall be deducted and withheld at the source^ and payment made to the collector of internal revenue as provided in the law,^ by the debtor, or his, her, or its duly appointed agent authorized to make such deduction and payment. (Art. 34, Reg. 33, Jan. 5, 1914.) 722 and shall pay the taxes so withheld to the collector of Internal revenue for the district in which the said withholding agent resides or has his, her, or its principal place of business. (Art. 64, Reg. 33, Jan. 5, 1914.) ******♦**♦♦♦ 723 In order that persons whose income tax is deducted and withheld and is to be paid at the source, may have an opportunity to file with the source which is required to withhold and pay tax for them, certificate claiming the benefit * * * exemptions provided for in [If 638 and 1[641.] * * * the law, withholding agents will not pay to collectors of internal revenue the tax withheld by them under the law until after the time for filing claim for * * * exemptions has expired. (T. D. 1965, Mar. 23, 1914.) 724 * * * ^ collectors will delay reporting for assessment taxes remaining in the hands of withholding agents, until the annual reports of such agents, w’hich must be filed not later than March 1 In each year, are received. (Art. 189, Reg. 33, Jan. 5, 1914.) 726 * * * The withholding agent will not, however, forward to the collector amounts withheld by him until notices of assessment are received from the collector. (Art. 33, Reg. 33, Jan. 5, 1914.) INC. 78 TAX INDIVIDUALS. 726 The withholding agent is not required by law to forward to the Collector the tax withheld by him until he has received notice of assessment and then, like the tax assessed in other cases, payment should be made by him on or before June 30 [15] of each year. (T. D. 2131, Jan. 18, 1915.) 727 Tax having been Deducted at the Source is not to be Again Deducted by Agent 'or other Person. — No other person, firm, or organization, in whatever capacity acting, having the receipt, custody, or disposal of any income, as herein provided, shall be required to again deduct and withhold the normal tax of 1 [8] per cent, thereon. (Art. 34, Reg. 33, Jan. 5, 1914.) 728 Law ^220. "Withholding Agents are Liable for the Tax to be Withheld. — “Every such individual, corporation, or partnership is hereby made liable for such tax and” 729 Law ^ 221 . Withholding Agents are Indemnified. — [Every withholding agent] “is hereby indemnified against the claims and demands of any individual, corporation, or partnership for the amount of any payments made in accordance w'ith the provisions of this section.” 730 Law ^222. Income on which Tax has been Withheld to be Included in Recipient’s Return of Income. — “(d) Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income,” 731 Law ^223. Amount of Tax "Withheld at the Source to be Credited against Amount of Tax as computed in Creditor’s Return. — “but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return.” 732 If for any reason there is included in the return which a foreign corporation is required to make of all income received from sources within the United States any income upon w’hich tax has been withheld at the source, such foreign corporation may take credit against the amount of tax due for the amount of the tax so withheld at the source; provided a statement is attached to the return setting forth the source and amount I of the income upon which the tax was so withheld. (Art. 201, 11602, Reg. 33, Rev., Jan. 2, 1918.) 733 Refund, on Return. — Where, upon filing return of income, it appears that a non- resident alien is not liable for income tax, but, nevertheless, income tax shall have been withheld at the source, in order to obtain a refund on the basis of the showing made by the return there shall be attached to the return a statement showing accurately the amounts of tax withheld, with the names and post-office addresses of all withholding agents. (Art. 32, 1[222, Reg. 33, Rev., Jan. 2, 1918.) 734 Law 1[224. If Tax Required to be Withheld is Paid by Creditor, such Tax is not to be Recollected from the Withholding Agent. — “(e) If any tax required under this section to be deducted and withheld is paid by the recipient of the income, it shall not ^ be re-collected from the withholding agent;” 736 Law 1[225. If Tax Required to be Withheld be Paid by the Creditor no Penalty Attaches for Innocent Failure to make Return or to Pay Tax. — “nor in cases in which the tax is so paid shall any penalty be imposed upon or collected from the recipient of the income or the withholding agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment.” Penalty for Failure to Make Return and to pay Tax. [Read at 1fl572]. 736 Law 1|80. Surtax on NetIncomeiAll Individuals. — “Sec. 211. (a) That, in lieu ot the taxes imposed by subdivision (b) of section 1 [surtax on individuals — income tax] of the Revenue Act of 1916 and by section 2 [surtax on individuals — war-income tax] of the Revenue Act of 1917, but in addition to the normal tax imposed by section 210 [1[47lj of this Act, there shall be levied, collected, and paid for each taxable year upon the net income of every individual, a surtax equal to the sum of the following;” [1[2829.] 737 Law 1[81. Surtax Rates. — “1 per centum of the amount by which the net income I exceeds $5,000 and does not exceed $6,000; 2 per centum of the amount by which the net income exceeds $6,000 and does not exceed $8,000; 3 per centum of the amount by which the net income exceeds $8,000 and does not exceed $10,000; INC. 79 TAX INDIVIDUALS. ( 737 ) 4 per cent aril of the amount by which the net income exceeds $10,000 and does not exceed $12,000; 5 per centurii of the amount by which the net income exceeds $12,000 and does not exceed $14,000; 6 per centum of the amount by which the net income exceeds $14,000 and does not exceed $16,000; 7 per centum of the amount by which the net income exceeds $16,000 and does not exceed $18,000; 8 per centum of the amount by which the net income exceeds $18,000 and does not exceed $20,000; 9 per centum of the amount by which the net income exceeds $20,000 and does not exceed $22,000; 10 per centum of the amount by which exceed $24,000; 11 per centum of the amount by which exceed $26,000; 12 per centum of the amount by which exceed $28,000; . 13 per centum of the amount by which exceed $30,000; 14 per centum of the amount by which exceed $32,000; 15 per centum of the amount by which exceed $34,000; 16 per centum of the amount by which exceed $36,000; 17 per centum of the amount by which exceed $38,000; 18 per centum of the amount by which exceed $40,000; 19 per centum of the amount by which exceed $42,000; 20 per centum of the amount by which exceed $44,000; 21 per centum of the amount by which exceed $46,000; 22 per centum of the amount by which exceed $48,000; 23 per centum of the amount by which exceed $50,000; 24 per centum of the amount by which exceed $52,000; 25 per centum of the amount by which exceed $54,000; 26 per centum of the amount by which exceed $56,000; 27 per centum of the amount by which exceed $58,000; 28 per centum of the amount by which exceed $60,000; 29 per centum of the amount by which exceed $62,000; 30 per centum of the amount by which exceed $64,000; 31 per centum of the amount by which exceed $66,000; 32 per centum of the amount by which exceed $68,000; 33 per centum of the amount by which exceed $70,000; 34 per centum of the amount by which exceed $72,000; f 35 per centum of the amount by which exceed $74,000; , 36 per centum of the amount by which exceed $76,000; t 37 per centum of the amount by which exceed $78,000; INC. the net income exceeds $22,000 and does not the net income exceeds $24,000 and does not the net income exceeds $26,000 and does not the net income exceeds $28,000 and does not the net income exceeds $30,000 and does not the net income exceeds $32,000 and does not the net income exceeds $34,000 and does not the net income exceeds $36,000 and does not the net income exceeds $38,000 and does not the net income exceeds $40,000 and does not the net income exceeds $42,000 and does not the net income exceeds $44,000 and does not the net income exceeds $46,000 and does not the net income exceeds $48,000 and does not the net income exceeds $50,000 and does not the net income exceeds $52,000 and does not the net income exceeds $54,000 and does not the net income exceeds $56,000 and does not the net income exceeds $58,000 and does not the net income exceeds $60,000 and does not the net income exceeds $62,000 and does not the net income exceeds $64,000 and does not the net income exceeds $66,000 and does not the net income exceeds $68,000 and does not the net income exceeds $70,000 and does not the net income exceeds $72,000 -and does not the net income exceeds $74,000 and does not the net income exceeds $76,000 and does not 80 TAX INDIVIDUALS, (737) 38 per centum of the amount by which the net income exceeds $78,000 and does not exceed $80,000; 39 per centum of the amount by which the net inconle exceeds $80,000 and does not exceed $82,000; 40 per centum of the amount by which the net income exceeds $82,000 and does not exceed $84,000; 41 per centum of the amount by which the net income exceeds $84,000 and does not exceed $86,000; ' 42 per centum of the amount by which the net income exceeds $86,000 and does not exceed $88,000; 43 per centum of the amount by which the net income exceeds $88,000 and does not exceed $90,000; ' 44 per centum of the amount by which the net income exceeds $90,000 and does not exceed $92,000; 45 per centum of the amount by which the net income exceeds $92,000 and does not exceed $94,000; 46 per centum of the amount by which the net income exceeds $94,000 and does not exceed $96,000; 47 per centum of the amount by which the net income exceeds $96,000 and does not exceed $98,000; 48 per centum of the amount by which the net income exceeds $98,000 and does not exceed $100,000; 52 per centum of the amount by which the net income exceeds $100,000 and does not exceed $150,000; 56 per centum of the amount by which the net income exceeds $150,000 and does not exceed $200,000; 60 per centum of the amount by which the net income exceeds $200,000 and does not exceed $300,000; 63 per centum of the amount by which the net income exceeds $300,000 and does not exceed $500,000; 64 per centum of the amount by which the net income exceeds $500,000 and does not exceed $1,000,000; 65 per centum of the amount by which the net income exceeds $1,000,000.” Application of the Rates for Fiscal Year Embracing Parts of Calendar Years With Differing Rates. — [Read at ^1678.] 738 Law ^82. Maximum Surtax Limitation in the Case of the Sale of Certain Mines, or Oil or Gas Wells. — “(b) In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tr'' Imposed by this section attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest.” ]1[2831.] 739 Surtax Computed on Separate Incomes of Husband and Wife. — The regulation! of the department requiring the incomes of husband and wife to be combined and authorizing the aggregate exemption ♦ ♦ ♦ from such combined income are applicable for the purpose of the normal tax only. The additional, or surtax, imposed by the act will be computed on the basis of the separate income of each individual; that is, on the amount of each individual’s income in excess of the minimum amounts upon which the surtax at the graduated rate is to be calculated. (T. D. 2090, Dec. 14, 1914.) 740 The separate incomes of husband and wife should not be combined in a return of income for the purpose of assessing the additional or surtax. (T. D. 2137, Jan. 30, 1915.) 741 All Taxable Income Received by Beneficiaries Through Fiduciaries is Subject to Surtax. — A beneficiary is liable for the normal tax upon the amount of net income derived by him from a taxable source through a fiduciary * ♦ * and is also liable for the additional tax assessable on the amount of net income received by him in excess of [$5,000], and in order to determine whether the net income of a beneficiary is or is not in excess of [$5,000] and subject to the additional tax the amount derived by him from an estate and all other taxable sources is required to be shown on his personal annual return. (T. D. 2090, Dec. 14, 1914.) 742 Corporations Are Not Subject to Surtax. — Corporations coming within the terms of this law are subject to the normal tax only; that is, a tax computed at a level rate of [12] per cent of their entire net income regardless of the amount of such net income. (Art. 185, Reg. 22, Jan. 5, 1914.) INC. 81 TAX INDIVIDUALS. 743 Dividends Received by Beneficiaries Through Fiduciaries are Subject to Surtax. — Dividends in the hands of a fiduciary and belonging to a beneficiary are not subject to the normal tax, but will be subject to the additional tax to the beneficiary whenever the beneficiary’s income from all taxable source is in excess of [$5,000]. (T. D. 2090, Dec. 14, 1914.) 744 Specific Exemption in its Relation to the Additional Tax. — Personal exemptions from tax are granted in respect of the normal income tax only. Where the total of allowable exemptions and credits exceeds the amount of net income, the excess of such exemptions may not be availed of as against the additional tax. (Art. 14, ^154, Reg. 33, Rev., Jan. 2, 1918.) 745 In Hyman Cohen vs. John Z, Lowe, Jr., Collector, District Court, Southern District of New York, July 18, 1916 (234 Fed. 474) the Court held against the contention of the plaintiff, that, before assessing the additional tax on the excess of net income over $20,000, he should have been allowed an exemption of $3,000, as in the case of the normal tax (Act of 1913). [Comment.] 746 Law 1[197. Individuals May Be Subject to Normal Tax and to Surtax on Undis- tributed Profits of Certain Corporations. — “Sec. 220. That if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of permit- ting its gains and profits to accumulate instead of being divided or distributed, such corpora- tion shall not be subject to the tax imposed by section 230 [^1662], but the stockholders or members thereof shall be subject to taxation under this title in the sam.e manner as provided in subdivision (e) of section 218 [If 1305] in the case of stockholders of a personal service corporation, except that the tax imposed by Title III [war-profits and excess- profits tax] shall be deducted from the net income of the corporation before the computation of the proportionate share of each stockholder or member.” [^2995.] 747 Law 1[198. “The fact that any corporation is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax;” 748 Law ^199, “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 tax in such case unless the Commissioner certifies that in his opinion such ac- cumulation is unreasonable for the purposes of the business.” 749 Law ^200. “When requested by the Commissioner, or any collector, every corpo- ration shall forward to him a correct statement of such gains and profits and the names and addresses of the individuals or shareholders w^ho would be entitled to the same if divided or distributed, and of the amounts that would be payable to each.” 760 Subdivision 2 of paragraph A, income-tax law of October 3, 1913 [^746 et seq. above], imposes no duty on the taxpayer to ascertain his distributive interest in the un- divided surplus of corporations for the purpose of making return of the amount, in addition to the amount of dividends declared on his stock, unless the [Commissioner] has certified that, in his opinion, such accumulation is unreasonable for the purpose of the business. (T. D. 2135, Jan. 23, 1915.) 751 Law ^7. “Secretary” Defined. — “The term ‘Secretary’ means the Secretary of the Treasury;” 762 Law ^[8. “Commissioner” Defined, — “The term ‘Commissioner’ means the Commissioner of Internal Revenue;” 763 Law ^9. “Collector” Defined. — “The term ‘collector’ means collector of internal revenue;” 754 Law 1[83. Net Income Defined. — “Sec. 212. (a) That in the case of an individ- ual the term ‘net income’ means the gross income as defined in section 213 [^763,] less the deductiens allowed by section 214 [^1019].” [^2832.] 756 Law 1[84. Net Income to Be Based on Taxpayer’s Annual Accounting Period. — “(b) The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer;” [^2833-]-.] INC. 82 TAX INDIVIDUALS. 756 Law ^85. Basis of Computation to Reject Income Clearly. — “but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income.” [^2834.] 757 Law 1^86. Basis of Computation to be the Calendar Year in Certain Instances. — “If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 200 [1|478] or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.” [^2839.] 758 Law ^87. Changing From One Accounting Period to Another. — “If a taxpayer changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of section 226 [^1479].” [^2840.] 759 An individual keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect his income may, subject to regulations made by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury, make his return upon the basis on which his accounts are kept. (Art. 24, ^167, Reg. 33, Rev., Jan. 2, 1918.) 760 Returns should be made on the basis of receipt unless the individual liable for the return keeps accounts on some other basis which will clearly reflect his income. (Art. 26, 1[171, Reg. 33, Rev., Jan. 2, 1918.) 761 L aw ^12. “Taxpayer” Defined. — “The term Taxpayer’ includes any person, trust or estate subject to a tax imposed by this Act;” 762 Law ^2. “Person” Defined. — “The term ‘person’ includes partnerships and corpo- rations as well as individuals;” 763 Law 1[88. Gross Income Defined. — “Sec. 213. That for the purposes of this title (except as otherwise provided in section 233, 1788]) the term “gross income” — [Read at 1[2841.] 764 Law ^89. “(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid,” [For salaries of officials of a State or political subdivision thereof see ^1013 and ^2863.] 765 Law ^90. “or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property;” 766 Law ^91. “also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit,” 767 Law % 92 . “or gains or profits and income derived from any source whatever,” 768 Law ^93. “The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212 [1[755], any such amounts are to be properly accounted for as of a different period; but” [“Gross income does not include,” for which see 1[944.] 769 Gross income includes gains or profits and income derived from any source whatever except such as is specifically exempted from income tax under provisions of section 4, act of September 8, 1916, as amended by act of October 3, 1917. [Subdiv. (b) of Sec. 213 (1f944) Act of 1918.] (Art. 4, ^12, Reg. 33, Rev., Jan. 2, 1918.) 770 Law ^29. “Dividends” Defined. — “Sec. 201. (a) That the term ‘dividend’ when used in this title (except in paragraph (10) of subdivision (a) of section 234 (f2248]) means” [For “dividends” in Reg. No. 45, read at ^3094.] INC. 83 TAX INDIVIDUALS. 771 Law ^30. Distribution by Corporations in General. — “(1) any distribution made by a corporation, other than a personal service corporation., to its share- holders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, or” 772 Law ^31. Distribution by Personal Service Corporations. — “(2) any such dis- tribution made by a personal service corporation out of its earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918.” 773 Dividends Paid with Securities. — Dividends declared by a corporation and paid with securities in which the surplus of the corporation has been invested, regardless of the character of such securities, is to be accounted for as a dividend for income-tax purposes by the recipients of same to the extent that it represents a distribution of surplus accrued to the corporation since March 1, 1913. (Art, 4, ^27, Reg. 33, Rev., Jan. 2, 1918.) 774 Dividends Paid in Liberty Bonds. — The appended opinion of the Attorney General on the question of exemption from income tax of corporation dividends paid in the form of Liberty Loan bonds is published for the information of internal-revenue officers and others concerned. (T. D. 2512, June 8, 1917.) The Secretary of the Treasury: 7 76 Sir: Pursuant to section 356 of the Revised Statutes you ask my opinion upon the following questions arising under the administration of your department: (1) Whether the stockholders of a corporation receiving a dividend declared 776 payable and distributable in bonds issued under the act of Congress approved April 24, 1917, will have to pay an income tax. (2) Whether a corporation owning these bonds would be to that extent exempt 7 77 from excise taxes, franchise taxes, and other corporation taxes of the United States and of the several States. I am of the opinion that an affirmative answer must be returned to the first question 778 and a negative answer to the second. The Act of April 24, 1917, provides as to the bonds thereby authorized that — 779 The principal and interest thereof ♦ * ♦ shall be exempt, both as to principal and interest, from all taxation, except estate or inheritance taxes, imposed by authority of the United States, or its possessions, or by any State or local taxing authority, ^ Like every exemption from taxation, this provision must be literally construed 780 and can not be extended beyond its precise terms. It protects an owner of these bonds from any tax of whatever character, except estate or inheritance taxes, levied upon them by reason of his possession and ownership; but a tax levied upon one’s net income or annual gain can not be evaded because the income or gain happens to be liquidated by the delivery of a certain number of these bonds or other nontaxable securities. Such a tax is upon the income itself as an entirety and not upon the specific articles into which this income is finally transmuted. When these bonds, therefore, are used as a medium of payment, whether in the discharge of a private debt or a corporate dividend, the profit or gain to the recipient is nevertheless subject to income tax. Similar principles control in answering your second question, I assume that 781 in speaking of “excise taxes, franchise taxes, and other corporation taxes” you refer to those taxes which are laid, not upon the property of a corporation by reason ^ of possession or ownership, but upon the value of the exercise of corporate privileges — a value which may be measured by the size of its annual income, the amount of its capital stock, or such other standard of measurement as the taxing power may select. Such a tax, for instance, was the special excise tax upon corporations under the act 782 of August 5, 1909 (36 Stat., 11,112), discussed by the Supreme Court of the United States in the case of Flint v. Stone Tracy Co. (220 U. S., 107), in which the court said: It is therefore well settled by the decisions of this court that when the sovereign 783 authority has exercised the right to tax a legitimate subject of taxation as an \ exercise of a franchise or privilege, it is no objection that the measure of taxation is found in the income produced in part from property which of itself considered is non- taxable. Applying that doctrine to this case, the measure of taxation being the income of the corporation from all sources, as that is but the measure of a privilege tax within the lawful authority of Congress to impose, it is no valid objection that this measure includes in part at least, property which as such could not be directly taxed (p. 165). The special excise tax levied upon corporations by the act of September 8, 1916 784 (39 Stat., 756, 789), and measured by the fair value of their capital stock is a tax of the same general character, imposed with respect to the carrying on or doing \ business by such corporations, and the rule laid down in the case of Flint v. Stone Tracy Co. applies equally to it. Quoting again from that decision: ♦ ♦ * The distinction INC. 84 TAX INDIVIDUALS. lies between the attempt to tax the property as such and to measure a legitimate tax upon the privileges involved in the use of such property (p. 163). Respectfully, T. W. Gregory, Attorney General. (T. D. 2512, June 8, 1917.) This office has before it your letter of June 8, 1917, asking whether dividends 785 paid in Liberty Loan bonds will be taxable to shareholders who receive them. ^In reply you are advised that, in fairness to all concerned, inquiries similar to that submitted by you were forwarded to the Attorney General for his opinion. ^'In accordance with the Attorney General’s opinion it is held that under the Income Tax Act of September 8, 1916, Liberty Loan bonds purchased from the eariiings or profits of a corporation, which have accrued since March 1, 1913, wdll constitute income to the stock- holders to the amount of the earnings or profits invested by the corporation in the bonds. If the bonds were purchased from earnings or profits accrued prior to March 1, 1913, they would not, of course, represent taxable incom.e; and if the surplus from which they were purchased accrued in part before and in part after March 1, 1913, they would represent taxable income, under the provisions of law applicable to dividends, to the amount of the surplus accrued since that date. ^You are probably aware of the present provisions. of ’aw that dividends are subject to super tax, only, in the hands of individuals, and that an individual is not liable for the super tax until his net income exceeds $20,000 [$5,000]. ^The income derived by an individual from the interest paid on Liberty Loan bonds does not constitute taxable income, whether the bonds have been received as a dividend or other- wise. [This sentence refers to the Liberty 3^% Bonds specifically but is applicable, to a limited extent, to all Liberty Bond issues. Read at ’[[981.] (Letter to Lee, Higginson & Company, Boston, signed by Deputy Commissioner L. F. Speer, and dated June 30, 1917.) 786 Determination of Cash Value to the Shareholder of a Dividend Paid in Liberty Bonds. — Acknowledgment is made of your letter of October 23, 1918, reading in part as follows: “Where a corporation distributed Liberty Bonds among its stockholders as a dividend: 1. Should an individual stockholder make return of that dividend for surtax purposes at the par value or at the market value of the Liberty Bonds 2. If the corporation bought the Liberty Bonds at 99.25 and the market value thereof when received by the stockholder was 94.25, should the stockholder make return of the dividend at 99.25 or at 94.25?” 787 In reply you are advised that, for the purposes of the income tax, income, in both instances, should be predicated on the cash value of the Liberty Bonds at the time of their receipt by the stockholders. (Letter to Ropes, Gray, Boyden & Perkins, Boston, Mass., signed by Deputy Commissioner L. F. Speer, and dated November 12, 1918.) 788 Interest on Exempt Bonds on Distribution as Dividend. — Interest on State, muni- cipal, and United States bonds received by corporations is not taxable to the corporation. Upon amalgamation with other funds of^the corporation such income loses its identity. When distributed to stockholders as a dividend, the entire amount of the dividend is subject to inclusion in returns of income for the purposes of the income tax. (Art. 4, ^42, Reg. 33, Rev., Jan. 2, 1918.) 789 Scrip Dividends. — The dividend paid by the corporation [in 1914] is income to the stockholder for 1914 ♦ ♦ ♦ ^ dividends must be included in the return and at the face value of the scrip. For income tax purposes this transaction is held to be a payment in cash of the divi- 790 dend, and an investment of the cash in the scrip. (Extract from letter to Oudin, Kilbreth & Schackno, signed by Deputy Commissioner L. F. Speer, and dated Jan. 19, 1915.) 791 Dividends Paid by a Foreign Corporation. — Dividends declared and paid by a foreign corporation which derives its entire income from business done wholly within the United States and pays, under the provisions of the Federal income-tax law, a tax upon its net income, should be treated in the same manner as dividends from domestic corporations. (T. D. 2090, Dec. 14, 1914.) 792 Income From Private Banks Considered as Dividends. — In the case of private banks which have the form of corporations and which are held to be associations within the meaning of the Federal income-tax law, it is not the purpose of this office to assess the income tax against such banking associations and then also against the individual members of the association. Income which the members of the association receive from the bank because of their 793 investments therein will be considered dividends, ♦ * ♦ ^ D 2152, Feb. 12, 1915.) » INC. 85 TAX INDIVIDUALS. 794 Private banks which have the form of corporate organizations, elect officers and a board of managers, have a distinctive name, a fixed situs, and distribute their net earnings upon the basis of the amount of capital invested by the members or owners, are held to be associations within the meaning of the Federal income tax law, and in their or- ganized capacity should make returns of annual net income and pay any income tax thereby shown to be due. The holders of the stock or the owners of the bank will be exempt from the normal 795 tax to the extent of the dividends or earnings which they receive from such private banks as make returns in their organized capacity and pay income tax in accordance therewith. * * * . (T. D. 2137, Jan. 30, 1915.) 796 Taxes Paid by Bank for Owners of Bank Stock Considered as Dividends. — Taxes assessed against the stockholders of a bank and paid by the bank in behalf of the stockholders do not constitute an allowable deduction from the gross income of the bank, but do constitute an allowable deduction in the return of the individual ♦ * * , amount of taxes so paid should be included in his return as income, the said amount being considered as an additional dividend to the amount of the taxes paid. (T. D. 2135, Jan. 23, 1915.) 797 Profits of Limited Partnerships Considered as Dividends. — The profits of limited partnerships making returns in the same manner as corporations make returns will be treated the same as dividends of corporations and will be returned in the returns of individuals in the same manner as are dividends upon the stock of corporations; that is to say, the dividends received from such limited partnerships will not be subject to the normal tax in the hands of the members of the partnership receiving the same. (T. D. 2137, Jan. 30, 1915.) 798 Dividends Paid on Life Insurance Policies. — Dividends paid on life Insurance policies that have not matured, whether such dividends are drawn in cash by the insured or applied to the reduction of the annual premium due, are not considered items of taxable income under the law, and should be excluded from a return of income. 799 Dividends from paid-up policies, however, are considered income to the recipient, and m.ust be included in the annual return of income * * * ^ They are considered the same as dividends or net earnings from corporations subiect to a like tax and may ♦ ♦ * . (T. D. 2137, Jan. 30, 1915.) 800 Law 1132. Earnings and Profits to be Distributed First. — “(b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed.” 801 Reference is made to your letter of April 22, 1918, relative to the following: “As- suming a corporation to have undivided surplus or profits of $500,000; to have re- valued its assets, resulting in an increase of $1,000,000; and to have declared a stock divi- dend amounting to $750,000 — said by the corporation to have been out of the revaluation increase, will the Treasury Department accept the statement of the corporation, or will it insist on $500,000 (or two-thirds of the stock dividend) as representing the undivided surplus or profits — and hence taxable — and the balance of $250,000 (or one-third) out of the increase due to the revaluation and hence not taxable?” ^In reply, you are advised that if the un- distributed surplus or profits of the corporation accumulated since March 1, 1913, are suf- ficient to pay the $750,000 dividend, then all of such dividend will be taxable. If only $500,000 surplus Is on hand on the date of payment of the dividend, then the amount of the dividend that is over and above such surplus on hand will be exempt. ^If there is no surplus on hand on the date of payment of the dividend, then all of the dividend will be tax exempt. In short, the dividend is taxable to the extent of the undivided profits (accumulated since March 1, 1913) on hand on the date of payment of such dividend [Read HSll). (Letter to Hornblower and Weeks, Boston, Mass., signed bv Deputy Commissioner L. F. Speer, and dated May 14, 1918.) 802 Law ^33. Earnings and Profits Since February 28, 1913, to be Distributed First by Corporations Generally. — “Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, or,” 803 Law ^34. Earnings and Profits Most Recently Accumulated to be Distributed First by a Personal Service Corporation. — “in the case of a personal service corpo- ration, from the most recently accumulated earnings or profits;” 804 Any distribution made to shareholders in the year 1917 [1918] or subsequent years ♦ * * shall be deemed to have been made from the most recently accumulated undivided surplus or profits, and shall constitute income of the distributee for the year in which received, * ♦ ♦ . INC. 86 TAX INDIVIDUALS. Thus, if a corporation distributed dividends in 1917 [1918], such dividends will be 805 deemed to have been paid from the earnings of 1917 [1918], and the recipient, if an individual, will be liable to additional tax, if any, * * * at the rates for the year 1917 [1918], ♦ * ♦ . (Art. 107, 1[374 and ^375, Reg. 33, Rev., Jan. 2, 1918.) 806 Relation of Income and War Excess Profits Taxes Paid or Accrued to Dividend Distributions. — In determining the source of earnings from which a particular distribution is made a corporation is, however, permitted to treat the undivided profits and surplus of the current year as reduced by payments for income and excess profits taxes or if keeping its accounts upon an accrual basis by proper reserves for such taxes, although such payments or reserves are not deductible in computing the income of the corporation for income and excess profits taxes. (T. D. 2700, April 16, 1918.) 807 Receipt is acknowledged of your letter of the 23d ult., in which you refer to Treasury Decision 2700, especially to the provisions of the last paragraph but one [1[806] contained therein and ask for certain information relative thereto. You ask to be advised * * * whether the earnings for the first half of 1918 may be charged with the corres- ponding taxes accruing during that period for the purpose of: “( “In reply you are advised that the landlord should include in his return of annual 922 net income the rents actually paid to him within the year; ♦ ♦ ♦ The rent paid on January 5, 1915, for the months of November and December, 1914, belonga to the year 1915 for * * ♦ the purposes of return by the landlord ♦ ♦ ♦ »» (Extract from letter to Wm. S. Lare, signed by Deputy Commissioner L. F. Speer, and dated February 9, 1915.) 923 Dividends and Interest are Returnable as Income in Year Received. — [Read 1[768I. This office holds that dividends on stock of corporations and interest on notes, ordinary mortgages, and corporate obligations, should be entered on the annual return for the year in which such payments “were received. (Part of letter to Beekman, Menken and Griscom, New York, N. Y., signed by Commissioner W. H. Osborn, and dated February 18, 1915.) 924 Accounts Receivable are Income for the Year in which Created. — This office holds that the net income of the individual in the mercantile business should be ascertained from- his books and the actual inventory of his merchandise, which is in accordance with established procedure in all mercantile businesses. [Extract from letter to Beekman, Menken and Griscom, signed by Deputy Commissioner L. F. Speer and dated March 31, 1915.) 926 Accrued Interest on Bonds Purchased Between Interest Dates.— Interest accrued to the time of purchase (advanced by purchaser) is not to be accounted for as income by the purchaser. Only the amount of interest assignable to the portion of the interest period subsequent to the purchase has a status of income for the purposes of return and tax by purchaser. The amount of accrued interest so advanced by the purchaser is taxable income 926 to be accounted for in the return of the vendor. (Art. 4, ^15-16, Reg.'33, Rev., Jan. 2, 1918.) 927 Interest Coupons Exchanged for New Bonds. — Coupons from bonds for interest thereon, exchanged for other bonds are held to be the equivalent of payment of the interest coupons and purchase of the new bonds with the cash. The amount of the coupons to be accounted for as income for the calendar year in which the exchange is made. (Art. 4, ^17, Reg. 33 Rev. Jan. 2, 1918.) 928 Scrip Payment of Interest. — The foregoing [see ^788] holds true for scrip pay- ment of interest [i. e., the scrip is gross income.] (Art. 4, ^43 Reg. 33, Rev., Jan. 2, 1918.) 929 Private Bank Owned by an Individual or by a Partnership. — When it can be clearly shown that a private bank is owned by one man, it is evident that such bank is not an association within the meaning of the Federal income tax law, and that therefore such bank will not be required to make a return such as corporations and associa- tions are required to make, but the individual owner, ♦ * ♦ will be required to make a return on Form 1040, showing in such return the income which he receives not only from the bank but from all other sources. (T. D. 2137, Jan. 30, 1915.) 930 Private banks which do not have this formal organization [paragraph 1732], but which transact business, not in the name of the bank, but in the name of the individuals who compose the firm, as John Smith & Co*, are held to be. co-partnerships and, as such, are not required to [pay tax]. In such cases the individuals who compose the firm, if they have net incomes in excess of [$1,000 or $2,000] will be required to make indivi- dual returns of Form 1040, accounting for therein their respective incomes arising and accruing from the earnings of the bank. (Mimeograph letter No. 1271 to Collectors, Oct. 19, 1915.) 931 Property Acquired by Gift. — The value of propertv acquired by gift is not subject to income tax, but all gains, profits, or income derived therefrom are subject to tax [see 1f961] and if the property so acquired is subsequently sold at a price greater than the appraised value at the time the property was acquired by gift, the gain in value is held to be income and subject to tax under the provisions of the Federal income tax law. (T. D. 2090, Dec. 14, 1914.) 932 Legacies. — The general policy of the law and rule of interpretation require that legacies in all cases, unless clearly inconsistent with the intention of the testator, should be held to be vested rather than contingent. Where there is a vested interest 98 INC. TAX INDIVIDUALS. the income from such interest, whether distributed or not, is subject to the tax; and when in the hands of fiduciaries they are required to account for and pay the tax thereon. (T. D. 2090, Dec. 14, 1914.) 933 Sale of Stock Received as a Bonus. — Where common stock is received as a bonus in consideration of the purchase of preferred stock, the entire proceeds derived from the sale or transfer of such stock is income subject to the normal and additional tax. (Art. 4, ^40, Reg. 33 , ^ev., Jan. 2, 1918.) 934 ^ Sale of Stock Acquired by Gift. — The fair market price or value of stock acquired by gift subsequent to March 1, 1913, is the basis for computing gain derived or loss sustained by the sale thereof. If acquired by gift prior to March 1, 1913, the fair market price or value as of that date is the basis for computation. (Art. 4, ^41, Reg. 33, Rev., Jan. 2, 1918.) 935 Sale of Property Acquired by Inheritance. — The appraised value at the time of the death of a testator is the basis for determining gain or profit upon sale sub- sequent to the death after March 1, 1913. (Art. 4, ^44, Reg. 33, Rev., Jan. 2, 1918.) 936 Interest on Bonds Received by Legatee. — A legatee is required to return as income the full amount of interest received by him on a bond, notwithstanding the fact that a part of the first coupon, payable after he had received it, had been added to the bond and included in the gross estate of the decedent, thereby becoming subject to the estate-tax law. (T. D. 2570, Nov. 6, 1917.) 937 Income Received by Beneficiaries Through Fiduciaries. — A beneficiary is liable for the normal tax upon the amount of net income derived by him from a taxable source through a fiduciary less ♦ * * the amount of income on which the normal tax has been withheld at source, and is also liable for the additional tax assessable on the amount of net income received by him in excess of [$5,000]; and in order to determine whether the net income of a beneficiary is or is not in excess of [$5,000] and subject to the additional tax, the amount derived by him from an estate and all other taxable sources in required to be shown on his personal annual return. (T. D. 2090, Dec. 14, 1914.) 938 Income Accruing to Minor through Natural Guardian. — The parent is held to be the natural guardian of a minor child. Income received by the minor child from sources other than the parent should be included by the parent in his return of income. The fact that such income is not appropriated by the parent is immaterial, as it will be held, in the absence of a showing of fact to the contrary, that such income was subject to appropriation and was appropriated by the parent, and that the child receives the same as a gift from the parent. Where the income is from a separate estate and the parent has been appointed guardian and the conditions are such that the income so received IS to be held for the use of the child, it shall not be included in the return of income of the parent, but shall be accounted for otherwise for the purposes of the income tax in man- ner and form as called for by the facts of the particular case. ,4(Art. 29,j^201, Reg. 33, Rev., Jan. 2, 1918.) 939 Pensions. — Pensions paid by the United States, private institutions, or individuals are to be accounted for, for income tax purposes, in all cases where income of the pensioner is liable for income tax. (Art. 4, ^[49, Reg. 33, Rev., Jan. 2, 1918.) 940 Distributable Amounts Received by Fiduciary to be Returned by Beneficiary Whether Distributed or Not. — The beneficiary will be required in the case of trust estates to account for the actual amounts distributed or credited to him. (Art. 29, 1[210, Reg. 33, Rev., Jan. 2, 1918.) 941 In answer to your letter of the 1st inst., there was sent to you a telegram reading as follows: “Beneficiary should report his share of the distributable income received by fiduciary during year.^ Fiduciary should inform beneficiary of his share of distributable income received by fiduciary also of his share of dividends received by fiduciary included therein.” (Letter to F. W. Denio, Old Colony Trust Co., Boston, Mass., signed by Com- missioner Daniel C. Roper, and dated Mar. 5, 1918.) 942 Dividends in the hands of a fiduciary and belonging to a beneficiary are not subject to the normal tax, but will be subject to the additional tax to the beneficiary when- ever the beneficiary’s income from all taxable sources is in excess of [$5,000]. (T. D. 2090, Dec. 14, 1914.) 943 Unless the beneficiary is under some disability which requires the fiduciary to act, the beneficiary will make his own return and account for the tax upon his entire net income. (T. D. 2090, Dec. 14, 1914.) INC. 99 TAX INDIVIDUALS. Other Gross Income. — [Read under “Corporations,” at ^1789.] 944 Law 1f94. Gross Income Exempt From Law. — “(b) [Gross income] Does not include the following items, which shall be exempt from taxation under this title:” [Read at 1[2863.] 945 Law ^95. Proceeds of Life Insurance Policies on Death of Insured are Exempt. — “(l) [Gross income does not include] The proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estate of the insured;” 946 Law ^96. Returns to Insured of Premiums Paid Under Life Insurance, Endow- ment, or Annuity Contracts Are Exempt. — “(2) [Gross income does not include] The amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract;” [Read at ^28g4.] 947 The amount paid under a life insurance, endowment, or annuity contract is not income when returned to the person making the contract, either upon the maturity or surrender of the contract; but the amount by which the sum received exceeds the sum paid and coming into the hands of the person making the contract and payment is income. (T. D. 2090 as amended by T. D. 2152, Feb. 12, 1915.) 948 Where insured receives, under any form of life insurance, an amount in excess of premiums paid for the insurance, such excess has a taxable status and is to be accounted for as for the calendar year of its receipt. (Art. 4, ^45, Reg.|33, Rev., Jan. 2, 1918.)! 949 There are two matters relating to Income Tax on Individuals regarding which I am unable to find any mention in the Law itself or in the Treasury Decisions, and would be glad to have you inform me about them at this time. First. * * ♦ . ^ 950 Second. Cancelled Life Insurance: An Endowment Policy and a Straight Life Policy are surrendered by the Policy- holder to the Insurance Company and cancelled, not at maturity but at an arbitrary date, and the “cash surrender value” is paid by the company to the policyholder. This amount exceeds the total of premiums theretofore paid on the respective policies. Is any portion of this difference regarded as Taxable Income.^ If so, what pro- 951 portion, seeing that the payment of premiums and consequent earning thereon by the Company began several years before the inception of the Income Tax Lav/? (Answer). You are further advised that the difference between the amount received by an insurance policyholder upon the maturity or surrender of the policy and the aggregate amount of premiums paid during the lifetime of the policy, constitutes taxable income W’hich should be included in any personal return the individual may be required to render for the year during which the proceeds of the policy are received. (Part of letter of inquiry to the Commissioner of Internal Revenue, from W. W. Bacon, Philadelphia, dated Jan. 19, 1917, and the answer thereto, signed by Deputy Commissioner L. F. Speer, and dated Feb. 8, 1917.) Dividends paid on life insurance policies that have not matured, whether such 962 dividends are drawn in cash by the insured or applied to the reduction of the annual premium due, are not considered items of taxable income under the law, and should be excluded from a return of income. (T. D. 2137, Jan. 30, 1915.) 953 Dividends on paid-up policies are in the nature of corporate dividends and are to be accounted for as income for the purposes of the additional tax only, (Art. 4, 1f46, Reg. 33, Rev., Jan. 2, 1918.) 954 Dear Sir: It has been my judgment that annuities sold by the National Life Insurance Company and other insurance companies were not subject to tax under the Income Tax Law, but I realize that the statute is not entirely free from doubt, so far as relates to such portion of annuity payments as may be treated as income, though such portions are comparatively small and the determination of their amount is difficult and almost impracticable. I would like to know, however, whether the Department has made any ruling relative to the taxation of annuities and if any ruling has been made, would be glad to receive a copy of it. (Letter to Commissioner W. H. Osborn, signed by Fred. A. Howland, Counsel, National Life Insurance Company and dated Feb. 5, 1914.) (Answer). Sir: In reply to your letter of Feb. 5, relative to the taxation of annuities^ under the Income Tax Law, you are informed that life insurance annuities shall not be included as income. (Signed by Deputy Commissioner L. F. Speer, and dated Feb. 17, 1914.) INC. 100 TAX INDIVIDUALS. 965 Dear Sir: I should have made earlier acknowledgment of your telegram of De- cember 27th reading as follows: “As at present advised, this office holds that proceeds of life insurance policies paid pursuant to terms of contract, whether upon maturity of policy, death of insured or as annuities are not subject to tax in hands of beneficiaries * * * ^ Payment of deferred dividends in so far as they represent portions of actual premiums received are proceeds of insurance policy within the meaning of law.” I thank you very much for advising of the ruling on the subjects mentioned and in 956 communicating with the counsel of other insurance companies I find that it cleared up in their minds some important points. There is, however, one further question which I raised in my letter of November 17th and possibly your telegram of the 27th covers it. The question is one of considerable importance and one which we are called upon to deal with at once. I am taking the liberty of bringing the matter to your attention at this time and state a concrete case with which wemust deal very shortly. On February 1, 1914, this company will be called upon to pay an annuity instalment of $3,448.46 under annuity contract No. . This annuity contract was purchased for cash February 1, 1903, the consideration being $40,985. Annually on February 1st, under the terms of the annuity contract, the sum of $3,448.46 is payable to the annuitant. The query is: Is this instalment of $3,448,46 which the company must pay”” to 967 the annuitant on February 1, 1914, and future annual instalments, subject to the income tax? It is my opinion, as I expressed it in my letter to you of November 17th, that the proper construction of the income tax law of 1913 imposes no tax in such a case. I would thank you very much indeed if you would give me a ruling in the matter. 958 As the company is constantly having to answer inquiries of annuitants in such cases, I would appreciate very much if you would send me a wire on the subject at my expense. (Letter to Commissioner W. H. Osborn, signed by Frederick L. Allen, General Solicitor, Mutual Life Insurance Company and dated Jan. 8, 1914.) (Answer.) So much of annuities paid to annuitant as represents payment made by him on annuity contract and paid back to him shall not be included in income of annuitant. Any incre- ment on purchase price of annuity is taxable income. * * * (Signed by Commissioner W. H. Osborn, and dated Jan. 12, 1914.) 69 Sir: In reply to your letter of January 28th, in which you request to be advised whether income received from or credited to policholders of life insurance, as divi- dends, shall be included as income, you are informed that dividends paid on life insurance policies that have not matured, whether such dividends are paid by the company in cash or added to the face value of the policy, are not considered items of taxable income under the law, and should be excluded in making the annual return. Dividends from paid-up policies are considered income to the recipient, and must be 960 included in the annual return. (Letter to Robert Lynn Cox, General Counsel and Manager, Association of Life Insurance Presidents, signed by Deputy Commissioner L. Speer, and dated Mar. 5. 1914.) 961 i^aw ^97. Value of Property Acquired by Gift, Bequest, etc., is Exempt. — “(3) [Gross income does not include] The value of piv perty acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income);” 962 Where the monthly salary of an officer or employee is paid for a limited period after his death to his widow in recognition of the services rendered by her husband, no services being rendered by the widow, it is held that such payment is a gratuity and exempt from taxation under the income tax law. Such a payment would not, however, be an allowable deduction as an expense of carrying on business in the return of the person, firm, or corporation paying same. (T. D. 2090, Dec. 14, 1914.) 963 Law ^98. Interest on United States Bonds, etc.. Except as Otherwise Provided in the Act of Authorization, and on Bonds of State or Political Subdivision Thereof is Exempt. — “(4) [Gross income does not include] Interest upon (a) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia or” 964 Law ^99. “(b) securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916; or” 966 Law ^100. “(c) the obligations of the United States or its possessions [Read ^975 below]; or” 966 Law 1[101 . “(d) bonds Issued by the War Finance Corporation [Read 1[975 below]:” 967 Law 11102. Provided, That every person owning any of the obligations, securities or bonds enumerated in clauses (a), (b), (c) and (d) shall, in the return required 101 TAX INC. INDIVIDUALS. by this title, submit a statement showing the number and amount of such obligations, securities and bonds owned by him and the income received therefrom, in such form and with such information as the Commissioner may require.” (Read beginning at ^2865.) 963 Obligations of a State, Political Subdivisions, etc. — Among income exempt from the income tax is interest upon the obligations of a State or any political subdivision thereof. Obligations issued for a public purpose by or on behalf of the State or a duly organized political subdivision acting by constituted authorities duly empowered to issue such obligations are the obligations of a State or a political subdivision thereof. (Art. 83, ^341, Reg. 33, Rev., Jan. 2, 1918, as amended by T. D. 2715, May 20, 1918.) 969 Where a municipality purchases a public utility subject to a mortgage the mortgage retains its original character, even though the municipality assumes the mortgage indebtedness and pays the interest thereon. Therefore, the indebtedness secured by such mortgage is not an obligation of the municipality within the meaning of Paragraph B of the income tax law. (T. D. 2090, Dec. 14, 1914.) 970 Political Subdivisions. — The term “political subdivision” denotes any division of the State made by proper authorities thereof acting within their constitutional powers for the purpose of carrying out a portion of those functions of the State which by long usage and the inherent necessities of government have always been regarded as public. Political subdivisions of a State, within the meaning of the exemption referred to in Article 83, include special assessment districts so created, such as road, water, sewer gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement and similar districts and divisions of a State.” (Art. 84, ^342, Reg. 33, Rev., Jan. 2, 1918, as amended by T. D. 2715, May 20, 1918.) 971 Referring to paragraph B, section 2 of the Income Tax Law, which reads as follows: “That in computing net income there shall be excluded interest upon the obligations of a State or any political subdivision thereof,” you are informed that under date of January 30, 1914, The Honorable, The Attorney General, held that special assessment districts created under the laws of the several States for public purposes, such as the improvement of streets and public highways, the pro- vision for sewerage, gas and light, and the reclamation, drainage or irrigation of bodies of land^ within such special assessment districts when such districts are for public use are political subdivisions of the State within the meaning of the above proviso. It is held that the term “political subdivision” includes special assessment dis- 972 tricts or divisions of a State created by the proper authority of the State acting within its constitutional powers and under its general laws, for the purpose of carrying out a portion of those functions of the State which by long usap#^ and inherent necessitates of government have always been regarded as public. Levee and school districts, when lawfully created under the authority of the State 973 and which are authorized by the laws of the State to levy a tax to meet the obliga- tions of such districts, are also held to be political subdivisions of a State within the meaning of the Income Tax law. The income derived from interest upon the obligations of all such public districts 974 shall, therefore, be excluded in computing net income for the income tax. (T. D. 1946, Feb. 10, 1914.) 975 Law ^103. Taxable Status of Interest on Obligations of the United States Issued After September 1, 1917. — “In the case of obligations of the United States issued after September 1, 1917, and in the case of bonds issued by the War Finance Cor- poration, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the tax- payer both under his title and under Title III;” [Read beginning at ^2868.] 976 Perpetual Exemption Provision Applicable to Second, Third, and Fourth Liberty Loan Bond Interest. — Attention is called to Section 7 of the Act of Congress approved September 24, 1917, “Second Liberty Loan Act” providing for the issue of 4% Liberty Bonds, Treasury Certificates of Indebtedness and War Savings Certificates, which reads as follows: “That none of the bonds authorized by section one, nor of the certificates authorized by action five, or by section six, of this Act, shall bear the circulation privilege. All such bonds and certificates shall be exempt, both as to principal and interest from all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess profits and war-profits taxes, now or hereafter imposed by the United States, upon the 102 TAX INC. INDmDUALS. income or profits of individuals, partnerships, associations, or corporations. The interest on an amount of such bonds and certificates the principal of which does not exceed in the aggregate $5,000, owned by any individual, partnership, association or corporation, shall be exempt from the taxes provided for in subdivision (b) of this section.” You are hereby informed that holders (whether individual, partnerships, associa- 977 tions or corporations) of Liberty Bonds, Treasury Certificates of Indebtedness and War Savings Certificates authorized by the Act of September 24, 1917, are entitled to exemption from all income and war excess profits taxes upon the interest received on a principal amount not to exceed $5,000 face value of such obligations. If, for example, the holder owns $5,000 Treasury Certificates of Indebtedness, $7,000 4% Liberty Bonds, and $1,000 War Savings Certificates, he will be entitled to exemption from graduated additional Income taxes and war excess profits taxes upon only the interest received upon $5,000 of the aforesaid obligations. It is immaterial whether the 4% Liberty Bonds were issued to the holder in exchange for Liberty Bonds of the first series or Treasury Certificates of Indebtedness, or whether issued upon a new subscription. The exemption Is upon the income from $5,000 face value of the obligations issued by authority of the aforesaid Act of September 24, 1917. (T. D. 2585, Nov. 8, 1917.) 978 Section 1200 of the Act of October 3, 1917, so amends section 4 of the Act of Sep- tember 8, 1916, as to exempt from the tax, interest on the obligations of the United States issued after September 1, 1917, only if and to the extent provided in the act of authorizing their issue. Said act provides that bonds and certificates issued thereunder shall be exempt 979 from all taxes except estate or inheritance taxes, additional income taxes, com- monly known as surtaxes, and excess or war profits taxes. (Art. 85, ^343-344, Reg. 33, Rev., Jan. 2, 1918.) 980 Application of Exemption when Several Members of Family Invest in Liberty Bonds. — {Question.) Please answer by wire at once if possible our telegram, October second, as follows: “If husband, wife and minor children each hold new Liberty fours and make joint income tax return will each member of such family be tax exempt as to $5,000 bonds each. Wire answer to-day if possible.” Information very important in campaign selling Liberty Bonds. {Answer.) Husband and wife each owning in own right Liberty Loan Bonds and certificates not exceeding five thousand dollars each entitle to exemption provided by Section Seven B, Loan Act. Minor children having separate estates each entitled to same exemption. (Telegram to Commissioner of Internal Revenue from Lee, HIgginson & Co., Boston, Mass., and the reply thereto, signed by Acting Secretary of the Treasury, O. T. Crosby, and dated October 8, 1917.) 981 Special Temporary Exemption Provisions Applicable to Second, Third, and Fourth Liberty Loan Bond Interest. — Questions have arisen with regard to the exemption of interest on bonds held or subscribed for by trustees, partnerships or cor- porations under Section 1 of the supplement to Second Liberty Bond Act, approved September 24, 1918. This Section is as follows: “That until the expiration of two years after the date of the termination of the war between the United States and the Imperial German Government, as fixed by proclamation of the President — “(1) The interest on an amount of Bonds of the Fourth Liberty Loan the principal of which does not exceed $30,000, owned by any individual, partnership, association, or corporation, shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of Individuals, partnerships, associations, or corporations;^ “(2) The interest received after January 1, 1918, on an amount of Bonds of the FIrst Liberty Loan Converted, dated either November 15, 1917, or May 9, 1918, the Second Liberty Loan, Converted, and Unconverted, and the Third Liberty Loan, the principal of which does not exceed $45,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from such taxes; Provided^ however^ That no owner of such Bonds shall be entitled to such exemption in respect to the Interest on an aggregate principal amount of such Bonds exceeding one and one-half times the prin- cipal amount of Bonds of the Fourth Liberty Loan originally subscribed for by such owner and still owned by him at the date of his tax return; and “(3) The Interest on an amount of Bonds, the principal^of which docs not exceed $30,000, owned by any individual, partnership, association, or corporation, issued upon conversion of the Z }/2 per centum Bonds of the First Liberty Loan in the exercise of any privilege arising as a consequence of the issue of bonds of the Fourth Liberty Loan, shall be exempt from such taxes. “The exemption provided in this Section shall be in addition to the exemption pro- vided in Section 7 of the Second Liberty Bond Act in respect to the interest on an amount of bondi and certificates, authorized by such Act and amendments thereto, the principal 103 TAX INC. INDIVroUALS. of trhich does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty^ Bond Act.” The exemptions authorized by subdivisions (1) and (3) of section one are con- 982 ferred by reason of the ownership of bonds therein referred to, while the exemption authorized by subdivision (2) is a collateral exemption conferred upon the bonds therein referred to by reason of the original subscription for, and continued holding of Fourth Liberty Loan Bonds. (1) Trusts. — When income as such is taxable to beneficiaries, as in the case, 983 under the present income tax law, of a trust the income of which is to be distri- buted annually or regularly between existing beneficiaries, each beneficiary is regarded as the owner of a proportionate part of the bonds held in trust and is entitled to exemption on account of such ownership as if he owned such proportionate part of the bonds directly. In such a case, a subscription by a trustee for bonds of the Fourth Liberty Loan constitutes each beneficiary existing at the time of such subscription an original subscriber for his proportionate part of such bonds, and entitles such beneficiary to the collateral exemption of interest on bonds of previous issues, whether owned by such beneficiary or by the trustee, as if the beneficiary had himself originally subscribed for such proportionate part of the bonds, and a subscription by such beneficiary for bonds of the Fourth Liberty Loan entitles him to the collateral exemption of interest on bonds of previous issues held by the trustee. 984 When income is taxable to the trustee as in the case, under the present income tax law, of a trust the income of which is accumulated for the benefit of unborn or unascertained persons, the trustee is regarded as the owner of all the bonds held in trust and the trust is entitled to exemption on account of such ownership. In such a case a subscription by a trustee constitutes the trustee as such the original subscriber and entitles the trust, on account of such subscription, to the collateral exemption of interest on bonds of previous issues. (2) PARTNERSHIPS. — When income of a partnership is taxable to the Individual 985 partners, as under the present income tax law, each partner is treated as the owner of a proportionate part of the bonds held by the partnership and entitled to exemp- tion on account of such ownership as if such partner owned such proportionate part of the bonds directly. When the income of a partnership is taxable to the partnership as such, as under 986 the present [former] excess profits tax law, the partnership is treated as the owner of the bonds held by it and entitled to exemption from taxes assessed upon the income of the partnership as such. With reference to a tax assessed upon an individual partner on his share of the part- 987 nership income, such partner, if a partner at the time of the original subscription by the partnership for bonds of the Fourth Liberty Loan, is treated as an original subscriber for a proportionate part of such bonds subscribed for by the partnership and is entitled to the collateral exemption of interest on bonds of previous issues, on account of such original subscription for bonds of the Fourth Liberty Loan, as if he had subscribed directly for such proportionate part of the bonds. With reference to a tax assessed to the partnership upon the partnership Income 988 as a whole [no such tax assessed now], such partnership is the original subs criber and entitled to the collateral exem.ption of interest on bonds of previous issues, on account of such original subscriptions for bonds of the Fourth Liberty Loan. (3) CORPORATIONS. — Income of a corporation as such is taxable to the corpo- 989 ration and is not taxable to the stockholders. The corporation, and not the stock- holders, is regarded as the owner of the bonds held by the corporation and entitled to exemption on account of such ownership. When bonds of the Fourth Liberty Loan are subscribed for by the corporation it, and not the stockholders, is the original subscriber and entitled to the collateral exemption of interest on bonds of previous issues on account of such original subscription. (T. D. 2762, Oct. 21, 1918.) 990 Exempt Status of Interest on Liberty Bonds when Purchased on Installment Plan and Not Fully Paid for on December 31, 1918. — Reference is made to your telegram dated December 14, 1918: “Please wire collect your ruling is exemption from tax on interest Second and Third Liberty Bonds based on holdings Fourth Liberty Bonds dependent on fourth subscription being fully paid and bonds delivered prior to end December or subscription paid on government plan sufficient.” l[In reply you are advised that an individual who originally subscribed to bonds of the Fourth Liberty Loan to an amount not exceeding $30,000 in accordance with the government plan and made payments in accordance with such plan is not required to pay for such bonds in full on or before December 31, 1918, in order to obtain the exemption provided in Section 1 of the Supplement to the Second Liberty Bond Act, or of interest on bonds of the previous issues referred to in subdivision 2 of said Section 1. ^Likewise if an Individual subscribed for bonds of the Fourth Liberty Loan through a bank by agreeing to pay the subscription price in install- ments acceptable to the bank, and made payments in accordance with this plan, it will not 104 INC. r V s: INDIVIDUALS. be necessary for such individual to pay for the bonds in full on or before December 31, 1918, in order to obtain the exemption mentioned in the preceding paragraph. (Letter to Clark J. Milliron, Los Angeles, Cal., signed by Acting Deputy Commissioner Homer S. Pace, and dated January 3, 1919.) 991 Government Obligations and War Finance Corporation Bonds Beneficially Owned by Nonresident Aliens May be Tax Exempt Under Certain Conditions. — Section 3 [of the “Fourth Liberty Bond Act,” Act of July 9, 1918]. That notwithstanding the pro- visions of the Second Liberty Bond Act [1i976] as amended by the Third Liberty Bond Act, or of the War Finance Corporation Act, bonds and certificates of indebtedness of the United States payable in any foreign money or foreign moneys, and bonds of the War Finance Corporation payable in any foreign money or foreign moneys exclusively or in the alter- native, shall, if and to the extent expressed in such bonds at the time of their issue, with the approval of the Secretary of the Treasury, while beneficially owned by a nonresident alien individual, or by a foreign corporation, partnership, or association, not engaged in business in the United States, be exempt both as to principal and interest from any and all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority. (Sec. 3, “Fourth Liberty Bond Act” of July 9, 1918.) 992 Returns of Income From Exempt Securities. — Where the entire income of an indi- vidual is from tax-exempt bonds and where the amount of income other than that from tax-exempt securities is less than the amount of income for which a return is required, no return of income is to be made. Interest from securities which is exempt from tax under section 4 [Sec. 213] of the Income Tax Law is not to be included in returns of income. [But read new law provision at ^975.] (Art. 26, ^178, Reg. 33, Rev., Jan. 2, 1918.) 993 No Ownership Certificates Required. — It has been called to the attention of this office that banks in certain sections are refusing to pay coupons for interest on bonds of States, counties, cities, or other political subdivisions of the United States, when such coupons are not accompanied by certificates of ownership, * * * ^ Please inform all parties interested, giving the information wide publicity, that 994 the income derived from the interest upon the obligations of a State, county, city, or any other political subdivision thereof, and upon the obligations of the United States or Its possessions is not subject to the income tax [is still not subject to normal in- come tax] and a certificate of ownership in connection with the coupons or registered Interest orders for such interest will not be required. The interest coupons should clearly show on their face whether they are issued 995 by the United States or any political subdivision thereof. If, however, they do not clearly show this, then, of course, an ownership certificate should be required. (T. D. 1892, Nov. 6, 1913.) [Note at ^1377 that “Information at the source” does not apply to interest on obligations of the United States.] 996 Law 1]104. Income of Foreign Governments from United States Sources. — “(5) [Gross income does not include] The income of foreign governments received from Investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from Interest on deposits In banks In the United States of moneys belonging to such foreign governments, or from any other source within the United States;” [^[2875.] 9 97 Section 30 of the act of September 8, 1916, as amended by the act of October 3, 1917 [1i996 above] provides that the income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities owned by them, or from interest on deposits in banks in the United States of money belonging to such foreign governments, is exempt from the tax imposed by this title. This does not, however, exempt from the tax any income collected by foreign governments from invest- ments in the United States in stocks, bonds, or other domestic securities, which are not bona fide owned by but are loaned to such foreign government. The exemption here provided for is predicated upon the fact that the securities or moneys from which income is derived are actually owned by such foreign governments. (Art. 87, ^348, Reg. 33, Rev., Jan. 2, 1918.) 998 Law ^105. Accident and Health Insurance, and “Damages” Received. — “(6) [Gross income does not include] Amounts received, through accident or health insurance or under workmen’s compensation acts, as compensation for personal Injuries or sickness, plus the amount of any damages received whether by suit or agreement on ac- count of such Injuries or sickness;” [^2864.] 999 The Attorney General has advised upon the basis of recent decisions of the Supreme Court (Doyle v. Mitchell Brothers Company (247 U. S. 179), decided May 20, 105 TAX INC. INDIVIDUALS. last; Lynch v, Hornby [^[2763], Lynch v. Turrish [^2776] and Southern Pacific Company V. Lowe [^2804], decided June 3, last) and it is accordingly held that the proceeds of an accident insurance policy received by an individual on account of personal injuries sus- tained by him through accident are not income taxable under the provisions of Title I of the Act of September 8, 1916, as amended by Title XII of the Act of October 3, 1917, and of Title I of the Act of October 3, 1917. It is held upon similar principles that an amount received by an individual as the 1 000 result of a suit or compromise for personal injuries sustained by him through accident is not income taxable under the provisions of said Titles. 1 001 Such provisions of Treasury Decisions and of Regulations No. 33 (Revised) as are inconsistent herewith are hereby revoked. (T. D. 2747, July 12, 1918.) 1 002 Reimbursement of Expenses Incident to an Accident. — Amounts received from a railroad company by way of reimbursement for expenses incident to an accident are not subject to the income tax. (T. D. 2135, Jan. 23, 1915.) 1 003 Accident Insurance Paid on Death of the Insured. — The proceeds of accident insur- ance policies paid upon the death of the person insured to the beneficiaries is to be treated like the proceeds of life insurance policies [^ 945 ]. (T. D. 2135, Jan. 23, 1915.) 1 004 Law Tfl06. Income Arising Through the Exercise of an Essential Governmental Function and Accruing to any State, Etc. — “(7) [Gross income does not include] Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the government of any possession of the United States, or any political subdivision thereof.” 1005 Law II 107. “Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, prior to September 8, 1916, entered i n good faith into a contract with any person, 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 title upon the income derived from the operation of such public utility, so far as the paymicnt thereof will impose a loss or burden upon such State, Territory, District of Columbia, or political subdivision; but this provision is not intended to confer upon such person any financial gain or exemption or to relieve such person from the payment of a tax as provided for in this title upon the part or portion of such Income to which such person or corporation is entitled under such contract;” 1006 Law ^108. Compensation of Soldiers and Sailors. — “(8) [Gross income does not include] So much of the amount received during the present war by a person in the military or naval forces of the United States as salary or compensation in any form from the United States for active services in such forces, as does not exceed $3,500.” 1007 Law ^14. “Military and Naval Forces of the United States’* Defined. — “The term ‘military or naval forces of the United States’ includes the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, and the Navy Nurse Corps, Female, but this shall not be deemed to exclude other units otherwise included within such term;” 1 008 Law ^15. The “Present War” Defined. — “The term ‘present war* means the war in which the United States is now engaged against the German Government.” 1009 Law ^16. The “Termination of the War.” — “For the purposes of this Act the date of the termination of the present war shall be fixed by proclamation of the President.” 1010 Coupon Interest Accruing Prior to Incidence of Tax.— Where coupons bear a date prior to March 1, 1913, but have not been presented for paym.ent until 1915, although funds have been on hand to meet them since maturity, no withholding is required for the reason that such coupons represent income that was due and payable and could have been reduced to possession, on demand, prior to the incidence of the income tax. Where coupons were due and payable in 1911, and have been in default since 1011 that year, funds to meet them having been deposited with the withholding agent since January 1, 1915, it is held that the income represented by such coupons accrued to the owners of the bonds prior to the incidence of the tax, and hence does not constitute taxable and returnable income. (Extract from letter to the Central Trust and Safe Deposit Company of Cincinnati, dated March 16, 1915, embodying a decision by Commissioner W. H. Osborn, signed by A. C. Gilligan, Collector.) INC. 106 TAX INDIVIDUALS. I 0 1 2 Alimony. — Alimony or allowance based on separation agreement is not Income to the recipient thereof, nor is it an allowable deduction for the person paying the same. (Art. 4, ^13, Reg. 33, Rev., Jan. 2, 1918.) 1013 Salaries of State, City, etc.. Employees. — [There shall not be included as Income — ] (g) Compensation of all officers and employees of a State or any political subdivision thereof except when such compensation is paid by the United States Government. [The present Act does not except such compensation as did, in terms, the Acts of 1913 and of 1916-17, but it will be noted at ^[764, that “States and the political subdivision thereof” are omitted. See ^2863.] (Art. 5, ^71, Reg. 33, Rev., Jan. 2, 1918.) An individual who enters into a contract with a State, or any political subdivision 1014 thereof, for the doing of a thing or things specified by the contract, the completion of which will constitute a fulfillment of the contract on the part of such individual, is not an officer or employee of the State or political subdivision thereof within the meaning and intent of section 4 of the income-tax law and the amount received by him from the State or political subdivision thereof under the terms of the contract is to be accounted for as income. (Art. 4, ^47, Reg. 33, Rev., Jan. 2, 1918.) 1015 Salaries Received Under Funds of Smith-Lever Act of May 8, 1914, as Taxable Income. — Section 1200 of the Act of October 3, 1917, amending Section 4 of the Act of September 8, 1916, provides in part that the following income shall be exempt from tax [the present Act does not so provide, in terms, but see ^764 and ^2863]: “The compensation of all officers and employees of a State, or any political sub- division thereof, except when such compensation is paid by the United States Government.” The Smith-Lever Act of May 8, 1914, makes provision for extending the benefits 1016 of the Act of Congress approved July 2, 1862 (12 Stat. 503), and the Act approved August 30, 1890 (26 Stat. 417). Under the aforesaid Act certain colleges were established in the several States and supported by the income from lands deeded to the States for that purpose. The colleges receiving the benefits of the two earlier Acts and of the Smith-Lever Act are controlled by states. The funds available under the Smith-Lever Act are appropriated by State legislatures to the colleges to be benefited thereby. The funds appropriated by the Federal Government are paid directly into the State Treasuries as any other subventions by the Federal Government. They lose their identity as funds of the United States by being paid to the states. There may be considerable difference between the different states in control and gov- 1017 ernment of the colleges receiving the benefits of the Act. If the organization of the college is one which belongs to the state and which the state governs, the legislature may vacate offices, elect new professors and do whatever it thinks necessary in the man- agement of the college. (Head v. Univ., 19 Wall. 526). If, however, the colleges are governed by trustees who are not directly responsible to the State legislators, the em- ployees of the college receiving salaries paid in part from Smith-Lever funds are not employees of the state, and accordingly are not exempt from tax on the ground that they are employees of the State. Where the employees of Universities receiving salaries paid in part or In whole 1018 from Smith-Lever funds are officers or employees of a state, they are not required to include in their income tax returns as taxable income the salaries so received. (T. D. 2668, March 9, 1918.) 1019 Law ^112. Deductions Allowed. — “Sec. 214. (a) That in computing net income there shall be allowed as deductions:” [1[2878] [For “net losses” read at 1[19i3.] 1 020 Law 11113. Business Expenses Are Deductible. — “(1) All the ordinary and neces- sary expenses paid or incurred during the taxable year in carrying on any trade or business,” [1[2878]. [For definition of “paid or incurred” see 1[1923.] 1021 Law 1[ 11 4. A Reasonable Allowance For Salaries Is Deductible. — “including a reasonable allowance for salaries or other compensation for personal services actually rendered, and” [For general discussion of salaries and bonuses, read at 1[1979 and 1[2882.] 1 022 Law If 1 15. Certain Rentals Are Deductible. — “including rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity;” [112891] 1023 Law 1[151. Certain Items of “Expense” Not Deductible. — “Sec. 215. That in computing net income no deduction shall in any case be allowed in respect of — ” 1 024 Law 11152, Personal Expenses Are Not Deductible. — “(a) Personal, living, or family expenses;” [112965] INC. 107 TAX INDIVIDUALS. 1025 Law 11153. Amounts Paid Out For New Buildings or For Permanent Improvements Are Not Deductible. — “(b) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate;” [Read at 112967.] 1 026'Additions and^Betterments. — Amounts expended in additions and betterments or for furniture and fixtures which constitute an increase in capital investment and add to the value of the assets are not a proper deduction, but such expenditures when capitalized may be extinguished through annual depreciation deductions, which latter deductions will be computed upon the basis of the cost and probable life of the property. (Art. 132, 1[433, Reg. 33, Rev., Jan. 2, 1918.) 1027 Law 1(154. Expenditures Covered By Depreciation Allowance Are Not Deductible. — “(c) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or” 1 028 Law 1fl55.^ Premiums Paid On Business Life Insurance Are Not Deductible. — “(d) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.” 1029 Section 32 of the act of September 8, 1916, specifically provides that premiums paid by corporations for insurance covering the lives of officers, employees, or those financially interested in the trade or business of such corporations, shall not be deducted from the gross income of the corporations paying the same. This provision is held to apply to all forms of life insurance, the premiums upon which the corporations may pay, whether or not the corporations are the beneficiaries of the insurance policies upon the death of the insured, and all rules and regulations in conflict with this article are hereby revoked. (Art. 236, H664, Reg. 33, Rev., Jan. 2, 1918.) 1030 Expenses Incurred in Earning Non-Taxable Income. — Expenses Incurred in earning income which is not subject to tax under the income tax law do not constitute allowable deductions in computing net income from other sources which are taxable under the law. (T. D. 2137, Jan. 30, 1915.) 1031 Business vs. Personal Expenses. — What constitutes an item allowable as a de- duction under the head of business expenses? 1032 Expenses of Professional Men. — A physician may claim as deductions the cost of medicines and medical supplies used by hi n in the practice of his profession, expenses paid in the operation and repair of an automobile used in making professional calls, dues to medical societies and subscriptions to medical journals, the expenses of attending medical conventions, the rent paid for office rooms and the hire of office assistants, the cost of the fuel, light, water, telephone, etc., used in such office rooms. Amounts expended for books, medical supplies and surgical instruments of a permanent character are not allowable as deductions. This, in a general way, outlines the ordinary and usual expenses incurred by 1 033 * * * or a professional man, which may be claimed as deductions, and the principles underlying these allowances are equally applicable in the case of any one engaged in a business, trade or profession. In short, all expenses connected directly and solely with the conduct of an income-producing business, trade, profession or vocation, are allowable. Items of personal expense or items connected in any way with the support, main- 1034 tenance and well-being of a family are not allowed; neither are the amounts paid for tools, implements, vehicles, machinery, or surgical instruments which are more or less permanent in character, nor the cost of medical, law or other professional books nor amounts expended in making permanent improvements or betterments of any kind whatsoever, allowable as deductions. These latter items are held to be investments of capital upon which depreciation may be claimed. If a physician, or other professional or business man, rents a home and uses 1 035 a portion of same for professional or business purposes, may any portion of the rent paid for that home be claimed as a business expense? (Answer.) Yes. The proportion of the rent paid which is properly chargeable to the number of rooms so used may be claimed as a deduction. (Questions 46 and 57, 1918 Income Tax Primer.) 1 036 Rent For Residential Property. — In the case of a professional man who rents a property for residential purposes but receives there clients, patients, or callers in connection with his professional work (the place of business being elsewhere), no part of the rent is deductible as business expense. (Art. 8, 1(114, Reg. 33, Rev., Jan. 2, 1918.) INC. 108 TAX INDIVIDUALS. 1037 Employment of Minor Children By Parents. — If I employ a minor son or daughter to assist me in my business or trade and I pay a salary or wage for such assistance, may I claim the amount as a deduction? (Answer.) No. If, however, the son or daughter has attained his or her majority, the amount of compensation paid for his or her services may be so claimed. (Question 48, 1918 Income Tax Primer.) 1038 Allowances to Minor Children. — The father is legally entitled to the service of his minor children. As a rule, allowances which he gives them, whether said to be in consideration of service or otherwise, are not allowable deductions, in his return of income nor are they income to the children. (Art. 8, 11104, Reg. 33, Rev., Jan. 2, 1918.) 1 039 Paying Salary to Self. — Can a taxpayer claim a deduction for his own remuneration? (Answer.) Wages or salary drawn by a taxpayer from his own business are more in the nature of a charge out of profits than a charge against profits. If such could be deducted they would merely be added to his income, the effect of which would be to take money out of one pocket and put it in another. Therefore, no deduction can be claimed. (Question 49, 1918 Income Tax Primer.) 1 040 Expenses of Salesmen Working on Commission Basis. — Can a salesman working on a commission basis claim as deductions the amounts expended from his own funds for railroad fare, excess baggage, taxicab or street-car fare, show rooms, assistants, advertising, etc.? (Answer.) Yes. If he is not reimbursed for such expenditures by his firm, he should report under Gross Income the total amount of commissions received and he may then claim such expenses as were actually incurred and paid In the earning of those commissions. (Question 51, 1918 Income Tax Primer.) 1041 Reimbursements For Eicpenses Paid. — Amounts paid out for expense incident to service rendered, and which are reimbursable are not deductible as expense nor are they to be returned as income when received in reimbursements. (Art. 8, 11112, Reg. 33, Rev., Jan. 2, 1918.) 1 042 Amounts paid from a salary received for all services rendered are deductible in returns of income as business expenses, when the expenditures are occasioned by the service in respect of which the salary is paid. (Art. 8, UlOl, Reg. 33, Rev., Jan. 2, 1918.) 1 043 Expenditures From Allowances. — The pay and allowance of Army officers are based on the obligation of an officer to provide equipment and mounts as a personal expense. The cost of mounts and equipment is not therefore a deductible expense. (Art. 8, ^103, Reg. 33, Rev., Jan. 2, 1918.) 1 044 Expenses of Commuters. — “A,” who Is employed in'a city, has his home in a suburb. He pays carfare between his home and place of employment and takes his noon lunch in the city. Can the amounts expended for carfare and lunch be claimed as a business expense? (Answer.) No, as such amounts are held to be items of personal expense. (Question 52, 1918 Income Tax Primer.) 1 045 Life and Fire Insurance Premiums. — Premium paid for Insurance on property used for business purposes is an allowable deduction. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible. Premium paid for life insurance by the insured Is not deductible. (Art. 8, 11109, Reg. 33, Rev., Jan. 2, 1918.) 1046 Can the amount of life insurance premiums and premiums paid for insurance on my residence property be claimed as deductions? (Answer.) No, as these are held to be items of personal expense. If, however, you pay premiums on insurance policies covering farm buildings, other than your dwelling house, or on any property used for business purposes, these premiums are allowable as deductions. (Question 54, 1918 Income Tax Primer.) 1047 Premium on Fidelity Bond. — Where an employee is required to furnish bond and pay the premium on such bond, as a necessary incident of his employment, the premium on the bond will constitute an allowable deduction in computing net income. (T. D. 2090, Dec. 14, 1914.) 1048 Expenses in Connection With Rental Property. — This office Is in receipt of your letter of February 18, 1915, and in reply thereto you are advised that the amount of rental received from a piece of real property should be included in any personal annual return of net income the landlord may be required to render for the year in which received, and deduction may be claimed on account of any expense incurred in the maintenance of the INC. 109 TAX INDIVIDUALS. said property, or Its use, for rental purposes, including arnounts paid for repairs, insurance* fuel, light and water, and janitor and elevator service, if any, and in addition thereto an amount representing a reasonable allowance for the wear and tear of the property arising from its use for rental purposes may be claimed as a deduction, but no claim for depreci- ation should be made on account of any amount of expense of restoring property or making good the exhaustion thereof for which a deduction is claimed elsewhere in the return. (Letter to The Corporation Trust Company, signed by Acting Commissioner David A. Gates, and dated Feb. 26, 1915.) Other Expenses. — [In general, the above regulations, in their application, have to do with individuals only. For the regulations applicable to individuals and corporations generally see “Expenses” under “Corporations,” at ^1943.] 1 049 Law If 116. All Interest Paid or Accrued on Indebtedness With One Exception Is Deductible. — “(2) All interest paid or accrued within the taxable year on indebted- ness” [^2895.] [Foi construction of “paid or accured” see ^1923]. 1050 Law ^117. Interest Paid in Connection With Holdings in Certain Tax-Free Obligations and Securities Is Not Deductible.— “except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States Issued after September 24, 1917), the interest upon which is wholly exempt , from taxation under this title as income to the taxpayer,” 1051 Interest on Indebtedness Incurred for the Payment of Dividend Paying Stock is Deductible for Both Normal Tax and Supertax Purposes. — Would you be good enough to advise us by telegram at our expense, whether interest upon a note the proceeds of which were used for the purchase of dividend-paying stock would be allowed as a full deduction or only as a deduction in arriving at the amount of income subject to the surtax.? (Answer.) Interest upon a note the proceeds of which are used to purchase dividend- paying stock allowable as a deduction for normal and additional tax purposes. (Letter of inquiry from Harris, Forbes & Company, New York, N. Y., and telegram of reply thereto signed by Commissioner Daniel C. Roper, and dated Nov. 19, 1917.) 1052 Law 11119. Taxes Paid or Accrued Are Deductible. — “(3) Taxes paid or accrued within the taxable year imposed” [For construction of “paid or accrued” see If 1923]. f 1053 Law If 120. United States Taxes Except Income and Excess-Profits Taxes, Are Deductible. — “(a) by the authority of the United States, except income, war- profits and excess-profits taxes; or” 1 054 Law If 121. Taxes Imposed by United States Possessions Are Deductible or Allowed as a Credit. — “(b) by the authority of any of its possessions, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 222 [1fl059]; or” 1 055 Law If 122. State and Municipal Taxes Are Deductible. — “(c) by the authority of any State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory,” 1 056 Law If 123. Certain Assessments Against Local Benefits Are Not Deductible. — ^ “not including those assessed against local benefits of a kind tending to increase the value of the property assessed; or” 1057 Law If 124. Taxes Imposed By Foreign Countries Are Either Deductible By or Allowed as a Credit to Citizens and Residents. — “(d) in the case of a citizen or resident of the United States, by the authority of any foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 222 [111059];” 1 058 Inheritance Talxes. — This office is in receipt of your letter of February 4, 1916, and in reply you are advised that a collateral inheritance tax levied under the laws of the State of New York being, as it is, a charge against the corpus of the estate, does not constitute such an item as can be allowed as a deduction in computing income tax liability to either the estate or a beneficiary thereof. (Letter to Charles J. McDermott, 2 Rector Street, New York, N. Y., signed by Deputy Commissioner G. E. Fletcher, and dated Feb. 10, 1916.) Regulaltions Under “Taxes Deductible.” — [Read at 1[2036 and at 1f2897.] 1 059 Law 1[226. Credit For Taxes. — “Sec. 222.^ (a) That the tax computed under Part II [individual normal and surtax] of this title shall be credited with:” [1f3008.] INC. 110 TAX INDIVroUALS. 1060 Law ^227. Certain Income and Excess-Profits Taxes Paid to Foreign Countries and All Such Taxes Paid to Possessions of the United States By Citizens to be Credited. — “(1) In the case of a citizen of the United States, the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States; and” [113008.] 1061 Law 1[228. Income and Excess-Profits Taxes Paid To Possessions of the United States By Residents Are To Be Credited. — “(2) In the case of a resident of the United States, the amount of any such taxes paid during the taxable year to any possession of the United States; and” [ifSOOS.] 1 062 Law ^229. Certain Income and Excess-Profits Taxes Paid to Foreign Countries By Alien Residents Are To Be Credited. — “(3) In the case of an alien resident of the United States who is a citizen or subject of a foreign country, the amount of any such taxes paid during the taxable year to such country, upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country; and” [1[3008.] 1063 Law 1[230. Proportionate Parts of Certain Income and Excess-Profits Taxes Paid to Foreign Countries and of All Such Taxes Paid to Possessions of the United States To Be Credited to Members of Partnerships and to Beneficiaries of Estates or Trusts. — “(4) In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid during the taxable year to a foreign country or to any possession of the United States, as the case may be.” [1[3008.] 1 064 Law 1[231. Adjustment of any difference between amount of tax paid and amount accrued. — “(b) If accrued taxes when paid differ froTu the amounts claimed as credits by the taxpayer, or if any tax paid is refunded inj-whole or ^in part, the tax- payer shall notify the Commissioner who shall redetermine the amount of the tax due under Part II of this title for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the tax- payer in accordance with the provisions of section 252 [112488]. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such penal sum as the Commissioner may require, con- ditioned for the payment by the taxpayer of any amount of tax found due upon any such redeterm.ination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require.” [1[3012.] 1065 Law 1[232. Credits for Income and Excess-Profits Taxes Paid To Foreign Countries and to Possessions of the United States to be Allowed Only if Satisfactory Evidence be Furnished. — “(c) These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, and all other information necessary for the computation of such credits.” ]1[3011.] 1 066 Law 1[ 126. All Business Losses Not Compensated For Are Deductible. — “(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;” [1[2901.] 1067 Losses actually sustained during the year incurred in trade are limited by the language of the act itself. “In trade,” is synonymous with business. 1 068 “Business” has been defined as: “That which occupies and engages the time, attention and labor of any one for the purpose of livelihood, profit, or improvement; that which is his personal concern or interest; employment, regular occupation, but it is not necessary that it should be his sole occupation or employment.” The doing of a single act incidentally or of necessity not pertaining to the particular 1 069 business of the person doing the same will not be considered engaging in or carrying on the business. (T. D. 1989, June 2, 1914.) 1070 Loss to be deductible must be an absolute loss, not a speculative or fluctuating valuation of continuing investment [but read at “Inventories” at If 1861] but must be an actual loss, actually sustained and ascertained during the tax year for which the deduction is sought to be made; it must be * * * and be determined and ascertained upon an actual, a completed, a closed transaction. Ill TAX INC. INDIVIDUALS. The term “in trade,” as used in the law and in Treasury Decision 2005, is held to 1071 mean the trade or trades in which the person making the return is engaged; that is, in which he has invested money otherwise than for the purpose of being employed in isolated transactions, and to which he devotes at least a part of his time and attention. A person may engage in more than one trade and may deduct losses incurred in all of them, provided, that in each trade the above requirements are met. As to losses on stocks, grain, cotton, etc., if these are incurred by a person engaged in trade to which the buying or selling of stocks, etc., are incident as a part of the business, as by a member of a stock, grain, or cotton exchange, such losses may be deducted [under (4) ^1056]. A person can be engaged in more than one business, but it must be clearly shown in such cases that he is actually a dealer, or trader, or manufacturer, or whatever the occupation may be, and is actually engaged in one or more lines of recognized businesses before losses can be claimed [under (4) ^1066] with respect to either or more than one line of business, and his status as such dealer must be clearly established. (T. D. 2090, Dec. 14, 1914.) 1072 (1) A person may have more than one business in the sense of being engaged in more than one trade, and may [under (4) ^1066] deduct losses incurred in all of them, provided that in each trade it can be clearly shown that he is actually a dealer, or trader, or manufacturer, or whatever the occupation may be. Neither the investment by an individual of money in the stock of a company 1073 not the employment by the company of his services in any official capacity can serve to make the business in which the company was engaged a matter of his individual trade. (T. D. 2135, Jan. 23, 1915.) 1 074 Shrinkage in Book Values [In connection with the following read at “Inventories” at ^1861.]. — For the purpose of checking up returns and ascertaining the amount of taxable income of individuals and corporations, you are given the following instructions and rules for use in determining the amount of deductible loss allowable to individuals and corporations * ♦ ♦ . The loss considered here has in it no element of “depreciation” or “allowance for 1075 wear and tear,” or “compensation from insurance or otherwise.” It is to be such loss as is absolute and complete and which has been actually sustained. 1076 Depreciation as an allowable deduction in ascertaining annual net income for the income tax is separately provided for, and is not to be confused with loss. The dejjreciation provided to be taken as a deduction in a return of income is the value assigned to the deterioration of physical improvements or assets, such as are suscepti- ble of having their value lessened through wear and tear, use or obsolescence. The depreciation referred to in the income tax law does not relate to evidence of a 1 077 right or interest in property, and hence, any shrinkage in the value of bonds, stocks and like securities, due to fluctuations in their market value, is not deductible in a return of income as depreciation or loss. Losses may be sustained by individuals or corporations on personal or real property. 1 078 * * * Loss to be deductible must be an absolute loss, not a speculative or fluc- tuating valuation of continuing investment, but must be an actual loss, actually sustained and ascertained during the tax year for which the deduction is sought to be made; it must be incurred in trade, and be determined and ascertained upon an actual, a completed, a closed transaction. (T. D. 2005, July 8, 1914.) 1079 Book values which reflect a shrinkage in the value of assets are not a basis for determining taxable income. (T. D. 2090, Dec. 14, 1914.) 1080 (2) A loss is none the less actual because an individual can not divest himself of the possession of worthless stock by sale, but that condition alone does not give the loss in question such a character as appears to the department to have been contem- plated by the income-tax law. (T. D. 2135, Jan. 23, 1915.) 1081 Loss — Definition. — The difference between “losses * * ♦ incurred in his busi- ness or trade” [“if incurred in trade or business”] (4th deduction [^[1066]) and losses “in transactions entered into for profit but not connected with his business or trade” [if incurred in any transaction entered into for profit, though not connected with the trade or business”] (5th deduction [1[1084]), is illustrated by the difference between the definitions of avocation*^: That which takes one from his regular calling; a minor occupation; and ‘‘vocation’’ : The occupation or pursuit to which one devotes his time or life, a calling. It is possible for a man to give sufficient time, attention, and capital to the pursuit of different lines of business to constitute more than one avenue of “business or trade or employment,” his business or trade. Paragraph 4 [^1066] of Section 5 (a). Act of September 8, 1916, provides for losses 1 082 “actually sustained during the year, incurred In his business or trade, etc.”, [“If incurred in trade or business”]. These would be losses under the head of vocation. Paragraph 5 [1[1084] of section 5 (a). Act of September 8, 1916, provides for losses 1083 actually sustained during the year in transactions entered into for profit but not INC. 112 TAX INDIVIDUALS. connected with his business or trade [the trade or business]; that is, losses under the head of “avocation;” that which takes one from his regular calling; a minor occupa- tion. Losses under the head of “avocation” may be deducted * * ♦ ^ (Art. 8, 11120-122, Reg. 33, Rev., Jan. 2, 1918.) 1084 Law 1[127. Losses in Transactions Entered into for Profit Outside of Business, if not Compensated for, are Deductible. — “(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business;” [1[2901.] 1085 Law Hi 29. Property Losses Outside of Business, if not Compensated for, are Deductible. — “(6) Losses sustained during the taxable year of property not connected with the trade or business” 1086 Law Hl31. “if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise;” [H2901.] Losses arising from fires, storms, or shipwreck, and not compensated for by insur- 1087 ance or otherwise are easily ascertained and there would not appear to be any chance of an erroneous construction as to these. (T. D. 1989, June 2, 1914.) k' General Regulations on “Losses.” — [Read at H2063 and at [H2901.] vss 1088 Law H132. Worthless Debts are Deductible. — “(7) Debts ascertained to be worthless and charged off within the taxable year;” Regulations on “Worthless Debts.” — [Read under identic law provision at “Cor- porations,” H2090. Read also at H2906.] 1089 Law H133. Reasonable Allowance for Depreciation of Business Property is Deductible. — “(8) A reasonable allowance for the exhaustion , wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence;” IH2910.] 1 090 Depreciation of Farm Buildings. — Depreciation of farm buildings, other than a dwelling occupied by the owner, actually sustained wdthin the year, in excess of repairs made, will be considered an allowable deduction. (T. D. 2090, Dec. 14, 1914.) 1091 Depreciation of Costumes. — Costumes purchased and used exclusively in the production of a play and which are not adapted for occasional personal use and are not so used are part of the equipment of a business, and as such subject to depreciation in value on account of wear and tear arising from their use in the business, a reasonable allowance for such depreciation may be claimed in returns of income. (Art. 8, Hl24, Reg. 33, Rev., Jan. 2, 1918.) 1 092 Depreciation of Good Will. — Good will does not represent a value attaching to physi- cal property. It is held to be an intangible asset whose value, separate and apart from the business with which it is connected, is not capable of determination. For the purpose of income tax it is capable of neither appreciation nor depreciation. An amount claimed to represent its decline in value is not an allowable deduction from gross income in computing the tax liability of an individual or corporation. (Art. 8, Hl23, Reg. 33, Rev., Jan. 2, 1918.) General Regulations on “Depreciation.” — [Read under identic law provision at “Corporations,” H2105. Read also at H2910.] 1 093 Law H134. A Reasonable Amount for the Amortization of Certain Assets (Special — Due to the War) is Deductible. — “(9) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the trans- portation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable dcduciii^n for the amortization of such part of the cost of such facili- ties or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or prev^ious Acts of Congress as a deduction in computing net income.” [l!2922.j 1 094 Law Hi 35. A Redetermination of the Amortization Deduction May be Effected. — “At any time within three years after the termination of the present war, the Com- missioner may, and at the request of the taxpayer shall, reexamine the return, and if he then 113 TAX INC. INDIVroUALS. finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the taxes Imposed by this title and by Title III [war excess-profits tax] for the year or years affected shall be redetermined; and” [^2922] 1095 Law 136. Adjustment of Under- or Over-Payment of Taxes Due to Redetermina- tion of Amoritzation Deduction. — “the amount of tax due upon such redeter- mination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252 [^[2488.]” [^2922] 1 096 Law 1|137. A Reasonable Allowance for Depletion of Mines, Oil and Gas Wells, Other Natural Deposits, and Timber, and for Depreciation of Improvements is Deductible. — “(10) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of develop- ment not otherwise deducted:” [^2929] 1097 Law ^138. Basis in the Case of Properties Acquired Prior to March 1 , 1913 . — “Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) on that date shall be taken in lieu of cost up to that date:” 1098 Law 11139. Basis in the Case of Mines or Wells Discovered by the Taxpayer on or After March 1 , 1913 . — “Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter;” 1099 Law 11140. Depletion and Depreciation Allowance to be Made in Accordance with Regulations. — “such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary.” 1 1 00 Law 11141. Depletion and Depreciation of Improvements Allowance to be Appor- tioned Between the Lessor and the Lessee. — “In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee;’’ 1101 Depletion or return of capital investment in the case of an individual owner or lessee will be calculated in the same manner as provided for corporate owners or lessees. (Art. 8, 1[86, Reg. 33, Rev., Jan. 2, 1918.) Regulations on “Depletion of Mines, Wells and Timber Lands.” — [Read under identic law provisions at “Corporations” at 1(2167. Read at 1(2929.] 1102 Law K142. Certain Contributions or Gifts Made by Individuals are Deductible to a Limited Amount. — “(11) Contributions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to the special fund for vocational rehabilitation authorized by section 7 of the Voca- tional Rehabilitation Act, to an amount not in excess of 15 per centum of the taxpayer’s net income as computed without the benefit of this paragraph. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations pre- scribed by the Commissioner, with the approval of the Secretary.” [K2962] 1 1 03 Contributions or gifts, not in excess of 15 per cent of taxable net Income, made within the year to corporations or associations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or to societies for the preven- tion of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual. 1 104 “Taxable net income” [the taxpayer’s net income] as used in section 5a [214(a)], ninth [eleventh] deduction, is construed to mean gross income, less deductions (except ninth [eleventh] deduction above) and less excess-profits tax, if any. In connection with claim for this deduction on returns of income there shall be 1 1 05 stated: (a) The name and address of each organization to which a gift was made. (b) The date and amount of the gift in each case. INC. 114 TAX INDIVroUALS. Where the gift is other than money, the basis for calculation of the value of the 1106 gift shall be the fair market value of the property the subject of gift at the time of the gift. (Art. 8, ^87-92, Reg. 33, Rev., Jan. 2, 1918.) 1 107 Receipt is acknowledged of your letter dated December 5, 1917, referring to con- tributions or gifts made by citizen and resident individuals of the United States to corporations or associations organized and operated exclusively for religious, charitable orscientific purposes which may be considered as a deduction for tax purposes, in accordance with the provisions of the ninth paragraph added to Section 5 (a), Act of September 8, 1916, by Section 1201, Act of October 3, 1917. 1 1 08 You present several inquiries which are repeated and answered in the order stated by you. 1 109 “Are gifts to foreign organizations of a character specified in the Law to be also deducted?” Such contributions or gifts may be considered in computing the amount allowable as a deduction under the provisions of paragraph nine. 1110 “Is the Red Cross to be included as a charitable organization?” It is held that the American National Red Cross falls within the class of associations enumerated in paragraph nine. 1111 “Is a church to be considered a religious institution? Of course, we known that ‘the Church’ is a religious institution, but is any particular church so considered?” It is held that every church constitutes a religious corporation or association for the purposes of the deduction provided by the ninth paragraph. “In this connection, are donations made to missionary funds, to the church build- 1112 ing funds and for the benefit of other activities of the church to be deductible?” It is held that all such donations, being for the benefit or furtherance of religious activities, constitute items which may be considered in computing the deductions provided by the ninth paragraph. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated December 24, 1917.) 1113 With reference to the ninth paragraph of Section 5 of the Act of September 8, 1916, as am.ended, how am I to determine to what extent contributions or rifts made to corporations or associations, organized exclusively for religious, charitable, scientific or educational purposes, societies for the Prevention of Cruelty to Children or Animals, miay be claimed as a deduction? You should first ascertain what your taxable net income would be were you not 1114 entitled to a deduction on account of contributions or gifts made to such corpora- tions, associations or societies, and then if the aggregate of your contributions and gifts made during the year to such organizations does not exceed 15 per cent of your taxable net income so computed, their aggregate amount may be entered in the space provided therefor under General Deductions on a personal return form. Is such aggregate am.ount exceeds 15 per cent of your taxable net income so computed, the excess cannot be claim.cd. For example: Your total taxable net Income amounts to $20,000. Durinjr the 1116 year you have contributed to the National Red Cross $1,000, to the li’ouiig IMen’s Christian Association $1,000, toward the construction of a new church $1,000, and to the Associated Charities of your home city $500, a total of $3,500. Fifteen per cent of your total net income amounts to $3,000, therefore, this latter amount may be claimed as a deduction, and the balance of your contributions and gifts may not be claimed. 1 1 1 6 During 1917 I contributed $100 toward the support of a needy family. May this contribution be claimed as a deduction? (Answer.) Contributions of gifts made to individuals do not constitute allowable deductions. (Questions 86 and 87, 1918 Income Tax Primer.) 1117 Dividends of Prior Years Received in Taxable Year may be Added to Amount in Line M on Form 1040 to Determine Amount on Which to Compute Allowable Contributions of 15%. — Client has $25,000 income line M, Form 1040 [total net Income (without deducting contributions)]; also received $10,000 block F column 5 [dividends taxable at rates of prior years]. Can he deduct $5,250 as contributions to charitable organizations? (Answer.) Under circumstances stated clients may deduct contributions allowable as such not to exceed $5,250. (Telegram of inquiry from A. Iselin & Co., New York, N. Y., and the telegraphic reply thereto signed by Commissioner Daniel C. Roper, and dated February 27, 1918.) 1 1 1 8 Red Cross Donations by Corporations. — Are such contributions deductible by corporation on its tax returns? (Answer.) Red Cross contributions not deduc- tible by corporations. (Part of telegram of inquiry from Loomis, Suffern and Fernald, New York, N. Y., and the answer thereto signed by Commissioner Daniel C. Roper, and dated May 23, 1918.) INC. 115 TAX INDIVroUALS. 1119 Law If 144. Adjustment for Substantial Losses Sustained in the Taxable Year 1919 Because of Material Reduction of Inventory Values for 1918, or Because of Certain Rebate Payments. — “(12) (a) At the time of filing return for the taxable year 1918 a taxpayer may file a claim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year, 1 120 Law 11145. “or from the actual payment after the close of such taxable year of rebates in pursuance of contracts entered into during such year upon sales made during such year. 1121 Law If 146. “In such case payment of the amount of the tax covered by such claim shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallowed then the remainder of the tax due shall on notice and demand by the collector be paid by the taxpayer with interest at the rate of 1 per centum per month from the time the tax would have been due had no such claim been filed. 1 1 22 Law ^147. “If it is shown to the satisfaction of the Commissioner that such sub- stantial loss has been sustained, then in computing the tax imposed by this title the amount of such loss shall be deducted from the net income. 1 1 23 Law ^148. “(b) If no such claim is filed, but it is shown to the satisfaction of the Commissioner that during the taxable year 1919 the taxpayer has sustained a substantial loss of the character above described then the amount of such loss shall be deducted from the net income for the taxable year 1918 and the tax imposed by this title for such year shall be redeterm.ined accordingly. Any amount found to be due to the tax- payer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252 [^2488].” [In relation to the above read at ^2963.] 1124 Law ^156. Credits Allowed. — For Normal Tax Only. — “Sec. 216. That for the purpose of the normal tax only there shall be allowed the following credits:” 1125 Law 11157. Dividends as Credit for Normal Tax Only. — “(a) The amount received as dividends from a corporation which is taxable under this title upon its net income, and amounts received as dividends from a personal service corporation out of earnings or profits upon which income tax has been imposed by Act of Congress;” 1 1 26 (a) For the purpose of the normal tax only, the income embraced in a personal return shall be credited with the amount received as dividends upon the stock or from the net earnings of any corporation, joint-stock company or association, trustee, or insurance company, which is taxable upon its net income. (Art. 9, 1[126, Reg. 33, Rev., Jan. 2, 1918.) 1127 Law 1[158. All Interest on Government and War Finance Corporation Bonds which has been Included as Gross Income is Credited for Normal Tax Purposes. — “(b) The amount received as interest upon obligations of the United States and bonds issued bv the War Finance Corporation, which Is included in gross income under section 213 [11975];” 1128 Law If 159. A Specific Exemption of Income is Allowed for Normal Tax Purposes. — Single Persons. — “(c) In the case of a sinde person, a personal exemption of ^1,000, or” [112970] 1129 Law 1[160. Married Persons Living Together and Heads of Families.— “In the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,000.” [1f2969] 1 130 Head of a Family. — A head of a family is a person who actually supports and maintains one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. (Art. 14, ^153, Reg. 33, Rev., Jan. 2, 1918.) 1 131 A head of a family Is a person who actually supports and maintains one or more of the individuals described in Paragraph 153 of the regulations in one household. In the absence of continuous actual residence together, whether or not a person with depend- ents Is a head of a family within the meaning of the statute must depend on the character of the separation. If a child, or other dependent is away only temporarily at school or on a visit, the common home being still maintained, the additional exemption applies. If, however, the dependent continuously makes his home elsewhere his benefactor is not the head of a family, irrespective of the question of support. (T. D. 2692, April 8, 1918.) 116 TAX INC. INDIVIDUALS. 1 1 32 “Living with Husband or Wife.” — In the case of a married man or married woman the joint exemption replaces the individual exemptions only if his wife lives with him or her husband lives with her. In the absence of continuous actual residence together, whether or not a man or woman has a wife or husband living with him or her within the meaning of the statute must depend on the character of the separation. If merely occasionally and temporarily a wife is away on a visit or a husband Js away on business, the joint home being maintained, the additional exemption applies. The unavoidable absence of a wufe or a husband at a sanitarium or asylum on account of illness does not preclude claiming the exemption. If, however, the husband voluntarily and continuously m.akes his home at one place and the wife hers at another, they are not living together for the purpose of the statute, irrespective of their personal relations. Resident aliens claiming exemption because of families or wuves residing abroad 1 133 are not heads of families or married men or women wuth wives or husbands living with them within the meaning of the statute, and they are in no case entitled to m.ore than their individual exemptions of $3,000 under the earlier Act and $1,000 under the later act [$1,000 only, now]. (T. D. 2692, April 8, 1918.) 1 134 Law TI161. One $2,000 Specific Exemption Only. — “A husband and wife living together shall receive but one personal exemption of $2,000 against their aggre- gate net_income;” 1 135 Husband and wife living together are entitled to an exemption of $4,000 [$2,000] only from the aggregate net income of both which may be deducted in making the return of such income for taxation. (Art. 10, Reg. 33, Jan. 5, 1914.) 1 136 Law ^162. $2,000 Specific Exemption May Be Prorated Between Husband and Wife. — “and in case they make separate returns, the personal exemption of $2,000 may be taken by either or divided between them;” 1137 The exemption allowed husband and wufe living together may be taken by one or divided betw'een them, in such ratio as they may determine. (Art. 26, 1[170, Reg. 33, Rev., Jan. 2, 1918.) 1 138 Law ^163. Additional $200 Specific Exemption for Each Dependent. — “(d) $200 for each person (other than husband or wufe) dependent upon and receiving his chief support from the taxpayer, if such dependent person is under eighteen years of age or is incapable of self-support because m.entally or physically defective.” [^2971] 1139 Relation of Specific Exemption to the Surtax. — Personal exemptions from tax are granted in respect of the normal income tax only. Where the total of allow- able exemptions and credits exceeds the amount of net income, the excess of such exemp- tions may not be availed of as against the additional tax. (Art. 14, 11154, Reg. 33, Rev., Jan. 2, 1918.) 1 140 Husband or Wife Dying During Taxable Year. — Where a husband or wife having a taxable income dies w’ithin a calendar year, and the full exemption for the calen- dar year is used by the personal representative in making return for the deceased, if the survivor is also required to make a return at the close of the calendar year for Income received within that calendar year the full personal exemption, according to the marital status of the survivor at the close of the calendar year, may be claimed In a return of income. [Modified by the instructions on Form 1040A — for calendar year 1918. (Page 1 of Instructions — VI.)] (Art. 14, 1[156, Reg. 33, Rev., Jan. 2, 1918.) 1141 Marital Status at Time of Making Claim and at End of Taxable Year Governs. — d'he single or married status of the person claiming the specific exemption shall be determined as of the time of claiming such exemption in such claim he made within the year for w'hich return is made, otherwise the status at the close of the year. [Modified by the instructions on Form 1040A — for calendar year 1918. (Page 1 of Instructions — VI.)] (Art. 10, Reg. 33, Jan. 5, 1914.) . 1 142 Law 1[233. Returns by Individuals. — “Sec. 223. That every individual having a net income for the taxable year of $1,000 or over if single or if married and not living wdth husband or wife,” 1 143 Law' 1[234. “or of $2,000 or over If married and living with husband )r wife,” 1 144 Law 1[235. “sh''.ll make under oath [*[1451] a return stating specifically the items of his gross income and the deductions and credits allowed by this title.” [For “Returns by Individuals” in Reg. No. 45, see 1[3013.] INC. TAX INDIVIDUALS. 1145 Returns are required of all unmarried persons ♦ * ♦ having a net income of $1,000 or over. And all married persons having a net income of $2,000 or over. Heads of families who are married will be required to make returns of income when having a net income of $2,000 or over. Heads of families who are unmarried will be required to make returns of income when having a net income of $1,000 or over, though the basic exemption which may be claimed in a return of income will be $2,000. (Art. 25, If 169, Reg. 33, Rev., Jan. 2, 1918.) 1 146 Forms for Making Returns. — Forms of returns are provided by the Commissioner of Internal Revenue, and are to be had from the collectors of internal revenue of the several collection districts. (Art. 23, 1fl66, Reg. 33, Rev., Jan. 2, 1918.) [See list of forms at back of book.] 1147 Manner of Reporting Tax-Free Covenant Bond Interest in Block G and Rent Payments in Block D on Form 1040. — Reference is made to your letter dated February 15, 1918, in regard to the execution of income tax return Form 1040. You inquire if a taxpayer in filling in Block G, interest on “tax-free” covenant bonds, is required to itemize the payments or only show the total amount of interest received dur- ing the calendar year. Ifin reply, you are advised that it is not necessary to enter in Block G the separate payments of interest on “tax-free” covenant bonds, but the total amount of interest received during the calendar year from each debtor corporation should be shown. You also inquire if the name and address of each tenant must be listed separately 1 148 under Block D, income from rents and royalties, and you state that in the case where a large office building is owned by a taxpayer it would be difficult for him to furnish the names and addresses of all the tenants and It would also be difficult to apportion repairs and property losses. ^In reply to this inquiry, you are advised that in cases where a large office building is owned by an individual, the amount received from each tenant should be reported separately under Block D in cases where the amount of rent received from the tenant equals $800 [$1,000] or more, but only the total amount of income received from the tenants paying rental less than $800 [$1,000] Is required to be shown. It will not be necessary to apportion the repairs and property losses with respect to each tenant in the building, but the total thereof must be shown. (Letter to The Corpo- ration Trust Company, signed by Commissioner Daniel C. Roper, and dated March 22, 1918.) 1 1 49 Manner of Reporting Profits and Losses in Block C on Form 1040. — Reference is made to your letter of February 7, 1918, in which you state that the Collector’s office. Third Massachusetts District, is requiring individuals who fill out income tax returns, P'orms 1040, to submit a list of all securities, together with the information called for in C, on page 3, and you ask if it is necessary to submit a list detailing each sale. ^In reply you are advised that if the profits or losses on sales made through any one broker aggregated [$1,000] or more, you should report the transactions on a separate line with the name and address of the broker. The total of other transactions should be reported, but It is not necessary to give details. If, however, this office should ask for further information the taxpayer should be able to furnish all the details requested. (Letter to Lee, HIgginson & Compan)^ Boston, Mass., signed by Deputy Commssioner L. F. Speer, and dated March 25, 1918.) 1 150 Law ^236. Joint or Separate Returns of Husband and Wife. — “If a husband and wife living together have an aggregate net income of $2,000 or over, each shall make such a return unless the income of each Is included in a single joint return.” 1151 H the husband and wife not living apart have separate estates, the income from both may be made on one return, but the amount of Income of each, and the full name and address of both, must be shown in such return. The husband, as the head and legal representative of the household and general 1 1 62 custodian of its income, should make and render the return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. If a wife has a separate estate managed by herself as her own separate property 1 1 53 ♦ * ♦ , she may make return of her own income and if the husband has other * * * income, making the aggregate of both incomes more than $4,000 [$2,000] the wife’s return should be attached to the return of her husband, or his income should be included in'her return in order that a deduction of $4,000 [$2,000] may be made from the aggregate of both Incomes. The tax in such case, however, will be imposed only upon so much of the aggregate income of both as shall exceed $1,000 [$2,000]. INC. 118 TAX INDIVIDUALS. If either husband or wife, separately has an income equal to or in excess of $3,000, 1 1 54 [$2,000] a return of annual net income is required under the law, and such return must include the income of both, ¥ * * ^ 1 155 If the aggregate net income of both exceeds $4,000 [$2,000] an annual return of their combined incomes must be made in the manner stated, * * * ^ They are jointly, and separately liable for such return and for the payment of the tax. Art. 10, Reg. 33, Jan. 5, 1914.) 1 156 Wife’s Income. — Unless the wife has a separate estate which requires her to file a separate return of income, or to join with her husband in a return which shall set forth her income separately, her husband should include in his return the income accruing to the wife from services rendered by her, or the sale of product of her labor. The actual proceeds coming into the wife’s possession during the tax year constitute the income to be included, and not the amount estimated upon acceptance prior to payment for articles sold. (Art. 26, 1[183, Reg. 33, Rev., Jan. 2, 1918.) 1 1 57 Husband and Wife Filing Separate. — Where husband and wife file separate returns of income, one of them being filed in time and the other delinquent, such returns are not supplemental of each other and delinquency must be answered for by the one in connection with whose return it occurred. (Art. 25, ^182, Reg. 33, Rev., Jan. 2, 1918.) General Law Provisions and Applicable Regulations Relative to Returns. — [Read beginning at ^1434.] 1158 Law 1[237. Duly Authorized Agent May Make Return. — “If the taxpayer is unable to make his own return, the return shall be made by a duly authorized agent or by the guardian or other person charged with the care of the person or property of such taxpayer.” [^3013.] 1 1 59 The return may be made an agent when by reason of illness, absence, or nonresidence the person liable for said return is unable to make and render the same, the agent assuming the responsibility of making the return and incurring penalties provided for erroneous, false, or fraudulent return. (Art. 22, 1[165, Reg. 33, Rev., Jan. 2, 1918.) 1 1 60 Fiduciaries acting for minors or other incompetents will be required to make returns of income according to the marital status of the beneficiaries, * * * ^ This return will be on Form 1040 or 1040 A. (Art. 27, If 185, Reg. 33, Rev., Jan. 2, 1918.) A fiduciary acting for a minor or insane person having a net income of $1,000 or 1161 $2,000, according to the marital status of such person, will be required to file a return for such incompetent on Form 1040 and 1040A and pay the tax found by such return to be due, in addition to the requirement in the preceding paragraph [^1201] when there is more than one beneficiary of the income of the same trust. (Art. 29, ^[205, Reg. 33, Rev., Jan. 2, 1918.) 1 1 62 When by reason of * * * * insanity, absence, sickness, or other disability the individual is unable to make his own .return, the same shall be made by his guardian or duly authorized agent. (Art. 17, Reg. 33, Jan. 5, 1914.) 1 163 A committee of the property of an incompetent person is held to be a fiduciary for the purpose of income tax and required to make a return on Form 1040, revised, for the incompetent whenever the amount of income is sufficient to require a return. (Art. 29, 1f203, Reg. 33, Rev., Jan. 2, 1918.) 1 1 64 Fiduciaries acting for minors or incompetent persons are permitted to take the personal exemption as to income derived from property of which they have charge in favor of each ward or beneficiary. (Art. 14, If 151, Reg. 33, Rev., Jan. 2, 1918.) 1 1 65 In all cases where fiduciaries act for minors or other incompetents they are held, for the purpose of the income tax, to be acting as the agents of such minors or other incompetents and must pay all tax (normal and additional) chargeable on such income in their hands as though the persons for whom they act were acting for themselves. (T. D. 2231, July 26, 1915.) 1 1 66 When the required return has not been made by a person acting as guardian, agent of a nonresident alien, or by one acting in any other capacity in which the INC. 119 TAX FIDUCIARIES. law makes it a duty for him to represent the individual, notice of failure to make such return will be served upon such guardian or agent. The person upon whom such notice is served may, however, when the facts war- 1167 rant, file evidence with the collector showing that the individual for whom he acts did not receive an income subject to tax during the year, or that the said guardian or agent has filed the return with some other collector. (Art. 18, Reg, 33, Jan. 5, 1914.) 1168 Law %239. Fiduciary Returns For, or as For, an Individual. — “Sec. 225. “That every fiduciary (except receivers appointed by authority of law in possession of part only of the property of an individual [see ^1433]) [shall make a return, ^1175] — ” [Read at 113019.] 1169Law1[21. The Term “Fiduciary” Defined. — “The term ‘fiduciary’ means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate;” [1[3081.] 1170 “Fiduciary” is a term which applies to all persons or corporations that occupy positions of peculiar confidence toward others, such as trustees, executors, or administrators; and the fiduciary for income-tax purposes is any person or cor- poration that holds in trust an estate of another person or persons. There may be a fiduciary relationship between an agent and a principal, but the 1171 word “agent” does not denote a “fiduciary” within the meaning of the income- tax law. (Art. 29, 11189-190, Reg. 33, Rev., Jan. 2, 1918.) [113082.] 1172 Power of Attorney. — A fiduciary relationship for the purposes of the income tax can not be created by a power of attorney. An agent having entire charge of property with authority to effect and execute leases with tenants entirely on his own responsibility and without consulting his principal, paying taxes and expenses and all other charges in connection with the property out of funds in his hands from collection of rents, merely turning over the net profits from the property periodically to his prin- cipal by virtue of authority conferred upon him by a power of attorney, is not a fiduciary within the meaning of the income-tax law. In all cases where no legal trust has been created in the estate controlled by the agent and attorney the liability under the law rests with the principal. (Art. 29, 1[191, Reg. 33, Rev., Jan. 2, 1918.) 11 73 Agents. — Agents not acting in a fiduciary capacity have no responsibility with reference to withholding the tax on, or m.aking a return of income turned over to resident aliens or citizens of the United States; * * ♦ , [Por return by agent as attorney-in-fact see If 1158.] (T. D. 2090, Dec. 14, 1914.) 1 1 74 A person can not, by a power of attorney, delegate to another a duty which he himself could not perform, * * * a person holding a power of attorney from another is without authority to file [a] certificate as a fiduciary. ^ However, for income- tax purposes he is authorized to file any certificate which his principal, as such, would be entitled to file. (T. D. 2090, Dec. 14, 1914.) 1 1 75 Law 1[240. Every Fiduciary to Make Return. — “[Every fiduciary] shall make under oath [If 1451] a return for the individual, estate or trust for which he acts.” 1 1 76 Law 1f245. Fiduciary to Make Return Under Oath as to Correctness. — “The fiduciary shall make oath that he has sufficient knowledge of the affairs of such individual, estate or trust to enable him to make the return, and the same is, to the best of his knowledge and belief, true and correct.” 1177 And the said return shall be signed and sworn to by the fiduciary, if an individual, making same, and his full address must be stated. ^ If the fiduciary is an organiza- tion, the return shall be signed and sworn to by the president, secretary, or treasurer of said organization. (Art. 73, Reg. 33, Jan. 5, 1914.) 1 178 Notice of failure to file a return as required shall be served upon the fiduciary. (T. D. 2231, July 26, 1915.) 1179 Law If 185. Responsibility for Making Return Rests with Fiduciary. — “(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts.” [1f2991] General Law Provisions and Applicable Regulations Relative to Returns. — [Read beginning at 1[1434.] 1180 Income Accruing Prior to Death to Decedent Dying During His Taxable Year. — If the net income of a decedent from January 1 to jhe date of his death within that year as $1,000 or over, if unmarried, or $2,000 or over if married, a return for such INC. 120 TAX FIDUCIARIES. decedent must be made by the executor or administrator, and such executor or adminis- trator may claim all deductions and exemptions to which the decedent would have been entitled under the law. (Art. 4, *[[23, Reg. 33, Rev., Jan. 2, 1918.) 1181 Where a person having a taxable income dies within the calendar year his per- sonal representative in making return for him will be entitled to claim full ex- emption granted by the statutes for the calendar year. (Art. 14, ^152, Reg. 33, Rev., Jan. 2, 1918.) 1 1 82 Liability for the tax due from a deceased person, or from his estate, also attaches to the estate itself, and when by reason of distribution of the estate and discharge of the executor or administrator it shall appear that collection of the tax can not be made from the executor or administrator, the collector will^make demand on the distributees for their proportionate share of the tax due and unpaid. (Art. 29, 1[198, Reg. 33, Rev., Jan. 2, 1918.) 1183 Appraised Value of Property at Time of Death of Owner, if Subsequent to March 1, 1913, the Basis for Determining Gain or Loss on Subsequent Disposition. — Your Mimeograph Letter to Collectors, dated August 14, 1914, states no apprecia- tion in value of assets due to appraisal or adjustment is taxable income until such apprecia- tion has been converted into cash. T. D. 2090 [1[931] states if property acquired by gift is sold at price greater than appraised value at time property acquired by gift, such gain is taxable income. We assume from these rulings and request your confirmation by wire, collect, that when individual dies after March 1, 1913, leaving property, all gains or losses on subsequent sales thereof should be computed from value at date of death, not date of his acquisition, and that executor should make no return of book gains or losses up to date of death. Also that on transfer of property in question by his executor to legatee or to trustee under will or from one trustee to succeeding trustee no tax is due though there be book gain at date of such transfer. (Telegram to the Commissioner of Internal Revenue from Ropes, Gray, Boyden and Perkins of Boston, dated January 31, 1917.) {Answer.) When individual dies after March 1, 1913, leaving property, all gains or losses on subsequent sales should be computed on basis of appraised value at date of death and executors should not make return of book gains or losses either up to date of death or on transfer of property to legatee or to trustee under will or from one trustee to succeeding trustee, the appraised value at date of death remaining as basis for all subsequent realization of losses or gains in cash. (Telegram to Ropes, Gray, Boyden and Perkins, Boston, Mass., signed by Commissioner W. H. Osborn, and dated February 3, 1917.) [Read 1[935.] 1184 Taxability of Income Accrued to Decedent Dying after March 1, 1913, but Befo , October 3, 1913.— The appended decision [Feb. 8, 1917] of the Circuit Court Appeals, Second Circuit, in the case of Nicholas F. Brady, et al. v. Charles W. Anderso^> collector of internal revenue, is published for the information of internal-revenue officers and others concerned. The United States Supreme Court on May 21, 1917, refused to grant a writ of certiorari in this case. (T. D. 2494, June 2, 1917.) United States Circuit Court of Appeals, for the Second Circuit. (240 Fed. 665) WARD, Circuit Judge: This is an action against the Collector of Internal Revenue by the executors of 1 1 85 Anthony N. Brady, deceased, to recover taxes assessed by the Commissioner of Internal Revenue and paid by them under protest upon Income received by Brady during his lifetime before the income tax act of October 3, 1913, imposing a tax, had been passed. The Sixteenth Amendment, by virtue of which the statute was enacted, was ratified 1 186 February 28, 1913, and the Supreme Court has for that reason held that Congress had power to make it retroactive to March 1, 1913. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1 , 20 [112685]. Anthony N. Brady died July 22, 1913, and his executors, in accordance with the 1187 requirement of the Commissioner of Internal Revenue, made a return of the income received by him between March 1, when the act went into effect, and July 22, 1913, when he died. The Commissioner assessed a tax of $61,654.72. The case having come on for trial before Grubb, J., and each side having moved 1 1 88 for the direction of a verdict, he directed a verdict for the defendant. This Is a writ of errof to the judgment entered thereon. The questions presented are purely of law, involving only the construction of 1 1 89 the statute. We confine ourselves to the consideration of the provisions relating to citizens and residents of the United States. INC. 121 TAX FIDUCIARIES. 1 1 90 Section II of the act reads as follows: *‘A. Subdivision 1. That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing for 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. :013: that although you have been informed that the name and address of the enemy or ally- of enemy, on whose account any particular item of interest may be paid over to the Aliefi. Property Custodian need not be given in the ownership certificate filed, some corporations h ave refused payment of interest when such certificates failed to show the name and address- of the enemy or ally of enemy. ^In reply you are advised that where ownership certificate- form, either 1000 or 1001, is executed to cover funds paid over to the Alien Property Cus- todian, the certificate will be sufficiently complete for present indentification purposes of this office if the name of the taxpayer and the trust number are given under the heading “Owner of Bonds” with the name and address of the enemy or ally of enemy concerned excluded. (Letter to the Equitable Trust Company, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated July 13, 1918.) ' 1626 Lav/ *|[256. Where Returns are to be Filed by Individuals. — “(b) Returns shall be made to the collector for the district in which is located the legal residence, or principal place of business of the person making the return, or,” [^3029.] 1627 Law ^257. “if he has no legal residence or principal place of business in the Uniteef States, then to the collector at Baltimore, Maryland.” 1628 R cturns of income of individuals are to be filed with the collector of internal revenue for the district in which such person has his legal residence or principal place of business, or if there be no legal residence or place of business in the United’ States, then with the collector of internal revenue at Baltimore, Md. The returns shall be in such form as shall be prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury. (Art. 26, 1[172, Reg. 33, Rev., Jan. 2, 1918.) f 1 629 Where Returns may be Filed by Persons in the Military or Naval Forces. — Per- sons in the military or naval service of the United States may file their returns of income with the collector of internal revenue of the district in which they have a legal residence, or with the collector of internal revenue at Baltimore, Md. (Art. 26, 11174, Reg. 33, Rev., Jan. 2, 1918.) 1630 Law 1(359. Where Returns are to be Filed by Corporations. — “(b) Returns shall be made to the collector of the district in which is located the principal place of ^ business or principal office or agency of the corporation, or,” 1631 Law K360. “if it has no principal place of business or principal office or agency in the United States, then to the collector at Baltimore, Maryland.” 1 632 The principal place of business of a corporation is the place or office in which are kept the books of account and other data from which the return is to be prepared. (T. D. 2090, Dec. 14, 1914.) ^ 1 633 Returns of Domestic Corporations Whose Books are Kept Abroad. — In the case of domestic corporations whose books of account and other data arc kept In foreign countries, the returns should be made to the collector of internal revenue of the district INC. 155 TAX RETURNS IN GENERAL. in which they have branch offices In this country, if they have such branch offices. Other- wise, the returns of annual net income of such corporations should be made to the collector 'of the district in which are located the statutory offices of the corporations. (T. D. 2137, Jan. 30, 1915.) 1534 Corporations Doing Business in the Philippines and Porto Rico. — [For the taxing 1 - . corporations under the present law read at ^[511]. Corporations whose business is done wholly in Porto Rico and the Philippine Islands, even though incorporated 3n the United States, are held to be resident corporations of these possessions, and will make returns and pay the income tax to the collectors of internal revenue having juris- diction there. (T. D. 2090, Dec. 14, 1914.) 1535 Such corporations organized under laws of the United States or any State thereof, United States but doing business in these possessions are taxable in the United States. If they are organized under the laws of the United States or local laws^ of these possessions and resident in said possessions, they are required to pay their tax in the Philippines or in Porto Rico, as the case may be. The law provides that cor- porations shall make their returns “to the collector of internal revenue for the district in which they have their principal place of business.” Held: “Principal place of business” of a corporation is the place of office in which are kept the books of account and other data from which the return is to be prepared. (T. D. 2090, Dec. 14, 1914.) 1 536 A domestic corporation doing the greater part of its business In the United States • t> having its principal place of business in this country and transacting business -in Porto RIso through a branch office, is required to report in its return of annual net -income its entire earnings from all sources including those arising and accruing to the branch in Porto Rico or elsewhere. The return of such corporation will be made to the collector of internal revenue '1537 of the district of this country in which is located its principal place of business. (T. D. 2137, Jan. 30, 1915.) 1538 Law ^258. Understatement in Returns and Increases by the Collector. — “Sec. 228. That if the collector or deputy collector has reason to believe that' the amount of any income returned is understated, he shall give due notice to the taxpayer making the return to show cause why the amount of the return should not be increased, and upon proof of the amount understated, may increase the same accordingly.” [^1030.] 1539 Law 1[259. Taxpayer May Appeal Collector’s Decision, to the Commissioner. — “Such taxpayer may furnish sworn testimony to prove any relevant facts and if dissatisfied with the decision of the collector may appeal to the Commissioner for his decision, under such rules of procedure as may be prescribed by the Commissioner with the approval of the Secretary.” 1 540 Correction by the Taxpayer of Erroneous Return. — All returns should be carefully scrutinized, and, if improperly prepared, they should be returned to the taxpaper for correction, with instructions that if a new return be executed, the old one, showing the date of the receipt thereon, should be fowarded to the Collector to avoid the possibility of subjecting the taxpayer to additional tax or penalties for failure to file the return wdthin the period required by law. A record of each return sent back to the taxpayer for correction should be made 1541 in the office of the Collector, so that if the taxpaper fails to properly amend and forward same, the Collector may take steps to secure the return. (Kxtract from Mimeograph Letter No. 1160 to Collectors, signed by Acting Commissioner David A. Gates and dated February 9, 1915.) 1 542 Correction of Erroneous Returns at the Instance of the Collector. — Referring to the returns of annual net income to be filed by corporations for the year [1914], you are requested to examine each return closely with a view to having such returns as nearly correct as possible before forwarding to this office. (Mimeograph letter No. 1148 to Collectors, Jan. 16, 1915.) 1 543 Referring to your statement that the representative of this office insists upon the officers of corporations signing amended returns without giving any reasonable time for investigation on the part of the officers, you are informed that examining officers have been instructed by this office to secure from corporations amended returns where- cver, as a result of their examinations, it is sho'wn thatthe original returns were not correct. It is not the desire of this office, however, that examining officers shall not give 1 544 the officers of corporations the fullest opportunity to m.ake any investigation they may desire prior to signing- these amended returns, provided, of course, such investigation does not cover an unreasonable length of time. (Extract from letter to the Industrial Association of Cincinnati, signed by Commissioner W. H. Osborn, and dated February 2, 1915.) ' INC. 1 56 TAX RETURNS IN GENERAL. 1545 Amended Return not Required When Audit or Investigation Reveals Necessity .for a Further Tax. — Hereafter, in cases where an individual, a fiduciary, or a with- holding agent has been found subject to a further tax as a result of the audit of a return in this office, or of an investigation made by a Revenue Agent an amended return will not be required. In cases where a further tax is to be assessed, either against an individual, afidu- 1546 ciary, or a withholding agent, collectors will be advised by letter from this office of the amount of further tax to be assessed, and the reason for making such assess- ment will be fully set forth. With a view to minimizing the work in the offices of Collectors a carbon copy of 1 547 the letter to them will be enclosed, which should be forwarded by the Collector to the individual, fiduciary, or withhholding agent, as the case may be, in lieu of writing a letter of explanation. The use of Income Tax Form 6981 by Revenue Agents will be discontinued in 1548 connection with reports on Personal Income Tax Returns. (Mimeograph Letter No. 1232 to Collectors, June 22, 1915.) 1 549 Law ^443. Penalty for Failure to Make Return or for False or Fraudulent Return. — Sec. 3176, Revised Statutes. “If any person, corporation, company, or association fails to make and file a return or list at the time prescribed by law or by regu- lation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return or list,” 1550 Law ^444. “the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise.” 1 551 Law 1[445. ^ “In any such case the Commissioner may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector.” 1552 Law ^446. “Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes.” 1 553 Law ^448. “The Commissioner of Internal Revenue shall determine and assess ^ all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section.” 1 554 Law ^449. “In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount,” 1 555 Law ^450. “except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax.” 1 556 Law 1[451. “In case a false or fraudulent return or list is willfully made, the Com- missioner of Internal Revenue shall add to the tax 50 per centum of its amount.” (50% of the am.ount of the deficiency only, added in case of income and war excess-profits tax returns, ^2358.] 1557 La w *|452. “The amount so added to any tax shall be collected at the same time and in the same manner and as part of the tax” 1558 I .aw ^453. “unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner as the tax.” [In relation to the above see ^3032.] 1559 Penalty 25 Per Cent Additional. — In section 3176, as [formerly] incorporated in and m.ade a part of this title, it is provided that — In case of any failure to make and file a return within the time prescribed by law or 1 560 by [regulation made under authority of law] the Commissioner of Internal Revenue shall add to the tax [25] per centum of its amount, except that when a return is voluntarily * * ♦ after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. 'rhe time “prescribed by [law]” [applies equally] to an extension of time, not ex- 1561 cceding 30 days from the normal due date, on or before which the return is required to be filed. That is to say, if upon application by a corporation, an extension of time is granted by the collector the return must be filed on or before the last day of the INC. 157 TAX RETURNS IN GENERAL. extended period. Otherwise the [25] per cent tax will be added, subject to the provisions above quoted. (Art. 228, ^648-650, Reg. 33, Rev., Jan. 2, 1918.) 1562 What Constitutes Reasonable Cause For Failure to File Return. — Section 3176, Revised Statutes, as amended * ♦ ♦ provides that if after delinquency has ensued * * * ^ delinquent individual or corporation shall have filed with the collector of internal revenue a return and shall accompany such return with a showing “that the failure to file it (in time) was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax.” “Reasonable cause,” for the purpose of this article of the regulations, is held to be 1563 such a condition of fact as had the taxpayer in default exercised ordinary business care and prudence it would have been impracticable or impossible for him to have filed return on the prescribed time. (Art. 54, ^291-292, Reg. 33, Rev., Jan. 2, 1918.) 1 564 In case of any failure to make and file a return within the time prescribed by law, or within the period of extension granted by the collector, the Commissioner of Internal Revenue shall add to the tax [25] per cent thereof, except that where a return is voluntarily filed, after the due date, * * * ^ and it is shown that the delinquency was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. (Art. 225, 1[643, Reg. 33, Rev., Jan. 2, 1918.) 1 565 Delinquent returns must be accompanied by an affirmative showing of fact alleged as reasonable cause for excuse from [25] per cent penalty. The Commissioner of Internal Revenue will pass upon the validity of the showing. The showing must be in the form of an affidavit, under oath, and should be attached to the return. The penalty of [25] per cent “additional to tax” will be asserted in all cases where the showing made is not approved by the Commissioner of Internal Revenue. (Art. 54, ^294, Reg. 33, Rev., Jan. 2, 1918.) 1 566 Statement Under Oath of Cause of Delay. — In all such cases the collector will * * * procure from the corporation to be forwarded with the return a state- ment, under oath, setting out in specific terms the cause of the delay, and if such cause is found to be reasonable, that is, a cause which, had the corporation exercised ordinary business care and prudence, would have made it impracticable or impossible to file the return within the prescribed time, the [25] per cent addition will not be made to the tax. Exemption from the [25] per cent additional tax will not, however, necessarily 1567 relieve the corporation from liability to the specific penalty, viz., a penalty of not to exceed [$1,000]. (Art. 225, ^[644-645, Reg. 33, Rev., Jan. 2, 1918.) 1 668 A 50 per cent additional tax attaches upon all delinquent returns for 1916 and sub- sequent years [now 25%] in the absence of a showing of a reasonable cause for delinquency. If the cause assigned is carelessness, oversight, or other trivial cause, the [25] per cfent penalty will be assessed. (T. D. 2584, Nov. 20, 1917.) 1 669 Ad Valorem Penalties Attach to Income. — Ad valorem penalties (those measured by income) attach to income and are to be enforced regardless of the death of the owner of the income by which the penalty is measured. (Art. 52, 1[285, Reg. 33, Rev., Jan. 2, 1918.) 1670 The fifty [25] per cent addition to the tax for failure to make return and the one hundred [50] per cent addition for intentional false or fraudulent return, will not be assessed against delinquent withholding agents (Mimeograph letter No 1265, to Col- lectors, Sept, 23, 1915.) 1671 What Constitutes a “False” Return. — [Comment: In National Bank of Com- merce in St. Louis v. E. B. Allen, Collector (223 Fed. 472) the question of the 100% [now 50%] penalty for rendering a false return was not at issue but the following state- ment was included in the decision: “It is true that the Commissioner did not add 100 per centum of the tax levied as provided for a false or fraudulent return, and we may conclude from this that the Commissioner was of the opinion that the returns were not false or fraudulent in the sense that those words were used in the language of the law which authorizes the addition of the penalty.”] [Read also at ^[2380.] 157 2 Law ^388. Specific Penalties. — “Sec. 253. That any individual, corporation, or partnership required under this title to pay or collect any tax, to make a return or to supply information, who fails INC. 158 TAX RETURNS IN GENERAL. 1573 to pay or collect such tax, to make such return, or to supply such information at the time or times required under this title, 1574 shall be liable to a penalty of not more than $1,000. 1575 Any individual, corporation, or partnership, or any officer or employee of any corporation or member or employee of a partnership, 1 57 6 who willfully refuses to pay or collect such tax, to make such return, or to supply such information at the time or times required under this title, or 1577 who willfully attempts in any manner to defeat or evade the tax imposed by this title, 157 8 shall be guilty of a misdemeanor and shall be fined not more than $10,000 or imprisoned for not more than one year, or both, together with costs of prosecution.” • 1579 Specific penalties provided by the income-tax law are held to attach to the person and in case of death of such person are non-enforceable. (Art. 52, ^284, Reg. 33, Rev., Jan. 2, 1918.) 1580 The specific penalty to be asserted independently of the ad valorem penalty. — The specific penalty, subject to the authority of the Commissioner of Internal Revenue to entertain offers in compromise, * * * ^nd is to be asserted inde- pendently of the penalty by way of “addition to the tax.” (Art. 54, ^[295, Reg. Rev., Jan. 2, 1918.) 1 581 The Specific Penalty WillNotbe Asserted under Certain Circumstances. — Liability to specific penalty attaches upon all delinquent returns and is recoverable by suit. By Section 3214 R. S. the Commissioner of Internal Revenue may or may not institute suit. It has been decided not to institute suit nor to assert specific penalty in certain cases. The assertion of specific penalty does not depend upon the fact of whether or not the [25]% addition to tax has been assessed. In some cases where the [25]% addition to tax must be assessed because the return was filed after notice from the collector, the specific penalty will not be asserted. It will not be asserted, regardless of whether the [25]% addition to tax has been assessed, in cases falling under any of the following designations: 1. Extension granted. Where a return is filed within the thirty-day period of 1582 extension granted by the collector or within a further period of extension granted by the Commissioner of Internal Revenue, as provided by Section 14 (c) of the Act of September 8, 1916. 2. Return on time. Specific penalty will not be asserted upon an amended return 1 583 provided the original return was filed within the prescribed time. 3. Mailed in tim.e. Where an affidavit is filed satisfactorily establishing that 1684 the return was placed in the mails in ample time to reach the Collector’s office in ordinary course of mails before the close of business on the final day for filing. 4. Tentative return. Where an informal return was filed within the time pre- 1585 scribed. The return of a parent company including therein the income of a sub- sidiary company v ill be accepted as a tentative return of the subsidiary company, if the fact is stated that the tentative return includes the income of the subsidiary. 5. Filed in wrong district. Where the return was filed in some other collection district 1586 within the prescribed time. 6. Net income under $3,000. Where it develops that the net income of an indi- 1 587 vidual for 1913, 1914, 1915 or 1916 was less than $3,000, or under the Act of October 3, 1917, for 1917, etc., less than $1,000 or $2,000. 1588 7. Erroneous information. Where the delinquency is alleged to be due to erron- eous or misleading information given by officials or employees of the Internal Revenue Service and there is no evidence in conflict therewith. 8. Organization incomplete. Where it is established that the organization of 1589 a corporation, joint-stock company or association, or insurance company was not completed until after the expiration of the period for which the return should have been filed. 9. Death. Where by reason of the death of an individual his return for the 1590 year or portion of the year prior to his death is not filed within the time prescribed. The death of a delinquent abates liability to specific penalty. An administrator or executor is charged with the duty of rendering a return for the decedent, and if he is 159 TAX INC, RETURNS IN GENERAL. appointed in ample time to make the return prior to March 1st and fails to do so, he should be charged as delinquent and the specific penalty should be asserted against him. The administrator or executor will not be relieved from specific penalty unless the return is made within a reasonable time after his appointment. 10. Severe illness or unavoidable absence. Where it is clearly established that 1 591 t^he delinquency in the filing of a return of an individual or of a corporation within the time prescribed was due to severe illness of the individual or of an officer of a corporation whose duty it was to prepare or sign the return, or to unavoidable absence from place of business or place of abode. 11. Absence from the United States. Where it appears that the filing of a return 1 592 within the time prescribed was rendered impossible by reason of absence from the United States. Delinquency beyond the period of extension which may be granted by the Commissioner of Internal Revenue will not be excused under this heading. 12. Military or naval service of United States. Where delinquency of an indivi- 1 593 dual was occasioned by service in the military or naval forces of the United States. 13. Not organized for profit. Comprehends numerous small corporations not 1 594 organized primarily for profit, such as local telephone companies, co-operative purchasing societies, etc., concerning whose liability under the law to make a return there may have been a reasonable doubt. 14. Inactive corporations. Those which transacted no business and had no 1595 income during the return year. 15. Fiscal year. Corporations which have established a fiscal year in the man- 1 596 ner prescribed by law which file a return on dr before the first day of the third month following the close of the fiscal year. 16. Assigned. Where corporations have made an assignment on account of in- 1597 solvency and do not intend again to engage in business. 17. Insolvent. Where the assets of a corporation are insufficient for the pay- 1598 ment of its debts and the corporation has ceased to do business. 18. Charter forfeited. Where, prior to the date when the return was due, the 1599 charter of a corporation is forfeited on account of noncompliance with state laws. It must be clear, however, that business in the name of the corporation was sus- pended at the time of such forfeiture. If business was continued under the same name, the concern wdll be held to be an association and the same liabilities will attach as if the charter had not been forfeited. 19. Defunct. Where corporations are out of business, have no assets, maintain 1600 no organization, and the purpose for which organized has been abandoned. 1601 20. Dissolved. Where all the assets of a corporation have been distributed. 21. Sale. Where corporations have disposed of all their assets and property 1 602 by sale to other corporations, firms, or individuals and business is not longer carried on under their charters. 22. Consolidated, merged or succeeded. Where corporations have terminated their 1603 existence as represented by these terms and it appears that no assets or property remain in the name of the retiring corporation. 23. No assets. Includes all corporation having no assets from which to submit 1 604 an offer in compromise. (L. Mimeograph Letter No. 1675 to Collectors, November 3, 1917; continued at ^1696.) 1 605 Compromises. — “The Commissioner of Internal Revenue, with the advice and con- sent of the Secretary of the Treasury, may compromise any civil or criminal case arising under the internal revenue laws instead of commencing suit thereon; and, with the advice and consent of the said Secretary and the recommendation of the Attorney- General, he may compromise any such case after a suit thereon has been commenced. Whenever a compromise is made in any case there shall be placed on file in the office of the Commissioner the opinion, of the Solicitor of Internal Revenue, or of the officer acting as such, with his reasons therefor, with a statement of the amount of tax assessed, the amount of additional tax or penalty imposed by law in consequence of the neglect or delin- quency of the person against whom the tax is assessed, and the amount actually paid in accordance with the terms of the compromise.” (Section 3229, Revised Statutes.) 1606 In cases not Included In any of the above classes [^[1581 to ^1694], the specific penalty will be asserted, and if the delinquency was not due to an intention to delay the administration of the law the minimum amount which, will be accepted in com- promise is as follows: $5.00 in the case of an individual or withholding agent. $10.00 in the case of a corporation, joint-stock company or association, or insurance com.pany. These amounts will be considered insufficient and will not be accepted in any case 1 607 w'hcre it appears that a taxpayer was intentionally violating the privisions of law, and purposely delaying the filing of the returns. In all cases w'here revenue agents or other exa,mlning officers discover that any individual has an appreciable taxable income and 160 INC. 'TAX RETURNS IN GENERAL. the examining officer is of the opinion that the individual knew or should have known that he was required to make a return, he should make a recommendation as to the minimum amount which should be accepted as an offer in compromise, and where the intent to evade tax is plain he should recommend prosecution. Special attention should be called to cases of individuals having a taxable income who have failed to file returns for a number of years. In the case of delinquent returns filed pursuant to the provisions of Section 2 of 1608 the Act of October 3, 1913, specific penalty will not be asserted if the case comes under any of the above designations [1[1581 to ^1604,] nor against taxpayers or withholding agents specifically relieved from specific penalty by the proviso contained in Section 18 of the Income Tax Law of September 8, 1916, as amended by Section 1209 of the Act of October 3, 1917, [1[734] which reads as follows: “PROVIDED, That where any tax heretofore due and payable has been duly paid by the taxpayer, it shall not be re-collected from any withholding agent required to re- tain it at its source, nor shall any penalty be imposed or collected in such cases from the taxpayer, or such withholding agent whose duty it was to retain it, for failure to return or pay the same unless such failure was fraudulent and for the purpose of evading payment.” Furthermore, specific penalty will not be asserted against taxpayers delinquent 1609 in filing returns for 1913, nor against corporations, joint-stock companies or asso- ciations or insurance companies delinquent in filing returns for prior years, unless it appears beyond a reasonable doubt that there was an intent on the part of the delinquent to violate the provisions of law. The specific penalty cannot in any case be asserted after five years from date of delinquency, and no recommendation with respect to penalty in such cases need be made. The minimum amounts mentioned above will be accepted in compromise of liability to specific penalty for each of the years 1914 and 1915, as well as for 1916, except where there was an apparent Intent to violate the taxing act, in which case the offer must be increased in a substantial amount. In the case of every delinquent return, the collector should secure a statement 1610 [Read at ^[1617.] from the delinquent of the cause of delinquency, which should be attached to and made a part of the return, together with delinquent card. If the delinquent is not relieved from specific penalty by clearly falling within one of the classes enumerated in this Mimeograph Letter [^1581 to ^1694], or if he fails, upon request, to file a statement of the reason for delinquency, the specific penalty should be promptly asserted and the delinquent advised of his privilege to submit an offer in compromise. If the collector is of the opinion that the delinquent should be relieved from the specific penalty under the provisions of this Mimeograph Letter, he should note on the delinquent card “Relieved under Mim. No. 1675.” In all cases of delinquency discovered by revenue agents and other examining 1611 officers, if the delinquency falls within a period for which the penalty can be asserted, such officers should secure from the delinquent a sworn statement setting forth the reason for delinquency. This statement should be attached to the return forwarded to the collector. The examining officer should state in his report the alleged reason for delinquency and if he is of the opinion that the minimum amount should not be accepted as an offer in compromise of liability to specific penalty, he should make a recommendation as to the minimum amount which should be accepted. Consideration w’ill be given such recommendation by this office in accepting an offer in compromise. In forwarding offers in com.promise on Form 656 collectors should call attention to revenue agent’s reports, if any, in which the non-acceptance of the minimum amount as an offer in compro nise is recommended. The statement or affidavit attached to the return setting forth the reason for delinauency is not in lieu of the affidavit required to be attached to Form 656. 1612 Mimeograph Letters Nos. 1347, 1390, 1465, 1477, 1530 and CT-Mim. No. 54 and CT-Mim. No. 56 are hereby superseded. (L. Mimeograph Letter to Collectors No. 1675, November 3, 1917.) 1613 Offers in Compromise by the Taxpayer. — [A letter, similar in content to the fol- lowing, suitably modified if the delinquent was a corporation, has been used in the past by Collectors in charging taxpayers with delinquency and in notifying them of their privilege to submit offers in compromise.] Sir: Your return of net income was not received in this office until 1614 thereby involving you in liability to a specific penalty of not * * * more than $1,000 under the Act of , in addition to the [25]% additional tax which will be assessed and collected. The provisions of the Act are mandatory, and no excuse or explanation can be 1615 accepted, except a showdne that a complete or tentative return was in fact inailed in time to have reached this office, or a Deputy Collector, in the ordinary course of business on or before Alarch 1, . Mowmver, before instituting proceedings in Court for the imposition of the specific 1616 penalty, I am directed to call your attention to the provisions of Section 3229 [^1605], Rc\ iscd Statutes, w'hich reads in part as follows: TNC. 161 Trx RETURNS IN GENERAL. “The Commissioner of Internal Revenue with the advice and consent of the Secretary of the Treasury, may com.promise any civil or criminal case arising under the internal revenue laws instead of commencing suit thereon,” * * * ^ Should you desire to take advantage of your privilege under this section and to 1617 submit an offer in compromise, the amount offered should be forwarded promptly to this office in the form of cash, postal money order, or certified check which can be cashed without cost, payable to my order, accompanied by an affidavit substantially in the following form: “To the Commissioner of Internal Revenue: I hereby solemnly swear (or affirm) that my delinquency in filing return of net income as required by the Act of , was not due to any intent to violate the law or evade taxation, but was due to (here insert, concisely and clearly, the reason for delay). Desiring to compromise my liability I hereby tender the sum of $ , which I request be accepted in compromise of the specific penalty only.” To be signed and sworn to before a deputy collector, notary, or other officer auth- 1618 orized to administer oaths. This affidavit will then be forwarded by me, together with the sum offered, to the 1619 Commissioner for consideration, and you will be notified by him of his acceptance or rejection of your proposal. In the latter event, you may increase your offer, if you so desire. *****♦♦*♦♦* Respectfully, Collector of Internal Revenue. 1 620 Law 1[429. The General Administrative Provisions of Law Relative to the Making of Returns, etc., are Applicable. — “Sec. 1305. That all administrative, special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act, and every person liable to any tax imposed by this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall comply with such regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe.” [^3126.] 1621 Law 11442. Collectors to Inquire After and Concerning Persons Liable to Make Income Tax Returns. — “Sec. 3172. Every collector shall, from time to time, f cause his deputies to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any internal-revenue tax, and all persons owning or having the care and management of any objects liable to pay any tax, and to make a list of such persons and enumerate said objects.” 1 622 Income-Tax Agents and Inspectors. — Revenue agents in charge of revenue agents’ divisions and income-tax revenue agents and inspectors are hereby instructed as follows : 1. Income-tax agents and inspectors appointed under the provisions of the act 1623 of October 3, 1913, and paid from the appropriation for collecting the income tax will be assigned to duty under the supervision of agents in charge of revenue agents’ divisions. 2. Persons appointed either as income-tax agents or income-tax inspectors, when 1 624 the appointment is sent from this office, will be instructed by letter to report to one ^ of the division revenue agents for duty, and until otherwise ordered may report either in person or by letter, and if by letter await the instructions of the agent in charge of the division to which they are assigned. 3. Officers of this class are expected to perform the duties of their offices where 1 625 their services are required, but for the present, and until they become somewhat familiar with the duties of their places, they will be assigned to the revenue agent in charge of the division embracing their legal residence. 4. Income-tax agents and inspectors will be expected to confine their operations 1 626 to income-tax work so long as there is income-tax work to be performed, and division ( agents are admonished not to employ officers of this class for the general or ordinary work of the bureau except when their services are not required on income-tax work. 5. The duties of officers of this class are to ascertain and report the names of persons 1 627 who in their opinion are liable to the income tax and who have failed to make return as required by law; to inquire into income-tax returns where there is any suspicion that the return made is erroneous; to examine the books and accounts of persons who have made returns, for the purpose of ascertaining and reporting as to whether the law has been complied with, when so ordered by the agent in charge of the division to which they are . assigned; to inquire into the manner in which income-tax employees are discharging their f official duties and to report those who have failed in this respect. For the purpose of secur- ing such information as they may desire they may visit the office of any State, county, or INC. 162 TAX RETURNS IN GENERAL. municipal officer, and for the general purpose of their employment may confer with any collector or deputy collector of internal revenue within the territory in which they are authorized to operate. 6. The reports of these officers should be made to the agent in charge of the f 628 division to which they are assigned, who in turn will report to the Comrrissloner of Internal Revenue and the collector of the proper district. 1629 7. In the discharge of their official duties officers of this class, as well as all officers of the Internal-Revenue Bureau, in making inquiries and investigations are expected to exercise sound discretion, treat all persons with due courtesy, and, while acting firmly and courageously, to avoid all contention or controversy that would give just ground for complaint. (T. D. 1932, Jan. 13, 1914.) 1 630 Law ^430. Return May Be Required of Any Person Whether Liable to Tax or Not. — “Whenever in the judgment of the Commissioner necessary Jie may require any person, by notice served upon him, to make a return or such statements as he deems sufficient to show whether or not such person is liable to tax.” 1631 Law ^431. Examination of Persons, Books and Papers. — “The Commissioner, for the purpose of ascertaining the correctness of any return or for the purpose of making a return where none has been made, is hereby authorized, by any revenue agent or inspector designated by him for that purpose, to examine any books, papers, records or memoranda bearing upon the matters required to be included in the return, and may require the attendance of the person rendering the return or of any officer or employee of such person, or the attendance of any other person having knowledge in the premises, and may take his testimony with reference to the matter required by law to be included in such return, with power to administer oaths to such person or persons.” 1 632 Law 1[454. Jurisdiction of District Courts in Connection with Attendance, Testi- mony or Production of Books. — “Sec. 1318. That if any person is summoned under this Act to appear, to testify, or to produce books, papers or other data, the district court of the United States for the district in which such person resides shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, or other data.” 1 633 Law ^455. “The district courts of the United States at the instance of the United States are hereby invested with such jurisdiction to make and issue, both in actions at law and suits in equity, writs and orders of injunction and of ne exeat republican orders appointing receivers, and such other orders and process, and to render such judgments and decrees, granting in proper cases both legal and equitable relief together, as may be necessary or appropriate for the enforcement of the provisions of this Act. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such provisions.” 1 634 Annual Returns to be Forwarded by Collectors to the Commissioner. — The annual returns will be forwarded by collectors by registered mail or express to the Com- missioner of Internal Revenue with the list for the month in which the returns are filed. Collectors must provide that said returns and all forms relating thereto are securely sealed in envelopes or packages before forwarding the same. (Art. 25, Reg. 33, Rev., Jan. 2, 1918.) 1 636 Collectors should not under any conditions retain copies of returns in their offices, but when information relative to any return of annual net income filed by any taxpayer is necessary in connection with the assessment and collection of the income tax, the same may be secured from the Commissioner of Internal Revenue at Washington. (T. D. 2024, Oct. 15, 1914.) 1 636 Law ^403. Returns to be Public Records. — “Sec. 257. That returns upon which the tax has been determined by the Commissioner shall constitute public records; 1637 Law ^404. Returns to be Open to Inspection Only on Order by the President.— “but they shall be open to inspection only upon order of the President and under rules and regulations prescribed by the Secretary and approved by the President:” 1638 Law ^405. Returns to be Open to Inspection of Proper State Officers. — ''Provided, That the proper officers of any State imposing an income tax may, upon the request of the governor thereof, have access to the returns of any corporation, or to an abstract thereof showing the name and income of the corporation, at such times and in such manner as the Secretary may prescribe:” INC. 163 TAX RETURNS IN GENERAL. 1 639 Law ^[406. Returns to be Open to Inspection by Stockholders of Record Owing^ One Per Cent or More of the Outstanding Stock of a Corporation. — "'Provided further. That all bona fide stockholders of record owning 1 per centum or more of the out- standing stock of any corporation shall, upon making request of the Commissioner, be allowed to examine the annual Income returns of such corporation and of its subsidiaries.”' I 640 Law ^407. “Any stockholder who pursuant to the provision of this section is allowed to examine the return of any corporation, and who makes known in any manner whatever not provided by law the amount or source of income, profits, losses, ex- penditures, or any particular thereof, set forth or disclosed in any such return, shall be guilty of a misdemeanor and be punished by a fine not exceeding $1,000, or by imprisonment not exceeding one year, or both.” 1641 Law 1[40S. Lists of Individuals Making Income Tax Returns to be Prepared. — “The Commissioner shall as soon as practicable in each year cause to be prepared and made available to public inspection in such manner as he may determine, in the office of the collector in each internal-revenue district and in such other places as he may determine, lists containing the names and the post-office addresses of all individuals making income- tax returns in such district.” [In connection with above read at ^30fi3.] 1 642 Inspection of Returns; Copies of Returns. — When the assessments shall have been made the returns shall be filed in the office of the commissioner and shall constitute public records, subject to inspection upon the order of the President, under the rules and regulations prescribed by the Secretary of the Treasury and approved by the President. Copies of returns on file in the Commissioner’s office are not permitted to be sent to any person, except the corporation itself or to its duly authorized attorney. A duly authorized attorney for this purpose is one possessing a properly executed power of attorney in writing by the corporation, which designation shall be signed by two officers of the corporation and bear the impress of the seal. (Art. 226, 11646, Reg. 33, Rev., Jan. 2, 1918.) 1 643 Certified Copies. — At the request of the Attorney General or a LFnited States district attorney, certified copies of returns may be made by the Commissioner of Internal Revenue and delivered to the United States district attorneys for their use as evidence in the prosecution or defense of suits in which the collection or legality of the income tax assessed on the basis of such returns is involved, or, by special permission of the Secretary of the Treasury, such certified copies of returns may be furnished as evidence in any suit to which the United States Government and the corporation, etc., making the returns are parties, or as evidence before any United States grand jury, and in which in the opinion of the Attorney General, such certified copies would constitute material evidence. (Art. 227, 1[647, Reg. 33, Rev., Jan. 2, 1918.) 1 644 The supplementary statement which is made a part of the return form prescribed for the use of corporations in making returns of annual net Income is by express terms made a part of the return, and to the same extent that the return constitutes a public record and is open to inspection, to that extent the supplementary statement is also a public record and open to Inspection “only upon the order of the President under rules and regulations prescribed by the Secretary of the Treasury and approved by the Presi- dent.” (T. D. 2137, Jan. 30, 1915.) 1 645 Copies of returns on file in the Commissioner’s office are not permitted to be sent to any person, except to the corporation itself or to its duly authorized attornev. (Art. 178, Reg. 33, Jan. 5, 1914.) 1646 In no case are the original returns to be removed from the office of the commis- sioner, except upon order and by direction of the Secretary of the Treasury or the President. (Art. 179, Reg. 33, Jan. 5, 1914.) 1 647 The following executive order, together with regulations signed by the Secretary and approved by the President, relative to the publicity feature of Section 2 of the Act of October 3, 1913, imposing an income tax, is hereby published for your information. EXECUTIVE ORDER. 1 648 Pursuant to the provisions of Section 2 of the Tariff Act of October 3, 1913, said section providing for an income tax, and which contains in paragraph G, sub- paragraph (d) the following provision, “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 INC. 164 TAX RETURNS IN GENERAL. returns shall be open to inspection only upon the order of the President, under rules tod regulations to be prescribed by the Secretary of the Treasury and approved by the President; Provided further, That the proper officers of any State imposing a general income tax may, upon the request of the governor thereof, have access to said returns or to any abstract 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 Secretary of the Treasury may prescribe,” it is hereby ordered, that all such returns shall be subject to inspection in accordance and upon compliance with rules and regulations prescribed by the Secretary of the Treasury and approved by the President, bearing even date herewith. WOODROW WILSON. The White House, July 28, 1914. [No. 1999.] Inspection of Returns. 1 649 By Section 2 of the Act of October 3, 1913, Congress imposed a tax upon the entire net income arising or accruing from all sources 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, and upon the entire net income from all property owned, and of every business, trade, or profession carried on in the United States by per- sons residing elsewhere, and upon every corporation, joint stock company or association, and every insurance company, with certain exceptions, engaged in business in the United States, and prescribed the method of handling the returns of annual net income filed in compliance with said law as follows: “(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 con- stitute 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 President, 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 imposing a general income tax may, upon the request of the governor thereof, have access to said returns or to an abstract thereof, showing the name and income of each such corporation, joint-stock company or association or insurance company, at such times and in such manner as the Secretary of the Treasury may prescribe.” For the purpose of making effective the legislative intent thus expressed, the 1 650 President has ordered that such returns shall be open to inspection under the following rules and regulations. The word “corporation” when used alone herein, shall be construed to refer to corporations, joint stock companies of asociations and insurance companies. 1. The return of every individual and of every corporation, joint stock company 1651 or association, and every insurance company, whether foreign or domestic, shall be open to the inspection of the proper officers and employees of the Treasury Department. Returns of individuals shall not be subject to inspection by any one except the proper officers and employees of the Treasury Department. 2. Where access to any return of any corporation is desired by an officer or 1652 employee of any other department of the Government, an application for per- mission to inspect such return, setting out the reasons therefor, shall be made in writing, signed by the head of the executive department in which such officer or employee is employed, and transmitted to the Secretary of the Treasury. If the return of a corporation is desired to be used in any legal proceedings other than those to which the United States is a party, or to be used in any manner by which any information con- tained in the return could be made public, the application for permission to inspect such return or to furnish a certified copy thereof shall be referred to the Attorney General, and if recommended by him transmitted to the Secretary of the Treasury. 3. All returns, whether of persons or of corporations, joint stock companies or 1653 associations, or insurance companies, may be furnished, upon approval of the Secretary of th.e Treasury, for use, either in the original or by certified copies thereof, in any legal proceedings before any United States grand jury or in the trial of any cause to which both the United States and the person or corporation or association ren- dering the return are parties either as plaintiff or defendant, and in the prosecution or defense or trial of which action, or proceeding before a grand jury, such return would consti- tute material evidence, but in any case arising in the collection of the income tax, the Com- missioner of Internal Revenue may furnish for use to the proper officer either the original or certified copies of returns without the approval of the Secretary of the Treasury. In all cases where the use of the original return is necessary, it shall be placed in evidence by the Commissioner of Internal Revenue or by some other officer of the Bureau of Internal INC. 165 TAX RETURNS IN GENERAL. Revenue designated by him for that purpose, and after such original return has been placed in evidence it shall be returned to the files in the office of the Commissioner of Internal Revenue at Washington, D. C. 4. The Secretary of the Treasury, at his discretion, upon application to him made, 1 654 setting forth what constitutes a proper showing of cause, may permit inspection of the return, of any corporation, by any bona fide stockholder in such corporation. The person desiring to inspect such return shall make application, in writing, to the Secretary of the Treasury, setting forth the reasons why he should be permitted to make such inspection, and shall attach to his application a certificate signed by the president, or other principal officer, of such corporation, countersigned by the secretary, under the corporate seal of the company, that he is a bona fide stockholder in said company. (Where this certificate cannot be secured, other evidence will be considered by the Secretary of the Treasury to determine the fact whether or not the applicant is a bona fide stockholder and, therefore, entitled to inspect the return made by such company.) Upon receipt of such application the corporation whose return it is desired to Inspect shall be notified of the facts and shall be given opportunity to state whether any legitimate reason exists for refusing permission to inspect its returns of annual net income by the stockholder applying for permission to make such inspection. The privilege of inspecting the return of any corporation is personal to the stockholders, and the permission granted by the Secretary to a stockholder to make such inspection cannot be delegated to any other person. 5. Returns of the following corporations shall be open to the inspection of any 1655 person upon written application to the Secretary of the Treasury, which applica- tion shall set forth briefly and succinctly all facts necessary to enable the Secretary to act upon the request: [See new law provision at 1[1639.] (a) The returns of all companies whose stock is listed upon any duly organized and recognized stock exchange within the United States, for the purpose of having its shares dealt in by the public generally. (b) All corporations whose stock is advertised in the press or offered to the public by the corporation itself for sale. In case of doubt as to whether any company falls within the classification above, the person desiring to see such return should make applica- tion, supported by advertisements, prospectus, or such other evidence as he may deem proper to establish the fact that the stock of such corporation is offered for 'general public sale. Return can be inspected only in the office of the Commissioner of Internal Revenue 1656 in Washington, D. C. In no case shall any collector, or any other Internal Revenue officer outside of the Treasury Department in Washington, permit to be inspected any returns or furnish any information whatsoever relative to any return or any informa- tion secured by him in his official capacity relating to such return, except in answer to a proper subpoena, in a case to which the United States is a party. 6. Returns of individuals shall not be open to the inspection of any person other 1 657 than the proper officers and employees of the Treasury Department or person rendering the same, and are under no conditions to be made public, except where such publicity shall result through the use of such returns in any legal proceedings in which the United States is a party. 7. Upon request of the governor of a State imposing a general income tax, the 1 658 proper officer of such State, to be designated by name and official position by the Governor of such State In his application to the Secretary of the Treasury, may have access to the returns or to abstracts thereof showing the name and income of each corporation, joint stock company or association, or insurance company, at such times and in such manner as the Secretary of the Treasury may prescribe. Such applica- tion shall be made in writing, addressed to the Secretary of the Treasury and shall show (first) that the State, whose governor makes the request, imposes a general income tax; (second) the name and address of each corporation, etc., to which access is desired; (third) why permission to inspect the returns of the corporation, etc., named in the request is desired, and (fourth) what officer or officers are designated to make the desired inspec- tion, giving their names and official designations. Such request must be signed by the governor of the State and sealed with the seal thereof, and shall be transmitted to the Secretary of the Treasury for his consideration and action thereon. [See new law provision at ^1638.] No provision is made in the law for furnishing a copy of any return to any person 1659 or corporation, and no copy of any return will be furnished to any other than the person or corporation making the return, or their duly constituted attorney, except as heretobefore authorized. The provisions herein contained shall be effective on and after the 1st day of 1 660 September, 1914. W. G. McAdoo, Secretary of the Treasury. Approved: Woodrow Wilson, The White House, July 28, 1914. (T. D. 2016, April 18, 1914.) INC. 166 TAX CORPORATIONS. 1661 Law ^409. Annual Report by the Commissioner of Statistical Information. — “Sec. 258. That the Commissioner, with the approval of the Secretary, shall prepare and publish annually statistics reasonably available with respect to the operation of the income, war-profits and excess-profits tax laws, including classifications of taxpayers and of income, the amounts allowed as deductions, exemptions, and credits, and any other facts deemed pertinent and valuable.” [^3067] CORPORATIONS. 1 662 Law ^260. Tax on Corporations. — “Sec. 230. (a) That, in lieu of the taxes im- posed by section 10 of the Revenue Act of 1916, as amended by the Revenue Act of 1917, and by section 4 of the Revenue Act of 1917, there shall be levied, collected, and paid for each taxable year upon the net income of every corporation” 1 663 Law 1[18. “Taxable Year” Defined. — “The term ‘taxable year’ means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 [1[754] or section 232 [^[1787]”. 1664 Law 1[19. “Fiscal Year” Defined. — “The term ‘fiscal year’ means an accounting period of twelve months ending on the last day of any month other than December.” Changing a Corporation’s Accounting Peiiod. — [Read at ^1479.] 1665 Law ^[20. The First Taxable Yealr Under me Revenue Act of 1918. — “The first taxable year, to be called the taxable year 1918, shall be the calendar year 1918 or any fiscal year ending during the calendar year 1918;” 1 666 Law ffiO. Application of the Rates For Fiscal Year Embracing Parts of Calendar Years with Differing Rates. — “Sec. 205. (a) That if a taxpayer makes return for a fiscal year beginning in 1917 and ending in 1918, his tax under this title for the first taxable year shall be the sum of:” In connection with the following read beginning at ^3117]. 1 667 Law ^61. “(1) the same proportion of a tax for the entire period computed under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 and under Title I of the Revenue Act of 1917, which the portion of such period falling within the calendar year 1917 is of the entire period, and” 1 668 Law lf62. “(2) the same proportion of a tax for the entire period computed under this title at the rates for the calendar year 1918 which the portion of such period falling within the calendar year 1918 is of the entire period:” 1 669 Law 1f63. Provided, That in the case of a personal service corporation the amount to be paid shall be only that specified in clause (1).” 1 670 Law ^64. “Any amount heretofore or hereafter paid on account of the tax imposed for such fiscal year by Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, and by Title I of the Revenue Act of 1917, shall be credited towards the pay- ment of the tax imposed for such fiscal year by this act, and if the amount so paid exceeds the amount of such tax imposed by this act, or in the case of a personal service corporation, the amount specified in clause (1), the excess shall be credited or refunded in accordance with the provisions of section 252 [^2488].” 1671 I ..aw ^65. “(b) If a taxpayer makes a return for a fiscal year beginning in 1918 and ending in 1919, the tax under this title for such fiscal year shall be the sum of:” 1672 I .aw ^66. “(1) the same proportion of a tax fcr the entire period computed under this title at the rates specified for the calendar year 1918 which the portion of such period falling within the calendar year 1918 is of the entire period, and” 1 673 Law ^67. “(2) the same proportion of a tax for the entire period computed under this title at the rates specified for the calendar year 1919 which the portion of such period falling within the calendar year 1919 is of the entire period.” 1674 Law ^68. “(c) If a fiscal year of a partnership begins in 1917 and ends in 1918 or begins in 1918 and ends in 1919, then notwithstanding the provisions of sub- division (b) of section 218 [1I1290j, INC. 167 TAX CORPORATIONS. 1 675 Law ^69. “(1) the rates for the calendar year during which such fiscal year begins shall apply to an amount of each partner’s share of such partnership net income (determined under the law applicable to such year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and” 1676 Law ^70. “(2) the rates for the calendar year during which such fiscal year ends shall apply to an amount of each partner’s share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year:” 1677 Law ^71. “ Provided, That in the case of a personal service corporation with re- spect to a fiscal year beginning in 1917 and ending in 1918, the am.ount specified in clause (1) shall not be subject to normal tax.” 167 8 Law ^72. Parts of Income Subject to Rates for Different Years. — “Sec. 206. That whenever parts of a taxpayer’s income are subject to rates for different calendar years, the part subject to the rates for the m.ost recent calendar year shall be placed in the lower brackets of the rate schedule provided in this title, the part subject to the rates for the next preceding calendar year shall be placed in the next higher brackets of the rate schedule applicable to that year, and so on until the entire net income has been accounted for.” 1679 Law ^73. “In determ.ining the income, any deductions, exemptions or credits of a kind not plainly and properly chargeable against the incomie taxable at rates for a preceding year shall first be applied against the income subject to rates for the most recent calendar year;” 1 680 Law ^74. “but any balance thereof shall be applied against the income subject to the rates of the next preceding year or years until fully allowed.” [In connection with the above read at ^3122 and ^3123.] 1 681 Law 1!261. Tax Rates Applicable to Corporations. — “a tax at the following rates:” 1 682 Law ^262. Tax Rates Applicable to Corporations for 1918.— “(1) For the calendar year 1918, 12 per centum of the amount of the net income in excess of the credits provided in section 236 [*[[2325]; and” 1 683 Law ^263. Tax Rates Applicable to Corporations for Years Subsequent to 1918. — “(2) For each calendar year thereafter, 10 per centum of such excess amount.” 1 684 Law ^264. Funds From '^Hiich Taxes Imposed on Railroads Under Government Control Are To Be Paid. — “(b) For the purposes of the Act approved March 21,. 1918, entitled ‘An Act to provide for the operation of transportation systems while under Federal control, for the just compensation of their owners, and for other purposes,* five- sixths of the tax imposed by paragraph (1) of subdivision (a) and four-fifths of the tax imposed by paragraph (2) of subdivision (a) shall be treated as levied by an Act in amend- ment of Title I of the Reveniie Act of 1917.” 1 685 Law ^3. What Constitutes a Corporation Under the Income Tax Law. — “The term ‘corporation’ includes associations, joint-stock companies, and insurance companies,” [The old law read “by every corporation, joint-stock company or association, or insurance com.pany.”] [^3074.] 1 686 Law ^2. The Term “Person” As Used in the Revenue Act of 1918. — “The term ‘person’ includes partnerships and corporations, as well as individuals;” [^3073.] 1 687 Corporations Defined. — “Corporation” or “corporations,” as used in these regu- lations, shall be construed to include all corporations, joint-stock companies and associations, and all insurance companies coming within the terms of the law, as well as all business trusts organized or created for the purpose of engaging in commercial or in- dustrial enterprises, the capital of which is evidenced by certificates or shares of interest issued or issuable to members on the basis of which profits are distributed or distributable. Such organizations will be hereinafter referred to as corporations. (Art. 57, ^299, Reg. 33, Rev., Jan. 2, 1918.) 1 688 Joint-Stock Companies and Associations Defined. — The term “joint-stock com- panies” or ‘ associations” shall include associations, common-law trusts, or organiza- tions by whatever name known which carry on or do business in an organized capacity, whether created under and pursuant to State laws, trust agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the- INC. 168 TAX CORPORATIONS. members or shareholders on the basis of the capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share or capital which each has, or has invested, in the business or property of the organization, all of which joint-stock com- panies or associations shall in their organized capacity be subject to the tax imposed by this act, and shall rnake returns of annual net income accordingly. (Art. 58, 1[300, Reg. 33, Rev., Jan. 2, 1918.) 1 689 Massachusetts Trusts Held to be Associations. — The appended decision of the United States Circuit Court of Appeals for the First Circuit in the cases of Crocker ct al., trustees, v. John F. Malley, collector of internal revenue, and John F. Malley, col- lector of internal revenue, v. Crocker et al., trustees, is published for the information of internal-revenue officers and others concerned. (T. D. 2720, June 4, 1918.) John F. Malley, Collector vs. Alvah Crocker, et al.. Trustees. U. S. Circuit Court of Appeals: First Circuit. May 3, 1918. (5 Dept. Reports of Mass., 1011.) fin U. S. Supreme Court. No. 649. October 1918 Term.] The opinion, written by Judge Dodge, follows, in part; 1690 “These cases arise under the Federal income tax act, approved Oct. 3, 1913 (38r stats. 166, 172). I 69 1 “The five persons who were then the trustees under a declaration of trust dated March 29, 1912, and recorded in Worcester County, Massachusetts, northern district, registry of deeds, brought suit, on January 15, 1917, against the collector of internal rev- enue to recover back certain amounts paid by them to him under protest, as income taxes claimed by him to be due from them under said a^'t, for years 1913, 1914 and 1915. The case was heard in the district court without a jury on an agreed statement of facts. The trustees recovered judgment for $9,554.07, with interest; which judgment the collector seeks to reverse in No. 1324, asserting that the allowance of any recovery was error. ^Ry their writ of error in No. 1323 the trustees assert the judgment to have been erroneous in not allowing also the further recovery of $1,321.33, included in their total claim as stated in their declaration. Neither party disputes the finding below that all the formalities required by the statute to enable the plaintiffs to bring this suit have been complied with. 1 692 “The declaration of trust provided that ‘the title of this trust (fixed for convenience) shall be the Wachusett Realty Trust.’ 1 693 “The district court has stated the question upon which the trustees’ right of re- covery depends, as follows: “ ‘The principal question in the case is whether the plaintiffs are trustees and subject to the tax provisions of section II, subdivision D. of the act of Oct. 3, 1913, or whether they are an association within section II, subdivision G a, of sai,d act. The contention of the defendant is that the plaintiffs are an association and taxable under the provisions of sub* division G, while that of the plaintiffs is that they are a strict trust, not an association or partnership, and are subject to the tax provisions of subdivision D.’ “This question was resolved by the district court in favor of the plaintiffs, and the 1 694 case decided upon the ground that they are a trust and not an association. “The district court, as its opinion states, held the plaintiffs to be ‘a trust’ subject 1 695 to the provision of section II, D, and not ‘an association,’ In deference to the de- cisions in W’illiams v. Milton 215 Mass. 1; Crocker v. Crocker, previously decided in the district court (May 23, 1914), and the authorities whereupon those decisions were based. Crocker v. Crocker required construction by the court of the same trust declaration as is now before us. The bill in that case, filed by one of the beneficiaries, asked the court to enjoin the present plaintiffs from making a re.turn of the income taxable under this statute according to section II, G a, thereof. “W'e agree with the district court, in this case in Cfocker v. Crocker, that'-the 1 696 organization formed under this trust declaration is not, in view of the authorities referred to, to be regarded as an association in such sense as to make the bene- ficiaries partners and the plaintiffs their agents for conducting the partnership business. Its income, therefore, for the calendar year in question, is not for the purpose of the statute to be treated as income of a partnership. If It were so treated it would be income arising or accruing to the several partners and subject to the provisions of section II, D, regarding such income. Nor could the organization be regarded as belonging to either of the classes mentioned in section II, G a, because the language there expressly excludes partnership. “But although their beneficiaries stood, neither as to the trust property, nor as to 1 697 the profits of its control and management, nor as to the Income therefrom, as part- ners, but only as beneficiaries of a strict trust; and although the plaintiffs were not the agents or representatives of a partnership, but trustees in whose management and control of the trust property and business the beneficiaries had no direct voice, we do not think it necessarily follows that the organization composed of themselves and the in- INC. 169 TAX CORPORATIONS. dividuals for whose benefit they act, cannot be called an ‘association’ for the pilfp6§6 of section 11, O a. Though not associated as partners, we fall to see why they may not reasonably be said to be associated in the sense contemplated by the statute. As pointed out above, the statute for tne purposes of the taxation which it imposes broadly distin- guishes between two classes of income only— that which does not arise or accrue to individ- uals as opposed to groups or bodies of Individuals. The plaintiffs fail to satisfy us that the terms ‘voluntary association,’ or associ- 1 698 ation, are entirely inapplicable for any purpose to an organization according to whose constitution individuals beneficially interested in various proportions in the same property, commit its control and management, for profit, to trustees free from their own immediate control or mtenerence. However important it m.ay be to distinguish between trust under which there is no partnership relation am.ong the beneficiaries, and an asso- ciation under which such relation exists, for the purposes of systems of taxation such as that of Massachusetts (Williams v. Milton, 215 Mass. 1), or for the purpose of statutes construed in Smith v. Anderson, 50 L. J. Ch. 39; it does not seem to us that the distinction so made necessarily excludes an organization like this from the general class to which the terms ‘voluntary association,’ or ‘association’ may be properly applied.^ 1 he holders of assignable certificates^ representing the different beneficial interests in this trust may certainly be described, without using language in any extraordinary or unusual sense, as associated together for their common benefit or profit. Their indi- vidual interests in the trust property are combined for the purposes of a joint business venture managed for the common benefit of all. The trust declaration in effect associates them for the purposes of allowing extra compensation to the trustees, of filling vacancies m the office of trustees, or of modifying the terms of the declaration itself, when it requires for those purposes written assent from a ‘majority in amount’ or a ‘majority in interest.’ “Bplieving, in view of the entire scheme for taxation of income as established by 1699 this statute, that the legislative jntent as to Incomes such as these plaintiffs have received, was to treat them as arising or accruing to the trustees collectively, rather than to the Individual beneficiaries for whose ultimate benefit they were received, we are obliged to hold that the taxes for the years here in question were lawfully assessed and col- lected, and that the district court erred in its decision to the contrary. This conclusion renders it unnecessary to consider the questions which would have had to be decided upon the plaintiffs’ writ of error in No. 1323, had we agreed with the district court. 1700 “In No. 1323 the writ of error is dismissed, and the defendant in error recovers his costs of appeal. 1701 “In 1324, the judgment of the district court Is reversed, and the case is remanded to that court, with directions to enter judgment for the defendant; and the plain- tiff in error recovers his costs of appeal.” (5 Dept. Reports of Mass., 1011.) (T. D. 2720, June 4, 1918.) 1 702 Corporations Subject to Tax. — ^The tax Imposed by the Federal income tax law is not imposed only upon such corporations as are organized and operated for profit. Any corporation, joint-stock company, or association, and any insurance company, no matter how created or organized or what the purposes of its organization may be, unless it comes within the class of organizations specifically enumerated in the act as exempt, will be required to make returns of annual net income and pay income tax upon the net income which arises and accrues to it during the year. A corporation is not exempt simply and only because it is primarily not organized 1 703 and operated for profit. If income within the meaning of the law arises and accrues to a corporation which is not organized and operated for profit, such income will be subject to the tax imposed by this act. 1704 It is therefore held that commercial men’s associations, * * * and like organ- izations come within the requirements of the law. (T. D. 2153, Feb. 12, 1915.) 1705 Incomplete Corporations. — Corporations which have applied for but have never received charters and corporations which have received charters but never perfected their organizations and which as entities have transacted no business and had no income whatever from any source may, upon presentation of the facts to the collector, be relieved from the necessity of making returns, so long as they remain in this unorganized condition. In the absence of a showing to this effect to the collector of internal revenue, such com- panies will be required to make returns and will be liable to the penalties of the law for failure to do so. (Art. 60, ^303, Reg. 33, Rev., Jan. 2, 1918.) 1706 Corporations Organized During Tax Year. — A corporation organized during the year should render a sworn return on the prescribed form, covering that portion of the year (calendar or fiscal) [for fiscal year read paragraph 1472] during which it was engaged In business or had an income accruing to it. (Art. 84, Reg. 33, Jan. 5, 1914.) INC. 170 TAX CORPORATIOT^S. 1 707 A corporation organized and transacting no business within the calendar year of its organziation must, nevertheless, make and file a return on the basis of the calendar year unless such corporation shall designate a fiscal year other than the calendar year in the manner and form as provided for that purpose. (T. D. 2090, Dec. 14, 1914.) 1 708 Also in the case of a new corporation making a return for the period from the date of its organization to the close of the calendar year, the tax will be computed on the entire net income so returned. (Art. 82, ^339, Reg. 33, Retv, Jan. 2, 1918.) 1 709 Corporations in Existence but Part of Year. — All corporations having an existence as such during all or any portion of a year, unless coming within the classes specifi- cally enumerated as exempt, are required to make returns. Dissolved corporations whose fiscal year coincides v.dth the calendar year will make returns covering the period from January 1 to the date of dissolution, and corporations having a fiscal year other than the calendar year will mmke returns covering the period from the beginning of the fiscal year to the date of dissolution and new corporations wdll make return for the period from the date of their organization to December 31. The net income in all such cases will be as- certained in the m.anner ret out in Paragraph G [i. e., the provisions relating to corporations, ^1787, et seq. herein.] of the act. (T. D. 2090, Dec. 14, 1914.) Affiliated Corporations. — [Read at ^1405.] 1710 Subsidiaries in Name Only. — If subsidiary- corporations exist in name only, or are mere agents or integral parts of the parent corporation and as such, transact no business and have no income of and for their own account, and incur no expenses, all business being transacted, all income being received and all expenses being paid directly by the parent company, no separate accounts being kept by.'' or for such subsidiaries, it will be considered that such subsidiary concerns do not have any taxable income within the meaning of this title, and so long as they are so operated no tax liability will be asserted against them.. (Art. 208, 1[617, Reg. 33, Rev., Jan. 2, 1918.) 1711 In such cases, hcv-^\er, such subsidiary corporations will be required to make returns of annual net income, and shall indorse thereon a statement to the effect that the corporation making th'^ return is a subsidiary or integral part of the parent company (naming it) and that, for its own account, it has no income from any source whatever, that it makes no disbursements and that all the business done in its name is done for the account of and is the business of the parent corporation, and -wdll be accounted for in the return cf such parent corporation. (Art. 208, lf618, Reg, 33, Rev., Jan. 2, 1918.) 1712 If) however, the subsidiary concerns are mere partnerships or branches of the parent com.pany, and not incorporated organizations, then these subsidiary concerns will not be required to make returns of annual net income, but all of their earnings and expenses wdll be taken up and accrunted for in the returns of the parent company or corporation. (T. D. 2161, Feb. 19, 1915.) 1713 Corporation Formed to Avoid Selling at a Sacrifice in Order to Partition. — A cor- poration formed as a family affair to hold property together and not to sacrifice in selling does not come within the class of corporations specifically enumerated as exempt from the requiremetts of the Federal income tax law, and is required to make a return of annual net income showing therein all income arising and accruing to it from all sources and to pay any income tax shown by such return to be due. (T. D. 2137, Jan. 30, 1915.) 1714 Corporations Owned by Exempt Organizations. — A stock corporation all of whose stock is owned by “a corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of whose net income inures to the benefit of any member, stockholder, or individual,” is required under the pro- visions of the Federal income tax law to make a return of annual net income and pay income tax. The fact that all of the stock of the corporation, except shares qualifying the direc- 1715 tors, is owned by a corporation which itself comes within the class specifically enumerated as e.^empt, does not relieve the first-named corporation from liability under the income tax law. The liability of a corporation to the requirements of the Federal income tax law is not r'-ntingent upon the ownership of its stock. (T. D. 2137, Jan. 30, 1915.). 1716 Lessee and Lessor* Corporations. — When a corporation shall have leased its property in consideration that the lessee shall pay in lieu of rental an amount equivalent to a certain rate of dividend on its capital stock or the interest on its outstanding indebted- ness, together with taxe'*^ insurance, or other fixed charges, such payments shall be con- INC. 171 TAX CORPORATIONS. sidisred rental payments and shall be returned by the lessor corporations as income, not- withstanding the fact that the dividends and interest are paid by the lessee direct to the stockholders and bondholders of the lessor. The lessee, in making these payments direct to the bondholders and the stockholders, does so as the agent of the lessor, and the latter is none the less liable to return the amounts thus paid as income and to pay any tax that may be due thereon. The fact that a corporation has conveyed or let its property and has thus parted 1717 with its management and cbntrol or has ceased to engage in the business for which it was originally organized will not relieve it from liability to income tax. If it has or may have income directly or indirectly from any source, it must make a return, account for all such income, and pay any tax assessable upon such income. (Art. 102, ^368-369, Reg. 33, Rev., Jan. 2, 1918.) 1 7 1 8 A railroad company operating leased or purchased lines as an integral part of its line or system, and keeping no separate books of account as to such leased or pur- chased line, and the income from the operation of which can not be segregated, shall include in its income all receipts derived therefrom, and if bonded or other indebtedness of the leased^ or purchased line has been assumed by the operating company, it may deduct from its gross income the interest paid on such indebtedness, provided the interest so paid plus the interest paid on its own indebtedness is not in excess of the limit fixed by the la_w. In this event the leased or purchased line so long as it has a corporate existence will make return of annual net income setting out that on its own account it has neither income nor expenses, and that both are taken up in the return of the operating company, naming it. If the leased or purchased line keeps separate books of account, or the income from 1 7 1 9 its operations is, or can be segregated, or if the lessee or operating company pays it a certain rental, or in lieu of rental pays a certain per cent of dividends on its stock, interest on its bonds, taxes, etc., it (the lessor) will return the same as its income and will be subject to tax accordingly and the lessee or operating company will make its return as though it were in no way related to the leased line. (Art. 125, ^415-416, Reg. 33, Rev., Jan. 2, i9i8.)f 1 720 The Rensselaer & Saratoga Railroad Company leased its properties to the Delaware and Hudson Company, which agreed to pay the interest upon and discharge the bonds issued by the former, to maintain the right of way and buildings, and to pay direct to each stockholder dividends at the rate of 8% per annum on each share of stock. The lessor received $1,000 per annum from the lessee to enable it to main^in its corporate existence. The lessor maintained that the dividend payments to its stockholders were not income to it and paid income tax assessed thereon to it by the Collector of Internal Revenue under protest. This action was on demurrer to the complaint of the Rensselaer & Saratoga Railroad Company, on the ground that it did not allege facts sufficient to constitute a cause of action. The court sustained the denlurrer, saying; It seems to me clear: 1721 1. That the moneys to be paid by the Delaware & Hudson Canal Company to the creditors and stockholders of the Rensselaer & Saratoga Railroad Company are rents or compensation to the Rensselaer & Saratoga Railroad Company^ for the use and occupation of its property, and, as the plaintiff corporation pays no operating or repair expenses, constitutes, aside from the interest paid, net income within the meaning of the law in question. 2. It is immaterial, so far as that question is concerned, that such dividends 1 722 are fixed as to amount by the lease, and by its terms paid directly to such stock- holders. 1 723 3. It is also immaterial that the plaintiff corporation is not possessed of money or other cash revenues with which to pay the tax. It has power to borrow. 1 724 4. The corporation could not exonerate itself from liability for thls^ tax subse- quently Imposed under a law thereafter enacted by making a lease of its property which provides for the payment of all its surplus revenues directly to its stockholders. On the face of the complaint a cause of action is not stated, and the demurrer 1725 is sustained. There will be an order and judgment accordingly. (Rennsselaer & Saratoga Railroad Company vs. Irwin, Collector, District Court, N. D. New York, March 5, 1917 — 239 Fed. 739^Act of Oct. 3, 1913.) (Affirmed 249 Fed. 726. Writ of certiorari denied by Supreme Court, April 15, 1918.) 1726 I am of the opinion, however, that the West End Street Railway Company was a duly organized and existing corporation under the laws of Massachusetts and had a net income which arose or accrued to it during the period from March 1, to December 31, 1913,. within the meaning of the Income Tax Statute of October 3, 1913, (c. 16; 38 Stat., P..114, 172) and was subject to the imposition of the tax herein authorized. The rental whi^h, under the terms of the lease of its road to the Boston Elevated Railway Company | INC. 172 TAX CORPORATIONS. was to be paid by the lessee directly to the shareholders of the West End Street Railway Company was income of the West End Company and did not cease to be such because it w'as not paid directly to it. The Boston Elevated Railway Company, in making the pay- ment to the shareholders, acted in no other capacity than as agent of the West End Com- pany. Anderson v. Morris & Essex R. R. Co., supra; Lewellyn v. Pittsburgh, etc., R. R. Co., 222 Fed. 177; Public Service Ry. Co. v. Herold, 219 Fed. 301. (Opinion by the Court in West End Street Railway Company v. John F. Malley, Collector, U. S. District Court, District of Massachusetts, June 23, 1916.) (Affirmed U. S. Circuit Court of Appeals, First Circuit, 246 Fed. 625. (Writ of certiorari denied by Supreme Court, April 15, 1918.) (T. D. 2620, Dec. 17, 1917.) 1727 Public Utility Corporation Intrusted with Use, Merely, of Property Owned by State. The fact that the plaintiff was a public utilities corporation which, under the laws of the State, was not the owner of the property but merely intrusted with the use thereof which it must devote to the public, does not entitle it to more favorable treat- ment than other corporations, it being a corporation organized for profit, having a capital stock represented by shares, and the act making no exceptions in favor of public utilities. (Caption: Union Hollywood Water Co. vs. John P. Carter, Collector, case. Act Aug. 5, 1909 (238 Fed. 329). (T. D. 2475, April 4, 1917.) ^ . . . 1 728 Liquidating Corporations. — A corporation going into liquidation during any period may, at the time of such liquidation, prepare a “final return” covering the income received or accrued to it during the fractional part of the year during which it Was engaged in business, and immediately file the same with the collector of the dis- trict in which the corporation has its principal place of business. Before distributing its assets, a dissolving corporation should reserve funds sufficient to pay any income tax assessable against it. Otherwise the tax may be collected by suit against the stockholders. (Art. 205, 11612, Reg. 33, Rev., Jan. 2, 1918.) 1729 Colorations Dissolving Before the Time for Making Returns. — A corporation which has continued in business through a calendar year cannot evade liability for the special excise tax imposed by Act of August 5, 1919, Section 38, by dissolving before the time when it is required to make a return of said business to the collector of internal revenue and the assessment of the tax. — United States v. General Inspection & Loading Co., 192 Fed. 223. Under Corporation Act N. J. Sections 53-55, the officers of a dissolved corporation 1730 who are also directors have authority to make return to the collector of internal revenue of its business of the preceding year on which it has incurred liability for the special taxjmposed by Act of August 5, 1909, Section 38. , Id. 1731 Corporation Dissolved Prior to October 4, 1917. — A corporation which was dissolved in 1917, prior to the passage of the war-revenue act of October 3, 1917, is subject to tax under the act of September 8, 1916, as amended, and also to the war income tax and the war excess profits tax imposed by the act of October 3, 1917 (Brady et al. v. Anderson, 240 Fed. 665). A corporation so situated will make a return on revised Form 1031, covering the period in 1917 during which it was in business prior to its dissolution. If it shall have previously made a return covering this period and shall have paid any exeCss profits tax under the act of March 3, 1917, it shall be entitled to credit for the amount of such tax so paid against any excess profits tax assessable against it under Title II of the act of October 3, 1917. (Art. 61, 11304, Reg. 33, Rev., Jan. 2, 1918.) Status of Partnerships. — [Read at 1[1269 and 113077.] 1732 Status of Private Banks. — Private banks which have the form of corporate organiza- tions, elect officers and a board of managers, have a distinctive name, a fixed situs, and distribute their net earnings upon the basis of the amount of capital invested by the members or owners, are held to be associations within the meaning of the Federal income tax law, and in their organized capacity should make returns of annual net income and pay any income tax thereby shown to be due. (T. D. 2137, Jan. 30, 1915.) 1733 The holders of the stock or the owners of the bank will be exempt from the normal tax to the extent of the dividends or earnings which they receive from such private banks as make returns in their organized capacity and pay income tax in accordance therewith. The individual owners of the bank will not be required to return as income for the purpose of the normal tax any dividends or earnings received from the private bank which pays the tax on its net earnings, but for the purpose of the supertax the divi- dends will be returned as income by the individual stockholders or owners. (T. D. 2137, Jan. 30, 1915.) INC. 173 TAX CORPORATIONS. 1734 The attention of this office has been called to the fact that many private banks, which have an organization similar in form to that of corporations — that is, they have articles of agreement or association, elective officers, and in some instances, boards of managers — have not been called upon by Collectors to make returns of annual net in- comes pursuant to the requirements of the Federal income tax law, which provides, in effect, that all corporations, joint stock companies, or associations, and all insurance companies, “no matter how created or organized,” shall make returns and pay any income tax thereby shown to be due. A private bank having a formal organization, a distinctive nanie and a fixed situs, 1 735 is held to be an association and, as an organization, comes within the requirements of the income tax law. Collectors are therefore urged to have all such banks in their respective districts, 1 736 make formal returns on Form 1031 Revised, and report them for assessment on their Forms ♦ * ♦ , (Mimeograph letter No. 1271 to Collectors, Oct. 19, 1915.) 1 737 When it can be clearly shown that a private bank is owned by one man, it is evident that such bank is not an association within the meaning of the Federal income tax law, and that therefore such bank will not be required to make a return such as corpora- tions and associations are required to make, but the individual owner, if he has a net income of 5^3,000 [$1,000 or $2,000] or more, will be required to make a return on Form 1040, showing in such return the income which he receives not only from the bank but from all other sources. (T. D. 2137, Jan. 30, 1915.) 1738 Private banks which do not have this formal organization [paragraph 1732], but which transact business, not in the name of the bank, but in the name of the indi- viduals who compose the firm, as John Smith & Co., are held to be co-partnerships and, as such, are not required to make returns. In such cases the individuals who compose the firm, if they have net incomes in excess of $3,000 [$1,000 or $2,000], will be required to make individual returns on Form 1040, accounting for therein, their respective incomes arising and accruing from the earnings of the bank. (Mimeograph letter No. 1271 to Collectors, Oct. 19, 1915.) 1739 Law 51265. Corporations that are Exempt from Tax. — “Sec. 231. That the following organizations shall be exempt from taxation under this title — 1 740 Law ^266. (1) Labor, agricultural, or horticultural organizations; 1741 Law ^267. (2) Mutual savings banks not having a capital stock represented by shares; 1742 Law ^268. (3) Fraternal beneficiary societies, orders, or associations, (a) oper- ating under the lodge system or for the exclusive benefit of the members of a frater- nity itself operating under the lodge system, and (b) providing for the payment of life, sick, accident or other benefits to the members of such society, order, or association or their dependents; 1 743 Law 1(269. (4) Dom.estic building and loan associations and cooperative banks without capital stock organized and operated for mutual purposes and without profit; 1 744 Law 1(270. (5) Cemetery companies owned and operat^ed exclusively for the bene- fit of their m.embers; 1745 Law 1(271. (6) Corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; 1746 Law 1[272. (7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual; 1 747 Law 1(273. (8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare; 1748 Law 1(274. (9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or member; INC. 1 74 TAX CORPORATIONS. 1 749 Law ^275. (10) Farmers’ or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local chaaracter, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses; 1760 Law ^276. (11) Farmers’, fruit growers’, or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; 1751 Law ^277. (12) Corporations organized for the exclusive purpose of holding title to property, collecting inco:r_e therefrom, and turning over the entire amount thereof, less expenses, to an organization -which itself is exempt from the tax imposed by this title; 1752 L aw ^278. (13) Federal land banks and national farm-loan associations as pro- vided in section 26 of the act approved July 17, 1916, entitled “An Act to provide capital for agricultural development, to create standard forms of Investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Governm.ent depositaries and financial agents for the United States, and for other purposes”; 1763 Law ^279. (14) Personal service corporations. [For definition see ^1308 and ^3083.] 1754 Proof Necessary to be Filed by Certain Organizations to Establish the Fact that They are Exempt from Filing Income Tax Returns or Paying an Income Tax. — The exemption from filing returns and paying income tax of corporations or associations organized and operated exclusively for religious, charitable, scientific or educational purposes, business leagues, chambers of commerce, boards of trade, civic leagues, cemetery companies, and pleasure and recreation clubs, under the Act of September 8, 1916, as amended by the Act of October 3, 1917, is conditional. In order to establish exemption and thus be relieved of the duty of filing returns 1755 and paying income tax, it is necessary that such organizations, as are specified hereinbefore file an affidavit with the Collector of Internal Revenue of the District in which they are located, W'hich will show the character of the organization, the purpose for which organized, the source of income and disposition of the same, and whether or not any of its income is credited to surplus or inures or may inure to the benefit of any private stockholder or individual. To such affidavit should be attached a copy of the charter or articles of incorporation and by-laws of the organization. Upon receipt of the affidavit accompanied by the copies of the charter, or articles of 1 756 incorporation and copy of the by-laws by the Collector he will advise the or- ganization whether or not it is exempt. If, however, the Collector is in doubt as to the taxable status of the organization he will refer the affidavit and accompanying papers to the Commissioner of Internal Revenue for decision. (T. D. 2693, April 8, 1918.) 1767 Conditional. — Corporations or associations organized and operated exclusively for religious, charitable, scientific, or educational purposes, business leagues, cham- bers of commerce, boards of trade, civic leagues, cemetery companies, and'pleasure and re- creation clubs, are not, as such, exempt from the requirements of this title. Their exemp- tion is conditional, and in order to be relieved from liability under the law they must file with the collector of internal revenue an affidavit setting out the character and purpose of the organizations, and showing that no part of any income which they receive inures to the benefit of any private stockholder or individual, and that such income is used exclu- sively for the promotion of the purposes for which organized as indicated in the particular paragraphs under which exemption is claimed. (Art. 67, ^312, Reg. 33, Rev., Jan. 2, 1918.) 1 768 Qualifications for Exemption. — In every instance wherein exemption is condi- tioned upon the ground that no part of the net income received by corporations inures to the benefit of any private stockholder or individual, it will be necessary, before such organizations will be classed as exempt, for them to show to the satisfaction of the collector or the Commissioner of Internal Revenue; (1) The character and purpose of the organization; (2) The source from which all its income is derived; (3) What disposition is made of such incomes; and (4) Whether or not any of it is credited to surplus or Inures or may inure to the benefit of any private stockholder or individual. (Art. 78, 1[331, Reg. 33, Rev., Jan. 2, 1918.) 1759 Unconditional. — Among the corporations exempt from the tax, without condition, are labor, agricultural and horticultural organizations, mutual savings bank not having capital stock represented by shares, fraternal beneficiary society, order, or asso- INC. 175 TAX CORPORATIONS. elation operating under the lodge system, or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, domestic building and loan associations, Federal land banks, and national farm loan associations, organized pursuant to the act of July 17, 1916, joint-stock land banks as to income specified in the law, and public utilities whose income inures to the benefit of any State, Territory, or political subdivision thereof. In all cases wherein the exemption is without condition, and the collector is satisfied 1760 that the organization comes within the exempted class, he will be authorized to eliminate it from his list and relieve it from the necessity of making returns. (Art. 68, ^313-314, Reg. 33, Rev., Jan. 2, 1918.) 1761 Organizations whose Exemption is Doubtful. — ‘Any corporation which entertains any doubt as to its status under the law, for the reason that it does not clearly come within one or another of the classes of those specifically enumerated as exempt, should, within the prescribed time, file a return and attach thereto for the consideration of the collector, a statement setting out fully the nature and purpose of the organization, the source of its income, what disposition is made of it, and particularly of any surplus which it may receive over and above its reasonable needs. the collector is in doubt, he will refer the statement and return to the Commis- 1762 sioner of Internal Revenue for decision, and withhold listing for assessment until a decision is reached. (Art. 79, ^332-333, Reg. 33, Rev., Jan. 2, 1918.) 1 763 Exemption having been Established. — When a corporation or organization has established its right to exemption under any of the paragraphs of section 11 of this title, it will be unnecessary for it to make a return or to make any further showing thereafter with respect to its status under the law, unless it changes the character of its organization or the purpose for which it was originally created. I Collectors will keep a list of all corporations whose exemption is conditional, to 1 764 the end that they may occasionally inquire into their status and ascertain whether or not they are violating the conditions upon which their exemption is' predicated. (Art. 80, 11334-335, Reg. 33, Rev., Jan. 2, 1918.) 1765 Mutual Insurance Companies, etc. — The organizations mentioned in paragraph “tenth” of section 11, act of September 8, 1916, as amended, are specifically exempt, provided that their entire income consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses, incurred in pursuance of the pur- pose for which organized. If any of such organizations have income from any source other than assessments, dues, and fees, such income will be held to be subject to tax, and the organizations receiving the same will be required to make returns and to pay any tax thereby shown to be due. (Art. 69, 1[316, Reg. 33, Rev., Jan. 2, 1918.) 1766 Domestic Building and Loan Associations. — A domestic building and loan asso- ciation entitled to exemption is one organized under and pursuant to the laws of the United States or under and pursuant to the laws of some State or Territory thereof, and which is actually carrying on for the benefit of its members a building and loan asso- ciation business in accordance with the laws under which it is organized. The fact that such an association issues fully paid or prepaid shares, calling for a specified rate of interest or dividends, will not disqualify it for exemption. The exemption is without qualification other than that the association is a domestic building and loan association. If a corpo- ration by any other name is carrying on an exclusive building and loan business, before it is entitled to exemption it will be incumbent upon it to show to the satisfaction of the Commissioner of Internal Revenue that it is in fact a building and loan association. (Art. 70, 11317, Reg. 33, Rev., Jan. 2, 1918.) 1767 Cemetery Company. — A cemetery company having a capital stock represented by shares, or which is operated for profit or for the benefit of others than its members, does not come within the exempted class, and will be required to make returns of annual net income and pay any income tax thereby shown to be due. In the case of such company a reserve set aside out of profits as a “maintenance 1 768 fund” is not deductible from gross income, and any accretions to such fund will be ^ held to be income, and, as such, must be returned by the corporation. The expenses of maintenance will be deductible as they are paid. (Art. 71, 1[318-319, Reg. 33, Rev., Jan. 2, 1918.) 1769 Social Clubs. — Social clubs organized and operated exclusively for pleasure, recre- ation, and other nonprofitable purposes are exempt from the tax, provided no part of any net income which they receive inures to the benefit of any private stockholder^ or individual. This exemption will reach practically all social and recreation clubs which are supported by membership fees, dues, and assessments. INC. 176 TAX CORPORATIONS. If a club, by reason of the comprehensive powers granted In its charter, engages 1770 in traffic, in agriculture, or horticulture, in the sale of real estate, timber, etc., for profit, it will be held that such club is not organized and operated exclusively for pleasure, recreation, or social purposes. It thus becomes a business or commercial enter- prise, and any profit realized from such activities is subject to the tax imposed by this title, and the club so operated must make returns of annual net income. (Art. 72, ^320-321, Reg. 33, Rev., Jan. 2, 1918.) 1771 Labor, Agricultural and Horticultural Organizations. — Agricultural or horti- cultural organizations, which are exempt under this title, do not Include those corporations engaged in growing agricultural or horticultural products, raising live stock or similar products for profit, but will include only those organizations W'hich, having no net income inuring to the benefit of their members, are educational or instructive in character, and which have for their purpose the betterment of the conditions of those engaged in these pursuits, the improvement of the grade of their products, and the encouragement and promotion of those industries to a higher degree of efficiency. Included in this class as exempt are those organizations such as county fairs and 17 72 like associations of a quasi-public character, which, through a system of awards, prizes, or premiums, are designed to encourage the production of better live stock, better agricultural and horticultural products, and whose income, derived from gate receipts, entry fees, donations, etc., is used exclusively to meet the necessary expenses of upkeep and operation. Societies or associations which have for their purpose the holding of annual or 1773 periodical race meets, and from which profits inure or may inure to the benefit of the members or stockholders do not come within the terms of this exemption. (Art. 73, 11322-324, Reg. 33, Rev., Jan. 2, 1918.) 1 774 Corporations owning sugar or other plantations and disposing of the product thereof are held to be operating for profit and are not entitled to exemption as agri- cultural organizations. (T. D. 2090, Dec. 14, 1914.) 1775 Corporations engaged In agricultural or horticultural pursuits for profit are liable under the law to make returns and to pay the income tax thereby shown to be due. (T. D. 2090, Dec. 14, 1914.) 1 77 6 Societies Not Agricultural or Horticultural. — A corporation engaged in the business of raising stock or poultry, or growing grain, fruits, or other products of this character, as a means of livelihood and for the purpose of gain, is an agricultural or horticultural society only in the sense that its name indicates the kind of business in which it is engaged and, as such, is not exempt from the requirements of the law , and must make returns and pay any income tax thereby shown to be due. (Art. 74, 1f325, Reg. 33, Rev., Jan. 2, 1918.) 1 7 7 7 Cooperative Associations Defined. — Cooperative associations. In order to come within the exemption provided in paragraph “eleventh” must establish to the satisfaction of the collector or Commissioner of Internal Revenue the fact that, for their own account, they have no net income, their business being to market the products of their members, and that the entire proceeds of such marketing, less necessary selling expenses, are turned back or paid to the members on the basis of the quantity of produce furnished by them — quality and grade being considered — as the purchase price of such produce. If in the course of their business such associations purchase for cash at a stipulated 1778 price articles of produce with a view to selling them for gain, it will be held that such associations are organized for profit and such associations will be required to make returns of annual net income and include therein, for the purpose of the tax, all income derived from such transactions. If amounts paid to members are based solely upon the quantity of produce furnished, such amounts may be deducted from the gross proceeds of sales, and the taxable net income will be the amount of earnings passed to surplus, or distributed or distributable among members on the basis of their stock holdings. (Art. 75, 1f326-327, Reg. 33, Rev., Jan. 2, 1918.) 1779 Fruit-growers’ associations whose purpose is to promote the mutual benefit of their members in marketing their products and which are not organized for profit and have no capital stock represented by shares, and whose income is derived wholly from mernber- ship fees, dues, and assessments to meet necessary expenses are horticultural societies within the meaning of the law and are not subject to tax or required to make returns. (T. D. 2090, Dec. 14, 1914.) INC. 177 TAX CORPORATIONS. 1780 Co-operative societies, associations or corporations which make a periodical refund — sometimes called a dividend — to member or to prospec'tive members or to patrons generally, in proportion to the purchases made by the 'recipient, are not within any of the exceptions or exemptions of the Act of September 8, 1916, as amended by the Act of October 3, 1917, and are subject to its provisions. Where such refund payments are made in accordance with by-laws or published 1781 rules regularly adhered to, they are to be regarded as discounts or rebates tending to reduce the taxable net income of the organization. Like discounts generally, they should appear as an added item of cost in the detailed schedule of cost items submitted with the organization’s return of incomb. T,his ruling is in accordance with settled practice in the administration of the 1782 income tax laws, adopted because the real purpose of such organizations is to furnish goods at cost. So-called “dividends” of this character are wholly different from ordinary dividends 1783 based on stock-holdings, and they need not be listed as income by the recipient. However, If the recipient is claiming the right to deduct as business expenses any expenditure on which the refund is based in whole or in part, the sum claimed as a deduction must be reduced in proportion to the refund received. (T. D. 2737, June 19, 1918.) 1 7 84 Cooperative Dairy Defined. — Cooperative dairy companies or associations not having capital stock and engaged in collecting milk and disposing of the same or the products thereof, and distributing the proceeds of the business, less necessary oper- ating expenses, among their patrons, upon the basis of the quantity of butter fat in the milk furnished by such patrons, are held to be exem.pt from the tax imposed by this title. If, however, a dairy company purchases milk at a stipulated price and disposes 17 85 of the same, or its products, through sale or otherwise, at a profit, and such profit inures to the benefit of the company or its members, on any basis other than the butter-fat content of m.ilk furnished, such company will come within the requirements of the law, and will be subject to the tax. fArt. 76, ^328-329, Reg. 33, Rev., jan. 2, 1918.) 1 786 Lodge System Defined. — A society or association “operating under the lodge system” is one organized under a charter or dispensation with properly appointed or elected officers, with an adopted ritual or ceremonial, holding meetings at stated intervals. An order, society, or association coming within this definition is exempt from the requirements of the income tax law. (Art. 77, ^330, Reg. 33, Rev., Jan. 2, 1918.) 1787 Law ^[280. Net Income of a Corporation Defined. — “Sec. 232. That in the case of a corporation subject to the tax imposed by section 230 [^1662] the term “net income” means the gross income as defined in section 233 [111788] less the deductions allowed by section 234 [1[1922], and the net income shall be computed on the same basis as is pro- vided in subdivision (b) of section 212 [1[755] or in section 226 [returns when accounting period is changed, 1[1479].” 1 788 Law 11281. Gross Income of a Corporation Defined. — “Sec. 233. (a) That In the case of a corporation subject to the tax imposed by section 230 [111662] the term “gross income” means the gross income as defined in section 213 [11763],” [See 112841.] 1789 Gross Income Defined. — Gross income embraces not only the operating revenues but also income, gains, or profits from all other sources, such as rentals, royalties, interest, and dividends from stock owned in other corporations; and also profits made in other corporations; and also profits made from the sale of assets, investments, etc. A true and accurate record of all income received, as well as of all disbursements or charges against income, should be kept, in order that it may be identified and verified by an internal- revenue officer if an examination of the books should be deemed advisable. (Art. 88, 11349, Reg. 33, Rev., Jan. 2, 1918.) 1790 Banks and Financial Institutions. — Gross Income of banks and other financial institutions consist of the total revenue received within the year for which the return is made from the operation of the business, including income, gains, or profits from the sale of capital assets and from all other sources. In cases where securities or other assets, real, personal, or mixed, acquired prior to 1791 March 1, 1913, are disposed of during the year, the gain or loss thereon will be based upon the difference between the price at which disposed of and the fair market price or value of such assets as of March 1, 1913, or the difference between the price at which disposed of and the cosl if acquired subsequent to that date. (Art. 90, 11351-352, Reg. 33, Rev., Jan. 2, 1918.) 1792 Bank Discounts. — In cases wherein banks or other corporations loan money by discounting bills or notes, one or two methods shall be used In determining the amount of discount that is to be reported as income, namely (1) if the bank or corporation INC. 178 TAX CORPORATIONS. makes a practice of crediting such discount directly to a “discount account” or to profit and loss, the total amount thus credited during the year shall be considered income and shall b'e so reported, regardless of the fact that a portion of this amount may represent discount paid in advance and not then earned; (2) if the bank or corporation follows tbe practice of crediting such discount to an “unearned discount account,” and later, as the discount becomes earned, debits the unearned account and credits an “earned discount account” with the amount so earned, the total amount credited to the “earned discount account” during the year shall be considered income and shall be so returned. The corporation having income of this character should state in a memorandum attached to its return which of the two methods was used in determining the amount of discount returned as incom.e. (Art. 114, ^385, Reg. 33, Rev., Jan. 2, 1918.) 1 793 Dividends On Federal Reserve Bank Stock. — The Federal reserve statute, section 3, of the act of October 22, 1914, provides that Federal reserve banks and the capital stock and surplus therein, are exempt from taxation. Under this provision of law the exemption provided for in the Federal reserve 1 794 act attaches to and follows the income derived from dividends on stock of Federal reserve banks into the hands of stockholders, that is to say, the dividends received on the stock of Federal reserve banks are exempt from the taxes imposed by the acts of Septem-ber 8, 1916, as amended, and of October 3, 1917. This ruling does not contemplate, however, that dividends paid by member banks 1 795 are [not to be included in gross Income as provided] by this title, but such dividends in so far as they may be received by other corporations, may be treated as a [de- duction] against [gross] income in computing [net income]. (Art. 86, ^345-347, Reg. 33, Rev., Jan. 2, 1918.) [1[2867.] 1796 Manufacturing Corporations. — Gross Income for the purpose of returns of manu- facturing companies shall consist of the total sales plus the inventory at the end of the year less the sum of the cost of goods or materials purchased during the year and the inx'entory at the beginning of the year. Instructions as to how inventories shall be taken will be included in special regulations [^1862] to be furnished upon application to the collector of internal revenue. To the gross manufacturing income should be added the in- come, including dividends, received from other corporations, and gains or profits from all sources. (Art. 91, 1[353, Reg. 33, Rev., Jan. 2, 1918.) 1797 Mercantile Corporations. — For the purpose of returns gross income of mercantile companies shall consist of the total sales plus the inventory at the end of the year less the sum of the cost of goods purchased during the year and the Inventory at the begin- ning of the year. As to method of taking inventory [^[1862], see preceding [^1796] para- graph. To the amount of income thus ascertained should be added the Income, gains, or profits derived from all other sources. All sales made during the year, whether compensated for by accounts receivable, 1 798 bills receivable, cash, or other property at a determined cash value, must be included in gross income of the year in which the sales were made. (Art. 92, ^[354-355, Reg. 33, Rev., Jan. 2, 1918.) 1799 Miscellaneous Corporations. — Gross Income of miscellaneous corporations consist of total revenue derived from the operation and management of the business and property of the corporation making the return, together with all amounts of income, including the income, gains, or profits from all other sources, including dividends received. (Art. 93, ^356, Reg. 33, Rev., Jan. 2, 1918.) 1 800 Contracting Corporations. — Corporations engaged in contracting operations and which have numerous uncompleted contracts, which In some cases run for periods of several years, will be allowed to prepare their returns so that the gross Income will be arrived at on the basis of completed work — that is, on jobs which have been finally com- pleted — any and all moneys received in payment for completed jobs will be returned as income for the year in which the work was completed. If ‘■he gross income is arrived at by this method, the deduction from gross Income should be limited to the expenditures made on account of such completed contracts. [See ^2843.] Or the percentage of profit from the contract may be estimated on the basis of per- 1801 centage of completion and payments made thereon, in which case the income to be returned each year during the performance of the contract will be computed upon the basis of the expenses incurred on such contract during the year; that is to say, if one-half of the estimated expenses necessary to the full performance of the contract are 'incurred during one year, one-half of the gross contract price should be returned as income for that year; all under or over statements of income to be adjusted upon completion the contract and return made accordingly. [See 1[2843.] INC. 179 TAX CORPORATIONS. In cases wherein contracts are fully performed in one year, although payment 1 802 therefor may be deferred until the next, the income resulting from the performance of the contract shall be returned for the year in which it was actually earned and determined. (Art. 121, ^398-400, Reg. 33, Rev., Jan. 2, 1918 ) [See 1(2843.1 1 803 Warrants of City, etc. — In cases wherein warrants are issued by a city, town, or other political subdivision of a State, and are accepted by the contractor in payment for public work done, the face value of such warrants must be returned as income for the year in which^ they are received. If, for any reason, the contractor upon conversion of the warrants into cash, does not receive and can not recover the full face value of the warrants so returned, he may allowably deduct from gross income for the year in which the warrants are converted into cash, any loss sustained, which loss will be measured by the dlifference between the face value of the warrants returned as income and the amount actually received for them in cash, or its equivalent, when redeemed or disposed of. (Art. 108, lf378, Reg. 33, Rev., Jan. 2, 1918.) [1(2844.] Farming Corporations.— [Read at K913 and at K2845.] I 804 Gross Income of Corporations Conducting More Than One Class of Business. — Where a corporation is engaged in carrying on more than one class of business, gross income derived from the different classes of business shall be ascertained according to the definitions above, and which are applicable thereto. (Art. 112, Reg. 33, Jan. 5, 1914.) I 805 Bad Debts Recovered. — Bad debts or accounts charged off by a corporation because of the fact that they were determined to be worthless, and subsequently recovered, constitute income for the year in which recovered, regardless of the date when the amounts were charged off. Neither the date at which the debt was charged off nor the fact that it was or was not deducted from gross income in any return made for tax purposes, will in any way affect its character as income of the year in which recovered. (Art. 110, 1^380 Reg. 33, Rev., Jan. 2, 1918.) 1 806 Compromise of Indebtedness. — This office is in receipt of your letter of the 30th ultimo in which you submit for ruling the following proposition: 1 807 “A company which has been unable to pay any Interest on its bonded indebtedness for some years proposes to settle thatindebtedness, part in new securities and part in cash, the creditors to reduce the face of the bonds by $100,000 as an inducement for the raising of $100,000 cash. “By this process the apparent financial condition of the debtor company is im- 1808 proved by $100,000, not through any earnings, but by effecting a settlement with its creditors by which $200,000 of its bonds are cancelled at a cost to it of $100,00^ in cash, namely at 50c on the dollar.” In reply to your inquiry as to whether such a compromise of indebtedness is taxable 1809 as income, you are informed that while in fact the earnings of the corporation are in no wise increased by this compromise, the liabilities are reduced and to that extent the corporation gains in its n'et worth. In somewhat similar cases to this, in which the creditor has forgiven the^ debt 1 81 0 of the debtor, this office has held that the amount of the debt forgiven constitutes income, in this particular case^ in the opinion of this office, the difference between the amount realized by the corporation when the bonds were sold and the amount which it now is required to pay upon the redemption of the same, constitutes income which income may be prorated over the period elapsing between the date of the bond issue and the date of their payment, and that portion of such income apportioned to the years subsequent to January 1, 1909, will be returned as taxable income for the year in which the bonds are redeemed. (Letter signed by Commissioner W. H. Osborn, and dated July 10, 1915.) 1811 [The Circuit Court of Appeals, Second Circuit, held in U. S, vs. Oregon-Washing- ton R. & Nav. Co., April 24, 1918 (251 Fed. 211), that a debt forgiven is not in- come to the debtor. (Page 665, 1918 Income Tax Service.)] 1812 Prevailing Rates of Exchange at Time Income on Foreign Investments was Credited to Govern in Computing Tax Liability on Such Income. — This office acknowledges receipt of your letter of January 4, 1916, wherein you cite the case of a resident American citizen who had accruing to him from time to time income from foreign investments which was not remitted to the United States but was placed to his credit in different foreign countries, and request to be advised whether in computing income tax liability it will be proper to use the rates of exchange prevailing at the time the amounts were credited abroad. INC. 180 TAX CORPORATIONS. In reply you are advised that, in the case cited, it will be proper for the individual 1813 to return each item of income at the rate of exchange which prevailed on the date it was credited to his account. (Letter to Herbert M. Teets, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated January 11, 1916.) 1814 Sinking Funds Invested in Bonds of Corporation. — If the trustees of a sinking fund established by a corporation have invested the amount of the sinking fund reserve or any portion of it in the bonds of the corporation and such corporation pays to the trustees the interest on these bonds, such corporation will be permitted to deduct such interest from its gross income, provided the amount of the interest thus paid, plus the interest on any other outstanding indebtedness which it may have, does not exceed the limit fixed by law. The interest paid to the trustees, together with all other earnings on investments made by the trustees of the sinking fund, must be included in the gross income of the corporation. (Art. 189, ^577, Reg. 33, Rev., Jan. 2, 1918.) 1815 Sale of Patents. — A corporation disposing of patents by sale, should determine the profit or loss arising therefrom, by computing the difference between the selling price and the cost, or value as of March 1, 1913, if acquired before that date. The apparent profit or loss should be increased or decreased, as the case may be, by the amounts deducted since March 1, 1913, as a return of capital invested in such patents. (Art. 109, ^379, Reg. 33, Rev., Jan. 2, 1918.) [1[2847.] 1816 Royalties from Patent Rights. — [Read 1[889.] Royalties received by a corporation in accordance With a contract by which it has assigned the patent rights to manu- facture machines, etc., are income and should be so accounted for. I’he owner of the patent may deduct from gross income each year, until the capital invested therein is ex- tinguished a sum ascertained by dividing the cost of the patent by the number of years constituting its life or by a number representing the years of its life remaining after the date of acquirement. (Art. 113, 1[384, Reg. 33, Rev., Jan. 2, 1918.) 1817 Royalties from Mines. — In the case of mines operated by a lessee on a royalty basis it is held that the lessor in disposing of his ores or natural deposits on the basis of royalties has a measure of profit in every ton of ore disposed of in this way, and that •o much of the gross receipts on account of royalties as is in excess of depletion, * * * plus any incidental expenses to which the corporation mav be subject, is income within the meaning of the Federal incom^ tax law and should be so returned by the lessor. (T. D, 2152, Feb. 12, 1915.) 1818 [It was so held under Act of Aug. 5, 1909, in the Sargent Land Company Case by the Supreme Court, June 15, 1917, (252 U. S. 503) (T. D. 2436) (Page 220, 1918 Income Tax Service).] 1819 Interest Received and Paidby Brokers in Connection with Purclrse and Carrying of Securities for Customers. — The appended decision [captions only] of the United States Circuit Court of Appeals, in the case of Altheimer & Rawlings Investment Co. V. Allen, collector, is published for the information of internal-revenue officers and others concerned. (U. S. Circuit Court of Appeals, Eighth Circuit. 248 Fed. 688.) 1. Gross Income. A corporation which did a brokerage business and bought 1820 securities for its customers. Who paid only a part of the purchase price, paying interest on balances, the corporation also paying for the securities purchased only part of the purchase price and owing balances on which it paid interest, including in return of gross income the difference between the interest received and the interest paid, made incorrect return. • 2. Interest. The interest received by plaintiff from its customers should be 1821 included in gross income. In determining net income, interest can be deducted only to an amount not exceeding the paid-up capital stock outstanding at the close of the year. 3. Judgment Affirmed. The judgment of the United States District Court 1822 (246 Fed., 270; T. D. 2441) is affirmed. (248 Fed. 688.) (T. D. 2686, April 1, 1918.) 1823 Interest Allowed on Advance Payments of Income and Excess Profits Tax during 1918. — Treasury Decision 2622, dated December 26, 1917, is amended by the revocation of the following paragraph: “The interest at the rate of 3% per annum (365 days), allowed to a taxpayer on advance payments on income and excess profits taxes, must be considered income and accounted for as income by the taxpayer in his return for the year in which said interest is allowed." (T. D. 2695, April 11, 1918.) INC. 181 TAX CORPORATIONS. 1 824 Interest Received from Tax-free Bonds. — The law requires the debtor corporation to deduct one normal tax from the interest on bonds containing a tax-free covenant, and to account for same. In'terest received by a corporation or indivudial on bonds held, whether they are guaranteed to be tax-free or not, rhust be included in the income of the corporation or individual receiving the same and must be so accounted for in the return of^annual net income. The matter of complying with the covenant of the bond is a matter to be adjusted 1 825 between the debtor corporation and the bondholder. If, however, it is clearly established by affidavit or otherwise that the debtor cor- 1 826 poration has actually withheld and paid to the proper officers of the United States the tax on such interest income, the recipient, having returned such interest as Income, may take credit against any tax to which subject on the basis of return, for the tax so paid by the debtor corporation. (Art. 122, ^401-403, Reg. 33, Rev., Jan. 2, 1918.) 1827 Discount for Cash in Relation to Income and Capital Account. — Reference Is made to your letter of the 15th instant, in which you state that a corporation has pur- chased a large quantity of equipment and in consideration of making a prompt payment therefor has been allowed a cash discount. You ask to be advised whether or not this dis- count should be reported as income. l[In reply you are informed that the discount allowed to the corporation purchasing this new equipment need not be reported as income, but the cost of the equipment as charged to capital must represent only the net cost after making allowance for the discount in question. (Letter to E. G. Shorrock & Co., Seattle, Washington, signed by Deputy Commissioner L. F. Speer, and dated November 26, 1918.) 1 823 Proceeds of Sale of Rights Income. — In cases wherein corporations desiring to secure additional capital propose to issue and sell further shares of stock, reserving to’their stockholders the right to subscribe for, at par or any other stipulated price, a certain number of shares of the new stock issue, proportioned to the number previously held, and if such stockholders shall sell their rights, it will be held that the proceeds of such sale are in their entirety Income for the year in which the rights are sold, and should be so returned by the stockholders, whether they be individuals or corporations. (Art. 95, 11359, Reg. 33, Rev., Jan. 2, 1918.) 1 829 Sale of Rights. — Amount realized from sale of rights to subscribe to stock is held to be income to the seller. (Art. 4, 1[61, Reg. 33, Rev., Jan. 2, 1918.) 1 830 Sale of Capital Stock. — The proceeds from the sale by a corporation of its shares of capital stock, whether such proceeds be in excess of or less than the par value of the stock subscribed for and issued, constitute the capital of the company. If the stock is sold at a premium, the premium is not income. Likewise, if the stock 1 83 1 is sold at a discount, the amount of the discount is not a loss deductible from operat- ing inc'ome. (Art. 97, 1[361-362, Reg. 33, Rev., Jan. 2, 1918.) 1 832 Treasury Stock — ^When Taxable. — Treasury stock, wherever and whenever that term is used in connection with the accounts of the corporation or for income-tax purposes, will be held to mean stock which had been previously issued by the corporation and which had been repossessed by it through purchase or otherwise and then carried on its books as an asset. If such stock is resold at a price in excess of its cost upon repos- session, such excess shall be returned as income for the year in which resold. Unissued stock, which had been retained by the corporation for the purpose of future sale, will not, for the purpose of the income tax, be considered “Treasury stock,” and when sold no part of the f )roceeds of such sale will be considered taxable income. Nor will there be any deductible oss if such stock is sold at a price less than par. (Art. 98, 1[363, Reg. 33, Rev., J an. 2, 1 918.) 1 833 Donations to Corporations of Capital Stock. — If, for the purpose of enabling a corporation to secure working capital or for any other purpose, the stockholders donate or return to the corporation to be resold by it certain shares of stock of the com- pany previously issued to them, the sale of such stock will be considered a capital trans- action, and the proceeds of such sale will be treated as capital and will not constitute income to the corooration. (Art. 99, 1f364, Reg. 33, Rev., Jan. 2, 1918.) 1 834 Voluntary Payments by Stockholders. — In cases wherein a corporation requirea additional funds for conducting its business and obtains such needed money through voluntary pro rata payments by its stockholders, and such amounts received are credited to its surplus account or to a special capital account, the amounts so received will not be considered income, although, as representing this additional fund, there is no increase in outstanding shares of stock or liability of the corporation. The payments under such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, the shares of stock held by the individual stockholders, and will be treated as an addition to and as a part of the operating capital of the company. (Art. 96, 11360, Reg. 33, Rev., Jan. 2, 1918.) INC. 182 TAX CORPORATIONS. 1 835 Dividends Received. — Section 10 of this title specifically sets out that corpora- tions shall return as gross income all income received from all sources during the year for which the return is made. Among the items to be Included in income are divi- dends on stock and interest on bonds or other interest-bearing obligations received from other corporations. Such dividends are, however, not subject to the ♦ * ♦ income tax ♦ ♦ ♦ jpqj. “Dividends as a Deduction,” read at ^[2102.] (Art, 105, 1f372, Reg. 38, Rev., Jan. 2, 1918.) 1836 Payments Made by Lessee Direct to Bondholders or Stockholders of Lessor. — While the payments made by the lessee direct to the bondholders or stockholders are rentals to both it and the lessor, rentals paid in one case and rentals received in the other, to the bondholders and the stockholders they are interest and dividend payments received as from the lessor, and as such will be accounted for in their returns of annual net income. (Art. 103, 1[370, Reg. 33, Rev., Jan. 2, 1918.) 1837 Payments Made to Holders of Stock Trust Certificates. — Stock trust certificates or leased line certificates, as the case may be, issued by the lessee for the purpose of securing or holding control of the stock of the lessor are held to be issued in lieu of the certificates of capital stock, and for the purpose of this tax will be treated as capital stock and the amounts received by the holders of these certificates are dividends to the holders to be treated as rentals by both lessee and lessor and constitute an allowable deduction in the one case and an Item of income in the other, accordingly as they are paid and received. (Art. 104, lf37I, Reg. 33, Rev., Jan. 2, 1918.) 1838 Income from Damages Recovered. — [Read ^[1840 below.] When a corporation as a result of suit or otherwise secures payment for damages which it may have sustained, and the amount of such payment Is in excess of an amount necessary to make good the damage or damaged property, the amount of such excess shall be considered and returned as Income for the year in which received. If the entire or an estimated amount of the damage shall have been previously charged off and deducted from gross income, then the amount recovered shall be returned as income. If the amount recovered is less than the damage sustained or less than an amount 1 839 necessary to make good the damage, the difference between the actual amount of damage sustained and the amount recovered will be deductible as a loss. (Art. 94, ^357-358, Reg. 33, Rev., Jan. 2, 1918.) 1840 Compensation for Property Requisitioned or Lost or Destroyed Through War Hazards; Replacement Fund; Taxation Deferred. — [Read at 1[2861.] Regulations No. 33 Revised provided in Article 94 ]1[1838] as follows: “Art. 94. Income from damages recovered. — When a corporation as a result of suit or otherwise secured payment for damages which it may have sustained, and the amount of such payment is in excess of an amount necessary to make good the damage or damaged property, the amount of such excess shall be considered and returned as income for the year in which received. If the entire or an estimated amount of the damage shall have been previously charged off and deducted from gross income, then the amount recovered shall be returned as income. “If the amount recovered is less than the damage sustained or less than an amount necessary to make good the damage, the difference between the actual amount of damage sustained and the amount recovered will be deductible as a loss.” In the case of property, title to which has been requisitioned for war uses, or 1 841 property which has been lost or destroyed in whole or in part through war hazards, the amount received by the owner as compensation for the property may show an excess over the value of the property on March 1, 1913, or over Its cost If it was acquired after that date. This excess of the amount received over the value or cost of the property except as far as actually used for the replacement of the property in kind, is subject to the income, war income and excess profits taxes. Although the intention or obligation of the taxpayer in such case may be to use 1 842 the entire sum received as compensation for the replacement in kind of the lost or damaged property, it is recognized that it may not be practicable, owing to war conditions, to make such replacement for a considerable time. In such case, the taxpayer may establish a “replacement fund” in which the entire amount of the com- pensation so received shall be held, and pending the disposition thereof, the accounting for gain or loss thereupon may be deferred for a reasonable period of time to be determined by the Commissioner of Internal Revenue. Where the property requisitioned, lost or damaged constituted all or part of the security under a mortgage or trust indenture, the amount carried to the replacement fund may, subject to the approval of the Commissioner of Internal Revenue, be the amount of compensation received less the amount, if any, which becomes payable out of such compensation under the terms of such instrument or the obligations thereby secured. INC. 183 TAX CORPORATIONS. In any such case the taxpayer should make application to the Commissioner of 1 843 Internal Revenue for permission to establish such replacement fund and in his application should recite all the facts relating to the transaction and undertake that he will proceed as expeditiously as possible to replace or restore such property and an affidavit as to the truthfulness of the statements made should be attached to the application. The taxpayer will be required to furnish a bond with such security or surety as 1 844 the Commissioner of Internal Revenue may require for an amount not less than the estimated additional excess profits and income taxes assessable by the United States upon the income so carried to the replacement fund; or at the option of the tax- payer and in lieu of such bond the taxpayer may deposit, as security for such estimated additional amount of tax, obligations of the United States issued after September 1, 1917, •uch obligations to be held in trust as such security under such agreement as may be prescribed by the Commissioner of Internal Revenue, in a bank or trust company approved by him. In any such case, when the replacement or restoration is made the new or restored 1 846 property shall not be valued in the accounts of the taxpaper at an amount in excess of that at which the requisitioned, damaged, or destroyed property was carried, except and to the extent that such new or restored property has an increased productive capacity. Article 94 of Regulations No. 33 (Revised) as hereby modified shall apply to 1 846 individuals and partnerships as well as to corporations. (T. D. 2706, April 25 1918.) 1847 Form for Instruments Required Under Above Regulation. — The following form is prescribed to facilitate compliance with T. D. 2706 [lfl840] regarding the establish- ment of a replacement fund in the case of property requisitioned for war uses or lost or destroyed in whole or in part through war hazards: 1848 Form 1114. U. S. Internal Revenue. INCOME AND EXCESS PROFITS TAXES. APPLICATION UNDER T. D. 2706 FOR PERMISSION TO ESTABLISH A REPLACEMENT FUND. To THE Commissioner of Internal Revenue: 1. The undersigned (individual) (partnership) (corporation) represents that as a result of suit or otherwise he has secured payment by way of damages or compensation for property title to which has been requisitioned for war uses, or property which has been lost or destroyed in whole or in part through war hazards, to an amount in excess of the value of the property on March 1, 1913, or of its cost iif acquired after that date, and that he desires and intends to use the entire sum received as compensation for the replacement in kind of the lost or damaged property. 2. It being impracticable owing to war conditions to make such a replacement for a considerable time, the undersigned hereby makes application for permission to establish a replacement fund in which the entire amount of the compensation so received will be held (unless the property requisitioned, lost or damaged, constituted all or part of the security under a mortgage or trust indenture, in which event the amount carried to the replacement fund will, subject to the approval of the Commissioner of Internal Revenue, be the amount of compensation received, less the amount, if any, which becomes payable out of such compensation under the terms of such instrument or the obligations thereby •ecured). 3. Attached hereto as Schedule A and made a part hereof Is a statement reciting all the facts relating to the transaction, including the nature of the property, the character and extent of the loss, the manner and date of securing compensation, the date of acquisi- tion of the property and its cost or fair value on March 1, 1913, the amount of compensa- tion, the amount necessary to make the damage good, a description of the replacement intended and the steps already taken to that end, the probable date of completion, the estimated additional excess profits and income taxes assessable upon the income carried to the replacement fund, and all other matters which might affect a determination. 4. The undersigned (a) has executed and will cause to be executed by a surety company in good standing the bond hereto annexed as Schedule B in an amount not less than the estimated additional excess profits and income taxes assessable by the United States upon income carried to the replacement fund, or (b) has executed the agreement hereto annexed as Schedule C and will deposit as security for such estimated additional amount of tax obligations of the United States issued after September 1, 1917, to at least an equal amount, to be held in trust as such security in a bank or trust company approved by the Commissioner of Internal Revenue. INC. 184 TAX CORPORATIONS. 5. The undersigned undertakes that he will proceed as expeditiously as possible to replace or restore such property, and covenants that when the replacement or restoration is made, the new or restored property will not be value^d in his accounts at an amount in excess of that at which the requisitioned, damaged or destroyed property was carried, except and to the extent that such new or restored property has an increased productive capacity. IN WITNESS WHEREOF the undersigned individual has hereunto set his hand and seal, or the undersigned partnership has executed this' instrument under the hand and seal of one of its members, or the undersigned corporation has caused these presents to be subscribed by one of Its officers and its corporate seal to be hereunto affixed, all the day of 19. in triplicate. (L. S.) (L.S.) State of \ County of / * . , . i ■ ^ . . • . being duly sworn, deposes and says that he is the individual applicant above-named, 'or is a member of the partnership above-named, or is an officer of the corporation above-named, and that the statements made in the foregoing application are true to the best of deponent’s knowledge, information and belief. | < ! Subscribed and sworn tol , .■ > before me / 1849 \ ■ Schedule A. ’ * ’ STATEMENT OF FACTS/ Name of applicant 1 . . Address . .1 . , Business . .K . Nature of property involved How requisitioned, lost or destroyed How com.pensation secured Date of receipt of payment Cost (or fair value on March 1, 1913) $ Amount of compensation $ Excess over cost or value on March 1, 1913 $ Amount necessary to make damage good $ Nature of replacement intended Steps already taken Probable date of completion of replacement • • • Amount deductible from replacement fund pursuant to any mortgage $...... Estimated additional excess profits tax $ Estimated additional income tax ■ Surety on bond or bank for deposit of securities 1850 Schedule B. ■ BOND. KNOW ALL MEN BY THESE PRESENTS that as principal, and , as surety, are held and firmly bound unto the United States of America in the sum of dollars, lawful money of the United States, for the payment. whereof we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally, firmly by these presents. - . WHEREAS the above-bounden principal has made application to the Commissioner of Internal Revenue for permission to establish a replacement fund pursuant to Treasury Decision 2706 of April 25, 1918, and it appears that the amount of this bond is not less than the estimated additional excess profits and income taxes assessable by the United States upon the income to be carried to the replacement fund; ^ NOW, THEREFORE, the condition of the foregoing obligation Is such that If the principal shall either dispose of said replacement fund as specified in said application and 18i5 INC. .TAX CORPORATIONS. complete said replacement on or before the final date set in the permit granted by the Commissioner of Internal Revenue, or account for and pay the additional excess profits and income taxes assessable upon the income so carried to the replacement fund at the rate of tax in force at the time of the original receipt of such income, and shall otherwise well and truly perform and observe all the covenants and conditions contained in the instruments annexed and hereto and all the provisions of law and the regulations, then this obligation is to be void, but otherwise to remain in full force and virtue. WITNESS our hands and seals in Signed, sealed and de- livered in the pres- sence of triplicate this . . . . Principal. 19. . ....(L. S.) ....(L. S.) . . . . ru s.') .. fL. S.') BOND ^APPROVED this Surety. , 19.... Commissioner of Internal Revenue. 1851 Schedule C, DEPOSIT AGREEMENT. of , a corporation of the State of AN AGREEMENT between party of the first part, and party of the second part. WHEREAS the party of the first part has made application to the Commissioner of Internal Revenue for permission to establish a replacement fund under Treasury Decision 2706 of April 25, 1918, in accordance with the instrument hereto annexed, and has elected in lieu of a bond to deposit as security for the estimated additional excess profits and income taxes assessable by the United States upon the income to be carried to the replacement fund obligations of the United States issued after September 1, 1917; NOW, THEREFORE, in consideration of a valuable consideration to each of the parties hereto in hand paid by the other, the receipt whereof is hereby acknowledged, it IS covenanted and agreed as follows: 1. The party of the first part has deposited with the party of the second part obliga- tions of the United States issued after September 1, 1917, for a principal amount not less than the estimated taxes aforesaid, in bearer form or with transfer power attached, described as follows: No. Name Denomination Total Aggregate total. . $ 2. Such obligations are to be held in trust by the party of the second part as security for^ the payment of the additional excess profits and income taxes assessable by the United States upon the income carried to said replacement fund at the rate of tax in force at the time of the original receipt of such income; provided the party of the first part shall not dispose of said replacement fund as specified in said application and complete said re- placement on or before the final dates set in the permit hereto annexed granted by the Commissioner of Internal Revenue. 3. Honor before the date set in said permit said replacement shall be completed, as evidenced by an acknowledgment in writing to such effect signed by the Commissioner of Internal Revenue, the party of the second part shall thereupon surrender said obligations to the party of the first part or upon his order, and the receipt therefor of the party of the first part shall constitute full satisfaction and discharge of any liability of the party of the second part hereunder. The Commissioner of Internal Revenue may similarly at any time and from time to time authorize the surrender of such portion of said obligations as In his judgment the progress of said replacement shall justify. 4. If on the date set in said permit the party of the second part shall not have received such final written acknowledgment from the Commissioner of Internal Revenue, it shall hold and deliver said obligations, or the remainder of them, in all respects subject to the order of the Commissioner of Internal Revenue, and at his direction shall proceed to sell said obligations at public or private sale, with or without notice thereof, and shall apply the proceeds thereof to the payment of said taxes and any other taxes due from the party of the first part, and Interest, penalties and expenses of the sale, paying the residue. If any, to the party of the first part. After said date the receipt of the Commissioner of Internal Revenue shall constitute full satisfaction and discharge of any liability of the party of the second part hereunder. 5. The party of the second part accepts the trust hereunder and acknowledges the receipt and deposit of said obligations. INC. 186 TAX CORPORATIONS. WITNESS our hands and seals inTriplicate this day of Signed, sealed and delivered in the presence of AGREEMENT APPROVED this day of , 19.. (L. S.) (L. S.) (L. S.) (L. S.) (L. S.) (L. S.) 19 Commissioner of Internal Revenue. PERMIT TO ESTABLISH REPLACEMENT FUND. Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C., , 19. . . , UPON the application and schedules hereto annexed the Commissioner of Internal Revenue hereby grants permission to establish a replacement fund pursuant thereto, and directs that pending the disposition of the amount held therein the accounting for gain or loss thereupon m.ay be deferred for the period of time ending 19. . . .,^ or such further date as he may determine to be reasonable and endorse hereupon. This permit, however, is expressly conditioned upon the applicant forthwith furnishing a bond in the prescribed form approved by the Commissioner of Internal Revenue, or executing an agreement in the prescribed form and depositing subject thereto obligations of the United States issued after September 1, 1917, in an amount and in a bank or trust company approved by the Commissioner of Internal Revenue. Commissioner of Internal Revenue. 1 852 INSTRUCTIONS 1. The applicant should execute the form of application in triplicate and fill out Schedule A. He should also attach to Schedule A a statement of any other special features of the situation which might help the Commissioner in arriving at a decision. 2. The applicant should execute the bond (Schedule B) or the deposit agreement (Schedule C) in triplicate, inserting the amount and indicating the surety or bank proposed. 3. The applicant should then forward all three copies of the for n to the Commissioner of Internal Revenue, who will consider the application and if he grants it will sign the permit and return the form of the applicant. 4. The applicant should then forthwith procure the completion of the bond or deposit agreement in triplicate and submit it for approval by the Commissioner, which must be given before the permit will become effective. (T. D. 2733, June 17, 1918.) 1 853 Depositaries and Sureties Acceptable under Above Regulations. — To facilitate compliance with the provisions of T. D. 2706 [^1840] of April 25, 1918, which permits the establishment of a replacement fund in the case of property requisitioned for war uses or lost or destroyed in whole or in part through war hazards, applicants are notified that only active depositaries of public moneys and surety companies holding certificates of authority from the Secretary of the Treasury as acceptable sureties on Federal bonds will be approved as sureties or depositaries under Schedules B and C of Form 114, pre- scribed by T. D. 2733 [^1850 and 1l851] of June 17, 1918. (T. D. 2755, August 26, 1918.) 1 854 Law 1(43. Basis For Determining Gain or Loss. — “Sec. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be — ” [^3102.] 1 855 Law ^44. Basis For Determining Gain or Loss in the Case of Property Acquired Prior to March 1, 1913. — “(1) In the case of property acquired before March I, 1913, the fair market price or value of such property as of that date; and” [^3102.] 1856 Method of Determining Value as of March 1 , 1913. — Np method of determining this value can be stated by the department which will adequately meet all cir- cumstances. What that value was is a question of fact to be established by any evidence which will reasonably and adequately make it appear. (Art. 4, ^63, Reg. 33, Rev., Jan. 2, 1918.) 1 857 Determination, in the Case of Stock, of ^‘Fair Market Price or Value” as of March 1, 1913. — This office is in receipt of your letter of November 20, 1916, in matter of computing gain or loss on sale of property acquired prior to March 1, 1913, and asking whether “In case of the sslc of stock traded in on the exchange, shall the opening price on INC. 187 TAX CORPORATIONS. March 1st, or the closing price, or the average price for the day, be taken as the basis?” Under paragraph (c) of Section 2 and paragraph (4) of Section 5, Act of September 1858 8, 1916, in case of property acquired prior to March 1, 1913, “the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of gain or loss” upon sale or other disposition of the property. “The fair market price or value as of March 1” is held to be the fair market price 1859 or value as of the entire day of March 1, which, in the case of variation between “opening and closing price” for the day, would mean the average price for the day. This, however, would be conditioned upon showing that the exchange quotation represented the fair market price or value of the stock, as it is this “fair market price or value” which is to control, however that fact may be ascertained. (Letter to The Corpo- ration Trust Companv, signed by Commissioner W. H. Osborn, and dated November 21, 1916.) 1 860 Law f45. Basis For Determining Gain or Loss in the Case of Property Acquired Subsequent to March 1, 1913. — “(2) In the case of property acquired on or after that date [March 1, 1913], the cost thereof; or the inventory value, if the inventory is made in accordance with section 203 [^[1861].” tf3102.] 1 861 Law ^50. Inventories. — “Sec. 203. That whenever in the opinion of the Commis- sioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Com- missioner, with the approval of the Secretary, may prescribe as conforming as nearly as may^ be to the best accounting practice in the trade or business and as most clearly re- flecting the income.” [For “Inventories” in Reg. No. 45, see ^3109.] [Heretofore there has been no specific reference to inventories in the law.] 1 862 L For the purposes of income and excess profits tax returns, inventories of mer- chandise, etc., and of securities, will be subject to the following rules: 1 863 A. Inventories of supplies, raw materials, work in process of production and unsold merchandise, must be taken either (a) at cost, or (b) at cost or market price which- ever is lower; provided that the method adopted must be adhered to in subsequent years unless another be authorized by the Commissioner of Internal Revenue. B. A dealer in securities who in his books of account regularly inventories unsold 1 864 securities on hand either (a) at cost, or (b) at cost or market price whichever is lower, may for purposes of income and excess-profits taxes make his return upon the basis upon which his accounts are kept; provided that a description of the method em- ployed shall be included in or attached to the return, that all the securities must be in- ventoried by the same method, and that such method must be adhered to in subsequent years unless another be authorized by the Commissioner of Internal Revenue. C. Gain or loss resulting from the sale or disposition of assets inventoried as 1 865 above must be computed as the difference between the inventory value and the price or value at which sold or disposed of. 1 866 2. In all other cases inventories must be taken at cost or at value as of March 1 , 1913, as the case may be. (T. D. 2609, Dec. 19, 1917.) 1867 T. D. 2609 [1[1862], issued under date of December 19, 1917, authorizes dealers in merchandise and dealers in securities to make their incomp-tax and excess-profits ta;^ returns upon the basis of inventories taken “at cost or at market price, whichever is lower.” The legality of this authorization having been questioned, the matter was referred 1868 to the Attorney Genera]., who advises that the general principle at issue is involved In cases pending in the Supreme Court of the United States and that an early de- cision may be reasonably expected. Pending this decision [^1871] returns made upon the basis of T. D. 2609 will be tentatively accepted. If the ruling of the Attorney General should be adverse to the principle enunciated 1 869 in the Treasury decision referred to, dealers in merchandise or in securities who shall have made returns on the basis of inventories taken at a value other than cost will be required to make amended returns upon the basis of inventories taken at cost. In making their returns in the first instance, for the taxable year 1917, dealers in mer- chandise or In securities will be required to indorse upon or attach to such returns a state- ment specifying the basis upon which the inventories were taken, whether at cost or market price. For the purposes of T. D. 2609 and this decision, a dealer in securities is a mer- 1870 chant of securities, whether an individual, partnership, or corporation, with an .established place of business and whose principal business is the purchase of se- curities and their resale to customers, that is, one who, as a merchant, buys securities and INC. 188 TAX CORPORATIONS. sells them to customers with a view to the gains and profits that may be derived therefrom. Taxpayers who buy and sell or hold securities for investment or speculation, and not in the course of an established business, officers of corporations or members of partnerships who in their individual capacities buy and sell securities are not “dealers in securities’* within the meaning and purpose of T. D. 2609 or this decision, and in all such latter cases inventories, if taken, must be taken at cost and the gain or loss will be determined and taken into account as the securities are sold and the transactions closed. (T. D. 2649, Feb. 16, 1918.) 1 87 1 A question had arisen as to the legality of the authorization by Treasury Decision No. 2609 [^1862] of returns for income and excess-profits tax purposes upon the basis of inventories taken “at cost or market value, whichever is lower,” the matter was referred to the Attorney-General. (See T. D. 2649 [^1867]). The Attorney-General has advised upon the basis of a recent decision of the Supreme Court (Doyle v. Mitchel Brothers, decided May 20th last [(247 U. S. 179) (Page 579, 1918 Income Tax Service)]) that the methods of taking inventories authorized by Treasury Decision No. 2609 are per- missible. That decision supplemented by the last paragraph [^1870] of Treasury Decision No. 2649 defining “a dealer in securities” therefore continues to stand as a regulation of the Department. (T. D. 2744, July 3, 1918.) 1872 Sale of Property in General. — Section 10 of this title provides that for the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired prior to March 1, 1913, the fair market price or value of such property, as of that date, shall be the basis for determining the amount of such gain derived. 1873 This provision contemplates that all such gain realized and so ascertained, in cash or its equivalent, upon the sale or disposition of capital assets, shall be returned as gross income. In the case of property acquired subsequent to March 1, 1913, and later sold or disposed of the difference between the cost and the selling price will be returned as income for the year in which the sale Is made. (Art. 116, ^[387-388, Reg. 33, Rev., Jan. 2, 1918.) 1 874 In the case of the sale of assets — real, personal, or mixed — the loss will be the difference between the cost thereof, or the value as of March 1, 1913, if acquired before that date, and the price at which disposed of. When the loss is claimed through the destruction of property by fire, flood, or other casualty the amount deductible will be the difference between the value as of March 1, 1913, or the cost of the property and the salvage value thereof, including in the latter value the amount, if any, that has been or should have been set aside and deducted in the current or previous years from gross in- come on account of depreciation and which has not been paid out in making good the depreciation sustained. (Art. 147, ^458, Reg. 33, Rev., Jan. 2, 1918.) 1875 Sale of Stock. — When stock is sold from lots purchased at different times and at different prices and the identity of the lots can not be determined as to the dates of purchase, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost of the stock, or its fair market price or value as of Marcii 1, 1913, if purchased before that date, will be the profit to be accounted for as income. In the case of stock received as a stock dividend out of surplus other than earnings or profits accrued since March 1, 1913, or of stock in respect of which any such dividend was paid, the cost of each share of such stock shall be ascertained as specified in paragraph 28 [1f826] hereof. (^60. of Art. 4, Rev. 33, Rev. fan. 2, 1918, as amended by T. D. 2734, June 17, 1918.) ' [112846.] 1876 Sale of Property Acquired for Stock of Excessive Aggregate Far Value. — Incases wherein property was taken over in exchange for the capital stock of a corporation at a par value in excess of the fair market value of the property, and such property should be later sold, it will be necessary to ascertain as nearly as possible the fair market value of the property at the time it was taken over or as of March 1, 1913, if acquired before that date, and any excess over this ascertained fair market value at which the property is sold will be held to be profit or income to the corporation for the year in which the sale was made. (Art. Ill, 1[381, Reg. 33, Rev., Jan. 2, 1918.) 1877 Sale of Property Acquired for Nominal Sum Merely. — Similar action may be taken in cases wherein corporations acquire property prior to March 1, 1913, for a mere nominal sum and which had, as of March 1, 1913, a value greatly In excess of such nominal sum. A careful estimate of the fair market value of such property as of March 1, 1913, may be made and set up as the capitrd invested in the property, and if such property is thereafter disposed of at a price in excess of such fair market value, the amount so in excess will be treated as income to be accounted for in preparing the return of annual net INC. 189 TAX CORPORATIONS. income of the year in which the property is sold. The value of the property fixed in the manner and for the purpose hereinbefore indicated will be subject to the approval of the Commissioner of Internal Revenue. If the property was acquired subsequent to March 1, 1913, the amount for which 1 878 it is later sold or disposed of in excess of the cost price, regardless of the fact that it may have been acquired for a mere nominal price, will constitute income for the year in which the property was disposed of and must be so returned. (Art. 112. ^382- 383, Reg. 33, Rev., Jan. 2, 1918.) 1879 Sale of Real Estate. — The entire profits realized by individuals or corporations from the sale of real estate will be taxable except where the property in connection with which the profit is obtained was acquired prior to March 1, 1913, * * * (T. D. 2090, Dec. 14, 1914.) The cost of property acquired subsequent to the incidence of the tax will be the 1 880 actual price paid for it, together with the expense incident to the procurement of the property in the first instance, and its sale thereafter, and the cost of improve- ment or betterment, if any. (T. D. 2005, July 8, 1914.) 1881 In determining the cost of the property for the purpose of arriving at the profit realized upon the sale it will be permissible for the corporation to add to the initial cost such carrying charges as interest, taxes, insurance, etc., provided such carrying charges have not been deducted from net income which the corporation may have had and returned for years subsequent to January 1, 1909, and prior to the date of the sale to the property. T. D. 2005 is not intended to be so construed that carrying charges, if they consist 1 882 of such expenditures as constitute allowable deductions from gross incomes, arc to be added to the cost of the property if there is a gross income from which such charges as constitute allowable deductions may be deducted. It is intended, however, that in the case of a holding or developing company which has not yet reached the stage of having any income of consequence resulting from its corporate operations, the carrying charges or other excess over the incidental income received may be added to and made a part of the cost of the property. (T. D. 2137, Jan. 30, 1915.) 1 883 In reply, you are informed that special assessments, if any, actually paid as local benefits in connection with real estate are held to be expenditures which add to the value of the property and should be capitalized. Whether such expenditures were made prior to, or subsequent to, the incidence of the tax; that is to say, such expenditures, no matter when paid, became, in effect, a part of the cost of the property. All carrying charges in excess of the income which may have been received prior 1 884 to the sale of the property may be included as a part of the cost of such property, and the cost thus determined will be excluded from the gross proceeds of the sale when the property is sold, and the excess of such cost will be returned as income. This ruling is based upon the presumption that the corporation is doing business, 1 885 and, having income as a result of the business done, must use such income to offset in as far as it will do so, the expense necessary to the operation and maintenance of the business. If the carrying charges are less than the income, such carrying charges, unless 1 886 they be for improvements and betterments, will not be added to and made a part of the cost of the property, but will be deducted from the gross income received, in which case it would appear that the return of the corporation would show a net income subject to tax. The Treasury Decision (T. D. 2005) referred to is not intended to be so construed 1 887 that the carrying charges, if they consist of such expenditures as constitute allow- ^ able deductions from gross income, are to be added to the cost of the property, if there is a gross income from which such charges as constitute allowable deductions may be deducted. It is intended, however, that in the case of a holding or developing company which^ has not yet reached the stage of having any income of consequence resulting from its corporate operations, the excess of the carrying charges over the incidental in- comfe received may be added to and made a part of the cost of the property. (Letter to The Corporation Trust Company, signed by Commissioner W. H. Osborn, and dated December 22, 1914.) 1 888 Real Estate Subdivisions. — In the case of real estate corporations, which purchase, or shall have purchased, a tract of land with a view to dividing it into lots or parcels of ground to be sold as such, the entire value, as of March 1, 1913, or cost, if acquired subsequent to that date, shall be equitably apportioned to the several lots or parcels, to the end that any gain, derived from the sale of any such lots or parcels may be returned as income for the year in which the sale was made. INC. 190 TAX CORPORATIONS. This rule contemplates that there will be a measure of gain or loss in every lot of I 889 parcel sold, and does not contemplate that the capital invested in the entire tract 'shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain will be accounted for accordingly. If a loss results from the sale of capital assets, the amount of the loss to be deducted will be ascertained in a like manner as if a gain had been realized, and will be the amount by which the selling price is less than the value, as of March 1, 1913, or less than the cost, if acquired subsequent to that date, as the case may be. (Art. 117, 11391-392, Reg. 33, Rev., Jan. 2, 1918.) [1f2850.] 1890 Sale of Real Estate or other Property on the Installment Plan. — [Amended by T. D. 2707, which see at 1[1894.] In the case of a contract to sell real estate or other property on the installment plan, title remaining in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. If, for any reason, the Vendee defaults in his install- ment payments and the vendor repossesses the property, the entire amount received on installment payments, less the proportion of profit previously returned, will be income to the vendor, and will be so returned for the year in which the property was repossessed. (Art. 117, 11390, Reg. 33, Rev., Jan. 2, 1918.) [1[2851-6.] 1891 Sale of Merchandise on Installments. — [Amended by T. D. 2707, which see at 1[1894.] Corporation selling furniture, musical instruments, clothing, furnishings, etc., on the installment basis, title passing to the vendee at the time of sale, will treat such contracts as accounts receivable and as “sales during the year” at their face value, thus accounting for as income the difference between the cost and the sales price. If the purchaser defaults in payment and the account becomes uncollectible and the uncollected balance is charged off, the amount so charged off may be deducted as a loss. In all cases where inventories are taken (and they must be taken where the business 1892 consists of buying and selling commercial commodities) for the purpose of ascer- taining the gain or loss resulting from the business of the year, the inventories must be taken in accordance with instructions to be included in special regulations [1[1862] which will be furnished upon application to the collector of internal revenue. (Art. 120, 1[395-396 Reg. 33, Rev., Jan. 2, 1918.) [1[2849.] 1893 Income From Contract Sales.— -[Amended by T. D. 2707, which see at 1[1894.1 When property or merchandise is disposed of under a contract of sale, payments to be made in installments, title remaining in the vendor until the contract price is fully paid, the vendor will return as income that proportion of each installment payment, which the gross profit to be realized when the contract is fully performed, bears to the gross contract price. If by reason of the default in payment or for any other reason the vendor repossesses the property he will return as income the entire amount of the install- ments up to that time received, less the proportion of profits previously returned, and the repossessed property will be taken into stock at its then value, that is, at cost less a rea- sonable allowance for depreciation. (Art. 120, 1[397, Reg. 33, Rev., Jan. 2, 1918.) 1 894 Amending Instructions Relative to Reporting Income Derived From the Sale of Personal Property on the Installment Plan. — It has been ascertained that dealers in personal property who sell on the installment plan adopt one of four ways of protecting themselves in case of default, namely: 1. A provision that title is to remain in the seller until the buyer has performed his part of the agreement. 2. A conveyance of title to the purchaser subject to a lien for the unpaid portion of the purchase price. 3. The conveyance to the purchaser and an immediate reconveyance by way of chattel mortgage to the seller. 4. Conveyance to a trustee in trust to hold the title pending performance of the contract and subject to its provisions. 1 896 The purpose is the same in all of these transactions. In view of the fact that in a number of States it is held that the form first mentioned 1896 shall not be enforced according to its terms but tvill be regarded as a sale with a chattel mortgage back to secure the unpaid purchase price, it is desirable that a uniform rule be established which will be equitable and applicable to all. The rule prescribed is that in the sale or contract for sale of personal property 1 897 on the installment plan, whether or not title remains in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. If, for any reason, the vendee defaults in his INC. 191 TAX CORPORATIONS. installment payments and the vendor repossesses the property, the entire amount received on installment payments less the profit originally returned will be Income to the vendor to be so returned for the year In which the property was repossessed. This ruling amends Articles 117 [^1890] and 120 [^[1891-1893] of Regulations 33, 1 8S8 revised and revokes all previous decisions and rulings which are in conflict herewith. (T. D. 2707, April 25, 1918.) 1112849.] 1 899 Method of Computing Profit or Loss from Sale of Standing Timber or of Lumber Manufactured Therefrom. — In compliance with your request of the 1st instant, you are advised that the following information is furnished you in regard to the preparation of your returns of annual net income under the provisions of the Act of September 8, 1916, as far as the calculation of the value of standing timber as of March 1, 1913, is concerned, and it also represents the regulations of this office in regard to allowances to be deducted from gross income for the value of stumpage: ^Corporations owning timber land and log- ging off the tim.ber and manufacturing it into lumber, will. If the timber was acquired prior to March 1, 1913, be permitted to exclude from gross Income either through a de- duction from gross receipts or through a charge Into the cost of manufacturing the timber into lumber, an amount equivalent to the fair market price or value of the standing timber as of March 1, 1913. 1[In order to secure the benefit of this deduction such corporations must set up on their books as of March 1, 1913, the fair market price en bloc^ of all the timber then owned by them, and then, by dividing this en bloc value by the estimated num.ber of feet (board measure) in the entire timber holdings, the per unit value or price as of March 1, 1913, will be ascertained, wffilch per unit price or value wdll be the basis for measuring the amount wdiich may be added to the cost of manufacture, or deducted from gross income, until the en bloc value of the entire holdings as of March 1, 1913, shall have been extinguished, after which no further deduction on this account shall be allowed. ^The sam.e rule will apply In the case of timber or timber lands purchased subsequent to March 1, 1913, the only difference being that actual cost, that is the gross purchase price, «hall, in miaking the computations, be substituted for en price or value as of that date. If the entire m.arket price or value of both timber and lands, as of March 1, 1913. or the entire cost, if acquired subsequent to that date, is extinguished through a deduction from gross incom.e for timber used, or through a per unit charge to cost of manufacturing lumber, then the entire amount realized from the logged-off lands or for other salvage, will be returned as incom.e of the year In ’.vhich such lands are sold or disposed of. 1[If the timber or timber lands are sold en blor, the gain or loss v/ill be ascertained on the basis of the dif- ference between the fair market price or cost and the selling price, accordingly as the property was acquired prior or subsequent to March 1, 1913. lIThe fair market price or value of timber or tim.ber lands, as of March 1, 1913, is the price at which the property in its then condition and with the circumstances then surrounding it, could have been sold, for cash or its equivalent. This value must not be speculative, but must be determined without taking into account any prospective profits that may result from the manu- facture of the tim.ber into lumber. It must be, as the law' contemplates, a fair .market value, and, once determ.ined, must be set up on the books, and, as the measure of a stumpage deduction for Income tax purposes must remain constant and cannot be increased. The value so set up as of March 1, 1913, will be subject to the approval of the Commissioner of Internal Revenue. IfYou are also Informed that this office is not prepared to express an opinion at the present time as to what stum.page value would constitute a fair value of short leaf North Carolina pine as of March 1, 1913, and in regard to your further request you are informed that the ruling contained in the above regulation wdll refer equally as well to the years 1913, 1914 and 1915, w ith the exception that the cost of the timber shall be the governing basis instead of its value as of htarch 1, 1913. (Letter to a subscriber, signed by Deputy Comm.issioner L. F. Speer, and dated March 3, 1917.) In reply [to your further inquiry] you are informed that in preparing returns of annual 1 900 net income of your corporation you should state therein your opinion of the fair market price or value of your timber as of March 1, 1913, and calculate your income based on that estimate. When an examnnation of your return is made, the figure given therein which represents the fair market price or value of your timber as of hlarch 1, 1913, will be given due consideration, and in the event that it appears to this office that it does not represent a fair m.arket price or value of your ti;nber as of March 1, 1913, you wdll be so advised and be given an opportunity to present reasons and facts as to w'hy the figures given in your returns should be accepted. (Letter to a subscriber — same as in 1[1899 — , signed by Deputy Commissioner L. F. Speer, and dated iMarch 10, 1917.) ISOl Sale of Property for Stock or Bonds of the Purchasing Corporation. — If corporation sells its capital assets in whole or in part, it will include in its gross income for the year in which the sale was juade an amount equivalent to the excess of the sales price over the fair market price or value of such assets, as of March 1, 1913, if acquired prior to that date, or over cost If acquired subsequent to that date. INC. 192 TAX CORPORATIONS . If the purchase price is paid with stock issued by a purchasing company, the pur- 1902 chase-price will be the actual value at the time of the stock issued in payment for such assets. (Art. 101, ^366-367, Reg. 33, Rev., Jan. 2, 1918.) 1903 In determining the profits realized or the loss sustained upon the sale of capital y assets by one corporation to another, payment therefor being made in the stocks or’bonds of the purchasing corporation, the profit or loss, as the case may be, from such sale will be ascertained upon the basis of the difference between the cost of such assets to the seller, in case they were acquired subsequent to March 1, 1913, or the fair market value as of March 1, 1913, if acquired prior to that date, and the fair cash value of the stock or bonds at the time the sale was made. (Art. 118, ^393, Reg. 33, Rev., Jan. 2, 1918.) 1 904 Where a subsidiary or other corporation sells or transfers its assets to a parent or other corporation accepting in exchange therefor the stock or bonds of the purchasing corporation, the question of gain or loss resulting from this transaction will be determined upon the basis of the difference between the cost or market value as above indicated of the assets sold and the actual value of the stock or bonds given in ex- change therefor. Any gain or loss thus ascertained as resulting from such a transaction will be added to or deducted from the entire gross income, as the case may be, of the selling corporation in the year in which the capital assets were sold. (Art. 119, ^394, Reg. 33, Rev., Jan. 2, 1918.) 1905 In a case wherein a corporation acquires from stockholders the stock of another corporation, giving in exchange therefor its owm stock, it is held the transaction is one by which the corporation acquiring the stock becom.es the sole stockholder of the other corporation. As a result of this transaction no income accrues to the corporation whose stock is thus acquired. Neither will any income accrue to this corporation if later the holding corporation should cause the assets of the underlying company to be transferred to it for mere nominal consideration. If, however, one corporation buys the assets of another and issues direct to the 1906 selling company its own capital stock in payment for the assets acquired, the transaction will be treated by the selling company as a sale of its assets, and the ques- tion as to W'hether profit or loss results from the sale will depend upon whether or not the value of the stock taken in payment for the assets is in excess of the fair market price or value as of March 1, 1913, of the assets sold or of their cost accordingly as they were acquired by the selling company prior or subsequent to that date. ^If the value of the stock is so in excess, the amount of such excess will be taxable income for the year in which the assets were sold and must be so returned. If the excess over value as of March 1, 1913, or over cost, as the case may be includes 1907 any surplus earned since March 1, 1913, upon which the income tax has been paid, the excess or profits resulting from the sale maybe reduced by the amount of such tax-paid surplus. If the purchasing corporation takes over all the assets including accounts receivable, 1908 bills receivable, surplus, etc., of the selling corporation and assumes its liabilities, the amount so assumed will be considered a part of the purchase price, and to the extent that the entire purchase price exceeds the cost or value, as of March 1, 1913, as the case mav be of the assets disposed, income will accrue to the selling company. (Art. 124, 11410-414, Reg. 33, Rev., Jan. 2, 1918.) 1909 Law 1146. Property Exchanged for Other Property. — “(b) When property is ex- changed for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any;” [Read at 1(3104-6.] 1910 Law 1[47. Stocks or Bonds Exchanged for Stocks or Bonds of Equal Aggregate Face Value in Connection with Reorganizations, Mergers, or Consolidations. — “but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value,” 1911 Law 1(48. “no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged.” [Read at 113107.] 1912 Law 1(49. Securities exchanged for securities of greater par or face value. — “When in the case of any such reorganization, merger or consolidation the aggregate par or face value of the new stock or securities received Is in excess of the aggregate par or face value of the stock or securities exchanged, a like amount in par or face value of the new stock or securities received shall be treated as taking the place of INC. 193 TAX CORPORATIONS. the stock or securities exchanged, and the amount of the excess in par or face value shall be treated as a gain to the extent that the fair market value of the new stock or securities is greater than the cost (or if acquired prior to March 1, 1913, the fair market value as of that date) of the stock or securities exchanged.” [Read at ^3108.] 1913 Law 1f51. A Net Loss Suffered in One Year to be Allowed as a Deduction in Computing Net Income of the Previous or Succeeding Year. “Net loss” Defined. — “Sec. 204 (a). That as used in this section the term “net loss” refers only to net losses result- ing from either” jin connection with “net loss” read at ^3114.] 1914 Law ^52. “(1) the operation of any business regularly carried on by the taxpayer, or” 1915 Law ^[53. “(2) the bona fide sale by the taxpayer of plant, buildings, machinery, equipment or other facilities, constructed, installed or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war;” 1916 Law ^54. “and when so resulting means the excess of the deductions allowed by law (excluding in the case of corporations amounts allowed as a deduction under paragraph (6) [dividends, ^2102] of subdivision (a) of section 234) over the sum of the gross income plus any interest received free from taxation both under this title and under Title III.” 1917 Law ^55. Net Loss as a Deduction for the Preceding Taxable Year. — “(b) If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year;” 1918 Law ^56. Redetermination of Income Tax and War Excess-Profits Tax for the Preceding Year. — “and the taxes Imposed by this title and by Title III [war excess- profits tax] for such preceding taxable year shall be redetermined accordingly.” 1919 Law ^57. Credit for or Refund of Amount Found to be Due the Taxpayer by Redetermination of Taxes for Prior Year. — “Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the tax- payer in accordance with the provisions of section 252 [^2488].” 1 920 Law 1[58. If the Net Loss to be Deducted be Greater than the Net Income of the Preceding Year, the Excess May be Deducted from the Net Income of the Succeeding Year. — “If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess shall under regulations prescribed by the Com- missioner with the approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year.” 1921 Law 1[59. Benefit of the Net Loss Provision Accrues to Members of a Partnership and to Beneficiaries of an Estate or Trust. — “(c) The benefit of this section shall be allowed to the members of a partnership and the beneficiaries of an estate or trust under regulations prescribed by the Commissioner with the approval of the Secretary.” In connection with the above read at ^3114.[ 1922 Law 1[287. Items Deducted in Computing Net Income of a Corporation. — “Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:” 1923 Law 1[28. “Paid or Incurred” and “Paid or Accrued” Construed,— “The term “paid,” for the purposes of the deductions and credits under this title, means “paid or accrued” or “paid or incurred,” and the terms “paid or incurred” and “paid or accrued” shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212 [1[754].” [^2834.] 1924 “Paid” or “actually paid,” within the meaning of this title, does not necessarily contemplate that there shall be an actual disbursement in cash or its equivalent. If the amount involved represents an actual expense or element of cost in the production of the income of the year, it will be properly deductible even though not actually disbursed in cash, provided it is so entered upon the books of the company as to constitute a liability against its assets, and provided further that the income is also returned upon an accrued basis. INC. 194 TAX CORPORATIONS, If In the course of its business, a corporation credits the accounts of individuals, 1 925 firms,, or corporations with the amount of any expenses, interest, rentals, wages, etc., due them, thereby making them subject to the personal drawings of such creditors, or if expenses actually Incurred are vouchered in definite amounts, the amounts 80 credited or vouchered may be treated as paid, and if the amounts so credited or vouchered are expenses incurred concurrently with and in the production of the income of the year, they may be allowably deducted therefrom. This ruling must not be construed to allow as a deduction any accrued charges 1926 which if paid in cash or otherwise would not be deductible. (Art. 126, ^418-420. Reg. 33, Rev., Jan. 2, 1918.) 1 927 Pursuant to the foregoing provision, corporations keeping their accounts In strict accord with the methods prescribed by municipal, State, or Federal authorities, or In accord with approved standard accounting practices consistently followed from year to year, will be permitted to make their returns of annual net income on the basis of the accounts so kept, provided such systems of accounting clearly and correctly reflect the net income of each year. (Art. 127, 1[421, Reg. 33, Rev., Jan. 2, 1918.) 1 928 Under this provision it will be permissible for corporations which accrue on their books monthly or at other stated periods, amounts sufficient to meet fixed annual or other charges, to deduct from their gross income the amounts so accrued, provided such accruals approximate as nearly as possible the actual liabilities for which the accruals are made, and provided that In cases wherein deductions are made on the accrual basis as hereinbefore Indicated, Income from fixed and determinable sources accruing to the cor- porations must be returned, for the purpose of the tax, on the same basis. In cases wherein, pursuant to the consistent practice of accounting of the corpora- 1 929 tion, or pursuant to the requirements of some Federal, state, or municipal super- vising authority, corporations set up and maintain reserves to meet liabilities, the amount of which and the date of payment or maturity of which. Is not definitely determlnedor determlnableatthetime the liability is incurred, it will be permissible for the corporations to deduct from their gross income the amounts credited to such reserves each year, provided that the amounts deductible on account of the reserves shall approxi- mate as nearly as can be determined, the actual amounts which experience has demon- strated would be necessary to discharge the liabilities incurred during the year and for the payment of which additions to the reserves were made; and provided if it shall be found that the amount credited to any such reserve Is In excess of the reasonable or prob- able needs of the corporation to meet and discharge the liabilities for which the reserve is credited, the excess of such reserves over and above the reasonable or probable needs for the purpose indicated, shall be at once disallowed as a deduction and restored to income for the purpose of the tax; and provided further, that In no event will sinking funds or other reserves set up to meet additions, betterments or other capital obligations, con- stitute allowable deductions from gross income. This ruling contem.plates that the Income and authorized deductions shall be com- 1 930 puted and accounted for on the same basis, and that the same practice shall be con- sistently followed year after year. Amounts paid in discharge of any liability or obligation for which a reserve has been set up, as hereinbefore outlined, will, when paid be changed to the reserve created to meet it, in so far as such reserve is sufficient to meet the liability, provided always that the liability is of a character, which constitutes an allowable deduction within the meaning of the law. If upon investigation. It shall be found that returns made upon the basis of accruals 1931 and reserves, do not reflect the true net income, the corporation so failing in this way to return the true net income, will not thereafter be permitted to make its returns upon any basis other than that of actual receipts and disbursements. The reserves contemplated by the foregoing rulings, are those reserves only, which 1 932 are set up to meet some actual liability incurred, the amount necessary to discharge which can not at the time be definitely determined, and do not contemplate reserves to meet losses contingent upon shrinkage in values, losses from bad debts, capital invest- ments, etc., which losses are deductible only when definitely determined as the result of a closed or completed transaction, and are charged off. (T. D. 2433, Jan. 8, 1917.) 1933 Changing from a Cash to an Accrual Basis, and Vice Versa. — May an Investment corporation change from, a cash to an accrual basis, and vice versa, whenever it wishes to and, if not, under what conditions may It change? (Answer.) In rej)ly you are advised that the change from a cash to an accrual basis and vice versa may be effected at any time, provided, however, that the method adopted is consistently followed from year to year. If it be assumed that the change to a different basis is made during 1918, an amended return for 1917 will not be required; but, as the year 1918 will be the year of transition from, one basis to another, the return for 1918 should show actual receipts and INC. 195 TAX CORPORATIONS. disbursements for that year, and all accruals, either receivable or payable, for this or any prior year. (Letter of inquiry from Geo. E. Holmes, New York, N. Y., and the reply thereto signed by Acting Commissioner Homer S. Pace, and dated December 17, 1918.) 1 934 jEach Year’s Return Must be Complete Within Itself. — All expenses, including interest, taxes, and other necessary charges, incidental and necessary to the crea- tion or production of the gross income or properly chargeable against the same, being deductible from the gross income, whether paid in cash or entered on the books as a lia- bility, can not, if unpaid, be carried forward to be deducted from the gross income of a subsequent year. (Art. 127, 11422, Reg. 33, Rev., Jan. 2, 1918.) 1 935 Each year’s return, both as to income and deductions therefrom, must be complete within itself. Charges, of whatever character, against income can not be cumu- lative. They must be deducted from the income of the year in which incurred or not at all. The expenses, liabilities, or deficit [read at 1[1913] of one year can not be used to reduce the income of a subsequent year. The deductions must in all cases be such as are authorized and within the limits 1 936 fixed by law. (Art. 127, *[423-424, Reg. 33, Rev., Jan. 2, 1918.) 1937 Adjustment on Account of Amounts Properly Deductible but not Deducted. — A corporation having the right under this rule to deduct all authorized allowances, whether paid in cash or set up as a liability, it follows that if it does not within any year pay or accrue certain of its expenses, interest, taxes, or other charges, and makes no deduction therefor, it cannot deduct from the income of the next or any subsequent year any amounts then paid in liquidation of the previous year’s liabilities. (Art. 128, ^425, Reg. 33, Rev., Jan. 2, 1918.) 1938 If, however, a corporation discovers or detects expenses or liabilities which were due and payable during a preceding year, it will be permissible for it to make an amended return for the year to which such expense or liability applies, include such expense in the deductions of that year, and file a claim for refund for any taxes overpaid by reason of the failure to deduct such expense or liability in the original return of that year. (Art. 128, 1[426, Reg. 33, Rev., Jan. 2, 1918.) 1939 No Particular Bookkeeping or Accounting System Required. — Any system of accounting which is not consistent with the purpose and intent of the rules set out in this title, and with the general rules set out in these regulations for the ascertainment of net income, will not be accepted as a correct basis for making returns. (Art. 128, 1[427, Reg. 33, Rev., Jan. 2, 1918.) 1 940 No particular system of bookkeeping or accounting will be required by the depart- ment. However, the business transacted by corporations must be so recorded that each and every item set forth In the return of annual net income may be readily verified by an examination of the books of account. (Art. 182, Reg. 33, Jan. 5, 1914.) 1941 Corporation Books Must Confirm Figures Given in Annual Return. — As this office requires no special system of bookkeeping, neither does it require any specific method by which the net income to be returned by corporations shall be determined. (T. D. 2161, Feb. 19, 1915.) 1942 The books of a corporation are assumed to reflect the facts as to its earnings income, etc. Hence they will be taken as the best guide in determining the net income upon which the tax imposed by this act is calculated. Except as the same may be modified by the provisions of the law, wherein certain deductions are limited, the net income disclosed by the books and verified by the annual balance sheet, or the annual report to stockholders, should be the same as that returned for taxation. (Art. 183, Reg. 33, Jan. 5, 1914.) 1 943 Law 1|288. All ordinary and Necessary Business Expenses are Deductible. — “(1) All the ordinary and necessary expenses paid or incurred during the taxable year In carrying on anv trade or business,” [For construction of “paid or incurred” read at 111923.] [Read at 112878.] 1944 Law 1[326. Items of Expense Not Deductible in Computing Net Income. — “Sec. 235. That in computing net income no deduction shall in any case be allowed in respect of any of the items specified in section 215.”* [1[2967.] *Sec. 215. That in computing net income no deduction shall in any case be allowed ID respect of [1[1023.] INC. 196 TAX CORPORATIONS. (a) Personal, living, or family expenses [^1024]; (b) Any amount paid out for new buildings or for permanent improvements or better- ments made to increase the value of any property or estate [^1025]; [^2967.] (c) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made (^1027]; [^2967.] or (d) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy [111028]. 1945 Organization Expenses do not Constitute an Allowable Deduction from Gross Income. — Numerous inquiries have been made of this office with respect to the treatment by corporations in their returns of annual net income of what are known and commonly designated as “organization expenses” — that is, attorney’s and accountants’ fees, together with fees paid to the State authorities prior to, or coincident with, the secur- ing of a charter and the incorporation of the company. In the absence of a formal and definite ruling on this question, there appears to 1946 have been some conflict in the holdings and instructions issued by this office in regard to this matter. Therefore, in order to make definite the position of the bureau and to promote consistency, it is held that “organization expenses” constitute a capital investment, such expenses being offset by the asset value of the corporate fran- chise, an intangible asset of a somewhat permanent character and in many instances of substantial value. Such expenses are very similar in character to the discount at which the stock issued by the company is being sold, the only effect of such expenses and discounts being to reduce the amount of capital available for use and employment in the business of the corporation. The discount at which the stock is sold is not a loss sustained within the meaning of the law, and therefore not deductible [1[1949]. Likewise “organiza- tion expenses” — that is to say, expenses incident to and connected with the Incorporation and organization of the company — are not “ordinary and necessary expenses of maintenance and operation,” which are the only “expenses” authorized by the incom.e-tax law to be deducted from gross Income. Hence it is held that “organization expenses” do not constitute an allowable deduc- 1947 tion from gross income of any taxable year, nor do such expenses constitute a proper item to be added to the cost of any physical property to be provided for through the authorized annual allowance for depreciation. (T. D. 2499, June 11*, 1917.) 1948 Expenses Incurred in Sale of Capital Stock. — Any and all expenses incidental to or connected with the selling of the capital stock (common or preferred) of a cor- poration for the purpose of raising capital to be by it invested in property or employed in the business for w'hich the corporation is organized are not an “expense of operation and maintenance” within the meaning of this title, and such expense is not an allowable deduction from the gross income, for the reason that such an expense is incurred^ in a capital transaction; that is, the raising of capital to be Invested or employed in the business. Such expense, like the discount at which the shares of stock may be sold, has the 1 949 effect only to reduce the available capital of the corporation and can not be used to reduce the income from operations; that is to say, any expense incident to the bring- ing of capital into the company, whether it be a new or a going concern, can not be recouped out of or charged against the operating income. It is a capital loss or expense properly chargeable against the proceeds of the sale of the stock and reduces the capital rather than the earnings of the company. (Art. 145, 1[453-454, Reg. 33, Rev., Jan. 2, 1918.) I960 Commissions Paid in Connection with Sale of Securities. — Commissions paid in purchasing and selling securities are a part of the cost or selling price of the securities and not otherwise deductible. They do not constitute expense deductions in a return of income. (Art. 8, 1[108, Reg. 33, Rev., Jan. 2, 1918.) 1951 Assessments on Stock Paid by Stockholders. — Amounts to be assessed and paid under a mutual agreement between bondholders or stockholders of a corporation, to be used in reorganization of a corporation are held to be investments of capital and not deductible for any purpose in a return of Income. (Art. 8, 1[100, Reg. 33, Rev. Jan. 2, 1918.) 1962 Assessments made by a corporation on its capital stock are regarded as an invest- ment of capital and do not constitute an allow^able deduction In the return of the- individual. (T. D. 2090, Dec. 14, 1914.) Charges to capital account generally, 112894. 197 TAX INC. CORPORATIONS. 1 953 Procurement of Copyright and Plates. — Amounts expended for securing copy- right and plates which remain in possession of and as property of the person making the payments are investments of capital and can not be allowed as deductions in returns of income. (Art. 8, 1[105, Reg. 33, Rev., Jan. 2, 1918.) 1 S54 Defending or Perfecting Title. — Cost of defending title or perfecting title to property constitutes a part of the cost of the property and is not a business expense. (Art. 8, 11106, Reg. 33, Rev., Jan. 2, 1918.) 1 955 Architect’s Services in Connection with Erection of Building. — The amount ex- pended for architect’s '’services is part of the cost of the building and not a deductible business expense, (Art. 8, 11107, Reg. 33, Rev., Jan. 2, 1918.) 1 956 Expenses of Operation and Maintenance. — Expenses of operation and maintenance shall include all expenditures for material, labor, fuel, and other items entering into the cost of the goods sold or inventoried at the end of the year, provided such expendi- tures have not been considered in determining the cost of goods or materials or purchases thereof during the year, when the income derived from operations is ascertained through inventory, and all other disbursements necessary to the operation of the business, except such as are required by the act to be segregated and stated separately in the return. Expenditures which are taken into account in determining the cost of products 1957 finished or unfinished, are not to be again deducted as expenses of operation^and maintenance. (Art. 129, 1[428-429, Reg. 33, Rev., Jan. 2, 1918.)i 1 958 Cost of Material. — In ascertaining expenses proper to be included in the deductions to be m.ade under the item of “Expenses,” corporations carrying materials and supplies on hand should include in such expense the charges for materials and supplies only to the amount that the same are actually consumed and used in operation and main- tenance during the year for which the return is made, Provided that the cost of such material and supplies has not been taken into account in determining the net income for any previous year. If a corporation carries materials or supplies on hand for which no record of consump- 1959 tion is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the corporation to include in its expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made. (Art. 130, 1[430-431 Reg. 33, Rev., Jan, 2, 1918.) 1960 Cost of Manufactured Products. — A manufacturing corporation may include as an element of the cost of manufactured products, the cost of the raw material, the cost of labor of the men who actually work on such products, as well as the cost of super- visory, or what may be denominated as “unproductive” labor, such as that of the fore- men, inspectors, overseers, etc., provided such expenditures are not separately deducted from the gross income and the return of annual net income. The overhead charges referred to in Form 1031 should Include the'salarles of officers, 1961 clerk hire, and such other office expenses as do not have to do^directlyi-with^the manufacture of the product. (T. D. 2152, Feb. 12, 1915.) 1962 The only'^ interest which constitutes an allowable deduction from gross income under the Federal income tax law is the amount actually paid within the year • ♦ ♦ ♦ ^ Interest payments of this character, being allowable deductions from gross income, 1963 will not be taken into account as a part of the cost of manufacture for the reason that to consider them an element of the cost of manufacture and to deduct them from gross income as specific items would In effect result In a double deduction of the amounts involved. A corporation would not be permitted to include in its deductions the rental value 1 864 of the property which it owns and occupies nor would it be permitted to deduct from gross income the interest which the capital Invested or employed would earn were It otherwise Invested. It therefore follows that a corporation can not take Into account as a part of the cost 1965 of manufacture any possible earnings; that Is, earnings which might accrue on its capitalized investment had such capital been so placed as to earn a given rate of interest. [Read at 1[2029.] (T. D. 2137, Jan. 30, 1915.) INC. 198 TAX CORPORATIONS. 1966 Incidental Repairs. — The cost of incidental repairs which neither add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided that the plant or property account is -not increased by the amount of such expenditures. 'Such repairs, to the extent that they arrest deterioration, should have the effect to reduce the depreciation charge otherwise deductible. (Art. 131, 1[432, Reg. 33, Rev., Jan. ,2, 1918.) 1967 Additions and Betterments Made by Tenant Corporations. — In the case of cor- porations which occupy leased premises under a lease contract which requires such corporations to make all necessary repairs or improvements, which repairs or improve- ments, revert to the owner of the fee at the expiration of the lease, the tenant corporation Is entitled to charge the cost of all such repairs and Improvements to the expense of doing business. This expense of improvements, somewhat permanent in character, should, how- ever, be prorated over the number of years constituting the term of the lease, and the amount deductible from gross income of each year would be the aliquot part of the cost of such re- pairs and improvements. (T. D. 2137, Jan. 30, 1915.) 1968 Where, under the terms of a rental or lease contract, a tenant agrees to erect a building or to expend during the rental period a certain fixed sum In making im- provements upon the freehold of another, it is held for income tax purposes that the build- ing or permanent improvement becomes a part of the realty unless otherwise agreed be- tween the contracting parties; and, as such, shall be accounted for, * * * as gain or profit to the lessor in the value of his realty at the termination of the contract, whether terminated by expiration of the lease or otherwise. The gain or profit to the lessor at the termination of the lease, by expiration or 1 969 otherwise, is held to be the difference between the cost of the building or improve- ment and a reasonable allowance for the exhaustion, wear and tear of the property arising out of its use or employment in the business or trade during the period of its life under the lease; and no annual deduction for depreciation shall be allowed during the lease term. As the use of the building or permanent improvement by the tenant during the 1970 term of the lease is a part of the consideration of the contract, the cost may be prorated by the tenant over the lease term and deducted at an annual rate as a part of the “necessary expenses actually paid in carrying on any business or trade,” to- gether with the cost of incidental repairs and maintenance. The paragraph of Treasury Decision 2135 entitled “Rental: Permanent improve- 1 97 1 ments made under contract in addition to yearly,” is hereby ‘repealed. (T. D. .2442, Feb; 6, 1917.) 1972 The cost of erecting permanent buildings, or of making permanent improvements on ground leased by a company, is held to be an additional rental and is there- fore a proper deduction from gross income, provided such buildings and improvements, under th-^ terms of the lease, revert to the owner of the ground at the expiration of the lease. In such case, however, the cost will be prorated according to the number of years constituting the term of the lease and the annual deduction will be an aliquot part of such cost. As to income to lessor see paragraph 50, Page 11, these regulations [^1973 herein]. (Art. 140, 1f445, Reg. 33, Rev., Jan. 2, 1918 ) 1 973 Permanent Improvements under Lease or Rental Contracts. — When improve nents become a part of real estate, the difference between cost of the improvements and allowable depreciation during the lease term Is gain or profit to the lessor at the end of the lease term and Is to be accounted for as income at that time. (Art. 4, ^50, Reg. 33, Rev., Jan. 2 1918.) 1974 The cost of the buildings being a rental charge and deductible on the prorated basis, the lessee corporation will not be permitted to deduct from gross income any depreciation with respect to such buildings, but the cost of incidental repairs neces- sary to keep them In an efficient condition for the purposes of their use, may be deducted as an expense of operation and maintenance. If, however, the life of the improvement is less than the life of the lease, the depre- 1975 ciatlon may be taken by the lessee, based upon the cost and life of the improvement. (Art. 140, ^446-447, Reg. 33, Rev./Jan. 2, 1918.) 197 6 Taxes Paid by a Tenant. — Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and tax- able inco.me to the landlord. iThe amount of the' tax w.ill be deductible by the landlord. (Art. 8, 11115, Reg. 33, |Rev., Jan. 2, 1918.) INC. 19.9 , TAX , CORPORATIONS. 1977 Purchase of a Leasehold. — Where a leasehold Is sold for a specified sum, the pur- chaser may take as a deduction in his return an aliquot part of such sum, each year, based on the number of years the lease has to run. (Art. 8, ^113, Reg. 33, Rev., Jan. 2, 1918.) 1978 Law ^289. A Reasonable Amount For Salaries or Other Compensation For Personal Services Actually Rendered May Be Deducted as a Necessary Business Expense. — “including a reasonable allowance for salaries or other compensation for per- sonal services actually rendered,” [Read at ^2882. J [“A reasonable allowance for salaries, etc.” is now for the first time provided for, specifically as such, in terms.] 1979 Sections 5 (a) of the Income Tax Act of September 8, 1916, as amended, provides, as to the Income of individuals- and partnerships, that for the purpose of the tax there shall be allowed as deductions, among others, “the necessary expenses actually paid in carrying on any business or trade,” and Section 12 (a) provides that the net income of a corporation shall be ascertained by deducting from the gross amount of its income received within the year, among other things, “all the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties.” Payments for services by business enterprises (including individuals in business, 1980 partnerships and corporations) may, of course, be deducted under this general lan- guage, The Government, entitled to taxes based on the net income of each enter- prise, is interested and authorized, however, to see that each specific expenditure sought to be deducted is in itself “necessary.” The question is by what examination and what test this shall be determined. The subject Is not dealt with in any general way in the Income Tax Regulations, although Article 138 [^1999] bears on special payments to em- ployees of corporation. The test of deductibility in the case of compensation payments is whether they are 1 981 in fact payments purely for services or include some other element. But in the case of any compensation, however determined, which exceeds amounts ordinarily paid for like services in like enterprises under like circumstances, the burden is upon the enterprise to show that the amount paid was solely the purchase price of services. This test|and Its practical application may be further stated and illustrated as follows: 1 982 1- Any amount paid In the form of compensation, but not in fact as the purchase price of services, is not deductible. 1 983 (a) An ostensible salary may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, practically all of whom draw salaries. If in such a case the salaries are based upon or bear a close re- lationship to the stockholdings of the officers or employees, it would seem likely that the salaries, if In excess of those ordinarily paid for similar services, are not paid wholly for services rendered, but in part as a distribution of earnings upon the stock. [Read at 1999.] (b) An ostensible salary paid by a corporation may be in part a waste or appro- 1 984 priation of assets of the corporation. This may occur where salaried employees are in control of the corporation through holding directly or indirectly a majority of its stock or. In the case of a large corporation with many stockholders, owning a substan- tial minority of Its stock, and the tendency of the officers unduly to inflate their salaries must be taken into account. If a compensation contract with the majority stockholder or stockholders is approved by all the stockholders, as well as by the directors, it might, however, be dealt with like any other contract. (c) An ostensible salary may be in part payment for property. This may occur, 1 985 for example, where a partnership sells out to a corporation, the former partners agree- ing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business. 1 986 2. The form or method of fixing compensation is not decisiv'e as to deductibility. While any form of contingent compensation invites scrutiny as possible distribution 1987 of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the enterprise and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. INC. 200 TAX CORPORATIONS. 3. As to compensation deterr » ned after services have been rendered, reasonable- 1 988 n^ss is ordinarily the control ig test of deductibility. In certain instances apparently of this sort it may be shown that the compensation 1989 is fixed according to a custom or practice having virtually the force of a contract. Where, however, such is not the case and it is for the management to fix compen- sation such as is deemed fair, it is just to assume that true compensation is only such amount as would ordinarily be paid in like circumstances by other similar enterprises, 4. In connection with the questions discussed above, the following rulings as to 1990 treatment of amounts ostensibly paid as compensation, but not allowed to be deducted as such, appear to be warranted: (a) In the case of excessive payments by corporations, if such payments correspond 1991 to or bear a close relationship to stockholdings, the amount of the excess should be treated as dividends and would thus be exempt from the normal tax and from the excess-profits tax in the hands of the recipients [Read at ^1999]; or if such payments represent an appropriation of assets of the corporation by officers who control it and fix their compensation in violation of the rights of the corporation, the amount of the excess, while disallowed as a deduction by the corporation, should be treated as compensation of the individuals subject to the normal and the excess-profits taxes, compensation illegally secured being none the less subject to tax in all respects; or if such payments constitute in part payment for property, the amount of the excess should be treated by the corpe- ration as capital expenditure and by the recipient as part of the purchase price. (b) In the case of excessive payments by individuals or partnerships, the amounts 1992 disallowed should ordinarily be treated as partnership shares and would thus be free from the excess-profits tax to the recipient, but, of course, still subject to the income tax, except that payments for property should be treated by the individual or part- nership as a capital expenditure and by the recipient as part of the purchase price. The foregoing rules naturally do not permit a ready determination of every question 1993 arising as to compensation payments, but applied in the light of full knowledge of the facts in the particular case they do, however, indicate a basis of solution. They may be summed up as follows: Compensation on whatever basis fixed, representing only the price paid for services 1 994 pursuant to a fair bargain made in advance between the individual and the business enterprise, is deductible in determining the taxable net income of the enterprise. Payments nominally as compensation for services, which in fact include amounts paid as dividends, waste of corporate assets, payments for property or for anything other than services, are deductible only to an amount not in excess of compensation for like services in similar enterprises. Compensation greater than that ordinarily paid for like services in similar enter- 1 995 prises must be shown to represent payment for services only. In the case of compensation fixed after services are rendered and not in accordance with any contract or any custom or practice amounting virtually to a contract, reasonableness is ordinarily the controlling test of deductibility. (T. D. 2696, April 10, 1918.) 1996 Special payments, sometimes denominated gifts or bonuses, made by corporations, partnerships, or individuals to employees, will constitute allowable deductions from gross income in ascertaining net income for the purpose of the income tax, when such payments are made in good faith and an additional compensation for the services actually rendered by the employees. If such payments, when added to the stipulated salaries do not exceed a reasonable compensation for the services rendered they will be regarded as a part of the wage or hire of the employee, and therefore an ordinary and necessary expense of operation and maintenance, and as such will be deductible from gross income. (Art. 8, 111 11, Reg. 33, Rev., Jan. 2, 1918.) 1997 Special payments, sometimes denominated as gifts or bonuses to employees of corporations, will constitute allowable deductions from gross income in ascer- taining net income for the purpose of the income tax, when such payments are made in good faith and as additional compensation for the services actually rendered by the employees. If such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered, they will be regarded as a part of the wage or hire of the employee, and therefore an ordinary and necessary expense of opera- tion and maintenance, and as such deductible from gross income. (Art. 138, 1[44I, Reg. 33, Rev., Jan. 2, 1918.) 1998 Payments, Other than Dividends, Paid by a Corporation to Officers or Employees Who are Stockholders. — Special payments made to officers or employees who are stockholders, in the guise of additional salaries or compensation, the amount of which is based upon or bears a close relationship to the stockholdings of such officers or employees INC. 201 TAX CORPORATIONS. or the capital invested by them in the business of the company, will be regarded as a special distribution of profits, or compensation for the capital invested, and not payment for services rendered. Payments under such latter conditions being in the nature of dividends, will not be deductible from gross income. (Art. 138, 1[442, Reg. 33, Rev., Jan. 2, 1918.) 1 999 Salaries of officers or employees who are stockholders will be subject to careful analysis, and if they are found to be out of proportion to the volume of business trans- acted, or excessive when compared with the salaries of like officers or employees of other corporations doing a similar kind of volume or business, the amount so paid in excess of reasonable compensation for the services will not be deductible from gross Income, but will be treated as a distribution of profits. (Read at ^1991 and ^[1983.] (Art. 138, 11443, Reg. 33, Rev., Jan. 2, 1918.) 2G00 The appended decision of the United States Circuit Court of Appeals for the Second Circuit in the case of Jacobs & Davies (Inc.) v. Anderson, collector, for internal revenue, is published for the information of internal-revenue officers and others concerned. Jacobs and Davies (Inc.) v. Anderson. (228 Fed. 505.) Summary. 1. Deductions from Gross Income. When a company composed of two stockholders divided the profits between them, calling it compensation, the same can not be deducted as an expense of business. 2. Income. Money paid out under these circumstances is equivalent to dividend and must be treated as income of the corporation. 3. Judgment of the United States District Court Affirmed. The decision of the lower court is affirmed by the Circuit Court of Appeals. (T. D. 2262, Nov. 15, 1915.) 2001 Bonuses Which May be Otherwise Deductible are Not So when Left with the Company to Secure it Against Loss. — This office is in receipt of your letter of the 19th instant, in reply to office letter dated July 11, 1917, in which you make a further inquiry which is substantially as follows: If a corporation pays its employees a salary in the form of weekly stated amounts, together with a certain percentage of the profits, and if such percentage of the profits is in no way based upon interest in the business and makes a total which is no more than a fair compensation, is such payment or percentage of the profits allowably deducted from gross income of the corporation in the event that there is an agreement to the effect that the so-called bonuses are to be left on deposit with the company to secure the company against such losses as may be by contract charged to the em- ployees at a percentage of the profits received under the contract. 2002 In reply, you are informed that under the conditions set out in the foregoing para- graph, the bonuses or percentages of profits “left on deposit with the company to secure it against loss,” are not deductible. (Letter to Greenbaum, Wolff & Ernst, New York, N. Y., signed by Acting Deputy Commissioner S. H. Boyd, and dated Novem- ber 30, 1917.) 2003 Compensation Paid in Stock. — Compensation paid an employee in capital stock of the corporation may be deducted as an expense if «o' charged on books at the actual value of such stock, and the recipient of such stock, if he be a taxable person, will return such stock at the same value as income. (Art. 139, 1f444, Reg. 33, Rev., Jan. 2, 1918.) 2004 Commissions Paid to Salesmen. — Commissions paid to salesmen as a part of the expense of conducting business are allowable deductions to the payer of the com- mission. (T. D. 2090, Dec. 14, 1914.) 2005 Commissions Paid Real Estate Agents. — A commission paid to a real estate agent for collecting rents and management of property is a legitimate business expense and constitutes an allowable deduction in computing net income. (T. D. 2090, Dec. 14 1914.) 2006 Commissions to Salesmen Paid in Stock.— Commissions allowed salesmen, paid in stock, may be deducted as expense if so charged on books at the actual value of such stock. (Art. 117, Reg. 33, Jan. 5, 1914.) , . 2007 Salaries -and Wages Paid to Employees 'While' ih-thfe Military or Naval Forces During the ..Pjesent War.^Many co'rparations, p^lrtherships and also ifidividuals who are engaged in business continue to pay all or -portions of the regular compensation of officers or employees who haveior-all 6r part of the period’ of the war joined the naval INC. 202 TAX CORPORATIONS. or military forces of the United States or have undertaken services for the Government at Washington or elsewhere at reduced or nominal compensation. The business purpose of the continuance of such compensation, under such circumstances, is to preserve the organization and secure the return after the war of such officers or employees. You are advised that amounts so expended by corporations, partnerships or individuals engaged in business constitute during the continuance of the war, ordinary and necessary expenses of doing business and are allowable as deductions in computing net income for purposes of the income, war income and excess profits taxes. (T. D. 2660, March 1, 1918.) 2008 Pensions. — Amounts paid for pensions to retired employees, or to their families or others dependent upon them, or on account of injuries received by employees, or lump-sum amounts paid as compensation for injuries, are proper deductions as “ordi- nary and necessary expenses.” Such deduction shall be limited to the amount not com- pensated for by insurance or otherwise. No deduction shall be made for contributions to a pension fund the resources 2009 of which are held by the corporation, the amount deductible in such case being the amount actually paid to the employee. (Art. 136, 1[438-439, Reg. 33, Rev., Jan. 2, 1918.) 2010 Salary Paid After Death of Employee. — When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, no services being rendered by the widow or heirs, such payment is not “ordinary and necessary” expense of transacting business and does not constitute an allowable deduction. (Art. 137, lf440, Reg. 33, Rev., Jan. 2, 1918.) 201 1 Spending Money. — So-called “spending or treating money” actually advanced by corporations to their traveling salesmen to be used by them as a part of the expense incident to selling the product of such corporations, is an allowable deduction in a return of income by such corporation. The deduction of such expenditures is conditioned upon a satisfactory showing that all the allowance claimed as a deduction was actually expended for and was an ordinary and usual expense incurred in selling the product or merchandise of the corporation. (Art. 133, 1[434, Reg. 33, Rev., Jan. 2, 1918.) 20 1 2 Donations not Deductible. — Donations made to employees and others, and which do not have in them the element of compensation, are considered gratuities and are not allowable deductions from gross income as expenses of operation or maintenance or under any other item. (Art. 135, 1[437, Reg. 33, Rev., Jan. 2, 1918.) 20 1 3 Donations by Agricultural Corporations to Fairs. — A corporation engaged in agricultural business cannot be allowed to make a deduction from gross income on account of donations to fairs, churches, and associations, such donations being made for the purpose of obtaining and preserving the good will of the farmers who raise crops for it, since the amounts so expended are clearly in the nature of gratuities and are not necessary expenses of operation and maintenance as there is no such consideration in this case as is contemplated in [^1201 2]. (Extract from letter to Carey, Piper and Hall, Attorneys at Law, Baltimore, Maryland, signed by Acting Commissioner G. E. Fletcher, and dated March 25, 1915.) 20 1 4 donations Deductible. — Donations made by a corporation for purposes connected with the operation of the property, when limited to charitable institutions, hospi- tals, or educational institutions, conducted for the benefit of its employees or their depend- ents, shall be a proper deduction as ordinary and necessary expenses. Such deduction should, however, be reduced by any amount repaid to the corporation by the employees. Donations which legitimately represent a consideration for a benefit flowing 2016 directly to the corporation as an incident of its business are allowable deductions from gross income in ascertaining net income subject to the income tax; for example, a street railway corporation donates a sum of money to an organization intending to hold a convention in the city in which it operates, with the expectation that the holding of such convention will augment its income through a greater number of people using the cars. In such case the donations would be an allowable deduction, the reduction to be reduced by any portion of the donation which may be returned to the corporation. (Art. 134, ^435-436, Reg. 33, Rev., Jan. 2, 1918.) 2016 Law 11290. Rentals or other Paj^ents Required to be Made as a Condition to the Continued Use of Possession of Certain Property is Deductible. — “and in- cluding rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity;” [Read at 1[2891.] INC. 203 TAX CORPORATIONS. 2017 Business Insurance. — Premiums paid In advance, covering a period of several years, are to be taken as a deduction on the basis of one of two methods: When the books are kept on a cash basis, the entire amount Is deductible in the year in which the premium is paid. Where the books are kept on an accrual basis the premium is to be prorated over the period covered by the insurance. (Art. 8, Hi 10, Reg. 33, Rev., Jan. 2, 1918.) 201 8 Reserves for Insurence. — Funds set aside by a corporation for Insuring its own property are not a proper deduction, but if such funds are set aside, or a reserve therefor is set up, any loss actually sustained and charged to such funds or reserves may be deducted. (Art. 144, H452, Reg. 33, Rev., Jan. 2, 1918.) 20 1 9 I^spositors’ Guaranty Fund. — Banking corporations which, pursuant to the laws of the States in which they are doing business, are required to set apart, keep, and maintain in their banks the amount levied and assessed against them by the State authori- ties as a “Depositors’ guaranty fund,” may deduct from their gross income in their returns of annual net income the amount so set apart each year to this fund, provided that such fund, when set aside and carried to the credit of the State banking board or other duly authorized State officer, ceases to be an asset of the bank, but may be withdrawn in whole or in part, upon demand by such board or State officer to meet ihe needs of these officers, as required by State laws, in reimbursing depositors in insolvent banks, and provided further that no portion of the amount thus set aside and credited is ’•f'tnrnable, under the existing laws of the State, to the assets of the banking corporation. If, however, such amount is simply set up on the books of the bank as a reserve 2020 to meet a contingent liability, and remains an asset of the bank, it will not be deductible except as it is actually paid out as required by law and upon demand of the proper State officers. (Art. 146, H455-456, Reg. 33, Rev., Jan. 2, 1918.) 2021 Redemption of Trading Stamps. — Corporations, mercantile or otherwise, which issue trading stamps, coupons, etc., for the purpose of increasing their business, which stamps or coupons are redeemable In merchandise, may allowably deduct from gross income as a business expense the amount which such corporations actually expend for such stamps or coupons, and also the actual cost to the corporations of the merchandise given in redeeming the same. [H2881.] This rule contemplates that a reserve set up as a liability equal to the redemption 2022 value of the stamps or coupons issued is not, as such, an allowable deduction, the deduction being limited to the cost of the stamps or coupons and the merchandise with which they are redeemed. (Art. 141, H-I‘18-449, Reg. 33, Rev., Jan. 2, 1918.) 2023 Earnings of Public Utility Paid to City, etc. — In case of a public utility constructed, operated, or maintained by a corporation under contract with any city. State, Territory, or the District of Columbia, with an agreement that a portion of the net earnings of such public utility corporation shall be pa’d to the city, State, Territory, or the Dis- trict of Columbia, the amount so paid may be deducted by the public utility company as a necessary expense of transacting business. (Art. 142, H450, Reg. 33, Rev., Jan. 2, 1918.) 2024 Service Connections and Pipe Extensions by Public Utility. — Aloneys so received for service connections and pipe extensions are not permitted to be deducted from the gross amount of the income, for they do not come within any of the permitted classes of deductions mentioned in the statute. iMoneys so expended are invested in permanent improvements, which tend to enhance the rental and the market value of the water system. (Caption: Union Hollywood Water Co. vs. John P. Carter, collector case, Act of Aug. 5, 1909 (238 Fed. 329). (T. D. 2475, April 4, 1917.) 2025 Certain Deductible and Non-Deductible Expenses of Railroads. — The appended decision [summary] of the United States District Court for the Western District of Michigan, Southern Division, in the case of the Grand Rapids & Indiana Railway Company v. Doyle, Collector. (245 Fed. 792.) 1. Deductions from Gross Income. Deductions for expenditures for addition and betterments to the property, such as expenditures for sidings or spur tracks, are not authorized. 2. Operating Expenses Deductible. The payment for labor and materials which go Into the actual operating of the road and the property are deductible. 3. Expenses of Maintenance Deductible. Maintenance means the upkeep or preser g of the condition of the property to be operated and does not mean additions to the uipment, additions to the property, or improvements of former condition of the road. INC. 204 TAX CORPORATIONSt 4. Cost oi Improvements. , Where old rails are replaced with neW and heavier rails, ^ wooden bridges and culverts with concrete and steel bridges and culverts, the rule is that the cost of re- newals with like kind and quality is allowable, but excess cost is not allowable as deduction. 5. Expenditures Included in Income. Amounts expended for improving and adding to the property, such as building new stations and new shops, installing new machinery, and making additions to equipmen't, are included in income. is published for the information of internal revenue officers and others concerned. (T. D. 2210, June 1, 1915.) (245 Fed. 792.) 2026 Lobbying Expenses and Campaign Contributions. — Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propa- ganda, and contributions for campaign expenses are held not to be an ordinary and neces- sary expense In the operation and maintenance of the business of a corporation, and are therefore not deductible from gross income in arriving at the net income upon which the income tax is computed. (Art. 143, 1f451, Reg. 33, Rev., Jan. 2, 1918.) 2027 Law 1[791. All Interest Paid or Accrued on Indebtedness, With One Exception, Is Deductible. — “(2) All interest paid or accrued within the taxable year on its indebtedness,” [For definition of “paid or accrued” read at ^1923.] [Read at 1[2895.] 2028 Faw' ^,292. Interest Paid in Connection With Holdings m Certain Tax-Free Obligations and Securities Is Not Deductible. — “except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917) the interest upon which is wholly exempt from taxation under this title as income to the taxpayer,” 2029 Interest on Capital or Surplus. — Interest calculated as being a charge against income on account of capital or surplus invested in the business but which does not represent a payment on an interest-bearing obligation, is not an allowable deduction from gross income — that is to say, the interest which the money would earn if otherwise invested is not a deductible charge against income. [Read at 1[1965j (Art. 187, ^572, Reg. 33, Rev., Jan. 2, 1918.) [1[2896.] 2030 Car-Trust Certificates. — Equipment or car-trust certificates Issued by or for rail- road companies are a means by which such companies secure cars or other equip- ment, or the money with which such equipment is purchased. The equipment becomes at once an asset of the company and the trust certificates 203 1 secured by such assets are obligations of the railroad companies, similar to corporate bonds, mortgages, and like obligations. The trustees in whose names legal title to the equipment stands, are not an association within the meaning of this title, and are therefore not a taxable entity, but they are, for the purpose of this title, a fiscal agent, pay- ing off the obligations, both principal and interest, of the railroad companies with funds appropriated by such companies. The railroad companies may include these trust certificates in the amount of their 2032 bonded or other indebtedness reported under item 2 of the return Form 1031, and the interest paid thereon, * * * ^ deductible, * * * ^ If the certificates contain a contract or provision by which the obligor agrees to 2033 pay any portion of the tax imposed by this title upon the obligee or reimburse the obligee for any portion of the tax, or to pay the interest without deduction for any tax which the obligor may be required to pay, the trustees in such cases, in making interest payments on these certificates, will, in the absence of claims for exemption when interest payments are made to individuals, withhold the normal income tax on such payments regardless of the amount thereof. (Art. 188, ^[573-576, Reg. 33, Rev., Jan. 2, 1918.) 2034 Interest on Indebtedness as Rental. — Interest paid pursuant to contract on an in debtedness secured by mortgage on real estate occupied and used by a corporation, in which real estate the corporation has no equity or to which it is not taking title, is an allowable deduction from gross income as a rental charge, payment of which is required to be made as a condition to the continued use and possession of the property. If, how- ever, the corporation has an equity in or is purchasing for its own use the real estate upon which such mortgage is a prior lien, the indebtedness will be held to be indebtedness of the corporation within the meaning of the law and the interest paid on such mortgage will be deauctible [as interest] * • ♦ , (Art. 186, ^571, Reg. 33, Rev., Jan. 2, 1918.) IKC. 205 TAX 'CORPORATIONS. 2035 Interest on Deposits. — In the case of ,banl;s and banking asspeiatlons, loan or trust companies, interest paid within the year on deposits or on moneys received for in- vestment and secured by interest-bearing certificates of indebtedness issued by such banks, banking association, loan or trust company, may be allowably deducted from; the gross income of such corporation. (Art. 190, 1[578, Reg. 33, Rev., Jan. 2, 1918.) 2036 I^aw ^294. Taxes Paid or Accrued Within the Year Are Deductible, with Certain Exceptions. — “(3) Taxes paid or accrued within the taxable year imposed” [For construe tion of “paid or accrued’Vread at ^1923.] [^[2897.1 2037 T aw ^295. All Taxes Imposed by the Federal Government Except Income and Excess-Profits Taxes Are Deductible. — “(a) by the authority of the United Status, except income, war-profits and excess-profits taxes [‘1[2327]; or” [^2898.] 2038 All taxes levied by the general taxing authority, levied and paid on all taxable subjects, including tax imposed and paid under the act of October 3, 1917, except war-excess profits, income taxes, and taxes assessed against local benefits, are allowable deductions to the party paying the same. Although excess-profits tax paid is not an allow- able deduction in ascertaining the net income, the net income shown on any return will be credited with the amount of excess-profits tax for which the taxpayer will be liable for the same year, in order to determine the amount of income-tax liability. [See ^2.^27] (Art. 8, 1[116, Reg. 33, Rev., Jan. 2, 1918.) 2039 T.aw ^296. All Taxes Imposed by the “Possessions” Are Deductible or Allowed as a Credit. — “(b) by the authoiiiy of any of its possessions, except the amoui'.t of Income, war-p. ofits and excess-profits taxes allowed as a credit under section 238 23.12]; 2040 Uaw ^297. All State and Municipal Taxes, Excent Certain Assessments A«^ainst Local Benefits, Are Deductible.; — “(c) by the authority of any .State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory,” 2041 Law' ^298. Certain Assessments Against Local Benefits are not Deductible.— “not Including those assessed against local benefits of a kind tending to increase the value of the property assessed; or” .1^2899.] , [The words “of a kind tending to increase the value of the property assessed” in the above are new.] 2042 So-called “taxes,” more properly assessments, paid for local benefits, such as street, sidewalk, and other like assessments, imposed because of and measured by some benefit inuring directly to the property against W'hich the assessment Is levied, do not con- stitute an allowable deduction from gross income. Taxes deductible are those lev'ied for the public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. Special assessments, such as are hereinbefore contemplated and w'hIch are measured 2043 upon the basis of the benefit flowing directly to the property, are not deductible, even though an incidental benefit may inure to the public welfare. (.Art. 194, 11586-587, Reg. 33, Rev., Jan. 2, 1918.) 2044 Taxes paid pursuant to assessments levied by special districts, such as irrigation, reclamation, drainage districts, etc., for sidewalks in cities, street extension, grading, paving, etc., are held to be “taxes assessed against local benefits.” Such taxes are not allow^- able deductions in a return of annual net income. (T. D. 2090, Dec. 14, 1914.) 2045 Taxes for Local Benefits. — What forms of taxes cannot be claimed as deductions'? (Answer.) Taxes assessed against an individual on property owned by him to pay for the paving of a street, contiguous to his property, the construction of a sewer, side- walk, etc., the sprinkling or oiling of a street In front of his home, the construction of levees to protect, or ditches to drain, property owned by him, cannot be claimed as deduc^ tions. In short, such taxes as are not general in nature and are levied on account of some w’ork or privileges the benefit of which accrues to a limited number of property owners, of which the taxpayer is one, are not allow^able deductions. (Question No. 62, 1918 Income Tax Primer.) CORPORATIONS. 2046 Excise, License, and Franchise Taxes are Deductible. — The ruling of this ofTice previously made to the effect that banking corporations are not permitted to deduct from gross income the amount of taxes paid for stockholders on the value of their capital stock outstanding, applies only to the taxes levied upon the value of the capital stock arid is not intended to operate as so to prevent banking corporations from deducting from their gross income any State tax imposed against the corporation itself, as an excise or franchise tax; that is, a tax which the corporation is required to pay to the State in order that it may transact business within the State. (T. D. 2152, Feb. 12, 1915.) 2047 In the case of business, excise, license, or privilege taxes, they may be deducted either as taxes or items of expense, but not under both heads. (Art. 8, ^[117, Reg. 33, Rev., Jan. 2, 1918.) 2048 Import, Tariff or Customs Duties. — Import or tariff duties levied by act of Congress and paid to the proper customs officers, stamp taxes, and all other taxes (except income and excess profits taxes) imposed by internal-revenue laws and paid to collectors are deductible as taxes irriposed under authority of the United States, provided they are not added to and made a part of the cost of articles of merchandise with respect to which they are paid, in which case they will be reflected in the cost of merchandise and can not be separately deducted. (Art. 195, ^588, Reg. 33, Rev., Jan. 2, 1918.) 2049 You are advised that this office now holds that custom duties paid during the year by an individual are allowable deductions, as taxes or as part of the cost price if the individual is engaged in the importation of goods and merchandise. This ruling super- sedes instructions contained in office letter to you referred to above, and you are requested to correct your report in accordance herewith. (Extract from a letter to a collector, signed by Deputy Commissioner L. F. Speer, and dated December 22, 1914.) 2050 Taxes Paid for Shareholders. — Banks paying taxes assessed against their stock- holders on account of their ownership of the shares of stock issued by such banks cannot deduct the amount of taxes so paid in making their returns for the purpose of the income tax imposed by this title unless and to the extent that the lav/s of the State in which they do business by specific terms make the tax a direct liability of such banks, that is, a lien upon its property. The shares of stock are the property of the stockholders, and to the extent that the taxes assessed on the value of the shares of stock are property taxes the holders are primarily liable for their payment. The fact that State laws make it the duty of banks to pay the tax does not neces- 2051 sarily make the tax a liability of the banks. These provisions of State laws are intended only to provide a convenient means whereby the tax assessed against the stock on the basis of its value can be the more readily collected by the tax-collecting officers and do not attempt to assert liability against the bank, as is evidenced by the fact that in most, if not all, cases the tax is a lien upon the stock. For this purpose the liability of the bank is limited to the duty to collect or withhold from the stockholders the amount of taxes due and to pay the same over to the proper tax-collecting offices. Federal statutes pro- hibit States from imposing any tax upon national banks except upon the value of their real estate. In cases where States levy a tax on the stock of such banks and make it the , duty of the banks to pay such tax for the stockholders such payments are not deductible from the gross income of such banks. ^I’his rule applies only to taxes levied upon the value of the capital stock, and it is 2052 not intended to so operate as to prevent banking corporations from deducting from their gross income any State tax imposed against the corporation itself on the value of its real estate, furniture and fixtures, or as an excise or a franchise tax; that is, a tax which the corporation is required to pay to the State on account of its own property or business in order that it may transact business within the State is deductible. The rule hereinbefore set out will apply in the case of corporations other than 2053 banks, upon the value of whose stock taxes are assessed to the stockholders. (Art. 192, ^581-584, Reg. 33, Rev., Jan. 2, 1918.) 2054 Tax on Bank Stock. — Taxes on bank stock paid under legal requirement by the bank for its stockholders are deductible by the stockholders and not by the bank. Such payments are regarded as in the nature of additional dividends and should be included by the stockholder in his dividends received. Where bank stock is sold and transferred between date of assessment and pay- 2055 nient of the tax, in the absence of statute governing, the stockholder liable for the tax (if the tax was actually paid) will have the benefit of the tax deduction in returns of income. 'Fhis is a question of fact and to be determined as such. (Art. 8, 11118-119, Reg. 33, Rev., Jan. 2, 1918.) INC. 207 TAX CORPORATIONS. 2056 A bank in Massachusetts held not authorized to deduct from is gross income taxes paid on its shares on behalf of its stockholders under Rev. Laws, Mass. c. 14, Secs. 9-18, in ascertaining its net income subject to special excise tax under Tariff Act Aug. 5, 1909, c. 6, Sec. 38, par. 2, 36 Stat. 112. — Eliot Nat. Bank v. Gill, 210 F. 833. (Affirmed by Circuit Court of Appeals, First Circuit, December 21, 1914 [218 Fed. 600].) The United States Circuit Court of Appeals, Eighth Circuit (No. 4260, December 2057 Term, 1914), in error to the District Court of the United States for the Eastern District of Missouri [March 25, 1915] in the case of the National Bank of Commerce in St. Louis, plaintiff in error, v. E. B. Allen, U. S. Collector of Internal Revenue for the First District of Missouri, defendant in error, affirms the decision of the court below (21 1 Fed. 743) in which judgment was rendered by the Court against the bank. The Court of Appeals held that (223 Fed. 472]; 1. Under the State law, where 2058 banks pay the State tax imposed on shareholders, but have a lien until reimbursed on the shares of stock and all dividends, the tax is not imposed on the banks; 2. State taxes so paid can not be legally deducted from gross income on returns made by banks under the corporation tax act; 3. The commissioner has powder to make a nev/ assessment within three years in case an incorrect return has been made; 4. There is no necessity of construing the word “false,” where it is used with reference to the time in which the com- missioner shall act, to mean fraudulently false. (T. D. 2198, May, 5, 1915.) [Petition to the United States Supreme Court for a writ of certiorari to the Court of Appeals for the Eighth District denied. October 25, 1915.] 2059 Taxable Status of Amount Refunded by Government in One Year, Represeaung Tax Paid for Which Credit has been Taken as a Deduction in a Previous Year.— Receipt, is acknowledged of your letter of December 16, 1918, in which you ask whether an individual who has claimed a deduction for taxes [such as Federal Excise Taxes] paid during the year in his income tax return for 1917 and in the following year it develops that these taxes were improperly assessed and collected, and a refund is made to the tax- payer in 1918, should consider “the amount of such refund gross income for the year 1918, or is it in the nature of additional inco.me for 1917 and should the additional tax liability on the amount of the refund be taken care of as 1917 income by means of an amended return for 1917 and by an additional tax payment as of that year?” ^In reply you are advised that this taxpayer will not be required to include in his return for 1918 the amount received as refund of taxes erroneously paid in the preceding year. He should, however, file an amended return for 1917 and claim a deduction therein for the correct amount of taxes due for that year. The further amount of income tax due for 1917 as a result of the reduction in the item of taxes paid during the year and a letter of explanation should accom- pany the amended return when it is forwarded the Collector of Internal Revenue. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated January 8, 1919.) 2060’Law ^[299. All Foreign Taxes Are Deductible or Allowed as"a Credit. — “(d) in the case of a domestic corporation, by the authority of any foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 238 [1I2332J; or” 2061 Law ^301. Taxes Withheld at the Source on Account of Tax-Free-Covenant Obligations Are Not Deductible. — Provided, That in the case of obligors specified in subdivision (b) of section 221 [1[604] no deduction for the payment of the tax imposed by this title or any other tax paid pursuant to the contract or provision referred to in that subdivision, shall be allowed;” 2062 iTax-Free Bonds. — In the case of bonds or other forms of indebtedness Issued with a guaranty that the interest thereon shall be free from taxation as against the holder, the corporation paying the tax pursuant to its guaranty, whether Federal, State, or muni- cipal, will not be permitted to deduct the tax so paid. The tax assessable upon this income is a direct liability of the recipient, and the debtor corporation paying it does so voluntarily or at least in pursuance of a contract voluntarily entered into, which contract is in nowise binding upon or to be recognized by the Government in determining the tax liability of the corporation. Hence taxes so paid are not deductible from the gross income of the debtor. (Art. 193, 1(585, Reg. 33, Rev., Jan. 2, 1918.) 2063 Law 1(302. Losses Sustained Are Deductible. — “(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise;” [Heretofore the law read “losses sustained and charged ofP However, Sec. 212 (b), K755, should be noted in this connection.] [K2901.] INC. 208 TAX CORPORATIONS. Basis of Determining Gain or Loss. — [Read at ^1854.] Net Losses. — [Read at 1(1913.] 2064 Deductible Losses. — The deduction for losses must represent losses not compensated for by insurance or otherwise and which were charged off and actually sustained within the year as evidenced by closed and completed transactions. [But read at “In- ventories,” 1(1861.] (Art. 147, 1(457, Reg. 33, Rev., Jan. 2, 1918.) 2065 The loss considered here has in it no element of “depreciation” or “allowance for wear and tear,” or “compensation from insurance or otherwise.” It is to be such loss as is absolute and complete and which has been actually sustained. Depreciation as an allowable deduction in ascertaining annual net Income for the 2066 income tax is separately provided for, and is not to be confused with loss. The depreciation provided to be taken as a deduction in a return of income Is the value assigned to the deterioration of physical improvements or assets, such as are susceptible of having their value lessened through wear and tear, use or obsolescence. (T. D. 2005, July 8, 1914.) 2067 Shrinkage in Securities [See “Inventories” at 1(1861.]. — A corporation possessing securities, such as stocks and bonds, can not allowably deduct from gross income any amount claimed as a loss on account of the shrinkage in value of such securities through fluctuations of the market or otherwise; the only loss to be allowed in such cases is that actually suffered when the securities mature or are disposed of. In the case of banks or other corporations which are subject to supervision by State 2068 or Federal authorities, and which, in obedience to the orders of such supervisory officers, charge off as losses, amounts representing an alleged shrinkage in the value of property, real, personal, or mixed, the amounts so charged off do not constitute allowable deductions. Deductible losses are those only which are determined upon the basis of a closed or completed transaction. The foregoing applies only to owners and investors and not to dealers in securities, as to which see T. D. 2609 [1(1862]. (Art. 148, 1(459-460, Reg. 33, Rev., Jan. 2, 1918.) [1(2904.] 2069 Losses may be sustained by individuals or corporations on personal or real property * * * . Loss to be deductible must be an absolute loss, not a speculative or fluctuating valuation of continuing investment, but must be an actual loss, actually sustained and ascertained during the tax year for which the deduction Is sought to be made; it must * * * be determined and ascertained upon an actual, a com- pleted, a closed transaction. Losses sustained by * * * corporations from the sale of or dealings in personal 2070 or real property growing out of ownership or use of or interest in such property, will not be deductible at all unless they are * * * ascertained, determined and fixed as absolute in the above sense, within the taxable year in which the deduction is sought to be made. When loss under this heading is ascertained to be deductible, the entire amount of the loss will be deductible except where the property, in connection with which the loss occurred, was acquired prior to March 1, 1913 * * * ^ (x. D. 2005, July 8, 1914.) 207 1 Irrigation Bonds. — District Irrigation bonds generally are a lien upon the real estate affected by the irrigation project, and until a corporation holding such bonds has taken the necessary action to protect its interest and enforce the collection of the bonds the corporation will not be allowed to deduct from gross income, as a loss, the face value or any estimated amount supposed to represent a loss or shrinkage in the value of such bonds. Any estimated shrinkage in the value of bonds or other securities does not con- stitute a loss within the meaning of this title. So long as the value of a security is un- certain or unknown a loss can not be definitely ascertained and is therefore not deductible. (Art. 153, K471, Reg. 33, Rev., Jan. 2, 1918.) 2072 Discount on Bonds Issued Prior to 1909. — Discount on bonds Issued and sold prior to the year 1909, if such discount was then charged against surplus or against the income of the year in which the bonds were sold, is held not to be deductible from the in- come of subsequent years, for the reason that the charging off prior to January 1, 1909, of the entire amount of the discount constitutes a closed transaction, and such transaction can not be reopened for the purpose of reducing the taxable income of a corporation for subsequent years by deducting therefrom an aliquot part of the discount. (Art. 149, K461, Reg. 33, Rev., Jan. 2, 1918.) (C. & A. R. R. v. U. S., Court of Claims [1(2073]). INC. 209 TAX CORPORATIONS. 2073 The appended opinion [caption only, ^2074] pf^the Court of Claims of’the United States in the case of Chicago & Alton Railroad- Co’ United States [decided Dec. 3, 1917] is published for the information of internal-revenue officers and other concerned, 2074 Caption referred to in ^[2073. — Where a railroad company sold bonds and equipment notes at a discount in 1906 and the books show that the loss was entirely charged off under the profit and loss account for 1906, and th-e company'in making returns under the act of August 5, 1909, for purpose of assessment of excise tax for years 1911 and 1912, failed to deduct the proportionate amount of discount sustained, it has no right to claim refund of such amount. The petition of claimant for refund'of tax dismissed. (T. D. 2631, Jan. 19, 1918.) (249 Fed. 280.) 2075 Discount on Bonds Issued Subsequent to January 1, 1909. — If, however, the bonds were sold subsequent to January 1, 1909, at a discount, and the amount of the dis- count was then charged off on the books, either against earnings or surplus, but not deducted ill the corporation’s return of net income, such discount as was not then deducted, may be spread over the life of the bonds, and an aliquot part of the discount may be deducted from the gross income of each year until the bonds mature or are redeemed. In cases wherein a corporation sells its bonds at a discount plus a commission 207 6 for selling, the amount of such discount and commission, together with other ex- penses incidental to issuing the bonds, constitutes a loss, the aggregate amount of which loss will for the purpose of an income tax return, be prorated over the life of the bonds sold, and the amount thus apportioned to 'each year will be deductible from the gross income of each such year until the bonds shall have been redeemed. If a corporation having sold its bonds at a discount, the discount having been 207 7 deducted from gross income later repurchases or redeems the bonds at a price , : less than par, the difference between the price at which they are redeemed and their par value will be returned as income. If bonds are sold at a premium the premium must- be returned as Income. (Art. 150, lf462-464, Reg. 33, Rev., Jan. 2, 1918.) 2078 The appended decision of the United States Circuit Court of Appeals for the Tlilrd Circuit, is the case of the Baldwin Locomotive Works v. McCoach, collector, [221 Fed. 59, holding that if the less sustained by selling its own bonds at a discount is an expense of the business of a corporation, the expense will not be paid until the maturity of the bonds, and should therefore be prorated over the life of the bonds] is published for the information of Internal revenue officers and others concerned. (T. D. 2185, April 1, 1915.) [Decision reported at 221 Fed. 59.] 2079 Loss Due to Retirement of Bonds. — In a case wherein a corporation, under the terms of its indenture, securing an issue of bonds is required annually or at certain specified periods to purchase and retire a certain number of its bonds and in doing so pays more than par for the bonds, the loss sustained is an allowable deduction from gross income for the year in which such purchase is made, under the following conditions: 2080 First. If the bonds w^ere sold at par, then the loss is the difference between par and the price at which they w'ere repurchased for retirement. 2081 Second. If the bonds were sold at a premium and such premium was accounted for as income for the year in which issued, then the difference between par and the repur- chase price may be deducted as loss, but if the premiums at which the bonds were issued had not been carried into the income account then the loss to be claimed should be the difference between the price at w hich the bonds were sold and the price at which they were repurchased. , , ‘ Third. If the bonds were sold at a discount and the discount was charged against 2082 tlie earnings of the year in which issued, the difference between par and the repur- chase price may be deducted as a loss, but if the. dicount on the bonds was pro- rated over the life of the bonds and the annual proportion charged against the yearly income, the amount to be charged off as a loss for the year in which the bonds are repur- chased for retirement should be the difference between the price at which the bonds were sold and the repurchase price minus an allowance for the sum that had been charged off annually on account of the prorated discount on such bonds. (Art. 152, 11467-470, Reg. 33, Rev., Jan. 2, 1918.) (• 2083 Redemption of Stock on a Stipulated Premium Basis Considered a Capital Trans- action. — I’his office is in receipt of your letter of the 6th instant, in which you ask for information on the following question: “A corporation in 1912 issued preferred stock for par. It was provided on the certificates that said stock was redeemable at 110. The company exercised its option and redeemed the stock at 1 10 by calling it in. The difference appeared on the books as a reduction of undivided profits. Is this difference a lawful INC. 210 TAX CORPORATIONS. deduction?” 1[In reply you are informed that this office will hold that the redeeminjt of the stock at a price in excess of par represents a capital transaction in which there can be no gain or loss to the corporation, and therefore the difference between the selling price of the stock and the price at which it was redeemed will not be deductible in a return of annual net income, (Letter to a subscriber, signed by Deputy Commissioner G. E. Fletcher and dated April 11, 1917.) 2084 Voluntary Removal of Buildings. — Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident'to renewals and replacements will be deductible from gross income, in an amount repre- senting the difference between the cost of such property demolished or scrapped and an amount treasuring a reasonable allowance for the depreciation which the property had undergone prior to its demolition or scrapping; that is to say, the deductible loss is only so much of the original cost, less salvage, as would have remained unextinguished had a reasonable allowance been charged off for depreciation during each year prior to its destruction. (Art. 155, ^473, Reg. 33, Rev., Jan. 2, 1918.) [^2902.] 2085 Razing Old Buildings to Give Place to New Ones. — When a corporation buys real estate, upon which is located a building or buildings, which it proceeds to raze, with a view to erecting thereon another building or buildings, it will be held that the cor- poration has sustained no deductible loss by reason of the demolition of the old building or buildings. In such case it will be considered that the value of the real estate, exclusive of old improvements, is equal to the purchase price of the land and buildings. (Art. 156,' ^474, Reg. 33, Rev., Jan. 2, 1918.) 2086 Sale of Patents. — A corporation disposing of patents by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the value as of March 1, 1913, if acquired prior to that date, or between the selling price and the cost, if acquired subsequent to that date. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted^ on account of depreciation of such patents since March 1, 1913, or since the date of pur- chase if acquired subsequent to that date. (Art. 157, 1[475, Reg. 33, Rev., Jan. 2, 1918.) 2087 Losses on Judgment. — Any amount paid pursuant to judgment or otherwise on account of damages is deductible from gross income to the extent of, and when the amount is actually paid, less any amount of such damages as may have been compen- sated for by insurance. (Art. 158, ^[476, Reg. 33, Rev., Jan. 2, 1918.) 2088 Cost of Successful Drawing, Models, etc.. Capital. — When a corporation has made expenditures for designs, drawings, patterns or models representing work" of an expcrlm.ental nature, and such designs, drawings, patterns, or models prove to be satisfactory and result in the production of salable goods, they will be treated as a capital asset, and the entire cost thereof, including experimental and development expense's, will be capitalized, in which case no part of such expenditures shall be included in expenses of rujining the business and shall not be treated as a deduction from gross income. — (Art. 175, ^553, Reg. 33, Rev., Jan. 2, 4918.) 2089 Cost of Unsatisfactory Models, Drawings, Etc., a Loss. — If, however, the designs, drawings, patterns, or m.odels prove by actual experience to be unsatisfactory and do not result in the production of salable goods and have no asset value, such expenditures charged off may be included as a ,lo,£S incident to running the business and as such deducted from gross incomg,. provided that the corporation in taking credit for such expenditures in its income tax return shall :nake a full and complete explanation with respect to the sam.e and to the satisfaction of the Commissioner of Internal Revenue. (Art. 176, 1|554, Reg. 33, Rev., Jan. 2, 1,918.) 2090 Law ^303. Worthless Debts are Deductible, — “(5) Debts ascertained to be worth- less and charged off withm tlie taxable .year;” [^2906.] 2091 Where all of the surrounding and attendant circumstances indicate that a debt is worthless and uneollectible and that legal action to enforce payment would in all probability not,.re,tfultl in thejjja-u.sfact.ioij.-rof execution on a judgment, a showing; of these facts will be -^ujffcient showing, of.gfig.. >vor.thle.ssness of the debt for purposes of deduction. , A bad debt or worthless debt, as contemplated by the income-tax law and which 2.092 may be deducted^uva return 'of :jnvpme| is.a-dcbt which .has been actually i^Ccr-* tained to be W 9 rt.hlu.ss-aiid .•qha.rgod off-wiLlriir the taxable year. • INC. 211 TAX CORPORATIONS. Debts arising from unpaid wages, salaries, rents, and items of similar taxable 2093 income will not be allowed as a deduction unless the income they represent has been included in the return of gross income for the year in which the deduction as a bad debt is sought to be made or in a previous year and the debts themselves have been actually ascertained to be worthless and charged off. (Art. 8, ^[94-96, Reg. 33, Rev., Jan. 2, 1918.) 2094 Losses which may be properly deducted from gross income on account of bad debts or doubtful accounts are those losses which have been definitely ascertained to have occurred and which were charged off during the year for which the return is made. It is not essential that the bad debt or account shall be proved worthless by legal proceedings before the deduction may be allowed but the corporation must not only be satisfied that the debt or account is worthless, but must be able to satisfy the Commissioner or Collector of Internal Revenue that the accounts charged off were definitely determined at the time to be worthless and that they had not been recognized as worthless or without value prior to the beginning of the year for which the return is made. (Art. 151, ^[465, Reg. 33, Rev., Jan. 2, 1918.) 2095 Loss Must be Definite. — In the absence of legal proceedings to determine the col- lectibility of a debt or account, the question of whether or not It is an asset without value will depend largely upon the judgment of the creditor. The mere writing down of the value of an account does not constitute such a loss as may be allowably deducted. The deduction will be permissible only when the debt or account is written out of the assets of the corporation. (Art. 151, 1[466, Reg. 33, Rev., Jan. 2, 1918.) 2096 Bankruptcy. — Bankruptcy may or may not be an indication of worthlessness of a debt. Actual determination of worthlessness in such cases is possible only when settlement in bankruptcy shall have been had. Only the difference between the amount received in distribution of assets of the bankrupt and the amount of proved claim may be considered for the purpose of deduction as a bad debt. (Art. 8, 1[97, Reg. 33, Rev., Jan. 2, 1918.) 2097 Foreclosure Sale on a Mortgage. — Where, under foreclosure, a mortgagee buys in the mortgaged property and credits the indebtedness with the purchase price the difference between purchase price and the indebtedness will not be allowable as a deduction for bad debt — the property which was security for the debt being In possession and ownership of the mortgagee is, for the purposes of income tax, held to be sufficient to justify a disallowance of a claim for bad debt. Only where purchaser for less than debt is another than mortgagee may the dif- 2098 ference between debt and net from sale credited be deducted as bad debt. (Art. 8, 198-99, Reg. 33, Rev., Jan. 2, 1918.) 2099 Compromise. — Where an indebtedness is claimed and contested and a settlement is had by way of compromise whereby an amount, less than the debt claimed, is accepted in full payment and satisfaction of the debt, the difference between the amount paid and that claimed is not allowable as a deduction for bad debts. Where the settle- ment in compromise consists of a promise to pay an amount less than the debt claimed, the amount promised to be paid forms the basis of a new transaction, and upon failure to make good this promise the question will arise as to the deductibility of the new amount only. (Art. 8, 193, Reg. 33, Rev., Jan. 2, 1918.) 2100 Debts Due and Payable Prior to March 1, 1913. — All debts representing amounts that became due and payable prior to March 1, 1913, and not ascertained to be worthless prior to that date, whether representing income or a return of capital, are held to be allowable deductions, under paragraph B of the law, in a return of income for the year in which they are actually ascertained to be worthless and are charged off. (T. D. 2224, July 13, 1915.) 2101 Reserves for Losses not Deductible. — Reserves to take care of anticipated or probable losses are not a proper deduction from gross income. (Art. 126, Reg. 33, Jan. 5, 1914.) 2102 Law 11304. Amounts Received as Dividends are Deductible. — “(6) Amounts received as dividends from a corporation which is taxable under this title upon its net income, and” 2 1 03 Law 11305. “amounts received as dividends from a personal service corporation out of earnings or profits upon which income tax has been imposed by Act of Congress (read at 11772.];” JNC, 212 TA^ CORPORATIONS. 2104 Earnings of Subsidiary Company. — In a case wherein a holding company actually takes up each month on its books and credits surplus or profit and loss with its proportionate share of the earnings of the underlying companies, such holding company will be required to include in its gross income the amounts thus taken up, regardless of the fact that the same may not have been actually paid to or received by it in cash. The fact that the underlying companies credit the holding company with the amount of earn- ings to w'hich it is entitled on the basis of the stock it holds, together with the fact that the holding company takes up on its books the amount thus credited, renders it incumbent upon the holding company to return these amounts as income. [But see “Consolidated returns,” ^[1405.] (Art. 115, ^386, Reg. 33, Rev., Jan. 2, 1918.) 2 1 05 Law 1[306. A Reasonable Allowance for Depreciation is Deductible. — “(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business including a reasonable allowance for obsolescence;” [Read at ^2910.] [Heretofore the law provided a reasonable allowance for the “exhaustion, wear and tear of property arising out of its use or employment in the business or trade,” no mention of “obsolescence” being made in the law, specifically. Such “loss” had to be “charged off.” As to “charged off” Sec. 212 (b), at ^755 should be noted.] 2106 Basis of Allowances for Depreciation. — Section 12(a) of the act of September 8, 1916, as amended, to which section 5(a) is similar, provides that net income shall be ascertained by deducting from gross income, among other things: Second. All losses actually sustained and charged off within the year and not compen- sated by insurance or otherwise, including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade. A reasonable allowance for the wear and tear of property arising out of its use 2107 or employment in the business or trade is to be based on the cost of such property or on its fair market price or value as of March 1, 1913, if acquired prior thereto. In the absence of proof to the contrary, it will be assumed that such value as of March 1, 1913, is the cost of the property, less depreciation up to that date. This decision is supplemental to articles 159 to 169, inclusive, of regulations No. 33 2108 (revised), which to any necessary extent are modified accordingly. (T. D. 2754, Aug. 23, 1918.) 2109 The value to be cared for by depreciation is the actual amount invested in the property and not the value which may be arbitrarily or otherwise fixed. (Art. 8, 1[84, Reg. 33, Rev., Jan. 2, 1918.) 2110 Section 12, item “second,” authorizes corporations to deduct from the gross amount of their income received within the year all losses actually sustained and charged off within the year, including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade. Depreciation as here used must be differentiated from depletion, obsolescence, 2111 and other losses elsewhere provided for in these regulations. The deduction for depreciation should be the amount of the loss occurring during 2112 the year to which the return relates, estimated on the cost of the physical property with respect to which such deduction is claimed, which loss results from wear and tear due to the use to which the property is put and which loss has not been made good through expenditures for renewals, replacements, and repairs, deducted under the heading of expenses for maintenance and operation. (Art. 159, ^477-479, Reg. 33, Rev., Jan. 2, 1918.) Depreciation in an amount representing exhaustion from wear and tear of property 2113 arising out of its use or employment in business or trade, but no deduction shall be allowed for any amount paid out for new buildings, permanent improvements or betterments to increase the value of any property or estate, and no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made. (Art. 8, ^[83, Reg. 33, Rev., Jan. 2, 1918.) 2114 Must Be Charged Off. — Within the purview of this item depreciation, to an amount measuring the decline in value due to exhaustion, wear and tear of property arising out of its use, is a loss. This loss, in order to constitute an allowable deduction from gross income, must be charged off. The particular manner in which the amount shall be charged off is not material, except that the amount measuring a reasonable allowance for depre- ciation must be either deducted directly from the book value of thejassets |or credited] to a depreciation reserve account, and as such shall be reflected in the annual balance sheet, (Art. 159, 1[480, Reg. 33, Rev., Jan. 2, 1918.) INC. 213 TAX CORPORATIONS. 2115 Your attention is called to the “second” deduction under section 12 of the act of September 8, 1916, which provides: 2116 All losses actually sustained and charged off within the year and not compensated by insurance or otherwise, including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade; (a) in the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be m,ade In the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury. [Bear in mind that all of this paragraph is a quotation from the old law.] In view of the fact that it has been the practice of examining officers to disallow 2117 a deduction for depreciation or depletion if not charged off on the books of the corporation at the tlm.e of the investigation, it is deemed necessary to clarify the interpretation of this provision of the law. A corporation is not entitled to a deduction from the amount of its gross Income 21 1 8 of any amount for depreciation, depletion, or other loss sustained wdthin the taxable year unless the amount of such depreciation, depletion, or other loss is charged off on the books of the corporation before such deduction is allowed. The purpose of this require- ment that depreciation, depletion, and other losses be charged off on the books of the corporation before allow'ance is to insure that the returns of such corporation are in accord with its books of account, and that thereby error and fraud with respect to the facts are prevented. The statute is not, however, to be construed as requiring that depreciation, depletion, and other losses be charged off within the taxable year. It is sufficient that they are charged off before they are allowed as deductions. Consequently at the time of an examination of a corporation It should be given an opportunity to reopen its books and charge off depreciation, depletion and other losses which it actually sustained during the taxable year. The depreciation, depletion, and other losses must be charged off in the manner 2119 prescribed’ by the regulations. If the books of the corporation are reopened for the purpose of charging off depreciation,^ depletion, or other losses, corresponding corrections m.ust be made In the other book entries; and if for any reason the facts do not warrant such other changes, depreciation, depletion, and other losses can not be charged off, and, therefore, can not be allowed as deductions. Thus, for example, if by reason of a distribution of earnings there is nothing from which to credit a reser>re for depreciation no allowance for depreciation can be credited to a depreciation reserve account. [See 112159.] Whenever, therefore, a corporation has clearly suffered allowable depreciation, 2120 depletion, or other loss which has not been charged off on its books, and on re- opening its books at the time of an examination charges off such depreciation, depletion, or other loss by proper entries, it is entitled to the benefit of the deduction of such depreciation, depletion or other loss subject to the general provisions of law. 2121 The Instructions contained herein revoke the last paragraph of C. T. R. A. Mim. 48, dated March 27, 1917. 2 1 22 You will please acknowledge the receipt of this letter. (Letter to Internal Revenue Agents, signed by Commissioner Daniel C. Roper, and dated June 25, 1918.) In connection with the above read at 1[2919.] 2 1 23 Assets Not Subject to Wear and Tear, Such as Real Estate and Securities. — Assets of any character whatever which are not affected by use, wear, and tear (except patents, copyrights, etc.) are not subject to the depreciation allowance authorized by this act. Real estate as such, and as distinct from the improvements thereon, is not reduced in value by reason of w^ear and tear, and it therefore follows that the “allowance” con- templated as an offset to depreciation in the case of real estate corporations does not apply to the ground, but is intended to measure the decline, by reason of wear and tear, In the value of the improvements. (Art. 162, 1[487, Reg. 33, Rev., Jan. 2, 1918.) 2 1 24 Value of Purchased Buildings May Have To Be Estimated. — In determining the cost of the real estate upon which depreciable property is located It frepucnfly occurs that no segregation is made of the cost of buildings as separate and drsti.net from the cost of the ground upon which such buildings stand. In such cases where thb .actual' cost of the buildings or improvements at the time they were taken over by the corporatigh egn not be definitely determined. It w’ill be sufficient for the purpose of •de- termining, the rate of depreciation to be used in computing ; the amount which will be de.du'ctible.from gross [inco.'ne to estimate the actual value at the time acquired, of buildings . INC. 214 TAX CORPORATIONS. or Improvements if acquired after March 1, 1913, or the fair market price or value as of that date If the property was acquired prior to March 1, 1913, the value in either case to be reduced by the amount of depreciation previously sustained. (Art. 163, ^488, Reg. 33, Rev., Jan. 2, 1918.) 2125 Depreciation in the Value of Stocks, Bonds, etc. (Read ^2067-^2068.] — The depreci- ation referred to in the income tax law does not relate to evidence of a right or interest in property and hence, any shrinkage in the value of bonds, stocks, and like securities, due to fluctuations in their market value, is not deductible in a return of income as depre- ciation or loss. (T. D. 2005, July 8, 1914.) 21 26 ♦ * ♦ depreciation, applies only to such tangible property as is subject to wear and tear, exhaustion and obsolescence, and is not to be construed as recognizing any gain or loss due to fluctuations in the market value or arbitrary changes in the book value of securities and like assets, the gain or loss with respect to which will be determined only when such assets mature, or are sold or disposed of — that is, when there is a completed, a closed transaction. (T. D. 2077, Nov. 21, 1914.) 2127 Bonds and securities are not subject to wear and tear within the meaning of the Federal income tax law, and therefore depreciation does not apply to any shrinkage in their value. Shrinkage in the value of securities, as such, does not constitute a loss actually sustained within the year, the amount of which is definitely ascertained. There- fore, under the rules of this office and consistent with the provisions of the law, a shrinkage in the value of bonds or like securities does not constitute an allowable deduction from gross income either as loss or depreciation. The fact that bonds and similar securities were written off at the direction of the 2128 Comptroller of the Currency or the State banking department is not material. A mere book entry does not constitute either a loss or gain for the purpose of the income tax. The fact that bonds were written off does not necessarily imply that they are a total loss, nor is this act a conclusive proof that any loss occurred during the year for which the return is made. 2129 Losses of this character are only ascertainable when the securities mature, are dis- posed of, or cancelled. (T. D. 2152, Feb. 12, 1915.) 21 30 Depreciation in Connection With Good-Will, Trade Marks, and Trade Brands. — “Good-will” represents the value attached to a business over and above the value of the physical property, and is such an intangible asset that it is not subject to wear and tear, and no claim for depreciation in connection therewith can be allowed. Any loss resulting from or on account of an investment in “good-will” can be determined only when the property or business to which the good-will attaches is sold or disposed of, in which case the profit or loss will be determined upon the basis of the value of the assets including good-will if acquired prior to March 1, 1913, or their cost if acquired subsequent to that date. (Art. 167, ^494, Reg. 33, Rev., Jan. 2, 1918.) [^2912.] 2131 Comment: We have been told that the last two lines above should read, “Including good-will on March 1, 1913, if acquired prior to that date, or their cost if acquired subsequent to that date.” (C. T. Co.) 2132 No deduction will be allowed for the depreciation of good-will, trade-marks, and trade brands. If such assets shall have been purchased at a determined price and shall be later sold at a price less than such cost, or less than their determined fair market value as of March 1, 1913, if acquired prior to that date, the amount by which the selling price is less than the cost or value, as the case may be, will be a loss deductible from the gross income of the year in which such assets were sold. (Art. 168, ^495, Reg. 33, Rev., Jan. 2, 1918.) 2133 Loss on Inventory of Merchandise or Material, by Obsolescence or Damage. — No deductions from the inventory value of merchandise or material will be allowed except in cases in which the inventory includes goods or materials which by reason of obsolescence or damage are unsalable. When such deduction is claimed the facts con- nected therewith, including a statement of the cost of the goods, the value at which they were inventoried, and their present condition, must be filed with the return. (Art. 160, 11481, Reg. 33, Rev., Jan. 2, 1918.) 21 34 Merchandise. — Depreciation computed on total invoice cost of merchandise in stock is not an allowable deduction, except that if any portion of the merchandise in stock is unsalable by reason of obsolescence or damage, a depreciation deduction not in excess of the decline in value during the taxable year will be allowed, (Art. 169, 11496, Reg. 33, Rev., Jan, 2, 1918.) 215, TAX INC. cotit>oiiAtioi^s. 21 35 Patents, Deduction for Return of Capital Invested Therein. — An allowable deduction for any given year for return of capital invested in patents at the time of issue will be an amount equal to one-seventeenth of the actual cost, in cash or its equivalent, of such patents. Where the patent has been secured from the Govern- ment, its cost v/ill be represented by the various Gbvernment fees, cost of drawings, experimental models, attorneys’ fees, etc., actually paid. Where the patent has been purchased for a cash consideration, the amount paid therefor would represent the capital invested therein. If the corporatioh purchased a patent and made payment therefor in stocks or other securities, the actual cash value of such stocks or other securities at the time of the purchase will represent the cost or capital invested in the patent. If the patent was purchased after a part of its life had expired, the cost for the purpose of a deduction for return of capital will be ratably spread over the remaining years of its life. If the patent becomes obsolete prior to its expiration, it will be permissible for the cor- poration to deduct from gross income such proportion of its original cost (less any amount previously charged off) as the number of years of its remaining life bears to the whole number of years Intervening between the date it v^as acquired dnd the date it legally expires. In determining the amount deductible on account of the expiring life of patents only the actual cost thereof and not an estimated vklue as of March 1, 1913, or any other date, will be considered. (Art. 174, 11552, Reg. 33, Rev., Jan. 2, 1918.) [1[2917.] 2 1 36 Obsolescence of Models, Drawings, Etc., Deductible as a Loss. — If designs, drawings, patterns, or models result in the production of goods which prove to be salable for a certain length of time and then become obsolete and can not be sold, the amount expended for such designs, drawings, patterns, or models, less any amounts previ- ously claimed as depreciation with respect to, the same or as a return of capital, may, when charged off, be included in, and deducted as a loss incident to running the business, provided full and complete information is reported in a manner satisfactory to the Corn- m.issioner of Internal Revenue. (Art. 177, 1f555, Reg. 33, Rev., Jan. 2, 1918.) [i[2918.] 2137 Obsolescence Deductible, Cost Less Depreciation and Salvage. — Amounts repre- senting losses on account of obsolescence of physical property m.ay be included as a deduction from gross income as a loss, provided such amounts have been recorded in the books following the condemnation and vithdrav.’al from use of the obsolete property. The amount of obsolescence that may be claimed as a deduction shall be ascertained by deducting from the cost of the property the total amount that has been previously claimed and deducted on account of the depreciation of the property, plus residual value at time of obsolescence, or plus the amount received from the sale of the property. The obsolescence deduction must not include the accumulated depreciation applicable to prior years. (Art. 178, 1|556, Reg. 33, Rev., Jan. 2, 1918.) 2133 Obsolescence V^Tien no Depreciation is Deducted. — If no depreciation has been charged off against such property and deducted from gross income of prior years, the amount allowable as a deduction for the year in which the property becomes obsolete shall be ascertained by deducting from the cost of the property its residual value, plus an amount equal to the depreciation actually sustained during the prior period and which might have been deducted when computed at the rate applicable to, the same or sim.ilar property. The amount of depreciation thus arrived at as applicable to former years may be made the basis of amended returns and a claim for the refund of taxes overpaid bv reason of the fact that no depreciation deduction was claimed in those years. (Art, 179, 1^^557, Reg. 33, Rev., Jan. 2, 1918.) 2130 Rate for Computing. — No definite rate has been fixed by which an allowable deduction on account of depreciation in the value of any class of property subiect to wear and tear is to be computed, but it is contemplated that this allowance shall be computed upon the basis of the cost of the property and the probable number of years constituting its life. The deduction to be allowed relates solely to loss due to use, wear and tear, and the matter of ob^dlescence is not relevant, inasmuch as when the property becomes obsolete a deduction for the loss sustained thereby, representing the difference between the cost and the amount of depreciatioh previously charged off or which should have been charged off in prior Vears, will be allowed. (See Arts. 178 [1(2137] and 179 [112138]). (Art. 162, 1(485, Reg. 33, Rev., Jan. 2, 1918.) 2140 Rate Based Upon Life. — In the case of buildings the deduction on account of depreciation shall not include any allowance for an estimated loss due to lessening of.’rental Rvalue, nor fshall the computation of the deduction be influenced by the changed environment after a period of years, nor by its lack of adaptability to the use originally intended nor to any other outside influence affecting its value but an allowable deprecia- tion shall be determined solely upon the estimated life of such buildings after making due allowance for ordinary repairs, the cost of which may be deducted as expenses for maintenance and operation. (Art. 162, 1(486, Reg. 33, Rev., Jan. 2, 1918.) INC. 216 TAX COUPORATIONS. 2141 The appended charge of the court tP the jury in the District Court of the United States for the S'butheril District Pf New York, in the case of Hyman Cohen v. John Z. Lowe, collector, is published for the information of internal-revenue officers and others concerned. (T. D. 2343-, June 14, 1916.) 2142 Suriimary of charge. 1. Depreciation Depends on Life of Building. The physical loss or deterioration a building suffers during the tax year depends on the life of the building; how many years it would remain so as to be habitable for general purposes for which it was constructed. 2. Yearly Deductions. The average amount of deduction each year covers the annual percentage. 3. Deductions for Improvements. When allowance Is made for depreciation of a building no deduction shall be allowed for expense of restoring the building or making good the exhaustion thereof. 4. Exhaustion, Wear and Tear. The word “exhaustion, wear artd tear” of a building contemplate only depreciation of the physical property itself, irrespective of its adaptability to the use originally Intended or the changing environments. 5. Decrease in Rental Value. No allowance can .be made for depreciation by reason of decrease in rental value nor in value arising from lack of modern improvements. Opinion of the Court In the Above Case. [234 Fed. 474.] The plaintiff was allowed 3 per cent for depreciation onan'apartmenChouse owned 2143 by him. The burden is on him to show that the depreciation so allowed was too small. This allowance is for the wear and tear suffered by the building during the tax year, which means the physical deterioration that the building suffered during that period. It does not take into account depreciation in value due to a loss in rental value because of the construction of more modern buildings with improved facilities or due to a change in the neighborhood. It is to be based upon the life of the building in the sense of the number of years the building would remain in a condition to be habitable for the use for which it was constructed and used; and which v/as In the instant case for an apartment house, and not merely the number of years it would stand without being con- demned and torn down. The annual depreciation would be an amount represented by a fraction having one (tax year) for the numerator and the number of years, representing thfe ascertained life of the building; as the denominator. This assumes that there would be an average deterioration Suffered each year during the life of the building, and that the plaintiff would keep the building in good repair during the life of it. This the law exacts of him. Upon these assumptions, and giving this meaning to the words of the statute, “a reasonable allowance for the exhaustion, wear and tear of the property, arising out of its use or employment in the business,” the amount of the deduction allowed" by the Government to the plaintiff on this account is deemed to be reasonable. (234 Fed. 474.) 21 44 At what rates mhy depreciation be claimed and under what conditions.^ (Answer.) As the rate at which depreciation may be claimed Is dependent, in a greater or less extent, upon local conditions, the use to which the property is put, and its probable lifetime under normal business conditions, no specific rates at which it may be claimed have ever been established. The Law states that a “reasonable allowance” may be claimed and it is for the taxpayer to determine what constitutes a “reasonable allow- ance.” To compute the amount which may be claimed, a taxpayer should determine the probable lifetime of the property, then divide its cost to him by the number of years it will be usable in a business In which employed, and the result thus obtained will repre- sent the amount which may be claimed each year as a deduction, e. g., a frame building, the probable lifetime of which, without repair of replacement, is 25 years, cost $5,000. Divide $5,000 by 25, and claim $200 bach year as depreciation. While each taxpayer must determine the probable lifetime of his property wuthout 2145 regard to the following figures. It has been estimated that the average usable life- time of a frame building is 25 years, a brick building 35 years; a stone building or steel and concrete building, 50 to lOO years. The estimated lifetime of ordinary machinery is ten years, that of automobiles used for business or farm purposes and farm tractors, four to five years. If a taxpayer wishes to claim the full amount of depreciation estimated to have 2146 occurred in the value of a building, or other property, used for business or trade purposes, he may do so, but this precludes his claiming a deduction to cover any amount expended during the same year in making repairs. If he wishes to claim a deduc- tion on account of repairs, their cost must be deducted from the full amount of deprccl^- fKc. 2i7 TAX CORPORATIONS. tion, and the balance may then be claimed as a deduction under the heading of Depre- ciation, that is, if the taxpayer expends $100 in making repairs to a building which will depreciate in value $200 during the calendar year, he may claim $100 as business expense and $100 as depreciation, or he may claim $200 as depreciation and nothing for repairs. In short, the aggregate deductions claimed on account of repairs and depreciation must not exceed the full amount of depreciation estimated to have occurred. In claiming depreciation the following fundamental principles must be taken into 2147 consideration^ (a) Only such depreciation as results from exhaustion, wear and tear of prop- erty, arising out of its use or employment in business or trade, can be claimed. Depre- ciation in the value of a home or any article of property, such as automobiles used for personal pleasure or convenience, cannot be claimed; the property must be used for the purpose of producing income. (b) Depreciation other than that arising from wear and tear, such as a lessening of values due to changes in the social or business conditions in the neighborhood in which a property is located, changes of street grade, or fluctuations in market values, etc., cannot be claimed. (c) Depreciation in the value of land, whether improved or unimproved, due to erosion, exhaustion, or any other cause cannot be claimed. (d) Where the value of a piece of machinery or any other asset is lessened by reason of the production of an improved machine or article, that depreciation can- not be claimed, as it does not result from exhaustion, wear and tear. (e) Where, in the course of years, the owner of property has claimed its full cost as depreciation in his income tax returns, no further claim will be allowed. (Ques- tion 80, 1918 Income Tax Primer.) 2148 Depreciation Allowance when Plant is Regularly Operated in Two Shifts or Con- tinuously. — Reference is made to your letter of the first instant in which you state that shipbuilding corporations and other industrial concerns have been engaged in a discussion as to whether or not this Department will, in connection with the income and excess-profits taxes, allow as a deduction depreciation at higher than normal rates in cases where two shifts are being worked, and the plant, machinery and equipment are operated sixteen or twenty-four hours a day in place of the usual eight or nine hours. l[In reply you are informed that it is obvious that in a case where machinery and equipment are operated more than the usual number of working hours, a greater rate of depreciation would be applicable in determining the actual loss sustained by a corporation due to depreciation than would be the case in the event that the machinery was only operated eight or nine hours as the normal time. 1[Therefore you are informed that a greater rate of depreciation will be allowed in the case you mentioned but no definite rulings relative thereto can be given except in record cases which are presented to this office for con- sideration in connection with a full statement of facts and figures relative thereto. (Letter to E. G. Shorrock & Co., Seattle, Wash., signed by Deputy Commissioner L. F. Speer, and dated July 12, 1918.) 2149 Unearned Increment. — Unearned increment will not be considered in fixing the value on which depreciation shall be based. (Art. 146, Reg. 33, Jan. 5, 1914.)^ 2150 Adjusting Excess Depreciation Charged Off in Previous Years. — This office is in receipt of your letter of the 8th instant, in which you state that a corporation in its returns for the years 1911, 1912 and 1913 claimed depreciation of 1234% on the value of its machinery; that in 1917 an income tax inspector examined the books and recommended that depreciation at the rate of 5% be allowed and as a result additional taxes were assessed against the corporation for the years 1911, 1912 and 1913, based upon the increase in net income resulting from the reduction of depreciation from 1234 to 5%; and that another corporation engaged in the same line of business and using the same kind of machinery charged off 12% for depreciation on the same, but the books of this corporation were never exam.ined and you ask what penalty, if any, the latter company will be required to pay for the years 1911, 1912 and 1913 if it now makes a claim that its calculations for such years were based on an excessive rate of depreciation. ^In reply, you are informed that no penalty will attach to the corporation if it files amended returns reducing its de- preciation deduction from 1234 to 5% on its machinery.. The amended returns should be prepared and filed with the Collector of Internal Revenue for its district with a letter of transmittal, stating the reason the amended returns were filed. The Collector will then notify this office and an additional tax * * * will be assessed against the corporation due to the increase in its net income on account of thq reduction of its depreciation de- duction from 1234 5%. [Read ^2lSl following, which bears a later date than the above.] (Part of letter to the First National Bank, Cleveland, Ohio, signed by Deputy Commis- sioner L. F. Speer, andjdatedJNov. 16, 1917.) INC, 218 TAX s CORPORATIONS. 2161 Depreciation in Excess of Cost. — If it develops that by reason of underestimating the life of the property or by overestimating the rate of deterioration an amount in excess of the yearly depreciation has been taken, the rate applicable to future years should at once be reduced and the balance of the cost of the property not provided for througli a depreciation reserve should be spread over the estimated remaining life of the property. (Art. 165, 1[491, Reg. 33, Rev., Jan. 2, 1918.) 2 162 Use of Depreciation Reserve. — Depreciation set up on the books and deducted from gross income can not be used for any purposes other than in making good the loss sustained by reason of the wear and tear of the property with respect to which it is claimed. If, however, an investment is made in extensions, additions, or betterments of the 2163 company’s own property, representing a part or the whole of the credit balance of the depreciation reserve account, such investment will not be considered a mis- use or diversion of the depreciation deduction otherwise allowable. (Art. 164, ^489-490, Reg. 33, Rev., Jan. 2, 1918.) 2 1 64 Investment of Depreciation Reserve Funds. — The “second” paragraph under Sec. 12 of Title I of the Act of September 8, 1916, authorizes corporations, joint- stock companies, etc., in making their returns of annual net income, to deduct from gross income — “all losses actually sustained and charged off within the year * * * including a reasonable allowance for the exhaustion, wear and tear of property, arising out of its use or employment in the business or trade” and in the case of oil and gas wells and mines, a reasonable allowance for depletion of natural deposits. The essential requirements of this provision are that the amount deductible on 2166 account of depreciation and depletion shall be charged off and shall be reasonable allowances — that is, an amount sufficient to make good the loss due to these causes. The phrase “charged off” contemplates that the “reasonable allowance” deducted from gross income on account of depreciation or depletion, shall be credited to appropriate reserve accounts and carried as a liability against the assets, to the end that when the total of these credits equals the capital investment account, no further deductions on these accounts will be allowed. 2166 While the presumption is that amounts credited to these accounts will be used to make good the loss sustained, either through a renewal or replacement of the property or a return of capital, there is no requirement of law that the funds represented by these reserve liabilities shall be held intact or remain idle against the day when they may be used in making good the depreciation of the property with respect to which the de- duction is claimed, or in restoring the capital invested in the depleted assets. The conversion of the depreciation reserve into tangible assets will not constitute 2157 such a diversion as would deny the corporation the right of deduction, provided in all cases, that the deduction claimed in the return is a reasonable allowance, that is, a fair measure of the loss due to “exhaustion, wear and tear of property, growing out of its use” and is charged off or so entered upon the books as to constitute a liability against the assets with respect to which the depreciation deduction is claimed. To the extent that Articles 130, 132, and 133 of [original] Regulations No. 33 are in 2168 conflict with the foregoing, they are hereby rescinded, and this decision is made appli- cable to the adjustment of returns of annual net income made pursuant to the require- ments of Section 38, Act of August 5, 1909, Section 2 of the Act of October 3, 1913, and the present income tax law, except that as to returns made under the first two Acts, the writing off of depreciation, if reasonable in amount, will not be insisted upon. (T. D. 2481, April 10, 1917.) 2159 Diversion of Fund. — If a corporation at the end of the year finds it has a certain net income, and, without making any provision for depreciation, distributes such net income among its stockholders as dividends, it will be estopped from claiming in its returns of annual net income for such year any deduction on account of depreciation unless it is shown conclusively that the property account has been reduced by the amount of depreciation claimed, or unless such amount has been credited to a depreciation reserve account, and such amount was in fact a reasonable allowance. The depreciation allowance authorized by section 12 is intended to provide a fund 2160 out of which the loss due to use, wear, and tear may be made good, and the fund thus created can not be diverted to the payment of dividends; that is to say, a de- duction made under the guise of depreciation can not measure a loss and at the same time be used in the payment of dividends. [Read at ^2119.] 216lThe fact that no reserve was made for depreciation indicates that there is no loss on this account to be provided for. (Art. 161, ^482-484, Reg. 33, Rev., Jan. 2 , 1918 .) INC. 219 TAX eoiiBaRATj^s. 2162 Sinking-Fund Reserve. — When a corporation sets aside a part of its earnings for the purpose of creating a sinking fund with which to retire its bonded Ojr ptlf\er indebtedness, the annual additions to such funds are not allowahie deductions from gross income as or in lieu of depreciation or on any other account. The earnings thus set aside are an asset of the corporation and any accretion thereto must be accounted for as IncQrnc. This ruling will not, however, forbid the deduction from gross income of a reason- 21 63 able allowance for depletion of natural deposits even though ^he amount so deducted be used in W'hole or in part in the payment of its bonded or other indebtedness. (Art. 166, 11492-493, Reg. 33, Rev., Jan. 2, 1918.) 21 64 Law 1f307. A Reasonable Allowance for the Amortization of Certain Assets Assets (Special — Due to the War) is Deductible. — “(8) In the case of buddings, machinery, equipment, or other facilities, constructed, erected, iqstalled, o,r acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on o.r after such date for the transportation of articles or men contributing to, the prosecution o.f the. present war, there shall be allowed a reasonable deduction for the amortizatiqn of suph part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again in- cluding any amount otherwise allo.w'ed under this title or previous Acts of Co.ngress as a deduction in computing net income.” 2 1 65 Law 1[308. A Redetermination of the Amortization Deduction May be Effected. — “At any time within three years after the termination of the present war the Commission^’- may, and at the request of the taxpayer shall, reexamine the return,, and if he then finds s a result of an appraisal or from other evidence that the deduction orig- inally allowed was incorrect, the taxes imposed by this title and by Title III [vvar excess- profits taXj for the year or years affected shall be redetermined and” 2166 Law 1f309. Adjustment of Under-Payment or Over-Payment of Taxes Di^e. to Redetermination of Amortization Deduction. — “the amount of tax due upon such redeterminaiion, if any, shall be paid upon notice and demand by the collector, o.r the amount of tax _verpaid, if any, shall be credited or refunded to the taxpayer in accordance with the pioviffons of section 252 [1l248t8};” [In connection with the above read at ^2^22.} 2167 Law 1[310. A Reasonable Allowance for Depletion of IV^ines, Oil and Gas Wells, Other Natural Deposits, and Timber, and for Depreciation of Improvements, is Deductible. — *‘(9) In the case of mines, oil and gas welljs, other na,tural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, accord- ing to the pe:u!iar conditions in each case, based upon cost including cost of developm.ent not otherwise deducted:” 2168 Law 11311. Basis in the Case of Properties Aequired Prior to March 1, 1913; — '^Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) o.u that date shall be taken in lieu of cost up to that date:” 2169 Law 11312. Basis in the Case of Mines and Wells Discovered by the Taxpajer on or after March 1, 1913. — Provided further, That in the case of mines, oil J-idgas wells, discovered by the taxpayer, on or after hjarch 1, 1913, and pot acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is ma- terially disproportionate to the cost, the depletion allo\yance shgll be based upon the fair market value of the property at the date of the discovery, or within thirtv days there- after;” 2170 Law 11313. Depletion and Depreciation of Improvements Allowance to be Made in Accortlance with Regulations. — “such reaso.nabfe allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary.” 217 1 Law 11314. Depletion and Dep;-eciation of Improvements Allowance to be Appor- tioned between the Lessor and the Lessee*. — “In the case of leases the deductions allowed by this paragraph shall be equitably apportioned betAyeen the lessor and lessee;” [In connection with th,e aboye reacj at 112929.] INC. 220 TAX CQ^qMTXQ^s. Comment. — [The following paragraphs, 112172 to ^2214 being the Department’s compilation ^of frulings on j depletion, under ^ the provisions of the Revenue Act of 1916 as amended by the^Rev^enue Act of 1917, as originally issued in Regulations No. 33, Revised, January 2, 1918, are reprinted here merely that they may be before the reader pending the issuance by the Government of the Department’s “rules and regulations” based on the new law provisions.] [Read at 1[2929.] 2172 Depletion of Oil and Gas Properties. — Sections 5 and 12 of the act of September 8, 1916, as amended by the act of October 3, 1917, authorize individuals and corpora- tions owning and operating gas or oil properties, to deduct from gross income — ■ “A reasonable allowance * * * for actual reduction in flow and production, 2173 * * * provided that when the allowance authorized * * * shall equal the capital originally invested, or in case of purchase made prior to March 1, 1913, the fair market value as of that date, no further allowance shall be made.” The essence of this provision of law is that the owner or operator of this character a 1 74 of properties shall secure through an aggregate of annual depletion deductions, the return of the amount of capital actually invested, or an amount not in excess of the fair market value as of March 1, 1913, of the properties owned prior to that date. For the purpose of determining the amount of capital to be returned through annual 2 1 75 deductions, operators may be divided into two classes, (a) operators who own the fee, and (b) operators who own a lease or leases. In the case of the operating fee owner, the amount returnable through depletion 2176 deductions is the fair market value of the property (exclusive of the cost of physical property) as of March 1, 1913, if acquired prior to that date, or the actual cost of the property if acquired subsequent to that date, plus. In either case, the cost of develop- ment (other than the cost of physical property incident to such development) up to the point at which the income from the developed territory equals or exceeds the deductible expenses. In the case of a lessee, the capital thus to be returned is the amount paid in cash 2177 or its equivalent as a bonus or otherwise by the lessee for the lease, plus also all expenses incurred in developing the property (exclusive of physical property) prior to the receipt of income therefrom sufficient to meet all deductible expenses, after which time as to both owner and lessee, such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the drilling of wells and further development of the property, may, at the option of the operator, be deducted as an operating expense or charged to capital account. If, in exercising this option, the individual or corporation charges the expense 2176 of drilling wells or further development to capital account, the same, in so far as such expense is represented by physical property, may be taken into account in determining, a reasonable allowance for depreciation during each year until the property account thus augmented has been extinguished through annual depreciation deductions, after which no further deduction on this account will be allowed. In the case of a going or producing business, the cost of drilling nonproductive wells may be deducted from gross income as an operating expense. (Art. 170, 1[497-503, Reg. 33, Rev., Jan. 2, 1918.) 21 79 Estimate of Probable Resources. — In the case of either an owner or lessee it will be required that an estimate, subject to the approval of the Commissioner of Internal Revenue, shall be made of the probable quantity of oil or gas contained in or to be recovered from the territory with respect to which the investment is made. The invested capital (value as of March 1, 1913, or cost, if acquired subsequent to that date, plus the cost of development, other than cost of physical property, up to the point of expense-paying production, in the case of an owner, and the amount actually paid for the lease plus cost of development, other than cost of physical property, up to the same point, in the case of a lessee) will be divided by the number of units of oil or gas so estimated to be contained in or to be recovered from the territory, and the quotient vdll be the per unit cost or amount of capital invested in each unit recoverable. This quotient, or per unit cost, when multiplied by the number of units removed from the territory dur- ing any one year, will determine the amount which may be allowably deducted from the gross income of that year on account of depiction of assets or as a return of invested capi- tal until the total of such deductions shall equal the capital invested. Every individual or corporation entitled to a deduction on account of the dcple- 2180 tion of the property under operation or for a return of the capital invested with respect to the same shall keep an accurate ledger account, in which, in the case of fee owner, shall be charged the fair market value as of March 1, 1913, or the cost, if acquired subsequent to that date, of the oil or gas property, plus cost of development as herejnbefoje defined, or, in the case of a lessee, the amount actually originally invested in the lease and its development. This account shall be credited with the amount claimed and allowed each year as a deduction on account of depletion or as a return of capital, CORPORATIONS. to the end that when the credits to the account equal the debits no further deduction on either account, with respect to this property and the capital invested therein, will be allowed. Or, in lieu of a direct credit to property account, the amount so claimed and allowed as a deduction may be credited to a depletion reserve account. (Art. 170, ^504- 505, Reg. 33, Rev., Jan. 2, 1918.) 2181 Where Resources are Uncertain.— If for any reason the quantity of oil or gas in the property can not be determined with any degree of certainty, the depletion deduction will be computed in accordance with the rule set out in Treasury Decision 2447, except that lessees may compute their deduction for return of capital (cost of lease and development) in the same manner as owners in fee; that is, they may extinguish such capital on the basis of the reduction in flow and production as compared with the pre- ceding year, or, in the case of leasehold properties brought in or developed during the year, the depletion reduction may be computed on the basis of the decline in settled flow and production, as ev^idenced by tests and gauges made at the end of the year as com- pared with similar tests and gauges made at the time the settled flow was determined. For the purpose of computing the depletion the territory comprehended in a given 2182 lease will be considered the unit with respect to which the depletion deduction may be claimed and allowed. If the operator is the owner of the fee the value determined and set up as of March 21 83 1, 1913, or the cost of the property if acquired subsequent to that date, or, if the operator is a lessee, the amount actually paid for the lease, plus, in the case of both owner and lessee, the cost of subsequent development, exclusive of physical property, if such cost is capitalized, will be the basis for determining the depletion deduction or the deduction for return of capital for all subsequent years during the continuance of the ownership under which the value was fixed or by which the investment was made, and during such ownership there can be no revaluation for the purpose of this deduction if it should be found that the quantity of oil or gas in the property was underestimated at the time the value was fixed or the property was acquired, or at the time the lease con- tract was entered into or purchased. This rule will not, however, be so construed as to forbid an operator from redistribut- 2 1 84 Ing tbe invested capital over the estimated number of units remaining in the territory under operation if a subsequent increase of invested capital should render this neces- sary in order to determine the amount of such capital applicable to each unit provided that when such redistribution is made the total capital invested will be reduced by the amount previously charged off and deducted on account of depletion or as a return of capital. (Art. 170, 11506-509, Reg. 33, Rev., Jan. 2, 1918.) 2185 Additional Depreciation for Machinery, Etc. — Both owners and lessees operating oil or gas properties will, in addition to and separate from the deduction allowable for the depletion or return of capital as hereinbefore provided for, be permitted to deduct a reasonable allowance for depreciation of physical property, such as machinery, tools, equipment, pipes, etc., the amount deductible upon this account to be such an amount, based upon its capitalized value (cost) equitably distributed over its useful life, as will bring it to its true salvage value when no longer useful for the purpose for which such property was acquired. As to both fee owner and lessee, the capital invested in physical property, upon 2186 which the depreciation deduction is computed, should be segregated in the books of account from that invested in the oil or gas territory or in the lease or leases, with respect to which the deduction for depletion or return of capital is claimed, and credits for depreciation may be made in the same manner as hereinbefore provided for depletion. (Art. 170, 11510-511, Reg. 33, Rev., Jan. 2, 1918.) 2187 Statement Required. — To each return made by an individual or corporation owning and operating oil or gas properties there should be attached a statement showing — (1) (a) The fair market value of the property (exclusive of machinery, equipment, etc.) as of March 1, 1913, if acquired prior to that date, or (b) the actual cost of the property if acquired subsequent to that date; (2) How the fair market value as of March 1, 1913, was ascertained; (3) The estimated quantity of oil or gas in the sand at the time the value or cost was determined; (4) Amount of capital applicable to each unit; (5) The quantity of oil or gas produced during the year for which the return^is made; (6) Any other data which would be helpful in determining the reasonableness of the depletion deduction. If the operator is a lessee that fact should be stated, and to the return made by such lessee there should be attached a statement showing — INC. 222 TAX CORPORATIONS. ( 1 ) The amount of cash or its equivalent actually paid for the lease; (2) The amount expended for development prior to the receipt of income from the output, sufficient to ^ay operating expenses; (3) The total capital thus invested; (4) The estimated quantity of oil or gas in the territory comprised in the lease; (5) The arfiount of capital applicable to each unit; (6) The number of units removed during the year for which the return is made, and other data that would be helpful in determining whether or not the deduction made for the return of capital is a reasonable allowance. (Art. 170, ^[5 12-525, Reg. 33, Rev., Jan. 2, 1918.) 2 1 88 Depletion. — Mines. — Paragraphs “seventh” and eighth” of section 5 (a) and paragraph “second” of section 12 (a) of Title I of the act of Septem.bcr 8, 1916, authorize Individuals and corporations to deduct from gross income “a reasonable allow- ance for exhaustion, wear and tear of property, and * * * (b) in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made”; provided, that when the sum of the annual allowances for depletion equals the capital originally invested, or in case of purchase prior to March 1, 1913, the fair market value as of that date of the mineral “in place,” no further allowance on this account shall be made. Ownership of the mine content at the time for which computation is made is an 21 89 essential prerequisite to an allowable deduction for depletion. The deduction in the case of a lessee will be limited to an amount equal to the 21 90 capital actually invested in the lease, without regard to value as of March 1, 1913, or any other date. The paragraphs of the title above referred to authorize in the case of mdne owners 2191 two classes of deductions to take care of the wasting of assets, namely, (a) depre- ciation, (b) depletion. (Art. 171, ^526-529, Reg. 33, Rev., Jan. 2, 1918.) 2192 Deductions and Valuation. — If the property was acquired by purchase or other- wise (other than by lease) prior to March 1, 1913, the amount of invested capital which may be extinguished through annual depletion deductions from gross income v/111 be the fair market value of the mine property so acquired, as of March 1, 1913. The value contem.plated herein as the basis for depletion deductions authorized by this title must not be based upon the assum.ed salable value of the output under current operative condi- tions, less cost of production, for the reason that the value so determined would com.pre- hend the profits to be realized from operation of the property. Neither must the value determined as of March 1, 1913, be speculative, but must 2193 be determined upon the basis of the salable value en bloc as of that date of the entire deposit of minerals contained in the property owned, exclusive of the improve- ments and development work; that is, the price at which the natural deposits or mineral property as an entirety In its then condition could have been disposed of for cash or its equivalent. The en bloc value having been thus ascertained, an estim.ate of the number of units 2194 (tons, pounds, etc.) should be m.ade. The en bloc value divided by the estim.ated number of units in the property will determ.ine the per unit value, or amount of capital applicable to each unit, which, multiplied by the number of units mined and sold during any one year, will determine the sum which will constitute an allowable deduction from the gross income of that year on account of depiction. Deduction computed on a like basis may be made from year to year during the 2 1 95 ownership under which the value was determined, until the aggregate ol bloc value as of March 1, 1913, of the mine or mineral deposits shall have been extin- guished, after which no further deduction on account of depletion with respect to this property will be allowed to the individual or corporation under whose ownersiilp the en bloc value was determined. (Art. 172, ^530-533, Reg. 33, Rev., Jan. 2, 1918.) 2196 Fak Market Value, March 1, 1913. — The precise detailed manner In which the estimated fair market value of mineral deposits as of March 1, 1913, shall be made must naturally be determined by each individual or corporation interested, and who is the owner thereof, upon such basis as must not comprehend any operating profits, the estimate in all cases to be subject to the approval of the Commissioner of Internal Revenue. In any case in which a corporation uses for purposes of its income return an estimate 2197 of the value of niines or of mineral lands or properties as of March 1, 1913, as the basis of computing amounts to be deducted for depletion or return of capital, this department in passing upon the accuracy and fairness of such estimate will attach due weight to the market value of the stock of the corporation on March 1, 1913, and also INC. 223 TAX CORPOIUTIONS. to sworn statements as to the value of capital stock of the corporation filed at any time thereafter for purposes of the special excise tax on corporations based on value of their capital stocks imposed by Title iV of the Act of September 8, 1916. In any case in which any depletion deduction is computed on the basis of the cost 2198 or price at which any mine, mineral lands, or properties were acquired the corporation will be required upon request of the Commissioner of Internal Revenue to show that the cost or price at which the property was bought was fixed for purposes of a bona fide purchase or sale by which the property passed to an owner in fact as well as in form, different from the vendor. No fictitious or inflated cost or price will be permitted to form the basis of any calculation of a depletion deduction, and in determining whether or not the prices or cost at which any purchase or sale was made represented the actual market value of the property sold due weight v»'ill be given to the relationship or connection existing between the party or parties selling the property and the buyer thereof. (Art. 172, 1|534- 536, Reg. 33, Rev., Jan. 2, 1918.) 2199 Records to be kept. — Every individual or corporation claiming and making a deduc- tion for depletion of natural deposits shall keep an accurate ledger account, in which shall be charged the fair market value as of March 1, 1913, or the cost, if the property was acquired subsequent to that date, of the m.ineral deposits involved. This account shall be credited with the amount of the depletion deduction claimed and allowed each year, or the amount of the depletion shall be credited to a depletion reserve account, to the end that when the sum of the credits for depletion equals the value or cost of the property no further deduction for depletion with respect to this property will be allowed. The v^^lue determined and set up as of March 1, 1913, or the cost of the property if acquired subsequent to that date will be the basis for determining the depletion deduction for all subsequent years during the ownership under which the value was fixed, and during such ownership there can be no revaluation for the purpose of this deduction if it should be found that the estimated quantity of the mineral deposit was understated at the time the value was fixed or at the time the property was acquired. In cases wherein the quantity of the mineral deposit in the mine prior to March 1, 1913, can not be estimated with any degree of accuracy, it will be necessary, if depletion deductions are to be taken, for the individual or corporation owning the deposits, with the best information available, to arrive at the fair market value of the property as of March 1, 1913; that is, its fair cash value en bloc, if such value is believed to be 'other than its original cost, which value, during the period of t|ie ownership under which it was determined, shall be final and shall be charged to the property account as hereinbefore indicated, and then, on the basis of the most probable number of units in the property, the per unit value shall be determined as the basis for computing annual deple- tion allowances, this method and allowances to be continued until, but not beyond, the time when the value as of March 1, 1913, shall have been extinguished. (Art. 172, ^537-538 Reg. 33, Rev., Jan. 2, 1918.) 2201 When to Use Original Cost Basis. — The original cost of the mineral deposit may be taken as the basis for computing annual depletion deductions if the fair market value as of March 1, 1913, as hereinbefore required, can not be ascertained otherwise, allowance being made for minerals which may have been removed prior to that date. In cases wherein a mineral property was acquired subsequent to March 1, 1913, 2202 the same rule for computing the annual depletion deduction will apply, except that in such case the basis of the computation will be the actual cost rather than the value as of March 1, 1913. A lessee corporation is not entitled to any depletion deduction as such, but if such 2203 lessee, in addition to royalties, pays a stipulated sum for the right to explore, develop, and operate a mine, such sum may be spread ratably over the estimated number of units in the mine, and thus ascertain the amount of invested capital or bonus payment applicable to each unit. The per unit cost thus ascertained will be multiplied by the number of units removed from the mine during any one year and the result will be the amount that may be deducted from the gross income of that year as a return of .the capital invested. In the case of both mine owner and lessee no deduction for depletion or return of capital will be allowed when the invested capital has through the aggregate of all such deductions been extinguished. (Art. 172, ^[539-541, Reg. 33, Rev., Jan. 2, 1918.) 22Q4 Lessee’s Computation of Invested Capital. — For the purpose of computing this deduction in the^case of a lessee company, the actual amount of the bonus payment and not a value as of March 1, 1913, will be considered the invested capital to be returned through the aggregate of the annual deductions. INC. 224 TAX QCX^OM^ioiKS. To the return made pursuant to the above rule there should be attached a statement 2205 setting out (1) whether the operator is a fee owner or lessee; (2) in the case of a fee owner, i^a) the fair market value of the mineral deposits as of March 1, 1913, if the property was acquired prior to that date, (b) the cost of the mineral property if ac- quired subsequent to that date; (3) the method by which the value as of March 1, 1913, was determined, in case the property was acquired prior to that date; (4) the estimated quantity in units in the mine as of March 1, 1913, or at the date of purchase if acquired subsequent to that date; (5) amount of capital applicable to each unit; (6) thp number of units removed and sold during the year for which the return was made; and (7) any other data which would be helpTul in determining the reasonableness of the depletion deduction claimed in the return. In the case of a lessee, the statenient should show (a) the amount of the bonus 2206 or other payment made for the right to operate the mine; (b) the period covered by the lease, and the estimated quantity of units in the mine when the lease con- tract was entered into. In addition to the deduction hereinbefore provided for, the operator will be per- 2207 mitted to deduct from the gross income of each year a reasonable allowance for depreciation of all physical property used in connection with the operation of the mine, and owned by the operator. For this purpose the actual cost (not value) will be equit- ably distributed over the useful life of such property until the true salvage value has been reached. Both owner and lessee will keep accurate ledger accounts to which will be charged 2208 the capital invested in the mine or leasp and in machinery, equipment, etc., crediting such accounts or a depletion and depreciation reserve account, with thp amount claimed and allowed as a Reduction each year until as a result of such credits the capital charge shall be extinguished, after which no further deduction on these accounts will be allowed. (Art. 172, ^542-546, Reg. 33, Rev., Jan. 2, 1918.) 2209 Depletion — Timber. — In the case of tirnberlands, the fair market price or value of timber standing March 1, 1913, or the cost of the timber wh,ere the purchase was made subsequent to March 1, 1913, will be the basis for calculation of depletion, and this value as of March 1, 1913, or cost wheq subsequently purchased, is not to be exceeded for purposes of deduction in returns of income. The whole of such value is to be dis- tributed over the entire amount of standing timber on these respective dates. See Art. 173 [^2210] of these regulations fot rule of calculation. (Art. 8, 1^125, Reg. 33, Rev., Jan. 2, 1918.) Read at ^2955.] 2210 Corporations owning timber knd and logging off the timber and manufacturing it into lumber, will, if the timber was acquired prior to March 1, 1913, be permitted to exclude from gross income either through a deduction from gross receipts or through a charge into the cost of manufacturing the timber into lumber, an amount equivalent to the fair market price or value of the standing timber as of March 1, 1913. In order to secure the benefit of this deduction such corporations must set up on 22 1 1 their books as of March 1, 1913, the fair market price en bloc, of all the timber then owned by them, and then, by dividing this en bloc value by the estimated number of feet (board measure), in the entire tirnber holdings, the per unit value or price as of March 1, 1913, will be ascertained, which per unit price or value will be the basis for measuring the amount which may be added to the cost of manufacture, or deducted from gross income, until the en bloc value of the entire holding as of March 1, 1913, shall have been extinguished, after which no further deduction on this account shall be allowed. The same rule will apply in the case of timber or timber lands purchased subse- 221 2 quent to March 1, 1913, the only difference being that actual cost — that is, the gross purchase price — shall, in making the computation, be substituted for en bloc price or value as of that date. If the entire mai;ket price or value of both timber and lands as of March 1, 1913, or the entire cost, if acquired subsequent to that date, is extinguished through a deduction from gross income for timber used, or through a per unit charge to cost of manufacturing lumber, then the entire amount realized from the logged-off lands or for other salvage will be returned as income of the year in which such lands are sold or disposed of. If the timber or timber lands are sold en bloc, the gain or loss will be ascertained on 2213 the basis of the difference between the fair-market price, or cost, and the selling price, according as the property was acquired prior or subsequent to March I, 1913. The fair market price or value of timber or timber lands as of Mqrch 1, 1913, is 2214 the price at which the property in its then condition, and with the circumstance then surrounding it could have been sold, for cash or its equivalent. This value must not be speculative, but must be determined without taking into account any pros- pective profits that may result from the manufacture of the timber into lumber. It must be, as the law contemplates, a fair market value and, once determined, must be set up CORPORATIONS. on the books and, as the measure of a stumpage deduction for income-tax purposes, must remain constant and can not be increased except as new purchases are made at a higner average cost. The value so set up as of March 1,1913, will be subject to the approval of the Commissioner of Internal Revenue. (Art. 173, ^547-551, Reg. 33, Rev., Jan. 2, 1918.) 2215 Law 1[319. Adjustment for Substantial Losses Sustained in the Taxable Year 1919 Because of Material Reduction of Inventory Values for 1918, or Because of Certain Rebate Payments. — “(14) (a) At the time of filing return for the taxable year 1918 a taxpayer may file a claim in abatement based on the fact that he has sustained a substan- tial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year,” 2216jLaw ^320. — “or from the actual payment after the close of such taxable year of rebates in pursuance of contracts entered into during such year upon sales made during such year.” 2217 Law ^321. — “In such case payment of the amount of the tax covered by such claim shall not be required until the claim is decided, but the taxpayer shall accom- pany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallow^ed then the remainder of the tax due shall on notice and demand by the collector be paid by the tax- payer with interest at the rate of 1 per centum per month from the time the tax would have been due had no such claim been filed.” 221 8 Law ^^322. — “If it is shown to the satisfaction of the Commissioner that such sub- stantial loss has been sustained, then in computing the taxes imposed by this title and Title III the amount of such loss shall be deducted from the net income.” 221 9 Law ^323. — “(b) If no such claim is filed, but it is shown to the satisfaction of the Commissioner that during the taxable year 1919 the taxpayer has sustained a substantial loss of the character above described then the amount of such loss shall be de- ducted from the net income for the taxable year 1918 and the taxes imposed by this title and by Title III for such year shall be redetermined accordingly. Any amount found to be due to the tax-payer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252 [^2488].” [In connection with the above read at ^1963.] 2220 Law ^456. Liberty and Other United States Bonds as Security in Connection with “Penal Bonds.” — “Sec. 1320. That wherever by the laws of the United States or regulations made pursuant thereto, any person is required to furnish any recognizance, stipulation, bond, guaranty, or undertaking, hereinafter called “penal bond,” wdth surety or sureties, such person may, in lieu of such surety or sureties, deposit as security with the official having authority to approve such penal bond. United States Liberty bonds or other bonds of the United States in a sum equal at their par value to the amount of such penal bond required to be furnished, together with an agreement authorizing such official to collect or sell such bonds so deposited in case of any default in the performance of any of the conditions or stipulations of such penal bond. The acceptance of such United States bonds in lieu of surety or sureties required by law shall have the same force and effect as indiv^idual or corporate sureties, or certified checks, bank drafts, post-office money orders, or cash, for the penalty or amount of such penal bond. The bonds deposited hereunder, and such other United States bonds as may be substituted therefor from time to time as such security, may be deposited with the Treasurer, or an Assistant Treasurer of the United States, a Government depository. Federal Reserv^e bank, or member bank, which shall issue receipt therefor, describing such bonds so deposited. As soon as security for the performance of such penal bond is no longer necessary, such bonds so deposited, shall be returned to the depositor: Provided, * * *.” 2221 Law ^457 . — '^Provided further, That nothing herein contained shall affect or impair the priority of the claim of the United States against the bonds deposited or any right or remedy granted by said Acts or by this section to the United States for default upon any obligation of said penal bond:” 2222 Law ^458. '"Provided further. That all laws inconsistent with this section are hereby so modified as to conform to the provisions hereof:” 226 TAX INC. INSURANCE COMPANIES. 2223 Law ^459. Aiid frovided further, That nothing contained herein shall affect the authority of courts over the security, where such bonds are taken as security in judicial proceedings, or the authority of any administrative officer of the United States to receive United States bonds for security in cases authorized by existing laws.” 2224 Law ^460. “The Secretary may prescribe rules and regulations necessary and proper for carrying this section into effect.” 2225 Tax on Insurance Companies. — [Comment: Same provisions in general as for other corporations. For the exceptions, see below.] 2226 In ascertaining the net Income of an insurance company, for the purpose of the tax imposed by this title, the general provisions contained in the law and elsewhere in these regulations will be observed, except as modified by specific legislation or regulations concerning insurance companies. (Art. 239, ^[684, Reg. 33, Rev., Jan. 2, 1918.) 2227 Exempted Organizations. — There are exempted under the provisions of the act fraternal beneficiary societies, orders, or associations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and providing for the payment of life, sick, accident, or other benefits to the members of such societies, orders, or associations or their dependents; and farmers’ and other mutual hail, cyclone, or fire insurance companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses. A society or association “operating under the lodge system” Is considered to be one 2228 organized under a charter, with properly appointed or elected officers, with an adopted ritual or ceremonial, holding meetings at stated intervals, and supported by fees, dues, or assessments. It is not sufficient that companies of the foregoing classes merely claim exemption, 2229 but it must be shown by affidavit or otherwise to the satisfaction of the Commissioner of Internal Revenue that the conditions set forth in the exempting provisions have been fully met. [See ^1754.] (Art. 239, ^681-683, Reg. 33, Rev., Jan. 2, 1918.) 2230 Gross Income of Insurance Companies. — [Sec. 230 (a), ^1662, provides that in the case of corporations, which includes insurance companies, “gross income” means the gross income as defined in section 213, 1[763, except as shown below at ^2256 for life insurance companies and at ^2264 for mutual marine insurance companies.] 2231 Gross income of insurance companies consists of the total revenue derived from the operation of the business, including income, gains, or profits from all other sources, within the calendar year for which the return is made, except as modified by the special provisions of law which apply to insurance companies. Gross income, as defined above, will include net premiums, investment income, 2232 income from the sale of capital assets, all gains, profits, and income as reported to the State insurance departments, except the items specifically exempted in the act, as construed by these regulations. (Art. 239, *[[673-674, Reg. 33, Rev., Jan. 2, 1918.) 2233 Amounts representing reinsurance treaties will be eliminated from income and disbursements. 2234 Deposit premiums on perpetual risks received and returned should be treated in the same manner, as no reserve will be considered covering liability for such de- posits, but the earnings on such deposits will be included in the premium income. For the purpose of ascertaining the gain or loss from sale or other disposition of 2235 ledger assets acquired prior to March 1, 1913, to fair market price or value of such assets as of March 1, 1913, shall be the basis for determining the amount of such gain or loss to be accounted for in the return of the year in which the assets are sold. If acquired subsequent to March 1, 1913, then the profit or loss to be returned or claimed will be the difference between the cost and the selling price. 2236 Reinsurance and return premiums should not be included in gross income nor in deductions. (Art. 239, 1[677-680, Reg. 33, Rev., Jan. 2, 1918.) 2237 Exempted Income. — There is specifically exempted from taxation interest received on obligations of the United States or its possessions, or on the obligations of a State or any political subdivision thereof. Therefore, in ascertaining gross income for the p.ujy poses of the tax, all interest receivci from such sources should be eliminated. (Report to State, schedule D, parts 1 and 4.) As accrued interest on bonds purchased is not iri- cluded in the interest income reported to the State insurance department, it must not be LNC. ^27 TAX INSURANCE C0MM5!riES. included in the amount eliminated from gross income in the return. (Report to State, schedule D, part 3.) In the case of obligations of the United States issued after September 1, 1917, income from such obligations is exempt from tax only to the extent provided in the act authorizing their issue. Income from such obligations received by insurance com- panies is exempt from the [12] per cent and [10] per cent income tax. (Art. 239, ^675, Reg. 33, Rev., Jan. 2, 1918.) 2238 General Deductions Allowed to Insurance Companies. — The following deductions from gross income will be allowed in returns made by insurance companies other than mutuals but Including mutual life and mutual marine. 2239 All ordinary and necessary expenses paid vdthin the year in the maintenance and operations of the company and its properties. 2240 Interest. — Interest paid on indebtedness wholly secured by property collateral the subject of sale or hypothecation in the ordinary business of the company as a dealer only in the property constituting such collateral or in the loaning of funds thereby produced Is an allowable deduction as a business expense to an amount of the interest paid on such Indebtedness not in excess of the actual value of the collateral securing It. [All interest paid or accrued on indebtedness is now deductil ic as interest, with one excep- tion, 1[:027.] 2241 Incidental Repairs. — Expenditures for incidental repairs which do not add to the value nor appreciably prolong the life of property are deductible as expenses, but expenditures for new buildings, permanent improvements, or betterments which increase the value of property, or for restoring or replacing property, are not deductible under this or any other item of the return. Such expenditures are properly chargeable to capital account, to be extinguished through annual depreciation allowances. 2242 Cost of Furniture. — Insurance companies will be permitted to add to expenses. In lieu of depreciation of furniture and fixtures, the actual cost of repairs, replace- ments, and renewals of such furniture as Is reported to the State insurance department. Provided that in case of an original investment the cost thereof shall be charged to capital account, 2243 Premiums Paid. — Premiums paid on life insurance policies covering the lives of officers, employees, or those financially Interested in any trade or business con- ducted by an individual, partnership, corporation, joint-stock company or association, or insurance company, shall not be deducted in computing the net income of insurance companies. 2244 Losses Actually Sustained. — Losses deductible (other than policy payments) must be distinguished from depreciation or allowances for exhaustion, wear and tear. The losses must be absolute, complete, actually sustained during the year, and charged off on the books of the company, and if the losses result from the sale of assets acquired prior to March 1, 1913, such losses shall be ascertained by taking the difference between the fair market price or value as of March 1, 1913, and the selling price. If the assets were acquired subsequent to March 1, 1913, the loss will be the amount by which the selling price Is less than the cost. 2245 Losses compensated by insurance or otherwise are not deductible. Agency Balances. — There may also be deducted losses from agency balances or 2246 other amounts charged off as worthless, and losses by defalcation, premium notes voided by lapse, provided such notes Have at some time been included in gross income for income tax purposes; otherwise, they will not be deductible. (Art. 240, ^685-693, Reg. 33, Rev., Jan. 2, 1918.) 2247 Taxes Paid For Stockholders. — Taxes paid by companies on the value of their cap- ital stock outstanding and in the hands of stockholders are not deductible. Such taxes are a primary liability of the stockholders and therefore chargeable against their (the stockholders’) income. ^ ... 2243 Dividends From Foreign Corporations. — Insurance companies claiming as a de- duction from gross income, for the purpose of the * ♦ * income tax, dividends received from foreign organizations must accompany their returns by a list giving the names of such organizations and the amount received from each. (Aft. 240, ^696-697, Reg. 33, Rev., Jan. 2, 1918.) 2249 Law ^315. Special Deductions Allowed to Insurance Companies in General. — “(10) In the case of insurance companies, in addition to the above [i. e., the general deductions allowed to all corporations]: (a) The net addition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of suras with State of Terfitoflail officers pursuant to law as additions to guarantee or reserve funds); and (b) the sums other than dividends paid within the taxable year on policy and annuity contracts;” IKC. TAX INSURANCE COMPANIES. 2250 Policy Losses. — -As payments on policies there should be reported all death, disa- bility, or other policy claims (other than dividends) paid within the year, including fire, accident, and liability losses, matured endowments, annuities, payments on install- ment policies, surrender values, and all claims actually paid under the terms of policy contracts. 2251 Net Addition to Reserve Funds. — All policy premiums, on which net addition to f'eserve is computed, must be included in gross income. The net addition may be based upon the highest authorized reserve by the statutes of any States in which the com- pany does business. When the reserve at the end of the year is less than at the beginning of the year there is a “released reserve,” and the amount so released must be included in gross income. In the case of assessment insurance companies, whether domestic or foreign, the actual deposit of sun s 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. In the case of life insurance com.panles, the net addition to the “reinsurance re- serve” and the “reserve for supplementary contracts,” and In the case of fire, marine, accident, liability, and other insurance companies, the net addition to the “uneariied- prerrtlun. reserves,” and only such other reserves as are specifically required by the statutes of the States within which the companv Is doing business will be allowed as deductiohs. (Art. 240, ^694-695, Reg. 33, Rev., Jan'. 2, 1918.) 2252 Decision of U. S. Supreme Court. — The appended decision [captions only] of the Supreme Court is published for the information of Internal-revenue officers and others concerned. (T. D. 2501, June 18, 1917.) (Act of Aug. 5, 1909.) 1. Reserve Against Unpaid Losses. Fire insurance companies not “required by law” of Pennsylvania to hold a reserve against unpaid losses within the meaning of the act of Congress. 2. Reserve Funds Required by Law. The words “reserve funds ” as used In the act of Congress, have reference to the funds ordinarily held as against the contingent liability on outstanding policies. (McCoach vs. Insurance Company of America. ^244 U. S. 585.) T. D. 2501, June 18, 1917.) 2253 Decision of U. S. Court of Claims. — The appended decision [captions only] of the United States Court of Claims in the case of the Maryland Casualty Co. v. United States is published for the information of internal-revenue officers and others concerned. (T. D. 2451, Feb. 20, 1917.) Maryland Casualty Co. v. United States. (Acts of Aug. 5, 1909 and Oct. 3, 1913.) Court of Claims of the United States. No. 33,191. [Decided February 12, 1917.] 1. Income Means Receipts in Cash. Income means what has come in or receipts. 2. Receipt by Agent is Receipt by Principal. Company obligated to report in full the total sums received in cash, both airiouhts received at the home office and those paid to its lawful agencies during the calendar year. 3. Net Addition to Reserve Funds. Only the net addition to reserve funds required by State statutes is deductible from gross income. No State law has been pointed out which requires the main- tenance of reserve fund to secure payments of taxes, salaries, and brokerage and agents’ commissions. 4. Decreases in Reserve Funds. Reserve funds when released arc In their very essence income. 2254 Law T,316. Life, Health, ard Accident Insuiance Combined in One Policy. — “(11) In the case of corporations issuing policies covering life, health, and accident insur- ance combined in one policy issued on the v/eekly premium, payment plan continuing for life and not subject to cancellation, in addition to the above [i. e., the general deductions allowed to all corporations and the special deduction allowed to all insurance companies, ^2249] such portion of the net addition (not required by law) made within the taxable year to reserve funds as the Commissioner finds to be required for the protection of the holders of such policies only;” 2265 Assessment Life and Accident Insurance Companies; Stock Fire Insurance Companies; Stock Casualty, Fidelity, and Surety Insurance Companies; Mis- cellaneous Stock Companies. — Com.panies of the foregoing classes will make their returns in accordance with articles applicable to insurance companies in general. (Art. 245, 1[713, Reg. 33, Rev., Jan. 2, 1918.) INC. 219 TAX INSURANCE COMPANIES. 2256 T-aw 11282. Life Insurance Companies. — Premium Income Paid Back.— “(1) In th'- case of life insurance companies there shall not be included in ^ross incorne such portion of any actual premium received from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year.” Life insurance companies are authorized to omit from gross income such portion 2257 of any actual premium received from any individual policyholder as shall have been paid back or credited to the policyholder or treated as an abatement of his premium. The amount authorized by this provision to be excluded from gross premium 2258 income on account of any premium refunded to any individual policyholder is explicitly limited to an amount not in excess of the actual premium paid by the individual policvholder within the tax year. (Art. 24-1, 1[700-701, Reg. 33, Rev. Jan. 2, 1918.) 2259 Cash Dividends. — Life insurance companies are entitled under the foregoing holding to exclude from gross income any part of the premium received which is paid back to the individual policyholder within the same return year. Where the divi- dend is In excess of the premdum received, there can be excluded from gross income only the amount of the premium received from such individual policyholder within the same return year. 2260 Dividends Provisionally Ascertained. — Dividends provisionally ascertained, appor- tioned, or credited on deferred dividend policies can not be excluded or deducted from gross Income for the reason that the assured has no vested or enforceable right in them and can not, at the time of the ascertainment, apportionm.ent, or credit, nor until the maturity of the policy, avail himself of such dividends; and in the event of the death of the assured prior to the expiration of the deferred dividend period, the amount so ascertained, apportioned, or credited lapses. (Art. 241, 1[702-703, Reg. 33, Rev., Jan. 2, 1918.) 2261 Decision of District Court. — Brief Summary: In rendering judgment for the plaintiff Judge Dickinson held that no matter during what year premiums had been received by mutual life insurance companies, those portions of such premiums, with any accretions thereto, which are returned to policyholders may be excluded from the gross income of the insurance company for the year in which returned, the fact being that in the case of such mutual life insurance companies the actual cost only of insurance is paid by the policyholders and returns of parts of premiums with interest are merely periodic refunds of excess amounts paid in. (Penn IVlutual Life Insurance Company vs. Lederer, Act of Oct. 3, 1913. U. S. District Court, E. D. Pennsylvania (247 Fed. 559), February 4, 1918.) 2262 Surrender Values. — Gross income of life Insurance companies should include, in addition to Income heretofore defined, surrender values applied in any manner, consideration for supplementary contracts involving and not involving life contingencies, and all other Income, gains or profits. Applied surrender values and consideration for supplementary contracts, not 2263 involving life contingencies included in income will, of course, be deducted as payments under policy contracts; but for convenience in verifying the returns these items should appear In the return in both gross income and deductions. (Art. 241, 11698-699, Reg. 33, Rev., Jan. 2, 1918.) 2264 Law 1[283. Mutual Marine Insurance Companies. — Gross Income. — “(2) Mutual m.arine insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance.” 2265 Law 1[317. Mutual Marine Insurance Companies. — Special Deduction Authorired. — “(12) In the case of mutual marine Insurance companies, there shall be allowed, in addition to the deductions allowed in paragraphs (1)* to (10)*, inclusive, amounts repaid to policyholders on account of prem.iums previously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof;” , *(l) to (9) — General deductions allowed to all corporations, beginning at 1[1943. (10) — Special deductions allowed to all insurance companies, 1[2249. 2266 A.*.utual marine insurance com.panies may include in their deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the date of ascertainment thereof and the date of payment thereof, such amounts and interest having been included in gross INC. 230 TAX INSURANCE COMPANIES. income, which amounts deducted fro n gross income should be fully set forth in the supple- mentary statement of the return form. (Art. 243, 11710, Reg. 33, Rev., Jan. 2, 1918.) 2267 Law 1[318. Mutual Insurance Companies Other than Mutual Life and Mutual Marine. — “(13) In the case of mutual insurance companies (other than mutual life or mutual m.arine insurance companies) requiring their members to make premium deposits to provide for lasses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (l)*to (10)*, inclusive, (unless otherwise allowed under such paragraphs)the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves;” *(1) to (9) — General deductions allowed to all corporations, beginning at If 1943. (10 — Special deductions allowed to all insurance companies, 1f2249. The foregoing provision [The Act of September 8, 1916, provided: “That mutual 2268 fire and mutual employers’ liability and mutual workmen’s compensation and mutual casualty insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return, etc.”] is construed to embrace all mutual insurance companies (other than mutual life and mutual marine and com- panies exempt); interinsurance and reciprocal exchanges and returns of annual net income should be made on the special form (No. 1030a) provided for that purpose. Gross Income. — Gross income of such companies will consist of the total revenue 2269 derived from the operation of the business but excluding all income received from premiums, assessments, fees, and other amounts paid by the policyholders necessary to secure or continue the policy in force. If, however, any portion of the funds thus received is retained or finally used for any purpose other than the payment of losses, expenses, or reinsurance reserves, such portion is, by the terms of the law, taxable and must be returned as income. Rent Income. — All payments received in cash or its equivalent, as rent on build- 2270 ings or other property owned or controlled by the company making the return, must be returned as taxable income, after deducting the amount paid for repairs and expenses, including taxes (levied for purposes other than local benefits) as has been expended on the property from which the rental income returned was derived. Sale of Capital Assets. — The profit or income to be returned in the event of the 227 1 sale or maturity of capital assets acquired prior to March 1, 1913, should be deter- mined upon the ba§is of the difference between the fair market value of such assets as of that date and the selling price thereof. If the assets were acquired subsequent to March 1, 1913, the loss will be the amount by which the selling price is less than the coji. This profit or income may, for the purpose of the tax, be reduced by the amount of any loss resulting from the same source and ascertained in the same manner. In no event can a loss resulting from the sale or maturity of capital assets exceed the gain within the year from like transactions. Other Income. — All other income or earnings not hereinbefore referred to will 22 72 form a part of and must be reported as taxable income. (Art. 242, 1[705-709, Reg. 33, Rev., Jan. 2, 1918.) 2273 Foreign Insurance Companies. — Insurance companies organized, authorized, or existing under the laws of any foreign government shall report as gross income the gross amount received within the year from all sources within the United States or its possessions. Incom.e from business transacted by a United States branch or agency of a foreign insurance company which relates to a foreign country must be returned as gross incom.e. Otherwise articles applicable to insurance companies in general will be followed as to incom.e and deductions. Income from Investment. — Insurance companies organized, authorized, or existing 2274 under the laws of any foreign government^ not transacting an insurance business in the United States or its possessions but receiving income from Investments therein must make returns of such income, deducting therefrom the amount of such Income [the tax on which has been] withheld at the source. [Dividends are now deductible, 1[2102.] (Art. 244, 1[71 1-712, Reg. 33, Rev., Jan. 2, 1918.) 2275 Returns by Insurance Companies. — Except as otherwise specially provided in the law or in these regulations, the general regulations hereinbefore provided for the use of corporations, joint-stock companies, or associations will be observed by insurance companies in making their returns. (Art. 246, 1[714, Reg. 33, Rev., Jan. 2, 1918.) INC. 231 TAX FOREIGN CORPORATIONS. 2276 Returns to Conform to State Reports. — Returns of insurance companies must be rendered in conformity with reports made for the same period to the State insurance departments. As all insurance com.panies are required by law to render their reports to the various State insurance departments for the calendar year, their returns of annual net income for the purpose of the incomie tax should be made for the same period, unless their books are actually kept on a fiscal-year basis. Treasury Decision 2433, [^1928], providing that returns may be made on a basis 2277 other than as above set forth, is not applicable to insurance companies. (Art. 239, 11671-672, Reg. 33, Rev., Jan. 2, 1918.) 227 8 Copy of Report to State. — As an assistance in auditing the returns, Vvdierever possible, a copy of the report to the State insurance department should be submitted with the returns; otherwise schedule D, parts 1, 3, and 4, of the report should be attached thereto showing Federal, State, and m.unicipal olDligations from which the interest omitted from gross income was derived. (Art. 239, 1[676, Reg. 33, Rev., Jan. 2, 1918.) General Lav7 Provisions and Applicable Regulations Relating to Returns. — [Read at 111434.] Ge neral Law Provisions and Applicable Regulations Relating to the Payment of of the Tax. — [Read at 1[2339.] 2279 Tax on Foreign Corporations. — [The rate is the same as for domestic corporations, for which see 1(1682.] 2280 Law K5. What Constitutes a Foreign Corporation. — “The term ‘foreign’ when applied to a corporation or partnership means created or organized outside the United States;” 2231 Law K6. “The term ‘United States’ when used in a geographical sense includes only the States, the Territories of Alaska and Hawaii, and the District of Colum.bia;” Foreign Corporations not Engaged in Trade or Business within the United States and not Having any Office or Place of Business therein. — [Against such, the tax is, in large measure, withheld at the source, 1(572.] 2282 “Exempt Coiporations” Includes Foreign as Well as Domestic Corporations. — This office is in receipt of your letter of the 30th ultimo in which you ask whether or not foreign corporations of the nature specified in Section 11, under the heading “Condi- tional and Other Exem^ptions” [1(1739] will also come within that heading, you are informed that the section referred to provides that the income of the corporations enumerated therein shall not be taxed and therefore it follows that if the corporations are not subject to tax they will not be required to file corporate returns, and it is held by this office that the exemp- tion applies to foreign as well as to domestic corporations. Corporations similar to those enumerated in the several subsections of Section 11 2283 are not necessarily exem.pt from m.aking returns of annual net income and can not be classed as exem.pt corporations until they have set out, in the form of an affidavit, either to the Collector of Internal Revenue for their districts or to this office the purpose and nature of the organization, the source of its income, the disposition of the same, and whether or not any of its net income will ever inure to the benefit of any private stockholder or individual. Upon receipt of such affidavit the corporation, either domestic or foreign, will be definitely advised as to its status, under the requirements of the law. (Letter to The Central Trust Company of New York, New York, signed by Com.m.issioner W. H. Osborn, and dated November 1, 1916.) 2284 Receipt is acknowledged of your letter of November 17, 1916, and in reply you are advised that the Federal Incom.e Tax Law of September 8, 1916, provides that cA'cry organization enum.erated in Section II of that statute is exempt from Federal Income Tax on its net earnings, profits or incom.e, and the office holds that the provisions apply V, hether the or~anization be domestic or foreign. In a case where a foreign organiza- tion desires to be held exempt from Federal income tax, and a doubt exists as to whether or not it comes within the class of ow’anlzations enumerated in Section II, it will be required to file a copy of its charter and by-laws, and an affidavit executed by its principal officer INC. 232 TAX FOREIGN CORPORATIONS. showing the disposition made of such income as it receives, and stating specifically, whether or not any of the income so received inures to the benefit of any individual stockholder. The question of whether or not the office will hold the organization to be “exempt” will be determ.ined by the facts shown in its charter, by-laws and affidavit. (Letter to 'I he Cor- poration Trust Company, signed by Com.m.issioner W. H. Osborn, and dated December 6, 1916.) 22S5 Law ^280. Net Income of a Foreign Corporation Defined. — “Sec. 232. That in the case of a corporation subject to the tax imposed by section 230* [^1662] the term ‘net incomm’ means the gross income as defined in section 233 [‘1[1788] less the deductions allowed bv section 234 [*[1922] and the net income shall b? computed on the same basis as is provided in subdivision (b) of section 212 [*lf755] or in section 226 [‘Returns when account- ing period is changed,’ ^1479].” *[The tax imposed by section 230 Is “upon the net income of every corporatiaa” si nply.] 2286 Law ^281. Gross Income of a Foreign Corporation Defined. — “Sec. 233. fa) That in the case of a corporation subject to the tax imposed by section 230 [^1662] the term ‘gross incom.e’ means the gross income as defined in section 213 [^763],” 2287 Law ^284. Gross Income of a Foreign Corporation is that from Sources within the United States only. — “(b) In the case of a foreign corporation gross income includes only the gross income from sources wdthin the United States,” 2288 Meaning of “Source v/ithin United States.” — It is not necessary that the foreIg.r.£j^* corporation shall be engaged In business in this country or that it have an offioe, branch, or agency in the United States. Liability to the tax attaches with respect to the^^ income, the source of which is in the United States. “Source” as here used means the place of the origin of the income. (Art. 66, ^309- 2289 310, Reg. 33, Rev., Jan. 2, 1918.) 2290 Foreign Corporations Doing Business by Agents. — [Note that the wording of the present Act is “income from sources wdthin the United States.”] The Federal income tax law’ prov^ides that the normal tax imposed by it shall be levied, assessed, and collected upon the entire net incom.e arising and accruing to foreign corporations from business transacted or capital invested in this country. Such a corporation may transact business or have capital invested in this country through and by an agen^: as completely as, if it w’ere transacting the business or Investing the capital direct from its home office or through a duly established branch office In the United States. An agent w’ho is doing- business in this country, buying and selling certain products of the foreign corpora tIon->. is to all intents and purposes a branch of the foreign corporation, as through and by him the foreign corporation is transacting business in this country. The buying and selling of a product in this country through a local agency or branch 2291 for and' on behalf of a foreign corporation is clearly transacting business in this, country within the meaning of the Federal income tax law, and any net income arising and accruing because of the business to transacted will be held to be subject to the tax imposed by the Federal income tax law, and every foreign corporation carrying on business in the manner indicated will be required to make a return of annual net income covering the business so transacted. (T. D. 2137, Jan. 30, 1915.) 2292 When a foreign corporation sends a representative to this country to solicit business^ the merchandise thus sold to be shipped direct to the consignee, it will be held that such corporation Is transacting business in this country. The fact that the solicitor or representative has only a mailing address in this country Is immaterial, he is none the less an agent of the foreign corporation. To the extent that he sells in this country goods or merchandise for the foreign corporation, to that extent the foreign corporation is trans- acting business in the United States, and the net income arising and accruing to the cor- poration by reason of the business so transacted will be subject to the income tax imposed by section 2, act of October 3, 1913. Any foreign corporation transacting business in this country in the manner herein- 2293 before indicated will make a return of annual net income to the collector of the district in which its representative has his mailing address, showing in such return the net income accruing to It from the business so transacted. (T. D. 2161, Feb. 19, 1915.) 2294 Taxable Income of Foreign Steamship Companies. — This office is in receipt of your letter of the 17th instant, in which you quote what purports to be a ruling of this office with respect to the manner of computing the income, taxable under the federa income tax law (Section 2, Act of October 3, 1913), against foreign steamship companies doing business in and from this country, and you ask if the ruling quoted “represents INC. 233 TAX FOREIGN CORPORATIONS. the stand of the Bureau of Internal Revenue on the subject in qwestron.” In reply you are informed that the ruling referred to is quoted from a letter Written by this office and, in the main, represents the position of this Bureau In regard to the question raised. ♦ * ♦ The rule or position of this office with respect to the method of ascertaining the taxable income of foreign steamship companies, whose steamships touch at American ports and which carry therefrom freight and passengers for hire, could perhaps be better stated as follows: The returns made by such corporations, for the purpose of the income tax im- posed by the act cited, should include as gross income the total receipts of all outgoing business, whether freight or passengers. With the gross income thus ascertained, the ratio existing between It and the gross income from all ports, both within and without the United States, should be determined as the basis upon which allowable deductions may be computed, the principle being that allowable deductions shall be computed upon a basis which recognizees that the income arising and accruing from business done in and from this country shall bear its share, and no more, of expense, incident to the earning or creation of such income, in the ratio that the gross income arising in and from this country bears to the entire gross income arising from business done both within and with- out this country. In other words, the net income of a foreign steamship company doing business in or from this country, for the purpose of the income tax assessable and payable to the United States, will be ascertained by deducting from the gross receipts from out- going business such a portion of the aggregate expenses, losses, etc., as such receipts bear to the aggregate receipts from all ports. * * * [See ^2305.1 (Letter to The Corporation Trust Company, signed by Acting Commissioner David A. Gates, and dated July 1'8,. 1916.) 2295 General expenses, such as coal, ship stores^ etc.,, of foreign steamship companies^, shall be prorated as provided in [112305 * * * ]. (Art. 116, Reg. 33, Jan. 5, 1914.) 2296 Law 1 [ 285 . “Gross Income” of a Foreign Corporation includes Interest on the Obligations of all Residents and Dividends on Stock of Resident Corporations. — “including the interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, div^idends from resident corporations, and’* [See 112876.] 2297 Gross income from sources within the United States as ap-plied to foreign corporations shall include interest received on bonds, notes, or other interest-bearing obliga- tions of residents, corporate or otherwise, as well as income^ derived from dividends on capital stock or from the net earnings of resident corporati-ons,^ joint-stock companies, or associations, or insurance companies, subject to tax under this title, and likewise income from rentals and royalties, from business transacted! or capital invested in the United States. (Art. 89, 11350, Reg. 33, Rev., Jan. 2, 1918.) 2298 Law 11286. “Gross Income” of a Foreign Corporation includes Amounts Re- ceived as Profits on the Manufacture and Disposition of Goods within the United States. — “including all amounts received (although paid under a contract for the safe of goods or otherwise) representing profits on the mianufacture and disposition of goods within the United States.” [Reg. 45 reads “manufacture or disposition”, 112876.1 Comment. — [The above provision] is new. The foilowing ruling is based on the old law.] 2299 A Foreign Corporation Having no Office or Agent in the United States, Collecting Commissions only on Account of Sales of American Goods Abroad, is Not Liable to Tax on Amounts so Earned. — Reference is made to your letter of the 12th instant, in which you state that a corporation located at Singapore, incorporated under the laws of that country, which has no office or agent in the United States, and is engaged in the commission business has, during the year 1917, sold in Singapore and nearby countries certain products of manufacturing establishments in the United States. The purchase price of these goods is transmitted by the purchasers to the manufacturers and American houses direct. When the money is received in the United States a commission is paid out of the proceeds of sale to this foreign corporation. IjRelative to your inquiries, you are advised that under the above statement of facts the commission earned by the Singapore corporation is not considered to be income derived from sources within the United States, and the Singapore corporation is not required to report such commissions as income under the provisions of the Act of September 8, 1916, and Titles I and II of the Act of October 3, 1917. 1[In regard to your second inquiry, you state that a corporation in this country receives from the manufacturer these commissions and transmits the same to the Singapore .corporation and ask to be advised whether this corporation which so receives and trans- INC. 234 TAX FOREIGN CORPORATIONS. nits these commissions is under obligations to report such commissions in its return of annual net income. l[In reply, you are informed that if the American corporation in question simply acts as the agent for the Singapore corporation in receiving and transmitting such commissions, and does not retain for its own use any part thereof, it is held that such commissions need not be reported as income by the domestic corporation referred to. (Letter to Brower, Brower and Brower, Brooklyn, New York, signed by Deputy Commissioner L. F. Speer, and dated April 20, 1918.) 2300 Law ^287. Deductions Allowed Foreign Corporations. — “Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:” 2301 Comment. — [The deductions which may be allowed to foreign corporations are in character the same as those allowed to domestic corporations. These shall be allowed only to the extent indicated below in paragraphs 2302, 2303, and 2301.] 2302 Law ^293. Interest Allowed as a Deduction to Foreign Corporations. — [Same as for domestic corporations, ^2027, qualified as follows — ] “or, in the case of a foreign corporation, the proportion of such interest which the amount of its gross income from sources within the United States bears to the amount of its gross income from all sources within and without the United States;” 2303 Law 11300. Taxes Allowed as a Deduction to Foreign Corporations. — [Same as for domestic corporations, 1[2036, qualified as follows — ] “(e) in the case of a foreign corporation, by the authority of any foreign country (except income, war-profits and excess- profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon the property or business:” 2304 Law 1[324. The Apportionment and Allocation of Deductions Allowed Foreign Corporations other than Interest and Taxes. — “(b) In the case of a foreign cor- poration the deductions allowed in subdivision (a) [111788], except those allowed in para- graph (2) [1f2027] and in clauses (a) [112037], (b) [112039], and (c) [112040] of paragraph (3), shall be allowed only if and to the extent that they are connected with income arising from a source within the United States;” 2305 Law 1[325. “and the proper apportionment and allocation of the deductions with respect to sources of income within and without the United States shall be de- termined under rules and regulations prescribed by the Commissioner with the approval of the Secretary.” 2306 For the purpose of the tax the net income of foreign corporations shall be ascertained by deducting from the gross amount of income received in this country the deduc- tions enumerated in the act, which deductions shall be limited to expenditures or charges actually incurred in the maintenance and operation of the business transacted and capital invested in the United States or, as to certain charges, such proportion of the aggregate charges as the gross income from business done and capital inVested in the United States bears to the aggregate infcome within and without the United States; that is to say, the deductions from gross income of a foreign corporation doing business in this country or receiving income from sources within the United States, must, as nearly as possible, repre- sent the actual expense and authorized charges incident to the business done and capital invested in this country and must not comprehend, either directly or indirectly, any expenditures or charges incurred in the transaction of business or the investment of capital without the United States. (Art. 197, 1f590, Reg. 33, Rev., Jan. 2, 1918.) 2307 Deductions Permitted to Foreign Corporations Deriving Their Taxable Income Solely from Stock or Bonds of Domestic Corporations. — [Under the present law the dividends themselves would constitute an allowable deduction. The tax on the bond interest should be withheld at the source [1[572] unless the corporation had an “office” within the United States. Under the present law gross income of a foreign corporation includes “only the gross income from sources within the United States.”] This office is in receipt of your letter of the 20th ultimo, in which you refer to office letter of April 8 [10], 1916, in which it was held that a non-resident corporation, holding stock of a domestic corporation, will be chargeable with such income tax as may be assessable upon the divi- dends on said stock and will he subject to all provisions of the law and the regulations for making return and paying tax. You also point out the fact that the income tax law provides, in paragraph 2 [G], that the normal tax shall be imposed upon INC. 235 TAX FOREIGN CORPORATIONS. the net income accruing to a foreign corporation from business transacted and capital invested within the United States during the year and prescribes the deductions to which such foreign corporations are entitled. You therefore ask: ^ , 2308 “if the foreign corporation is not engaged in business, but derives its income from the United States solely in the form of dividends or interest, to what extent is it entitled to take advantage of the deductions prescribed by law.” In reply you are informed that, if a foreign corporation is liable under the present 2309 income tax law to the tax imposed by it, it is liable for the reason that such cor- poration is either transacting business or has capital invested in the United States. The liability of a foreign corporation to income tax on the income received by it from stocks and bonds of domestic corporations exists because of the fact that such corporation has capital invested in the securities the income from which has its source in the United States. In other words, a foreign corporation which derives its income from the United States solely in the form of dividends or interest has capital invested in the United States, and, under the ruling hereinbefore referred to, the liability of the corporation to tax attaches by reason of the source of the income being in the United States, the domicile of the securi- ties as well as of the corporation owning them being immaterial. It therefore follows that, as the income arising and accruing to a foreign corporation 231 0 from capital invested in stocks and bonds of domestic corporations is subject to the tax imposed by Section 2, Act of October 3, 1913, it will be permissible for such a foreign corporation, although its income from the United Satest is derived “solely in the form, of dividends and interest” on domestic stocks and bonds, to deduct from the gross income so received any or all of the items scheduled in the law as proper deductions in the case of a foreign corporation, regardless of the source of the income, provided the amounts so deducted will not exceed the limit defined in the schedule of allowable deductions. In other words, the fact that the income arising or accruing in the United States to a foreign corporation is “derived solely from dividends or interest” on domestic stocks and bonds will not operate to deprive such foreign corporation from deducting from the gross income from this source such items of disbursement, loss, etc., as would be properly deductible were the income derived from any other source. It is contemplated by this ruling, however, that, in as far as practicable, the deduc- 23 1 I tions shall comprehend only such expenditures, losses, etc., as are incurred in, or are incidental to, the creation of the income against which they are charged, and in all cases the deductible amounts must be within the limit fixed by the law. (Letter to The Corporation Trust Company, signed by Commissionfer W. H. Osborn, and dated June 6, 1916.) 2312 Returns by Foreign Corporations. — Every foreign corporation having income from sources within the United States must makt return's of annual net income in accord- ance with the rule set out in section 12 (b) of the act of September 8, 1916, as amended by the act of October 3, 1917. (Art. 66, 1[311, Reg. 33, Rev., Jan. 2, 1918.) 2313 Law ^359. “('b) Returns shall be made to the collector of the district in which is located the principal place of business or principal office or agency of the corpora- tion,” 2314 Law ^345. “If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return shall be made by the agent.” 23 1 5 Law ^360. “or, if it has no principal place of business or principal office or agency in the United States, then to the collector at Baltimore, Maryland.” 2316 Obligation of a Foreign Corporation to Make Return. — If a foreign corporation having no office, agent, or place of business in the United States receives income from sources within this country, other than that upon which the tax has been withheld at the source, it shall make a return of annual net income to the collector of internal revenue at Baltimore, Md., accounting for therein all the income received during the year from all sources in the United States, includine that upon which the tax has been withheld, taking credit for the amount of the tax so withheld at the source under the conditions hereinbefore set out. Nothing in the foregoing provisions shall be construed to relieve a foreign corpora- 2317 tion having income from sources within the United States from making a return of annual net income. (Art. 202, ^604-605, Reg. 33, Rev., Jan. 2, 1918.) I^C. 236 TAX FOREIGN CORPORATIONS. 23 18 Foreign Corporations Having Several Branch Offices iri the United * States. — A foreign corporation having several branch offices in the United; States should designate one of such branches as its principal office and should also designate the proper- officers to make the required return. (Art. 83, Reg. 33, Jan. 5, 1914.) 2319 Form to be Used by Foreign Corporations in Making Annual Returns. — Receipt of your letter of the 5th instant is acknowledged, and your sug-gestion that a new form of return in lieu of 1031 for the use. of nonresident alien corporations should be pre- pared, Is noted, and will have careful consideration when the revision of forms is taken up. You are informied, however, that in several instances, nonresident alien corpora- 2320 tions using Form 1031 have been advised that on blank line. No. 10 of the return proper, they should take credit for any tax that had been withheld at the source and paid to the proper United States officer, on income received by them from sources within this country. ^Replying to your further inquiries you are informed: ^That it will be sufficient for foreign corporations against whom income tax is withheld at the source to give the name of the withholding agent and the amount so withheld. ^In the case of bonds which contain the so-called “tax-free” covenant, the bondholders have the right to assum.e that the fiscal agent of the corporation has withheld and paid over to the proper officers of the United States Governmient the tax due on the bond interest due the bondholders, though this assumption will not relieve the bondholder from the tax should it develop that the debtor corporation did not so withhold it or pay It over to the proper United States officer. ^Clearly, when the tax has been withheld and remitted to the Government and the bondholder Is advised of that fact, such bondholder may take credit in his or its return against the full amount of tax due as shown by the return, for the am.ount so withheld and paid over to the United States officer. In other words, when withholding agents have paid the tax on account of nonresident alien corporations having incom.e from, interest and * * * from sources within the United States, they, are entitled to the benefit of a credit for such payments as against the tax due and assessable on the basis of the incom.e which they received from all sources within the United States. As to the case you cite in which a nonresident alien corporation, through you 2321 as its Am.erican agent, had over-paid Its tax by reason of Its not having been able to take credit for the am.ount of tax withheld at the source, you are Inform.ed that a claim for refund [^^25 14] of the amount overpaid may be filed with the Collector to whom such am.ount was paid. With the claim, a statement setting out all the facts should be filed and the m.atter will have proper consideration and as prompt attention as possible. (Letter to Lee, Higginson & Co., Boston, Mass., signed by Commissioner Daniel C. Roper, and dated November 10, 1917.) Consolidated Returns. — [Read at ^1405.] General Law Provisions and Applicable Regulations Relative to Returns by Cor- porations. — [Read at If 1398.] 2322 Credit for Amount of Tax Withheld at the Source. — [Sec. 237, ^572, provides that a 10 per cent or a 2 per cent tax is to be withheld at the source in the case of foreign corporations not engaged in trade or business within the United States and not having any office or place of business therein, in the sam.e manner as is provided in Sec. 221, ^553 and “subject to the sam.e conditions as provided in that section.” One condition provided for in Sec. 221 at ^731, is that any am.ount of tax withheld is to be credited against the income tax shown in the taxpayer’s return, the income on which the tax has been with- held being included in such return.] 2323 In m.aking its return a foreign corporation may take credit against the tax assess- able on the basis of the net incom.e so returned for any tax which may have been withheld at the source, provided the income upon v.ffilch the tax was withheld is Included in the return and provided that the name of the withholding agent Is given in the return. (Art. 198, 11591, Reg. 33, Rev., Jan. 2, 1918.) 2324 If for any reason there is Included in the return which a foreign corporation is required to m.ake of all income received from sources within the United States any incom.e upon which tax has been withheld at the source, such foreign corporation m.ay take credit against the am.ount of tax due for the amount of the tax so withheld at the source; provided a statement is attached to the return setting forth the source and am.ount of the income upon which the tax was so withheld. (Art. 201, 1f602, Reg. 33, Rev., Jan. 2, 1918.) Payment of Tax, if Any, Not Withheld at the Source. [Read at 1[2339.] IXC. 237 TAX CREDITS TO CORPORATIONS. 2326 Law 1[327. Credits Allowed to Corporations. — “Sec. 236. That for the purpose only of the tax imposed by section 230 (1116621 there shall be allowed the following credits:” 2326 Law 1[328. Any Interest from Government Obligations and from War Finance Corporation Bonds is to be Credited for Purposes of the Income Tax. — “(a) The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is included in gross income under Section 233 [1fl788]; 2327 Law 1f329. The Amount of War and Excess-Profits Tax Imposed for the Same Taxable Year is to be Credited Against Income for Purposes of the Income Tax. — “(b) The amount of any taxes imposed by Title III for the same taxable year;!” 2328 Law 1[330. War and Excess-Profits Tax Credit in the Case of Fiscal Year Cor- porations. — ^^Provided, That in the case of a corporation which makes return for a fiscal year beginning in 1917 and ending in 1918, in computing the tax as provided in subdivision (a) of section 205 [1(1666], the tax computed for the entire period under Title II of the^ Revenue Act of 1917 shall be credited against the net income computed for the entire period under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 and under Title I of the Revenue Act of 1917, and the tax computed for the entire period under Title III of this Act at the rates prescribed for the calendar year 1918 shall be credited against the net income computed for the entire period under this title; and” When the net incomm has been ascertained in accordance with the rule set out 2329 in Section 12 (a) of the Act of September 8, 1916, as amended by the Act of Octo- ber 3, 1917, tl>e income so ascertained shall be credited with the amount of excess-profits tax assessed or to be assessed for the same year. (Art. 199,1(594, Reg. 33, Rev., Jan. 2, 1918.'' 2330 Law K331. Domestic Corporations are Allowed a Specific Credit of $2,000. — (c) In the case of a domestic corporation, $2,000.” 2331 Law K4. “Domestic Corporation” Defined. — “The term “domestic” when applied to a corporation or partnership means created or organized in the United States [K2281];” Credit of $2,000 Apportioned When Returns are Being Made for a Changed Accounting Period. — [Read at 1(1485.] 2332 Law K337. Credit to a Domestic Corporation Against Federal Income and War and Excess-Profits Taxes for Certain Income and Excess-Profits Taxes Paid to Foreign Countries and for all Such Taxes Paid to United States Possessions Diming the Taxable Year. — “Sec. 238 (a). That in the case of a domestic corporation the total taxes imposed for the taxable year by this title and by Title III [war and excess-profits tax] shall be credited with the amount of any income, war-profits and excess-profits taxes paid during the taxable year” 2333 Law K338. “to any foreign country, upon income derived from sources therein,” 2334 Law 1(339. “or to any possession of the United States.” 2335 Law K340. “If accrued taxes when paid differ from the amounts claimed as credits by the corporation, or if any tax paid is refunded in whole or in part, the corporation shall at once notify the Commissioner who shall redetermine the amount of the taxes due under this title and under Title III for the year or years affected, and the amount of taxes due upon such redetermination, if any, shall be paid by the corporation upon notice and demand by the collector, or the amount of taxes overpaid, if any, shall be credited or re- funded to the corporation in accordance with the provisions of section 252 [1(2488]. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the corporation to give a bond with sureties satis- factory to and to be approved by him in such penal sum as he may require, conditioned for the payment by the taxpayer of any amount of taxes found due upon any such rede- termination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require.” [For United States bonds as security see 1(2220.] INC. 238 TAX PAYMENT OF THE TAX. 2336 Law 1341. “(b)This credit shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, as the case may be, and all other information necessary for the computation of such credit.” 2337 Law 1342. Credit to a Domestic Corporation Making Return for Fiscal (Not Calendar) Year Ending in 1918. — “(c) If a domestic corporation makes a return for a fiscal year beginning in 1917 and ending in 1918, only that proportion of this credit shall be allowed which the part of such period within the calendar year 1918 bears to the entire period.” 2338 Any Tax Actually Paid by Creditor on Tax-Free-Covenant Bond Interest may be Credited by Domestic Corporation Creditor if Interest is Being Returned as Income (as it should be). — If a corporation shall have returned as income interest received on bonds, the interest upon which the debtor corporation had agreed to pay without deduction of income taxes, and if the debtor corporation shall have actually paid the incom.e tax assessable on such interest income, it will be permissible for the cor- poration receiving such interest to take credit against the tax assessable on the basis of its net income returned, for the amount of tax paid thereon by the debtor corporation. (Art. 199, ^593, Reg. 33, Rev., Jan. 2, 1918.) PART IV. ADMINISTRATIVE PROVISIONS. PAYMENT OF THE TAX. [For “Paym.ent of Taxes” in Reg. No. 45, see at ^3031.] 2339 Law 1[361. The Tax is to b' Paid in Four Equal Installments Except When With- held at the Source. — “Sec. 250. (a) That except as otherwise provided in this section and sections 221 and 237 [1[553 and ^572, taxes collected at the source] the tax shall be paid in four installments, each consisting of one-fourth of the total amount of the tax.” 2340 Law. ^362. “The first installment shall be paid at the time fixed by law for filing the return and” 2341 Law ^363. month,” 2342 Law ^364. 2343 Law 1[365. 2344 Law ^[366. “the second installment shall be paid on the fifteenth day of the third “the third installment on the fifteenth day of the sixth month, and” “the fourth installment on the fifteenth day of the ninth month,” “after the time fixed by law for filing the return.” 2345 Law ^367. When First Installment is Due When Time For Filing Return Has Been Extended. — “Where an extension of time for filing a return is granted the time for payment of the first installment shall be postponed until the date of the expiration of the period of the extension, but the time for payment of the other installments shall not be postponed unless the Commissioner so provides in granting the extension.” 2346 Law 1(368. Interest Runs on Amount of Installment During Period of Extension Availed of. — “In any case in which the time for the payment of any install nent is at the request of the taxpayer thus postponed, there shall be added as part of such install nent interest thereon at the rate of H of 1 per centum per month from the time it would have been due if no extension had been granted, until paid.” 2347 Law K369. If Any Installment is Not Paid When Due the Entire Unpaid Tax Becomes Due. — “If any installment is not paid when due, the whole amount of the tax unpaid shall become due and payable upon notice and demand by the collector [K2399].” INC. 239 TAX PAYMENT OF THE TAX. 2348 Law ^370. The Entire Tax May Be Paid On or Before the Due Date of the Return. — “The tax may at the option of the taxpayer be paid in a single payment instead of in installments, in which case the total amount shall be paid on or before the time fixed by law for filing the return, or, where, an extension of time for filing the return has been granted, on or before the expiration of the period of such extension.” 2349 Law 1[371. Recomputation of Instalhnents After an Examination of the Return by the Commissioner. — “(b) As soon as practicable after the return is filed, the Commissioner shall examine [it]. If It then appears that the correct amount of the tax is greater or less than that shown in the return, the installments shall be recomputed.” 2350 For the purpose of verifying the accuracy of a return, or for making one where none is made, the books of corporations and all other relative data shall be open to the inspection of the Commissioner of Internal Revenue or his duly authorized agents. (Art. 221, 11639, Reg. 33, Rev., Jan. 2, 1918.) 2351 For the purpose of verifying any return, made pursuant to this act, the Commis- sioner of Internal Revenue may, by any duly authorized revenue agent or deputy collector, cause the books of such corporation to be examined, and if such examination discloses that the corporation is liable to tax in addition to that previously assessed, or assessable, the same shall be assessed and shall be payable immediately upon notice and demand. For the purpose of such examination, the books of corporations shall be open to the examining officer, or shall be produced for this purpose upon summons issued by any properly authorized officer. (Art. 186, Reg. 33, Jan. 5, 1914.) 2352 Law 1[372. Crediting or refund of excess payment. — “If the amount already paid exceeds that which should have been paid on the basis of the installments as re- computed, the excess so paid shall be credited against the subsequent installments; and if the amount already paid exceeds the correct amount of the tax, the excess shall be credited or refunded to tlie taxpayer in accordance with the provisions of section 252 1112488]”. 2353 An excess payment of tax in one year can not be offset against an assessment of tax for a subsequent year. (Art. 39, 1[247, Reg. 33, Rev., Jan. 2, 1918.) 2354 Law 1[373. Pa 3 anent of Amounts Due Because of Underpayments Originally. — “If the amount already paid is less than that which should have been paid, the dif- ference shall, to the extent not covered by any credits then due to the taxpayer under section 252 [1[2488j, be paid upon notice and demand by the collector.” 2355 In cases wherein additional assessments are made as a result of an examination or audit of the return, the taxpayer shall, immediately following the making of the assessment, be notified of the amount thereof, and such taxes shall be paid within 10 days from the date of such notice. (Art. 230, 1[655, Reg. 33, Rev., Jan. 2, 1918.) 2356 Law 11374. No Penalty for Understatement if Return be Made in Good Faith and if the Understatement is Due to No Fault of the Taxpayer. — “In such case if the return is made in good faith and the understatement of the amount in the return is not due to any fault of the taxpayer, there shall be no penalty because of such under- statement.” 2357 Law 1[375. Penalty if Understatement is Due to Negligence, Merely. — “If the understatement is due to negligence on the part of the taxpayer, but without intent to defraud, there shall be added as part of the tax 5 per centum of the total amount of the deficiency, plus Interest at the rate of 1 per centum per month on the amount of the de- ficiency of each installment from the time the installment was due.” 2358 Law 1[376. Penalty if Understatement is False or Fraudulent with Intent to Evade the Tax. — “If the understatement is false or fraudulent with intent to evade the tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or fraudulent returns willfully made [50% of the amount of the tax, 1[1556], but in addition to other penalties provided by law for false or fraudulent returns, there shall be added as part of the tax 50 per centum of the amount of the deficiency.” 2359 Law 1[377. Payment of the Tax in Installments Does Not Apply to Tax Due on Returns Made by the Collector or by the Commissioner. — “(c) If the return is made pursuant to section 3176 [1[1549] of the Revised Statutes as amended, the amount of tax determined to be due under such return shall be paid upon notice and demand by the collector.” INC. 240 TAX PAYMENT OF THE TAX. 2360 Law ^378. Five-Year Limitation on the Assessment of Taxes and on the Col- lection of Taxes by Suit Except in the Case of False or Fraudulent Return With Intent to Evade the Tax. — “(d) Except in the case of false or fraudulent returns with intent to evade the tax, the amount of tax due under any return shall be determined and assessed by the Commissioner within five years after the return was due or was made, and no suit or proceeding for the collection of any tax shall be begun after the expiration of five years after the date when the return was due or was made. In the case of such false Or fraudulent returns, the amount of tax due may be determined at any time after the return is filed, and the tax may be collected at any time after it becomes due.” 2361 Law 1|461. Continuing Effect of Prior Laws for the Assessment and Collection of Taxes, and the Imposition and Collection of Penalties, that have Accrued There- under. — “Sec. 1400. (a) That the following parts of Acts are hereby repealed, subject to the limitations provided in sub-division (b): (1) The following titles of the Revenue Act of 1916: Title I (called “Income Tax”). ♦ **♦*♦*♦*♦♦* (2) The following parts of the Act entitled “An Act to provide increased revenue to defray the expenses of the increased appropriations for the Army and Navy and the ex- tensions of fortifications, and for other purposes,” approved March 3, 1917: ♦ ♦ ♦. 9 Section 402 (called “Returns of Dit^idends”). (3) The following titles of the Revenue Act of 1917: Title I (called “War Income Tax”). Title X (called “Administrative Provisions”). Title XII (called “Income-Tax Amendments”). 2362 Law 1(462. “(b) Such parts of Acts shall remain in force for the assessment and collection of all taxes which have accrued thereunder, and for the imposition and collection of all penalties or forfeitures which have accrued and may accrue in relation to any such taxes, and except that the unexpended balance of any appropriation heretofore made and now available for the administration of any such part of an Act shall be available for the administration of this Act or the corresponding provision thereof: Provided^ That, except as otherwise provided in this Act, no taxes shall be collected under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, or Title I or II of the Revenue Act of 1917, in respect to any period after December 31, 1917: ************ 2363 Law 1(463. “In the case of any tax imposed by any part of an Act herein repealed, if there is a tax imposed by this Act in lieu thereof, the provision imposing such tax shall remain in force until the corresponding tax under this Act takes effect under the pro- visions of this Act.” 2364 The “Three-Year Limitation on Assessments” and the “No Limitation on Collec- tion of the Tax by Suit” Provisions of Prior Laws. — [Sec. 9 (a) of Title I of the I "■'•enue Act of 1916 as amended by the Revenue Act of 1917 providing for the assessment of income taxes on individuals reads, in part, as follows: “except in cases of refusal or neglect to make such return and in cases of erroneous, false, or fraudulent returns, in which cases the Comm.issioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, or has been made, m.ake a return upon inform.ation obtained as provided for in this title or by existing law, or require the necessary corrections to be made, and the assessment m.ade by the Com- missioner of Internal Revenue thereon shall be paid by such person or persons Immediately upon notification of the am.ount of such assessment:” 2365 [Sec. 14 (a) of Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 providing for the assessment of incom.e taxes on corporations reads, in part, as follows: “except in cases of refusal or neglect to make such return, and in cases of erroneous, false, or fraudulent returns, in which cases the Com.niissioner of Internal Revenue shall, upon the discovery thereof, at any tim.e within three years after said return is due, make a return upon inform.ation obtained as provided for in this title or by existing law; and the assess- m.ent m.ade by the Comm.issioner of Internal Revenue thereon shall be paid by such corpora- tion, joint-stock company or association, or insurance com.pany immediately upon notifi- cation of the am.ount of such assessm.cnt;”] INC. 241 TAX PAYMENT OF THE TAX. 2366 Procedure in Cases of Delinquency. — In cases of refusal or neglect to make return and in cases of erroneous, false, or fraudulent returns the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due or has been made make a return of income upon information obtained as provided for by law, or require the necessary corrections to be made, and the assessment made by the Com.m.issioner of Internal Revenue thereon shall be paid by such person or persons im.mediately upon notification of the amount of such assessment. If the amount of such assessment rem.ains unpaid for 10 days after notice and demand therefor by the collector, there shall be added the sum of 5 per cent on the amount of tax unpaid and interest at the rate of 1 per cent per month upon such tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons. (Art. 42, 1[253, Reg. 33, Rev., Jan. 2, 1918.) 2367 I n cases wherein corporations have neglected or refused to m.ake returns, and in cases wherein returns are found, upon investigation or otherwise, to be false or fraudulent, the com.m.issioner may, upon discovery thereof, at any tim.e within three years after such return is due, m.ake a return upon the information obtained in the manner pro- vided in the act, and the tax so discovered to be due, together with the additional tax pre- scribed, shall be assessed, and the amount thereof shall be paid immediately upon notice and demand. (Art. 221, 1[638, Reg. 33, Rev., Jan. 2, 1918.) 2368 The statute (Sec. 9 (a), act Sept. 8, 1916) does not require the assessment to be made within three years from the time a return was due. The limitation is upon the discovery of delinquency or error, within three years. Where a further tax is found to be due as result of audit of a return or agent’s 2369 report, an amended return or waiver will not be required, except where the discovery of the tax is made subsequent to the expiration of the three-year period of limitation. (Art. 38, 1f243-244, Reg. 33, Rev., Jan. 2, 1918.) 2370 Section 14 authorizes the Commissioner of Internal Revenue in cases of refusal or neglect to m.ake returns, or in cases of erroneous, false or fraudulent returns, upon discovery thereof at any time within three years after said returns are due, to make returns upon inform.atlon obtained and assess the tax thus found to be due against such corporations and collect it in the ordinary statutory method; and section 38, act of August 5, 1909, and section 2, act of October 3, 1913, contain similar provisions. Under this pro- vision, it appears that the commissioner is without authority to make a formal assessment of special excise or income tax unless the liability therefor has been discovered within three years from the date when the return is due. This lim.itatlon does not, however, limit the right of the Government to claim and collect, by suit or otherwise, any additional tax found due for a period antedating the three-year limitation. (Art. 233, 1[658, Reg. 33, Rev., Jan. 2, 1918. 2371 No Three-Year Limitation to Right of Government to Collect Taxes by Suit. — In numerous cases the courts have held that there is no limitation upon the right of the Government to sue for and recover unpaid taxes. It is not essential that assessment be made; or, if made, that it be made within a specified time. If liability to original or additional tax exists or has been discovered, the amount thereof may be recovered by suit, regardless of the fact that no assessment of the amount has been made, and regardless of the date of its discovery or the period for which the tax is due. (Art. 233, 1[659, Reg. 33, Rev., Jan. 2, 1918.) 2372 The appended decision [Corporation Tax Act of August 5, 1909] of the United States District Court for the Western District of Alichigan, in the case of the United States, plaintiff, v. Grand Rapids and Indiana Railway Company, defendant, is published for the information of internal-revenue officers and others concerned. (T. D. 2166, March 4, 1915.) [239 Fed. 153.] 1. The Three Years’ Limitation. The three-years’ limitation in section 38, act of August 5, 1909, fifth subdivision, is not a limitation upon the right of the Government to sue for unpaid taxes, but at most is a limitation upon tne right of the collecting officers to make assessment and to enforce payment by the customary statutory proceedings. 2. Suit for Taxes. A suit for taxes will lie without an assessment. In the District Court of the United States for the Western District of Michigan, Southern Division. The United States, plaintiff, v. Grand Rapids Indiana Railway Co., defendant. INC. 242 TAX PAYMENT OF THE TAX. Demurrer. 2373 A careful study and analysis of the statute here involved and an examination and consideration of the applicable and controlling authorities lead to the following conclusions: (1) The three-year clause of the fifth subdivision of section 38 of the 1909 excise 2374 law is not a limdt'atlon upon the right of the Government to sue for unpaid taxes, but, at m.ost, is a limitation upon the right of the collecting officers to make assess- ment and to enforce payment by the summary statutory proceedings. (2) In the collection of the taxes im.posed by the statute the Government is not 2375 confined to the sum.mary proceedings therein provided, but may resort to a plenary suit; and (3) Where a tax of a fixed percentage (like the one here sought to be recovered! 2376 is imposed by the statute on a subject or object which is so definitely described in the statute that its amount or value on which the fixed per centum is to be cal- culated can be ascertained and determined, on evidence, by a court, a suit for the tax will lie without an assessment. United States v. Tilden (28 Fed. Gas., 161; No. 16519); United States V. Hazard (26 Fed. Gas., 251; No. 15337); Dollar Savings Bank v. United States (19 Wall., 227); United States v. Ghamberlaln (219 U. S., 250-264); King v. United States (99 U. S. 229); United States v. Reading R. R. (123 U. S., 113); United States v. Gobb (11 Fed., 76); United States v. M. H. and O. R. Go. [W. D. Mich.], (17 Fed., 719; 22 Cyc., 1670, and cases there cited); Eliot National Bank v. Gill (210 Fed., 923, affirmed by the Gircuit Gourt of Appeals of First Gircuit, December 21, 1914, [218 Fed. 600].). The demurrer will be overruled and the defendant will be given fifteen days within 2377 which to plead to the declaration. G. W. Sessions, District Judge. February 25, 1915. (T. D. 2166, March 4, 1915.) [Gomment: After the demurrer w^as overruled the case went on trial, resulting 2378 in judgment in favor of the United States.] 2379 The appended decision [captions only as shown below] of the United States Gircuit Gourt of Appeals for the Sixth Gircuit, in the case of the United States v. Nashville, Ghattanooga & St. Louis Railway, is published for the information of internal-revenue officers and others concerned. (T. D. 2697, April 16, 1918.) 2380 1- False or Incorrect Returns. — The word “false,” as used in the fifth subdivision of section 38, of the act of August 5, 1909, providing that in case of any return made with false or fraudulent intent the Gommissioner of Internal Revenue shall add 100 per centum of the tax, means “untrue” or “incorrect,” and does not necessarily mean intentionally or fraudulently false. 2. Gommon-Law Action of Debt for Taxes. — A common-law action of debt lies 2381 in favor of the Government whenever by accident, mistake, or fraud, taxes have not been paid; thus the Government may recover a personal judgment for a tax whenever there exists a duty to pay, provided another remedy has not been made ex- clusive by clear and specific declaration. 3. Reassessment as Prerequisite to Suit. — Act of August 5, 1909, section 38, does 2382 not make the remedy by way of a reassessment by the Gommissioner of Internal Revenue exclusive of all other remedies for collection of excise tax imposed on corporations, and suit may be brought under Revised Statutes, section 3213, providing that taxes may be sued for and recovered in the name of the United States, In any proper form of action, before any circuit or district court of the United States for the district within which liability to such tax is incurred, or where the party from whom such tax is due resides at the time of the commencement of the action, without any such reassessment. 4. Operating Expenses and Depreciation. — Though what is a necessary expense 2383 of operation and what is a reasonable allowance for property depreciation are ultimately questions of fact, so far as they involve legal questions they are absolutely judicial questions, and the declaration in a suit to recover excise tax imposed on corpora- tions by the act of August 5, 1909, which fails to show the making of a new assessment by the Gommissioner of Internal Revenue, is therefore not demurrable. 5. Declaration in Suit to Recover Tax — Evidence. — Evidence sustaining allegations 2384 of incorrectness in returns by corporation subject to excise tax imposed by act of August 5, 1909, need not be set out in the declaration in a suit to recover such tax; declaration here sufficiently averred erroneous or untrue return of operating ex- penses and deductions for depreciation. 6. Declaration in Suit to Recover Tax — Bill of Particulars. — Where declaration 2385 in action to recover of a corporation the excise tax imposed by act of August 5, 1909, expressly avers that alleged deductions were not reasonable allowances for depreciation within the meaning of such act, if more definite or detailed information is needed to enable defendant to plead or prepare for trial, remedy is by bill of particulars. 7. Judgment Reversed. — judgment of the district court is reversed. (249 Fed. 678.) 2386 (T. D. 2697, April 16, 1918.) INC. 243 TAX PAYMENT OF THE TAX. 2ZS7 In a case [^2372] recently decided in the United States District Court for the Western District of Michigan, the court held that the three-year clause of the special excise corporation-tax law is not a limitation upon the right of the Government to sue for unpaid taxes, but, at most, is a limitation of the right of the collecting officers to make assessments and to enforce payment by the ordinary summary statutory proceedings. It was also held that, in a case wherein the tax was measured by a fixed percentage, as is the case in the special excise and income taxes, and the amoun't of the tax is capable of definite ascer- tainment, a suit for tax will lie without assessment. It follows, therefore, that when an additional tax is found to be for a period ante- 2388 dating the three-year limit, an assessment is not a necessary condition precedent to the collection of the tax, as the amount of the tax may be collected by suit. In the examination of books of corporations for the purpose of verifying their 2383 returns of annual net income for years antedating the three-year limit, examining officers have discovered additional tax liability in many cases and have encountered some difficulty in securing either amended returns or waivers in order that assessments of this additional tax may be formally made. (Mimeograph letter No. 1192 to Collectors, ^Iarch 24, 1915; continued at ^2391.) 2390 The Three-Year Statutory Limitation May be Waived. — While the Government is fully authorized to recover such taxes by suit, it is desirable, in order to obviate needless expense and annoyance to the taxpayer and the Government, that the collection be made as a result of a formal assessment. In order that this may be done, corporations owing additional taxes for any period antedating the three-year limitation should file amended returns, together with a statement formally waiving the three-year statutory limitation and consenting to assessm.ent. In executing such amended returns or waivers, the corporations forfeit none of their rights under the law, and no penalty is Incurred which might not be otherwise enforced by suit. (Art. 233, 1[660, Reg. 33, Rev., Jan. 2, 1918.) 2391 While the Government is fully authorized, as hereinbefore indicated, to recover • such taxes by suit, this office prefers that the collection should be made in the ordinary statutory method, that is, as a result of a formal assessment. In order that this may be done, corporations should be requested to make amended returns, or to execute waivers in such form as will waive the three-year statutory limitation as to the time within which assessments may be made, and the corporations should be informed that, in execut- ing this waiver, they forfeit none of their rights under the law or assum.e liability to no penalty that might not be enforced against them in the absence of such waiver. The cor- porations should also be given to understand that the execution of the waiver is, in fact, to their advantage, in that it has the effect to eliminate the necessity, on the part of the Government, to recover taxes by suit. If, however, the corporations against which addi- tional tax liability is discovered will formally accept the findings of the examining officer and agree to voluntarily pay to the Collector of Internal Revenue the amount of tax found due, amended returns or waivers need not be required. In cases wherein waivers are executed, they should be substantially in the following 2392 form: , a corporation organized under the laws of the State of , hereby consents to an assessment of any and all taxes imposed by section 38 of the Act of Congress approved August 5, 1909, and shown or found to be due on a basis of its net income received from all sources during the year , and any and all penalties attached to or on account of said taxes, and said corpora- tion hereby waives any statutory limitation as to the time in which such taxes and penalties should have been assessed. (Signed) ^ (Corporation.) (Corporate Seal.) It is believed that if corporations against which additional tax has been discovered 2293 for years antedating the three-year limit are fully advised that the making of amended returns or the execution of waivers does not in any way imperil any right which they have under the law or involve them in any additional penalties, no dif- ficulty will be had in securing such amended returns or waivers. Examining officers should in all cases clearly present this matter to_ the corpora- 2394 tions and, if possible, secure either amended returns or waivers, in order that formal assessments may be made and suit to recover tax, with the expense incident thereto, may be avoided. (Mimeograph letter No. 1192, to Collectors, March 24, 1915.) 2395 When Waiver is Given the Ad Valorem Penalty Does not Accrue. — Where the limitation of the statute as to assessment has run and a written waiver of exemption from assessment is given by the taxpayer, the ad valorem penalties of 50 per cent, addition to tax, is not to be assessed for delinquency in filing return. (Art. 52, 1f286, Reg. 33, Rev., Jan. 2, 1918.) INC. 244 TAX PAYMENT OF THE TAX. 2396 Past Due Taxes Voluntarily Paid. — If the corporation against which additional tax liability is discovered will formally accept the findings of the examining officer and agree to voluntarily pay the additional tax to the Collector of Internal Revenue and does so pay the additional tax, amended returns or waivers will not be required. (Art. 234, 1[661, Reg. 33, Rev., Jan. 2, 1918.) 2397 Law 1[379. Ad Valorem Penalty, Plus Interest, for Delay in Payment of Tax. — “(e) If any tax remains unpaid after the date when it is due, and for ten days after notice and demand by the collector, then, except in the case of estates of insane, deceased, or insolvent persons [^2413], there shall be added as part of the tax the sum of 5 per centum on the amount due but unpaid, plus interest at the rate of 1 per centum per month upon such amount from the time it became due:” 2398 Law 11380. Interest Rate Lower as to any Amount Subject to a Fona Fide Claim for Abatement. — Provided, That as to any such amount which is the subject of a bona fide claim for abatement [1[2499], such sum of 5 per centum shall not be added and the interest from the time the amount was due until the claim is decided shall be at the rate of of 1 per centum per month.” 2399 Form 17. — Collectors should Issue Form 17 for the purpose of fixing definitely the date when the 5 per cent penalty accrues and interest at 1 per cent per month begins to run, and a copy of this notice should be filed as provided by act of August 17, 1912, amending section 3186, Revised Statutes. (Art. 41, 1[252, Reg. 33, Rev., Jan. 2, 1918.) 2400 [If any Installment is not paid when due] notice and demand (Form 17) should be at once Issued, and unless the tax [all of the tax unpaid] in such case is paid within 10 days after the service of such notice, general demand for tax, penalty, and interest (Form 21) should at once be issued. Immediate notice and demand (Form 17) will, how- ever, be served in case of failure to file the required return within the statutory period. (Art. 197, Reg. 33, Jan. 5, 1914.) 2401 It appears that certain collectors hold that notice of assessment and demand, P'orm 17, is nbt necessary to create a liability to 5 per cent, penalty and interest at 1 per cent, per month in the case of income tax remaining unpaid after [ * * * the] due date. This view as to the requirements of the law Is clearly wrong and contrary to the instructions (Art. 197, Reg. 33) issued on the subject. The necessity of issuing Form 17 is twofold — first, to determine the date when 2402 5 per cent, penalty accrues and Interest at 1 per cen't per month begins to run, and, second, to complete the Government’s lien on property belonging to the taxpayer. 2403 In case of non-payment, * * * ^ formal notice and demand which the law clearly contemplates and which the courts hold to be necessary before the delinquent tax- payer becomes chargeable with penalty and interest [is to be issued]. In all cases, therefore, where an assessed tax remains unpaid after it becomes due 2404 a notice on Form 17 should be at once issued, to be followed, when necessary, by Form 21 and 69, in their order. The fact that a claim for abatement is pending or the tax is in litigation does not relieve the collector from Issuing the notices, demands, etc., required by law. A misunderstanding on the part of certain collectors as to these requirements 2405 has occasioned a considerable loss to the Government of penalty and Interest, especially where claims for abatement were pending. (T. D. 19'95, June 12, 1914.) 2406 Notice of Assessment (Form 17) may lawfully be given by mail, and when so given is presumed to have been received. The burden rests on the taxpayer to prove the contrary in order to avoid penalty. (U. S. v. General Inspection & Loading Company, 204 F. 657.) 2407 [Comment: The following word was given to The Corporation Trust Company orally, regarding the practice of the Department relative to the proof “to the contrary.” The taxpayer is required only to prove to the satisfaction of the Commissioner that he did not receive nbtice of assessment. Under such conditions, it has been the practice of the Bureau of Internal Revenue to waive the penalties and give the taxpayer an oppor- tunity to pay his taxes. Of course, the Collector would be called on to produce his records to prove his assertion, that notice had been sent, but that would not stand in the way of the taxpayer offering proof that the notice did not reach him. (July, 1917)]. INC. 245 TAX PAYMENT OF THE TAX. 2408 Notice and Demand when Taxpayer is Abroad, or Absent from Home in the Military or Naval Forces of the United States. — By reason of absence in foreign countries or on account of traveling abroad, or of absence from their homes or places of business in the military or other service of the country, and the consequent delay in receiving mail, it is impossible for many individuals to receive notice and demand on Form 17 and make payment of the taxes assessed thereon so that such taxes can be received by the collector * ♦ * within the ten-day period following the service of notice. You are requested therefore to enter on Form 17, as the date on which such assessed 2409 tax becomes due and payable, as near as possible, a date ten days subsequent to the time that said notice should be receiv^ed in the ordinary course of the mails by the taxpayer, and where it appears that the full amount of tax assessed was placed in the mails within the ten-day period after the receipt of Form 17, or in case notice so sent is not delivered in due time by reason of delay in the mail and satisfactory evidence of that fact is furnished, the penalty and interest in such cases will not be collected. This ruling applies to excess profits taxes as well as to income taxes. 2410 Where the office of a corporation, joint stock company, association or insurance company to which the collector addresses the notice and demand for income taxes or income and excess profits taxes is situated so far from the collector’s office that normal conditions render it impossible for payment to reach the collector within ten days of the mailing of notice and demand, the procedure herein outlined with respect to in- dividuals will govern with respect to corporations, joint stock companies, associations and insurance companies. Except as herein indicated the five per cent penalty will be imposed where there 241 1 is a failure of the tax payment to reach the collector within ten days of the day of mailing by the collector of the nbtice and demand. (T. D. 2679, March 23, 1918.) 2412 Penalties for Failure to Pay Tax When Due. — Upon failure to pay the tax when ^ , due and for 10 days after notice and demand, a penalty of 5 per cent of the amount of tax unpaid and interest at the rate of 1 per cent per month until paid shall be added to the amount of such tax. (Art. 231, ^[656, Reg. 33, Rev., Jan. 2, 1918.) 2413 Delay in Payment of Tax from Estates of Insane, Deceased or Insolvent Persons. — Receipt is acknowledged of your letter of March 29, 1916, reading, in part, as follows : “Please refer to that portion of Paragraph E of the Income Tax Law [Identical pro- visions in Revenue Act of 1918 at ^2397 above.] which exempts the estates of insane, deceased, or insolvent persons. 2414 (1) Does this exempt the agent of an insane person, the executor of a deceased person, or the receiver for an insolvent person, from penalty for failure to pay the tax in due course.^ 2415 (2) Does it exempt such fiduciary from penalty for failure to make the return in due course? 24 1 6 (3) In the case of deceased persons, does it cover the tax due upon the return which is filed by the executor for the period from the first of the year to the date of death? 2417 (4) In the case of insolvent persons, does it cover the tax based on the return made by the insolvent person?” 2418 Your several inquiries are answered as follows: 2419 1. With reference to that paragraph of the Federal Income Tax Law to which reference is made, and which, in part, reads as follows: “ * ♦ ♦ rjf ^ny tax remains unpaid after the date when it is due,] 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 the said tax from the time the same became due, except from the estates of insane, de- ceased, or insolvent persons,” the office holds that the exemption provision contained therein applies in a case of non-payment of tax by reason of insanity, decease, or in- insolvency of the taxpayer occurring after a personal return has been rendered by the incapacitated person. 2420 2. The provision does not relate to returns required under the law from fiduciaries. 2421 3. No. 4. Yes, it being understood that a return was rendered in due course by the in- 2422 solvent person, and that insolvency occurred prior to required date of payment of tax. (Letter to The Corporation Trust Company, signed by Acting Commissioner David A. Gates, and dated April 1, 1916.) 2423 Law ^[381. Ipso Facto Assessment of the Tax and Notice and Demand for ^e First Installment. — “In the case of the first installment provided for in subdivision (a) the instructions printed on the return shall be deemed sufficient notice of the date when the tax is due and sufficient demand, and the taxpayer’s computation of the tax on the ’•e- turn shall be deemed sufficient notice of the amount due.” INC. 246 TAX PAYMENT OF THE TAX. 2424 f Law 382. $5 Penalty for Necessitating a Warrant of Distraint. — “(f) In any case in which in order to enforce payment of a tax it is necessary for a collector to cause a warrant of distraint to be served, there shall also be added as part of the tax the sum of $5.** 2425 Law ^383. Procedure when Commissioner Finds that a Taxpayer Designs to Pre- judice or to Render Wholly or Partly Ineffectual Proceedings to Collect the Tax for the Preceding or Current Taxable Year. — “(g) If the Commissioner finds that a tax- payer designs quickly to depart from the United States or to remove his property therefrom, or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly or partly ineffectual proceedings to collect the tax for the taxable year then last past or the taxable year then current unless such proceedings be brought without delay, the Commissioner shall declare the taxable period for such taxpayer term- inated at the end of the calendar month then last past and shall cause notice of such finding and declaration to be given the taxpayer, together with a demand for immediate payment of the tax for the taxable period so declared terminated and of the tax for the preceding taxable year or so much of said tax as Is unpaid, whether or not the time otherwise allowed by law for filing return and paying the tax has expired; and such taxes shall thereupon be- come immediately due and payable. In any action or suit brought to enforce payment of taxes made due and payable by virtue of the provisions of this subdivision the finding of the Commissioner, made as herein provided, whether made after notice to the taxpayer or not, shall be for all purposes presumptive evidence of the taxpayer’s design. A tax- payer who is not in default in m.aking any return or paying income, war-profits, or excess- profits tax under any Act of Congress may furnish to the United States, under regulations to be prescribed by the Commissioner with the approval of the Secretary, security approved by the Commissioner that he will duly make the return next thereafter required to be filed and pay the tax next thereafter required to be paid. The Commissioner may approve and accept in like manner security for return and payment of taxes made due and payable by virtue of the provisions of this subdivision, provided the taxpayer has paid in full all other income, war-profits, or excess-profits taxes due from him under any Act of Con- gress. If security is approved and accepted pursuant to the provisions of this subdivision and such further or other security with respect to the tax or taxes covered thereby is given as the Commissioner shall from time to time find necessary and require, payment of such taxes shall not be enforced by any proceedings under the provisions of this subdivision prior to the expiration of the time otherwise allowed for paying such respective taxes.” 2426 Law ^434. Fractional Part of Cent to be Disregarded in Payment of Tax. — “Sec. > 1313. That in the payment of any tax under this Act not payable by stamp a fractional part of a cent shall be disregarded unless It amounts to one-half cent or more, in which case it shall be increased to 1 cent.” 2427 In the payment of income tax a fractional part of a cent shall be disregarded unless it amounts to a half cent or more, in which case the fraction shall be increased to 1 cent. (Art. 41, 1[251, Reg. 33, Rev., Jan. 2, 1918.) 2428 Law ^435. Payment of the Tax by Means of Treasury Certificates of Indebtedness and Uncertified Checks. — “Sec. 1314. That collectors may receive, at par with an adjustment for accrued interest, certificates of indebtedness issued by the United States and uncertified checks in payment of income, war-profits and excess-profits taxes and any other taxes payable other than by stam.p, during such time and under such regulations as the Commissioner, with the approval of the Secretary, shall prescribe; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tendered shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been tendered.” [^[3128,] 2429 Instructions Relative to Acceptance of Uncertified Checks. — In accordance with the provisions of Section 1010 [^2428] of the Act of October 3, 1917, collectors may accept uncertified checks in payment of income and excess-profits taxes. If such check Is not paid by the bank on which it is drawn, the person by whom it has been tendered shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been received. 2430 Such uncertified checks as the depositary bank is willing to accept should be in- cluded in the certificate of deposit issued to the collector. 2431 All other uncertified checks will be carried by the collector as “cash on hand” and not credited as “Collections,” as the dates of the certificates of deposit de- termine the dates of collections. 2432 The date on which the collector receives the check will be considered the one on which payment is made, unless the check is return dishonored. INC. 247 TAX PAYMENT OF THE TAX. 2433 Such uncertified checks as the depositary bank is not willing to accept for immediate credit may be deposited for collection by the collector of internal revenue to his official credit, under his bond, with a regular depositary bank, and when the check or checks have been collected the proceeds should be immediately deposited by him with his other collections for the day. At the same time the collector will charge his account “Cash on hand” and credit the taxpayer from whom the particular uncertified check was received. (T. D. 2627, Dec. 28, 1917.) 2434 Instructions to Public. — 1. Collectors should give the widest possible publicity, through newspapers and by all other available means, to the fact that all checks in paym.ent of incom.e and excess-profits taxes must be collectible at par (without any de- duction). Taxpayers who are not sure that their checks will be paid at par should be advised to write beneath the amount “without deduction for exchange,” or “with exchange.” Indorsement of Checks. — 2. The collector need not, however, examine all checks to 2435 see whether or not they are collectible at par, but should stamp on the face of each the words “This check is in payment of an obligation to the United States and must be paid at par. No protest,” with his nam.e and title. If the bank on which a check is drawn should refuse to pay it at par, it will be returned through the depositary bank and should be treated in the same manner as a bad check (see paragraphs 4 and 5). Obtaining Certificates of Deposit for Out-of-Town Checks. — 3. All out-of-town checks 2436 for which the depositary bank is unwilling to issue an immediate certificate of deposit to the credit of the Treasurer of the United States should be deposited separately in a collection account as provided in T. D. 2627, dated Decem.ber 28, 1917. The col- lection account will be charged and the Treasurer’s general account credited by the issuance of a certificate of deposit on Form. 15, either (a) as the checks are collected or (b) after a number of days as agreed upon with the depositary, subject to the Secretary’s approval, not exceeding five days, depending upon the average time of collection. Redeeming Bad Checks Deposited to the Credit of the Treasurer. — 4. If any check 2437 for which a certificate of deposit to the credit of the Treasurer of the United States has been issued should be returned to the depositary bank unpaid, the collector will be promptly notified and the check will be held in suspense for a few days, during which the collector should make an effort to recover the am.ount from the taxpayer. If the am:ount of the check is recovered from, the taxpayer, the collector should Im.m.ediately turn it over to the depositary in exchange for the bad check, which should be returned to the drawer. If he fails to obtain the amount from, the taxpayer within a reasonable time, the depositary will return the check with a letter of transmittal and ask a receipt from the collector. The collector should give such a receipt in duplicate, retaining one copy. The depositary will charge the amount to the Treasurer’s account in its next daily transcript. Redeeming Bad Check Deposited in Collection Account. — 5. If a check deposited 2438 in the collection account should be returned unpaid, and no certificate of deposit on Form 15 covering the amount thereof has been issued, the amount of the check will be charged by the depositary to the collection account, after being held in suspense account for a few days while an effort is made to recover the amount from the taxpayer. Collecting Taxes for Which Bad Checks Have Been Tendered. — 6. Taxpayers 2439 whose checks have been returned uncollected by the depositary bank should be immediately notified, as indicated in paragraph 4, to make the checks good. If any taxpayer should fail to do so, the collector should proceed to collect the taxes by the usual methods, as though no check had been given. Correcting Assessment List. — 7. If the recapitulation of the assessment list for 2440 the month has not yet been sent to the Commissioner, cancel the original entry of the payment, at the same time noting in the “Remarks” column “Check returned unpaid; transferred to p. ,1 ,” with the date, and reenter the item in the unpaid section of the list, with the notation “Transferred from p. , 1 .” Submit in support of a new entry a copy of the collector’s letter to the taxpayer with regard to the non-pay- ment of the check. Be careful not to duplicate the charge in the monthly recapitulation of the list. 8. If the monthly recapitulation has gone forward make a note in the “Remarks” 2441 column, opposite the original entry, “Check returned unpaid,” with the date, and let the item stand as an unpaid item to be cleared by an entry of the date on which the amount is finally paid. Posting Records 1 and 9. — 9. Record 1 for income tax collections should be posted 2442 in accordance with previous Instructions and the daily totals should be transferred to line 1 or Record 9. As the daily total in Record 9 will not agree with the total deposit for the day in the Treasurer’s general account, the certificate of deposit numbers should not be entered on line 48 of Record 9. INC. 248 TAX PAYMENT OF THE TAX. 10. The balance in the collection account at the close of each month should be 2443 subtracted from the balance at the close of the preceding month (or vice versa). If the balance in the collection account shows an increase for the month, such in- crease should be added to the amount of returned checks (if any) charged back to the Treasurer’s general account during the month and the total should be entered on line 8 in the total column of Record 9 in red ink, to be deducted from the other entries in the same column. 11. If the balance in the collection account shows a decrease for the month, and 2444 the amount of returned checks charged back to the Treasurer’s general account for the month is less than the decrease in the balance, the amount of such returned checks should be substracted from the decrease in the balance and the difference entered in black ink on line 8 in the total column of Record 9, to be added to the other entries in the same column. 12. If the amount of returned checks charged back to the Treasurer’s general 2445 account for the month should exceed the decrease in the balance for the month, such decrease should be subtracted from the amount of such returned checks and the difference entered in red ink on line 8 in the total column of Record 9. 13. The net total for each month entered on line 9 of Record 9 will thus agree 2446 with the amount deposited that month on account of collections on lists. Monthly Accounts. — 14. Form 325 should be prepared from Record 1 in accordance 2447 with previous instructions. At the close of the month the entry on line 8 in the total column of Record 9 (black 2448 or red ink) should be entered in column 8 of the second table on Form 5lB, on the blank line following the line for “Old regular” lists. If the amount entered in column 8 is in black ink the same amount should be entered in red ink on the same line in column. 11. If the amount entered in column 8 is in red ink the same amount should be entered in black ink on the same line in column 11. 15. The amount of returned checks charged to the Treasurer’s general account 2449 each month should be deducted on Form 49 from the total of the certificates of deposit for the month in which the checks are returned. The entry making the deduction should be supported by the banks’ letters returning the checks. 16. The collector should submit with his monthly account on Form 51B a monthly 2450 statement signed by the cashier of the depositary bank in the following form: Total amount Amount trans- ferred each day to Treasurer’s general acet. Checks Day deposited each day charged back each day Balance Balance from last month’s accou: 1 1 nt. 1 2 Etc Quarterly Account. — 17. On Form 79 the balance in the collection account should be 2451 included in item 9 as part of the balance due the United States and interlined in the analysis of the balance (at the foot of the account) as “Uncollected checks.”” (T. D. 2666, March 8, 1918.) 2452 Instructions Relative to Acceptance of Certificates of Indebtedness for Income Taxes. — [The law formerly read “at par and accrued interest” instead of “at par with an adjustment for accrued interest.”] Collectors of Internal Revenue are directed to receive at par United States Treasury certificates of indebtedness of the Tax Series of 1919, dated August 20, 1918, and maturing July 15, 1919, and of Series T, dated November 7, 1918, and maturing March 15, 1919, in payment of income and profits taxes when payable at or before the maturity of the certificates. The amount, at par, of the Treasury certi- ficates of indebtedness presented by any taxpayer in payment of income and profits taxes must not exceed the amount of the taxes to be paid by him. Deposits of certificates of indebtedness must be made by collectors with the Federal Reserve Banks of the districts in which the respective collectors’ offices are located. Such certificates of Indebtedness may be accepted by the collector prior to the date the tax is due and in that case should be forwarded by the collector to the Federal Reserve Bank to be held for account of the collector until the date the tax is due and for deposit on such date. Certificates of indebtedness should be stamped as follotvs by the collector and when so stamped transmitted to the Federal Reserve Bank by registered mail uninsured: INC. 249 TAX PAYMENT OF THE TAX. ,191.... This certificate has been accepted in payment of income and profits taxes and will not be redeemed by the United States except for credit of the undersigned. Collector of Internal Revenue for the district of Each unmatured coupon attached to each such certificate of indebtedness must be stamped across the face by the collector as follows: “Paid.” All coupons maturing on or before the date the tax is due must be detached by the 2453 taxpayer and collected in ordinary course; but all other coupons must be attached to the certificates and forwarded to the Federal Reserve Bank. Any accrued inter- est to the date the tax is due not covered by coupons detached as above provided will be remitted to the taxpayer by the Federal Reserve Bank by check and the collector must furnish to the Federal Reserve Bank the name and address of the taxpayer, the amount and serial numbers of the certificates presented in each case, the date of issue of the certificates, and the date the tax is due. Collectors shall in no case pay interest on such certificates nor accept them for an amount other or greater than their face value. Receipts given by collectors to taxpayers should show the amount of certificates of each series received in payment of taxes. The collectors should make in tabular form a schedule in duplicate of the certi- 2454 ficates of indebtedness to be sent to the Federal Reserve Bank, showing the serial number of each certificate, date of issue, and face value. Certificates of indebted- ness accepted prior to the date the tax is due must be scheduled separately, and such date must appear on the schedule. At the bottom of the schedule there should be written or stamped “Income and Profits Taxes $ ,” which must agree with the total shown on the schedule. Such income and profits tax deposits must in all cases be shown on the face of the certificate of deposit (National Bank Form 15) separate and distinct from the item of miscellaneous internal revenue collections (formerly called Ordinary), but it is not necessary to give the separation into corporation income, individual income and profits taxes. One copy of this schedule must accompany the certificates sent to the Federal Reserve Bank, and the other be retained by the collector. Until certificates of deposit are received from the Federal Reserve Banks, the 2455 amounts must be carried as cash on hand, and not credited as collections, as the dates of certificates of deposit determine the dates of collections. For the purpose of saving taxpayers the expense of transmitting such certificates 2456 as are held in Federal Reserve cities to the office of the collector in whose district the taxes are payable, taxpayers desiring to pay income and profits taxes by Treasury certificates of indebtedness acceptable in paym.ent of such taxes, should communicate with the collector of the district in which the taxes are payable and request from him authority to deposit such certificates with the Federal Reserve Bank in the city in which the certificates are held. Collectors are authorized to permit deposits of Treasurv certificates of indebtedness 2457 in any Federal Reserve Bank with the distinct understanding that the Federal Reserve Bank is to issue a certificate of deposit in the collector’s name covering the amount of the certificates of indebtedness at par and to state on the face of the certi- ficate of deposit that the amount represented thereby is in payment of income and profits taxes. The Federal Reserve Bank should forward the original certificate of deposit to the Treasurer of the United States, with its daily transcript, and transmit to the collector the duplicate and triplicate, accompanied by a statement giving the name of the tax- payer for whom the payment is made in order that the collector may make the necessary record and forward the duplicate to this office. (T. D. 2778, Dec. 11, 1918.) 2458 Payment of Taxes at Collector’s Offices. — In view of the conditions existing in the offices of many collectors, especially in the rush season of June and July, beginning with June 1, 1915, collectors may close to the public the sale of stamps and the payment of taxes not earlier than 3 p. m. daily, and on Saturdays or other days when the office is closed at 1 p. m. by order of the Secretary of the Treasury not earlier than 12 noon, to enable the cashiers to balance up with the bookkeepers before making their daily deposits. [Read 1[2462 below.] 2459 The public should be given due notice of any change in the hours for the sale of stamps and payment of taxes. 2460 To accommodate those who may come to make payments after the closing time, a mail box should be provided at the cashier’s wdndow for the deposit of such collec- tions. [See Treasury Decision 1728, dated September 28, 1911 [office routine].) This order in no wise affects the hours of service required daily of each govern- 2461 ment employee — nor the hours that collector’s offices will be open for the transaction of business other than the sale of stamps and payment of taxes. (T. D. 2205, May 19, 1915.) INC. 250 TAX PAYMENT OF THE TAX. 2462 The following instructions issued by the Assistant Secretary of. the Treasury on May 3 relative to depositing collections are published for your information and guid- ance: To Collectors of Customs and Internal Revenue: In view of the existing conditions in the offices of many collectors and the hour at which . Government depositaries require daily deposits to be made therewith, collectors may close their business day at an hour sufficiently early to enable them to make the deposits for that day before the banks close. After balancing the accounts for the day, the collection of taxes and the sale of stamps should be resumed and continued until the official closing time, and such transactions should be accounted for as collections of the following business day, except on th.Q last business day of each fiscal year, when all collections made for that day should be deposited with the regular depositary, which will be instructed to remain open to receive the par- ticular deposit. Please instruct your deputies who deposit receipts to be governed in accordance with the above. This method is adopted for the convenience of both the collectors and the depositaries and in order that all collections actually made within the fiscal year may be deposited therein and so covered into the Treasury. Wm. P. Malburn, Assistant Secretary, To THE Assistant Treasurers of the United States, Federal Reserve Banks and Active National-Bank Depositaries: Collectors of customs and internal revenue have been authorized to close the bus- iness day in their respective offices sufficiently early to enable them to deposit their collections during banking hours, and to include collections made later In the day as transactions of the next day, except on the last business day of each fiscal year, when they will deposit the receipts for the entire day. You are therefore requested to remain open on the last business day of the fiscal year for the purpose of receiving deposits from the collecting officers who deposit with your bank, notwithstanding the fact that the bank has been closed to the public at the usual hour. This will enable the department to include all customs and internal- revenue collections made during a fiscal year in its accounts and reports for that year. Compliance with the above instructions Is requested. Wm. P. Malburn, Assistant Secretary. 2463 The instructions contained in T. D. 2205 [^[2458-}-], dated May 19, 1915, are modified accordingly. (T. D. 2332, May 8, 1916.) 2464 Income Tax Due Has Status of Debt to United States. — Tax due on income has the status of a debt due to the United States. Persons receiving property charged with such indebtedness must answer for the debt. (Art. 39, ^248, Reg. 33, Rev., Jan. 2, 1918.) 2465 Law ^384. Receipts for Taxes. — “Sec. 251. That every collector to whom any payment of any tax is made under the provisions of this title shall upon request give to the person making such payment a full written or printed receipt, stating the amount paid and the particular account for which such payment was made;” [1[3044.] 2466 The department has received from time to time complaints from taxpayers, especi- ally those paying corporation income tax, that collectors refuse to sign what is known as commercial receipts, or refuse to indorse what is generally known as voucher checks, many of such receipts and checks stating on the face that by indorsement the voucher check or receipt becomes a receipt in full for amount and purpose drawn. The only official receipt for taxes that collectors may sign under the law are stamps,' 2467 where stamps are issued, or Form 1, when the tax is not payable by stamp, which receipts are to be issued to every taxpayer for taxes paid. However, the depart- ment has no objection to collectors signing commercial receipts or voucher checks (subject , in the latter case to the rules of the depositary), but they should, in signing such receipts or vouchers, write or stamp across the face thereof the words “Not an official receipt.” The official receipt on Form 1 must, however, be furnished;^ and it is to be distinctly under- stood that an unofficial receipt is not in any manner binding on the department, and will . not be received by it as evidence of payment of the tax. (T. D. 2226, July 14, 1915.) INC. 251 TAX ADMINISTRATIVE PROVISIONS. 2468 Deputy Collectors to Give Personal Receipts for Collections Made by Them. — After careful consideration, this office has reached the conclusion that, in order thoroughly to protect the interests of both the taxpayers and the Government, some evidence of payment should be given at the time to taxpayers who pay taxes directly to deputy collectors, and that such a receipt as herein described is not in violation of Section 3188, which prohibits the issuance of a receipt in lieu of a stamp. You are therefore instructed to direct your deputies hereafter to give to special and 2469 other taxpayers, at the time of payment, a personal receipt for moneys collected, substantially in the following form: “Received of JOHN DOE $ , to be forwarded to the Collector to cover special tax due as ” 2470 In case the payment is for stamp tax or for amounts other than special tax, the form of receipt may be modified accordingly. (T. D. 2341, June 19, 1916.) 247 1 Law ^385. Receipts to be Given for Payments Made by Withholding Agents on Account of Amounts Deducted at the Source. — “and whenever any debtor pays taxes on account of payments made or to be made by him to separate creditors the collector «hall, if requested by such debtor, give a separate receipt for the tax paid on account of each creditor in such form that the debtor can conveniently produce such receipts separately to his several creditors in satisfaction of their respective demands up to the amounts stated in the receipts; and such receipt shall be sufficient evidence in favor of such debtor to justify him in withholding from his next payment to his creditor the amount therein stated; but the creditor may, upon giving to his debtor a full written receipt acknowledg- ing the payment to him of any sum actually paid and accepting the amount of tax paid^as aforesaid (specifying the same) as a further satisfaction of the debt to that amount, require the surrender to him of such collector’s receipt.” 2472 Procedure Under Which Collectors Are Authorized to Refund Excessive Payments of Internal Revenue Tax. — Beginning April 1, 1918, there will be advanced to each Collector of Internal Revenue, at the beginning of each quarter of the fiscal year, out of the .-appropriation for the refundment of internal revenue taxes, a sum estimated to be sufficient tfor the repayment to taxpayers of certain excessive collections, as follows: — 1. Collections exceeding the tax shown by the return of the taxpayer to be due. '2. Collections exceeding the amount of tax shown by the assessment list to be due. 3. Duplicate payments where: — (a) Both are made in advance of assessment; Jb) Both are made after assessment; {c) One is made before, and one after assessment. 2473 1. Procedure where a collection has exceeded the tax shown in the taxpayers return as due. 2474 The Collector will enter on the assessment list the full amount paid, and in the “Remarks” column of the list will note the amount of the excess. S475 The complete data regarding the excessive collection is then to be entered on the schedule of Claims for Authority to Refund, Form 751. The “Paid,” “Due,” sand “Refundable Excess” columns on the Form will be totaled. Form 751 ’s to rrlade in triplicate, one copy to be retained by the Collector, and 2476 two to be forwarded securely attached to the proper assessment list. A single Form 751 cannot be used for items on lists of the separate classes. 247 7 In the Proving Division of the Bureau the amount shown on Form 751 as due will be checked against the taxpayer’s return, and the amount shown on the assess- ment list as paid will be checked against the similar item on Form 751. _ The original Form 751 will remain attached to the assessment list and will form 2478 an integral part thereof, so that the Commissioner’s signature of approval of the assessment list will be, to the Collector, sufficient evidence of the Commissioner’s approval of the claim. To effectuate this, there should be typewritten on the first page of Form no, below the line reading, “Total Chargeable to Collector,” the words, “Amount Refundable on Form 751.” Upon receipt of the returned ffalm, thus determined as approved by the Com- 2479 missioner, the Collector will immediately make refund to the^ taxpayer, clearly designating upon the draft the nature of the refund, as, for instance, “Refund cinder Claim on Form 751, March list, 1918.” The list to be designated is the list on which the claim was approved, rather than the list on which the assessed or overpayment was reported. 2480 2. Procedure where a collection has exceeded the tax. The procedure will be identical with that outlined under subheading (1), above, except that in the “Remarks” column on the assessment list the exact amount paid is to be noted. INC. 252 Tixy ADMINISTRATIVE PROVISIONS. 2481 3. Procedure where a tax has been paid wholly or in part in duplicate. 2482 (a) Where both payments are in advance, there shall be entered on Form 751 a notation showing both lines of the advance payment list or lists on which pay- ments appear. If the amounts of the two payments differ, the Collector shall claim authority for refund of the lesser payment. 2483 (b) Where the assessment has been made, entries will be made on the assessment list to show both dates of payment. 2484 A similar notation should be made under the item claimed on Form 751 as re- fundable. 2485 The total amount collected is to be reported on Forms 325 and 51 B. (c) Where one payment has been made before and one after the entry of assessment, 2486 notations will be made on Form 751 showing the line of the list on which the advance payments was reported and the line on which the assessment was entered. 2487 Except as indicated, the balance of procedure under subheading (3) will correspond to the procedure fully outlined under subheading (1). (T. D. 2688, April 1, 1918.) 2488 Law ^386. Credit or Refund, on Disclosure by Examination of Any Return, of Amount Paid in Excess of that Properly Due. — “Sec. 252. That if, upon examina- tion of any return of income made pursuant to this Act, the Act of August 5, 1909, entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” the Act of October 3, 1913, entitled “An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes,” the Revenue Act of 1916, as amended, or the Revenue Act of 1917, it appears that an amount of income, war-profits or excess-profits tax has been paid in excess of that properly due, then, notwithstanding the provisions of section 3228 of the Revised Statutes [^2615], the amount of the excess shall be credited against any income, war-profits or excess-profits taxes, or installment thereof, then due from the taxpayer under any other return, and any balance of such excess shall be immediately refunded to the taxpayer:” [^3045.] 2489 Law ^387. Five-Year Limitation for Making Claim for Credit or Refund. — Provided^ That no such credit or refund shall be allowed or made after five years from the date when the return was due, unless before the expiration of such five years a claim therefor is filed by the taxpayer.” 2490 Claims Heretofore Rejected May be Reopened. — Sir: This office is in receipt of your letter of the 26th ultimo, asking for a ruling as to whether, under section 14, paragraph A, of the act of September 8, 1916, claims for refund which have once been rejected by the commissioner because of the statute of limitation in existence at that time may be reopened. The portion of section 4 referred to is in the following words: Provided, That upon the examination of any return of income made pursuant to this title, the act of August 5, 1909, * * * ^nd the act of October 3 1913, * * * it shall appear that amounts of tax have been paid in excess of those properly due, the taxpayer shall be permitted to present a claim for refund thereof notwithstanding the pro- visions of section 3228. This office is of the opinion that claims can now be made for refund under that 2491 provision. Claims rejected can also be reopened if the question involves an exam- ination of the return. The power does not extend to other claims whose ad- justment does not necessitate an examination of the return. (T. D. 2396, Nov. 1, 1916.) 2492 Claims for Refund on Account of Taxes Paid Under the Act of Oct. 3, 1913, on Stock Dividends. — In order to complete claims for the refunding of Income tax collected under the Act of October 3, 1913, on stock dividends; that is, claims based upon the decision of the Supreme Court in the case of Towne vs. Eisner ^2738], the following evidence is required. An affidavit showing: 1. The name of the corporation which declared and paid the stock dividend. 2. The date of declaration of the stock dividend and date of receipt by claimant, 3. In which year’s return of annual net income did the claimant include this stock dividend? 4. Under what Item on the return was the value of the stock dividend included, and what was the valuation placed upon the dividend in the return? 5. Has the stock thus received and returned as a dividend been sold by the claim- ant, and if so, what was the date of sale; how much did claimant receive from the sale; and what part of the total amount received from the sale was included by the claimant in its return of annual net income for the year in which the sale occurred? 6. Did the dividend consist of stock of the corporation distributing the dividend to claimant, or did It consist of stock acquired by the distributor in another corporation ? INC. 253 TAX ADMINISTRATIVE PROVISIONS. Note. — A stock dividend is a distribution by a corporation to its stockholders 2493 of capital stock of the distributing corporation. A distribution of capital stock other than that of the distributing corporation is not a stock dividend but a dividend in property. 2494 The receipt on Form No. 1 should also be filed with the claim. In giving publicity to this requirement please inform taxpayers that there is no 2495 possible advantage in the employm.ent of special attorneys for the prosecution of claims. Preparations are being made for the prompt handling of these cases and it is believed that they can be disposed of with minimum delay and inconvenience to the taxpayer. Claims filed directly by the claimants will receive in every respect as careful and expeditious consideration as those filed through special attorneys. (IT-Cls. Mim. 1795, Feb. 26, 1918.) 2496 Refund of Taxes Paid on Account of Stock Dividends Under Revenue Acts of 1916 and 1917, in Event such Taxes are Hereafter Held to Have Been Erroneously Assessed. — Receipt is acknowledged of your letter of October 28, 1918, in which * * * you ask to be advised whether persons who w'ish to take advantage of a possible decision that the taxing of stock dividends as income is unconstitutional, would be required to begin suit wdthin two years after the payment of the tax in order to prevent their right to recover} being outlawed, in accordance with the provisions of Sec. 3227 Revised Statutes [^2614.]. ^In reply, you are advised that Sec. 14 (a) [^2488] of the Act of September 8, 1916, pro- vides in part as follows: “Upon the examination of any return of income made pursuant to this title, the Act of August 5, 1909 — and the Act of October 3, 1913 — if it shall appear that amounts of tax have been paid in excess of those properly due, the taxpayer shall be permitted to present a claim for refund thereof, notwithstanding the provisions of Sec. 3228 [^2615] Revised Statutes.” ^In accordance with that portion of the Section above quoted, it is held that it is not necessary for an individual to institute suit or file a claim within two years after the payment of income tax, in order to obtain a refund of taxes which, by a later court decision or ruling of the Department, are held to have been erroneously assessed. (Letter to Herbert J. Lyall, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Nov. 2, 1918.) Lower Court Decision on Stock Dividends Under the Act of September 8, 1916, ^815. 2497 Law ^436. Taxes Erroneously Assessed or Collected, Penalties Collected Without Authority, and Excessive Taxes May be Remitted or Refunded by the Commissioner — “Sec. 1316. (a) That section 3220 of the Revised Statutes is hereby amended to read as follows: ‘Sec. 3220. The Commissioner of Internal Revenue, subject to regulations prescribed by the Secretary of the Treasury, is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed or excessive in amount, or in any m.anner wrongfully collected; also to repay to any collector or deputy collector the full amount of such sums of money as may be recovered against him in any court, for any internal revenue taxes collected by him, with the cost and expenses of suit [^2521]; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any suit brought against him by reason of anything done in the due performance of his official duty, and shall make report to Congress at the beginning of each regular session of Congress of all transactions under this section’.” [Effective as amended on day after “the passage” of the Revenue Act of 1918, ^2823. See ^2603.] 2498 Abatement of Second Assessments and Refund of Taxes Collected under Second Assessments. — [Comment. — The following, formerly incorporated in Sec. 3220 Revised Statutes, ^2497, has been eliminated: 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 under- statement or undervaluation.” A companion change has been made in Sec. 3225 Revised Statutes, ^2590, which governs directly the remitting of second assessments, the refund of taxes collected on such assess- ments, and the recovery by suit of taxes so paid.] INC. 254 TAX ADMINISTRATIVE PROVISIONS. 2499 Form 47. Preparation of Claims for the Abatement of Taxes and Penalties Alleged to Have Been Erroneously or Illegally Assessed or to be Abatable Under Remedial Acts. — Claims for the abatement of taxes or penalties erroneously or illegally assessed or which are abatable under remedial acts, etc., must be m.ade out upon Form 47, and must be sustained by the affidavits of the parties against whom the taxes were assessed, or of other parties cognizant of the facts, and must be accom.panied by affidavits of the deputy collectors of the divisions in which the claims arise. But if the deputy collector has reason to doubt the correctness of the statements 2500 m.ade by a claimant he should modify his affidavit accordingly, a space being left for that purpose at the close of the affidavit. If he has not investigated all the facts he should state in the blank space left in the body of the affidavit for that purpose what facts he has not investigated. If there are any objections to a claim, the collector should be careful to state them 2501 fully in a certificate to be attached to and m.ade part of the claim.. In some cases, wffiere the collector has certified to the correctness of claim.s, the deputy collector makes exceptions to the facts as stated by the claim.ants. Unless the collector m.akes a special explanation in every such case, the claim will be returned for such explanation. The claim should be still further supported by a certificate of the collector show- 2502 ing the list, page, and line of all assessments therein referred to, not only of the assessm.ent of the tax for the abatement of which the claim is filed, but also of each and every other assessment m.entioned in the claim,. Even where only a portion of a tax is claim.ed as erroneous, the collector should be careful to certify the full amount assessed. When a tax has been assessed and turned over to the collector, the presumption 2503 is that the assessm.ent is correct. The burden of proof in rebutting that presum.p- tion, and showing that it was improperly or illegally assessed or that relief should be given under a rem.edial statute, rests upon the applicant for abatem.ent. The affidavits must, therefore, contain full and explicit statements of all the m.aterial facts relating to the claims in support of which they are offered, and which are essential to their proper con- sideration. Nothing should be left to mere inference, but all the facts relied upon should appear on the papers them.selves. It is only the correctness of the statement of facts to which the deputy collector certifies, not the legality of the claim. The legality of the claim, is to be determ.ined by the Com.m.issioner of Internal Revenue upon the facts presented and proved by the affidavits. When a case is compromised, in which an assessment Is Involved, the am.ountpald 2504 as tax should be credited to the list. The amount, if any, remaining outstanding, should be claim.ed for abatement on Form 47, if the terms of the com.oromise so required. (Art. 258, 1[734-739, Reg. 33, Rev., Jan. 2, 1918.) 2505 Claims on Form 47 for abatement of errors in assessment made In the collector’s office, which errors are not corrected by the filing of Form 488, should be executed by the collector, but briefed in the name of the taxpayer against whom the assessment was made. [Read at ^[2558]. When claims for the abatement of taxes, either as uncollectible or erroneous, are 2506 allowed in the office of the Commissioner of Internal Revenue, schedule Form 7220 for abatement is drawn for the aggregate of so much as is abated upon each claim named in the schedule. The schedule Is sent directly to the collector of internal revenue to whom the taxes are charged, and is his authority for taking credit on Form 51 B and his quarterly account. Form 79, for taxes abated. No credit for abatements shall be taken except upon schedule Form 7220 from the Commissioner of Internal Revenue. Orders for abatement are sent to the Auditor for the Treasury Department. [Read at ^[2558.] (Art. 259, 1f740-741, Reg. 33, Rev., Jan. 2, 1918.) 2507 If a collector should discover from the schedule of abated taxes that a mistake has oc- curred, either in having abated a larger amount than that claimed, or in abating a tax which has been previously abated, he should immediately notify the commissioner of the fact, so that the order may be recalled, and the error be corrected by the issuing of a new one in its place. In such a case no credit, /or any amount whatever^ should be taken upon Form 51 B, or upon the quarterly account until the order of abatement and schedule have been corrected. [Read at ^2558.] (Art. 260, 1[742, Reg. 33, Rev., Jan. 2, 1918.) 2508 Filing of a Claim for Abatement Does not Operate as a Delay of Collection. — The filing of a claim for the abatement of a tax alleged to have been erroneously assessed does not necessarily operate as a suspension of the collection of the tax, or make it any less^ the duty of the collector to exercise due diligence to prevent the collection of the tax being jeopardized. He should, if necessary, collect the tax and leave the taxpayer to his remedy by claim on Form 46. (Art. 261, ^[743, Reg. 33, Rev., Jan. 2, 1918.) INC. 255 TAX ADMINISTRATIVE PROVISIONS. 2509 Penalty of 5 Per Cent and Interest at the Rate of 1 Per Cent or of i % a Month, Section 3184, Revised Statutes. — Where it is not otherwise provided the collector shall in person or by deputy, within 10 days after receiving any list of taxes from the Commissioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, to be left at his dwelling or usual place of business, or to be sent by mail, stating the amount of such taxes and demanding payment thereof. If such person does not pay the taxes within 10 days after the service or the sending by mail of such notice it shall be the duty of the collector or his deputy to collect the said taxes, with a penalty of 5 per cent, additional upon the amount of taxes and interest at the rate of 1 per centum a month. (Art. 262, ^[744, Reg. 33, Rev., Jan. 2, 1918.) 2510 When an assessment is made for a tax or penalty and demand made for payment, if a claim for abatement (From 47) is filed within 10 days after such demand and accepted by the collector, the amount of the 5 per cent penalty on the tax claimed will wait on the determination of the claim. Upon receipt of the notice of rejection of the claim (or so much thereof as shall not be allowed) the collector should immediately notify the party assessed and demand the payment of the tax; if the tax is not then paid within 10 days after mailing of the notice to the claimant by the collector of the rejection of the claim, the 5 per cent penalty accrues on the amount not allowed. If entire amount of assessment is not demanded in claim for abatement and balance of tax is not paid within the required 10 days, the 5 per cent penalty accrues on the balance not claimed. Interest at 1 per cent per month continues to run and should be collected with the tax at the time of payment for the full num.ber of calendar months which intervene between the date of the expiration of the first 10 days’ notice and the date of the payment of the tax, notwithstanding the fact that a claim for abatement has been filed. [Interest runs at 3^ of 1 per cent only, as to any amount which is the subject of a bona fide claim for abate- ment, 112398.] (Art. 263, 1f745, Reg. 33, Rev., Jan. 2, 1918.) 25 1 1 Duplicate Charges. — Taxes erroneously or illegally assessed are by the Commissioner of Internal Revenue abated to the taxpayer, while taxes uncollectible are simply abated by the commissioner to the collector against whom they are charged: but amounts which by error or otherwise have been twice charged to a collector, are held by the accounting officers to be matters of account, and not subjects for abatement. The collectors shall use Form 488 to adjust the errors in income-tax matters 2512 held to be matters of account and not subjects for abatement, and forward the completed form to the Commissioner of Internal Revenue, marked “Income Tax Division.” [Read at 1[2558.] See Regulations No. 2, Article 41, pages 47 and 48, for further information to 2513 collectors as to entries to be made in records and accounts. [Read at 1[2558.] (Art. 264, 11746-748, Reg. 33, Rev., Jan. 2, 1918.) 2514 Form 46. — Preparation of Claims for the Refunding of Taxes and Penalties Claimed to have Been Erroneously or Illegally Collected, or Refundable Under Remedial Statutes. — Claims for the refunding of assessed taxes and penalties must be made out upon Form 46. In this case, as in that of claims for abatement upon Form 47, the burden of proof rests upon the claimant. All the facts relied upon in support of the claim should be clearly set forth under oath. The claim should be still further supported by an affidavit of the deputy collector of the proper division, and by the certificate of the collector, showing the list, page and line upon which the assessment appears, the amount of the tax, and the date of payment thereof. Collectors and deputy collectors are cautioned that these certificates and affidavits 2515 should not be made in a merely perfunctory manner. Claims have been received at the office of the Commissioner of Internal Revenue wherein the statements of the claimant have been certified by the collector and deputy collector as “in all respects just and iruef^ whereas a slight examination of the records of their own offices would have disclosed an entirely different state of facts. (Art. 265, 1[749-750, Reg. 33, Rev., Jan. 2, 1918.) A claim for refunding should be made in the name of the party assessed, if living; 251 6 if he is dead, the claim should be made in the name of the executor or administrator. Certified copies of the letters of administration or letters testamentary, or other similar evidence, should be annexed to the claim to show that the claimant is adminis- trator, etc. The affidavit may be made by an agent of the party assessed; but in such a case, 2517 a power of attorney must accompany the claim. (Art. 266, 11751-752, Reg. 33, Rev., Jan. 2, 1918.) I’^C. 256 TAX ADMINISTRATIVE PROVISIONS. 251 8 Claims for Refund of Excess Amounts Withheld at the Source. — When, however, claims for exem.ption * * * as above described [i. e., made to the source by the taxpayer] are not filed within the prescribed time the tax collected in excess can be remitted only on presentation of a claim for refund under the provisions of Section 3220, Revised Statutes [paragraph 2497] said claims to be made either by the withholding agent against w'hom the assessm'ent was made, or by the person on account of whom such taxes were withheld. Claim.s for abatement of taxes erroneously assessed, or which are excessive in 2519 am.ount, m.ay, prior to collection thereof, be filed under the provisions of said Section 3220, Revised Statutes, either by the withholding agent against whom the assessment was m.ade, or by the persons on account of whom such taxes were withheld. (Art. 33, Reg. 33, Jan. 5, 1914.) 2520 W hen it is found that a withholding agent has failed to withhold tax and make return, field officers will at once procure the return required by law and regulations. The delinquent return should be accom.panied by a claim, executed on Form 47, for the abatem.ent of such item.s of tax as can be shown to have been paid by the individual tax- payers. The delinquent withholding return will then receive consideration in connection with the personal returns made or to be made by the individuals concerned. (Mim. 1265, Jan. 23, 1915.) [In connection with the above paragraph read 1[734.] 2521 Claims for Sums Recovered by Suit. — Claims for sums of money recovered by suit for any of the causes, and against any of the officers, enumerated in section 3220, Revised Statutes, should be made upon Form 46. The claimant should state the grounds of his claim under oath, giving the names of all the parties to the suit, the cause of action, date of its commencement, the date of the judgment, court in which it was recovered, and its amount. To this affidavit there should be annexed a duly certified copy of the record of the court in the case, copy of the final judgment, certificate of probable cause, and itemized bill of costs paid receipted by the clerk or other proper officer of the court. (Art. 274, ^[772, Reg. 33, R'ev., Jan. 2, 1918.) 2522 Payment of Claims Allowed. — Warrants in payment of claims allowed will be drawn in the names of the parties entitled to the money, and shall, unless otherwise directed, be sent by the Treasurer of the United States directly to the proper parties or their duly authorized attorneys or agents. But if the claimants are indebted to the United States for taxes, they must be paid before the warrants are delivered. (Art. 267, 1[753, Reg. 33, Rev., Jan. 2, 1918.) 2523 Deductions of Amounts Due by Claimants, etc. — Attention is called to the following act, approved March 3, 1875 (18 Stat. L., 481), concerning — 2524 tV enacted by the Senate and House of Representatives of the United States of America in Congress assembled^ That when any final judgment recovered against the United States or other claim, duly allowed, by legal authority, shall be presen'ted to the Secretary of the Treasury for payment, and the plaintiff or claimant therein shall be indebted to the United States in any manner, whether as principal or surety, it shall be the duty of the Secretary to withhold payment of an amount of such judgment or claim equal to the debt thus due to the United States; and if such plaintiff or claimant assents to such set-off, and discharges his judgment or an amount thereof equal to said debt or claim, the Secretary shall execute a discharge of the debt due from the plaintiff to the United States. But if such plaintiff denies his indebtedness to the United States, or refuses to consent to the set-off, then the Secretary shall withhold payment of such further amount of such judgment, or claim, as in his opinion will be sufficient to cover all legal charges and costs in prosecuting the debt of the United States to final judgment. And if such debt is not already in suit, it shall be the duty of the Secretary to cause legal proceedings to be im- mediately commenced to enforcfe the same, and to cause the same to be prosecuted to final judgment with all reasonable dispatch. And if in such action judgment shall be rendered against the United States, or the amount recovered for debt and costs shall be less than the amount so withheld as before provided, the balance shall then be paid over to such plaintiff by such Secretary, with six per centum interest thereon, for the time it has been withheld from the plaintiff.” (Art. 268, ^754-755, Reg. 33, Rev., Jan. 2, 1918.) 2525 Instructions to Collectors Relative to Refund Claims. — Section 14 {a)^ act of September 8, 1916, provides that upon the examination of any return of income made pursuant to the act of August 5, 1909, levying an excise tax, and the acts of October 3, 1913, September 8, 1916 (and the same act as amended October 3, 1917), and the act of October 3, 1917, levying an income taXy “and for other purposes,” if it shall appear that amounts of tax have been paid in excess of those properly due, the taxpayer shall be per- INC. 257 TAX ADMINISTRATIVE PROVISIONS. mitted to present a claim for refund thereof notwithstanding the provisions of section 3228 of the Revised Statutes. (Art. 269, 1[757, Reg. 33, Rev., Jan. 2, 1918.) 2526 The lodging of an appeal [1[25 14] (claim for refund) made out in due form with the proper collector of internal revenue, for the purpose of transmission to the Comrnls- sioner of Internal Revenue in the usual course of business under the requirements of the regulations of the Secretary of the Treasury, is in legal effect a presentation of the appeal to the Commissioner. (14 Otto, 728; 28 Int. Rev. Rec., 87.) (Art. 270, ^758, Reg. 33, Rev., Jan. 2, 1918.) 2527 All claims for the refunding of taxes should be received by the collector and for- warded to the Commissioner of Internal Revenue. In no case should the collector refuse to forward a claim for the reason that it was not presented to him within two years after payment of tax. (Art. 271, 1[759, Reg. 33, Rev., Jan. 2, 1918.) 2528 The collector should keep a perfect record, in the book furnished for the purpose, of all claims presented to the Commissioner, and must certify as to each claim whether it has been before presented or not. (Art. 272, 1[760, Reg. 33, Rev., Jan. 2, 1918.) 2529 If any claim on form 46 or 47 is presented without the affidavit of the deputy collector, the reason for the omission must be given. If in any case, after a full investigation, the collector can not certify to the facts 2530 set forth in the affidavit, he should state the reason for his dissent, and allow the party to corroborate his statements by such other proof as he may be able to furnish. 2531 All amendments in the statement of facts in claims must be made under oath. 2532 All copies should be certified to be true ones. 2533 Care should be taken to certify, in every instance where a previous claim has been presented in the same case, the date of the previous claim. When an affidavit is made upon form 46 by some other party than the one against 2534 whom the tax was assessed, the name of the party assessed should appear upon the outside of that form. When a firm is the claimant the claim should be in the name of the firm; but a 2535 member of the firm or authorized agent or attorney should swear to the facts set forth, including that of membership or agency, and should subscribe his individual name.^ The artificial person, to wit, the firm, can not make oath. 2536 In claims for abatement or refunding the collector will in all cases insert in his certificate the full amount of the assessment^ and not simply the amount claimed. When the collector has twice collected the tax upon the same assessment he will 2lBZ7 charge himself with the duplicate payment on form 58; and when a claim is made he will state in his certificate, upon form 46, that he has so charged himself with said amount, stating the m'onth, list, page, line, amount, and date of payment. When a claim for refunding is made on the ground of a duplicate assessment and 2538 payment, _ the collector will certify to the duplicate assessment and payment of form 46, giving the full amount both of the assessment and of the payment, and will also give the page, list, and line in each case. Many of the rules for the preparation of claims upon form 47 are equally applicable 2539 to the preparation of those upon form 46. They should be followed wherever they are not manifestly inapplicable. (Art. 273, ^761-771, Reg. 33, Rev., Jan. 2, 1918.) 2540 Special Instructions to Collectors in Connection with Claims for Refund or Abate- ment of Income Tax [Read at ^2558.] — Section 3218, Revised Statutes. — Every collector shall be charged with the whole amount of taxes, whether contained in lists transmitted to him by the Commissioner of Internal Revenue or by other collectors, or delivered to him by his predecessor in office, and with the additions thereto, ♦ * ♦ ^ and with all moneys collected for penalties, forfeitures, fees, or costs; and he shall be credited with all payments into the Treasury made as provided by law, * * ♦ ^ and with the amount of taxes contained in the lists transmitted, in the manner heretofore provided, to other collectors, and by them receipted as aforesaid; also with the amount of the taxes of such persons as may have absconded or become insolvent prior to the day when the tax ought, according to the provisions of law, to have been collected, and with all uncollected taxes transferred by him, or by his deputy acting as collector, to his successor in office: Provided^ That It shall be proved to the satisfaction of the Commissioner of Internal Revenue, who shall certify the facts to the (First) Comptroller of the Treasury, that due diligence was used by the collector. And each collector shall also be credited with the amount of all property purchased by him for the use of the United States, provided he faithfully account for and pay over the proceeds thereof upon a resale of the same, as required by law. (Art. 247, ^715, Reg. 33, Rev., Jan. 2, 1918.) INC. 258 TAX ADMINISTRATIVE PROVISIONS. 2541 Credit to Collectors for Taxes Charges Against Them Which Are Uncollectible. — [Read at lf2558.] Collectors are entitled to credit for taxes assessed against parties who may have absconded or become insolvent prior to the day when the tax ought, accord- ing to the provisions of the law, to have been collected: Providedy That it shall be proved to the satisfaction of the Commissioner of Internal Revenue, who shall certify the fact to the Auditor for the Treasury Department, that due diligence was used by the collector. It should be borrle in mind that, though credits allowed on account of insolvency 2542 or absconding release the collector from the obligation created by his receipt for the amount credited, the obligation to pay still remains upon the parties assessed. Collectors ’should therefore keep a record (No. 23) of all taxes thus credited and of the persons from whom they are due, and should enforce payment whenever it is in their power to do so. If a tax reported as uncollectible on account of the insolvency or absconding of 2543 the party owing it is paid after credit has been given for it, it should be returned upon Form 58. (Art. 248, ^716-718, Reg. 33, Rev., Jan. 2, 1918.) 2544 Preparation of Claims for Credit for Taxes and Assessed Penalties Alleged to be Uncollectible — Form 53. — (Read at ^2558.] When a tax is found to be uncollectible the collector or deputy collector who made the demand for payment and is conversant with the facts should prepare a claim on Form 53, showing the name and address of the party assessed, the article or occupation for and on account of which the assessment was made, the list, page, and line on which assessed, the amount claimed, the date of first demand, and the date when the tax was found to be uncollectible, and the cause of inability to collect. The amount or amounts claimed should be entered on the Form 53 under the respective column in which it or they are charged to the collector on Form 23. One or more claims, covering taxes of the same nature, may be entered upon one Form 53, and in cases where a tax and a penalty are both claimed to be uncollectible but one entry of the name, address, etc., should be made, but the amounts should be entered in their respective columns. Collectors are required to make demand within the time prescribed by law, and 2545 either to collect the taxes or prove them to be uncollectible, within six weeks after the receipt of the list, unless special reasons are furnished, such as lack of mail facilities, great extent of territory, etc., showing why they could not be collected within that time. Six months are allowed from the receipt of a list in which to close it up, either 2546 by collection or by presenting claims for abatement; but when an abatement of taxes alleged to be uncollectible is asked, it must be showm in the vouchers, by dates, or otherwise, that they could not have been collected at the tim.e they first became due and payable according to law, not at any time since. Where dates can not be given, it should appear in each case that they were uncollectible before distraint was or could have been made. When it happens that a tax has been paid for which a claim on Form 53 has been 2547 filed and is pending, the collector should at once notify the departm.ent of such payment. When the claim.s have been thus prepared they should be carefully sealed up and 2548 mailed to the Commissioner of Internal Revenue, m.arked “Income Tax Division.” Letters of transmittal should not be sent with claims unless they contain necessary explanations. The Form 53 should show v/hen the tax first became due; whether the taxpayer 2549 had any property liable to distraint at that time or thereafter; and whether the collector used due diligence at all times to collect the tax. It is the duty of the collector to use the same diligence to collect a tax after it has 2550 been abated as uncollectible, or as in suit, as before abatement. Such an abate- ment does not impair the claim of the Government against the taxpayer. (Art. 249, ^719-725, Reg. 33, Rev., Jan. 2, 1918.) 2551 Taxes that Are or Have Been in Litigation. [Read at ^[2558.] — No suit will be brought for the recovery of unpaid Internal-revenue taxes until the collector of the district shall have submitted to the Commissioner of Internal Revenue a full report of all material facts and circumstances with the case, and shall have received from him express authority to report the case to the United States attorney for suit. (Art. 250, T[726, Reg. 33, Rev., Jan. 2, 1918.) 2552 Am.ounts collected by distraint or otherwise, subsequent to the institution of the suit, should be at once reported to the United States attorney for his guidance in his further prosecution of the case in court. (Art. 251, ^727, Reg. 33, Rev., Jan. 2, 1918.) INC. 259 TAX ADMINISTRATIVE PROVISIONS. 2553 Credit given the collector for taxes abated as uncollectible will not affect a suit pending for their recovery, nor will it relieve the collector from the duty of distraining any property of the taxpayer that may be found at any time before judgment. (Art. 252, ^728, Reg. 33, Rev., Jan. 2, 1918.) 2554 When a suit for the recovery of a tax is decided in favor of the United States, and execution issued and returned nulla hona, as respects the whole or a part of the judgment, the collector should satisfy himself by careful inquiry, whether any personal property can be found to satisfy the judgment in whole or in part, and whether there is any real estate which can be subjected, by distraint or by suit in equity, under section 3207, Revised Statutes of the United States, to sale in satisfaction of the judgment; and if he should be fully satisfied that there is no such real or personal property, he should there- upon present to the Comimissioner of Internal Revenue a claim, on Form 53, for the abate- ment of the amount which has not been and can not be collected, if it has not already been abated, making a statement thereon of his action, accompanied by a certificate of the clerk of the court as to the facts in the case. (Art. 253, 1f729, Reg. 33, Rev., Jan. 2, 1918.) 2555 When a suit for taxes not abated as uncollectible is dismissed upon a technical defeat in the proceedings, or when an adverse verdict is rendered on some technical ground not reaching the merits of the case, and the right to a new trial or to an appeal has lapsed, and the tax can not be collected by distraint or by suit in equity to subject real estate to sale, the claim for abatement of the taxes should be made on Form 53. (Art. 254, 1f730, Reg. 33, Rev., Jan. 2, 1918.) 2556 Collectors are authorized to pay the clerk of the court his legal fees for the certi- ficates required by the regulations of this department furnished by him relative to litigated taxes, and will be credited in their expense accounts for the amounts so paid on filing therewith vouchers covering the expenses thus incurred. (See Regs. No. 2, p. 84.) (Art. 255, 1[731, Reg. 33, Rev., Jan. 2, 1918.) 2557 Where land is sold to satisfy assessments the amount realized, after deducting expenses of sale, should be credited to the lists, and the remiainder, if uncollectible, claimed on Form 53. If land is bid in by the collector for the United States, the amount for which the same is purchased, after deducting expenses of sale, should be credited to the assessments under the lim.itations prescribed in Regulations No. 2, revised, and the remainder, if uncollectible, claimed on Form 53. (Art. 256, ^732, Reg. 33, Rev., Jan. 2, 1918.) 2558 The following m.odifications in the procedure with regard to claims on Forms 46 , 47, 53 and 488 are prescribed. 1. Claims on Form 46 and Form 47 will not hereafter be referred to division deputies 2559 for investigation, and the division deputy’s certificate on page 2 of the claims need not be executed. Where an investigation is necessary it will be directed by the Commissioner to be m,ade. 2. All claim.s on Form.s 46 and 47 are to be stamped with the date of receipt imme- 2560 diately on presentation to the collector or division deputy, and thereafter are to be forwarded, without further recording or certification, immediately to the Com- missioner. Two exceptions to this rule are to be especially noted. (a) The certificate on page 2 of the claim is to be executed in the case of claims 2561 for taxes paid by special tax stam.p, since there is no data in the Commissioner’s office which will permit the verification of these claims without the collector’s certi- ficate. (b) When a claim, is filed for abatement such notation is to be made on the col- 2562 lector’s assessm.ent list on Form 23 as vdll the issuance of collection notices until after the abatement claim has been acted upon, unless, of course, the collector deems the interests of the Government insufficiently protected to justify suspension of the collection. 3. The use of Record 22 is to be abandoned. Record 23 will continue to be used, 2563 as at present. 4. Form, 7213, notification of allowance of refunding claim, will no longer be for- 2564 warded to collectors. 5. Hereafter, where an abatement claim is acted upon, the collector will receive 2565 an original letter addressed to the claimant and a carbon c^y for the collector’s files. The original is to be mailed the claimant immediately with notice and demand for the payment of any tax shown by the letter and the assessment list to be due. 6. Where the claim is allowed in full, credit for the abated tax is not to be taken 2566 by the collector until the receipt of schedule on Form 3220. This schedule will be prepared and mailed to the collector monthly, as heretofore. INC. 260 T,A.X ADMINISTRATIVE PROVISIONS. 2567 7. Because of the distribution of the claims work to the various divisions of the Bureau, it is no longer practicable to consider a claim on Form. 46 or 47, 53 or 488, covering taxes assessed upon m.ore than one of the lists of the various classifications. In presenting their own claim.s on Form.s 53 and 488, therefore, collectors will hereafter group in their claim.s the item.s which are upon the list, or lists, of a given class, and if a claimant makes claim, on Form. 46 or 47 for the rem.ission or refund of taxes assessed upon m.ore than one kind qf list, the collector will assist the claimant in formulating new claims correctly prepared. 2568 Regulations 2, 14 and 33 (.4rt. 247-273) are modified accordingly. The purposes of the m.odification of the form.er procedure with regard to claims 2569 are to elim.inate a duplication of detail in the collector’s and the Comm.issioner’s office, and the accomm.odation of the taxpayer by making it possible for him to secure a m.uch m.ore prom.pt consideration of his claims than has been possible heretofore. (T. D. 2654, February 19, 1918.) 2570 Authorizing Collectors in Certain Cases of Erroneous Assessment to Present Blanket claims Monthly on Form No. 47. — Hereafter, collectors will present once a month a blanket claim on Form 47 for the abatement of taxes coming within the following classes of taxes erroneously assessed: 1. Duplicate assessm.ents. 2. Cases where specific exemption has not been taken on the taxpayer’s return and assessment has accordingly been excessive to the extent of the tax assessed because of failure to take exemption. 3. Cases of excessive assessm.ent caused by mathematically erroneous calculations of tax by the taxpayer upon his return. 4. 50% additional taxes where a tentative return has been filed within the time required by law, but where the fact of such filing has been overlooked in the collector’s office and an assessm.ent of 50% additional tax has accordingly been made, and is unquestionably erroneous. In all other cases of 50% additional tax assessm.ents, a claim, m.ust be presented by the taxpayer, as at present. In preparing these claim.s, the collector will paste upon the blank space on Form 47 257 1 a schedule showing the name and address of the taxpayers; the m.onth, page, and line of the assessm.ent list, am.ount assessed, am.ount due, amount abateable; the nature of the erroneous assessm.ent, as classified above; and a brief and clear statement of the ground for abatement. These claim.s should be forwarded so as to be received in the Com.m.issioner’s office 2572 by the 5th of the m.onth, in order that the allowance m.ay be scheduled on the Form 7220 for the same month. 2573 Where am.ounts abateable have been assessed upon lists of the different classes, 2574 separate claim.s must, of course, be presented, each to cover the items upon the list, or lists, of a given class. (T. D. 2698, April 16, 1918.) 2575 Internal-Revenue Officers Forbidden to Furnish Unauthorized Statements or Certificates in Support of Claims for Remission of Taxes or Penalties Under Inter- nal Revenue Law. — The attention of this office has recently been called to voluntary written statements or certificates furnished by certain revenue officers in support of claims pending in this office for rem.ission of taxes and penalties found to have been incurred by distillers or other taxpayers. All such statem.ents or certificates are not only wholly unauthorized, but in many 2576 instances are m.isleading and tend to defeat the Government’s claim. Revenue officers are therefore positivelv prohibited from furnishing statements 2577 in cases pending before this office unless called for by this office or required by regulations to be furnished in cases when originally presented to this office through the regular official channels. In this connection attention is called to T. D. 1607 of March 1, 1910, forbidding 2578 revenue officers from preparing affidavits for claimants in like cases. Any viola- tion of the instructions contained in that decision or herein contained will subject the offending officer to dismissal from the service, and, where the circumstances justify, to prosecution under Section 3169 of the Revised Statutes. (T. D. 2443, Feb. 9, 1917.) 2579 Suits to Restrain Assessment or Collection of Taxes.— “No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.” (Section 3224, Revised Statutes.) 2580 The appended decision of the Supreme Court of the United States in the case of podge V. Osborn, Commissioner of Internal Revenue, is published for the informa- tion of internal-revenue officers and other concerned. ('F. 1). 2301, March 3, 1916.) INC. 261 TAX ADMINISTRATIVE PROVISIONS. Decision. (February 21, 1916.) 240 U. S. 118. John F. Dodge and Horace E. Dodge, Appellants, v. William H. Osborn, Commissioner of Internal Revenue. Appeal from the Court of Appeals of the District of Columbia. Mr. Chief Justice White delivered the opinion of the Court. 2581 The appellants filed their bill in the Supreme Court of the District of Columbia against the Commissioner of Internal Revenue to enjoin the assessment and col- lection of the taxes imposed by the Incom.e Tax section of the Tariff Act of October 3, 1913 (38 Stat. 166, 181) and especially the surtaxes therein provided for on the ground that the statute was void for repugnancy to the Constitution of the United States. The case is here on appeal from the judgment of the court below affirming the action of the trial court in sustaining a m.otlon to dismiss the complaint for want of jurisdiction because the complainants had an adequate rem.edy at law and because of the provision of section 3224 Revised Statute that “No suit for the purpose of restraining the assessment or col- lection of any tax shall be maintained in any court.” We at once put out of viev/ a contention that section 3224 [^2579] is not applicable 2582 to taxes imposed by the Income Tax Law since we are clearly of the opinion that It Is within the contem.plation of paragraph L of the act which provides: [f^l620.] “That all admiinistrative, special and general provisions of law, includ- ing the laws in relation to the assessment, remission, collection, and refund of internal- revenue taxes not heretofore specifically 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 imposed.” And for the same reason we do not further notice a contention as to the inapplica- 2583 bility of sections 3220, 3226 and 3227, to which effect was given by the court below requiring an appeal to the Commissioner of Internal Revenue after payment of a tax claimed to have been erroneously and illegally assessed and collected and upon his refusal to return the sum paid giving a right to sue for Its recovery. The question for decision therefore Is v.^hether the sections of the Revised Statutes 2584 referred to are controlling as to the case in hand. The plain purpose and scope of the sections are thus stated in Snyder v. Marks, 109 U. S. 189, 193-194, a suit brought to enjoin the collection of a revenue tax on tobacco: “The inhibition of Section 3224 applies to all assessments of taxes, made under color of their offices, by internal revenue officers charged with general jurisdiction of the subject of assessing taxes against tobacco mianufacturers. The remedy of a suit to recover back the tax after it is paid is provided by statute, and a suit to restrain its collection is for- bidden. The remedy so given is exclusive, and no other remedy can be substituted for it. Cheatham v. United States, 92 U. S. 85, 88, and again in State Railroad Tax Cases, 92 U. S. 575, 613, it was said by this court that the system prescribed by the United States in regard to both customs duties and internal revenue taxes, of stringent measures, not judicial, to collect them, with appeals to specified tribunals, and suits to recover back moneys illegally exacted was a system of corrective justice intended to be complete, and enacted under the right belonging to the government to prescribe the conditions on which it would subject itself to the judgment of the courts in the collection of its revenues. In the exercise of that right it declares, by Sec. 3224,that its officers shall not be enjoined from, collecting the tax claim.ed to have been unjustly assessed, when those officers, in_ the course of general jurisdiction over the subject matter in question have made the assign- ment (assessm.ent) and claim that it is valid.” And this doctrine has been repeatedly applied until it is no longer open to question 2585 that a suit may not be brought to enjoin the assessment or collection of a tax because of the alleged unconstitutionality of the statute imposing it, Sheldon v. Platt, 139 U. S. 591; Pittsburgh, etc., Ry. v. Board of Public Works, 172 U. S. 32; Pacific Whaling Company v. United States, 187 U. S. 447, 451, 452. But it is contended that this doctrine has no application to a case where wholly 2586 independent of any claim of the constitutionality of the tax sought to be enjoined, additional equities sufficient to sustain jurisdiction are alleged, and this, it is asserted, being such a case, falls within the exception to the general rule. But conceding for argument’s sake only the legal prem.ise upon which the contention rests, we think the conclusion that this case falls within such exception Is wholly without merit, since after an examination of the complaint we are of the opinion that no ground for equitable juris- diction is alleged. It is true the complaint contains averments that unless the taxes are enjoined m.any suits by other persons will be brought for the recovery of the taxes paid by them., and also, that by reason of Section 3187 Rev. Stat. making the tax a lien on plaintiffs’ property the assessment of the taxes would constitute a cloud on plaintiffs’ title. But these allegations are wholly inadequate under the hypothesis which we have assumed solely for the sake of the argument, to sustain jurisdiction, since it is apparent INC. 262 TAX ADMINISTRATIVE PROVISIONS. on their face they allege no ground for equitable relief independent of the mere complaint that the tax is illegal and unconstitutional and should not be enforced — allegations which if recognized as a basis for equitable jurisdiction would take every case where a tax wa* assailed because of its unconstitutionality out of the provisions of the statute and thuf render it nugatory, while it is obvious that the statute plainly forbids the enjoining of a tax unless by some extraordinary and entirely exceptional circumstance its provisions are not applicable. There is a contention that the provisions requiring an appeal to the Commissioner 2587 of Internal Revenue after payment of the taxes and giving a right to sue in case of his refusal to refund are wanting in due process and therefore there is jurisdic- tion. But we think it suffices to state that contention to demonstrate its entire want of merit. 2588 Affirmed. (240 U. S. 118.— T. D. 2301, March 3, 1916.) 2588 No Suit to Enjoin Collection of Penalties Shall be Maintained in Any Court.— In Kohlham.er vs. Smietanka, Collector (239 Fed. 408), it was held that while Section 3224 R. S. [Paragraph 2579] which prohibits suits to enjoin the collection of internal revenue taxes, does not specifically include “penalties” as such, yet where penalties are authorized by statute to be added to the tax and collected as a part of the tax, the court will hold that the penalty is a part of the tax, the assessment and collection of which arc governed by Section 3224. (239 Fed. 408.) 2580 Law 1[437. Abatement of Second Assessments, Refund of Taxes Collected on Such Assessments, and the Recovery by Suit of Taxes so Paid. — “Sec. 1316. (b) Section 3225 of the Revised Statutes of the United States is hereby amended to read as follows: ‘Sec. 3225. When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or deputy collector was false or fraudulent, or con- tained any understatement or undervaluation, such assessment shall not be remitted, nor shall taxes collected under such assessment be refunded, or paid back, or recovered by any suit, unless it is proved that such list, statement, cr return was not willfully false or fraudulent and did not contain any willful understatement or undervaluation.’ (Effective as amended on the day after “the passage” of the Revenue Act of 1918, ^2823. (See ^2603.] 2581 Law ^433. The Cemmissioner Authorized to Make Rules and Regulations. — “Sec. 1309. That the Commissioner, with the approval of the Secretary, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act.” 2582 Effective Date of Treasury Decisions. — Treasury decisions promulgating rulingt of the Internal Revenue Bureau become effective upon the date of approval unless otherwise stated therein. Cases previously adjusted in contravention of law as pro- nounced in such decisions, are subject to readjustment in accordance with the decision. (Art. 38, ^245, Reg. 33, Rev., Jan. 2, 1918.) 2583 Burden of Proof as to Fraud, etc., in Suits to Recover Taxes Collected Undef Second Assessment Under Sec. 3225 Prior to Amendment. — [Comment: Sec. 3225, Revised Statutes, as amended by the Revenue Act of 1916 read as follows: “Sec. 3225. When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or deputy collector was false or fraudulent, or con- tained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suit unless it is proved that the said list, statement or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this section shall not apply to statements or returns made or to be made in good faith under the laws of the United States regarding annual depreciation of oil and gas wells and mines.” T. D. 2661, the Camp Bird (Ltd.) case, and the Northwestern Mutual Life Insurance Company case, reported below at f 2594 to ^[2612, refer to Sec. 3225 as it was prior to its amendment by the Revenue Act oif 1916 and as it was amended by such Act. In giving consideration to Sec. 3225 as now again amended, ^2590, the reader should note ^2603. J 2584 The Camp Bird (Ltd.) Case. — The appended decision of the United States Circuit Court of Appeals for the Eighth Circuit, in the case of Camp Bird (Ltd.) v. Frank W. Howbert, collector of internal revenue, is published for the information of internal- revenue officers and others concerned. (T. D. 2661, March 5, 1918.) INC. 263 TAX ADMINISTRATIVE PROVISIONS. 1. Section 3225, Revised Statutes. The plaintiff having understated in its original return the amount for which it was subject to tax is not entitled to recover any part of a second assessment paid, although the original return was made in good faith and without any intention to escape lawful tax. 2. Amendment to Section 3225, Revised Statutes. The amendment to section 3225, Revised Statutes (sec. 14, act of Sept. 8, 1916), providing that it shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines, does not purport to be retroactive in its operation. 3. Judgment Affirmed. The judgment of the United States District (T. D. 2366) is affirmed. United States Circuit Court of Appeals, Eighth Circuit. (249 Fed. 27) Camp Bird {Ltd.)^ a corporation^ plaintiff in error, v. Frank W. Howbert, as collector of internal revenue within and for the district of Colorado, defendant in error. In error to the District Court of the United States for the district of Colorado. Before^ Carland, Circuit Judge, and Amidon and Mungel, District Judges. Mungel, District Judge, delivered the opinion of the court: This action was brought by plaintiff in error, hereafter called plaintiff, against 2595 defendant in error, as collector of internal revenue of the United States for the district of Colorado, hereafter called defendant. The object of the action was to recover sums of money that plaintiff had paid to defendant as an internal-revenue tax. A jury was waived and the trial court entered judgment upon special findings of facts, dismissing plaintiff’s action. Briefly stated, the court found that the plaintiff was the owner of valuable and pro- 2596 ductive mining property in Colorado, after the year 1902, and that it made a return for each of the years 1909, 1910 and 1911 to the collector of internal revenue, pur- porting to set forth its income for each of those years, under the provisions of the act of Congress approved August 5, 1909 (36 Stat. 1 12), relating to an excise tax on corporations. In these returns the plaintiff stated the items of charge and credit and the net annual income which it considered subject to the tax. The Commissioner of Internal Revenue found that deductions claimed in each of these returns had been overstated, and that the amount subject to the tax had been understated, and made additional assessments against the plaintiff and notified it of his action. The plaintiff, under protest, paid the additional taxes levied. An application to the Comtnissioner of Internal Revenue for an abatement of the additional tax was denied by the commissioner, and this action was then begun. While the court found that the plaintiff had understated its net income upon which it was required to pay the excise tax, it was further found that the understatement was not made fraudulently, knowingly, willfully, nor for the purpose of defrauding the United States, but was made in good faith, and with the belief that the figures presented stated the facts. The only question in the case is whether the judgment is supported by these findings. Section 3225 of the Revised Statutes as it existed at the time these taxes were 2597 levied and collected was as follows: When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or deputy collector was false or fraudulent, or contained any understatemjfent or undervaluation, no taxes collected under such assessment shall be recovered by any suit, unless it is proved that the said list, statement, or return was not false nor fraudulent, and did not contain any understatement or undervaluation. It is contended that this section was meant to be applied only to those who inten- 2598 tionally made false statements or undervaluations, because when this act was passed an accurate statement of the facts required in returns by taxpayers could be made, whereas returns under the corporation tax law necessarily must be estimates. By the acts of Congress approved June 30, 1864 (13 Stat., 223), as amended and 2599 supplemented by the acts of Congress of March 3, 1865 (13 Stat., 469), of July 13, 1866 (14 Stat., 98), and March 2, 1867 (14 Stat., 471), a general system of internal revenue was provided to meet the financial burdens imposed by the Civil War. Taxes were imposed generally upon property, occupations, industries, and intomes. Many classes of persons subject to taxation were required to make sworn lists or returns of prop- erty subject to the tax. The values of property were to be reported and amounts of net income, and the accurate statement of many of the items required were quite as difficult as the ascertainment of the required items under the present corporation tax. Section^l4 gave the assessor poWer to summon a declarant and to examine him and his books, if in his opinion the return was either false or fraudulent or contained any understatement or undervaluation. If the return was false or fraudulent, the assessor was required to increase INC. 264 TAX ADMINISTRATIVE PROVISIONS. the tax by 100 per cent. An unexcused neglect or refusal to make or to verify a list was penalized by the addition of 50 per cent to the tax. By section 20 the assessor was em- powered to fix the amount of additional tax to be paid, when there had been an omission, understatement, undervaluation, or false or fraudulent statement. Section 44 authorized the Commissioner of Internal Revenue to refund excessive taxes collected and to repay|[to collectors amounts recovered in court against them for taxes collected by them, but pro- vided that no taxes should be recovered, refunded, or paid back, where a second assessment had been made because the first list had been, in the opinion of the assessor, either false, fraudulent, or contained any understatement or undervaluation, unless it was proved that the return was not false or fraudulent, or did not contain any understatement or under- valuation. The substance of these enactments has continued in force ever since. (See Rev. Stats., secs. 3173, 3176, 3182, 3220, 3225; U. S. Comp. Stats. Ann., secs. 5896, 5899, 5904, 5944, 5948.) They evince a discriminating use of terms as between false and fraud- ulent returns and those that contain only an understatement or valuation, and provided remedies and penalties apportioned to the several delinquencies. The mere undervaluation or understatement in a return is made a basis for summoning the delinquent to appear and be examined and a basis also for imposing an additional assessment, and prevents the Commissioner of Internal Revenue from making a refund or remission of taxes. The further provision found in section 3225 of the Revised Statutes, denying recovery by suit of any tax imposed under a second assessment, because in the opinion of the collector or his deputy, the former return was false or fraudulent or contained an understatement or undervaluation, unless it is proved that the prior list was not false nor fraudulent nor contained any understatement nor undervaluation, is in harmony with these provisions, and manifests the intention of Congress that no recovery may be had although the under- valuation or understatement was made unintentionally. See Bergdoll vs. Pollock (95 U. S., 337). The proposition is advanced that this construction of section 3225 renders it vio- 2600 lative of the Constitution, as it would result in the confiscation of the plaintiff’s property. It is well settled that “this corporation tax act imposed an excise tax and the only limitation on the power of Congress in the imposition of excise taxes is that they shall be uniform throughout the United States.” United States vs. Singer (15 Wall., Ill, 121); Pacific Insurance Co. vs. Soule (7 Wall., 433, 446). By this a geographical uniformity is meant. Flint vs Stone Tracy Co. (220 U. S. 107). The provisions laying an additional tax proportionate to the property omitted from the list on all who make any understatement or undervaluation operates uniformly on all of that class of persons where- ever found and hence was within the power of Congress. The refusal of a right of action to recover such taxes, unless proof is made that there was no understatement or under- valuation is likewise within the scope of the legislative power. It is claimed that “section 3225, Revised Statutes, does not apply to the suit for the recovery of taxes collected under the corporation tax of 1909. This section applies to internal revenue taxes generally” and the corporation tax is one embraced in that class. In addition the corporation tax law contained a clause as follows (p. 951 Supp. to U. S. Comp. Stats., 1911): All laws relating to the collection, remission, and refund of internal-revenue taxes, 80 far as applicable to and not inconsistent with the provisions of this section, are hereby extended and made applicable to the tax imposed by this section. We think that section 3225, Revised Statutes, is a part of the laws relating to the 2601 refund of internal-revenue taxes, as section 3220, Revised Statutes, provides that the Commissioner of Internal Revenue is authorized to refund to the collector any amount that may be recovered against him in any court for any internal taxes collected by him. Plaintiff also contends that the judgment is erroneous, because after final judgment 2602 was entered in this case Congress enacted an amendment to section 3225, Revised Statutes, which reads (p. 6984, 6 U. S. Comp. Stats., Ann.); “* * * But this section shall not apply to statements or returns made or to be made in good faith under the laws of the United States regarding annual depreciation of oil or gas wells and mines.” This statute does not purport to be retroactive in its operation and hence can not 2603 affect the judgment in this case. This disposes of all questions that require con- sideration. 2604 The judgment will be affirmed. (249 Fed. 27.) (T, D. 2661, March 5, 1918.) INC. 265 TAX ADMINISTRATIVE PROVISIONS. 2605 The Northwestern Mutual Life Insurance Company Case (248 Fed. 568). — [Com- .ment: The following is extracted from Judge Geiger’s opinion in this case in which judgment was rendered for plaintiff, and reproduced here because of the importance of the fundamental question discussed.] *******3^*^*ttl 2606 A final question, one not suggested in the pleadings, briefly referred to in oral argumfent, but later elaborately discussed in briefs, arises on these facts: In making its return for the year 1910, plaintiff omitted an item of $77,000 from the income aggregate of receipts from agencies, omitted because information respecting the accounts to which individual items were distributable was not at hand at the time of making the return, and, apparently, was in good faith treated as a “suspense” item which would naturally, upon later ascertainment, go into the return for the ensuing year. There IS no suggestion that the facts are not consistent with perfect good faith. The record attests fully that the omission, if it involved delinquency at all, arose as stated — it was an erroneous failure to include the items. The government urges that such failure bars the right to maintain the action, 2607 and bases its contention upon section 3225, R. S. U. S. (Comp. St. 1916, Sec. 5948), which is asserted to be incorporated into the excise law in question: “When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or any deputy collector was false or fraudulent, or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suit unless it is proved that the said list, statement, or return was not •false nor fraudulent, and did not contain any understatement or undervaluation.” The broad proposition is that any and every error of understatement or under- 2608 valuation, howsoever innocently made, bars relief against a reassessment, how- soever inaccurate, or unjust it may be. It may be said, confidently, that so drastic -a rule should not be accepted unless unmistakably clear language, disclosing a legislative purpose and intent viewed in the light of history and results to be achieved, leaves no alternative. I shall assume that section 3225 is brought into the tax law in question; and it 2609 necessitates consideration of that section as part of a chapter, dealing generally with practice, procedure, rights and remedies awarded to both government and taxpayer or citizen, in the matter of assessment, collection, remission, and refund of public dues. These laws are not of recent enactment. The times and conditions at and under which they came into being to further the raising of revenue to meet a situation of great national stress, the administrative recognition and application accorded them for over fifty years, may safely aid in throwing light upon the just interpretation to be given. Without narrating historically the advent and amendment of this particular section 3225 and allied provisos, it suffices to say that they had their beginnings in the Civil War Rev- enue Act of June 30, 1864 (13 U. S. Stat. p. 223, c. 173), as amended by the Act of July 13, 1866 (14 U. S. Stat. 98, c. 184). They exhibit the early recognition by the government of the necessity of ways and means for revising, both in the interest of the government and the taxpayer, the returns or assessments made or levied, and for refunding or recovery of taxes actually paid; and from the earliest occasions when Interpretation of these statutes was called for the courts here have uniformly given to the resultT*"accomplished by legis- lation on the general subject, this broad characterization: “The revenue measures of every civilized government constitute a system which pro- vides for its enforcement by officers commissioned for that purpose. In this country, the system for each state, or for the federal government, pro /ides safeguards of its own against mistake, injustice, or oppression, in the administration of its revenue laws. Such appeals are allowed to specified tribunals as the lawmakers deem expedient. Such remedies, also, for recovering back taxes illegally exacted, as may seem wise are provided. In these respects, the United States have, as was said by the court in Nichols v. United States, 7 Wall. 122 [19 L. Ed. 125], enacted a system of corrective justice, as well as a system of taxation in both its customs and internal revenue branches. That system is intended to be complete. * ^ * So also in the internal revenue department, the •tatute allows appeals from the assessor to the Commissioner of Internal Revenue; and, if dissatisfied with his decision, on paying the tax the party can sue the collector; and if the money was wrongfully exacted, the courts will give him relief by a judgment, which the United States pledges herself to pay.” Per Miller, Justice, Cheatham v. U. S., 92 U. S. 88, 23 L. Ed. 561. A careful reading of adjudicated cases — Indeed, all legislation upon the varied 2610 phases of public revenue — ^suggests that at no time has there_ been a purpose to cut off or to impair, either as against the government or the citizen, this “system of corrective justice” attending the administration of revenue laws. INC. 266 TAX ADMINISTRATIVE PROVISIONS. At the outset, the proposition advanced by the defense is repugnant, utterly, 261 1 to this view, and the broad purpose disclosed. If it is not obviously, it is easily demonstrably so. A few considerations of a practical nature — which a court may entertain — will be helpful. When property is assessed for taxation upon an ad valorem basis, the taxing officers frequently must, initially, determine values. Even in such cases, the taxpayer is not left wholly remediless to review or revise the finding of the assessing or taxing officer. In very rare situations is it possible, justly, to ascribe to any individual, whether he be the interested taxpayer or the public assessor, the power or the duty to make an initial valuation to be accepted by the one adversely interested, as indubitably fair; and, as indicated, there have arisen of necessity, in the interest of just dealing, the varying methods of revision and correction. Coming to the particular case before us, where assess- ments are based upon returns exhibiting great magnitude and complexity of business operations, the possibility and the probability of errors — without a suggestion of attendant bad faith — is increasingly present. It may safely be said that the great majority of returns under these excise and income tax laws contain items involving for their fixing and deter- mination, judgment, honestly and conscientiously exercised; and It is equally true that, no matter how conscientiously one man may fix and determine an item, another, with equal probity and integrity, may fix It at a substantially higher or lower figure. The very purpose is to enable revision, to correct the mistake, of omission or commission, or to prevent frauds; and it would be anomalous to assume infallibility on the part of the government in its efforts at revision, wherefore mistakes of the citizens only are to be corrected. This is said because, in my judgment, the drastic construction of section 3225, now Insisted upon, will, if adopted, lead to that result as a matter of practical administration and application. It means that the taxpayer cannot prevail unless he succeeds in reinstating his own return, item for item, against the revision or reassessment. Naturally, suits to recover can rarely be brought when the reassessment is more favorable than the original return, though even such result can conceivably come through an entire rearrangement of the return through the exclusion of items admitted and the Inclusion of items contested by the taxpayer. But this is true as a practical matter: Every reassessment, which results In an Increased tax, must involve, expressly or by necessary Implication, the opinion or conviction of the reviewing officer that the original return contained, somewhere or somehow, an understate- ment or undervaluation, a false (erroneous, or fraudulent) item or items. Therefore, unless the taxpayer can establish that his original return was right, and hence that the reassess- ment, in Its attempted revision or additions, is wrong, in every particular, he must fail in his action. If this is possible, and It must follow so strict an interpretation ^of the statute (section 3225), then there is little left that can commend itself — to the citizen or taxpayer — of any so-called system of “corrective justice.” The present case furnishes a good illustration: Assuming that the exaction of 1 2612 per cent, on the millions of dividends treated as income is illegal and unjust, a remedy would have to be denied because of an honest error respecting an item, by comparison, trifling. I am unwilling to give to the section in question any such inter- pretation; and, no matter how drastic an application may be compelled in cases of actual fraud — Hvhether the items fraudulently withheld or misstated be large or small— the view that the section aims to furnish a rule of proof, to give to the finding of executive officers a status or dignity prima facie good, to cast upon the citizen the burden of overthrowing it, thereby giving the section a distinct place and function in the corrective and revisory “system” of the revenue law, is far more reasonable and commendable. It furthers the accomplishment, by the government or by the taxpayer, of the general purpose of enabling just revision or recovery; whereas, the view urged by the defendant makes the statute highly penal, and, in its application, one-sided, resulting, as indicated, in foreclosure of recovery in every case where the original return cannot be established. Item for item. In opposition to the government revision. (Northwestern Mut. Life Ins. Co. vs. Fink, Collector, District Court, E. D. Wisconsin, Nov. 7, 1917 — 248 Fed. 568.) 2613 Suit for Recovery of Taxes Wrongfully Collected. — No suit shall be maintained in any ccurt for the recovery of any internal tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully col- lected, until appeal [^2526] shall have been duly made to the Com.missioncr of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Sec- retary of the Treasury established in pursuance thereof, and a decision of the Con'imissloner 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 wdthin the period limited in the next section.” (Section 3226, Revised Statutes.) 2614 Limitation as to Suits for Recovery of Taxes Wrongfully Collected. — “No suit or proceeding for the recovery of any internal tax alleged to have been erroneously or illegally assessed or collected, or of any penalty alleged to have been collected without INC. 267 TAX ADMINISTRATIVE PROVISIONS. authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, shall be maintained in any court unlesss the same is brought within two years next after the cause of action accrued: PROVIDED, That actions for such claims which accrued prior to June six, eighteen hundred and seventy-twO; may be brought within one year from said date; and that where any such claim was pending before the Commissioner, as provided in the preceding section, an action thereon may be brought within one year after such decision and not after. But no right of action which was already barred by any statute on the said date shall be revived by this section.” (Section 3227, Revised Statutes.) 2615 Limitation on Claims for Refunding Other Than Those Based on an Examination of a Return of Income. — “All claims for the refunding of any internal tax alleged to have been erroneously or Illegally assessed or collected, or of any penalty alleged to have been collected without authority, or of any sum alleged to have been excessive or in any m.anner wrongfully collected, must be presented to the Commissioner of Internal Revenue within two years next after the cause of action accrued: PROVIDED, That claims which accrued prior to June six, eighteen hundred and seventy-two, may be presented to the Commissioner at any time within one year from said date. But nothin? in this section shall be construed to revive any right of action which was already barred by any statute on that date.” (Section 3228, Revised Statutes.) [Read at ^2488.] 2616 We now come to the taxes of 1909 and 1910. The 1909 tax wms paid June 28, 1910, but claim for refund was not filed until June 10, 1913, nearly three years there- after. The 1910 tax was paid June 8, 1911, but claim for refund was not filed until June 10, 1913, two years and one day (excluding Sunday, June 8, 1913) thereafter. The relevant sections of the United States Revised Statutes are as follows: [^2613, ^2614 and ^2615 above]. Sections 3226, 3227 and 3228 of the Revised Statutes (Comp. St. 1913, Sections 261 7 5949-5951) must be read together, and, when so read, provide a sim.ple and orderly system, where by an aggrieved taxpayer may sue to recover taxes wrongfully collected. In the first place, under section 3226, no suit can be maintained unless the taxpayer 2618 appeals to the Commissioner of Internal Revenue. This appeal under section 3228 must be presented to the Commissioner of Internal Revenue within two years after the cause of action accrued. Under section 3227 no suit can be maintained unless brought within two years next after the cause of action accrued. Under section 3228 the accrual of the cause of action is at the date when the tax is illegally assessed or collected. Obviously the wrongful act was done when the United States, acting in this instance through the Collector, received the money in payment of the tax. Under section 3227, the date of accrual is the date when the Commissioner of Internal Revenue decides adversely to the taxpayer. Of course, under that section the taxpayer need not wait longer than six months in the event that the Commissioner delays his decision. To illustrate, therefore, with the precise facts in the case at bar: On June 28, 2619 1910, the Mail Com.pany paid the Collector the tax for the year 1909. The appeal to the Commissioner of Internal Revenue should have been made on or before June 28, 1912, but was not m.ade until June 10, 1913. On June 8, 1911, the Mall Company paid the Collector for the tax for the year 1910. The appeal to the Commissioner of Internal Revenue should have been made on or prior to June 8, 1913, but was not made until two days later, to wit, June 10, 1913. Thus the condition precedent with which it was necessary to comply before the Mail Company could maintain a suit was not complied with, and no cause of action ever accrued for the years 1909 and 1910 in favor of the Mall Company against the Collector. If, to illustrate, an appeal in those cases had been presented to the Commissioner 2620 of Internal Revenue within two years, say on or before June 8, 1912, and on or before June 9, 1913 (June 8, 1913, being a Sunday) respectively, then the Mail Com.pany under section 3227 would have been in time if suit had been commenced on or before June 8, 1914, and June 8, 1915, respectively. Merck v. Treat, 174 Fed. 388, 98 C. C. A. 606. * * * . (Mail & Newspaper Transportation Co., et al., v. Anderson, Collector, Cir- cuit Court of Appeals, Second Circuit, New York. April 11, 1916. — 234 Fed. 590.) 2621 Conditions Precedent to Suit Which the Law Requires. — [Comment: The fol- lowing example of procedure, with the Court’s comment thereon, is taken from Gulf Oil Corporation v. Lewellyn in the lower court (242 Fed. 709.) (Reversed by Circuit Court of Appeals, 245 Fed. 1. Decision of Circuit Court reversed by U. S. Supreme Court, Decem.ber 9, 1918.).] 2622 From the evidence produced at the trial, the Court has found the following: INC. 268 TAX ADMINISTRATIVE PROVISIONS. FACTS. 2623 FIRST. * * * . SECOND. The Gulf Oil Corporation, on the 14th day of February, 1914, in 2624 compliance with the provisions of the Act of Congress of October 3, 1913, made a return of its annual net income for the twelve months ending December 31, 1913, as required by said Act. In making said return the Gulf Oil Corporation certified that it had notincluded in the statementof gross income for the year 1913 certain div^idends amount- ing to $11,424,440 received by it from subsidiary companies out of earnings and surplus of said subsidiary com.panies accrued prior to January 1, 1913. THIRD. In said return the Gulf Oil Corporation showed net Income for the twelve 2625 mionths ending December 31, 1913, of $886,250.44, but under date of May 1, 1914, the said C. G. Lewellyn, Collector, m.ailed to said corporation notice of an assess- ment of tax thereon amounting to $9,072.56. A claim for abatement of this overcharge, amounting to $210.06 was filed with the Collector June 9, 1914, and on June 30, 1914, the Gulf Oil Corporation paid to the said C. G. Lewellyn, Collector, the sum of $8,862.50, being the am.ount of said assessment, less the $210.06 for which abatement was claimed. Said claim for abatement having been disallowed, said Gulf Oil Corporation, on the 5th day of November, 1914, paid the said Collector the additional sum of $210.06, with interest amounting to $6.30, m.aking a total payment of $216.36. FOURTH. On the 30th day of December, 1914, the said C. G. Lewellyn, Collector, 2626 acting under instructions from, the Commissioner of Internal Revenue at Washing- ton, D. C., m.ailed notice and demand for tax assessm.ent against the Gulf Oil Corporation for the year ending December 31, 1913, amounting to $114,034.34. In fact, this additional assessment amounted to $114,244.40, being the 1% upon the entire amount of the dividends received by the Gulf Oil Corporation from subsidiary com.panies out of surplus accrued to such subsidiaries prior to January 1, 1913, and payable to the Gulf Oil Corporation prior to March 1, 1913, and said additional assessment was based solely on said dividends. In making the assessment, however, the Commissioner of Internal Revenue reconsidered and allowed the previous claim for abatement of $210.06, erroneously assessed against the corporation In the original assessment, and credited the same as having been paid upon the assessment of December 30, 1913, leaving the net balance of such assessment $114,034.34 as stated. FIFTH. The notice and demand of the said C. G. Lewellyn, Collector, for the 2627 payment of this additional tax recited that If the tax is not paid on or before January 8, 1915, it would be the duty of the Collector to collect said tax. together with 5% additional and interest at the rate of 1% per month until paid. SIXTH. That subsequently the plaintiff filed wdth the defendant for presentation 2628 to the Com.mdssioner of Internal Revenue a claim for the abatement of said income tax am.ounting to $1 14,034.34, a copy of which claim is attached to and made a part of plaintiff’s Statem.ent as Exhibit A. That after an examination of said claim for abate- ment the Com.missioner of Internal Revenue rejected the same. SEVENTH. On February 17, 1915, the said Gfilf Oil Corporation paid to the said 2629 C. G. Lewellyn, Collector, said additional income taxes assessed for the period ending Decem.ber 31, 1913, in the sum of $114,034.34, and at the same time filed said C. G. Lewelly a written protest, a copy of which protest Is attached to and made a part of plaintiff’s Statement as Exhibit B. 2630 EIGHTH. That subsequently the plaintiff filed with the said C. G. Lewellyn for presentation to the Com.missioner of Internal Revenue a claim for the refund of the net am.ount of the assessment of said Income tax, to wit: $114,034.34, and also the amount of the credit allowed thereon of $210.06, representing an over assessment against the corporation on the basis of its return as originally filed, the two amounts constituting the entire amount of the assessment in the sum of $114,244.40. A copy of the said claim for refund is attached to and a part of plaintiff’s Statem.ent as Exhibit C. NINTH. That after consideration of said claim for refund, the Commissioner of 2631 Internal Revenue rejected the same, and the said C. G. Lewellyn was instructed to notify the Gulf Oil Corporation, and on or about April 13, 1915, did so notify said corporation, that said claim was rejected a copy of which notice is attached to and made a part of plaintiff’s statement as Exhibit D. **♦♦♦♦♦***** 2632 The payment of all taxes hitherto required of the several subsidiaries by acts of Congress, and the full disclosure by the plaintiff In its return for 1913 of the dividends from its subsidiaries negative any suggestion that the conduct of the plaintiff has been in any way evasive or otherwise improper. I’he plaintiff has merely asserted Its legal rights. Its rights to bring this action is clear because it has performed all the conditions precedent to suit which the law requires. ♦ * * (242 Fed. 709.) INC. 269 TAX ADMINISTRATIVE PROVISIONS. 2633 A Suit for Recovery of Taxes Erroneously or Illegally Assessed Can be Brought Against the Collector only Who Collected the Taxes, and not His Successor. — The appended decision (236 Fed. 604) of the United States District Court for the Southern District of New York, in the case of Duncan I. Roberts v. John Z. Lowe, Jr., collector, 'Js published for the information of internal revenue officers and others concerned. [Summary: A suit to recover back taxes can not be maintained against the successor 2634 to the collector to whom the taxes were paid, except in his individual capacity. The remedy lies either in an action against the collector who actually received the taxes or in an action against the United States.] (T. D. 2394, Nov. 14, 1916.) 2635 The appended decision of the United States Circuit Court of Appeals for the Third Circuit in the case of Philadelphia, Harrisburg & Pittsburgh Railroad Company to use, etc., v. Ephriam Lederer, collector of internal revenue, is published for the informa- tion of internal-revenue officers and others concerned. Before Buffington, McPherson, and Wooley, Circuit Judges. The satisfactory opinion of Judge Thompson (239 Fed., 184) relieves us from 2636 discussing nearly all the questions raised by this writ of error. We concede the force of the company’s argument that in substance, and especially in practical effect, suits such as this are against the collector as an official rather than as an individual — yhis personal liability is rarely if ever enforced — and it may be that Congress might with safety and propriety extend the existing law to cover the situation now presented. But until the change be actually made we are bound by the law as it stands, and we see no reason to doubt that the statutes and decisions now in force prevent the company from recovering in this action for the taxes collected by William McCoach, the defendant’s predecessor in office. No suit to recover them has been brought against McCoach, and for this reason the act of 1899 does not apply. We need hardly sav that without statutory permission no suit to recover a Federal 2637 tax can be maintained. Moreover the statutes on this subject must be strictly obeyed; they lay down the conditions and limitations under which the sovereign consents to be sued, and this consent should not be enlarged by construction. We turn for a few moments to the act of 1899, since this seems to be the company’s principal reliance. Some additional facts should first be stated in order to make the position clear. The com- pany paid the tax for 1909 in June, 1910, the tax for 1910 in June, 1911, and the tax for 1911 in June 1912. These taxes were paid under protest to McCoach, who remained in office until October 7, 1913, During his term, namely, in June, 1912, January, 1913, and May, 1913, respectively, the company claimed the refund of these three taxes; and in June, 1913, it also presented a petition to abate the tax of 1912 apparently on the ground that penalties had been incurred in addition to the tax, although we do not precisely know what abatement was asked for. The claim for the refund of the tax for 1909 was rejected by the Commissioner of Internal Revenue on July 15, 1912, but apparently the Bubsequent claims for refund of the taxes of 1910 and 1911 and also the petition for abate- ment in connection with the tax for 1912 were not disposed of until February, 1914. On October 22, 1913, after McCoach had retired from office, the company filed 2638 a supplemental affidavit with the commissioner in support of its petition to abate the tax of 1912, and on the same day asked him to reopen and reconsider his refusal to refund the tax of 1909. On October 27, 1913, this request to reopen was granted, and at the same time the commissioner asked for additional information and affidavits In refer- ence to the claims for the refund of the taxes for 1909, 1910, and 1911, and also in reference to the petition to abate the tax of 1912. Accordingly, an affidavit was furnished on January 14, 1914. In February, 1914, the petition for abatement was refused, and apparently at the same time the claims for the refund of the taxes for 1909, 1910, and 1911 were also refused, for on February 13, 1914, Lederer notified the company that these claims, and also the petition for abatement, had been examined and rejected by the commissioner. In^March, 1914, a claim to refund the tax for 1913 was presented, and was refused soon afterwards. The present suit was brought on June 29, 1914, and sought to recover from Lederer the taxes for the four years. From these acts it seems clear to us that the act of 1899 does not apply. The 2639 act is as follows: No suit, action, or other proceeding, lawfully commenced by or against the head of any department or Bureau or other officer of the United States in his official capacity or in relation to the discharge of his official duties, shall abate by reason of his death, or the expiration of his term of office, or his retirement, or resignation or removal from office; but, in such event the court, on motion or supplemental petition filed, at any time within twelve months thereafter, showing a necessity for the survival thereof, to obtain a settlement of the questions involved, may allow the same to be maintained by or against his successor in office, and the court may make such order as shall be equitable for the payment of costs. INC. 270 TAX ADMINISTRATIVE PROVISIONS. The only “suit, action, or other proceeding” that could have been begun against 2640 McCoach while he was in office would have been a suit for the taxes of 1909 and 1910, but no such suit was brought, and it can not be successfully contended that a mere claim for refund, which is a matter wholly for the commissioner is a suit proceeding against the collector. The basis of an action against the collector Is his receipt of the tax, and if he has not received it we do not see how he can be called on to pay it back, i^nd the fact that Lederer was the channel by which the commissioner transmitted the refusal to refund did not impose liability. Lederer was liable, if at all, for the tax of 1912, for this had come Into his own hands, but no statute made him liable for the money that was collected by his predecessor but had never been sued for. For these reasons, and for those to be found in Judge Thompson’s opinion, the 2641 judgment is affirmed. (242 Fed. 492.) (T, D. 2507, July 2, 1917.) 2642 Protection to Collector from Personal Liability as result of Suit. — Section 989, Revised Statutes. — When a recovery is had in any suit or proceeding against a collector or other officer of the revenue for any act done by him, or for the recovery of any money exacted by or paid to him, and by him paid into the Treasury, in the performance of his official duty, and the court certifies that there was probable cause for the act done by the collector or other officer, or that he acted under the directions of the Secretary of the Treasury, or other proper officer of the Government, no execution shall issue against such collector or other officer; but the amount so recovered shall, upon final judgment, be provided for and paid out of the proper appropriation from the Treasury. In view of the foregoing provisions protecting the collector from personal liability 2643 in case the court rertifies that there was probable cause for the act done by him, it will be observed that it Is for the interest of the collector to see that in all cases where judgment is rendered against him the court shall be asked to give the certificate of probable cause. If the judgment debtor shall have already paid the amount recovered against him, 2644 the claim should be made in his name, and the affidavit should state the exact amount paid by him. There should also be a certificate of the clerk of the court in which the judgment was recovered (or other satisfactory evidence), showing that the judgment has been satisfied, and specifying the exact sum paid In its satisfaction, with a detail of all items of cost paid, or for which the judgment debtor is liable. (Act. 275, 1f773-775, Reg. 33, Rev., Jan. 2, 1918.) 2645 Law ^441. Specific Information Relative to Taxpayers’ Affairs, Disclosed by Returns or Otherwise, not to be Divulged. — [Sec. 1317 of the Revenue Act of 1918 amends Sec. 3167, Revised Statutes, 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, or to permit any income return or copy thereof or any book ccntaining 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 person to print or publish in any manner whatever not provided by law any income return, or any part thereof or source of income, profits, losses, or expenditures appearing in any income return; and any offense against the foregoing provision shall be a mis- demeanor and be punished by a fine not exceeding $1,000 or by imprisonment not exceeding 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 or discharged from employment.” 2646 The attention of collectors of internal revenue, internal-revenue agents, and other officers concerned is invited to section 3167 of the United States Revised Statutes, which prohibits the disclosure of information contained in income and other returns of internal-revenue taxpayers. All internal-revenue officers will preserve as inviolablv confidential all Income 2647 tax returns, as the slightest infraction of law upon this subject will be severely punished. (T. D. 1962, March 20, 1914.) 2648 Disclosure of Return — Penalty. — The disclosure by a collector, deputy collector^ agent, clerk, or other officer or employee of the United States, to any person not legally authorized to receive the same, of any information whatever contained in or set forth by any return of annual net income made pursuant to this act, Is, by the act, made a misdemeanor, and is punishable by a fine not exceeding $1,000, or by Imprisonment not exceeding one year, or both, in the discretion of the court, and If the offender is an officer or employee of the United States he shall be dismissed and be incapable thereafter of hold- ing any office under the United States Government. (Art. 229, 1[651, Reg. 33, Rev., Jan. 2, 1918.) INC. 271 TAX ADMINISTRATIVE PROVISIONS. 2649 Secrecy Applies Equally to Information on Returns of Income Withheld at the Source. — The income-tax law is specific and mandatory in the matter of safe guarding from publicity the information acquired by reason of its requirements relative to annual returns of income. * * * 2650 The law does not provide for supplying corporations, with a list of their bondholders drawn from withholding returns of income. (T. D. 2135, Jan. 23, 1915.) Annual Return of Corporation May be Examined by Stockholders of Record Owning One per Centum or More of Outstanding Stock. — [Read at 1[1639.] 2651 Law 11439. Duty of Collector to Report Violations of Law. — [Sec. 1317 of the Revenue Act of 1918 amends Sec. 3164, Revised Statutes, to read as follows]: “Sec. 3164. It shall be the duty of every collector of internal revenue having knowledge of any willful violation of any law of the United States relating to the revenue, within thirty days after coming into possession of such knowledge, to file with the district attorney of the district in which any fine, penalty, or forfeiture may be incurred, a statement of all the facts and circumstances of the case within his knowledge, together with the names of the witnesses, setting forth the provisions of law believed to be so violated on which reliance may be had for condemnation or conviction.” 2652 Law 11423. The “Advisory Tax Board.” — “Sec. 1301. (a) * * (b) * * (c) * * (d) (!)■ There is hereby created a board to be known as the “Advisory Tax Board,” hereinafter called the Board, and to be composed of not to exceed six members to be ap- pointed by the Commissioner with the approval of the Secretary.. The Board shall cease to exist at the expiration of two years after the passage of this Act, or at such earlier time as the Commissioner with the approval of the Secretary may designate.” 2653 Law 1[424. “Vacancies in the membership of the Board shall be filled in the same manner as an original appointment. Any meuiber shall be subject to removal by the Commissioner with the approval of the Secretary. The Commissioner with the approval of the Secretary shall designate the chairman of the Board. Each member shall receive an annual salary of $9,000, payable monthly, together with actual necessary expenses when absent from the District of Columbia on official business.” 2654 Law 1[425. “(2) The Commissioner may, and on the request of any taxpayer directly interested shall, submit to the Board any question relating to the interpre- tation or administration of the income, war-profits or excess-profits tax laws, and the Board shall report its findings and recommendations to the Commissioner.” 2655 Law 1[426. “(3) The Board shall have its office in the Bureau of Internal Revenue in the District of Columbia. The expenses and salaries of members of the Board shall be audited, allowed, and paid out of appropriations for collecting internal revenue, in the sam.e manner as expenses and salaries of employees of the Bureau of Internal Revenue are audited, allowed, and paid.” 2656 Law 1[427. “(4) The Board shall have the power to summon witnesses, take testi- mony, adm.inister oaths, and to require any person to produce books, papers, docu- ments, or other data relating to any matter under investigation by the Board. Any member of the Board may sign subpoenas and members and employees of the Bureau of Internal Revenue designated to assist the Board, when authorized by the Board, may administer oaths, examine witnesses, take testimony and receive evidence.” [Effective on the day after “the passage” of the Revenue Act of 1918, 1[2823.] [In connection with the above read at 1|3124.] 2657 Law 1[428. Leaves of Absence for Internal-Revenue Officers. — “Sec. 1302. That all internal-revenue agents and inspectors shall be granted leave of absence with pay, which shall not be cumulative, not to exceed thirty days in any calendar year, under such regulations as the Commissioner, with the approval of the Secretary, may prescribe.” 2658 Under the provisions of section 413 [1[2657 above] the following regulations are prescribed: 2659 (1) Applications for leave of absence should be in writing, or by telegraph or telephone if the emergency of the case so requires, and such applications should be approved by the revenue agent under whom the agent or inspector is assigned to duty. Agents in charge of divisions will make application for leave of absence direct to this office. (2) All leave of absence is subject to the approval of the Commissioner of Internal 2660 Revenue. INC. 272 TAX SUPREME COURT DECISIONS. (3) Charges incurred on account of telegrams or telephone messages incident 2661 to procuring leave will be at the expense of the officer desiring the leave. (4) Leave of absence is reckoned by the calendar year and is not cumulative; that 2662 is, the leave applying to one calendar year can not accrue and be taken in a sub- sequent calendar year. 2663 (5) An agent or inspector in the service on January 1 and serving under a permanent appointment may be granted leave of absence not to exceed 30 days any time thereafter in the calendar year if the application is approved by the Commissioner of Internal Revenue. (6) Leave is reckoned at the rate of 2)^ days per month, and if an agent or inspector 2664 entered the service under permanent appointment on March 1, he would be entitled to only 25 days’ leave for the balance of the calendar year, or if service began on November 1, he would be entitled to only 5 days’ leave of absence. (7) Sundays and legal holidays occurring within the period leave is taken should be 2665 considered and counted as days on leave. (8) Leave taken in this calendar year, under the provisions of section 413, must 2666 be subsequent to September 8, 1916, the date of approval of the act. (T. D. 2369, Sept. 12, 1916.) 2667 Law ^465. Invalidating Clause. — “Sec. 1402. That if any clause, sentence, para- graph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remain- der of this Act, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment has been rendered.” 2668 Cases Involving the Constitutionality of the Revenue Acts of 1916, 1917, and 1918. — [No suit brought under any one of these three Acts has been decided by the Supreme Court, February 24, 1919.] 2669 Cases Involving the Constitutionality of the Act of October 3, 1913. — The following cases arising under the income Tax Law of October 3, 1913, have been decided in the Supreme Court of the United States. 2670 Frank R. Brushaber, Appellent, v. Union Pacific Railroad Company. (240 U. S. 1.) Appeal from the District Court of the Southern District of New York. [For the opinion see ^2685.] 2671 John F. Dodge and Horace E. Dodge, Appellants, v. James J. Brady, Collector of Internal Revenue. (240 U. S. 122.) Appeal from U. S. District Court E. D. Michigan. [For the opinion see ^2719.] 2672 John R. Stanton, Appellant, v. Baltic Mining Company ei al. (240 U. S. 103.) Appeal from U. S. District Court District of Massachusetts. [For the opinion see ^2722.) 2673 Tyee Realty Company, Plaintiff in Error, v. Charles W. Anderson, Collector of of Internal Revenue. (240 U. S. 115.) In Error to U. S. District Court S. D, New York. [For the opinion see ^2715.) 2674 Edwin Thorne, Plaintiff in Error, v. Charles W. Anderson, Collector of Internal Revenue. (240 U. S. 115.) In Error to U. S. District Court S. D. New York. [For the opinion see ^2715.] 2675 John F. Dodge and Horace Dodge, Appellants, v. William H. Osborn, Commissioner of Internal Revenue. (240 U. S. 118.) Appeal from the Court of Appeals of the District of Columbia. 267 6 [Comment: The appellants here [1[2675], sought in the lower courts to enjoin the asse;ssinent and collection of the additional tax. The Court of Appeals of the District of Columbia affirmed the decree of the Supreme Court of the District of Columbia dismissing the bill and held that the constitutional questions could not be considered in a proceeding to enjoin collection. The U. S. Supreme Court affirmed. For the opinion see paragraph 2580.] INC. 273 TAX SUPREME COURT DECISIONS. 2.^11 Howard Gould, Plaintiff in Error v. Katherine C. Gould. (245 U. S. 151). In error to the Supreme Court of the State of New York. [For opinion see 1[2732.] 2678 Henry R. Towne, Plaintiff in Error v. Mark Eisner, Collector of Internal Revenue (245 U. S. 418.) In error to the U. S. District Court for the Southern District of New York. [For opinion see ^2738.] 2679 William E. Peck & Co., Inc., Plaintiff in Error v. John Z. Lowe, Jr., Collector of Internal Revenue. 247 U. S. 165. In error to the U. S. District Court for the Southern District of New York. [For opinion see ^2754.] 2680 E. J. Lynch, Collector of Internal Revenue, Petitioner, v. H. C. Hornby. (247 U. S. 339) On writ of certiorari to the U. S. Circuit Court of Appeals for the Eighth Circuit. [For opinion see ^2763.] 2681 E. J. Lynch, Collector of Internal Revenue, petitioner v. Henry Turrish. (247 U. S. 221.) On writ of certiorari to the U. S. Circuit Court of Appeals for the Eighth Circuit. [For opinion see ^2776.] 2682 Charles A. Peabody, Plaintiff in Error v. Mark Eisner, Collector of Internal Revenue* (247 U. S. 347.) In error to the U. S. District Court for the Southern District of New York. [For opinion see ^[2802.] 2683 Southern Pacific Company, Plaintiff in Error v. John Z. Lowe, Jr., Collector of Internal Revenue. (247 U. S. 330.) In error to the U. S. District Court for the Southern District of New York. [For opinion see ^2804.] 2684 Gulf Oil Corporation, Petitioner v. C. J. Lewellyn, Collector of Internal Revenue. (December 9, 1918.) On writ of certiorari to the U. S. Circuit Court of Appeals for the Third Circuit. [For opinion see ^2820.] Brushaber v. U. P. Railroad Company. (240 U. S. 1.) 2685 The appended decision of the Supreme Court of the United States In the case of Frank R. Brushaber v. Union Pacific Railroad Co. is published for the information of internal-revenue officers and others concerned. (T. D. 2290, Jan. 31, 1916.) (January 24, 1916.) Mr. Chief Justice White delivered the opinion of the Court. As a stockholder of the Union Pacific Railroad Company the appellant filed his 2686 bill to enjoin the corporation from complying with the income tax provisions of the Tariff Act of October 3, 1913, (Section II, ch. 16, 38 Statutes 166). Because of constitutional questions duly arising the case is here on direct appeal from a decree sus- taining a motion to dismiss because no ground for relief was stated. The right to prevent the corporation from returning and paying the tax was based 2687 upon many averments as to the repugnancy of the statute to the Constitution of the United States, of the peculiar relation of the corporation to the stockholders and their particular interests resulting from many of the administrative provisions of the assailed act, of the confusion, wrong and multiplicity of suits and the absence of all means of redress which would result If the corporation paid the tax and complied with the act in other respects without protest, as It was alleged it was its intention to do. .To put out of the way a question of jurisdiction we at once say that in view of these averments and the ruling in Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429, sustaining the right of a stockholder to sue to restrain a corporation under proper av'erments fro.m voluntarily % IXC. 274 TAX SUPREME COURT DECISIONS. paying a tax charged to be unconstitutional on the ground that to permit such a suit did not violate the prohibitions of Section 3224, Revised Statutes, against enjoining the en- forcement of taxes, we are of opinion that the contention here made that there was no juris- diction of the cause since to entertain it would violate the provisions of the Revised Statutes referred to is without merit. Before coming to dispose of the case on the merits, however, we observe that the defendant Corporation having called the attention of the government to the pendency of the cause and the nature of the controversy and its unwillingness to voluntarily refuse to comply with the act assailed, the United States as amicus curiae has at bar been heard both orally and by brief for the purpose of sustaining the decree. Aside from the averments as to citizenship and residence, recitals as to the pro'/Isions 2688 of the statute and statements as to the business of the corporation contained in the first ten paragraphs of the bill advanced to sustain jurisdiction, the bill alleged twenty-one constitutional objections specified in that number of paragraphs or subdivisions. As all the grounds assert a violation of the Constitution, it follows that In a v/ide sense they all charge a repugnancy of the statute to the Sixteenth Amendment under the more immediate sanction of which the statute was adopted. The various propositions are so intermingled as to cause it to be difficult to classify 2689 them. We are of opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the Sixteenth Amendment provides for a hitherto unknown power of taxation, that is, a power to levy an income tax which although direct should not be subject to the regulation of apportionment applicable to all other direct taxes. And the far-reaching effect of this erroneous assumption will be made clear by gen- eralizing the many contentions advanced in argument to support it, as follows: (a) The Amendment authorizes only a particular character of direct tax without apportionment, and therefore if a tax is levied under its assumed authority which does not partake of the characteristics exacted by the Amendment, it is outside of the Amendment and is void as a direct tax in the general constitutional sense because not apportioned, (b) As the Am.cndment authorizes a tax only upon incomes “from whatever source derived,” the exclusion from taxation of some income of designated persons and classes is not authorized and hence the constitutionality of the law must be tested by the general provisions of the Constitution as to taxation, and thus again the tax is void for want of apportionment, (c) As the right to tax “incomes from whatever source derived” for which the Amendment provides must be considered as exacting intrinsic uniform.ity, therefore no tax comes under the authority of the Am.endment not conforming to such standard, and hence all the provisions of the assailed statute must once more be tested solely under the general and pre-existing provisions of the Constitution, causing the statute again to be void in the absence of apportionment, (d) As the power conferred by the Amendment Is new and prospective, the attempt in the statute to make its provisions retroactively apply is^ void because so far as the retroactive period is concerned, it is governed by the pre-existing constitutional requirement as to apportionment. But it clearly results that the proposition and the contentions under it, if acceded 2690 to, would cause one provision of the Constitution to destroy another; that is, they would result In bringing the provisions of the Amendm.ent exempting a direct tax from apportionm.ent into Irreconcilable conflict with the general requirement that all direct taxes be apportioned. Moreover, the tax authorized by the Am.endment, being direct, would not come under the rule of uniformity applicable under the Constitution to other than direct taxes, and thus It would come to pass that the result of the Amendment would be to authorize a particular direct tax not subject either to apportionment or to the rule of geographical uniformity, thus giving power to im.pose a different tax in one state or states than was levied in another state or states. This result instead of simplifying the situation and m.aking clear the lim.itations on the taxing power, which obviously the Amendment must have been intended to accomplish, would create radical and destructive changes in our constitutional system and multiply confusion. But let us by a demonstration of the error of the fundamental proposition as to the 2691 significance of the Amendment dispel the confusion necessarily arising from the arguments deduced from it. Before coming, however, to the text of the Amendment, to the end that Its significance may be determined in the light of the previous legislative and judicial history of the subject with which the Amendment is concerned and with a knowledge of the conditions which presumptively led up to its adoption and hence of the purpose it was intended to accomplish, we make a brief statement on those subjects. That the authority conferred upon Congress by section 8 of Article I “to lay and 2692 collect taxes, duties, imposts and excises” is exhaustive and embraces every conceiv- able power of taxation has never been questioned, or. If it has, has been so often au- thoritatively declared as to render it necessary only to state the doctrine. And it has ajso never been questioned from the foundation, without stopping presently to determine under which of the separate headings the power was properly to be classed, that there INC. 275 TAX SUPREME COURT DECISIONS. was authority given as the part was included in the whole, to lay and collect income taxes. Again, it has never moreover been questioned that the conceded complete and all-embracing taxing power was subject, so far as they were respectively applicable, to limitations result- ing from, the requirem.ents of Art. I, sec. 8, cl. 1, that ‘‘all duties, im.posts and excises shall be uniform throughout the United States,” and to the limitations of Art. I, sec. 2, cl. 3, that ‘‘direct taxes shall be apportioned among the several states” and of Art. 1, sec. 9, cl. 4, that “no capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken.” In fact the two great subdivision embracing the complete and perfect delegation of the power to tax and the two correlated limitations as to such power were thus aptly stated by Mr. Chief Justice Fuller in Pollock V. Farmers’ Loan & Trust Com.pany, supra, at page 557: “In the matter of taxation, the Constitution recognizes the two great classes of direct and indirect taxes, and lays down two rules by which their imposition must be governed, namely: The rule of appor- tionment as to direct taxes, and the rule of uniformity as to duties, imposts and excises.” It is to be observ'ed, however, as long ago pointed out in Veazie Bank v. Fenno, 8 Wall. 553, 541, that the requirement of apportionment as to one of the great classes and of uni- formity as to the other class were not so much a limitation upon the complete and all em- bracing authority to tax, but in their essence were simply regulations concerning the mode in which the plenary power was to be exerted. In the whole history of the Government down to the time of the adoption of the Sixteenth Am.endment, leaving asicfe some conjec- tures expressed to the possibility of a tax lying intermediate between the two great classes and em.braced by neither, no question has been anywhere made as to the correct- ness of these propositions. At the very beginning, however, there arose di^erences of opinion concerning the criteria to be applied in determining in which of the two great subdivisions a tax would fall. Without pausing to state at length the basis of these didferences and the consequences which arose from them, as the whole subject was elaborately reviewed in Pollock V. Farmers’ Loan 5: Trust Company, 157 U. S. 429; 158 U. S. 601, we make a con- densed statement which is in substance taken from what was said in that case. Early the differences were manifested in pressing on the one hand and opposing on the other, the passage of an act levying a tax without apportionment on carriages “for the conveyance of persons,” and when such a tax was enacted the question of its repugnancy to the Constitu- tion soon came to this court for determination. (Hylton v. United States, 3 Dali. 171.) It was held that the tax came within the class of excises, duties and imposts and therefore did not require apportionment, and while this conclusion was agreed to by all the members of the court who took part in the decision of the case, there was not an exact coincidence in the reasoning by which the conclusion was sustained. Without stating the minor dif- ferences, it may be said with substantial accuracy that the divergent reasoning was this: On the one hand, that the tax was not in the class of direct taxes requiring apportionment because it was not lemed directly on property because of its ownership but rather on its use and was therefore an excise, duty or impost; and on the other, that in any event the class of direct taxes included only taxes directly levied on real estate because of its owner- ing. Putting out of view the difference of reasoning which led to the concurrent conclusion in the Hylton case, it is undoubted that it came to pass in legislative practice that the line of demarcation between the two great classes of direct taxes on the one hand and excises, duties and imposts on the other which was exemplified by the ruling in that case, was accepted and acted upon. In the first place this is shown by the fact that wherever (and there were a number of cases of that kind) a tax was levied directly on real estate or slaves because of ownership, it was treated as com.ing within the direct class and apportionment was provided for, while no instance of apportionment as to any other kind of tax is afforded. Again the situation is aptly illustrated by the various acts taxing incomies derived from property of every kind and nature which were enacted beginning in 1861 and lasting during what m.ay be termed the Civil War period. It is not disputable that these latter taxing laws were classed under the head of excises, duties and imposts because it was assumed that they were of that character inasmuch as, although putting a tax burden on income of every kind, including that derived from property real or personal, they were not taxes directly on property because of its ownership. And this practical construction came in theory to be the accepted one since it was adopted without dissent by the most eminent of the text-writers. 1 Kent. Com. 254, 256; 1 Story Const., Sect. 955; Cooley Const. Lim. (5th ed.) 480; Miller on the Constitution, 237; Pomeroy’s Constitutional Law, Section 281; Hare Const. Law, Uol. 1, 249, 250; Burroughs on Taxation, 502; Ordronaux, Constitutional Legislation, 225. Upon the lapsing of a considerable period after the repeal of the income tax laws 2693 referred to, in 1894 an act was passed laying a tax on incomes from all classes of property and other sources of revenue which was not apportioned, and which there- fore was of course assumed to come within the classification of excises, duties and imposts which were subject to the rule of uniformity but not to the rule of apportionment. The constitutional validity of this law was challenged on the ground that it did not fall within the class of excises, duties and imposts, but was direct in the constitutional sense and was INC. 276 TAX SUPREME COURT DECISIONS. therefore void for want of apportionment, and that question came to this court and was passed upon in Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429; 158 U. S. 601. The court, fully recognizing in the passage which we have previously quoted the all-embracing character of the two great classifications including, on the one hand, direct taxes subject to apportionm.ent, and on the other, excises, duties and im.posts subject to uniformity, held the law to be unconstitutronal in substance for these reasons. Concluding that the classification of direct was adopted for the purpose of rendering it impossible to burden by taxation accumulations of property, real or personal, except subject to the regulation of apportionm.ent, it wms held that the duty existed to fix what was a direct tax in the constitutional sense so as to accom.pllsh this purpose contemplated by the Constitution. (157 U. S. 581.) Coming to consider the validity of the tax from this point of view, while not questioning at all that in com.m.on understanding it was direct merely on income and only indirect on property, it was held that considering the substance of things it was direct on property in a constitutional sense since to burden an income by a tax was from the point of substance to burden the property from which the incomie was derived and thus accom- plish the very thing which the provision as to apportionment of direct taxes was adopted to prevent. As this conclusion but enforced a regulation as to the mode of exercising power under particular circum.stances, it did not in any way dispute the all embracing taxing authority possessed by Congress, including necessarily therein the power to impose income taxes if only they conformed to the constitutional regulations which were applicable to them.. Atoreover in addition the conclusion reached in the Pollock case did not in any degree involve holding that incom.e taxes generlcally and necessarily came within the class of direct taxes on property, but on the contrary recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such unless and until it was con- cluded that to enforce it would amount to accom.plishing the result which the requirement as to apportionmient of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it. Nothing could serve to make this clearer than to recall that in the Pollock case in so far as the law taxed incomes from other classes of property than real estate and invested per- sonal property, that is, incom.e from “professions, trades, employments, or vocations” (158 U. S. 637), its validity was recognized; indeed it was expressly declared that no dispute was made upon that subject and attention was called to the fact that taxes on such incom.e had been sustained as excise taxes in the past. Ib. p. 635. The whole law w'as, howmver, declared unconstitutional on the ground that to permit it to thus operate would relieve real estate and invested personal property from taxation and “would leave the burden of the tax to be borne by professions, trades, employments, or vocations; and in that way what was intended as a tax on capital would remain, in substance, a tax on occupations and labor,” (Ib. p. 637) a result which it was held could not have been con- templated by Congress. This is the text of the Amendment; 2694 “That Congress shall have power to lay and collect taxes on incomes from what- ever source derived, without apportionment among the several States, and without regard to any census or enumeration.” It is clear on the face of this text that it does not purport to confer power to levy 2695 income taxes in a generic sense — an authority already possessed and never ques- tioned — or to limit and distinguish between one kind of income taxes and another, but that the whole purpose of the Amendment was to relieve all income taxes when imposed from apportionment from a consideration of the source whence the income was derived. Indeed, in the light of the history which we have given and of the decision in the Pollock case and the ground upon which the ruling in that case was based, there is no escape from the conclusion that the Amendment was drawn for the purpose of doing away for the future with the principle upon which the Pollock case was decided, that is, of determining whether a tax on income was direct not by a consideration of the burden placed on the taxed income upon which it directly operated, but by taking into view the burden which resulted on the property from which the income was derived, since in express terms the Amendment provides that income taxes, from whatever source the income may be derived, shall not be subject to the regulations of apportionment. From this in substance it indis- putably arises, first, that all the contentions which we have previously noticed concerning the assumed limitations to be implied from the language of the Amendment as to the nature and character of the income taxes which it authorized find no support in the text and are in irreconcilable conflict with the very purpose which the Amendment was adopted to accomplish. Second, that the contention that the Amendment treats a tax on income as a direct tax although it is relieved from apportionment and is necessarily therefore not subject to the rule of uniformity as such rule only applies to taxes which are not direct, thus destroying the two great classifications which have been recognized and enforced INC. 277 TAX SUPREME COURT DECISIONS. from the beginning, Is also wholly without foundation since the command of the Amend- ment that all income taxes shall not be subject to apportionment by a consideration of the sources from which the taxed income may be derived, forbids the application to such taxes of the rule applied in the Pollock case by which alone such taxes were removed from the great class of excises, duties and imposts subject to the rule of uniformity and were placed under the other or direct class. This must be unless it can be said that although the Constitution as a result of the Amendment in express terms excludes the criterion of source of income, that criterion yet remains for the purpose of destroying the classifica- tions of the constitution by taking an excise out of the class to which it belongs and trans- ferring it to a class in which it cannot be placed consistently with the requirements of the Constitution. Indeed, from another point of view, the Amendment demonstrates that no such purpose was intended and on the contrary shows that it was drawn with the object of maintaining the limitations of the Constitution and harmonizing their operation. We say this because it is to be observed that although from the date of the Hylton case because of statements made in the opinions in that case it had come to be accepted that direct taxes in the constitutional sense were confined to taxes levied directly on real estate because of its ownership, the Amendment contains nothing repudiating or challenging the ruling in the Pollock case that the word direct had a broader significance since it embraced also taxes levied directly on personal property because of its ownership, and therefore the amendment at least impliedly makes such wider significance a part of the constitution — a condition which clearly demonstrates that the purpose was not to change the existing interpretation except to the extent necessary to accomplish the result intended, that is, the prevention of the resort to the sources from which a taxed income was derived in order to cause a direct tax on the income to be a direct tax on the source itself and thereby to take an income tax out of the class of excises, duties and imports and place it In the class of direct taxes. We come then to ascertain the merits of the many contentions made in the light 2696 of the Constitution as it now stands that is to say including within its terms the provisions of the Sixteenth Amendment as correctly interpreted. We first dispose of two propositions assailing the validity of the statute on the one hand because of its repugnancy to the Constitution in other respects, and especially because its enactment was not authorized by the Sixteenth Amendment. The statute was enacted October 3, 1913, and provided for a eeneral yearly Income 2697 tax from December to December of each year. Exceptionally, however, it fixed a first period embracing only the time from March 1, to December 31, 1913, and this limited retroactivity is assailed as repugnant to the due process clause of the Fifth Amendment and as inconsistent with the Sixteenth Amendment itself. But the date of the retroactivity did not extend beyond the time when the Amendment was operative, and there can be no dispute that there was power by virtue of the Amendment during that period to levy the tax, v.'ithout apportionment, and so far as the limitations of the Con- stitution in other respects are concerned, the contention is not open, since in Stockdale vs. Insurance Companies, 20 Wall 323, 331, in sustaining a provision in a prior income tax law which was assailed because of its retroactive character, it was said: “The right of Congress to have imposed this tax by a new statute, although the measure of it was governed by the income of the past year, cannot be doubted; much less can it be doubted that it could impose such a tax on the income of the current year, though part of that year had elapsed when the statute was passed. The joint resolution of July 4, 1864, imposed a tax of five per cent upon all incom.e of the previous year, although one tax on it had already been paid, and no one doubted the validity of the tax or attempted to resist it.” The statute provides that the tax should not apply to enumerated organizations 2692 or corporations, such as labor, agricultural or horticultural organizations, mutual savings banks, etc., and the argument is that as the Amendment authorized a tax on Incomes “from whatever source derived,” by implication it excluded the power to make these exemptions. But this is only a form of expressing the erroneous contention as to the meaning of the Amendment, which we have already disposed of. And so far as this alleged illegality is based on other provisions of the Constitution, the contention is also not open, since it was expressly considered and disposed of in Flint v. Stone Tracy Co., 220 U. S. 108, 173. Without expressly stating all the other contentions, we summarize them to a 2699 degree adequate to enable us to typify and dispose of all of them. 1. The statute levies one tax called a normal tax on all incomes of individuals 2700 up to $20,000 and from that amount up by gradations, a progressively increasing tax called an additional tax, is imposed. No tax, however, is levied upon incomes of unmarried individuals amounting to $3,000 or less nor upon incomes of married persons amounting to $4,000 or less. The progressive tax and the exempted amounts, it is said, are based on wealth alone and the tax is therefore repugnant to the due process clause of the Fifth Amendment. INC. 278 TAX SUPREME COURT DECISIONS. 2. The act provides for collecting the tax at the source, that is, makes it the duty 2701 of corporations, etc., to retain and pay the sum of the tax on interest due on bonds and mortgages, unless the owner to whom the interest is payable gives a notice that he claims an exemption. This duty cast upon corporations, because of the cost to which they are subjected, is asserted to be repugnant to due process of law as a taking of their property without compensation, and we recapitulate various contentions as to discrim- ination against corporations and against individuals predicated on provisions of the act dealing with the subject: (rt) Corporations indebted upon coupon and registered bonds are discriminated 2702 against, since corporations not so indebted are relieved of any labor or expense involved in deducting and paying the taxes of individuals on the income derived from bonds. {b) Of the class of corporations indebted as above stated, the law further dis- 2703 criminates against those w'hich have assumed the payment of taxes on their bonds, since, although some or all of their bondholders may be exempt from taxation, the corporations have no means of ascertaining such fact, and it would therefore result that taxes would often be paid by such corporations when no taxes were owing by the indi- viduals to the Government. (c) The law discriminates against owners of corporate bonds in favor of individuals 2704 none of whose income is derived from such property, since bondholders are, during the interval benveen the deducting and the paying of the tax on their bonds, de- prived of the use of the money so wdthheld. {d) Again corporate bondholders are discriminated against because the law does 2705 not release them from payment of taxes on their bonds even after the taxes have been deducted by the corporation, and therefore if after deduction the corporation should fail, the bondholders would be compelled to pay the tax a second time. ((f) Owners of bonds the taxes on which have been assumed by the corporation are 2706 discriminated against because the payment of the taxes by the corporation does not relieve the bondholders of their duty to include the income from such bonds in’making a return of all income, the result being a double payment of the taxes, labor and expense in applying for a refund, and a deprivation of the use of the sum of the taxes during the interval which elapses before they are refunded. 3. The provision limiting the amount of interest paid which may be deducted from 2707 gross income of corporations for the purpose of fixing the taxable income to interest on indebtedness not exceeding one-half the sum of bonded indebtedness and paid- up”'capita! stock, is also charged to be wanting in due process because discriminating between different classes of corporations and individuals. 4. It is urged that want of due process results from the provision allowing indi- 2708 viduals to deduct from their gross income dividends paid them by corporations whose incomes are taxed and not giving such rights of deduction to corporations. 5. Want of due process is also asserted to result from the fact that the act allows 2709 a deduction of $3,000 or $4,000 to those who pay the normal tax, that is, whose incomes are $20,000 or less, and does not allow the deduction to those whose incomes are greater than $20,000; that is, such persons are not allowed for the purpose of the additional or progressive tax a second right to deduct the $3,000 or $4,000 which they have already enjoyed. And a further violation of due process is based on the fact that for the purpose of the additional tax no second right to deduct dividends received from corporations is permitted. 6. In various forms of statement, want of due process, it is moreover insisted, 27 1 0 arises from the provisions of the act allowing a deduction for the purpose of ascer- taining the taxable income of stated amounts on the ground that the provisions discriminate between married and single people and discriminate between husbands and wives who are living together and those who are not. 7. Discrimination and want of due process results, It Is said, from the fact that 271 1 the owners of houses in which they live are not compelled to estimate the rental value In making up their incomes, while those who are living in rented houses and pay rent are not allowed, in making up their taxable income, to deduct rent which they have paid, and that want of due process also results from the fact that although family expenses are not as a rule permitted to be deducted from gross to arrive at taxable, income, farmers are permitted to omit from their income return, certain products of the farm which are susceptible of use by them for sustaining their families during the year. So far as these numerous and minute, not to say in many respects hypercritical 2712 contentions, are based upon an assumed violation of the uniformity clause, their want of legal merit is at once apparent, since it is settled that that clause exacts only a geographical uniformity and there is not a semblance of ground in any of the pro- positions for assuming that a violation of such uniformity is complained of. Knowlton v. Moore, 178 U. S. 41; Patton v. Brady, 184 U. S. 608, 622; Flint v. Stone Tracy Co. 220 U. S. 107, 158; Billings v. United States, 232 U. S. 608, 622. INC. 279 TAX SUPREME COURT DECISIONS. So far as the due process clause of the Fifth Amendment Is relied upon, it suffices 2713 to say that there is no basis for such reliance since it is equally well settled that such clause is not a limitation upon the taxing power conferred upon Congress by the Constitution; in other words, that the Constitution does not conflict with itself by conferring upon the one hand a taxing power and taking the same power away on the other by the limitations of the due process clause. Treat v. White, 181 U. S. 264; Patton V. Brady, 184 U. S., 608; McCray v. United States, 195 U. S. 27, 61; Flint v. Stone Tracy Co., supra; Billings v. United States, 232 U. S. 261, 282. And no change in the situation here would arise even if it be conceded, as we think it must be, that this doctrine would have no application in a case where although there was a seeming exercise of the taxing power, the act complained of was so arbitrary as to constrain to the conclusion that it was not the exertion of taxation but a confiscation of property, that is, a taking of the same in violation of the Fifth Amendment, or, what is equivalent thereto, was so wanting in basis for classification as to produce such a gross and patent inequality as to inevitably lead to the same conclusion. We say this because none of the propositions relied upon in the remotest degree present such questions. It is true that it is elaborately insisted that although there be no express constitutional provision prohibiting it, the progressive feature of the tax causes it to transcend the conception of all taxation and to be a mere arbitrary abuse of power which must be treated as wanting in due process. But the propostion dis- regards the fact that in the very early history of the Government a progressive tax was imposed by Congress and that such authority was exerted in some if not all of the various income taxes enacted prior to 1894 to which we have previously adverted. And over and above all this the contention but disregards the further fact that its absolute want of foundation in reason was plainly pointed out in Knowlton v. Moore, supra, and the right to urge it was necessarily foreclosed by the ruling in that case made. In this situation, it is, of course, superfluous to say that arguments as to the expediency of levying such taxes or of the economic mistake or wrong involved in their imposition are beyond judicial cog- nizance. Besides this demonstration of the want of merit in the contention based upon the progressive feature of the tax, the error in the others is equally well established either by prior decisions or by the adequate bases for classification which are apparent on the face of the assailed provisions, that is, the distinction between individuals and corporations, the difference between various kinds of corporations, etc., etc., Knowlton v. Moore, supra Flint V. Stone Tracy Co., supra; Billings v. United States , supra; National Bank v. Commonwealth, 9 Wall 353; National Safe Deposit Co. v. Illinois, 232 U. S. 58, 70. In fact, com.prehensively surveying all the contentions relied upon, aside from the erroneous construction of the Amendm.ent which we have previously disposed of, we cannot escape the conclusion that they all rest upon the m.istaken theory that although there be difter- ences between the subjects taxed, to differently tax them transcends the limit of taxation and amiounts to a want of due process, and that where a tax levied is believed by one who resists it enforcement to be wanting in wisdom and to operate injustice, from that fact in the nature of things there arises a want of due process of law and a resulting authority in the judiciary to exceed its powers and correct what is assumed to be m.istaken or unwise exertions by the legislative authority of its lawful powers, even although there be no sem- blance of warrant in the Constitution for so doing. We have not referred to a contention that because certain administrative powers 2714 to enforce the act were conferred by the statute upon the Secretary of the Treasury, therefore it was void as unwarrantedly delegating legislative authority, because we think to state the proposition is to answer it. Field v. Clark, 143 U. S. 649; Buttfield V. Stranahan, 192 U. S. 470, 496; Oceanic Steam Navigation Co. v. Stranahan, 214 U. S. 320. Affirmed. Mr. Justice McReynolds took no part in the consideration and decision of this case. Tyee Realty Company vs. Anderson and Edwin Thorne vs. Anderson. (240 U. S. 115.) 27 15 T he appended decision of the Supreme Court of the United States in the case of Tyee Realty Co. v. Anderson, collector, and Edwin Thorne v. Anderson, collector, is published for the inform.ation of internal-revenue officers and others concerned. (T. D. 2300, March 3, 1916.) (February 21, 1916.) Mr. Chief Justice White delivered the opinion of the Court. Both the plaintiffs in error, the one in 393 a corporation and the other in 394 an 2716 individual, paid under protest to the Collector of Internal Revenue, taxes assessed under the Incom.e Tax section of the Tariff Act of October 3, 1913 (Sec. II, ch. 16, 38 Stat. 166). After an adverse ruling by the Commissioner of Internal Revenue on INC. 280 TAX SUPREME COURT DECISIONS. appeals which were prosecuted conformably to the statute (Rev. Stat. Sections 3220, 3226) by both the parties for a refunding to them of the taxes paid, these suits were commenced to recover the amounts paid on the ground of the repugnance to the Constitution of the Section of the Statute under which the taxes had been collected, and the cases are here on direct writs of error to the judgments of the court below sustaining demurrers to both com- plaints on the ground that they stated no cause of action. Every contention relied upon for reversal in the two cases is embraced within the 2717 following propositions: (a) that the tax imposed by the statute was not sanctioned by the Sixteenth Amendment because the statute exceeded the exceptional and lim.ited power of direct Income taxation for the first time conferred upon Congress by that Amendment and, being outside of the Amendment and governed solely therefore by the general taxing authority conferred upon Congress by the Constitution, the tax was void as an attempt to levy a direct tax without apportionment under the rule established by Pollock V. Farmers’ Loan & Trust Company, 157 U. S. 429; 158 U. S. 601. (b) That the statute is m.oreover repugnant to the Constitution because of the provision therein contained for its retroactive operation for a designated time and because of the illegal discrimination and inequalities which it creates, including the provision for a progressive tax on the income of individuals and the method provided in the statute for computing the taxable income of corporations. But we need not now enter Into an original consideration of the merits of these 2718 contentions, because each and all of them were considered and adversely disposed of in Brushaber v. Union Pacific Railroad Com.pany [*[[2685]. That case, therefore, is here absolutely controlling and decisive. If follows that for the reasons stated in the opinion in the Brushaber case the judgments in these cases must be and they are AFFIRMED. Dodge vs. Brady, (240 U. S. 122.) 2719 The appended decision of the Supreme Court of the United States in the case of Dodge V. Brady, collector, is published for the information of internal-revenue officers and others concerned. (T. D. 2302, March 3, 1916.) (February 21, 1916.) Mr. Chief Justice White delivered the opinion of the Court. The appellants are the same persons who sued in Dodge v. Osborn, just decided 2720 [112580]. After the dismissal of that suit by the Supreme Court of the District of Columbia for want of jurisdiction the parties, on June 10, 1914, filed their bill in the court below against the Collector of Internal Revenue to enjoin the collection of the surtaxes assessed against them which were disputed in the previous case on substan- tially the same grounds alleged in the complaint in that case. The bill alleged, however, that plaintiffs had filed with the Collector “an appeal or claim for the remission and abate- ment of the surtaxes” because of the unconstitutionality of the statute imposing them and that the Commissioner of Internal Revenue to whom the claim had been forwarded by the Collector had such protest under advisement. Upon the filing of the bill the plaintiffs moved for a preliminary injunction which was denied July 29, 1914. On the same day by leave of court a supplemental bill was filed which alleged that since the filing of the original bill the Commissioner of Internal Revenue had ruled adversely upon plaintiffs* protest and that thereupon they had paid the surtaxes to the Collector under protest, and they prayed a recovery of the amount paid to the Collector and for the other relief asked in the original bill. The defendant moved to dismiss the bill for want of jurisdiction because the suit was brought to enjoin the collection of a tax contrary to the provisions of Section 3224 Revised Statutes and for want of equity because the Income Tax Law was constitutional and valid. The court sustained the motion on the latter ground and dismissed the bill on the merits and the case is here on direct appeal because of the con- stitutional questions. The government Insists that the court below was without jurisdiction to decide 2721 the merits and we come first to that question. It is apparent if the original bill alone is taken into view that the suit was brought to enjoin the collection of a tax and the court was without jurisdiction by the reasons stated in the previous case. And it Is argued by the Government that there was no jurisdiction under the supplemental bill since it fails to allege that an appeal was taken to the Commissioner of Internal Revenue after the payment of the taxes and that he refused to refund them and therefore fails to allege a compliance with the conditions imposed by sections 3220 and 3226 of the Revised Statutes as prerequisites to a suit to recover taxes wrongfully collected. But broadly considering the whole situation and taking into view the peculiar facts of the case, the protest to the Commissioner and his exertion of authority over it and his adverse ruling upon the merits of the tax, thereby passing upon every question which he would be called upon to decide on an appeal for a refunding of the taxes paid, we think that this case is 80 exceptional in character as not to justify us in holding that reversible error was com- mitted by the court below in passing upon the case upon its merits, thus putting an end 281 INC. TAX SUPREME COURT DECISIONS. to further absolutely useless and unnecessary controversy. We say useless and unneces- sary because on the merits all the contentions urged by the appellants concerning the uncon- stitutionality of the la'w and of the surtaxes which it imposes have been considered and adversely disposed of in Brushaber v. Union Pacific Railroad Company [^26851. JUDGMENT AFFIRMED. Stanton v. Baltic Mining Co. (240 U. S. 103.) 2722 The appended decision of the Supreme Court of the United States in the case of Stanton v. Baltic Mining Co. is published for the information of internal-revenue officers and others concerned. (T. D. 2303, March 3, 1916.) (February 21, 1916.) Mr. Chief Justice White delivered the opinion of the Court. As in Brushaber v. Union Pacific Railroad Company, [^2685] this case was cora- 27 23 menced by the appellant as a stockholder of the Baltic Mining Company, the appellee, to enjoin the voluntary payment by the corporation and its officers of the tax assessed against it under the Income Tax section of the Tariff Act of October 3, 1913 (38 Stat. 166, 181) As the grounds for the equitable relief sought in this case so far as the question of jurisdiction is concerned are substantially the same as those which were relied upon in the Brushaber case, it follows that the ruling in that case upholding the power to dispose of the controversy in controlling here and we put that subject out of view. Further also like the Brushaber case this is before us on a direct appeal prosecuted 27 24 for the purpose of reviewing the action of the court below in dismissing on motion the bill for want of equity. The bill averred: “That under and by virtue of the alleged authority contained 2725 in said Income Tax Law, if valid and constitutional, the respondent company is taxable at the rate of I per cent upon its gross receipts from all sources, during the calendar year ending December 31, 1914, after deducting (1) its ordinary and necessary expenses paid within the year in the maintenance and operation of its business and proper- ties and (2) all losses actually sustained within the year and not compensated by insurance or otherwise, including depreciation arising from depletion of its ore deposits to the limited extent of 5 per cent of the ‘gross value at the mine of the output’ during said year.” It was further alleged that the company would if not restrained make a return for taxation conformably to the statute and would pay the tax upon the basis stated without protest and that to do so would result in depriving the complainant as a stockholder of rights secured by the Constitution of the United States as the tax which it was proposed to pay without protest was void for repugnancy to that Constitution. The bill contained man}’- averments on the following subjects which may be divided into two generic classes: (A) Those concerning the operation of the law in question upon individuals generally and upon other minine corporations and the discrimination against mining corporations which arose in favor of such other corporations and individuals by the legislation, as well as*'discriminatlon which the provisions of the act operated against mining corporatons because of the separate and more unfavorable burden cast upon them by the statute than was placed upon other corporations and individuals, — averments all of which were obviously made to support the subsequent charges which the bill contained as to the repugnancy of the law Imposing the tax to the equal protection, due process and uniformity clauses of the Constitution. And (B) those dealing with the practical results on the company of the operation of the tax in question evidently alleged for the purpose of sus- taining the charge which the bill made that the tax levied was not what was deemed to be the peculiar direct tax which the Sixteenth Amendment exceptionally authorized to be levied without apportionment and of the resulting repugnancy of the tax to the Con- stitution as a direct tax on property because of its ownership levied without conforming to the regulation of apportionment generally required by the Constitution as to such taxation. We need not more particularly state the averments as to the various contentions 2726 in class (A), as their character will necessarily be made manifest by the statement of the legal propositions based on them which we shall hereafter have occasion to make. As to the averments concerning class (B),it suffices to say that it resulted from copious allegations in the bill as to the value of the ore body contained in the mine which the company worked and the total output for the year of the product of the mine after deducting the expenses as previously stated, that the five per cent deduction permitted by the statute was inadequate to allow for the depletion of the ore body and therefore the law to a large extent taxes not the mere profit arising from the operation of the m.lne, but taxes as income the yearly product which represented to a large extent the yearly depletion or exhaustion of the ore body from which during the year ore was taken. Indeed, 282 IXC. TAX SUPREME COURT DECISIONS. the following alleged facts concerning the relation which the annual production bore to the exhaustion or diminution of the property in the ore bed must be taken as true for the purpose of reviewing the judgment sustaining the motion to dismiss the bill. “That the real or actual yearly income derived by the respondent company from its businsss or property, does not exceed $550,000. That, under the Income Tax, the said company is held taxable in an average year, to the amount of approximately $1,150,000, the same being ascertained by deducting from its net receipts of $1,400,000 only a deprecia- tion of $100,000 on its plant and a depletion.of its ore supply limited by law to 5 per cent of the value of its annual gross receipts and amounting to $150,000; whereas, in order properly to ascertain its actual income $750,000 per annum should be allowed to be deducted for such depletion, or five times the amount actually allowed.” Without attem.pting minutely to state every possible ground of attack which 2727 m.ight be deducted from the averments of the bill, but in substance embracing every m.aterial grievance therein asserted and pressed in argument upon our atten- tion in the elaborate briefs which have been submitted, we come to separately dispose of the legal propositions advanced in the bill and arguments concerning the two classes. Class A. Under this the bill charged that the provisions of the statute are “un- 2728 constitutional and void under the Fifth Amendment, in that they deny to m.lning companies and their stockholders equal protection of the laws and deprive them of their property without due process of law,” for the following reasons: (1) Because all other individuals or corporations were given a right to deduct a fair and reasonable percentage for losses and depreciation of their capital and they were therefore not confined to the arbitrary 5 % fixed as the basis for deductions by mining corporations. (2) Because by reason of the difference in the allow'ances which the statute per- mitted the tax levied was virtually a net income tax on other corporations and indivi- duals and a gross tax on rndnlng corporations. (3) Because the statute established a discriminating rule as to individuals and other corporations as against mining corporations on the subject of the m.ethod of the allow- ance for depreciations. (4) Because the law permitted all Individuals to deduct from their net income dividends received from corporations which had paid the tax on their incomes, and did not give the right to corporations to make such deductions from their income of dividends received from other corporations which had paid their Income tax. This was illustrated by the averment that 99 per cent of the stock of the defendant company was owned by a holding company and that under the statute only not was the cor- poration obliged to pay the tax on its incom.e, but so also was the holding company obliged to pay on the dividends paid it by the defendant company. (5) Because of the discrimination resulting from the provision of the statute pro- viding for a progressive increase of taxation or surtaxes to individuals and not as to corporations. (6) Because of the exemptions which the statute made of individual Incomes below $4,000 and of incom.es of labor organizations and various other exemptions which were set forth. But it is apparent from the mere statement of these contentions that each and all of them were adversely disposed of by the decision in the Brushaber case and they all therefore may be put out of view. Class B. Under this class these propositions are relied upon: 2729 (1) That as the Sixteenth Amendment authorized only an exceptional direct income tax without apportionment, to which the tax in question does not conform, it is therefore not within the authority of that amendment. (2) Not being within the authority of the Sixteenth Amendment the tax is there- fore, within the ruling of Pollock v. Farmer’s Loan & Trust Company, 157 U. S. 429; 158 U. S. 601, a direct tax and void for want of com.pliance with the regulation of appor- tionment. As the first proposition is plainly in conflict with the meaning of the Sixteenth 2730 Amendment as interpreted in the Brushaber case it may also be put out of view. As to the second, while indeed it is distinct from the subjects considered in the Brushaber case to the extent that the particular tax which the statute levies on mining corporations here under consideration is distinct from the tax on corporations other than mining and on individuals which was disposed of in the Brushaber case, a brief analysis will serve to demonstrate that the distinction is one without a difference and therefore that the proposition is also foreclosed by the previous ruling. The contention is that as the tax here imposed is not on the net product but in a sense somewhat equivalent to a tax on the gross product of the working of the mine by the corporation, therefore the tax is not within the purview of the Sixteenth Amendment and consequently it must be INC. 283 TAX SUPREME COURT DECISIONS. treated as a direct tax on property because of its ownership and as such void for wariii 0 / apportionment. But aside from the obvious error of the proposition intrinsically considered, it m.anifestly disregards the fact that by the previous ruling it was settled that the pro- visions of the Sixteenth Amendment conferred no new power of taxation but simply pro- hibited the previous com.plete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged and being placed in the category of direct taxation subject to appor- tionm.ent by a consideration of the sources from which the income was derived, that is by testing the tax not by what it was — a tax on income, but by a mistaken theory deduced from the origin or source of the income taxed. Mark, of course, in saying this v/e are not here considering a tax not within the provisions of the Sixteenth Amendm.ent, that is, one in which the regulation of apportionment or the rule of uniformity is wholly negligible because the tax is one entirely beyond the scope of the taxing power of Congress and where consequently no authority to impose a burden either direct or indirect exists. In other words, we are here dealing solely with the restriction imposed by the Sixteenth Amendment on the right to resort to the source whence an incom.e is derived in a case where there is power to tax for the purpose of taking the incom.e tax out of the class of indirect to which it generically belongs and putting it in the class of direct to which it would not otherwise belong in order to subject it to the regulation of apportionment. But it is said that although this be undoubtedly true as a general rule, the peculiarity of mining pro- perty and the exhaustion of the ore body which miust result from working the mine, causes the tax in a case like this where an Inadequate allowance by way of de- duction is m.ade for the exhaustion of the ore body to be in the nature of things a tax on property because of its ownership and therefore subject to apportionment. Not to so hold, it is urged is as to m.ining property but to say, that m.ere form controls, thus rendering in substance the command of the Constitution that taxation directly on property because of its ownership be apportioned, wholly illusory or futile. But this merely asserts a right to take the taxation of mining corporations out of the rule established by the Sixteenth Am.endment when there is no authority for so doing. It, m.oreover, rests upon the wholly fallacious assum.ption that looked at from the point of view of substance a tax on the product of a mine is necessarily in its essence and nature in every case a direct tax on property because of its ownership unless adequate allowance be made for the exhaustion of the ore body to result from working the mine. We say wholly fallacious assumption because independently of the effect of the operation of the Sixteenth Amendment it was i settled in Stratton’s Independence v. Howbert 231 U. S. 399 that such a tax is not a tax * upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations. (Pp. 413 et seq.) As it follows from what we have said that the contentions are in substance and 2731 effect controlled by the Brushaber case and in so far as this may not be the case are without merit, it results that for the reasons stated in the opinion in that case and those expressed in this, the judgment must be and it is AFFIRMED. Gould vs. Gould. (245 U. S. 151.) November 19, 1917. Mr. Justice McReynolds delivered the opinion of the Court. i 2732 Adecreeof the Supreme Court for New York County entered in 1909 forever separa- ’ ted the parties to this proceeding, then and now citizens of the United States, from bed and board; and further ordered that plaintiff in error pay to Katherine C. Gould during her life the sum of three thousand dollars ($3,000.00) every month for her support and maintenance. The question presented is whether such monthly payments during the years 1913 and 1914 constituted parts of Mrs. Gould’s income within the intendment of the Act of Congress approved October 3, 1913 (38 Stat. 114, 166), and were subject as such to the tax prescribed therein.^ The court below answered in the negative; and . we think it reached the proper conclusion. i Pertinent portions of the Act follow: , . , , „ , 2733 “Section II, A. Subdivision 1. That there shall be levied, assessed, collected 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; ♦ * ♦ “B. That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person 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 INC. 284 TAX SUPREME COURT DECISIONS. real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful 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 ac- quired by gift, bequest, devise, or descent: * * * ” In the interpretation of statutes levying taxes it is the established rule not to 2734 extend their provisions, by im.plication, beyond the clear import of the language used or to enlarge their operations as so to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the Government, and in favor of the citizen. United States v. Wiggle sworth^ 2 Story 369; American Net and Twine Company v. Worthington, 141 U. S. 468, 474; Benziger v. United States, 192 U. S. 38, 55. As appears from the above quotations, the net income upon which subdivision 1 2735 directs an annual tax shall be assessed, levied, collected and paid is defined in division B. The use of the word itself in the definition of “income” causes some obscurity, but we are unable to assert that alimony paid to a divorced wife under a decree of court falls fairly within any of the terms employed. In Audubon v, Shufeldt, 181 U. S. 575, 577, 578, we said: “Alimony does not arise 2736 from any business transaction, but from the relation of marriage. It is not founded on a contract, express or implied, but on the natural and legal duty of the husband to support the wife. The general obligation to support is made specific by the decree of the court of appropriate jurisdiction. * * * Permanent alimony is regarded rather as a portion of the husband’s estate to which the wife is equitably entitled, than as strictly a debt; alimony from time to time may be regarded as a portion of his current income or earnings; * * *” The net income of the divorced husband subject to taxation was not decreased 2737 by payment of alimony under the court’s order; and, on the other hand, the sum received by the wife on account thereof cannot be regarded as income arising or accruing to her within the enactment. The judgment of the court below is Affirmed. (245 U. S. 151.) Towne v. Eisner. (245 U. S. 418.) 2738 The appended decision of the Supreme Court of the United States in the case of Henry R. Towne v. Mark Eisner, collector, is published for the information of internal-revenue officers and others concerned. (T. D. 2634, Jan. 21, 1918.) (January 7, 1918.) Mr. Justice Holmes delivered the opinion of the Court. This is a suit to recover the amount of a tax paid under duress in respect of a 2739 stock dividend alleged by the Government to be income. A demurrer to the declara- tion was sustained by the District Court and judgment was entered for the defend- ant, 242 Fed. Rep. 702. The facts alleged are that the corporation voted on December 17, 1913 to transfer $1,500,000 surplus, being profits earned before January 1, 1913, to its capital account, and to issue fifteen thousand shares of stock representing the same to its stock- holders of record on December 26; that the distribution took place on January 2, 1914, and that the plaintiff received as his due proportion four thousand and one hundred and seventy-four and a half shares. The defendant compelled the plaintiff to pay an income tax upon his stock as equivalent to $417,450 income in cash. The District Court held that the stock was income within the meaning of the Income Tax Act of October 3, 1913, c. 16, Section II; A, subdivision 1 and 2; and B. 38 Stat. 114, 166, 167. It also held that the Act so constructed was constitutional, whereas the declaration set up that so far as the Act purported to confer power to make this levy it was unconstitutional and void. The Government in the first place moved to dismiss the case for want of jurisdiction, 2740 on the ground that the only question here is the construction of the statute, not its constitutionality. It argues that if such a stock dividend is not income within the meaning of the constitution, it is not income within the intent of the statute, and hence that the meaning of the Sixteenth amendment is not an immediate issue, and is important only as throwing light on the construction of the Act. But is is not necessarily true that income means the same thing in the Constitution and the Act. A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used. Lamar v. United States, 240 U. S. 60, 65. Whatever the meaning of the Constitution, the Government had applied its force to the plaintiff on the assertion that the statute authorized it to do so, before the suit was brought, and the Court below has sanctioned its course. The plaintiff says that the statute as it is construed and administered is unconstitutional. He is not to be defeated by the reply that the Government does not adhere to the construction by virtue of which alone it has taken and keeps the plaintiff’s INC. 285 TAX SUPREME COURT DECISIONS. money, if this Court should think that the construction would make the Act unconstitu- ional. While it keeps the money it opens the question w’hether the Act construed as it has contrued it can be maintained. The motion to dismiss is overruled. Billings V. United States 232 U. S. 261, 276. B. Altman-Company v. United States 224 U. S. 583, 596, 597. The case being properly here, however, the construction of the Act is open, as 2741 well as its constitutionality if construed as the Government has construed it by its conduct. Billings v. United States ubi supra. Notwithstanding the thought- ful discussion that the case received below we can not doubt that the dividend was capital as well for the purposes of the Income Tax Law as for distribution between tenant for life and remainderman. What was said by this Court upon the latter question is equally true for the former. “A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interest of the shareholders. Its property is not diminished and their interests are not increased. * * * proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones.” Gibbons v. Mahon, 136 U. S. 549, 559, 560. In short, the corporation is no poorer and the stockholder is no richer than they were before. Logan County v. United States, 169 U. S. 255, 261. If the plaintiff gained any small advantage by the change it certainly was not an advantage of $417,450, the sum upon which he was taxed. It is alleged and admitted that he received no more In the way of dividends and that his old and new certificates together are worth only Avhat the old ones were worth before. If the sum had been carried from surplus to capital account without a corresponding issue of stock certificates, which there was nothing in the nature of things to prevent, we do not suppose that any one would contend that the plaintiff had received an accession to his income. Presumably his certificate would have the same value as before. Again if certificates for $1,000 par were split up in ten certificates, each for $100, we presume that no one would call the new certificates income. What has happened is that the plaintiff’s old certificates have been split up in effect and have diminished in value to the extent of the value of the new. Judgment reversed. Mr. Justice McKenna concurs In the result. [For refund, because of above decision, of taxes paid, see ^2492.] [For the bearing of the above on the question of the taxing of stock dividends as income under the Revenue Acts of 1916, 1917 and 1918, see ^812]. [For U. S. District Court decision on “stock dividends” under Revenue Act of 1916 see ^815.] 2742 Digest Recent Decisions of the Supreme Court. — [Comment: Of the cases referred to those brought under the Act of October 3, 1913 only, are reproduced,. in full, as indicated by the paragraph references. The other cases digested were brought under the Excise Tax Act of August 5, 1909.) The following propositions of law, stated for the Information and guidance of internal revenue officers and others concerned, are expressed or implied in the recent decisions of the Supreme Court of the United States in United States v. Biwabik Mining Company (T. D. 2721) (247 U. S. 116), Goldfield Consolidated Mines Company v. Scott (T. D. 2722) (247 U. S. 126) Doyle v. Mitchell Bros. Co. (T. D. 2723) (247 U. S. 179), Hays v. Gauley Mountain Coal Company (T. D. 2724) (247 U. S. 189), United States v. Cleveland, Cin- cinnati, Chicago & St. Louis Railway Company (T. D. 2725) (247 U. S. 195), William E. Peck & Co. (Inc.) v. Lowe (T. D. 2726) [^2754], Lynch v. Turrish (T. D. 2729) (2776 Southern Pacific v. Lowe (T. D. 2739) [^2891] Lynch v. Hornby (T. D. 2731) [^2763], and Peabody v. Eisner (T. D. 2732) [^2802]: 1. In the determination of net income the Excise Tax Act of August 5, 1909, per- 2743 mitted the deduction from gross income of “a reasonable allowance for deprecia- tion of property, if any”; the Income Tax Act of October 3, 1913, permitted “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”; and the Income Tax Act of September 8, 1916, as amended permits, in the case of mines- a reasonable allowance for depletion thereof not to exceed the market value in the mine, of the product thereof which has been mined and sold during the year for which the retura and computation are made.” INC. 286 TAX SUPREME COURT DECISIONS. (a) As mining leases are not conveyances of the ore in place, but are grants of the 2744 privilege of entering upon the premises and mining and removing the ore, under none of the Acts of 1909, 1913 or 1916, may a lessee of mining property deduct as so much depletion of capital aSsets the proportionate value in place on January 1, 1909, or any other date, of each ton of ore mined during the taxable year. See T. D. 1606 (75); Article 145 of Regulations No. 33; and Article 8, 171 and 172 of Regulations No. 33 (revised). (United States v. Biwabik Mining Company. See Von Baumbach v. Sargent Land Company, 242 U. S. 503.) (b) Under the Act of 1909 a mining corporation owning its mine Is not entitled 2745 to a deduction from its gross income of any amount whatever on account of deple- tion or exhaustion of the ore bodies caused by Its operations for the year for which the tax is assessed, nor to a deduction against the gross proceeds from the mining and treatment of ores to the extent of the cost value of the ore in the ground before it was mined. T. D. 1675 (80-89) and T. D. 1742 (96-105) are modified accordingly. In view of their different provisions this rule is Inapplicable to situations arising under the Acts of 1913 and 1916. See Articles 141 and 142 of Regulations No. 33; and Articles 8, 171 and 172 of Regulations No. 33 (revised). (Goldfield Consolidated Mines Company v. Scott. See Stratton’s Independence v. Howbert, 231 U. S. 399; Stanton v. Baltic Mining Company, 240 U. S. 103'.) 2. The Excise Tax .A.ct of August 5, 1909, measured the tax by the net income of a 2746 corporation “received” by it from all sources during the taxable year; the Income Tax Act of October 3, 1913, imposed the tax upon the net income “arising or ac- cruing” from all sources during the taxable year; and the Income Tax Act of September 8, 1916, as amended upon the net income “received” from all sources during the taxable year. (a) Where property is acquired by a corporation and subsequently sold for a higher 2747 price, under all three Acts the gain on the sale is income to the corporation. If, however, the property was acquired before January 1, 1909, only such portion of the gain as ac.rued subsequent to December 31, 1908, was taxable under the Act of 1909, and if it was acquired before March 1, 1913, only such portion of the gain as accrued sub- sequent to February 28, 1913, was taxable under the Act of 1913, or is taxable under the Act of 1916. See Regulations No. 31, T. D. 1606 (40, 50, 76), T. D. 1675 (37, 48, 75) T. D. 1742 (43, 55, 91); and Articles 88, 101 and 116 of Regulations No'. 33 (revised) (Doyle V. Mitchell Bros. Co.; Hays v. Gauley Mountain Coal Company; United States v. Cleveland, Cincinnati, Chicago & St. Louis Railway Company.) (b) In order to determine whether there has been gain or loss on a sale, and the 2748 amount of the gain, if any, in general under all three Acts an amount mfist be with- drawn from the gross proceeds sufficient to restore the cost of the property or the capital value that existed at the commencement of the period under consideration (either Jan'uary 1, 1909, or March 1, 1913). Interest should not be added to the purchase price in order to ascertain the cost of the property. In apportioning the profits derived from a disposition of property acquired before and sold after January 1, 1909, for the purpose of the Act of 1909, or acquired before and sold after March 1, 1913, for the purpose of the Act of 1913, the division may be pro rata according to the time elapsed or may be based on an appraisal or inventory taken as of December 31, 1908, or February 28, 1913. This is a matter of detail, to be settled according to the best evidence obtainable and in accordance with valid departmental regulations. For the purpose of the Act of 1916, however, the fair market price or value as of March 1, 1913, to be ascertained in any practicable manner, is the statutory basis for determining the amount of gain on a sale of property acquired before that date. See Regulations No. 31, T. D. 1578, T. D. 1588, T. D. 1606 (37, 71), T. D. 1675 (36, 55, 69), T. D. 1742 (42, 62, 86); Articles 4, 90, 91, 92, 93, 101, 1 09, 111, 112 and 116 of Regulations No. 33 (revised), and T. D. 2649. (Doyle v. Mitchell Bros. Co.; Hays V. Gauley Mountain Coal Company; United States v. Cleveland, Cincinnati, Chicago & St. Louis Railway Company.) (c) The Act of 1913 is valid and constitutional In taxing net income derived from 2749 sales in foreign commerce. The same principle applies to the Acts of 1909 and 1916. (William E. Peck & Co., (Inc.) v. Lowe). 2750 (d) Where a stockholder in a corporation receives as a liquidation dividend, repre- senting his share in the distribution of the proceeds of the sale of the property of the corporation upon dissolution, a sum greater than the cost of his stock, under the Acts of both 1913 and 1916 the gain is income to the stockholder. If, however, he acquired the stock before March 1, 1913, only such portion of the gain as accrued subsequent to February 28, 1913, was taxable under the Act of 1913 or is taxable under the Act of 1916. Compare the case of a dividend in ordinary course in paragraph (f) below. See the citations in paragraphs (a) and (b) above. (Lynch v. Turrish). INC. 287 TAX SUPREME COURT DECISIONS. (e) Where a corporation owns all the stock and operates under a lease all the 2751 property and business of another corporation, acting as banker for it and the two corporations being in substance identical and merged for all practical purposes, under the Acts of both 1913 and 1916 surplus of the lessor corporation accrues as income to the lessee corporation as and when accumulated by the lessor corporation, notwithstand- ing the formal distribution of such surplus in dividends to the lessee corporation may not occur during the taxable year. This special situation forms an exception to the general rule stated in paragraph (f) below. See Articles 125, 207 and 208 of Regulations No. 33 (revised). (Southern Pacific Company v. Lowe.) (f) Where a stockholder of a corporation receives dividends paid in the ordinary 2752 course of business, even though extraordinary in amount, under the Acts of both 1913 and 1916 such dividends are income in the year in which they are received by the stockholder. If paid out of surplus accrued to the corporation prior to March 1, 1913, they were subject to tax under the Act of 1913, although expressly exempt from tax under the Act of 1916. A dividend paid by a going corporation out of current earnings or accumu- lated surplus when declared by the directors in their discretion, being in the nature of a recurrent return upon the stock, is distinguishable from a so-called dividend in liquidation of the entire assets and business of the corporation, which is a return to the stockholder of the value of his stock upon the surrender of his entire interest in the corporation. Com- pare the case of a liquidation dividend in paragraph' (d) above. See Articles 105, 106 and 107 of Regulations No. 33 (revised), T. D. 2659 and T. D. 2678. (Lynch v. Hornby; Peabody v. Eisner.) (g) A dividend in ordinary course paid on stock of a corporation in property or 2753 stock other than its own is income to the stockholders to the amount of its cash value when received under the Acts of both 1913 and 1916. A dividend paid in stock of another corporation is not a stock dividend. See Articles 4 and 106 of Regulations No. 33 (revised). (Peabody v. Eisner. Compare Towhe v. Eisner, (245 U. S. 418).) [^[2738.] (T. D. 2740, June 24, 1918.) Peck vs. Lowe. (247 U. S. 165.) 2754 The appended decision of the United States Supreme Court in the case of William E. Peck & Company (Inc.) v. John 7. Lowe, Jr., collector of internal revenue is published for the information of internal-revenue officers and others concerned. (T. D. 2726, June 4, 1918.) (May 20, 1918.)^ Mr. Justice Van Devanter delivered the opinion of the Court. 2755 This was an action to recover a tax paid under protest and alleged to have been imposed contrary to the constitutional provision (Art. 1, sec. 9, cl. 5) thaP*" No tax or duty shall be laid on articles exported from any State.” The judgment below was for the defendant. 234 Fed. 125. The plaintiff is a domestic corporation chiefly engaged in buying goods in the 2756 several States, shipping them to foreign countries and there selling them. In 1914 its net income from this business was $30,173.66, and from other sources $12,436.24. An income tax for that year, computed on the aggregate of these sums, was assessed against it and paid under compulsion. It is conceded that so much of the tax as was based on the income from other sources was valid, and the controversy is over so much of it as was at- tributable to the income from shipping goods to foreign countries and there selling them. The tax was levied under the Act of October 3, 1913, c. 16, sec. 11, 38 Stat. 166, 172, 2757 which provided for annually subjecting every domestic corporation to the payment of a tax of a specified per centum of its “entire net income arising or accruing from all sources during the preceding calendar year.” Certain fraternal and other corporations, as also income from certain enumerated sources, were specifically excepted, but none of the exceptions included the plaintiflF or any part of its Income. So, tested merely by the- tcrms of the act, the tax collected from the plaintiff was rightly computed on its total net income. But as the act obviously could not impose a tax forbidden by the Constitution, we proceed to consider whether the tax, or rather the part in question, was forbidden by the constitutional provision on which the plaintiff relies. The Sixteenth Amendment, although referred to in argument, has no real bearing 2758 and may be put out of view. As pointed out in recent decisions, it does not extend the taxing power to new or excepted subjects, but merely removes all occasion which otherwise might exist, for an apportionment among the States of taxes laid on In- come, whether to be derived from one source or another. Brushaber v. Union Pacific A. .*. Co., 240 U. S. 1, 17-19: Stanton v. Baltic Mining Co., 240 U. S. 103, 112-113. INC. 288 TAX SUPREME COURT DECISIONS. The Constitution broadly empowers Congress not only “to lay and collect taxes, k 2759 duties, imposts and excises,” but also “to regulate commerce with foreign nations.” ^ So, if the prohibitory clause invoked by the plaintiff be not in the way. Congress undoubtedly has power to lay and collect such a tax as is here in question. That clause says, “No tax or duty shall be laid on articles exported from any State.” Of course it qualifies and restricts the power to tax as broadly conferred. But to what extent? The decisions of this court answer that it excepts from the range of that power articles in course of exportation, Turpin v. Burgess, 117 U. S. 504, 507; the act or occupation of exporting. Brown v. Maryland, 12 Wheat. 419, 445; bills of lading for articles being exported. Fair- bank V. United States, 181 U. S. 283; charter parties for the carriage of cargoes fro.T state to foreign ports. United States v. Hvoslef, 237 U. S. 1; and policies of marine insurance on articles being exported, — such insurance being uniformly regarded as “an integral part of the exportation” and the policy as “one of the ordinary shipping documents,” Thames and Mersey Ins. Co. v. United States, 237 U. S. 19. In short, the court has interpreted the clause as m.eaning that exportation must be free from taxation, and therefore as requiring “not sim.ply an omJssion of a tax upon the articles exported, but also a freedom from any tax which directly burdens the exportation.” Fairbank v. United States, supra, pp. 292- 293. And the court has indicated that where the tax is not laid on the articles themselves while in course of exportation the true test of its validity is whether it “so directly and I closely” bears on the “process of exporting” as to be in substance a tax on the exportation. Thames and Mersey Ins. Co. v. United States, supra, p. 25. In this view it has been held that the clause does not condemn or invalidate charges or taxes, not laid on property while being exported, merely because they affect exportation indirectly or remotely; thus a charge for stamips which each package of manufactured tobacco intended for export v/as required to bear before rem.oval from, the factory was upheld in Pace v. Burgess, 92 U. S. 372, and Turpin v. Burgess, 117 U. S. 504; and the application of a manufacturing tax on all filled cheese to cheese manufactured under contract for export, and actually exported, was upheld in Cornell v. Coyne, 192 U. S. 418. In that case it was said, p. 427: “The true construction of the constitutional provision is that no burden by way of tax or duty can be cast upon the exportation of articles, and does not mean that articles exported are relieved from the prior ordinary burdens of taxation which rest upon all property similarly situated. The exemp- tion attaches to the export and not to the article before its exportation.” While fully assenting and adhering to the interpretation which has been put on 1 2760 the clause in giving effect to its spirit as well as its letter, we are of opinion that to broaden that interpretation would be to depart from both the spirit and letter. 27 61 The tax in question is unlike any of those heretofore condemned. It is not laid on articles in course of exportation or on anything which inherently or by the usages of commerce is embraced in exportation or any of its processes. On the contrary, it is an income tax laid generally on net incomes. And while it cannot be applied to any income which Congress has no power to tax (see Stanton v. Baltic Mining Co., supra, p. 113), it is both nominally and actually a general tax. It is not laid on income from exportation be- cause of its source, or in a discriminative way, but just as it is laid on other income. The words of the Act are “net income arising or accruing from all sources.” There is no dis- crimination. At most, exportation is affected only indirectly and remotely. The tax is levied after exportation is completed, after all expenses are paid and losses adjusted, and after the recipient of the Income is free to use it as he chooses. Thus what Is taxed — the net . income — is as far removed from exportation as are articles intended for export before } the exportation begins. If articles manufactured and intended for export are subject to taxation under general laws up to the time they are put in course of exportation, as we have seen they are, the conclusion is unavoidable that the net income from the venture when completed, that is to say, after the exportation and sale are fully consummated, is like- wise subject to taxation under general laws. In that respect the status of the income Is not different ^’•om that of the exported articles prior to the exportation. For these reasons we hold that the objection urged against the tax Is not well 27 62 grounded. Judgrnent Affirmed. Lynch vs. Hornby (247 U. S. 339.) The appended decision of the United States Supreme Court in the case of E. J. 27 63 Lyn ch, as collector of internal revenue, v. H. C. Hornby is published for the infor- mation of internal-revenue officers and others concerned. (T. D. 2731, June 11, 1918.) i ... (June 3, 1918.) ^ Mr. Justice Pitney delivered the opinion of the Court. Hornby, the respondent, recovered a judgment in the United States District Court 2764 against Lynch, as Collector of Internal Revenue, for the return of $171, assessed as an additional income tax under the Act of October 3, 1913 (Ch. 16, 38 Stat. 114, INC. 289 TAX SUPREME COURT DECISIONS. 166), and paid under protest. The Circuit Court of Appeals affirmed the judgment,. 236 Fed. Rep. 661, and the case comes here on certiorari. It was submitted at the same time with Lynch, Collector v. Turrish, ante, ^2776, Southern Pacific Co. v. Lowe, Collector, ante, ^2804, and Peabody v. Eisner, Collector, -post, ^2802, arising under the same Act, and this day decided. The facts, in brief, are as follows; Hornby, from 1906 to 1915, was the owner of 2 7 6 5 434 (out of 10,000) shares of the capital stock of the Cloquet Lumber Company, an Iowa corporation, which for more than a quarter of a century had been engaged in purchasing timber lands, m.anufacturing the tim.ber into lumber and selling it. Its shares had a par value of $100 each, making the entire capital stock $1,000,000. On and prior to March 1, 1913, by the increase of the value of its timber lands and through its business operations, the total property of the company had come to be worth $4-, 000,000, and Hornby’s stock, the par value of which was $43,400, had become worth at least $150,000. In the year 1914 the company was engaged in cutting its standing timber, manufacturing it into lum.ber, selling the lum.ber, and distributing the proceeds among its stockholders. In that year it thus distributed dividends aggregating $650,000, of which $240,000, or 24 per cent, of the par value of the capital stock, was derived from current earnings, and $410,000 from conversion into money of property that it owned or in which it had an interest on March 1, 1913. Hornby’s share of the latter amount was $17,794, and this not having been included in his incom.e tax return, the Commissioner of Internal Revenue levied and additional tax of $171 on account of it, and this forms the subject of the present suit. The case was tried in the District Court and argued in the Circuit Court of Appeals 2766 together with Lynch, Collector v. Turrish (236 Fed. Rep. 653), and was treated as presenting substantially the same question upon the merits. In our opinion it is distinguishable from the Turrish case, where the distribution in question was a single and final dividend received by Turrish from the Payette Company in liquidation of the entire assets and business of the company and a return to him of the value of his stock upon the surrender of his entire interest in the company, at a price that represented its intrinsic value at and before March 1, 1913, when the Income Tax Act took effect. In the present case there was no winding up or liquidation of the Cloquet Lumber 2767 Company, nor any surrender of Hornby’s stock. He was but one of many stock- holders, and had but the ordinary stockholder’s interest in the capital and surplus of the com.pany, that is, a right to have them devoted to the proper business of the cor- poration and to receive from the current earnings or accumulated surplus such dividends as the directors in their discretion might declare. Gibbons v. Mahon, 136 U. S. 549, 557. The operations of this company in the year 1914 were, according to the facts pleaded^ of a nature essentially like those in which it had been engaged for more than a quarter of a century. The fact that they resulted in converting into money, and thus setting free for distribution as dividends, a part of its surplus assets accumulated prior to March 1, 1913, does not render Hornby’s share of those dividends any the less a part of his income within the true intent and meaning of the Act, the pertinent language of which is as follows (38 Stat. 166, 167): “A. Subdivision 1. That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources in the preceding calendar )’^ear to every citizen of the United States, * * * ^nd to every person residing in the United States, * * * ^ ^^x of 1 per centum per annum upon such income, except as hereinafter provided; * * * “B. That, subject only to such exemptions and deductions as are hereinafter allowed,, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or com.pensation for personal service * * * ^ ^|so from interest, rent, dividends, securities or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever.” Among the deductions allowed for the purpose of the normal tax is, “seventh, 2768 the amount received as dividends upon the stock or from the net earnings of any corporation, * * * which is taxable upon its net income as hereinafter provided.” There is a graduated additional tax, commonly known as a “surtax,” upon net income in excess of $20,000, including incom.e from dividends, and for the purpose of this additional tax “the taxable incom.e of any individual shall embrace the share to which he would be entitled of the gains and profits, if divided or distributed, whether divided or distributed or not, of all corporations * * * form.ed or fraudulently availed of for the purpose of preventing the imposition of such tax through the medium of permitting such gains and profits to accum.ulate instead of being divided or distributed.” It is evident that Congress intended to draw and did draw a distinction between 2769 a stockholder’s undivided share or interest in the gains and profits of a corporation, prior to the declaration of a dividend, and his participation in the dividends declared and paid; treating the latter, in ordinary circumstances, as a part of his income for the purposes of the surtax, and not regarding the former as taxable income unless fraudulently accumulated for the purpose of evading the tax. INC. 290 TAX SUPREME COURT DECISIONS. This treatment of undivided profits applies only to profits permitted to accumulate 27 70 after the taking effect of the Act, since only with respect to these is a fraudulent purpose of evading the tax predicable. Corporate profits that accumulated before the Act took effect stand on a different footing. As to these, however, just as we deem the legislative intent m.anifest to tax the stockholder with respect to such accumulations only if and when, and to the extent that, his interest in them, comes to fruition as incom.e, that is, in dividends declared, so we can perceive no constitutional obstacle that stands in the way of carrying out this intent when dividends are declared out of a pre-existing surplus. The Act took effect on March 1, 1913, a few days after the requisite num.ber of States had given approval to the Sixteenth Amendment, under which for the first time Congress was em.pow|ered to tax income from property without apportioning the tax among the States according to population. Southern Pacific Co. v. Lotve, supra. That the retroactivity of the Act from the date of its passage (October 3, 1913) to a date not prior to the adoption of the Amiendm.ent was perm.issible is settled by Brushaber v. Union Pacific R. R., 240 U. S. 1, 20. And we deem it equally clear that Congress was at liberty under the Amend- ment to tax as incom.e, without apportionment, everything that became income, in the ordinary ^sense of the word, after the adoption of the Amendment, including dividends received in the ordinary course by a stockholder from a corporation, even though they were extraordinary in amount and m.ight appear upon analysis to be a mere realization in possession of an inchoate and contingent interest that the stockholder had in a surplus of corporate assets previously existing. Dividends are the appropriate fruit of stock ownership, are comm.only reckoned as income, and are expended as such by the stockholder without regard to whether they are declared from the m.ost recent earnings, or from a sur- plus accumulated from the earnings of the past, or are based upon the increased value of the property of the corporation. The stockholder is, in the ordinary case, a different entity from the corporation, and Congress was at liberty to treat the dividends as coming to him ab extra, and as constituting a part of his income when they came to hand. Hence we construe the provision of the Act that “the net income of a taxable 2771 person shall include gains, profits, and income derived from * * * interest, rent, dividends, * * * or gains or profits and income derived from any source whatever” as including (for the purposes of the additional tax) all dividends declared and paid In the ordinary course of business by a corporation to its stockholders after the taking effect of the Act (March 1, 1913), whether from current earnings, or from the accumulated surplus made up of past earnings or increase in value of corporate assets, notwithstanding it accrued to the corporation in whole or in part prior to March 1, 1913. In short, the word “dividend” was employed in the Act as descriptive of one kind of gain to the individual stockholder; dividends being treated as the tangible and recurrent returns upon his stock, analogous to the interest and rent received upon other forms of invested capital. In the more recent Income Tax Acts, provisions have been Inserted for the pur- 2772 pose of excluding from the effect of the tax any dividends declared out of earnings or profits that accrued prior to March 1, 1913. This originated with the Act of September 8, 1916, and has been continued in the Act of October 3, 1917.* We are re- ferred to *In Act of September 8, 1916 (Ch. 463, 39 Stat. 756, 757), which took the place of the Act of 1913, the substance of what we have quoted from Paragraph B of the 1913 Act was embodied in Sec. 2 (a), but with this proviso: Provided, that the term ‘dividends* as used in this title shall be held to mean any distribution made or ordered to be made by a corporation ♦ * * nf its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation,” etc. And by the Act of October 3, 1917 (Ch. 63, 40 Stat. 300, 329, 337-8), Sec. 2 (a) of the 1916 Act was amended by being repeated without the proviso (p. 329), while the proviso was inserted as a new section — 31 (a) — and to it was added a subsection, (b), as follows: “(b) Any distribution made to the shareholders or members of a corporation * ♦ ♦ in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, * ♦ ♦ but nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends or otherwise, exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen, has been^ made. The subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out of the earnings or profits accrued prior to March first, nine- teen hundred and thirteen.” INC. 291 TAX SUPREME COURT DECISIONS. the legislative history of the Act of 1916, which it is contended indicates that the new definition of the term “dividends” was intended to be declaratory of the meaning of the term as used in the 1913 Act. We cannot accept this suggestion, deeming it more rea- sonable to regard the change as a concession to the equity of stockholders granted in the 1916 Act, in view of constitutional questions that had been raised in this case, in the companion case of Lynch, Collector v. Turrish, and perhaps in other cases. These two cases were commenced in October, 1915; and decisions adverse to the tax w'ere rendered in the District Court in January, 1916, and in the Circuit Court of Appeals September 4, 1916. We repeat that under the 1913 Act dividends declared and paid in the ordinary 2773 course by a corporation to its stockholders after March 1, 1913, whether from current earnings or from a surplus accumulated prior to that date, were taxable as income to the stockholder. We do not overlook the fact that every dividend distribution diminishes by just 27 74 so much the assets of the corporation, and in a theoretical sense reduces the intrinsic value of the stock. But, at the same time, it demonstrates the capacity of the corporation to pay dividends, holds out a promise of further dividends in the future, and quite prob- ably increases the market value of the shares. In our opinion. Congress laid hold of dividends paid in the ordinary course as de facto income of the stockholder, without regard to the ultimate effect upon the corporation resulting from their payment. Of course we are dealing here with the ordinary stockholder receiving dividends 27 75 declared in the ordinary way of business. Lynch, Collector v. Turrish and Southern Pacfiic Co. V. Lowe, Collector, this day decided, rest upon their special facts and are plainly distinguishable. It results from what we have said that it was erroneous to award a return of the tax collected from the respondent, and that the judgment should be Reversed, and the cause remanded to the District Court for further -proceed- ings in conformity with this opinion. Lynch vs. Turrish. (247 U. S. 221.) 27 7 6 The appended decision of the United States Supreme Court in the case of E. J. Lynch, as collector of internal revenue, v. Henry Turrish, is published for the information of internal-revenue officers and others concerned. (T. D. 2929, June 11, 1918.) (June 3, 1918.) Mr. Justice McKenna delivered the opinion of the Court. Suit to recover an income tax, paid under protest, assessed under the Act of Oct- 2777 ober 3, 1913, 38 Stat. 166. The facts, as admitted by demurrer, are these: Respondent, Turrish, who wa» 27 78 plaintiff in the trial court, made a return of his income for the calendar year 1914 which showed that he had no net income for that year; afterwards the Commissioner of Internal Revenue made a supplemental assessment showing that he had received a net income of $32,712.08, which, because of specific deductions and exemptions, resulted in no normal tax, but as the net income exceeded the sum of $20,000 the Commissioner assessed an additional or super-tax of one per cent upon the excess, resulting in a tax of $127.12, which was sought to be recovered. The reassessment was based upon certain sums received by the plaintiff in the year 1914 as distributions from corporations subject to the Income Tax Law and held by the Commissioner to be income derived from divi- dends received by the plaintiff on stock of domestic corporations; of which the sum of $79,975, received as a distribution from the Payette Lumber & Manufacturing Company, and without which no tax could have been levied against the plaintiff, is here in dispute. Prior to March 1, 1913, and continuously thereafter until the surrender of his 27 79 stock as hereinafter mentioned, plaintiff was a stockholder in the Payette Com- pany, which was organized in the year 1903 with power to buy, hold, and sell timber lands, and in fact never engaged in any other business than this except minor businesses incidental to it. Immediately after its organization this company began to invest in timber lands, and prior to March 1, 1913, had thus invested approximately $1,375,000. On March 1, 1913, the value of its assets was not less than $3,000,000, of which 2780 sum the value of the timber lands was notless than $2,875,000. The increase was due to the gradual rise in the market value of the lands. At that date the value of Turrish’s stock was twice its par value, or $159,950, and about that time he and all the other stockholders gave an option to sell their stock for twice its par value. The holders of the option formed another company, called the Boise-Payette Lumber Com- INC. 292 TAX SUPREME .COURT DECISIONS. pany, and transferred the options to it. The options having been extended to December 31, 1913, the new company informed the Payette Company and its stockholders shortly before this date that instead of exercising the option it preferred and proposed to purchase all of the assets of the Payette Company, paying to that company such a purchase price that there would be available for distribution to its stockholders twice the par value of their stock. The stockholders by resolution authorized this sale, and, pursuant to this and a resolution of the directors, the Payette Company transferred to the new company all of its assets, property, and franchises, and upon the completion of the transaction found itself with no assets or property, except cash to the amount of double the par value of its stock which had been paid to it by the new company, and with no debts, liabilities, or obligations except those which the new company had assumed. The cash was distributed to the stockholders on the surrender of their certificates of stock, and the company went out of business. In this way, upon the surrender of his shares, Turrish received $159,950, being double their par value. The Commissioner of Internal Revenue considered that of this sum one-half was 2781 not taxable, being the liquidation of the par value of Turrish’s stock, but that the other half was income for the year 1914 and taxable under the Act of 1913. The question in the case is thus indicated. The District Court took a different 2782 view from that of the Com.missioner of Internal Revenue and therefore overruled the demurrer to Turrish’s corr.plaint and entered judgment for him for the sum prayed, which judgment was affirmed by the Circuit Court of Appeals for the Eighth Circuit. 236 Fed. 653. The point in the case seems a short one. It, however, has provoked m.uch discus- 2783 sion on not only the legal but the econom.ic distinction between capital and income and by what processes and at what point of time the form.er produces or becomes the latter. And this in resolution of a statute which concerns the activities of men and in- tended, it might be supposed, to be without perplexities and readily solvable by the off- hand conceptions of those to whom it was addressed. The provisions of the Act, so far as material to be noticed, are the following: That 2784 there is assessed “upon the entire net incom.e arising or accruing from all sources in the preceding calendar year to every * * * person residing in the United States * * * a tax of one per centum per annum upon such income * * * »» Par. A, Subdlv. 1. In addition to that tax, which is denominated the normal income tax, it is provided 27 85 that there shall be levied “upon the net income of every Individual an additional tax * * * of one per centum per annum upon the amount by which the total net Incom.e exceeds” certain amounts, and the person subject to the tax is required to make a personal return of his total net incom.e from all sources under rules and regulations to be prescribed by the Commissioner of Internal Revenue. Subdiv. 2. By Paragraph B it is provided that, subject to certain exemptions and deductions, 2786 “the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service * * * also from in- terest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever.” 2787 After specifying the exemptions and deductions allowed, the law declares as follows: “The said tax shall be computed upon the remainder of said net income of each person subject thereto, accruing during each preceding calendar year ending December thirty- first: Provided, however. That for the year ending Decem.ber thirty-first, nineteen hundred and thirteen, said tax shall be computed on the net incom.e accruing from l\'farch first to Decem.ber thirty-first, nineteen hundred and thirteen, both dates inclusive * * * >» Par. D. It will be observed, therefore, that the statute levies a normal tax and an additional 2788 tax upon net incom.es, derived from whatever source, “arising or accruing” each preceding calendar year ending Decem.ber 31, except that for the year ending December 31, 1913, the tax shall be coinputed on the net income accruing from Afarch 1, 1913, to December 31, 1913. And in determining the application of the statute to Turrish we must keep in mind 27 89 that on the adm.Itted facts the distribution received by him from the Payette Com.pany m.anifestly was a single and final dividend In liquidation of the entire assets and business of the com.pany, a return to him of the value of his stock upon the sur- render of his entire interest in the com.pany, and at a price that represented its intrinsic value at and before March 1, 1913, when the act took effect. ff’he District Court and the Circuit Court of Appeals decided that the amount so 2790 distributed to 'hurrlsh was not income within the meaning of the statute, basing the decision on two propositions as expressed in the opinion of tlie Circuit Court of Appeals, by Sanborn, Circuit Judge — (a) 'I’he amount was the realization of an invest- ment m.ade som.e years before, representing its gradual increase during those years, and which reached its height before the effective date of the law, that Is, before March 1, 1913, and the m.ere change of form of the property “as from real to personal property, or from stock 293 TAX INC. SUPRERIE COURT DECISIONS. to cash” was not income to its holders because the value of the property was the same after as before the change; ^(b) The timber lands were the property, capital and capital assets of their legal and equitable owner and the enhancement of their value during a series of years “prior to the effective date of the income tax law, although divided or distributed by ^ dividend or otherwise subsequent to that date, does not become income, gains, or profits \ taxable under such an act.” For proposition “a” the court cited Collector v. Hubhardy 12 Wall. 1; Bailey v. Railroad Company, 22 Wall. 604, and the same case in 105 U. S. 109. For proposition “b” Gray v. Darlington, 15 Wall. 63, was relied on. The Government opposes both contentions by an elaborate argument containing 2791 definitions of capital and income drawn from legal and economic sources and given breadth to cover a number of other cases submitted with this. The argument, m effect, miakes any increase of value of property income, emerging as such and taxable at the moment of realization by sale or some act of separation, as by dividend declared ' or by distribution, as in the instant case. To sustain the argument these definitions are presented: “1. Capital is anything, 2792 material or otherwise, capable of ownership, viewed in its static condition at a m.oment of time, or the right of ownership therein. 2. Income is the service or return rendered by capital during a period of time. * * * 4 _ income (‘profits’) is^ the difference between income and outgo. * * * 7. In the actual production and distribution of capital there is a constant conversion of capital into income, and vice versa. 8. The attempt to conceal this conversion by treating ‘income’ as the standard return , from intact ‘capital’ only leads to confusion of the value of capital with capital itself.” ^ 2793 From these definitions are deduced the following propositions, which are said to be decisive of the problems in the cases: 1. Income being derived from the use of capital, the conversion or transfer of capital always produces income. 2. Mere appreciation of capital value does not produce ‘income,’ nor mere depreciation ‘outgo.’ 3. Net income is the difference between actual ‘income’ and actual ‘outgo.’ 4. Income is not confined to money income, but includes anything capable of easy valuation in money.” It will be observed that the breadth of definition and the breadth of application are 2794 necessary to the refutation of the reasoning of the Circuit Court of Appeals. There is direct antagonism, the court basing its reliance, it says, upon what it asserts is the comm.on sense and understanding of the words of the law, and the exposition of like laws by the decisions of this court. The Government’s resource is the discussion of econ- omists and the fact, concrete and practical, of wealth not only increased but come to actual t hand. 1 he instant case is an example. Turrish’s stock doubled in value. He paid for V It $79,975; he received $159,950. It requires a struggle to resist the influence of the fact, but we are aided and fortified by our own precedents and saved from much intricate and subtle discussion and an elaborate review of other cases cited in confirmation or oppo- sition. In Collector v. Hubbard, supra, the distinction between a corporation and its stock- 2795 holders was recognized and that the stockholder had not title for certain purposes to the earnings of the corporation, net or other, prior to a dividend being declared, but they m.ight become capital by investment in permanent improvements and thereby increase the market value of the shares, “whether held by the original subscribers or by assignees.” In other wmrds, it was held that the investments of the corporation were the investments of the stockholders: that is, the stockholders could have an interest, taxable under the act considered, though not identical wnth the corporation. This was repeated in Bailey v. Railraod Company, 22 Wall. 604, 635, 636. L The latter case came here again in 106 U. S. 109, and it was then declared that the 2796 purpose of an incom.e tax law was to tax the incomie for the year that it accrued; in other words, no tax in contem.plation of the law accrued upon something except for the year in which that som.ething — earnings, profits, gains or income — accrues. In that case the subject of the tax was a scrip dividend, but the certificates did not show the year of the earnings and testimony as to the particular year was admitted. The principle applies to the case at bar. If increase in value of ‘the lands was income, it had Its par- . ticular tirne and such time must have been within the time of the law to be subject to the law, that is, it m.ust have been after Afarch 1, 1913, But, according to the fact admitted, \ there was no increase after that date and therefore no increase subject to the law. There was continuity of value, not gain or increase. In the first proposition of the Court of Appeals we, therefore, concur. In support of its second proposition it adduced, as we hav'e seen. Gray v. Darlington, 2797 15 W all. 63. The cast arose under the income tax law of 1867, which levied “upon the gains, profits, and income of every person, * * * whether derived from any kind of property * * * or from any other source whatever * * * a tax of five per centum on the amount so derived over $1,000 * * * for the year ending the thirty- first of Decemibcr next preceding the lime for levying, collecting and paying said tax.” V INC. 294 TAX SUPREME COURT DECISIONS. Darlington, in 1865, being the owner of certain United States Treasury notes, 2798 exchanged them for United States bonds. In 1869 he sold the bonds at an advance of $20,000 over the cost of the notes and upon this amount was levied a tax of five per centum as gains, profits and income for that year. He paid the tax under protest and sued to recover, and prevailed. .This court, by Mr. Justice Field, said: “The question pre- sented is whether the advance in the value of the bonds, during this period of four years, over their cost, realized by their sale, was subject to taxation as gains, profits, or income of the plaintiff for the year in which the bonds were sold. The answer which should be given to this question does not, in our judgment, admit of any doubt. The advance in the value of property during a series of years can, in no just sense be considered the gains, profits, or incom.e of any one particular year of the series, although the entire amount of the advance be at one time turned into money by the sale of the property. The statute looks, with some exceptions, for subjects of taxation only to annual gains, profits and income.” And again, “The mere fact that property has advanced in Value between the date 2799 of its acquisition and sale does not authorize the imposition of a tax on the mount of the advance. Mere advance in value in no sense constitutes the gains, profits, or income specified by the statute. It constitutes and can be treated merely as increase of capital.” This case has not been since questioned or modified. The Government feels the impediment of the case and attempts to confine its ruling 2800 to the exact letter of the Act of March 2, 1867, and thereby distinguish that act from the act of 1913 and give to the latter something of retrospective effect. Opposed to this there is a presumption, resistless except against an intention imperatively clear. The Government, however, m.akes its view depend upon disputable differences between certain words of the two acts. It urges that the act of 1913 makes the income taxed one “arising or accruing” in the preceding calendar year, while the act of 1867 makes the income one “derived.” Granting that there is a shade of difference between the words, it cannot be granted that Congress made that shade a criterion of intention and committed the construction of its legislation to the disputes of purists. Besides, the contention of the Government does not reach the principle of Gray v. Darlington, which is that the gradual advance in the value of property during a series of years in no just sense can be ascribed to a particular year, not therefore as “arising or accruing,” to meet the challenge of the words, in the last one of the years, as the Government contends, and taxable as income for that year or when turned into cash. Indeed, the case decides that such advance in value is not income at all, but merely increase of^capital and not subject to a tax as income. We concur, therefore, in the second proposition of the Circuit Court of Appeals 2801 as well as in the first and affirm the judgment. Mr. Justice Brandeis and Mr. Justice Clarke concur in the result. Peabody vs. Eisner. (247 U. S. 347.) 2802 The appended decision of the United States Supreme Court in the case of Charles A. Peabody v. Mark Eisner, as collector of internal revenue, is published for the informaion of internal-revenue officers and others concerned. (T. D. 2732, June 11, 1918.) • ^ (June 3, 1918.) 5^ Mr. Justice Pitney delivered the opinion of the Court. 2803 This case arose under the Federal Income Tax Act of October 3, 1913 (Ch. 16, 38 Stat.l 14, 166). The controversy is over the first cause of action set up by plaintiff in error in a suit against the collector for the recovery of an additional tax exacted in respect of a certain dividend received by plaintiff in the year 1914, the facts being as follows: On and prior to March 1, 1913, and thenceforward until payment of the dividend in question, petitioner was owner of 1,100 shares (out of a total of 2,000,000 shares outstand- ing) of common stock of the Union Pacific Railroad Company, of the par value of $100 each, and during the same period the company had large holdings of the common and pre- ferred stocks of the Baltimore & Ohio Railroad Company. On March 2, 1914, the Union Pacific declared and paid an extra dividend upon each share of its common stock, amounting to $3 in cash, $12 in par value of preferred stock of the Baltimore & Ohio, and $22.50 in par value of the common stock of the same company; the result being that petitioner received as his dividend upon his holding of Union Pacific common stock $3,300 in cash, 132 shares of Baltimore & Ohio preferred and 247 shares of Baltimore & Ohio common stock. In his income return for 1914 he included as taxable income $4.12 per share of this dividend, or $4,532 in all, and paid his tax upon the basis of this return. Afterwards he was sub- ject to additional assessment upon a valuation of the balance of his dividend, and this, having been paid under protest, is the subject of the present suit, the theory of which is that the entire earnings, income, gains, and profits from all sources realized by the Union INC. 295 TAX SUPREME COURT DECISIONS. Pacific Railroad Company from March 1, 1913, to March 2, 1914, remaining after the pay- ment of prior charges did not exceed $4.12 per share of the Union Pacific common stock, and that the cash and Baltimore & Ohio stock disposed of in the extra dividend (so far as they exceeded the value of $4.12 per share of Union Pacific) did not constitute a gain, profit, or income of the Union Pacific, and therefore did not constitute a gain, profit, or incom.e of the plaintiff arising or accruing either in or for the year 1914 or for any period subsequent to March 1, 1913, the date when the Income Tax Law took effect. The District Court overruled this contention upon the authority of Southern Pacific Co. v. Lowe, CoU lector, 238 Fed. Rep. 847, and Towne v. Eisner, Colletcor, 242 Fed. Rep. 702. The latter case has since been reversed (245 U. S. 418), but only upon the ground that it related to a stock dividend which in fact took nothing from the property of the corporation and added nothing to the interest of the shareholder, but merely changed the evidence which represented that interest. Southern Pacific Co. v. Lowe, Collector, has been reversed this day, ante ^2804, but only upon the ground that the Central Pacific Railway Company, which paid the dividend, and the Southern Pacific Company, which received it, were in substance identical corporations because of the complete ownership and control which the latter possessed over the former as stockholder and in other capacities, so that while the two companies were separate legal entities, yet in fact and for all practical purposes the former was but a part of the latter, acting merely as Its agent and subject In all things to its direction and control; and for the further reason that the funds represented by the dividend were in the actual possession and control of the Southern Pacific Company as well before as after the declaration of the dividend. In this case the plaintiff in error stands in the position of the ordinary stockholder, whose Interest in the accumulated earnings and surplus of the company are not the same before as after the declaration of a dividend; his right being m.erely to have the assets devoted to the proper business of the corporation and to receive from the current earnings or accumulated surplus such dividends as the directors In their discretion may declare; and without right or power on his part to control that discretion. ^It hardly is necessary to say that this case is not ruled by our decision in Towne v. Eisner, since the dividend of Baltimore & Ohio shares was not a stock dividend but a distribution in specie of a portion of the assets of the Union Pacific, and is to be governed for all present purposes by the same rule applicable to the distribution of a like value in money. It is controlled by Lynch, Collector v. Hornby, this day decided, ante, ^2763. Judgment A firmed. Southern Pacific Company vs. Lowe. (247 U. S. 330.) 2804 The appended decision of the United States Supreme Court In the case of Southern Pacific Co. V. John Z. Lowe, Jr., as collector of Internal revenue, is published for ' the information of internal-revenue officers and others concerned. (T. D. 2730, June 11, 1918.) (June 3, 1918.) Fir. Justice Pitney delivered the opinion of the Court. This case presents a question arising under the Federal Income Tax Act of October 3, 2805 1913 (Ch. 16, 38 Stat. 114, 166). Suit was brought by plaintiff in error against the Collector to recover taxes assessed against it and paid under protest. There were two causes of action, of which only the second went to trial, it having been stipulated that the trial of the other might be postponed until the final determination of this one. So far as it is presented to us, the suit is an effort to recover a tax imposed upon certain dividends upon stock, in form received by the plaintiff from another corporation in the early part of the year 1914, and alleged by the plaintiff to have been paid out of a surplus accumulated not only prior to the effective date of the Act but prior to the adoption of the Sixteenth Amendment to the Constitution of the United States. The District Court directed a verdict and judgment in favor of the Collector, 238 Fed. Rep. 847, and the case comes here by direct writ of error under sec. 238, Judicial Code, because of the constitutional question. That our jurisdiction was properly invoked is settled by Towne v. Eisner, 245 U. S. 418, 425. The case was submitted at the same time with several other cases arising under the 2806 same Act and decided this day, viz.. Lynch, Collector v. Turrish, ante, ^[2776, Lynch, Collector v. Hornby, post, 1|2763, and Peabody v. Eisner, Collector, post, ^[2802. The material facts are as follows:^ Prior to January 1, 1913, and at all tixues material 2807 to the case, plaintiff, a corporation organized under the laws of the State of Ken- ^ tucky, owned all the capital stock of the Central Pacific Railway Company, a cor- poration of the State of Utah, including the stock registered in the names of the directors.* *There was another question, concerning a dividend paid by the Reward Oil Company, whose stock likewise was owned by the Southern Pacific Company, but the contention of plaintiff in error respecting this item has been abandoned. INC. 296 TAX SUPREME COURT DECISIONS. This situation existed eontinuously from the Incorporation of the Railway Company in the year 1899. That company is the successor of the Central Pacific Railroad Company and acquired all of its properties, which constitute a part of a large system of railways owned or controlled by the Southern Pacific Company. The latter company, besides being sole stockholder, was in the actual physical possession of the railroads and all other assets of the Railway Company, and in charge of Its operations, which were conducted in accord- ance W'ith the terms of a lease m.ade by the predecessor company to the Southern Pacific and assumed by the Railway Company, the effect of which was that the Southern Pacific should pay to the lessor company $10,000 per annum for organl^^atlon expenses, should operate the railroads, branches, and leased lines belonging to the lessor, and account annually for the net earnings, and if these exceeded 6 per cent on the existing capital stock of the lessor the lessee should retain to itself one-half of the excess; advances by the lessee for account of the lessor were to bear lawful interest and the lessor was to be entitled at any time and from time to time to refund to itself its advances and interest out of any net earnings which might be in its hands. The provisions of the lease were observed by both corporations for bookkeeping purposes. The Southern Pacific acted as cashier and banker for the entire system; the Central Pacific kept no bank account, its earnings being deposited with the bank account of the Southern Pacific; and if the Central Pacific needed money for additions and betterments or for making up of a deficit of current earnings, the necessary funds were advanced by the Southern Pacific. As a result of these operations and of the conversion of certain capital assets of the Central Pacific Company, that com.pany showed upon its books a large surplus accumulated prior to January 1, 1913, principally in the form of a debit against the Southern Pacific, which at the same time, as sole stockholder, was entitled to any and all dividends that might be declared, and being in control of the board of directors was able to and did control the dividend policy. The dividends In question were declared and paid during the first six months of the year 1914 out of this surplus of the Central Pacific accumulated prior to January 1, 1913; but the payment was only constructive, being carried into effect by bookkeeping entries which simply reduced the apparent surplus of the Central Pacific and reduced the apparent indebtedness of the Southern Pacific to the Central Pacific by pre- cisely the amount of the dividends. The question is whether the dividends received under these circumstances and 2808 in this manner by the Southern Pacific Company were taxable as income of that company under the Income Tax Act of 1913.* *In addition, a question was made in the District Court as to a special dividend declared by the Central Pacific out of the proceeds of sale of certain land on Long Island, taken in satisfaction of a debt and sold in December, 1913. As to this, however, no argument is submitted by plaintiff in error, the facts are not clear, and we pass it with- out consideration. The Act provides in Section II, Paragraph A, Subdivision 1 (38 Stat. 166): “That 2809 there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources in the preceding calendar year” to every person residing in the United States a tax of 1 per centum per annum, with exceptions not now material. By Paragraph G (a) (p. 172), it is provided: “That the normal tax hereinbefore imposed upon individuals [1 per cent.] 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 * ♦ * organized in the United States,” with other provisions not now material. 2810 It is provided in Paragraph G (b), as to domestic corporations, that such net income shall be ascertained by deducting from the gross amount of the income of the corporation (1) ordinary and necessary expenses paid within the year in the main- tenace and operation of its business and properties, including rentals and the like; (2) losses sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation by use, wear and tear of property, if any, and in the case of mines a certain allowance for depletion of ores and other natural deposits; (3) interest accrued and paid within the year upon indebtedness of the corporation, within prescribed limits; (4) national and state taxes paid. It will be observed that moneys received as dividends upon the stock of other corporations are not deducted, as they are in computing the income of individuals for the purpose of the normal tax under this Act (p. 167), and as they were in computing the income of the corporation under the Excise Tax Act of August 5, 1909 (Ch. 6, 36 Stat. 11, 113, Sec. 38). By Paragraph G (c), the tax upon corporations is to be computed upon the entire 281 1 net income accrued within each calendar year, but for the year 1913 only upon the net Income accrued from March 1 to JDccember 31, to be ascertained by taking five-sixths of the entire net income for the calendar year. INC. 297 TAX SUPREME COURT DECISIONS. The purpose to refrain from taxing income that accrued prior to March 1, 1913, 2812 and to exclude from consideration in making the computation any income that accrued in a preceding calendar year, is made plain by the provision last referred to; indeed, the Sixteenth Amendment, under which for the first time Congress was authorized to tax income from property without apportioning the tax among the States according to population, received the approval of the requisite number of States only in February, 1913. Pollock v. Farmers" Loan Trust Co., 157 U. S. 429, 581; 158 tJ. S. 601, 637; Brushaher v. Union Pacific R. R., 240 U. S. 1, 16. We must reject in this case, as we have rejected in cases arising under the Corpora- 2813 tion Excise Tax Act of 1909 (Doyle^ Collector v. Mitchell Brothers Co. and Hays, Collector v.Gauley Mountain Coal Co., decided May 20, 1918), the broad contention sub- mitted In behalf of the Government that all receipts — everything that comes in — are income within the proper definition of the term “gross Income,” and that the entire pro- ceeds of a conversion of capital assets, in whatever form and under whatever circumstances accomplished, should be treated as gross Income. Certainly the term “income” has no broader meaning In the 1913 Act than in that of 1909 (see Stratton" s Independence v. Howbert, 231 U. S. 399, 416, 417), and for the present purpose we assume there is no dif- ference in Its meaning as used in the two Acts. This being so, we are bound to consider accumulations that accrued to a corporation prior to January 1, 1913, as being capital, not income, for the purposes of the Act. And we perceive no adec^uate ground for a distinction, in this regard, between an accumulation of surplus earnings, and the incre- ment due to an appreciation in value of the assets of the taxpayer. That the dividends in question were paid out of a surplus that accrued to the 281 4 Central Pacific prior to January 1, 1913, is undisputed; and we deem it to be equally clear that this surplus accrued to the Southern Pacific Company prior to that date. In every substantial sense pertinent to the present Inquiry, and hence underwent nothing more than a change of form when the dividends were declared. We do not rest this upon the view that for the purposes of the Act of 1913 stock- 28 1 5 holders in the ordinary case have the same interest in the accumulated earnings of the company before as after the declaration of dividends. The act is quite different in this respect from the Income Tax Act of June 30, 1864 (Ch. 173, 13 Stat. 223, 281, 282), under which this court held, in Collector v. Hubbard, 12 Wall. 1, 16, that an indi\idual was taxable upon his proportion of the earnings of the corporation although not declared as dividends. That decision was based upon the very special language of a clause of Sec. 117 of the Act (13 Stat. 282) that “the gains and profits of all companies, whether Incor- porated or partnership, other than the companies specified in this section, shall be included in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or otherwise.” The Act of 1913 contains no similar language, but on the contrary deals with dividends as a particular item of income, leaving them free from the normal tax imposed upon individuals, subjecting them to the graduated surtaxes only when received as dividends (38 Stat. 167, Paragraph B), and subjecting the interest of any individual shareholder in the undivided gains and profits of his corporation to these taxes only in case the company is formed or fraudulently availed of for the purpose of preventing the imposition of such tax by permitting gains and profits to accumulate instead of being divided or distributed*. Our view of the effect of this Act upon divi- dends received by the ordinary stockholder after it took effect but paid out of a surplus that accrued to the corporation before that event, is set forth in Lynch, Collector v. Hornby, post, ^2763, decided this day. * “For the purpose of this additional tax the taxable income of any Individual shall embrace the share to which he would be entitled of the gains and profits, if divided^ or distributed, whether divided or distributed or not, of all corporations, joint-stock com- panies, or associations however created or organized, formed or fraudulently availed of for the purpose of preventing the Imposition of such tax through the medium of permitting such gains and profits to accumulate instead of being divided or distributed; and the fact that any such corporation * * * is a .uere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business shall be prima facie evidence of a 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.” (38 Stat. 166, 167.) We base our conclusion in the present case upon the view that it was the purpose 2816 and intent of Congress, while taxing “the entire net income arising or accruing from all sources” during each year commencing with the first day of March, 1913, to refrain from taxing that which, in mere form only, bore the appearance of income INC. 298 TAX SUPREME COURT DECISIONS. accruing after that date, while in truth and in-substance it accrued before; and upon the fact that the Central Pacific and the Scuthern Pacific were in substance identical because of the complete ownership and control which the latter possessed over the former, as stockholder and in r.ther capacities. While the two com.panies were separate legal entities, yet in fact, and for all practical purposes they were merged, the former being but a part of the latter, acting merely as its agent and subject in all things to its proper direction and control. And besides, the funds represented by the dividends were in the actual possession and control of the Southern Pacific as well before as after the declaration of the dividends. The fact that the books were kept in accordance with the provisions of the lease, so that these funds appeared upon the account as an indebtedness of the lessee to the lessor, cannot be controlling, in view of the practical identity between lessor and lessee. Aside from the interests of creditors and the public — and there is nothing to suggest that the interests of either were concerned in the disposition of the surplus of the Central Pacific — the Southern Pacific was entitled to dispose of the matter as it saw fit. There is no question of there being a surplus to warrant the di/idends at the time they were made, hence any speculation as to what might have happened in case of financial reverses that did not occur is beside the mark. ' ' It is true that in ordinary cases the mere accumulation of an adequate surplus 2817 does not entitle a stockholder to dividends until the directors in their discretion declare them. New York, etc., Railroad v. Nickals, 119 U. S. 296, 306; Gibbons V. Mahan, 136 U. S. 549, 558. And see Humphreys v. McKissock, 140 U. S. 304, 312. But this is not the ordinary case. In fact the discretion of the directors was affirmatively exercised by declaring dividends out of the surplus that was accumulated prior to January 1, 1913; it does not appear that any other fair exercise of discretion was open; and the com.plete ownership and right of control of the Southern Pacific at all times material makes it a m.atter of indifference whether the vote was at one time or another. Under the circumstances, the entire matter of the declaration and payment of the dividends was a paper transaction to bring the books into accord with the acknowledged rights of the Southern Pacific; and so far as the dividends represented the surplus of the Central Pacific that accumulated prior to January 1, 1913, they were not taxable as income of the Southern Pacific within the true intent and meaning of the Act of 1913. The case turns upon its very peculiar facts, and is distinguishable from others 2818 in which the question of the identity of a controlling stockholder with his cor- poration has been raised. Pullman Car Co. v. Missouri Pacific Co., 115 U. S. 587, 596; Peterson v. Chicago, Rock Island Pacific Ry., 205 U. S. 364, 391. Judgment reversed, and the cause remanded for further proceedings in conformity with this opinion. Mr. Justice Clarke dissents. Gulf Oil Corporation vs. Lewellyn. (December 9, 1918.) Mr. Justice Holmes delivered the opinion of the Court. The appended decision of the United States Supreme Court in the case of the 2819 Gulf Oil Corporation, petitioner, v. C. G. Lewellyn, Collector of Internal Revenue for the 23rd District of Pennsylvania, is published for the information of Internal Revenue officers and others concerned. (T. D. 2783, Jan. 7, 1919.) 2820 This is a suit to recover a tax levied upon certain dividends as Income, under the Act of October 3, 1913, c. 16, Section II. 38 Stat. 114, 166. The District Court gave judgment for the plaintiff, 242 Fed. Rep. 709, but this judgment was reversed by the Circuit Court of Appeals. 245 Fed. Rep. 1. 158 C. C. A. 1. 2821 The facts may be abridged from the findings below as follows: The petitioner was a holding company owning all the stock in the other corporations concerned 'except the qualifying shares held by directors.^ These companies with others constituted a single enterprise, carried on by the petitioner, of producing, buying, transporting, refining and selling oil. I’he subsidiary companies had retained their earnings, although making some loans inter se, and all their funds were invested in properties or actually required to carry on the business, so that the debtor companies had no money available to pay their debts. In January, 1913, the petitioner decided to take over the previously accumulated earnings and surplus and did so in that year by votes of the companies that it controlled. But, disregarding the forms gone through, the result was merely that the petitioner became the holder of the debts previously due from one of its com- panies to another. It was no richer than before, but its property now was represented by stock in and debts due from its subsidiaries, whereas formerly it was represented by the stock alone, the change being effected by entries upon the respective companies’ books. 'Fhe earnings thus transferred had been accumulated and had been used as capital before the taxing year. Lynch v. Turrish, 247 U. S. 221, 228 (^27761. INC. 299 TAX SUPREME COURT DECISIONS. VVe are of opinion that the decision of the District Court was right. It is true 2822 that the petitioner and its subsidiaries were distinct beings in contemplation of law, but the facts that they were related as parts of one enterprise, all owned by the petitioner, that the debts were all enterprise debts due to members, and that the dividend represented earnings that had been made in former years and that practically had been converted into capital, unite to convince us that the transaction should be regarded as bookkeeping rather than as ‘dividends declared and paid in the ordinary course by a corporation.’ Lynch v. Hornby, 247 U. S. 339, 346 [1i2763]. The petitioner did not Itself do the business of its subsidiaries and have possession of their property as in Southern Pacific Co. v. Lowe, 247 U. S. 330 1112804], but the principle of that case must be taken to cover this. By Section II, G, (c), 38 Stat. 174, and S, id. 202, the tax from January 1 to February 28, 1913, is levied as a special excise tax, but in view of our decision that the dividends here concerned were not income it is unnecessary to discuss the further question that has been raised under the latter clause as to the effect of the fact that excise taxes upon the subsidiary corporations had been paid. 2823 Law 1f469. General Effective Date of the Revenue Act of 1918 of which Title II Relates to “Income Tax.” — “Sec. 1409. That unless otherwise herein specially provided, this Act shall take effect on the day following its passage [i. e., approval by the President].” 2824 Approved by the President, February 24, 1919,^ at 6.55 P. M. 2825 For 1[2825 see page 305. INC. 300 TAX 4 - 24 - 19 . INSERT THIS SHEET TO FACE PAGE 3CC. Guide to Ar^cle Numbers and Law Section numbers referred to in Regulations No. 45, Revised. (See other side.) GUIDE TO ARTICLES OF REGULATIONS NO. 45, REVISED. (By means of this guide the reader may locate quickly, any article which is referred to by number in the body of Regulations. There are many such cross references.) Articles of Beginning at 701 to 972 (Part II-B. Profits Tax). Regulations No. 45 Paragraph The references below. preceded by the 1 to 4 13 2825 2829 initials W. T., are to our War Tax Service. 21 to 26 2832 Articles of Beginning at 31 to 40 2841 Regulations No. 45 Paragraph 4 1 to 49 2848 701 W. T. 859 51 to 54 2862a 71 1 to 720 . . . . W. T. 860 71 to 80 2863 731 to 733 W. T. 896 81 to 88 2873 741 to 743 W. T. 901 91 to 93 2876 751 to 753 W. T. 912 101 to 110 2878 761 W. T. 915 1 1 1 2893 771 W. T. 916 121 to 122 2895 781 to 785 . ... W. T. 917 131 to 134 2897 791 W. T. 922 141 to 145 2901 801 to 802 151 to 154 2906 811 to 818 W. T. 925 161 to 170 2910 831 to 840 W. T. 933 171 2921 841 to 850 W. T. 947 181 to 188 2922 851 to 860 . . . . W. T. 965 201 to 210 2929 861 to 870 W. T. 978 211 to 220 2939 871 W. T. 987b 221 to 230 2949 901 W. T. 988 231 to 233 2959 911 to 914 W. T. 989 251 2962 931 to 934 W. T. 991 261 to 268 2963 941 W. T. 995 271 2964 951 to 955 W. T. 996 291 to 294 2965 961 to 962 W. T. 1003 301 to 307 2968 971 to 972 . ... W. T. 1004 311 to 316 2973 1001 to 1010 3031 321 to 330 2978 1011 to 1013 3041 331 to 335 2986 1021 3044 341 to 346 2991 1031 to 1038 3045 351 to 353 2995 1041 3051 361 to 370 2996 1051 3052 371 to 376 3003 1061 3053 381 to 384 3008 1071 to 1080 3054 401 to 407 3013 1091 to 1094 3063 411 to 412 3018 1101 3067 421 to 425 3019 1111 3068 431 3024 1121 3069 441 to 448 3025 1131 to 1133 3070 451 3030 1501 to 1510 3073 501 to 504 3181 1521 to 1530 3081 511 to 520 3185 1531 to 1533 3091 521 to 522 3198 1541 to 1549 3094 531 3200 1561 to 1570 3102 541 to 550 3201 1581 to 1585 561 to 570 3209 1601 to 1603 3114 571 to 573 3221a 1621 to 1625 3117 581 to 582 3223 1641 to 1642 3122 591 3224 1701 to 1702 3124 601 3225 1711 3126 611 3226 1721 3127 621 to 626 3227 1731 to 1734 3128 631 to 638 3233 1800 3137, 3243 651 3241 GUIDE TO LAW SECTIONS REFERRED TO IN REGULATIONS NO 45. Section 1 to 261 Paragraph Section 1317 Paragraph 438-453 300 to 337 1318 • • 454 1301 423 1320 456 1302 428 1400 461 1305 429 1402 465 1307 432 1403 466 1309 433 1404 467 1313 434 1405 468 1314 435 1408 3136 1316 436-437 1409 469 GUIDE TO AMENDED ARTICLES Or New Articles of Regulations No. 45, Revised. (Amended to November 12, 1919.) ARTICLES OF REGULATIONS NO. 45 . PARAGRAPH 23 (Amended) 345Q 92a (New) 3434 133 (Amended) 3631 163 (Amended) 3594 184 (Amended) 3390 234 (New) 3548 235 (New) 3549 307 (Amended) 3495,3517,3568 312a (New) 3435 363a (New) 3566 443 (Amended) 3629 445 (Amended) 3336 1036 (Amended) 3448 1506 (Amended) 3634 1566 (Amended) 3577 1567 • (Amended) 3432, 3578 1731 (Amended and supplemented) 3518, 3565 1732 (Amended and supplemented) 3518, 3565 Amended articles or new articles referring exclusively to the excess- profits tax law are not shown in the above table. For such see the War Tax Service. Insert this sheet immediately following the blue sheet now in the binder, facing page 300. 7=.'., .... h- , . I-' ' ; ■'■•■ ''.i;, w .7-. w^.\ ',vjd i*’ "tv/ I '' . ^ J ( 4 - 19 - 19 . Stijp Corporation ®rnat Companp’a 1913-1919 INCOME TAX SERVICE PART II. 1919. PART I, PART II-A, PART III, AND PART IV of REGULATIONS No. 45, REVISED RELATING TO THE INCOME TAX under THE REVENUE ACT OF 1918. Regulations No. 45. Paragraph Part I. Income Tax on Individuals 210-228) 2825 n. Income Tax and War Profits and Excess Profits Tax on Cor- porations A. Income Tax {Sections 230-241) 3181 B. War Profits and Excess Profits Tax {Sections 300-337) {See \859 War Tax Service.) m. Administrative Provisions on j 250-261) 3031 rV. Definitions and General Provisions {Sec. 1-206; 1301-1408) 3073 NOTE. — Differences between the preliminary edition and the present revised and enlarged edition of Regulation No. 45, Parts I, II-A, III, and IV, are shown by printing in brackets [ ] those matters w'hich were in the old but are not in the new edition, and by putting in italics those matters which are new to the revised edition. Otherwise the two editions are the same, except that when references in the body of paragraphs have been changed the old reference numbers are not shown. Added paragraphs have been desig- nated by sub-paragraph letters, as 3079a, 3080a, etc., so that, in the main, the old paragraphs, whether amended or not, retain their original bold face designations. Thus, the cross references to Regulations No. 45, in other parts of the Service, either in print or in pencil or ink, still apply. PART I. INCOME TAX ON INDIVIDUALS. CONTENTS. [The section numbers refer to the statute and the article numbers to the regulations.! Section 210. Normal tax 75 Article 1. Income tax on individuals 2825 2. Normal tax 2826 3. Persons liable to tax 2827 4. Who is a citizen 2828 INC. 301 TAX Reg. 45. Rev. See Note on page 301. Paragraph Section 211. Surtax 80 Article 11. Surtax 2829 12. Computation of surtax 2830 13. Surtax on the sale of mineral deposits 2831 Section 212. Net income defined •. 83 Article 21. Meaning of net income 2832 22. Computation of net income 2833 23. Bases of computation 2834 24. Methods of accounting 2835 25. Accounting period 2839 26. Change in accounting period 2840 Section 213. (a). Gross Income defined: inclusions 88 Article 31. What included in gross income 2841 32. Compensation for personal services 2842 33. Compensation paid other than in cash 2842a 34. Compensation paid in notes 2842b 35. Gross income from business 2S42c 36. Long term contracts 2843 37. State contracts 2844 38. Gross income of farmers 2845 39. Sale of stock and rights 2846 40. Sale of patents and copyrights 2847 41. Sale of good will 2848 42. Sale of personal property on installment plan 2849 43. Sale of real estate in lots 2850 44. Sale of real estate involving deferred payments 2851 45. Sale of real estate on installment plan . . s 2855 46. Deferred payment sales of real estate not on the installment plan. . . 2856 47. Annuities and insurance policies 2357 48. Rent and royalties 2858 49. Compensation for loss 2860 50. Replacement fund for loss 2861 51. Forgiveness of indebtedness 2862a 52. When included in gross income 2S62b 53. Income not reduced to possession 2862c 54. Examples of constructive receipt 2862d Section 213 (b). Gross income defined: exclusions 94 Article 71. What excluded from gross income 2863 72. Proceeds of insurance 2864 73. Gifts and bequests 2864a 74. Interest upon State obligations 2865 75. Dividends and interest from Federal land bank and national farm loan association 2866 76. Dividends from Federal reserve bank 2867 77. Interest upon United States obligations 2868 78. Liberty bond exemption from normal tax in 1918 2869 79. Liberty bond exemption from surtax and war-profits and excess- profits tax in 1918 2871 80. Liberty bond exemption after December 31, 1918 2872a 81. Liberty bond exemption in the case of tiusts 2873 82. Liberty bond exemption in the case of partnerships and personal service corporations 287 4 83. Income of foreign Governments 2875 S4. Income of states 2875a 85. Compensation of state officers 2875b 86. Compensation of soldiers and sailors 2875c 87. Income accruing prior to March 1, 1913 2875d 88. Subtraction for redemption of trading stamps 2875e Section 213 (c). Gross income defined: nonresident alien individual 109 Article 91. Gross income of nonresident alien individuals. 2876 92. Income of nonresident alien individuals not subject to tax 2877 93. Income of nonresident aliens from United States bonds . . . , 2877a INC. 302 TAX Reg. 45, Rev. See Note on page 301. Paragraph Section 214 (a) (1). Deductions allowed: business expenses 113 Article 101. Business expenses 2878 102. Cost of materials 2879 103. Repairs 2880 104. Professional expenses 2881a 105. Compensation for personal services 2882 106. Treatment of excessive compensation 2886 107. Bonuses to employees 2889 108. Pensions 2890 109. Rentals 2891 110. Expenses of farmers 2892 111. When charges deductible 2893 Section 214 (a) (2). Deductions allowed: interest 116 Article 121. Interest 2895 122. Interest on capital 2896 Section 214 (a) (3). Deductions allowed: taxes 119 Article 131. Taxes 2897 132. Federal duties and excise taxes 2898 133. Taxes for local benefits 2899 134. Inheritance taxes. . 2900 Section 214 (a) (4), (5) and (6). Deductions allowed: losses 126, 127, 128 Article 141. Losses 2901 142. Voluntary removal of buildings 2902 143. Loss of useful value. . 2903 144. Shrinkage in securities and stocks. 2904 145. Losses of farmers 2905 Section 214 (a) (7). Deductions allowed: bad debts 132 Article 151. Bad debts 2906 152. Examples of bad debts 2907 153. Worthless mortgage debt 2908 154. Worthless securities 2909 Section 214j(a) (8). Deductions allowed: depreciation 133 Article 161. Depreciation 2910 162. Depreciable property 2911 163. Depreciation of intangible property 2912 164. Capital sum recoverable through depreciation allowance 2914 165. Method of computing depreciation allowance 2915 166. Modification of method of computing depreciation 2916 167. Depreciation of patent or copyrights. . 2917 168. Depreciation of drawings and models 2918 169. Charging off depreciation 2919 170. Closing depreciation account 2920 171. Depreciation in the case of farmers 2921 Section 214 (a) (9). Deductions allowed : amortization 134 ^Article 181. Scope of provision for amortization 2922 182. Property cost of which may be amortized 2922a 183. Cost recoverable through amortization ■. . . 2923 184. Cost which may be amortized 2924 185. Method of amortization 2925 186. Additional requirements for amortization 2926 187. Redetermination of amortization allowance 2927 188. Information to be furnished by taxpayer 2923 Section 214 (a) (10). Deductions allowed: depletion 137 Article 201. Depletion of mines, oil and gas wells 2929 202. Capital recoverable through depletion allowance in the case of owner 2930 203. Capital recoverable through depletion allowance in the case of lessee 2931 204. Apportionment of deductions between lessor amd lessee. 2932 205. Determination of cost of deposits. ... 2933 206. Determination of fair market value of deposits 2934 207. Revaluiatlon of deposits not allowed 2935 208. Determination of quantity of ore in mine . ; 2936 209. Determination of quantity of oil in ground 2937 303 TAX INC. Reg. 45, Rev. See Note on page 301. Paragraph Article 210. Computation of allowance for depletion of mines and oil wells. .. 2938 211. Computation of allowance for depletion of gas wells 2939 212. Gas well pressure records to be kept 2940 213. Computation of allowance where quantity of oil or gas uncertain. . 2941 214. Computation of depletion allowance for combined holdings of oil and gas wells 2942 215. Depletion of mine based on advance royalties 2943 216. Depletion and depreciation account on books 2944 217. Statement to be attached to return where depletion of mine claimed 2945 218. Statement to be attached to return where depletion of oil or gas claimed 2946 219. Discovery of mine .’ 2947 220. Discovery of oil and gas wells 2948 221. Proof of discovery of oil and gas wells 2949 222. Charges to capital and to expense in the case of mine 2950 223. Charges to capital and to expense in the case of oil and gas wells. . 2951 224. Depreciation of improvements in the case of mine 2952 225. Depreciation of improvements in the case of oil and gas wells 2953 226. Depletion and depreciation of oil and gas wells in years before 1916 2954 227. Depletion of timber 2955 228. Capital recoverable through depletion allowance in the case of timber 2956 229. Computation of allowance for depletion cf timber 2957 230. Revaluation of stumpage not allowed 2958 231. Charges to capital and to expense in the case of timber 2959 232. Depreciation of improvements in the case of timber 2960 233. Statement to be attached to return where depletion of timber claimed 2961 Section 214 (a) ( 11 ). Deductions allowed: Charitable contributions 142 Article 251. Charitable contributions 2962 Section 214 (a) ( 12 ). Deductions allowed: loss in inventory 144 Article 261. Losses in inventor}^ and from rebates 2963 262. Loss from rebates 2963a 263. Loss in inventory 2963b 264. Loss where goods have been sold 2963c 265. Loss where goods have not been sold 2963d 266. Claims 2963e 267. Disposition of claim 2963f 268. Effect of claim in abatement 2963g Section 214 (b) Deductions allowed: nonresident alien individual 149 Article 271. Deductions allowed nonresident alien individuals 2964 Section 215 . Items not deductible 151 Article 291. Personal and family expenses 2965 292. Traveling expenses 2966 293. Capital expenditures 2967 294. Premiums on business insurance 2968a Section 216 . Credits allowed 156 Article 301. Credits against net income 2968 302. Personal exemption of head of family 2969 303. Personal exemption of married person 2970 304. Credit for dependents 2971 305. Date determining exemption 2971a 306. Credits to nonresident alien individual 2972 307. When nonresident alien Individual entitled to personal exemption. ..2972a Section 217 . Nonresident aliens — Allowance of deductions and credits 165 Article 311. Allowance of deductions and credits to nonresident alien individual2973a 312. Who is a nonresident alien individual 2973 313. Proof of residence of alien 2974 314. Loss of residence by alien 2975 315. Duty of employer to determine status of alien employee 2976 316. Allowance of personal exemption to nonresident alien employee.. . . 2977 INC. 304 TAX Reg. 45, Rev. See Note on page 301. Paragraph Section 218. Partnerships and personal service corporations 168 Article 321. Partnerships 2978 322. Distributive shares of partners 2978a 323. Credits allowed partners 2978b 324. Taxation of partners in partnership with fiscal year ending in 1918. 2979 325. Application of different tax rates in the case of fiscal year of partner- ship ending in 1918 2980 326. Taxation of partners in partnership with fiscal year ending in 1919. 2981 327. Application of different tax rates in the case of fiscal year of partner- ship ending in 1919 2982 328. Personal service corporations 2983 329. Personal service corporation with fiscal year ending in 1918 2984 330. Distributive shares of stockholders in personal service corporation.. 2985 331. Credits allowed stockholders of personal service corporation 2986 332. Taxation of stockholders of personal service corporation with fiscal year ending in 1918 2987 333. Application of different tax rates in the case of fiscal year of personal service corporation ending in 1918 2988 334. Taxation of stockholders of personal service corporation with fiscal year ending in 1919 2989 335. Application of different tax rates in the case of fiscal year of personal service corporation ending in 1919 2990 Section 219. Estates and trusts 180 Article 341. Estates and trusts.. 2991 342. Estates and trusts taxed to fiduciary 2991a 343. Decedent’s estate during administration 2992 344. Incidence of tax on estate or trust 2993 345. Estates and trusts taxed to beneficiaries 2994 346. Credits to trust or beneficiary 2994a Section 220. Profits of corporations taxable to stockholders 197 Article 351. Profits of corporation taxable to stockholders 2995 352. Purpose to escape surtax 2995a 353. Unreasonable accumulation of profits 2995b Section 221. Payment of tax at source 201 Article 361. Withholding tax at source 2996 362. Fixed or determinable annual or periodical income 2996a 363. Exemption from withholding 2997 364. Ownership certificates for interest coupons. 2998 365. Form of certificate where withholding required 2999 366. Form of certificate where no withholding required 3000 367. Use of substitute certificates 3001 368. Interest coupons without ownership certificates 3001a 369. Interest on registered bonds 3001b 370. Return of tax withheld 3002 371. Withholding in 1918 3003 372. Release of excess tax withheld 3004 373. Use of information return where no actual withholding 3005 374. Ownership certificates in ihe case of fiduciaries and joint owners... 3006 375. Withholding in the case of enemies 3007 376. Return of income from which tax withheld 3007a Section 222. Credit for taxes 226 Article 381. Analybis of credit for taxes 3008 382. Meaning of terms 3010 383. Conditions of allowance of credit 3011 384. Redetermination of tax when credit proves incorrect 3012 Section 223. Individual returns 233 Article 401. Individual returns 3013 402. Form of return 3013a 403. Return of income of minor 3014 404. Return of income of nonresident alien 3015 405. Return of corporate dividends 3016 406. Verification of returns 3017 407. Use of prescribed form 3017a INC. 305 TAX Reg. 45, Rev. See Note on page 301. Paragraph Section 224. Partnership returns 238 Article 411. Partnership returns 3018 412. Contents of partnership return 3018a Section 225. Fiduciary returns 239 Article 421. Fiduciary returns 3019 422. Return by guardian or committee 3020 423. Returns where two trusts 3021 424. Return by receiver 3022 425. Return for nonresident alien beneficiary 3023 Section 226. Returns where accounting period changed 247 Article 431. Returns when accounting period changed 3024 Section 227. Time and place for filing return 253 Article 441. Time for filing return 3025 442. Time for filing return upon death or termination of trust 3025a 443. Extension of time by collector 3026 444. Extension of time by Commissioner 3026a 445. Extension of time in the case of persons abroad 3027 446. Extension of time in the case of enemies 3028 447. Last due date 3028a 448. Place for filing return t.3029 Section 228. Understatement in returns 258 Article 451. Understatement of income 3036 PART II-A. [Of Regulations No. 45, Revised.] INCOME TAX ON CORPORATIONS CONTENTS. [The section numbers refer to the statute and the article numbers to the regulations.] INCOME TAX Paragraph Section 230. Tax on Corporations 260 Article 501. Income tax on corporations 3181 502. Rates of tax 3182 503. Corporations liable to tax 3183 501. Tax on transportation corporations 3184 Section 231. Conditional and other exemptions 265 Article 511. Proof of exemption 3185 512. Agricultural and horticultural organizations 3186 513. Mutual savings banks 3187 514. Fraternal beneficiary societies : . : '. 3188 515. Building and loan associations 3189 516. Cemetery companies 3190 517. Religious, charitable, scientific and educational corporations 3191 518. Business leagues . 3195 519. Civic leagues 3196 520. Social clubs ^ ;.... 3197 521. Mutual insurance companies and like organizations 3198 522. Cooperative associations. 3199 Section 232. Net income defined 280 Article 531. Net income ..7 3200 Section 233. Gross income defined 281 Article 541. Gross income 3201 542. Sale of capital stock 3202 543. Contributions by stockholders 3203- 544. Sale and retirement of corporate bonds 3203a 545. Sale of capital assets 3204 INC. 306 TAX Reg. 45, Rev. See Note on page 301. Section 233. Gross income defined. — Concluded. Paragraph Article 546. Income from leased property 3205 547. Gross income of corporations in liquidation 3205a 548. Gross income of insurance companies 3206 549. Gross income of life insurance companies 3207 550. Gross income of foreign corporations 3208 Section 234. Deductions allowed 287 Article 561. Allowable deductions 3209 562. Donations 3210 563. Sale of capital stock, bonds and capital assets 3210a 564. Interest 3211 565. Effect of tax-free covenant in bonds 3212 566. Tax on bank stock 3213 567. Depositors’ guaranty fund 3219 568. Deductions allowed insurance companies 3220 569. Required addition to reserve funds of insurance companies 3221 570. Special deductions allowed in the case of combined life, health and accident policies 3221a 571. Special deductions allowed mutual marine insurance companies. .. .3221b 572. Special deductions allowed mutual insurance companies 3221c 573. Deductions allowed foreign corporations. 3222 Section 235. Items not deductible .' 326 Article 581. Items not deductible 3223 582. Capital expenditures . 3223a Section 236. Credits allowed 327 Article 591. Credits allowed , 3224 Section 237. Payment of tax at source 332 Article 601. Withholding in the case of nonresident foreign corporations 3225 Section 238. Credit for taxes 337 Article 611. Credit for foreign taxes 3226 Section 239. Corporation returns 343 Article 621. Corporation returns 3227 622. Returns by receivers. . . ... 3228 623. Returns of insurance companies 3229 624. Returns of personal service corporations ; 3230 625. Returns of foreign corporations... . . . . .\ 3231 626. Returns for fractional part of year 3232 Section 240. Consolidated returns 349 Article 631. Affiliated corporations .. 3233: 632. Consolidated returns ... 3234 633. When corporations are affiliated 3235 634. Change in ownership during taxable year 3236 635. Corporation deriving chief Income from Government contracts 3237 636. Domestic corporation affiliated with foreign corporation 3238 637. Consolidated net income of affiliated corporations . 3239 638. Different fiscal years of affiliated corporations 3240 Section 241. Time and place for filing returns 358 Article 651. Time and place for filing returns 3241 PART III. [Of Regulations No. 45, Revised.] ADMINISTRATIVE PROVISIONS. CONTENTS. [The section numbers refer to the statute and the article numbers to the regulations.] Paragraph section 250. Payment of taxes 361 Article 1001. Time for payment of tax 3031 1002. Payment of tax when no proper return 3032 INC. 307 TAX Reg. 45, Rev. See Note on page 301. Section 250. Payment of taxes. — Concluded. Paragraph 1003. Interest on tax 3033 1004. Penalty for failure to file return 3034 1005. Penalty for understated return 3035 1006. Penalty for nonpayment of tax 3036 1007. Notice and demand of payment 3037 1008. Collection of tax by suit.. 3038 1009. Collection of tax by distraint 3039 1010. Enforcement of tax lien by bill in equity 3040 1011. Compromise of tax cases 3041 1012. Assessment of tax 3042 1013. Declaration of termination of taxable period 3043 Section 251. Receipts for taxes 384 Article 1021. Receipts for tax payments 3044 Section 252. Refunds 386 Article 1031. Authority for abatement, credit and refund of taxes 3045 1032. Claims for abatement of taxes erroneously assessed 3046 1033. Claims for abatement of uncollectible taxes 3047 1034. Claims for credit of taxes erroneously collected 3047a 1035. Action on claims for credit 3047d 1036. Claims for refund of taxes erroneously collected 3048 1037. Suits for recovery of taxes erroneously collected 3049 1038. Claims for refund of sums recovered by suit 3050 Section 253. Penalties 380 Article 1041. Specific penalties 3051 Section 254. Returns of payments of dividends 389 Article 1051. Return of information as to payments of dividends 3052 Section 255. Returns of brokers 390 Article 1061. Return of information by brokers 3053 Section 256. Information at source 391 Article 1071. Return of information as to payments of $1,000 3054 1072. Return of information as to payments to employees 3055 1073. Return of information by partnerships, personal service corpora- tions and fiduciaries 3055a 1074. Cases where no return of information is required 3056 1075. Return of information as to interest on corporate bonds 3057 1076. Return of information as to payments to non-resident aliens 3058 1077. Source of information as to foreign items 3059 1078. Ownership certificates for foreign items 3060 1079. Return of information as to foreign items 3061 1080. Information as to actual owner 3062 Section 257. Returns to be public records 403 Article 1091. Inspection of returns 3063 1092. Inspection of returns by State 3064 1093. Inspection of returns by stockholder 3065 1094. Penalties for disclosure of returns 3066 Section 258. Publication of statistics '. 409 Article 1101. Statistics of income 3067 Section 259. Collection of foreign items 410 Article 1111. License to collect foreign Items 3068 Section 260. Citizens of United States possessions 413 Article 1121. Status of citizen of United States possession 3069 Section 261. Porto Rico and Philippine Islands 415 Article 1131. Income tax in Porto Rico and Philippine Islands 3070 1132. Taxation of individuals between United States and Porto Rico and Philippine Islands 3071 1133. Taxation of corporations between United States and Porto Rico and Philippine Islands 3072 INC. 308 TAX Reg. 45, Rev. See Note on page 301. PART IV. [Of Regulations No. 45, Revised.] DEFINITIONS AND GENERAL PROVISIONS. CONTENTS. [The section numbers refer to the statute and the article numbers to the regulations.] Paragraph Section 1. General definitions 1 Article 1501. Person 3073 1502. Association 3074 1503. Association distinguished from partnership 3075 1504. Association distinguished from trust ■ 3076 1505. Limited partnership as partnership 3077 1506. Limited partnership as corporation 3078 1507. Joint ownership and joint adventure 3079 1508. Insurance company 3079a 1509. Domestic and foreign persons 3080 1510. Government contract 3080a Section 200. Definitions 17 Article 1521. Fiduciary 3081 1522. Fiduciary distinguished from agent 3082 1523. Personal service corporation 3083 1524. Personal service corporation; certain corporations excluded 3084 1525. Personal services rendered by personal service corporation 3085 1526. Personal services rendered by personal service corporation: more than one business 3086 1527. Activities of stockholders of personal service corporation 3087 1528. Activities of stockholders of personal service corporation: con- duct of affairs 3088 1529. Activities of stockholders of personal service corporation: stock interest required 3089 1530. Activities of stockholders of personal service corporation: change in ownership 3090 1531. Capital of personal service corporation 3091 1532. Capital of personal service corporation: inference from use 3092 1533. “Taxable year”, “withholding agent,” and “paid” 3093 Section 201. Dividends 29 Article 1541. Dividends 3094 1542. Presumption as to source of distribution 3094a 1543. Distributions which are not dividends 3095 1544. Dividends paid in property 3096 1545. Stock dividends 3097 1546. Stock dividends of 1918 3098 1547. Sale of stock received as dividend 3099 1548. Distribution In liquidation 3100 1549. Distribution from depletion or depreciation reserve 3101 Section 202. Basis for determining gain or loss 43 Article 1561. Basis for determining gain or loss from sale 3102 1562. Sale of property acquired by gift or bequest 3103 1563. Exchanges of property 3104 1564. Determination of gain or loss from exchange of property. 3105 1565. Exchange for different kinds of property 3106 1566. Exchange of property and stock. .- 3106a 1567. Exchange of stock for other stock of no greater par value 3107 1568. Determination of gain or loss from subsequent sale 3107a 1569. Exchange of stock for other stock of greater par value 3108 1570. Readjustment of partnership Interests 3108a Section 203. Inventories 50 Article 1581. Need of inventories 3109 1582. Valuation of inventories 3110 1583. Inventories at cost 3111 1584. Inventories at market 3112 1585. Inventories by dealers in securities 3113 INC. 309 TAX Rep. 45 , Rev. See Note on page 301. Paragraph Section 2C4. Net losses 51 Article 1601. Scope of net losses 31 H 1602. Claim for allowance of net loss 3113 1603. Allowance of net loss 3116 Section 205. Fiscal year with different rates. 60 Article 1621. Fiscal year with different rates 3117 1622. Fiscal year of corporation ending in 1918 ^ 3118 1623. Deductions and credits: corporation fiscal year ending in 1918.. 3119 1624. Fiscal year of Individual ending in 1918 3120 1625. Fiscal year of corporation or individual ending in 1919 3121 Section 206. Parts of income subject to rates for different years 72 Article 1641. Parts of income subject to rates for different years 3122 1642. Stock dividend subject to rates for different years 3123 Section 1301. Advisory Tax Board 423 Article 1701. Submission of questions to Advdsory Tax Board 3124 1702. Procedure before Advisory Tax Board 3125 Section 1305. Extension of existing statutes 429 Article 1711. Aids to collection of tax 3126 Section 1313. Fractional part of cent 434 Article 1721. When fractional part of cent may be disregarded 3127 Section 1314. 'Medium of payment of tax 435 Article 1731. Payment of tax b}^ certificates of indebtedness 3128 1732. Procedure with respect to certificates of indebtedness 3129 1733. Payment of tax by uncertified checks 3130 1734. Procedure with respect to dishonored checks 3131 Section 1318. Jurisdiction of district courts 454 Section 1320. Deposit of United States bonds as security 456 Section 1400. Repeal of former acts : 461 Section 1402. Validating provision 465 Section 1405. Citation of Act .' 468 Section 1408. Inspection of Government contracts . 3136 Section 1309. Authority for regulations 433 Article 1800. Promulgation of regulations. 3137 REGULATIONS NO. 45, REVISED. PART I • INCOME TAX ON INDIVIDUALS NORMAL TAX 2825 Article 1. Income Tax on Individuals. — The statute imposes an 76 income tax on individuals, including a normal tax and a surtax. 471 See section 211 of the statute. The tax is upon net income, as defined in the statute, after deducting from gross income, as de- fined in the statute, the allowable deductions. See sections 212, 213, 214 and 215. In certain cases credits are allowed against net income and against the amount of the tax. See sections 216 and 222. Special provi- sions of the statute deal with the effect of the tax on nonresident alien in- dividuals, partnerships and personal service corporations, estates and trusts, and the stockholders of corporations which unreasonably accumulate their profits. See sections 217, 218, 219, and 220. The tax is payable upon the basis of returns rendered by the persons liable thereto, except that in some instances it is to be paid at the source of the income. See sections 221, 223, 224, 225, 226, 227 and 228. The statute also imposes an income tax at a fixed rate and a war profits and excess profits tax on 310 TAX INC. Reg. 45, Rev. See Note on page SOI. corporations. See Part II of the regulations. For administrative provi- sions, and for definitions and general provisions, see Parts III and IV' of the regulations. 2826 Art. 2. Normal Tax. — For the calendar year 1918 the normal income tax on individual citizens or residents of the United States is at the rate of 6 per cent upon the first $4,000 of net income subject to the normal tax and 12 per cent upon the excess over that amount, and for the calendar year 1919 and subsequent years is at the rate of 4 per cent upon the first $4,000 and 8 per cent upon the excess over that amount. The lower rate on the first $4,000 applies to each separate individual, whether married or unmarried, and should not be confused with the joint exemption granted married persons. In the case of nonresident alien individuals the normal tax for 1918 is 12 per cent and for subsequent years 8 per cent. In order to determine the income to which the normal tax is applied, the net income, as defined in section 212 of the statute and articles 21-26 of the regulations, is first entitled to the credits and exemptions specified in section 216 of the statute and articles 301-307. 2827 Art. 3. Persons Liable to Tax. — Every citizen of the United States, wherever resident, is liable to the tax. It makes no dif- ference that he may own no assets within the United States and may receive no income from sources within the United States. Every resident alien individual is liable to the tax, even though his income is wholly from sources outside the United States. Every nonresident alien individual is liable to the tax on his income from sources within the United States. Sei section 213 (c) of the statute and articles 91-93. Estates and trusts are also subject to the tax. See section 219 of the statute and articles 341-346. 2828 Art. 4. Who Is a Citizen. — Every person born in the United States subject to its jurisdiction, or naturalized in the United States, is a citizen. When^any naturalized citizen has left the United States and resided for two years in the foreign country from which he came, or for five years in any other foreign country, he is presumed^ to have lost his American citizenship; but this presumption does not apply to residence abroad while the United States is at war. An Italian, who has come to the United States and filed his declaration of intention of becoming a citizen, but who has not yet received his final citizenship papers, is an' alien. A Swede who, after having come to the United States and become naturalized here, returned to Sweden and resided there for two years prior to April 6, 1917, is presumed to be once more an alien. On the other hand, an in- dividual born in the United States of citizen or resident alien parents, who has long since moved to a foreign country and established a domicile there, but who has never been naturalized therein or taken an oath of allegiance thereto, is still a citizen of the United States. For the difference between resident alien individuals and nonresident alien individuals, see articles 312-315. SURTAX. 2829 Art. 11. Surtax. — In addition to the normal tax a surtax is im- 80 posed at the rates specified in the statute upon the net income of 736 every individual, resident or nonresident. See articles 2-4. In determining the taxable net income for the purpose of the surtax, the credits provided by section 216 of the statute in the case of the normal tax are nor applicable. INC. 311 TAX Reg. 45, Rev, See Note on page 301. 2830 Art. 12 . Computation of Surtax. — The following table shows the surtax on net incomes of the specified amounts. In each instance the first figure of net income in the net income column is to be excluded and the second figure included. The percentage given opposite applies to the excess of income over the first figure in the net income column, and the sum in the next column is the tax on the entire difference between the first figure and the second figure in the net income column. The final column gives the total surtax on a net income equal to the second figure in the net income column. Net Income $5,000 to $6,000 $6,000 to $8,000 $8,000 to $10,000 $10,000 to $12,000 $12,000 to $14,000 $14,000 to $16,000 $16,000 to $18,000 $18,000 to $20,000 $20,000 to $22,000 $22,000 to $24,000 $24,000 to $26,000 $26,000 to $28,000 $28,000 to $30,000 $30,000 to $32,000 $32,000 to $34,000 $34,000 to $36,000 $36,000 to $38,000 $38,000 to $40,000 $40,000 to $42,000 $42,000 to $44,000 $44,000 to $46,000 $46,000 to $48,000 $48,000 to $50,000 $50,000 to $52,000 $52,000 to $54,000 $54,000 to $56,000 $56,000 to $58,000 $58,000 to $60,000 $60,000 to $62,000 $62,000 to $64,000 $64,000 to $66,000 $66,000 to ^8,000 $68,000 to $70,000 $70,000 to $72,000 $72,000 to $74,000 $74,000 to $76,000 $76,000 to $78, 000 $78,000 to $80,000 $80,000 to $82,000 $82,000 to $84,000 $84,000 to $86,000. . . . $86,000 to $88,000. . . . $88,000 to $90,000 $90,000 to $92,000. . . . $92,000 to $94 ,000.... r Cent Surtax Total surtax 1 $10 $10 2 40 50 3 60 no 4 80 190 5 100 290 6 120 410 7 140 550 8 160 710 9 180 890 10 200 1,090 11 220 1,310 12 240 1,550 13 260 1,810 14 280 2,090 15 300 2,390 16 320 2,710 17 340 3,050 18 360 3,410 19 380 3,790 20 400 4,190 21 420 4,610 22 440 5,050 23 460 5,510 24 480 5,990 25 500 6,490 26 520 7,010 27 540 7,550 28 560 8,110 29 580 8,690 30 600 9,290 31 620 9,910 32 640 10,550 33 660 11,210 34 680 11,890 35 700 12,590 36 720 13,310 37 740 14,050 38 760 14,810 39 780 15,590 40 800 16,390 41 820 17,210 42 840 18,050 43 860 18,910 44 880 19,790 45 900 20,690 INC. 312 TAX Reg. 45, Rev, See Note on page 301. Total Net Income Per cent Surtax Surtax $94,000 to $96,000 46 920 21,6ia $96,000 to $98,000 47 940 22,550 $98,000 to $100,000 960 23,510 $100,000 to $150,000 52 26,000 49,510 $150,000 to $200,000 56 28,000 77,510 $200,000 to $300,000 60 60,000 137,510 $300,000 to $500,000 63 126,000 263,510 $500,000 to $1,000,000 64 320,000 583,510 $1,000,000 up 65.... The surtax for any amount of net income not shown in the above table is com- puted by adding to the total surtax for the largest amount shown which is less than the income the surtax upon the excess over that amount at the rate indicated in the table. For example, if the amount of net income is $63,128, the surtax is the sum of $8,690 (the surtax upon $62,000 as shown by the table) plus 30 per cent of $1,128, or $338.40, making a total surtax of $9,028.40. 2831 Art. 13. Surtax on the Sale of Mineral Deposits. — Where the 8* taxpayer by prospecting and locating claims, or by exploring and 738 discovering undeveloped claims, has demonstrated the principal value of mines, oil or gas wells, which prior to his efforts had a merely nominal value, the portion of the surtax attributable to a sale of such property or of the taxpayer’s interest therein shall not exceed 20 per cent of the selling price. Exploration work alone without discovery is not sufficient to bring a case within this provision. Shares of stock in a corporation owning mines, oil or gas wells do not constitute an interest in such property. To determine the application of this provision to a particular case, the taxpayer should first compute the surtax in the ordinary way upon his net income, including his net income from any such sale. The proportion of the surtax indicated by the ratio which the tax- payer’s net income [profit] from the sale of the property, computed as pres- cribed in article 715, bears to [the sum of] his total net income [plus the general deductions not chargeable against any particular item of gross income] is the portion of the surtax attributable to such sale, and if it exceeds 20 per cent of the selling price of the property such portion of the surtax shall be reduced to that amount. See articles 219-221. NET INCOME DEFINED. 2832 Art. 21. Meaning of Net Income. — The tax imposed by the 83 statute is upon income. In the computation of the tax various 754 classes of income must be considered: {a) Income (in the broad k sense), meaning all wealth which flows in to the taxpayer other ) than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. It is not limited to cash alone, for the statute recognizes as income-determining factors other items, among which are inventories, accounts receivable, property exhaustion and accounts payable for expenses incurred. See sections 202, 203, 213 and 214 of the statute. {b) Gross income, meaning income (in the broad sense) less income which is I by statutory provision or otherwise exempt from the tax imposed by the statute. See section 213 and articles 71-86. (c) Net income, meaning gross 313 TAX INC. Reg. 4c, Rev. See Note on page 3 01. income less statutory deductions. The statutory deductions are in general, though not exclusively, expenditures, other than capital expenditures, con- nected with the production of income. See sections 214 and 215 and the articles thereunder, {d) Net income less credits. See section 216 and articles 301-307. The surtax is imposed upon net income; the normal tax upon net income less credits. Though taxable net income is wholly a statutory con- ception it follows, subject to certain modifications as to exemptions and as to some of the deductions, the lines of commercial usage. Subject to these modifications statutory “net income” is [subject to these modifications] commercial “net income.” This appears from the fact that ordinarily it is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. [For instances in which net income is not to be computed in accordance with the taxpayer’s method of accounting see articles 22 and 23.] As to net income of corporations see section 232 [236 of the statute] and article 531. 2833 Art. 22. Computation of Net Income. — Net income must be com- puted with respect to a fixed period. Usually [Ordinarily] that period is twelve months and is known as the taxable year. Items of income and of expenditures which as gross income and deductions are elements in the computation of net incomie need not be in the form of cash. It is sufficient that such items, if otherwise properly included in the computation, can be valued in termis of money. The time as of which any item of gross income or any deduction is to be accounted for miust be determined in the light of the fundamental rule that the computation shall be made in such a manner as clearly refiects the taxpayer’s income. If the method of accounting regularly employed by him in keeping his books clearly refiects his income, it is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting which clearly refiects his income, the computation shall be m.ade in such mianner as in the opinion of the Commissioner clearly refiects it. 2834 Art. 23. Bases of Computation. — Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. See section 200 of the statute for definitions of “paid,” “paid or accrued,” and “paid or incurred.’* All Items of gross incomie shall be included in the gross income for the taxable year in which they are received by the taxpayer, and deductions taken accordingly, unless in order clearlv to reflect income such amounts are to be properly accounted for as of a different period. See section 213 {a) of the statute. A taxpayer is deemed to have received items of gross income which have been credited to or set apart for [made available to] him without restric- tion. See article 53. On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through conversion of the property. The return of income shall in every case be made on the basis clearly reflecting the income^ including such i:ems of income and deductions as properly would have been included in the return for the preceding taxable year had the present basis been used., but which were not so included, and excluding such items of income and deductions as would have been excluded from the return for the preceding taxable year had the present basis been used, but which were in fact included. A separate statement shall be attached to the return shozuing in detail all such items and the reasons INC. 314 TAX Reg. 45, Rev. See Note on page 301. why they were excluded or included in the return for the preceding taxable year. If in the opinion of the Commissioner the net effect of such items upon the net income for the taxable year indicates that the returns for any previous years did not approximately reflect the true income for such years, amended returns for such years ‘may be required. 2836 Art. 24. Methods of Accounting. — It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. See section 1305 of the statute and article 1711. Amiong the essentials are the following: (1) In all cases in which the production, purchase or sale of mer- 2836 chandise of any kind is an income-producing factor inventories of the merchandise on hand (including finished goods, work in process, raw materials and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year; (2) Expenditures made during the year should be properly 2837 classified as between capital and income, that is to say, that expenditures for items of plant, equipment, etc., which have a useful life extending substantially beyond the year should be charged to a capital account and not to an expense account; and (3) In any case in which the cost of capital assets is being recov- 2838 ered through deductions for wear and tear, depletion or obsoles- cence any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be charged against the property account or the appropriate reserve and not against current expenses. 2839 Art. 25. Accounting Period. — The return of a taxpayer is made and his income computed for his taxable year, which means his fiscal year, or the calendar year if he has not established a fiscal year. The term “fiscal year” means an accounting period of 12 months ending on the last day of any month other than December. No fiscal year will, however, be recognized unless before its close it was definitely established as an accounting period by the taxpayer and the books of such taxpayer were kept in accordance therewith. The taxable year 1918 is the calendar year 1918 or any fiscal year ending during the calendar year 1918. See section 200 of the statute. A taxpayer having an existing accounting period which is a fiscal year within the meaning of the statute not only needs no per- mission to make his return on the basis of such a taxable year, but is required to do so, regardless of the former basis of rendering returns. A person having no such fiscal year must make return on the basis of the calendar year. The first reUirn under the present statute of a taxpayer who has heretofore made return on a basis diffferent from his accounting period will necessarily overlap his next previous return. For the method of adjusting the tax in such a case see section 205 of ^ the statute and articles 1621-1624. Section 226 has no applica- tion to this-' situation. [A taxpayer shall make his return for the taxable year 1918 on the basis of his annual accounting period (fiscal or calendar year), even though a part of such accounting period was included in a period for which he had previously made return. Thus an individual whose account- ing period ended June 30, 1918, and who had previously made a return for the calendar year 1917, should make a complete return in accordance with the provisions of the statute for the twelve months ending June 30, 1918. INC. 315 TAX Reg. 45, Rev. See Note on page 301. For adjustments to be m.ade with respect to income included in both returns see section 205 of the statute and articles 1622 and 1624. A taxpayer making- his first return for income tax shall make such return on the basis of his annual accounting period. See section 226 of the statute and article 431.] Except in the cases of a return for the taxable year 1918 and of a first return for income tax a taxpayer shall make his return on the basis (fiscal or calendar year) upon which he made his return for the taxable year immediately preceding unless, with the approval of the Commissioner, he has changed the basis of computing his net income. 2840 Art. 26. Change in Accounting Period. — If a taxpayer changes his accounting period, and not merely his taxable year to conform zvith his existing accounting period^ he shall as soon as possible give [written notice] to the collector for transmission to the Commissioner written notice of such change and his reasons therefor. The Commissioner will not approve a change of the basis of computing net income unless such notice is given at a time which is both {a) at least 30 days before the due date of the taxpayer’s return on the basis of his existing taxable year and {b) at least 30 days before the due date of his return on the basis of the proposed taxable year. If the change in the basis of computing the net income of the taxpayer is approved by the Commissioner, the taxpayer shall thereafter make his returns upon the basis of the new accounting period in accordance with the requirement of section 226 of the statute and his net income shall be computed as therein provided. See article 431. GROSS INCOME DEFINED: INCLUSIONS 2841 Art. 31. What Included in Gross Income. — Gross income includes in general compensation for personal and professional services, [service, 88 professional and] business income, profits from sales of and dealings 763 in property, interest, rent, dividends, and gains, profits and income derived from any source whatever, unless exempt from tax by law. Profits derived from sales in foreign commerce are taxable. Income may be in the form of cash or of property Dividends {other than stock dividends declared before November 1, 1918, and received before March 27, 1919) are taxed at the rates for the year in which paid. See section 201 of the statute and articles 1541-1549. The amount of income tax paid for a bondholder by an obligor pursuant to a tax-free covenant in its bonds is in the nature of additional interest paid the bondholder and must be included in his gross income. He is not however, entitled to deduct such income tax paid on his behalf See sections 214 {a) (3) and 221 {b) of the statute and articles 565 and 566. As to the basis for determining gain or loss from sales see section 202 and articles 1561-1570. As to the gross income of corporations see section 223 and articles 541-550. [See sections 201 and 202 of the statute and articles 1541-1548 and 1561- 1567.] 2842 Art. 32. Compensation for Personal Services.— Where no deter- mination of compensation is had until the completion of the services, the amount received is [ordinarily] income for the calendar year of its determination [or receipt. Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary such price will be presumed to be the fair value of the compensation received]. Commis- sions paid salesmien, compensation for services on the basis of a percentage INC. 316 TAX Reg. 45, Rev. See Note on page 301. of profits, commissions on insurance premiums, tips, retired pay of federal and other officers, and pensions or retiring allowances paid by the United States or private persons, are incom.e to the recipients; as are also marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other [so-called] gifts and contributions received by a clergyman, evangelist or religious worker for services rendered. The salaries of federal officers and employees are subject to tax. But see article 86. [Premiums paid by an em- ployer on accident or health policies in favor of his employees as additional compensation of such employees are income to the employees. Compensation paid an employee of a corporation in its stock is to be treated as if the cor- poration sold the stock for its market value and paid the employee in cash. {But see article 33 below.)] See further articles 85 and 105-108. 2842a Art. 33. Compensation Paid Other than in Cash. — Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary such price will be presumed to be the fair value of the compensation received. Compen- sation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. When living quarters such as camps are furnished to employees for the con- venience of the employer, the ratable value need not be added to the cash compen- sation of the employee, but where a person receives as compensation for services rendered a salary and in addition thereto living quarters, the value to such person of the quarters furnished consitutes income subject to tax. Premiums paid by an employer on life, accident or health policies in favor of his employees as additional compensation of such employees are income to the employees. 2842b Art. 34. Compensation Paid in Notes. — Promissory notes received in payment for services, and not merely as security for such payment^, constitute income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, may properly treat as income as of the time of receipt the fair discounted value of the note at such time. Thus, if it appears that such a note is or could be discounted on a six or seven per cent basis, the recipient may include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions. If the payments due on a note so accounted for are met as they become due, there should be included as income in respect of each such payment so much thereof as represents recovery for the dis- count originally deducted. 2842C Art. 35. Gross Income From Business. — In the case of a manu- facturing, merchandising or mining business ^‘gross income’’ means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. Gross income includes all amounts received by the taxpayer as allowances for amortization, from whatever source and by whatever name called. The allowance for amortization authorized by the statute must be taken by way of explicit de- deduction from gross income. See section 214 {a) (9) and articles 181-188. See also article 52. 2843 Art. 36 [Art. 33]. Long Term Contracts. — Persons engaged in con- tracting operations, who have uncompleted contracts, in some cases perhaps running for periods of several years, will be allowed to prepare INC. 317 TAX Reg. 45, Rev. See Note on page 301. their returns so that the gross income will be arrived at on the basis of completed work; that is, on jobs which have been finally completed any and all moneys received in payment will be returned as income for the year in which the work was completed. If the gross income is arrived at by this method, the deduction from gross income should be limited to the expenditures made on account of such completed contracts. Or the per- centage of profit from the contract may be estimated on the basis of per- centage of completion, in which case the income to be returned each year during the performance of the contract will be computed upon the basis of the expenses incurred on such contract during the year; that is to say, if one-half of the estimated expenses necessary to the full performance of the contract are incurred during one year, one-half of the gross contract price should be returned as income for that year. Upon the completion of a contract if it is found that as a result of such estimate or apportionment the income of any year or years has been overstated or understated, the taxpayer should file amended returns for such year or years. See section 212 of the statute and articles 22—24. 2844 Art. 37 [Art. 34]. State Contracts. — ^Any profit received from a State or political subdivision thereof by an independent contractor is taxable income. Where warrants are issued by a city, town or other political subdivision of a State, and are accepted by the contractor in pay- ment for public work done, the face value of such warrants must be returned as income. If for any reason the contractor upon conversion of the warrants into cash does not receive and can not recover the full face value of the warrants so returned, he may allowably deduct from gross income for the year in which the warrants are converted into cash any loss sus- tained [which will be mieasured by the difference between the face value of the warrants returned as incom.e and the aimount actually received for them when redeemed or disposed of]. 2845 Art. 38 [Art. 35]. Gross Income of Farmers. — ^All gains, profits and income derived from the sale or exchange of farm products, whether produced on the farm or purchased and resold, shall be included in the return of income for the year in which the products were actually marketed and sold, unless an inventory is used. In case of the sale of machinery, and of animals purchased as draft or work animals or solely for breeding purposes and not for resale, any excess [increase] over the cost thereof reduced by all sums theretofore deducted for depreciation shall be included as gross income in preparing the taxpayer’s return. Where farm produce is ex- changed for merchandise, groceries or mill products, the market value of, the article or product received in exchange is to be returned as income. Rents received in crop shares shall be returned as of the year in which the crop shares are reduced to money or a money equivalent. If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such case the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized. When live stock purchased is sold, its cost is to be deducted from the sales price in ascertaining the amount of gain or profit to be returned for tax purposes. If, however, an inventory [method of accounting] is used, the cost price of the article sold must not be taken as an additional deduction in the return of income, as such cost price will be reflected in the inventory. As herein used the term “farm” embraces the farm in the ordinarily accepted sense, and includes stock. INC. 318 TAX Reg. 45, Rev. See Note on page 301. dairy, poultry, fruit and truck farms, also plantations, ranches and all land used for farming operations. All individuals, partnerships or cor- porations that cultivate, operate or manage farms for gain or profit, either as owners or tenants, are designated [as] farmers. A person cul- tivating or operating a farm for recreation or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer. See further articles 110, 145 and 171. 2846 Art. 39 [Art. 36]. Sale of Stock and Rights. — When shares of stock in a corporation are sold from lots purchased at different times and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost of the stock, or its fair market value as of March 1, 1913, if purchased before that date, will be the profit to be accounted for as income. In the case of stock received as a stock dividend, whether or not paid out of earnings or profits accrued since February 28, 1913, and in the case of stock in respect of which any such dividend was paid, the cost of each share of such stock shall be ascer- tained as specified in article 1547. Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between the stock and securities purchased for the purpose of determining the portion of the consideration attributable to each class of stock or securities and so representing its cost, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost. See article 1565. The entire amount realized from the sale of rights to subscribe for stock is income. 2847 Art. 40 [Art. 37]. Sale of Patents and Copyrights. — A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the value as of March 1, 1913, if acquired prior to that date, or be- tween the selling price and the cost, if acquired subsequently to that date. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patents or copyrights since February 28, 1913, or since the date of acquisition [purchase] if [acquired] subsequently thereto [to that date]. See article 167. 2848 Art. 41 [Art. 38]. Sale of Good Will [and Trademarks].— Any profit or loss resulting from an investment in good will can be taken only when the business, or a part of it, to which the good will attaches is sold, in which case the profit or loss will be determined upon the basis of the cost of the assets, including good will, or their fair market value as of March 1, 1913, if acquired prior thereto. If nothing was paid for good will acquired after February 28, 1913, no deductible loss is possible, although, on the other hand, upon the sale of the business there may be a profit. It is immaterial that good will may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market value on March 1, 1913, of the good will sold. 2849 Art. 42 [Art. 39]. Sale of Personal Property on [the] Installment Plan. — Dealers in personal property'ordinarily sell either for cash, or on the personal credit of the buyer, or on the Installment plan. Occasionally a fourth type of sale is met with, in which the buyer makes an initial payment of such a substantial nature (for example, a payment of more INC. 319 TAX Reg. 45, Rev. See Note on page 301. than 25 per cent) that the sale, though involving deferred payments, is not one on the installment plan. In sales on personal credit, and in the substantial payment type just mentioned, obligations of purchasers are to be regarded as the equivalent of cash, but a different rule applies to sales on the installment plan. Dealers in personal property who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default: {a) through an agreement that title is to remain in the seller until the buyer has completely performed his part of the transaction; {b) by a form of contract in which title is conveyed to the purchaser im- mediately, but subject to a lien for the unpaid portion of the purchase price; (c) by a present transfer of title to the purchaser, who at the same time executes a reconveyance in the form of a chattel mortgage to the seller; or {d) by conveyance to a trustee pending performance of the contract and subject to its provisions. The general purpose and effect being the same in all of these plans, it is desirable that a uniformly applicable rule be estab- lished. The rule prescribed is that in the sale or contract for sale of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. Such income may he ascertained by taking that proportion of the total pay- ments received in the taxable year from installment sales {always including pay- ments received in the taxable year on account of sales effected in earlier years as well as those effected in the taxable year) which the gross profit to he realized on the total installment sales made during the taxable year bears to the gross contract price of all such sales made during the taxable year. Where a change is made to this method of computing net income the taxpayer's balance sheet should he adjusted conformably as of the date when the change is effected. If for any reason the vendee defaults in his installment payments and the vendor repossesses the property, the entire amount received on installment payments, less the profit already returned, will be income of the vendor for the year in which the property was repossessed, and the property repossessed must he included in the inventory at its original cost to himself^ less proper allowance for damage and use, if any. If the vendor chooses as a matter of consistent practice to treat the obligations of purchasers as the equivalent of cash, such a course is per- missible. 2850 Art. 43 [Art. 40]. Sale of Real Estate in Lots.— Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the entire market value as ofMarch 1, 1913, or the cost, if acquired subsequently to that date, shall be equitably apportioned to the several lots or parcels and made a matter of record in the books of the taxpayer, to the end that any gain derived from the sale of any such lots or ' parcels may be returned as incomie for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss in every lot or parcel sold, and [does] not [contemplate] that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain or loss will be accounted for accordingly. 285 1 Art. 44 [Art. 41 ]. Sale of Real Estate Involving Deferred Payments. — Deferred payment sales of real estate ordinarily fall into two classes when considered with respect to the terms of sale, as follows: (1) Installment transactions, in which the initial payment is 2852 relatively small (generally less than one-fourth of the purchase INC. 320 TAX Reg. 45, Rev. See Note on page 301. price) and the deferred payments usually numerous and of small amount. They include (a) sales where there is immediate transfer of title when a small initial payment is made, the seller being protected by a mortgage or other lien as to deferred payments, and (b) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the agreed in- stallments have been paid. (2) Deferred payment sales not on the installment plan, in which 2853 there is a substantial initial payment (ordinarily not less than one- fourth of the purchase price), deferred payments being secured by a'^mortgage or other lien. Such sales are distinguished from sales on the installment plan by the substantial character of the initial payment and also usually by a relatively small number of deferred payments. In determining how these classes shall be treated in levying the 2854 income tax, the question in each case is whether the income to be reported for taxation shall be based only on amounts actually received in a taxing year, or on the entire consideration made up in part of agreements to pay in the future. 2855 Art. 45 [Art. 42 ]. Sale of Real Estate on Installment Plan. — In the two kinds of transactions included in class (1) in the foregoing article, installment obligations assumed by the buyer are not ordinarily to be regarded as the equivalent of cash, and the vendor may report as his income from such transactions in any year that proportion of each payment actually received in that year which the gross profit to be realized when the property is paid for bears to the gross contract price. If the return is made on this basis and the vendor repossesses the property after default by the buyer, retaining the previous payments, the entire amount of such payments, less the profit previously returned, will be income to the vendor and will be so returned for the year in which the property was repossessed, and the property repossessed must be included in the inventory at its original cost to himself {less any -depreciation as defined in articles 161 and 162). If the tax- payer chooses as a matter of settled practice consistently followed to treat the obligations of the purchaser as equivalent to cash and to report the profit derived from the entire consideration, cash and deferred payments, as income for the year when the sale is made, this is permissible. If so treated the rule prescribed in article 46 will apply. 2856 Art. 46 [Art. 43 ]. Deferred Pa 3 anent Sales of Real Estate not on Installment Plan. — In class (2) in the next to the last article the obligations assumed by the buyer are much better secured because of the margin afforded by the substantial first payment, and experience shows that the greater number of such sales are eventually carried out according to their terms. These obligations for deferred payments are therefore to be regarded as equivalent to cash, and the profit indicated by the entire con- sideration is taxable income for the year in which the initial payment was made and the obligations assumed. If the buyer defaults and the seller regains title to the land by agreement or process of law, retaining payments previously made, he may deduct from his gross income as a loss in the year of repossession any excess of the amount previously reported as income over the amount actually received^ and must include such real estate in his inventory at its original cost to himself {less any depreciation as defined in articles 161 and 162) [such proportion of the defaulted payments as was previously returned as income, provided that so much of the selling price previously received as has not been reported as income is accounted for in the inventory of the property by deduction from the original cost]. See article 153. 321 INC. TAX Reg. 45, Rev. See Note on page 301. 2857 Art. 47 [Art. 44]. Annuities and Insurance Policies.— Annuities paid by religious, charitable and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds any amounts paid by him as consideration for the contract. An annuity charged upon devised land is income taxable to the annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as taxable income the amount of rent paid to the annuitant, and he is not entitled to deduct from his taxable income any sums paid to the annuitant. Where an insured receives under life insurance, endowment or annuity contracts sums in excess of the premiums paid therefor, such excess is income for the year of its receipt. See article 72. Distributions on paid-up policies which are made out of earnings of the insurance company subject to tax are in the nature of corporate dividends and are income of an indi- vidual only for the purpose of the surtax. 2858 Art. 48 [Art. 45]. Rent and Royalties. — When improvements made by a lessee become part of the real estate, the value of such improve- ments upon the expiration [termination] of the existing term of the lease is income to the lessor. In general, sums paid by a tenant for the use of property, although to another than the landlord, are properly to be regarded as rent and constitute income of the landlord. See further article 109. Royalties on patents are income. 2859 [Art. 46. Allocation of Income from Judgments.— Art. 52, 1[2862^/or content of this article and paragraph as originally printed.] 2860 Art. 49 [Art. 47]. Ccmpensaticn for Less.— In the case of property which has been lost or destroyed in whole or in part through fire, storm, shipwreck or other casualty, or where the owner of property has lost or transferred title by reason of the exercise of the power of requisition or eminent domain, including cases where a voluntary transfer or convey- ance is induced by reason of the fact that a technical requisition or condem- nation proceeding is imminent, the amount received by the owner as com- pensation for the property may show an excess over the value of the property on March 1, 1913, or over its cost, if it was acquired after that date (after making proper provision in either case for depreciation to the date of the loss, damage or transfer). The transaction is not regarded as completed at this stage, however, if the taxpayer proceeds immediately in good faith to replace the property, or if he makes application to establish a replacement fund as provided in the following article. In such a case the gain, if any, is measured by the excess of the amount received over the amount^actually and reasonably expended to replace or restore the property substantially in kind, exclusive of any expenditures for additions or betterments. The new or restored property effects a replacement in kind only to the extent that it serves the same purpose as the property which it replaces without added capacity or other element of additional value. Such new or restored property shall not be valued in the accounts of the taxpayer at an amount in excess of the cost or value at March 1, 1913, if acquired before that date (after making proper provision in either case for depreciation to the date of the loss, damage or transfer), of the original property, plus the cost of any actual additions and betterments. If the taxpayer does not elect to replace or restore the property, the transaction will then be deemed to be completed and the income shall be measured by the excess of the amount of the compensation received over the cost of the property or its actual INC. 322 TAX value at March 1, 1913, if acquired before that date (after making proper provision in either case for depreciation to the date of the loss, damage or transfer). See article 141. Articles 49 and 50 have no application to property which is voluntarily sold or disposed of. 2861 Art. 50 [Art. 48]. Replacement Fund for Loss. — In any case in 1840 which the taxpayer elects to replace or restore the lost, damaged or transferred property, but where it is not practicable to do so immediately, he may obtain permission to establish a replacement fund in his accounts in which the entire amount of the compensation so received shall be held, without deduction for the payment of any mortgage, and pending the disposition thereof the accounting for gain or loss thereupon may be deferred for a reasonable period of time, to be determined by the Com- missioner. [The following is a part of this paragraph in this revised edition.\ 2862 [Art. 49. Application for Replacement Fund. — ] In such a case [specified in the preceding article] the taxpayer should make appli- cation to the Commissioner on form 1114 for permission to establish such a replacement fund and in his application should recite all the facts relating to the transaction and undertake that he will proceed as expeditiously as possible to replace or restore such property. The taxpayer will be required to furnish a bond with such [security or] surety as the Commissioner may require for an amount not less than the estimated additional income and war profits and excess profits [and income] taxes assessable by the United States upon the income so carried to the replacement fund [or at the option of the tax- payer and in lieu of such bond the taxpayer may deposit, as security for such estimated additional amount of tax, obligations of the United States issued after September 1, 1917, such obligations to be held in trust as such security under such agreement as may be prescribed by the Commissioner in a bank or trust company approved by him]. See section 1320 of the statute. The estimated additional [incom.e and excess profits] taxes, for the amount of which the claimant is required to furnish security, should be computed at the rates at which the claimant would have been obliged to pay, taking into con- sideration the remainder of his net income and resolving against him all matters in dispute affecting the amount of the tax. Onlv surety companies holding certificates of authority from the Secretary of the Treasury as accep- table sureties on federal bonds will be approved as sureties [under schedule B of form 1114, and onlv active depositaries of public moneys will be ap- proved as depositaries under schedule C]. The application should be executed in triplicate, so that the Commissioner, the applicant and the surety or depositary may each have a copy. 2862a Art. 51. Forgiveness of Indebtedness.— 7V/}/2 per cent bonds [of the first liberty loan] is entirely exempt from tax, but that absolute exemption does not extend to the bonds of the first liberty loan converted [is lost if the bonds are con- verted into bonds of later issues]. 2869 Art. 78 [Art. 77]. Liberty Bond Exemption from Normal Tax in 103 1918. — The Second Liberty Bond Act of September 24, 1917, '"‘as 975 amended by the Third Liberty Bond Act of April 4, 1918, and by the Fourth Liberty Bond Act of July 9, 1918, provides: Sec. 7. That none of the bonds authorized by section one, nor of the certificates authorized by section five, or by section six, of this Act, shall bear the circulation privilege. All such bonds and certifi- cates shall be exempt, both as to principal and interest from all taxa- tion now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations. The interest on an amount of such bonds and certifi- cates the principal of which does not exceed in the aggregate $5,000, owned by any individual, partnership, association, or corporation, shall be exempt from the taxes provided for in subdivision (b) of this section. 2870 Accordingly., in addition to the interest on first liberty loan bonds, which is entirely free from tax, all interest on first liberty loan converted 4 per cent bonds, first loan converted 4j^ per cent bonds, first hberty loan second converted 4^^ per cent bonds, second liberty loan 4 per cent bonds, second liberty loan converted 43^ per cent bonds, third liberty loan 4j^ per cent bonds, and fourth liberty loan 43^ per cent bonds, together with all interest on United States certificates of indebtedness and war savings certificates, is exempt from the normal tax. Such interest in excess of the interest on not exceeding $5,000 principal amount of such bonds and certificates may , however, be subject to surtax and to the war profits and excess profits tax and may accordingly require to be included in gross income. [Accordingly, all interest on Liberty bonds of the second, third and fourth issues is exempt from the normal tax. Such interest may, however, be subject to surtax and may require to be included in gross income. As to any issue after the fourth, the provisions of the act authorizing it will govern its exemption.] 2871 Art. 79 [Art. 78]. Liberty Bond Exemption from Surtax and War 981 Profits and Excess Profits Tax in 1918. — Section 7 of the Second Liberty Bond Act provides that the interest on an aggregate of not exceeding $5,000 principal amount of liberty bonds of issues after the first, owned by any person, including in such later issues bonds of the first liberty loan [bonds] converted. Treasury certificates and war savings certificates [owned by any person at one time] shall be exempt from surtaxes and war profits and excess profits taxes, as well as the normal tax [all income and war 327 TAX INC. Reg. 45, Rev. See Note on page 301. excess profits taxes]. The Supplement to Second Liberty Bond Act, approv- ed September 24, 1918, provides: That until the expiration oL’two years after the date of the termina- tion of the war between the United|States and the Imperial German Government, as fixed by proclamation of the President — (1) The interest on an amount of bonds of the Fourth Liberty Loan the principal of which does not exceed $30,000 owned by any indi- vidual, partnership, association, or corporation, shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits’ of individuals, partnerships, associations, or corporations; (2) The interest received after January 1, 1918, on an amount of bonds of the First Liberty Loan Converted, dated either November 15, 1917, or May 9, 1918, the Second Liberty Loan, converted and uncon- verted, and the Third Liberty Loan, the principal of which does not exceed^$45 ,000 inThe aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from such taxes: Pro- vided, however. That no owner of such bonds shall be entitled to such exemption in respect to the interest on an aggregate principal amount of such bonds exceeding one and one-half times the principal amount of bonds of the Fourth Liberty Loan originally subscribed for by such owner and still owned by him at the date of his tax return; and (3) The interest on an amount of bonds, the principal oLwhich does not exceed $30,000, owned by any individual, partnership, association, or corporation, issued upon conversion of 33^ per centum bonds of the First Liberty Loan in the exercise of any privilege arising as a conse- quence of the issue of bonds of the Fourth Liberty Loan, shall be ex- empt from such taxes. The exemptions provided in this section shall be in addition to the exemption provided in section 7 of the Second Liberty Bond Act in re- spect to the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty Bond Act. 2872 Accordingly^ tne exemption from surtaxes and war profits and excess profits taxes covers^ and there may be excluded from gross income, the interest received on not exceeding $5,000 principal amount in the aggregate of first liberty loan converted 4 per cent bonds, first liberty loan converted 4J4 bonds, first liberty loan second converted 4}^ P^'^' bonds, second liberty loan 4 per cent bonds, second liberty loan converted 434 P^^" bonds, third liberty loan 434 P^^ bonds, fourth liberty loan 434 P^^ bonds, and treasury certificates and war savings certificates, apportioned as the taxpayer may choose; and in addition, until the expiration of two years after the termination of the war, {a) the interest received on not exceeding $30,000 principal amount of fourth liberty loan 434 P^^ bonds ; plus {b) the interest received on an aggre- gate principal amount of first liberty loan converted 4 per cent bonds, first liberty loan converted 434 P^^ cent bonds {dated May 9, 1918), second liberty loan bonds, converted and unconverted, and third liberty loan 434 pe'C cent bonds, not exceeding $45,000 and not exceeding 150 per cent of the principal amount of bonds of the fourth liberty loan both originally subscribed for by the taxpayer and still owned by him at the date of his return; plus (c) the interest received on not exceeding $30,000 principal amount of first liberty loan second converted 434 P^c cent 328 TAX INC. bonds {dated October 24, 1918). [Accordingly , there may be excluded from gross income {a) the interest received on not exceeding $5,000 principal amount of liberty bonds of any or all issues after the first, up to and including the fourth; and, until two years after the war, {h) the interest received on not exceeding $30,000 principal am.ount of liberty bonds of the fourth issue; plus {c) the interest received on an aggregate principal amount of liberty bonds of the first liberty loan converted, the second liberty loan, converted or unconverted, and the third liberty loan, not exceeding $45,000 and not exceeding 150 per cent of the principal amount of the bonds of the fourth liberty loan both originally subscribed for by the taxpayer and still owned by him at the date of his return; plus {d) the interest received on not ex- ceeding $30,000 principal amount of liberty bonds into which first liberty bonds may have been converted in the exercise of any privilege arising as^a consequence of the issue of the fourth liberty bonds.] 2872a Art. 80. Liberty Bond Exemption After December 31, 1918. — The 975 Victory Liberty Loan Act of March 3, 1919, provides: 3169 Sec. 2. {a) Thatuntil the expiration of five years after the date of the term- 3297 ination of the war between the U nited States and the German Government, as fixed by proclamation of the President, in addition to the exemptions provi- ded in section 7 of the Second Liberty Bond Act in respectto the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty Bond Act or the Supplement to Second Liberty Bond Act, the interest received on and after January 1, 1919, on an amount of bonds of the First Liberty Loan converted, dated November 15, 1917, May 9, 1918, or October 24, 1918, the Second Liberty Loan converted and unconverted, the Third Liberty Loan, and the Fourth Liberty Loan, the principal of which does not exceed $30,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States upon the income or profits of individuals, partnerships, associations, or corporations. {b) In addition to the exemption provided in subdivision (a), and in addition to the other exemptions therein referred to, the interest received on and after January 1, 1919, on an amount of the bonds therein specified the principal of which does not exceed $20,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from the taxes therein specified: Provided, That no owner of such bonds shall be entitled to such exemption in respect to the interest on an aggregate principal amount of such bonds exceeding three times the principal amount of notes of the Victory Liberty Loan originally subscribed for by such owner and still owned by him at the date of his tax return. 2872b Accordingly, with respect to the interest on liberty bonds received after December 2>\, 1918, the exemption from surtaxes and war profits and excess profits taxes covers, and there may be excluded from gross income, in addition to the exemptions specified in articles 77, 78 and 79, {a) the interest received on and after January 1, 1919, until the expiration of five years after the termination of the war, on not exceeding $30,000 principal amount in the aggregate of first liberty loan converted 4 per cent bonds, first liberty loan con- verted 43 ^ per cent bonds, first liberty loan second converted 434 bonds, second liberty loan 4 per cent bonds, second liberty loan converted 434 cent bonds, third liberty loan 4J4 bonds, and fourth liberty loan 434 per cent bonds, apportioned as the taxpayer may choose: and in addition {h) 329 TAX INC. Reg. 45, Rev. See Note on page 301. the interest received on and after January 1, 1919, during the life of the notes of the victory liberty loan, on an aggregate principal amount of the bonds described in subdivision {a) not exceeding $20,000 and not exceeding three times the principal amount of notes of the victory liberty loan originally subscribed for by the taxpayer and still owned by him at the date of his return. The specific exemptions of notes of the victory liberty loan will be prescribed by the Secretary of the Treasury pursuant to the Victory Liberty Loan Act. [See lf3297 for the exemption provisions.] 2873 Art. 81 [Art. 79 j. Liberty Bond Exemption in the Case of Trusts. — {a) When income is taxable to beneficiaries, as in the case of a trust the income of which is to be distributed to the beneficiaries periodically, each beneficiary is regarded as the owner of a proportionate part of the bonds held in trust and is entitled to exemption on account of such ownership as if he owned such proportionate part of the bonds directly. In such a case a subscription by a trustee for bonds of the fourth liberty loan or notes of the victory liberty loan, constitutes each beneficiary existing at the tin e of such subscription an original subscriber for his proportionate part of such bonds or notes, as the case may be, and entitles such beneficiary to the appropriate collateral exemption of interest on bonds of previous issues, whether owned by such beneficiary or by the trustee, as if the beneficiary had himiself origin- ally subscribed for such proportionate part of the bonds or notes; and a subscription by such beneficiary for bonds of the fourth liberty loan, or notes of the victory liberty loan, as the case may be, entitles him to the appropriate collateral exemption of interest on bonds of previous issues held by the trustee, {b) When, on the other hand, income is taxable to the trustee, as in the case of a trust the income of which is accumulated for the benefit of unborn or unascertained persons, the trustee is regarded as the owner of all the bonds held in trust and the trust is entitled to any exemption on account of such ownership. In such a case a subscription by a trustee constitutes the trustee as such the original subscriber and entitles the trust, on account of such subscription, to the collateral exem.ption of interest on bonds of previous issues. 2874 Art. 82 [Art. 80]. Liberty Bond Exemption In the Case of Partner- ships and Personal Service Corporations. —As income of a partner- ship is taxable to the individual partners, each partner is treated as the owner of a proportionate part of the bonds held by the partnership and is entitled to i exemption on account of such ownership as if such partner owned such proportionate part of the bonds directly. Such partner, if a partner at he time of the original subscription by the partnership for bonds of the fourth liberty loan or notes of the victory liberty loan, as the case may be, is treated as an original subscriber for a proportionate part of such bonds or notes subscribed for by the partnership and is entitled to the appropriate collateral exemption of interest on bonds of previous issues on account of such original subscription for bonds or notes [of the fourth liberty loan] as if he had subscribed directly * for such proportionate part [of the bonds]. This principle also applies to stockholders in personal service corporations. 2875 Art. 83 [Art. 81]. Income of Foreign Governments. — The exemption 104 of income of foreign governments applies also to their political sub^ 996 divisions. Any income collected by foreign governments from in- vestments in the United States in stocks, bonds or other domestic i securities, which are not actually owned by but are loaned to such foreign governments, is subject to tax. The income of foreign ambassadors and min- 330 TAX INC. Reg. 45, Rev. See Note on page 301. isters from investments in bonds and stocks and from interest on bank balances, and the fees of foreign consuls, are exempt from tax but income of such foreign officials from any business carried on by them in the United States would be taxable. The compensation of citizens of the United States who are officers or employees of a foreign government is, however, not exempt from tax. 2875a Art. 84. Income of States. — In general income accruing to any 107 State, Territory or possession of the United States, or to any political 1005 subdivision thereof, or to the District of Columbia, is exempt from tax. See article 74. The income of State workmen's compensation insurance funds established by State statutes is not taxable. In the case of a public utility acquired, constructed, operated or maintained by a taxpayer under contract with any State, Territory, or political subdivision thereof, or with the District of Colu?nbia, containing an agreement that a portion of the net earnings of such pub- lic utility shall be paid to the State, Territory, or political subdivision thereof, or the District of Columbia, the amount so paid may be deducted by the taxpayer as a necessary expense in transacting business. See section 214 {a) (1) of the statute, 2875b Art. 85. Compensation of State Officers. — -Compensation paid its 1013 officers and employees by a State or political subdivision thereof, in- cluding fees received by notaries public commissioned by States and the commissions of receivers appointed by State courts, are not taxable. Employees of universities receiving salaries paid in part or in whole from funds available under the Smith-Lever Act of May 8, 1914, who are officers or employees of a State, are not required to return as taxable incomes the salaries so received. This is also true with respect to the Act of August 30, 1890, relating to colleges for the benefit of agriculture and the mechanic arts, and to the Act of March 2, 1887, relating to agricultural experiment stations in such colleges. 287 5C Art. 86. Compensation of Soldiers and Sailors. — A person of either 108 sex in active service in the military or naval forces of the United States 1006 may exclude from gross income his or her compensation received from the United States up to the amount of $3,500 in any taxable year, except that this exemption does not apply to compensation received either before or after the present war. The date of the termination of the war for the purpose of the statute will be fixed by proclamation of the President. The military and naval forces of the United States include, among others, army contract surgeons and the individuals named in section 1 of the statute. A person is in active service if he is actually serving in such forces, not necessarily in the field or in the theatre of war, and is not merely on the retired or reserve list. Accordingly, if such a person receives compensation from the United States o/ $3,500 or less and has no other income of an amount sufficient in itself to require him to render a return of income, he need make no return. Members of draft boards are not as such entitled to this exemption. 2875d Art. 87. Income Accruing Prior to March 1, Property held by the taxpayer on March 1, 1913, is capital. Included in this capital are all claims, whether evidenced by writing or not, and all interest which had accrued thereon before that date. Interest accruing on or after that date is taxable income. Where an interest-bearing claim contracted prior to March 1, 1913, is paid in whole or in part after that date, any gain derived from the conversion of the claim into money is taxable. The amount of such gain is the excess of the pro- ceeds of the claim {both principal and interest), exclusive of any interest accrued since February 28, 1913, already returned as income, over the fair market value 331 TAX INC. Reg. 45, Rev. See Note on page"301.^ of the claim as of March 1, 1913 {both -principal and interest then accrued). In the case of an insurance policy its surrender value as of March 1, 1913, may be used as a basis for the purpose of ascertaining the gain derived from the sale or other disposition of such policy. Where services were rendered prior to March 1, 1913, hut paid for thereafter, the amount received is taxable income to the extent of the excess of such amount over the fair market value on March 1, 1913, of the principal of the claim and any interest which had then accrued. A claim for the purpose of this article means a right existing unconditionally on March 1, 1913, and then assignable, whether presently payable or not. Interest does not, of course, include dividends on corporate stock See section 201 of the statute and articles 1541-1549. 28756 Art. 88. Subtraction for Redemption of Trading Stamps . — Where a 2021 taxpayer, for the purpose of promoting his business, issues with sales trading stamps or premium coupons redeemable in merchandise or cash, he should in computing the income from such sales subtract only the amount received or receivable which will be required for the redemption of such part of the total issue of trading stamps or premium coupons issued during the taxable year as will eventually be presented for redemption. This amount will be determined in the light of the experience of the taxpayer in his particular business and of other users engaged in similar businesses. The taxpayer shall file for each of the five preceding years, or such number of these years as stamps or coupons have been issued by him, a statement showing {a) the total issue of stamps during each year, {b) the total stamps redeemed in each year, and (c) the percentage for each year of the stamps redeemed to the stamps issued in such year. A similar statement shall also be presented showing the experience of other users of stamps or coupons whose experience is relied upon by the taxpayer to determine the amount to be subtracted from the proceeds of sales. The Commissioner will examine the basis used in each return, and in any case in which the amount subtracted in respect of such stamps or coupons is found to be excessive an amended return or amended returns will be required. [Art. 104, of the preliminary edition read as follows: Where a taxpayer, for the purpose of promoting his business, issues trading stamps or coupons redeemable in merchandise or cash, and sets up a reserve each year to cover all probable redemptions of coupons issued in that year, the reserve so set up may be deducted from gross income as a business ex- pense, provided: {a) that the returns of the taxpayer are otherwise made on an accrual basis; {b) that any income tax and excess profits tax returns of the taxpayer which have been previously made covering the period since March 1, 1913, shall be amended, if necessary, so that deductions for any of such years are made on the basis of reserves instead of upon actual redemptions as formerly required; and (c) that no larger amount shall be set up as a reserve for any taxable year than would-be required for the redemption of such part of the entire issue of that year as it appears will eventually be presented for redemption. The reserve percentage will be determined by considering the experience of the taxpayer and of other users, taking into account any material differences between the taxpayer’s situation and that of other users whose experience is relied on. Taxpayers who submit returns on this basis shall file therewith any amended returns called for by this article and shall also attach thereto a statement of the experience of the taxpayer and of any other user of coupons whose ex- perience is relied on to determine the percentage of reserve, indicating the name of such other user, the denominations most largely issued, and the character of business involved in each instance.] INC. 332 TAxI Reg. 45, Rev. See Note on page 301. GROSS INCOME DEFINED: NONRESIDENT ALIEN INDIVIDUAL. 2876 Art. 91. Gross Income of Nonresident Alien Individuals.— In 109 the case of nonresident alien individuals “gross income” means 503 only the gross income from sources within the United States. This includes [including] interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident cor- porations, amounts received representing profits on the manufacture or dis- position of goods within the United States, rentals and royalties from property and income from business carried on in the United States, [income from isolated transactions or activities, directly resulting in gain, carried on within the United States by a nonresident or his representative in person,] interest on deposits in banks located within the United States, income from capital otherwise invested in the United States, and income from services rendered or labor performed within the United States. For what is a resident corporation see article 1509. As to the gross income of foreign corporations see section 233 {b) of the statute and article 550. 2877 Art. 92. Income of Nonresident Alien Individuals not Subject to Tax. — Salaries, wages, commissions and rents paid by domestic business enterprises to nonresident alien employees for services rendered entirely in a foreign country or for property located in a foreign country are not subject to tax as income from a source within the United States. Divi- dends on stock and interest on notes of corporations organized in the United States, but doing no business and owning no property therein, paid to nonresident alien individuals or corporations, are not subject to the tax. The tax does not apply to charter money or freight payments received by a foreign owner in regard to [for] a vessel operated between the United States and foreign ports, if the person receiving the income maintains no regular agency in the United States a7id is not doing business in the United States. Compensation received by nonresident alien munitions inspectors and pur~ chasing agents from foreign governments is not subjec to the tax [making of the charter contract grows out of no solicitation or similar commercial activity by the owner or his representative in person within the United States]. 287 7a Art. 93 . Income of N onresident Aliens from United States Bonds. — 3180 By virtue of section 4 of the Victory Liberty Loan Act of March 3, 1919, amending section 3 of the Fourth Liberty Bond Act of July 9, 1918, the interest received on and after March 3, 1919, on bonds ^ notes and certificates of indebtedness of the United States and bonds of the War Finance Corporation^ while beneficially owned by a nonresident alien individual, or a foreign corpor- ation, partnership or association, not engaged in business in the United States, is exempt from all income and war profits and excess profits taxes. DEDUCTIONS ALLOWED : BUSINESS EXPENSES. 2878 Art. 101. Business Expenses. — Business expenses, whether sub- 113 tracted from total receipts in computing gross income or deducted from 1020 gross income in computing net income, include all items entering into what is ordinarily known as the cost of goods sold, together with selling and management expenses, except such classes of items as are treated in articles 121 to 268. Among the Items to be treated as business expenses are material, labor, supplies and repairs in the case of a manufacturer, while a merchant would include his purchases of goods bought for resale. In either case the amount to be taken as a deduction in any year should be determined 333 TAX INC. Reg. 45, Rev. See Note on page 301. by taking into consideration the inventory at the beginning and end of the year. Other items that may be included as business expenses are reasonable compensation for the services of officers and employees, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, ( accident or other similar losses in the case of a business, and rental for the use of business property. A taxpayer is entitled to deduct the necessary expenses paid in carrying on his business from his gross income from whatever source. See section 215 of the statute and articles 291-294. As to deductions by corpo- rations see section 234 and articles 561-573. 2879 Art. 102. Cost of Materials. — Taxpayers carrying materials and ^ supplies on hand should include in expenses the charges for materials and supplies only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such material and supplies has not been taken into account in de- termining the net income for any previous year. If a taxpayer carries materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not , taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method. 2880 Art. 103. Repairs. — The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not in- creased by the amount of such expenditures. Repairs in the nature of re- placements, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserve. See articles 161-171 . 2881 [Art. 104. Reserve for Redemption of Trading Stamps. — See 1f2875e.] 2881a Art. 104. Professional Expenses. — A professional man may claim as 1031 deductions the cost of supplies used by him in the practice of his pro- 2965 fession, expenses paid in the operation and repair of an automobile used in making professional calls, dues to professional societies and subscriptions to prof essional journals, the rent paid for office rooms, the expense of the fuel, lights water, telephone, etc., used in such offices, and the hire of office assistants. Amounts expended for books, furniture and professional instruments and equipment of a permanent character are not allowable as deductions. See section 215 and articles 291-294. 2882 Art. 105. Compensation for Personal Services. — Among the ordi- 1979 nary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services. This test and its practical application may be further stated and illustrated as follows: 2883 (1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible, {a) An osten- sible salary paid by a corporation may be a distribution of a dividend on 334 TAX INC. Reg. 45, Rev. See Note on page 301. Stock. This is likely to occur in the case of a corporation having few stockholders, practically all of whom draw salaries. If in such a case the salaries are based upon or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries, if in excess of those ordinarily paid for similar services, are not paid wholly for services rendered, but in part as a distribution of earnings upon the stock, {b) An ostensible salary paid by a corporation may be in part a waste or appropria- tion of assets of the corporation. This may occur where salaried em- ployees are in control of the corporation through holding directly or in- directly a majority of its stock or, in the case of a large corporation with many stockholders, owning a substantial minority of its stock, and the tendency of the officers unduly to inflate their salaries must be taken into account, (r) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business. (2) The form or method of fixing compensation is not decisive as 2884 to deductibility. While any form of contingent compensation in- vites scrutiny as a possible distribution of earnings of the enter- prise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to com- pensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the enterprise and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantage- ous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not 2885 exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are thosej^existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. See article 32. 2886 Art. 106 . Treatment of Excessive Compensation.— As to the treatment of amounts ostensibly paid as compensation, but not allowed to be deducted as such, the following rules apply: (1) In the case of excessive payments by corporations, if such 2887 payments correspond or bear a close relationship to stockholdings, the amount of the excess should be treated as dividends and would thus be exempt from the normal tax in the hands of the recipients; or if such payments represent an appropriation of assets of the corporation by officers who control it and fix their compensation in violation of the rights of the corporation, the amount of the excess, while disallowed as a deduction by the corporation, should be treated as compensation of the individuals sub- ject to the normal tax, compensation illegally secured being none the less subject to tax in all respects; or if such payments constitute in part payment for property, the amount of the excess should be treated by the corporation as a capital expenditure and by the recipient as part of the purchase price. (2) In the case of excessive payments by individuals or partner- 2888 ships, the amounts disallowed should ordinarily be treated as shares of the profits of a partnership, except that a payment for 335 INC. TAX Reg. 45, Rev. See Note on page 301. property should be treated by the individual or partnership as a capital expenditure and by the recipient as part of the purchase price. 2889 Art. 107. Bonuses to Employees. — Gifts or bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensa- tion for the services rendered. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are considered gratuities and are not deductible from gross income. 2890 Art. 108. Pensions. — Amounts paid for pensions to retired em- ployees or to their families or others dependent upon them, or on account of injuries received by employees, and lump sum amounts paid as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. No deduction shall be made for contribu- tions to a pension fund held by the corporation, the amount deductible in such case being the amount actually paid to the employee. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs in recognition of the services rendered by the individual, such payments may be deducted. Salaries paid by em- ployers during the continuance of the war to employees who are absent in the military or naval service or are serving the Government in other ways at a nominal compensation, but who intend to return at the conclusion of the war, are allowable deductions. 2891 Art. 109. Rentals. — Where a leasehold is acquired for a specified 115 sum, the purchaser may take as a deduction in his return an aliquot 1022 part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord, the amount of the tax being deductible by the latter. The cost of erecting buildings or permanent improvements on ground leased by a taxpayer is additional rental and is therefore a proper deduction from gross income, provided such buildings and improvements under the terms of the lease revert to the owner of the ground at the ex- piration of the lease. In such a case the cost will be prorated according to the number of years constituting the term of the lease. The lessee will pot be permitted to deduct from gross income any depreciation with respect to such buildings, but the cost of incidental repairs necessary to keep them in an efficient condition for the purposes of their use may be deducted. If, however, the life of the improvement is less than the life of the lease, de- preciation may be taken by the lessee instead of treating the cost as rent. See article 48. 2892 Art. 110. Expenses of Farmers.— A farmer who operates a farm 890 for profit is entitled to deduct from gross income as necessary ex- penses all amounts actually expended in the carrying on of the business of farming. The cost of ordinary tools, of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The cost of feeding and raising live stock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not including the value 336 INC. TAX Reg. 45, Rev. See Note on page 301. of farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipts therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deductions. The cost of farm machinery and farm buildings represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, orchards and ranches prior to the time when the productive state is reached may be regarded as [constitute] investments of capital. The amount expended in purchasing draft or work animals or live stock either for resale or for breeding purposes is regarded as an investment of capital. The purchase price of an automobile, even when wholly used in carrying on farming operations, is not deductible, but [and] it is regarded as an investment of capital. The cost of gasoline, repairs and upkeep of an automobile if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to [in accordance with] the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to [use for] business purposes [alone] is deductible as a necessary expense. See articles 38, 145 and 171. 2893 Art. 111. When Charges Deductible. — Each year’s return, so far as practicable, both as to gross income and deductions there- from, should be complete in itself, and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. See articles 21-24 and 52. The expenses, liabilities, or deficit of one year can not be used to reduce the income of a subsequent year. A person making returns on an accrual [accrued] basis has the right to deduct all authorized allowances, whether paid in cash or set up as a liability, and it follows that if he does not within any year pay or accrue certain of his ex- penses, interest, taxes or other charges, and makes no deduction therefor, he can not deduct from the income of the next or any subsequent year any amounts then paid in liquidation of the previous year’s liabilities. A loss from theft or embezzlement occurring in one year and discovered in another is de- ductible only for the year of its occurrence. Any amount paid pursuant to a judgment or otherwise on account of damages for personal injuries, patent infringement or otherwise, is deductible from gross income when the claim is [liquidated or] put in judgment or [actually] paid, less any amount of such damages as may have been compensated for by insurance or otherwise. If subsequently to its occurrence [thereto], however, a taxpayer first ascertains [has for the first time ascertained] the amount of a loss sustained during a prior taxable year which has not been [and not] deducted from the gross in- come [therefor], he may render an amended return for such preceding taxable year, including such amount of loss in the deductions from gross income, and may file a claim for refund of the excess tax paid by reason of the failure to deduct such loss in the original return. See section 252 of the statute and articles 1031-1038. 2894 [Art. 112. Charges to Capital Account.— ^12967.] INC. 337 TAX Reg. 45, Rev. See Note on page 301. DEDUCTIONS ALLOWED: INTEREST. 2895 Art. 121. Interest. — Interest paid or accrued within the year on 116 indebtedness may be deducted from gross income. But interest 1049 on indebtedness incurred or continued to purchase or carry se- curities, such as municipal bonds, the interest upon which is exempt from tax, is not deductible. However, this exception does not apply to obligations of the United States issued after September 24, 1917, which include the liberty bonds of the second and subsequent issues, and interest on indebtedness incurred to purchase such obligations is deductible pursuant to the general rule. See articles 77-80. Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness. [ The foregoing sentence, slightly changed, is brought from old Art. 563, for which see ^3211.] Payments made for Maryland or Pennsylvania ground rents are not deductible as interest. 2896 Art. 122. Interest on Capital. — Interest calculated as being a charge against income on account of capital or surplus invested in the business, but which does not represent a payment on an interest-bearing obligation, is not an allowable deduction from gross income; that is to say, the interest which the money might earn if otherwise invested is not a de- ductible charge against income. DEDUCTIONS ALLOWED: TAXES. 2897 Art. 131. Taxes. — Federal taxes (except income, war profits and 119 excess profits taxes). State and local taxes (except taxes assessed 1052 against local benefits of a kind tending to increase the value of the property assessed), and taxes imposed by possessions of the United States or by foreign countries (except the amount of income, war profits and excess profits taxes allowed as a credit against the tax), are deductible from gross income. See section 222 of the statute and articles 381-384 as to tax credits. Postage is not a tax. Amounts paid to States under secured debts laws in order to render securities tax exempt are deductible. Automobile license fees are ordinarily taxes. 2898 Art. 132. Federal Duties and Excise Taxes. — Import or tariff duties paid to the proper customs officers, and business, license, privilege, excise and stamp taxes paid to internal revenue collectors, are de- ductible as taxes imposed by the authority of the United States, provided they are not added to and made a part of the expenses of the business or the cost of articles of merchandise with respect to which they are paid, in which case they can not be separately deducted. 2899 Art. 133. Taxes for Local Benefits. — So-called taxes, more prop- erly assessments, paid for local benefits, such as street, sidewalk and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public wel- fare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. Assessments INC. 338 TAX Reg. 45, Rev. See Note on page 301. under Illinois laws relating to drainage districts are not limited to the property benefited, and assessments so paid are deductible. Assessments under the statutes of California relating to irrigation and of Iowa relating to drainage, and under certain statutes of Tennessee relating to levees, are limited to property benefited, and amounts so paid are not deductible as taxes. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct the assessments paid as an expense incurred in business, if the payment of such assessments is neces- sary to the conduct of his business. Where the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible. 2SC0 Art. 134. Inheritance Taxes. — State inheritance taxes paid by the executor or administrator of an estate of a deceased person, which are provided by law to be deducted from the respective legacies or distri- butive shares, are not allowable deductions in computing the net income of such estate subject to tax, even though the will contains a direction to pay inheritance taxes out of the residue. (An inheritance tax is upon the transfer of the property and not upon the estate of the decedent or upon the executor or administrator, although the latter is required to pay it. In general, taxes paid or accrued within the year imposed by the authority of any State, or otherwise, are limited to those imposed upon the taxpayer and do not include taxes paid by him on behalf of another, even though he is required by law to make such payment. See articles 565 and 566. Since, moreover, the tax is imposed upon the transfer before the property reaches the legatee or distributee, and merely diminishes the capital share of the estate received by him, such tax is not imposed upon the legatee or distributee and is not an allowable deduction from his income. Similarly^ Federal estate taxes are not deductible. DEDUCTIONS ALLOWED— LOSSES 2901 Art. 141. Losses. — Losses sustained during the taxable year and 126 not compensated for by insurance or otherwise are fully deductible 127 (except by nonresident aliens) if {a) incurred in the taxpayer’s 129 trade or business, or Q?) incurred in any transaction entered into 1066 for profit, or (c) arising from fires, storms, shipwreck or other 1086 casualty, or from theft. They must usually be evidenced by closed 1084 and completed transactions. In the case of the sale of assets^the 1085 loss will be the difference between the cost thereof, less depreciation sustained since acquisition, or X.\\Q.fair market value as of Marcli 1, 1913, if acquired before that date, less depreciation since sustained, and the price at which they were disposed of. See section 202 of the statute and articles 39-46 and 1561. When the loss is claimed through the destruction of property by fire, flood or other casualty, the amount deductible will be the difference between the cost of the property or \l?> fair market value as of March 1, 1913, and the salvage value thereof, after deducting from the cost or value as of ^Viarch 1, 1913, the amount, if any, which has been or should have been set aside and deducted in the current year and previous years from gross income on account of depreciation and which has not been paid out in making good the depreciation sustained. But the loss should be reduced by NC. 339 TAX Reg. 45, Rev. See Note on page 301. the amount of any insurance or other compensation received. See articles 49 and 50. A loss in the sale of an individuals residence is not deductible. Losses in illegal transactions are not deductible. 2902 Art. 142. Voluntary Removal of Buildings. — Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements will be deductible from gross income in a sum representing the difference between the cost of such property demolished or scrapped and the amount of a reasonable allowance for the depreciation which the property had undergone prior to its demolition or scrapping; that is to say, the deductible loss is only so much of the original cost of the property, less salvage, as would have remained unextinguished had a reasonable allowance been charged off for depreciation during each year prior to its destruction. When a taxpayer buys real estate upon which is located a building which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible loss by reason of the demolition of the old building, and no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building. 2903 Art. 143. Loss of Useful Value. — When through some change in business conditions the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in the business, he may claim as a loss for the year in which he takes such action the difference between the cost or the fair market value as of jVfarch 1, 1913, of any asset so discarded (less any depreciation allowances) and its salvage value remain- ing. This exception to the rule requiring a sale or other disposition of pro- perty in order to establish a loss requires proof of some unforeseen cause by reasdn of which the property must be prem.aturely discarded, as, for example, where machinery or other property must be replaced by a new invention, or where an increase in the cost of or other change in the m.anu- facture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the propertv im- possible. This exception does not extend to a case where the useful life of property termiinates solely as a result of those gradual processes for wTich depreciation allowances are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or perm.anently devoted to a radically different use, and to machinery onlv when its use as such is permanentb.- abandoned. Any loss to be deductible under this exception must be charged off on the books and fully explained in returns of income. But see articles 181- 188. [This article is not intended to cover cases calling for the application of articles 181-187.] 2904 Art. 144. Shrinkage in Securities and Stocks. — A person possess- ing securities, such as stocks and bonds, can not deduct from gross income any amount claimed as a loss on account of the shrinkage in value of such securities through fluctuation of the market or otherwise. The loss allowable in such cases is that actually suffered when the securities mature or are disposed of. See, however, article 154. In the case of banks or other corporations which are subject to supervision by State or federal INC. 340 TAX Reg. 45, Rev. See Note on page 301. authorities, and which in obedience to the orders of such supervisory officers charge off as losses amounts representing an alleged shrinkage in the value of property, the amounts so charged off do not constitute allowable deduc- tions. The foregoing applies only to owners and investors, and not to dealers in securities, as to whom see article 1585. However, if stock of a corporation becomes worthless, its cost or its fair market value as of March 1, 1913, if acquired prior thereto, may be deducted by the owner in the taxable year in which the stock was ascertained to be worthless and charged off, provided a satisfactory showing of its worthlessness be made as in the case of bad debts. See article 151. 2905 Art. 145. Losses of Farmers. — Losses incurred in the operation 890 of farms as business enterprises are deductible from gross income. If farm products are held for favorable markets, no deduction on account of shrinkage in weight or physical value or by reason of deteriora- tion in storage shall be allowed. The total loss by frost, storm, flood or fire of a prospective crop, or of a crop which has not been sold, is not a deductible loss in computing net income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the value of animals that perish from among those animals that were raised on the farm. If live stock has been purchased for any purpose, and afterwards dies from disease, exposure or injury, or is killed by order of the authorities of a State or the United States, the actual purchase price of such stock, less any depreciation which may have been previously claimed with respect to such perished live stock, and less also any insurance or indemnity re- covered, may be deducted as a loss. The actual cost of other property, less depreciation already allowed, destroyed by order of the authorities of a State or of the United States may in like manner be claimed as a loss; but if reimbursement is made by a State or the United States in whole or in part on account of stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made. In determining the cost of stock for the purpose of ascertaining the deductible loss there shall be taken into account only the purchase price, and not the cost of any feed, pasturage or care which has been deducted as an expense of operation. If gross income is ascertained by inventories, no deduction can be made for live stock or products lost during the year, whether pur- chased for resale or produced on the farm, as such losses will be reflected in the inventory by reducing the amount of live stock or products on hand at the close of the year. If an individual owns and operates a farm, in addition to being engaged in another trade, business or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure. See articles 38, 110, and 171. DEDUCTIONS ALLOWED— BAD DEBTS 2906 Art. 151. Bad Debts. — An account merely written down or a debt 132 recognized as worthless prior to the beginning of the taxable year 1088 is not deductible. Where all the surrounding and attendant circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. Bankruptcy may or may not be an indication of the worth- lessness of a debt, and actual determination of worthlessness in such a case INC. 341 TAX Reg. 45, Rev. See Note on page 301. is sometimes possible before and at other times only when a settlement in bankruptcy shall have been had. Where a taxpayer ascertained a debt to C be worthless and charged it off in one year, the mere fact that bankruptcy proceedings instituted against the debtor are terminated in a later year confirming the conclusion that the debt is worthless will not authorize shift- ing the deduction to such later year. In the case of debts existing prior to March 1 , 1913, only their value on that date may be deducted upon sub- sequently ascertaining them to be worthless. See article 52. If a taxpayer computes his income upon the basis of valuing his notes or accounts receivable ^ at their fair market value when received, which may be less than their face value, the amount deductible for bad debts in any case is limited to such original valu- ation. 2907 Art. 152. Examples of Bad Debts. — Worthless debts arising from unpaid wages, salaries, rents and similar items of taxable income will not be allowed as a deduction unless the income such items represent 4 has been included in the return of income for the year in which the deduc- ■ tion as a bad debt is sought to be made or in a previous year. Only the difference between the amount received in distribution of the assets of a bankrupt and the amount of the claim may be deducted as a bad debt. The difference between the amount received by a creditor of a decedent in dis- tribution of the assets of the decedent’s estate and the amount of his claim may be considered a worthless debt. A purchaser of accounts receivable which can not be collected and are consequently charged off the books as bad debts is entitled to deduct them, the amount of deduction to be based upon the price he paid for them and not upon their face value. 2908 Art. 153. Worthless Mortgage Debt. — Where under foreclosure a mortgagee buys in the mortgaged property and credits the in- debtedness with the purchase price, the difference between the purchase price and the indebtedness will not be allowable as a deduction for a bad debt, for the property which was security for the debt stands in the place of the debt. The determination of loss in such a situation is deferred until the property is disposed of, except where a purchase money mortgage is fore- closed by the vendor of the property. See article 46. Only where a purchaser for less than the debt is another than the mortgagee may the difference be- tween the debt and the net proceeds from the sale be deducted as a bad debt. 2909 Art. 154. Worthless Securities. — Where bonds purchased before March 1 , 1913, depreciated in value between the date of purchase and that date, and were in a later year ascertained to be worthless and charged off, the owner is entitled to a deduction in that year equal to the value of the bonds on March 1 , 1913. Bonds purchased since February 28, 1913, when ascertained to be worthless, may be treated as bad debts to the amount actually paid for them, but not exceeding their amortized value if purchased at a premium. Bonds of an insolvent corporation secured only by a mortgage from which on foreclosure nothing is realized for the bond- holders are regarded as ascertained to be worthless not later than the year of the foreclosure sale, and no deduction for a bad debt is allowable in com- puting a bondholder’s income for a subsequent year. To authorize a deduc- tion for a bad debt on account of notes held prior to March 1 , 1913, their value on that date must be established. INC. 342 TAX Reg. 45, Rev. See Note on page 301. DEDUCTIONS ALLOWED— DEPRECIATION 2910 Art. 161. Depreciation. — A reasonable allowance for the exhaus- 133 tion, wear and tear and obsolescence of property used in the trade 1089 or business may be deducted from gross income. For convenience such an allowance will usually be referred to as covering depreciation^ excluding from the term any idea of a mere reduction in market value not resulting from exhaustion, wear and tear or obsolescence. The proper allowance for ^ such depreciation of any property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a consistent plan by which the aggregate of such amounts for the useful life of the property in the business will suffice, with the salvage value, at the end of such useful life to provide in place of the property its cost, or its value as of Tvlarch 1, 1913, if acquired by the taxpayer before that date. See further articles 839 and 844. ^ 2911 Art. 162. Depreciable Property. — The necessity for a depreciation ^ allowance arises from the fact that certain property used in the business gradually approaches a point where its usefulness is exhausted. The allowance should be confined to property of this nature. In the case of tangible property, it applies to that which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence due to the normal progress of the art or to becoming inadequate to the grow- ing needs of the business. It does not apply to inventories or to stock in trade; nor to land apart from the improvements or physical development added to it. It does not apply to bodies of minerals which through the process of removal suffer depletion, other provision for this being made in I the statute. See articles 201-233. Property kept in repair may, nevertheless, ' be the subject of a depreciation allowance. See article 103. The deduction of an allowance for depreciation is limited to property used in the taxpayer’s trade or business. No such allowance may be made in respect of automobiles or other vehicles used chiefly for pleasure, a building used by the taxpayer solely as his residence, nor in respect of furniture or furnishings therein, personal effects, or clothing; but properties and costumes used exclusively in a business, such as a theatrical business, may be the subject of a depreciation allowance. 2912 Art. 163. Depreciation of Intangible Property.— Intangibles, the I use of which in the trade or business is definitely limited in dura- tion, may be the subject of a depreciation allowance. Examples are pat- ents and copyrights, [and limited leases,] licenses and franchises. Intan- gibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be . estimated from experience with reasonable certainty, such intangible asset ' may be the subject of a depreciation allowance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the Com- missioner. There can be no such allowance in respect of good will, trade names, trade marks, trade brands, secret formulae or processes. 2913 [Art. 164. Depreciation of Trust Propenj^. — in the case of a trust 1253 where the terms of the will or trust or the decree of a court of ) competent jurisdiction or the general law require the corpus of the estate to be kept intact, and where physical property forming a part of the corpus of such estate is subject to depreciation through its em- INC. 343 TAX Reg. 45, Rev. See Note on page 301. ployment in business, the fiduciary may claim in his return of income an allowance for such depreciation for the taxable year, provided the amount of the deduction is applied or held by the fiduciary for making good such depreciation. Fiduciaries in their returns should set forth the provision of the law, trust or decree requiring such depreciation deduction and should show that the amount deducted has been or will be preserved and so applied. All amounts paid by fiduciaries to beneficiaries of trust estates as income from such trust estates, whether from reserves or otherwise, are distribu- tions of income and will be so treated for income tax purposes.] See note on page 301. 2914 Art. 164 [Art. 165]. Capital Sum Recoverable through Depreciation Allowances. — The capital sum to be replaced by depreciation allow- ances is the cost of the property in respect of ’which the allowance is mmde, except that in the case of property acquired by the taxpayer prior to March 1, 1913, the capital sum to be replaced is the fair miarket value of the property as of that date. In the absence of proof to the contrary, it will be assumed that such value as of A'larch 1, 1913, is the cost of the property less depre- ciation up to that date. To this sum should be added from timie to time the cost of improvements, additions and betterments, [replacements, and re- newals,] the cost of ’wTich is not deducted as an expense in the taxpayer’s return, and from it should be deducted from, tim.e to tim.e the amount of any definite loss or dam.age sustained by the property through casualty, as dis- tinguished from the gradual exhaustion of its utility which is the basis of the depreciation allo’wance. In the case of the acquisition after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump price, as, for example, land and buildings, the capital sum to be replaced is limited to that part of the lump price which represents the value of the depreciable property at the time of such acquisition. 2915 Art. 165 [Art. 166]. Method of Computing Depreciation Allowance. — The capital sum to be replaced should be charged off over the useful life of the property either in equal annual installments or in accordance with any other recognized trade practice, such as an apportionment of the capital sum over units of production. Whatever plan or method of apportion- ment is adopted must be reasonable and should be described in the return. 2916 Art. 166 [Art. 167]. Modification of Method of Computing De- preciation. — If it develops that the useful life of the propertv'' has been underestimated, the plan of computing depreciation should be miodified and the balance of the cost of the property, or its fair market value as of March 1, 1913, not already provided for through a depreciation reserve, or deducted from book value^ should be spread over the estimated remaining life of the property. A taxpayer who in computing depreciation allowances in returns for years prior to 1918 has not taken ordinary obsolescence into con- sideration may for the year 1918 and subsequent years revise the estimate of the useful life of any property so as to allow for such future obsolescence as may be expected from experience to result from the normal progress of the art [sic]. No modification of the method should be made on afccount of changes in the market value of the property from time to time, such as, on the one hand, loss in rental value of buildings due to deterioration of the neighborhood, or, on the other, appreciation due to increased demand. The conditions affecting such market values should be taken into considera- tion only so far as they affect the estimate of the useful life of the property. INC. 344 TAX Reg. 45, Rev. See Note on page 301. 2917 Art. 167 [Art. 168]. Depreciation of Patent or Copyright. — In com- puting a depreciation allowance in the case of a patent or copyright, the capital sum to be replaced is the cost (not already deducted as current ex- pense) of the patent or copyright or its fair market value as of March 1 , 1913, if acquired prior thereto. The allowance should be computed by an appor- tionment of the cost of the patent or copyright or of its fair market value as of March 1, 1913, over the life of the patent or copyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913, as the case may be. If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, cost of drawings, experi- ' mental models, attorney’s fees, etc., actually paid. If a corporation pur- chased a patent and paid for it in stock or securities, its cost is the fair market value of the stock or securities at the time of the purchase. Depreciation of a patent can be taken on the basis of the fair market value as of March 1, 1913, only when affirmi.ative and satisfactory evidence of such value is offered. Such evidence should whenever practicable be submitted with the return. If the patent becomes obsolete prior to its expiration such proportion of the amount on which 1 its depreciation may be based as the number of years of its remaining life bears to the whole number of years intervening between the date when it was acquired and the date when it legally expires may be deducted, if permission so to do is specifi- cally secured from the Commissioner. Owing to the difficulty of allocating to a particular year the obsolescence of a patent, such permission will be granted only if affirmative and satisfactory evidence that the obsolescence occurred in the year for which the return is made is submitted to the Commissioner. The fact that depreciation has not been taken in prior years does not entitle the taxpayer to deduct in any taxable year a greater amount for depreciation than would other- zvise be allowable. See articles 40 and 843. [A taxpayer may elect not to take a depreciation allowance for patents, but such election if made is final and ) will control the returns for all subsequent years.] 2918 Art. 168 [Art. 169]. Depreciation of Drawings and Models. — A tax- pa;'mr who has incurred expenses in his business for designs, drawings, patterns, models, or work of an experimental nature calculated to result in improvement of his facilities or his product, may at his option deduct such expenses from gross income for the taxable year in which they are incurred or treat such articles as a capital asset to the extent of the amount so expended. In the latter case, if the period of usefulness of any such asset may be estimated from experience with reasonable accuracy, it may be \ the subject of depreciation allowances spread over such estimated period of ' usefulness. The facts must be fully shown in the return or prior thereto to the satisfaction of the Commissioner. Except for such depreciation allow- ances no deduction shall be made by the taxpayer against any sum so set up as an asset except on the sale or other disposition of such assets at a loss or on proof of a total loss thereof. 2919 Art. 169 [Art. 170]. Charging Off Depreciation. — A depreciation al- ) lowance, in order to constitute an allowable deduction from gross in- come, must be charged off. The particular manner in which it shall be charged off is not material, except that the amount measuring a reasonable allow- ance for depreciation must be either deducted directly from the book value of the assets or preferably credited to a depreciation reserve account, which must be reflected in the annual balance sheet. The allowances should be computed and charged off with express reference to specific items, units or A groups of property, each item or unit being considered separately or specifi- cally included in a group with others to which the same factors apply. The INC. 345 TAX Reg. 45, Rev. See Note cn page 301. taxpayer should keep such records as to each item or unit of depreciable property as will permit the ready verification of the factors used in com- puting the allowance for each year for each item, unit or group. 2920 Art. 170 [Art. 171]. Closing Depreciation Account. — If the use of any [the] property in the business is permanently discontinued, al- though no sale or other disposition of the property has taken place [been made], a determination of any gain or loss may be made; but any deduction in respect of any loss thereon must be disclosed in the taxpayer’s return for the year in'which the determination is made and a full statement of the facts and the basis upon which the computation is calculated must be attached to the return. Upon a sale or other disposition of the property, the consideration received shall be compared with the amount of the estimated salvage value used in computing the gain or loss as above provided, and the amount of the difference shall be treated as a gain or loss, as the case may be, of the year in which the sale or other disposition was made. See articles 141-145. 2921 Art. 171 [Art. 172]. Depreciation in the Case of Farmers . — k reason- 890 able allowance for depreciation may be claimed on farm buildings (other than a dwelling occupied by the owner), farm machinery and other physical property, including live stock purchased for draft, dairy or breeding purposes, but no claim for depreciation on life stock raised or pur- chased for resale, will be allowed. Live stock purchased for draft, breeding or dairy purposes, or for any purpose other than resale, maybe included in the inventory for each year at a figure which will reflect the reduction in value estimated to have occurred during the year through increase of age or other causes. Such a reduction in value should be based on the cost and estimated life of the live stock. If an inventory is not used, a reasonable allowance for depreciation may be claimed based upon the cost of draft and work animals and animals kept solely for breeding purposes and not for resale. See also articles 38, 110 and 145. DEDUCTIONS ALLOWED : AMORTIZATION. 2922 Art. 181. Scope of Provision for Amortization . — Any allowance 134 made to a taxpayer by a contracting Department of the Government or 1093 by any other contractor for amortization or fall in the value of prop- erty^ either as a part of the cost of production or as a part of the price of the product^ shall be included in gross income. See article 52. The a?nount to be allowed as a deduction from gross income for amortization for the purpose of the tax is to be based upon the provisions of articles 181 to 188, pursuant to which the deduction should be made instead of upon the basis of any amounts contractually or otherwise determined. The allowance for amortization covers the decline in value of the property subject thereto and is inclusive of the deprecia- tion which would ordinarily be allowed separately. Depreciation for any tax- able period after December 31, 1917, should., therefore not be claimed with respect to property as to which an allowance for amortization is claimed. ISee also section 204 of the statute and articles 1601-1603. 2 ^ 2 a~ Art. 182 [Art. 181]. Property Cost of Which May Be Amortized. — The taxpayer may make a reasonable deduction from gross income not in excess of a sum sufficient to extinguish the cost of buildings, ma- chinery, equipment or other facilities constructed, erected, installed or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and of vessels constructed or acquired INC. 346 TAX Reg. 45, Rev, See Note on page iJOl. on or after such date for the transportation of articles or men contributing to the prosecution of the present war. In the case of property the construction or installation of which was commenced before April 6, 1917, and completed subsequently to that date, arnortization will be allowed with respect only to the cost incurred on or after April 6, 1917. [A deduction on account of amortiz- ation will be allowed only in the case of enterprises or projects falling within the class of activities contributing to the prosecution of the present war. See also section 204 of the statute and articles 1601-1603.] 2923 Art. 183. Cost Recoverable Through Amortization. — The total amount to be extinguished by amortization, in general, is the excess of the unextinguished or unrecovered cost of the property over its maximum value {either for sale or for use as part of the plant or equipment of a going business) under stable postwar conditions. Under the provisions of the statute authorizing reexamination of the claim at any time within three years after the termination of the present war, the allowance will be finally determined upon such basis. However, in many cases it will be impracticable during the calendar year 1919 to make final determination either of the length of the amortization period or of the value of the property under stable postwar conditions. Consequently, in returns made during the calendar year 1919 the amortization allowance will tentatively be determined in accordance with articles 184 and 185. 2924 Art. 184. Cost Which May Be Amortized. — For the purpose of making returns in 1919 the total amount to be extinguished by amortiz- ation is the difference between the value of the property on the basis indicated below and the original cost of the property less any amounts otherwise deducted for depreciation, losses, etc., prior to January 1, 1918; or in the case of property acquired or completed after December 31, 1917, it is the difference between the value of the property on the basis indicated below and the cost of such property at the date of acquisition or completion. 2924a (1) In the case of property useful only during the war period and permanently discarded at the date of the return the basis is the salvage value as of the date when the property was discarded. 2924b (2) In the case of property still in use which will not be required for the future use of the business and which is certain to be permanently discarded before the last installment payment of the tax covered by the return the basis is the salvage value as of the date when the property will be permanently dis- carded. 2924C (3) In the case of other property the basis is the estimated reproduction cost as of April, 1919, of such property in its then condition. In the final determination such cost will be ascertained under stable postwar conditions, without reference to such date. 2924d A special record of all property falling in classes (1) and (2) must be preserved by the taxpayer and the Commissioner must be promptly advised {a) if such property is restored to use; {b)the selling price if sold; and (c), if still on hand and not in use at the close of the three year period, the reasons why such property has not been disposed of. 2925 Art 185. Method of Amortization. — For the purpose of making re- turns in 1919 the amount to be extinguished by amortization shall be spread in proportion to the net income {computed without benefit of the amortiz- 347 I NX. TAX Reg. 45, Rev. See Note on page 301. ation allowance) between January 1, 1918, and the following dates: {a) if the claim is based on subdivision (1) of article 184, the date when the property was permanently discarded; {b) if the claim is based on subdivision (2) of article 184, the date upon which the property will be permanently discarded; and (c) if the claim is based upon subdivision (3) of article 184, Aprif 1919. All tax- payers claiming an allowance for amortization will be required to estimate the amount of their net income for the period between January 1, 1918, and the dates specified above^ and also to estimate what part of such net income is properly allocable to the calendar year 1918 and what part thereof is properly allocahle to the calendar year 1919. Such estimates shall be the basis for apportioning the amounts to be extinguished by amortization between the calendar years 1918 and 1919. Taxpayers reporting on the fiscal year basis {a) in all computations based upon 1918 rates shall use the amount of such allowance apportioned to the calendar year 1918; {b) in any computation based upon 1919 rates for a year beginning in 1918 and ending in 1919 shall use the amount of such allowance apportioned to the calendar year 1919; and (c) in any computation for a fiscal year beginning in 1919 shall use as many twelfths of the allowance apportioned to the calendar year 1919 as there are months of such fiscal year falling in the calendar year 1919. ' [Art. 182. Cost Which May Be Amortized. — The total amount to be extinguished by amortization is the difference between the original cost to the taxpayer of the property and its value to the taxpayer at the close of the amortization period {a) for sale or {b) for use, immediate or prospective, as part of the plant or equipment of a going business, which ever value is the larger, less any amounts otherwise deducted or deductible for wear, tear, obsolescence, and loss. In the case of property the construction or installation of which was commenced before April 6, 1917, and completed subsequently to that date, amortization will be allowed with respect only to the cost incurred on or after April 6, 1917.] See note on page 301. ( [Art. 183. Amortization Period. — The period over which the deduction allowed is to be spread, or during which it is to be amortized, is the estimated period between the date of acquisition or completion of the property and the date upon which either {a) the property will become useless or (Z?)the taxpayer will be able to earn by operation or use a normal return upon the unamortized cost, whichever date is the earlier.) See note on page 301. [Art. 184. Method of Amortization. — The proportion of allowable deduction to be allocated to each taxable year of the amortization period will be, as nearly as may be determined, the same proportion which the net income or profit derived during such taxable year bears to the entire i net income or profit derived during the amortization period from the operation or use of such property.) See note on page 301. 2926 Art. 186 [Art. 185). Additional Requirements for Amortization. — Claims for amortization must be unmistakably differentiated in the return from all other claims for wear, tear, obsolescence and loss. No such claim will be allowed unless it is reflected in any accounts submitted by the ^ taxpayer to stockholders and in any credit statements by the taxpayer to banks, and is given full effect on his financial books of account. If Govern- ment or other contracts taken by the taxpayer contained recognition of amortization as an element in the cost of production, copies of such con- tracts shall be filed with the taxpayer’s return, together with a statement and description of any sums received on account of amortization and the basis upon which they were determined. In any case in which an allowance ^ has been made for amortization of cost the taxpayer will not be allowed to * 348 TAX INC. Reg. 45, Rev. See Note on page 301. 6-6-19. restore to his invested capital for the purpose of the war profits and excess profits tax any portion of the amount covered by such allowance. 2927 Art. 187 [Art. 186]. Redetermination of Amortization Allowance. — A redetermination of the deduction allowed on account of amort- tization may, or at the request of the taxpayer shall, be made by the Com- missioner at any time within three years after the termination of the present war, and if as a result of an appraisal or from other evidence it is found that the deduction originally allowed was incorrect, the amount of tax due for each taxable year during the amortization period will be adjusted by additional assessment or by refund. 2928 Art. 188 [Art. 187). Information to be Furnished by Taxpayer. — ^To obtain the benefit of this provision of the statute the taxpayer must establish to the satisfaction of the Commissioner that the entire deduction claimed and the proportion claimed for any particular year are reasonable. The taxpayer shall also submit a supplementary statement setting forth the following information: {a) a description of the property in reasonable detail; {b) the date or dates on which the property was acquired, and from whom, or, if constructed, erected or installed by the taxpayer, the dates on which such construction, erection or installation was begun and completed; (c) evidence establishing the intention of the taxpayer on and after April 6, 1917, or on and after the date of acquisition or the date of beginning con- struction, erection or installation, to devote such property or vessels to the production of articles (or, in the case of vessels, the transportation of articles or men) contributing to the prosecution of the present war; {d) the cost of construction, erection, installation or acquisition; {e) the value of the property after termination of the amortization period; (/) a segregation of the property permanently discarded^ or of the property which will be permanently discarded before the last installment payment covered by the return [which will have no value (except for salvage) following the amortization period, and of property which will have value after such period for use in a going concern or business]; (g) all deductions from gross income otherwise taken or claimed with respect to such property; Qi) the computation by which the total amount to be extinguished by amortization was determined; and (i) the computation by which the proportion of the amortization charge claimed as a deduction in the taxable year for which return is being made was determined. DEDUCTIONS ALLOWED— DEPLETION 2929 Art. 201. Depletion of Mines, Oil and Gas Wells. — A reasonable 137 deduction from gross income for the depletion of natural deposits 1096 and for the depreciation of improvements is permitted, based {a) upon cost, if acquired after February 28, 1913, or {b) upon the fair market value as of March 1, 1913, if acquired prior thereto, or (c) upon the fair market value within 30 days after the date of discovery in the case of mines, oil and gas wells discovered by the taxpayer after February 28, 1913, where the fair market value is materially disproportionate to the cost. The essence of this provision is that the owner of such property, whether it be a leasehold or freehold, shall secure through an aggregate of annual depletion and depreciation deductions a return of the amount of capital invested by him in the property, or in lieu thereof an amount equal to the fair market value as of March 1, 1913, of the properties owned prior to that date, or an amount equal to the fair market value within 30 days after the date of discovery of mines, oil or gas wells discovered by the taxpayer on or 349 TAX INC. Reg. 46, Rev. See Note on page 301. after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost; plus in any case the subsequent cost of plant ( and equipment (less salvage value) and underground and overground de- velopment, which is not chargeable to current operating expense, but not including land values for purposes other than the extraction of minerals. Operating owners, lessors and lessees are entitled to deduct an allowance for depletion, but a stockholder in a mining or oil or gas corporation is not. further articles 839 and 844. t 2930 Art. 202. Capital Recoverable through Depletion Allowance in the Case of Owner. — In the case of an operating owner in fee or a lessor the capital remaining in any year recoverable through depletion allow- ances is the sum of {a) the cost of the property, or its fair market value as of March 1, 1913, or its fair market value within 30 days after discovery, as the case may be, plus (b) the cost of subsequent improvements and de- velopment not charged to current operating expenses, but minus (c) deduc- ^ tions for depletion which [have] has or should have been taken to date and {d) the portion of the capital account, if any, as to which depreciation has been and is being deducted instead of depletion. The value of the surface of the land should be taken into consideration. In no case, however, may a lessor [take deductions for depletion in any year during the continuance of the lease in excess of the royalties payable thereunder for such year, nor may hej include in his capital recoverable through such an allowance any part of development costs not borne by the lessor nor any part of the dis- covery value. 2931 Art. 203. Capital Recoverable through Depletion Allowance in ^ the Case of Lessee. — In the case of a lessee the capital remaining in any year recoverable through depletion allowances is the sum of {a) the cost of the leasehold, or its fair market value as of March 1, 1913, or its fair market value within 30 days after discovery, as the case may be, plus (b) the cost of subsequent improvements and development not charged to current operating expenses, but minus (c) deductions for depletion which [have] has or should have been taken to date and {d) the portion of the capital account, if any, as to which depreciation has been and is being deducted instead of depletion. Any annual or periodical rents or royalties supple- menting the bonus or other amount paid for the lease may be charged to ^ current operating expenses or, until the property reaches the operating stage, to capital account, and in the latter event will form part of the capital return- able through deductions for depletion. 2932 Art. 204. Apportionment of Deductions between Lessor and Lessee. — As the value of property comprehends the interests of both lessor and lessee, no computation, for the purpose of depletion allow- | ances, of the value of these interests separately as of any date which com- bined exceeds the value of the property in fee simple will be permitted. The same principle applies to holders of fractional interests. If the aggre- gate deduction claimed is deemed excessive, the Commissioner may request the owner or lessee to show that the valuation claimed does not exceed the fair market value of the property at a specified date determined in the manner explained in article 206. The lessor and lessee shall, with the ap- a proval of the Commissioner, eq uitably apportion the allowance in the light ' of the peculiar conditions in each case and on the basis of their respective INC- 350 TAX Reg. 45, Rev. See Note on page 301, interests therein. To the return of every taxpayer claiming an allowance for depletion in respect of {a) property in which he owns a fractional interest only or {h) a leasehold or {c) property subject to a lease, there shall be at- tached a statement setting forth the name and address and the precise nature of the holdings of each person interested in the property. 2933 Art. 205. Determination of Cost of Deposits. — In any case in which a depletion or depreciation deduction is computed on the basis of^the cost or price at which any mine, mineral deposit, mineral right or leasehold was acquired, the owner or lessee will be required upon request of the Commissioner to show that the cost or price at which the property was bought was fixed for the purpose of a bona fide purchase and sale, by which the property passed to an owner in fact as well as in form different from the vendor. No fictitious or inflated cost or price will be permitted to form the basis of any calculation of a depletion or depreciation deduction, and in determining whether or not the price or cost at which any purchase or sale was made represented the actual market value of the property sold, due weight will be given to the relationship or connection existing between the person selling the property and the buyer thereof, 2934 Art. 206. Determination of Fair Market Value of Deposits, — Where the fair market value of the property at a specified date in lieu of the cost thereof is the basis for depletion and depreciation deduc- tions, such value must be determined, subject to approval or revision by the Commissioner, by the owner of the property in the light of the con- ditions and circumstances known at that date, regardless of later dis- coveries or developments in the property or in methods of mining or ex- traction. The value sought should be that established assuming a transfer between a willing seller and a willing buyer as of that particular date. No rule or method of determining the fair market value of mineral property is prescribed, but the Commissioner will lend due weight and consideration to any and all factors and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties, market value of stock or shares, royalties and rentals, value fixed by the owner for purposes of the capital stock tax, valuation for local or State taxation, partnership accountings, records of litigation in which the value of the property was in question, the amount at which the property may have been inventoried in probate court, disinterested appraisals by approved methods, and other factors. 2935 : Art. 207. Revaluation of Deposits not Allowed.— The cost of the property or its fair market value at a specified date, as the case may be, plus subsequent charges to capital account not deductible as current expense, will be the basis for determining the depletion and depreciation deductions for each year during the continuance of the ownership under which the fair market value or cost was fixed, and during such ownership there can be no revaluation for the purpose of this deduction. This rule will not forbid the redistribution of the capital account over the estimated number of units remaining in the property in accordance with either of the next two articles. 2936 Art. 208. Determination of Quantity of Ore in Mine.— Every taxpayer claiming a deduction for depletion will be required to estimate with respect to each separate property the total units (tons, pounds, ounces or other units) of ores and minerals reasonably known or on good evidence believed to have existed in the ground on March 1, 1913, INC. 351 TAX Reg. 46, Rev. See Note"on"pagel301. or on the date of acquisition of the property, or within 30 days after the date of discovery, as the case may be. In estimating the total units of ores and minerals for purposes of depletion the property must be considered in the condition in which it was on March 1, 1913, or the date of acquisition, or within 30 days after the date of discovery, but if subsequently during the ownership of the taxpayer making the return additional recoverable mineral deposits have been discovered or developed which were not taken into account in estimating the number of units for purposes of depletion, or if it shall be discovered by working, development or exploration that ground previously estimated to contain commercially recoverable mineral is barren or contains only commercially unworkable mineral, a new estimate of the recoverable units of ores or minerals {but not of the cost or fair market value at a specified date) shall be made and when made shall thereafter con- stitute a basis for depletion. In the selection of the unit of estimate the custom or practice applicable to the type of mineral deposit and the character of the operations thereon should be considered. The estimate of the recover- able units of ores or minerals for the purpose of depletion shall include {a) the ores and minerals “in sight,” “blocked out,” “developed,” or “assured,” ^ in the usual or conventional meaning of these terms in respect to the type of deposit, and may also include {b) “prospective” or “probable” ores and min- erals (in the same sense), that is, ores and minerals that are believed to exist on the basis of good evidence, although not actually known to occur on the basis of existing development; but “probable” or “prospective” ores and minerals may be computed for purposes of depletion only as exten- sions of known deposits into undeveloped ground. 2937 Art. 209. Determination of Quantity of Oil in Ground.— In the case of either an owner or lessee it will be required that an esti- mate, subject to the approval of the Commissioner, shall be made of the ’ probable recoverable oil contained in the territory with respect to which the investment is made as of the time of purchase, or as of March 1, 1913, if acquired prior to that date, or within 30 days after the date of discov- ery, as the case may be. The oil reserves must be estimated for all unde- veloped proven land as well as producing land. If information subse- quently obtained clearly shows the estimate to have been materially erroneous, it may be revised with the approval of the Commissioner. 2938 Art. 210. Computation of Allowance for Depletion of Mines and Oil Wells. — When the cost or value as of March 1, 1913, or within | 30 days after the date of discovery of the property shall have been det^- mined, and the number of mineral units in the property as of the date of acquisition or valuation shall have been estimated, the division of the former amount by the latter figure will give the unit value for purposes of depletion, and the depletion allowance for the taxable year may be computed by multiplying such unit value by the number of units of mineral extracted during the year. If, however, proper additions are made to the capital account represented by the original cost or value of the property, * or unforeseen [extraordinary] circumstances necessitate a revised estimate of the number of mineral units in the ground, a new unit value for purposes of depletion may be found by dividing the capital account at the end of the year, less deductions for depletion to the beginning of the taxable year which have or should have been taken, by the number of units in the ground at the beginning of the taxable year. This number, unless a re- vision of the original estimate has been necessary, will equal the number | of units in the ground at the date of original acquisition or valuation less 352 TAX INC. Reg. 45, Rev. See Note on page 301. the number extracted prior to the taxable year. If, however, a recalcula- tion is needed, the number of units at the beginning of the year will be the sum of the gross production of the year and the estimated mineral reserves in the property at the end of the year. 2939 Art. 211. Computation of Allowance for Depletion of Gas Wells. — On account of the peculiar conditions surrounding the production of natural gas it will be necessary to compute the depletion allowances for gas properties by methods suitable to the particular cases in question and acceptable to the Commissioner. Usually, the depletion of natural gas properties should be computed on the basis of decline in closed or rock pres- sure, taking into account the effects of water encroachment and any other modifying factors. [The following methods may also be used. In many fields more or less additional evidence on depletion is to be had from such considerations as (a) details of production (performance record of well or property); (b) decline in open flow capacity; (c) comparison with life his- tories of similar wells or properties, particularly those now exhausted; and (d) size of reservoir and pressure of gas. In using the closed pressure decline method, the pressure at which wells are abandoned may be sub- tracted from the observed pressures in order to determine the correct per- centages. The estimates for properties in certain fields are subject to some further correction for various reasons, among which are (a) irregular encroachment of water or oil which reduces the rate of decline in pressure; (b) even though there be no encroachment of oil or water, the size of the reservoir remaining fixed, the pressure decline does not follow in exact and precise proportion to the amount withdrawn; and (c) as a rule less gas is marketed for 50 pounds of decline in 'the early history of the well than during the decline of a similar amount in the later history or after the pressure has become low.] The gas producer will be expected to compute the depletion as accurately as possible and submit with his return a de- scription of the method by which the computation was made. The following formula, in which the units of gas are pounds per square inch of closed pressure may be used and is recommended: the quotient of the capital account recoverable through depletion allowances to the end of the taxable year, divided by the sum of the pressures at the beginning of the year less the sum of the pressures at the time of expected adandonment (which quo- tient is the unit cost), multiplied by the sum of the pressures at the be- ginning of the taxable year plus the sum of the pressures of new wells less the sum of the pressures at the end of the tax year, equals the depletion allowance. 2940 Art. 212. Gas Well Pressure Records to be Kept. — Beginning with 1919 closed pressure readings of representative wells, if not of all wells, must be carefully made and kept. In order to standardize pressure readings the well should remain closed until [such time as] the pressure does [will] not build up more than 1 per cent of the total pressure in 10 minutes. Ordinarily 24 hours will suffice for this purpose, but some wells will need to remain closed for a longer period. If there is any water in the well it should be blown or pumped off before the well is closed. A closed pressure reading of a gas well which has been producing, or is near gas wells that have been producing, is lower than the actual pressure of the gas in the reservoir by an amount [reduced to a greater or less extent,] depending on the welV s [its] location with reference to other producing wells and the length of time it has been closed in. [To get readings most useful for tax purposes] It is necessary to record the length of time the well has been closed and to show how the 353 TAX INC. Reg. 45, Rev. See Note on page 301. pressure built up during this period. Successive [Several] readings [at suc- cessive times] will [tend to] indicate the point at which the pressure becomes approximately stationary, that is, the point at which the closed pressure approaches as nearly as possible the maximum pressure which would be shown \i all wells [the well and all others] in the pool were closed for several months. The length of time required varies [of course] with the character of the sand, position of the packer, the location of the well with reference to other wells, the limits of the pool, and otlutv factors [considerations]. The depth of the well, diameter of tubing, and line pressure when the well was shut off, should be noted. Since readings at the exact end of the taxable [fiscal] year will ordinarily not be available, the pressure of that date may be obtaine 1 by interpolation or extrapolation, [or] In certain cases readings taken regularly in September or some other month may be applicable to the end of the taxable [fiscal or tax] year. As a general rule September closed pressure readings [taken regularly] furnish the best indication of depletion and it is recommended that such readings be made with [especial] regularity and care. Where interpolated or extrapolated readings are used the data from which they are obtained should be given. Gauges should be of appropriate capacity [considering the pressure to be measured] and should be frequently tested. A record should be kept of the number^] of [the] gauges, date each was [dates the gauges were] tested, names of men testing, and other significant details. 294 1 Art 213 . Computation of Allowance Where Quantity of Oil or Gas Uncertain. — If by reason of the youth of the field, the restricted pro- duction, or for any other cause, it is not possible to determine with any degree of certainty the quantity of oil or gas in a property, it will be necessary to make a tentative estimate which will apply until production figures are available from which an accurate determination may be made. [If for any reason the quantity of oil OT gas on the property can not be determined with any degree of cer- tainty, thus precluding the use of the unit cost method of computing de- pletion, the depletion deduction may be computed in accordance with some other method or rule satisfactory to the Commissioner. In case any method other than the unit cost method is proposed to be used by the taxpayer in computing his depletion allowance, a full description of the method used must be submitted with the return, together with a summary of the figures or calculations pertaining to such computation.] 2942 Art 214. Computation of Depletion Allowance for Combined Holdings of Oil and Gas Wells. — (1) [Oil properties. — ] The recover- able oil belonging to the taxpayer shall be estimated separately on the smallest unit on which data are available, such as individual wells or tracts, and these added together into a grand total to be applied to the total capital account returnable through depletion. The capital account shall include the cost or value, as the case may be, of all oil or gas leases or rights within the United States and its possessions, plus all incidental costs of development not charged as expense nor returnable through depreciation. The 'unit value of the total recoverable oil or gas is the quotient obtained^by dividing* the totarcapital account recoverable through depletion^by the total Jestima ted recoverable oil or gas. This unit multi- p^lied by the’totaUnumber oUunits of, oikor'gas produced by the taxpayer during the taxable year from all of the oil and gas properties will deter- mine the amount which may be allowably deducted from the gross income of that year. [This total depletion allowance divided by the total capital account returnable through depletion will give the percentage of depletion 354 TAX INC. Reg. 45, Rev. See Note on page 301. for the""taxable year. This percentage must be applied to the capital account'^returnable through depletion of each separate leasehold and fee property included in the holdings of the taxpayer to find the proper amount deductible for depletion from the capital account of each tract at the end of the taxable year.] (2) [Gas properties . — ] In the case of the gas properties of a tax- 2942a payer the depletion allowance for each pool may be computed' by using the combined capital account returnable through depletion of all the tracts of gas land "owned by the taxpayer in the pool and The average decline in rock pressures of all the taxpayer’s wells in such pool [as] in the formula given in article 211. The total allowance for depletion of the gas properties of the taxpayer will be the sum of the amounts com- puted for each pool. 2943 Art 215. Depletionof Mine Based on Advance Royalties. — Where the owner has leased a mining property for a term of years with a requirement in the lease that the lessee shall mine and pay for annually a specified number of tons or other agreed units of measurement of such mineral, or shall pay annually a specified sum of money which shall jbe applied in payment of the purchase price or agreed royalty per unit of such mineral whenever the same shall thereafter be mined and removed from the leased premises, the value in the ground to the lessor for pur- poses of depletion of the number of units so paid for in advance of mining will constitute an allowable deduction from the gross income of the year in which such payment or payments shall be made; but no deduction for depletion by the lessor shall be claimed or allowed in any subsequent year on account of the mining or removal in such year of any ore or mineral so paid for in advance and for which deduction has been once made.**- If for any reason any such mining lease shall be terminated before the ore or mineral therein which has been paid for in advance has been mined and removed, and the lessor repossesses the leased property, an amount equal to the aggregate deductions for depletion allowed in respect of ore or min- eral not mined and removed by the lessee, but still in the ground, will be deemed income to the lessor and will be returned as such for the’year in which the property is repossessed. ^ 2944 Art. 216. Depletion and Depreciation Accounts on Books. — Every taxpayer claiming and making a deduction for depletion and de- preciation of mineral property shall keep accurate ledger accounts in which shall be charged the fair market value as of March 1, 1913, or within 30 days after the date of discovery, or the cost, as the case may be, {a) of the property, and {h) of the plant and equipment, together with such amounts expended for development of the property or additions to plant and equipment since that date as have not been deducted [allowed] as expense in his returns. These accounts shall be credited with the amount of the depreciation and depletion deductions claimed and allowed each year, or the amount of the depreciation and depletion shall be credited to depletion and depreciation reserve ac- counts, to the end that when the sum ot the credits for depletion and depreciation equals the value or cost of the property, plus the amount added thereto for development or additional plant and equipment, less salvage value of the physical property, no further deduction for depletion and depreciation with respect to the property will be allowed. If^|dividends are paid out of a depletion or depreciation reserve, the stockholders' must be expressly notified that the dividend is a return of capital and not an ordinary dividend out of profits. See article 1549. 355 TAX INC. Reg. 45, Rev. See Note on page 301. 2945 Art. 217. Statement to be Attached to Return Where Depletion of Mine Claimed. — To the return of the taxpayer claiming a deduction for depletion or depreciation or both there should be attached a statement setting out: {a) whether the owner is a fee owner or lessee or both; {b) a description of the property owned in fee, if any, and a description of the leasehold property, if any, including the date of acquisition and the date of expiration of the lease; {c) the fair market value as of March 1, 1913, or within 30 days of the date of discovery, or the cost, as the case may be, of the property owned in fee and the leasehold property, together with a statement of the precise method by which the value or the cost of free- hold and leasehold property was determined; id) the estimated number of units of mineral or ore at the date of acquisition or of valuation in the property owned in fee and in the leasehold property separately, together with an explanation of the method used in estimating in each case the number of units of mineral or ore for purposes of depletion; (e) the amount of capital applicable to each unit; (/) the number of units removed and sold during the year for which the return was made; {g) the total amount deducted on account of depletion and on account of depreciation, stated separately, up to the taxable year during the ownership of the taxpayer; and (Ji) any other data which would be helpful in determining the reason- ableness of the depletion and depreciation deductions claimed in the return. 2946 Art. 218. Statement to be Attached to Return Where Depletion of Oil or Gas Claimed. — ^To each return made by a person owning or operating oil or gas properties, there should be attached a statement showing for each property the following information, which may be given in the form of a table, if desired, by taxpayers owning more than one property: {a) the fair market value of the property (exclusive of machinery, equipment, etc., and the value of the surface rights) as of March 1, 1913, if acquired prior to that date; or the fair market value of the property within 30 days after the date of discovery; or the actual cost of the prop- erty, if acquired subsequently to February 28, 1913, and not covered by the foregoing clause; (h) how the fair market value was ascertained, if the property came under the first or second head under (a); (c) the estimated quantity of oil or gas in the property at the time that the value of cost was determined; (d) the name and address of the person making the esti- mate and the manner in which this estimate was made, including a summary of the calculations; (e) the amount of capital applicable to each unit (this being found by dividing the value or cost, as the case may be, by the estimated number of units of oil or gas in the property at the time the value or cost was determined); (/) the quantity of oil or gas produced during the year for which the return is made (in the case of new properties it is desirable that this information be furnished by months); (g) the num- ber of acres of producing and proven oil or gas land; (h) the number of wells producing at the beginning and end of the taxable year; (i) the date of completion of wells finished during the taxable year; (j) the date of abandonment of all wells abandoned during the taxable year; (k) a property map showing the location of the property and of the producing and abandoned wells, dry holes, and proven oil and gas land; (1) the aver- age gravity of the oil produced on the tract; (m) the number of pay sands and average thickness of each pay sand or zone on the property; (n) the average depth to the top of each of the different pay sands; (o) any data regarding change in operating conditions, such as flooding, use of^jeom- pressed air, vacuum, shooting, etc., which have a direct effect on the pro- iNC. 356 TAX Reg. 45, Rev. See Note on page 301. duction of the property; (p) the monthly or annual production of individual wells and the initial daily production of new wells (this is highly desirable information and should be furnished wherever possible); (q) (for the first year in which the above information is filed for a property which was producing prior to the taxable year covered by the above statement the following information must be furnished) annual production of the tract or of the individual wells, if the latter information is available, from the beginning of its productivity to the beginning of the taxable year for which the return was filed; the average number of wells producing during each year; and the initial daily production of each well; and (r) any other data which will be helpful in determining the reasonableness of the deple- tion deduction. When a taxpayer has filed adequate maps with the Com- missioner he may be relieved of filing further maps of the same properties, provided all additional information necessary for keeping the maps up to date is filed each year. This includes records of dry holes, as well as pro- ducing wells, together with logs, depth and thickness of sands, location of new wells, etc. By ‘‘production” is meant ihe net [gross] production of [all] oil or gas belonging to the taxpayer [recovered from the wells and tanked or utilized]. In those leases where no account is kept of the oil or gas used for fuel, the [gross] production will necessarily be that remaining after the fuel used in the property has been taken out. In cases of this kind an estimate of the fuel used from each tract should be given for each year. 2947 Art. 219. Discovery of Mine.— The discovery of a mine or a 139 natural deposit of mineral, whether it be made by an owner of 1098 the land or by a lessee, shall be deemed to mean (a) the bona fide discovery of a commercially valuable deposit of ore or mineral of a value materially in excess of the cost of discovery in natural exposure or by drilling or other exploration conducted above or below ground, or (6) the development and proving of a mineral or ore deposit which has been abandoned or apparently worked out, or sold, leased or otherwise dis- posed of, by an owner or lessee prior to the development of a body of ore or mineral of sufficient size, quality and character to determine it, in con- nection with the physical and geological conditions of its occurrence, to be a minable deposit of ore or mineral having a value materially in excess of the cost of the proving and development. In determining whether a dis- covery has been made the Commissioner will take into account the peculiar conditions of the case, and every taxpayer claiming the value of a mineral deposit on the date of discovery or within 30 days thereafter for purposes of depletion will be required to attach to his return a statement setting forth the conditions and circumstances of the discovery and the size, char- acter and location of the deposit, together with the cost of discovery, its value and the precise method used in determining the value. 2948 Art. 220. Discovery of Oil and Gas Wells. — In order to take ad- 139 vantage of his discovery on or after March 1, 1913, of oil or gas 1098 wells, the taxpayer must show {a) that the tract for which such valuation is claimed was not proven oil land as to the particular sand or zone discovery of which is claimed at the time the so-called dis- covery was made, proven oil land being that which has been shown by finished wells, supplemented by geologic data, to be such that other wells drilled thereon are practically certain to be commercial producers; {b) that the discovery was a bona fide discovery of a commercial well of oil or gas or both of these substances on the property in question, a commercial well being one whose production is such as to offer a reasonable expectation of 357 TAX INC. Reg. 45, Rev. See Note on page 301. it least returning the capital invested in such well through the sale of the oiror gas or both derived therefrom during its economic life; and (c) that the fair iriarket value of the property was materially in excess of the cost. 2949 Art. 221. Proof of Discovery of Oil and Gas Wells. — In order to meet the requirertients of the preceding article to the satisfaction of the Commissioner the taxpayer will be required/among other things, to submit the following with his return: (a) a map'^of convenient scale, showing the location of the tract and discovery well in question and of the nearest producing well, and the development for a radius of at least 3 miles from the tract in question, both on the date of discovery and on the date when the fair market value was set; (b) a certified copy of the log of the discovery well," showing" the location, the date drilling^^began, the date of completion and beginning" of production, the formations penetrated, the oil, gas and water sands penetrated, the casing record, including the record of perforations^ and any other information tending to show the condition of the well and the location of the sand or zone from which the oil or gas is pro-- duced on the date the discovery was claimed; ic) the logs of enough other wells drilled prior to the date of completion of the discovery in the vicinity of the discovery well to convince the Commissioner that the sand or zone discovery of which is claimed was not known prior to the so-called discovery; {d) a sworn record of production, clearly proving the comm.ercial productivity of the discovery well; (e) a sworn copy of the records, showing the cost of the property; and (/) a full explanation of the method of determining the vdue on the date of discovery or within 30 days thereafter, supported by satisfactory evidence of the fairness of this value. 9260 Art. 222 . Charges to Capital and to Expense in the Case of Mine . — In the case of mining operations all expenditures for plant, equip- ment, development, rent and royalty prior to production, and thereafter all major items of plant and equipment, shall be charged to capital account for purposes of depletion and depreciation. After a mine has been developed and equipped to its notmal and regular output capacity, however, the cost of additional minor items of equipment and plant, including mules, motors, mine cars, trackage, cables, trolley wire, fans, small tools, etc., necessary to maintain the normal output because of increased length of haul or depth of working consequent on the extraction of mineral, and the cost of replace- ments of these""^and 'similar'"minor items of worn-out and discarded plant and equipment, may be charged to current expense of operations, unless the taxpayer elects to write off such expenditures through charges for depreciation, 295l^^Art. 223. Charges to Capital>nd to Expense'in the Case of Oil r and Gas Wells. — Such incidental expenses as are paid forVages, fuel, '^repairs, hauling, etc., in connection with the exploration of the prop- erty,*^ drilling of ' wells, building of pipe lines, and development of the property may at the option of the taxpayer be deducted as an operating expense or charged^to the' capital 'account returnable^ through depletion. lf|in exercising this^option the taxpayer charges these incidental expenses to"capitaPacc6unt,^in so far as^^such expense^is^represented^by' physical property' iPmay be^taken into account' in determining' a reasonable^allow- ance^for^depreciation .% TheJcosPoPdrilling" nonproductive"* wells^ may at the^option'of the operator* be''deducted^from;'^gross^income as an^operating expense^or^charged to capital ^account rcturnable^through depletion and depreciation as in the case of productive wells. Jn election once made under this option will control the taxpayer's returns for all subsequent years, Casing- 358 TAX INC. Reg. 45, Rev. See Note on page 801. head-gas contracts have been construed to be tangible assets and their cost may be added to the capital account returnable through depletion, following the rate set by the oil wells from which the gas is derived, or, if the life of the contract is shorter than the reasonable expectation of the life of the wells furnishing the gas, the capital invested in the contract may be written off through yearly allowances equitably distributed over the life of the contract. All oil produced during the taxable year, whether sold or unsold, must be considered in the computation of the depletion allowance for that [the taxable] year. In computing net income all oil in storage at the beginning and at the end of the taxable year must be inventoried at cost, that is^ unit cost plus lifting cost. Where deductions for depreciation or depletion have either on the books of the taxpayer or in his returns of net income been included in the past in expense or other accounts, rather than specifically as depreciation or depletion, or tvhere capital expenditures have been charged to expense in lieu of depreciation or depletion, a statement indicating the extent to which this practice has been carried should accompany the return. 2952 ^ Art. 224. Depreciation of Improvements in the Case of Mine. — ‘ It shall be optional with the taxpayer, subject to the approval of the Commissioner, {a) whether the cost or value of the mining property, including ores and minerals, plant and equipment, and charges and addi- tions to capital account not charged to expense and deducted as expense on the returns of the taxpayer, shall be recovered at a rate established by current exhaustion of mineral, or {b) whether the cost or value of the mineral and charges to capital account of expenditures other than for physical property shall be recovered by appropriate charges based on depletion and the cost or value of plant and equipment shall be recovered by reasonable charges for depreciation calculated by the usual rules for depreciation or according'to the peculiar conditions of the taxpayer’s case by a method satisfactory^to the Commissioner. Nothing in these regula- tions shall be interpreted^'to mean that the value of a mining plant and equipment may be reduced by depreciation or depletion deductions to a sum below the value of the salvage when the property shall have become obsolete or shall have been abandoned for the purpose of mining, or that any part of the value of land for purposes other than mining may be recov- erable through depletion or]^depreciation. 29531 Art. 225. Depreciation of Improvements in the Case of Oil and Gas Wells. — Both owners and lessees operating oil or gas proper- ties will, in addition to and apart from the deduction allowable for the depletion or return of capital as hereinbefore provided, be permitted to deduct a reasonable allowance^for depreciation of physical property, such as machinery, tools,*^ equipment, pipes, etc., so far as not in conflict with the option exercised j^by the taxpayer under article 223. The amount de- ductible on this account shall be such an amount based upon its cost or fair market value as of March 1, 1913 [capitalized value or cost] equitably dis- tributed over its useful life as will bring such property to its true salvage value when no longer useful for the purpose for which such property was acquired. Accordingly, where it can be shown to the satisfaction of the Commissioner that the reasonable expectation of the economic life of the oil or gas deposit with which the property is connected is shorter than the normal useful life of the physical property, the amount annually deductible for depreciation may for such property be based upon the length of life of the deposit. See articles 161-170. iiic. 559 TAX Reg. 46, Rev. See Note on page 301. 2954 Art. 226. Depletion and Depreciation of Oil and Gas Wells in Years Before 1916. — If upon examination it is found that in respect of the entire drilling cost of wells, including physical property and inci- dental expenses, between March 1, 1913, and December 31, 1915, a tax- payer has been allowed a reasonable deduction sufficient to provide for the elements of exhaustion, wear and tear, and depletion, it will not be neces- sary to reopen the returns for years prior to 1916 in order to show separately in these years the portions of such deduction representing depletion and depreciation, respectively. Such separation will be required to be made of the reserves for depreciation at January I, 1916, and proper allocation between depreciation and depletion must be maintained after that date. In any case in which it is found that the deductions taken between March 1, 1913, and December 31, 1915, are not reasonable, amended returns may be required for these years. See article 839. 2955 Art. 227. Depletion of Timber. — A reasonable deduction from 2209 gross income for the depletion of timber and for the depreciation of improvements is permitted, based (a) upon cost if acquired after February 28, 1913, or (b) upon the fair market value as of March 1, 1913, if acquired prior thereto. The essence of this provision is that the owner of timber property, whether it be a leasehold or a freehold, shall secure through an aggregate of annual depletion and depreciation deduc- tions a return of the amount of capital invested by him in the property, or in lieu thereof an amount equal to its fair market value as of March 1, 1913, plus in any case the subsequent cost of plant, equipment and de- velopment which is not chargeable to current operating expenses, but not including cut-over land values. 2956 Art. 228. Capital Recoverable Through Depletion Allowance In the Case of Timber. — In general, the capital remaining in any year recoverable through depletion allowances may be determined as indicated in articles 202 and 203. In the case of leases the apportionment of deduc- tions between the lessor and lessee should be made as specified in article 204. Where it becomes necessary to determine the cost or fair market value as of March 1, 1913, of the property, the rules laid down in articles 205 and 206 should be followed so far as possible. 2957 Art. 229. Computation of Allowance for Depletion of Timber. — An allowance for the depletion of timber in any taxable year shall be based upon the number of feet of stumpage cut during the year and the unit cost of the stumpage at the date of acquisition or the unit market value on March 1, 1913, if acquired prior thereto. The unit market value as of March 1, 1913, shall be the unit price at which the standing timber in its then condition and in view of its then environment could have been sold for cash or its equivalent. The amount of the deduction for deple- tion in any taxable year shall be the product of the number of feet of stumpage cut during the year multiplied by such unit cost or market value of the stumpage. 2958 Art. 230. Revaluation of Stumpage Not Allowed. — The fair market value of stumpage when determined as of March 1, 1913, for the purpose of depletion allowances in the case of timber acquired prior thereto, shall be the basis for determining the depletion deduction for each year during the continuance of the ownership under which the fair market value of the stumpage was fixed, and during such ownership there can be no redeter- 360 TAX INC. Reg. 45, Rev. See Note on page 301. mination of the fair market value of the stumpage for such purpose. How- ever, the unit market value of stumpage adopted by the taxpayer may subsequently be changed if from any cause such value, if continued as a basis of depletion, should upon evidence satisfactory to the Commissioner be found inadequate or excessive for the extinguishment of the fair market value of the timber as of March 1, 1913. 2959 Art. 231. Charges to Capital and to Expense in the Case of Tim- ber. — In the case of timber operations all expenditures for plant, equipment, development, rent and royalty prior to production, and there- after all major items of plant and equipment, shall be charged to capital account for purposes of depreciation. After a timber operation and plant has been developed and equipped to its normal and regular output capacity, the cost of additional minor items of equipment and the cost of replacement of minor items of worn-out and discarded plant and equipment may be charged to current expenses of operations. 2960 Art. 232. Depreciation of Improvements in the Case of Timber . — The cost or value as of March 1, 1913, as the case may be, of de- velopment not represented by physical property having an inventory value, and such cost or value of all physical property which has not been deducted and allowed as expense in the returns of the taxpayer, shall be recoverable through depreciation. It shall be optional with the taxpayer, subject to the approval of the Commissioner, (a) whether the cost or value, as the case may be, of the property subject to depreciation shall be recov- ered at a rate established by current exhaustion of stumpage, or (b) whether the cost or value shall be recovered by appropriate charges for depreciation calculated by the usual rules for depreciation or according to the peculiar conditions of the taxpayer’s case by a method satisfactory to the Com- missioner. In no case may charges for depreciation be based on a rate which will extinguish the cost or value of the property prior to the termin- ation of its useful life. Nothing in these regulations shall be interpreted to mean that the value of a timber plant and equipment, so far as it is rep- resented by physical property having an inventory value, may be reduced by depreciation deductions to a sum below the value of the salvage when the plant and equipment shall have become obsolete or worn out or shall have been abandoned, or that any part of the value of cut-over land may be recoverable through depreciation. 2961 Art . 233 . Statement to Be Attached to Return Where^^Depletion of Timber Claimed. — To the return of the taxpayer claiming a deduc- tion for depletion or depreciation or both there should be attached a state- ment setting out (a) whether the owner is an owner in fee or a lessee or both; (b) a description of the property owned in fee, if any, and a descrip- tion of the leasehold property, if any, including the date of acquisition and the date of expiration of the lease; (c) the cost of the freehold and the leasehold property; (d) the number of feet of timber removed and sold during the year for which the return was made; (e) the total amount de- ducted on account of depletion and on account of depreciation, stated separately, up to the taxable year during the ownership of the taxpayer; and (f) any other data which would be helpful in determining the reason- ableness of the depletion and depreciation deductions claimed in the return. The taxpayer shall keep accurate ledger accounts as outlined in article 216, and in general should comply with the requirements of the foregoing articles relating to the depiction of mines and oil and gas wells so far as applicable. INC. 361 TAX Reg. 46, Rev. See Note on page 301. DEDUCTIONS ALLOWED-CHARITABLE CONTRIBUTIONS 2^0.$ Art. 251. Charitable Contributions. — Con^tributlons or gifts within 142 t{ie taxable year are deductible to an aggregate amount not in 1102 excess of fifteen per cent of the taxpayer’s net Income including such payments, if made (a) to corporations or associations of the kind exempted from tax by subdivision (6) of section 231 of the statute or {h) to the special fund for vocational rehabilitation under the Vocational Rehabili- tation Act of June 27, 1918. For a discussion'of what corporations and associations are included within (a) see article 517. A gift to a common agency {as a wOfT chest) for several such corporations or associations is treated like a gift dvTrectly to them. In connection with claims for this deduction there shall be stated on returns of Income the name and address of each organization [corpqration or fund] to which a gift was made and the approximate date and the amount of the gift in each case. Where the gift is other than money, the basis for calculation of the amount of the gift shall be the fair market value of the property at the time given. A gift of real estate to a city to be maintained perpetually as a public park is not an allowable deduction. This article does not, apply to gifts by partnerships^ estates and trusts, or corporations. Ses sections 218 and 219 of the statute and articles 561 and 562. DEpyjCTIONS ALLOWED: LOSS IN INVENT9Ry. [The old provisions follow at the end of the new matter, in italics, below.] 290,3 Art. 261. Losses in Inventory and From Rebates. — Taxpayers are 144 allowed deductions from net income for the taxable year 1918 /or losses 11,19 resulting (a) from material reductions after the close of the taxable, year 1918 of the values of inventories for such taxable year., and {b) fro.7^ actucd payments after the close of the taxable year 1918 of rebates in pur- suance of contracts entered into during such year upon sales made during such year^ The taxable year of the taxpayer, whether calendar or fiscal, is meant in every case. Such deductions may be secured by two methods, either by a claim in alsatemenl or by a claim for refund, and must not be entered upon the regular return. 2900a Art. 262. Loss from Rebates. — Where after the close of the taxable year ,1918 rebates have been bona fide paid in pursuance of contracts enler^d into during such year upon sales made during such year, the n^t income for that year may be reduced by the deduction of the amount of such rebates actually paid. No such deduction will be allowed unless the profits from such sales have been included in the income for the taxable year 1918. 29e3b Art. 263. Loss in Inventory. — Inventory losses are allowable either (a) where goods included in an inventory at the end of the taxable year 191-8 have been sold at a loss during the succeeding taxable year, or {b) where such goods' remain unsold throughout the taxable year 1919 and at its close have a then market value {not resulting from a temporary fluctuation) materially below the value at which they were inventoried at the end of the taxable year 1918. No deduction is allowable for losses of anticipated profits or for losses not sub- stantial in amount, nor for physical damage or obsolescence occurring in the taxable year 1919. In determining whether goods included in an inventory at the end of the taxable year 1918 have been sold during the succeeding taxable year, and whether loss has resulted therefrom, sales of goods made in the taxable yecMt 191*^ will be deemed to have been made from the inventoried stock of 1918 until such inventoried stock is exhausted. INC. 362 TAX Reg. 45, iRev. See Note on page 301. 4 ^ 0 - 19 . 2963C Art. 264. Loss Where Goods Have Been Sold. — Where goods included in the inventory at the end of the taxable year 1918 have been sold during the succeeding taxable year^ the loss which may be deducted from net income for the taxable year 1918 is the amount by which the value at which the goods sold were included in the inventory exceeds the actual selling price minus a reasonable allowance for selling expenses and for manufacturing expenses, if any, incurred in the taxable year 1919 and attributable to such goods. 2963d Art. 265. Loss Where Goods Have Not Been Sold. — Where goods included in the inventory at the end of the taxable year 1918 have not been sold during the succeeding taxable year, the loss which may be deducted from net income for the taxable year 1918 is the am.ount by which the net income for such year would be reduced if the inventory were redetermined and such goods taken at their market value {ignoring mere temporary fluctuations of vahie) at the end of the taxable year 1919. 2963e Art. 266. Claims. — Claims in abatement should be filed with the collector on form 47 when the return for the taxable year 1918 is made. Claims for refund should be filed on form 46 not later than 30 days after the close of the taxable year 1919. Each claim shall contain a concise statement of the amount of the loss sustained and the basis upon which it has been computed, to- gether with all pertinent facts necessary to enable the Commissioner to determine the allowability of the claim . The amount allowed by the Commissioner in respect of any such claim shall be deducted from the net income for the taxable year 1918 and the taxes shall be recomputed accordingly. Any excess paid over the tax due shall be credited or refunded to the taxpayer. See section 252 of the statute and articles 1031-1038. In computing income for the taxable year 1919 the opening inventory must be properly adjusted by the taxpayer in respect of any claim allowed for the year 1918 under this article. 2963f Art. 267. Disposition of Claims. — A claim for loss resulting from rebates paid or from actual sales will be decided as soon as practicable after it has been filed. A claim for loss in inventory not realized by sale will be decided only after the close of the taxable year 1919 upon the basis of any per- manent reduction in the level of market values which may occur during such year from the inventory values taken at the close of the taxable year 1918. Not later than thirty days after the close of the taxable year 1919 <2 taxpayer who has filed either a claim in abatement or a claim for refund, or both, shall submit to the Commissioner a descriptive statement showing the quantity and kind of all goods included in the 1918 inventory which have been {a) sold at a loss in the taxable year 1919, {b) sold at a profit during the taxable year 1919, or {c) not sold or otherwise disposed of during the taxable year 1919, together with such other information in respect of such goods as the Commissioner may require. A claim filed with the return for a loss not then realized by sale will be passed upon in the light of any sales thereafter made during the taxable year 1919. A claim filed with the return is authorized for the purpose of allowing the tax- payer to utilize, where justified, a preliminary allowance for inventory losses and not to provide a deduction essentially different from that taken by way of a claim filed at the end of the taxable year 1919. 2963g Art. 268. Effect of Claim in Abatement. — In the cast of a claim in abatement filed with a return payment of the amount of the tax covered thereby shall not be required until the claim is decided, provided the taxpayer files therewith a bond on form 1124 in double the amount of the tax covered by the claim, conditioned for the payment of any part of such tax found to be due 363 TAX INC. Reg. 45, Rev. See Note on page 301. with interest at the rate of 12 per cent per annum. The bond shall be executed by a surety company holding a certificate of authority from the Secretary of the Treasury as an acceptable surety on federal bonds and shall be subject to the ap- proval of the Commissioner. See also section 1320 of the statute. If abatement of any part of the tax covered by such a claim is denied, then such part shall be paid by the taxpayer with interest at the rate of 12 per cent per annum from the original due date of the tax. [Art. 261. Loss In Value of Inventory. — Losses under this paragraph relate only to a redetermination of the value of inventories taken at the close of the taxable year 1918. Such redetermination of value may be made (a) before the date of filing a return for that year, in which case the c aim should be filed with the return, or (b) if no such claim is filed with the return, a claim may be filed subsequently thereto with the collector. Each claim should state the name and address of the taxpayer and should contain a concise statement of the amount of the loss sustained and the basis upon which it has been computed, together with all pertinent facts necessary to enable the Commissioner to determine the allowability of the claim. Each claim should be supported by an affidavit, and after one claim has been allowed no further claim can be considered. To be allowed such inventory loss must be substantial in amount and represent either (a) a realization by sale of goods taken in the inventory or (b) a shrinkage in market price (and such shrinkage must show sound evidence of permanency) of goods taken in the inventory and unsold at the date of the claim. In determining whether a loss has been realized by the sale of goods taken in the inventory, all sales made subsequent to the date of the inventory will be deemed to have been made from the inventoried stock until such inventoried stock is exhausted. No claim will be allowed for any loss of anticipated profits. Claims may also be made for a deduction from income of the taxable year 1918 of the amounts of payments actually made after the close of such taxable year on account of rebates in pursuance of contracts entered into during such year upon sales made during such year. In any case where payment of the tax has not been made prior to the filing of the claim no such payment shall be required upon the income covered by such claim until the claim is decided, but in such case the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfac- tory to the Commissioner, conditioned for the payment of any part of such tax found to be due. If any part of such claim is disallowed, then the remainder of the tax due shall bear interest at the rate of one per cent per month from the time the tax would have been due had no such claim been filed. The amount allowed by the Commissioner in respect of any such claim shall be deducted from the net income for the taxable year 1918, and the taxes shall be recomputed accordingly and the excess of tax due, if any, shall be credited or refunded to the taxpayer. See section 252 of the statute and articles 1031-1036. In computing income for the tax- able year 1919, the opening inventory must be properly adjusted by the taxpayer in respect of any claim allowed for the year 1918 under this article. Goods taken in the inventory which have been so intermingled that they can not be identified with specific invoices will be deemed to be the goods most recently purchased.] DEDUCTIONS ALLOWED-NONRESIDENT ALIEN INDIVIDUAL 2964 Art. 271. Deductions Allowed Nonresident Alien Individuals. — 149 In the case of a nonresident alien individual the deduction for 529 interest paid or accrued is proportionate to his income from sources within the United States (see paragraph (2) of subdivision (a) of INC. 364 TAX Ref:. 45, Rev. See Note on page 301. section 214 of the statute); for losses incurred in any transaction entered into for profit, or arising from casualty or theft, is confined to transactions and property within the United States (5), (6); for charitable contributions excludes gifts to foreign corporations (11); and for business expenses, taxes imposed by a foreign country, losses in trade, bad debts, depreciation, amor- tization, depletion, and loss in inventory (1), (3), (4), (7), (8), (9), (10) and (12), is allowed only if and to the extent that it is connected vdth income arising from a source within the United States. See articles 91 and 311-316. As to deductions allowed foreign corporations^ see section 234 {h) of the statute and article 573. ITEMS NOT DEDUCTIBLE. 2965 Art. 291. Personal and Family Expenses.— Insurance paid on a 152 dwelling owned and occupied by a taxpayer is a personal expense. 1024 Premiums paid for life insurance by the insured are not deductible. 2881a In the case of a professional man w'ho rents a property for resi- dential purposes, but incidentally receives there clients, patients or callers in connection with his professional work (his place of business being else- where), no part of the rent is deductible as a business expense. //, however, he uses part of the house for his office, such portion of the rent as is properly attributable to such office is deductible. The father is legally entitled to the services of his minor children, and allowances which he gives them, whether said to be in consideration of services or otherwise, are not allowable deduc- tions in his return of income. Alimony and an allowance paid under a separ- ation agreement are not deductible from gross income. See article 73. The cost of the equipment of an army officer to the extent only that it is specially required, by his profession and. does not merely take the place of articles required in civilian life is deductible. Accordingly, the cost of a sword is an allozvable deduction, but the cost of a uniform is not. 2966 Art. 292. Traveling Ejq)enses. — Traveling expenses, as ordinarily understood, include railroad fares and meals and lodging. If the trip is undertaken for other than business purposes, such roAlroad fares are personal expenses and such meals and lodging are living expenses. If the trip is on business, the railroad fares become business instead of personal expenses but the meals and lodging continue to be living expenses and are not deductible in computing net income, {a) If, then, an individual whose business requires him to travel receives a salary as full compensation for his services, without reim- bursement of traveling expenses, his expenses for railroad fares, but not for meals and lodging, are deductible from gross income, (b) If such an individual receives a salary and is also repaid his actual traveling expenses, no part of such expenses, is deductible from gross income aMd no part of such repayment is returnable as income, {c) If such an individual receives a salary and also an allowance for meals and lodging, as, for example, a per diem allowance in lieu of subsistence, any excess of the cost of such meals and lodging over the allowance is not deductible, but any excess of the allowance over the actual expenses is taxable income. Con- gressmen and others who receive a mileage allowance for railroad fares should return as income any excess of such allowance over their actual expenses for such fares. A payment for the use of a sample room at a hotel for the display of goods is a business expense. [Living Expenses. — Living expenses are in no event allowable deductions even though incurred in the carrying on of business. Amounts paid out for expenses for meals and lodging and the like by sales- men, actors, and others traveling in the course of their employment are their living expenses and can not be deducted from gross income. Amounts which 365 TAX INC. Reg. 45, Rev. See Note on page 301. are paid out for expenses incident to services rendered and which are re- irnbursable are not deductible as expenses, nor are the sums received as reimbursement for them to be returned as income. Any excess of a per diem allowance in lieu of subsistence while under traveling orders over living expenses is taxable income. Amounts paid from a salary received for all services rendered and expenses incurred are deductible as business expenses when the expenditures are occasioned by the services in respect of which the salary is paid. A salesman who has to pay for the use of a sample room at a hotel for the display of his goods is entitled to deduct such payment as a business expense, and a traveling man or actor is en- titled to^ deduct railroad fares paid to enable him to move about in carry- ing on his occupation.] 2967 Art. 293. Capital Expenditures . — Amounts paid for increasing the capital value or for restoring the depreciated value of property are not deductible from gross income. See section 214 {a) (8) of the statute and article 161. * Amounts expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. *The cost of defending or perfecting title to property constitutes a part of the cost of property and is not a deductible expense. *The amount expended for architect's services^ is part of the cost of the building. *Commissions paid in purchasing securities are a part of the cost price of such securities. *Commissions paid in selling securities are an offset against the selling price. * Expenses of the ad- ministration of an estate, such as court costs, attorney's fees and executoEs com- missions, are chargeable against the corpus of the estate and are not allowable deductions . * Amounts to be assessed and paid under an agreement between bond- holders or stockholders of a corporation, to be used in a reorganization of the ^corporation, are investments of capital and not deductible for any purpose in returns of income. See article 543. An assessment paid by a stockholder of a national bank on account of his statutory liability is similarly not deductible. As to items not deductible by corporations, see section 235 and articles 581 and 582. [Amounts expended for additions and betterments or for furniture and fixtures, which constitute an increase in capital investment and add to the value of the assets, are not a proper deduction, but such expenditures when capitalized may be reduced through annual depreciation deductions.] *Verbatim as in Art. 112, preliminary edition. See ^2894. .2967a Art. 294. Premiums on Business Insurance. — Where the taxpayer 155 pays premiums on an insurance policy on the life of an officer, employee 1028 or individual financially interested in the taxpayers business, for the purpose of protecting himself from loss in the event of the death of any such person, such premiums are not deductible from his gross income. But if the taxpayer is in no sense a beneficiary under such a policy, except as he may derive advantage from the increased efficiency of the employee, and pays the premiums purely as reasonable additional compensation of such employee, they are allowable deductions. See articles 33 and 105-108. In either case whether the proceeds of such policies paid upon the death of the insured may be excluded from gross income or must be included therein depends upon whether the bene- ficiary is an individual or a corporation. See section 213 {b) (1) and articles 72 and 541. CREDITS ALLOWED. 2968 Art. 301. Credits Against Net Income. — For the purpose of im- 156 posing the normal tax the taxpayer’s net income as computed 1124 pursuant to section 212 of the statute and articles 21-26 is first reduced by the sum of the allowable credits. These include divi- 366 TAX INC. Reg. 45, Rev. See Note on page 301. dends (as defined in section 201 [of the statute] and articles 1541-1549) re- ceived other than from foreign [domestic or resident] corporations having no income from sources within the United States; interest not entirely exempt from tax received upon obligations of the United States and bonds of the War Finance Corporation [bonds]; a personal exemption; and a credit for de- pendents. Consequently^ the normal tax does not apply to dividends from domestic corporations or from foreign corporations deriving income from sources within the United States, or to interest on any obligations of the United States. See section 213 {b) of the statute and articles 11-^2 and 1131. For the purpose of imposing the surtax the taxpayer’s net income is entitled to none of these credits. As to credits allowed corporations, see section 236 and article 591. 2969 Art. 302. Personal Exemption of Head of Family. — A head of a 160 family is a person who actually supports and maintains in one 1129 household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adop- tion, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a per- son with dependent relatives is a head of a family within the meaning of the statute must depend on the character of the separation. If a father is absent on business or at war, or a child or other dependent is away [only temporarily] at school or on a visit, the common home being still main- tained, the additional exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with rela-- tives or in a boarding house zvhile he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not the head of the family. 2970 Art. 303. Personal Exemption of Married Person. — In the case 160 of a married man or married woman the joint exemption replaces 1129 the individual exemption only if the man lives with his wife or the woman lives with her husband. In the absence of continuous actual residence together, whether or not a man or woman has a wife or husband living with him or her within the meaning of the statute must depend on the character of the separation. If merely occasionally and temporarily a wife is away on a visit or a husband is away on business, the joint home being maintained, the additional exemption applies. The unavoidable absence of a wife or husband at a sanatorium or asylum on account of illness does not preclude claiming the exemption. If, however, the husband voluntarily and continuously makes his home at one place and the wife hers at another, they are not living together for the purpose of the statute, irrespective of their personal relations. A resident alien with a wife residing abroad is not entitled to \\\(z joint [$2,000] exemption. 2971 Art. 304. Credit for Dependents. — A taxpayer receives a credit 168 of $2Q0 for each person (other than husband or wife), whether 1138 related to him or not and whether living with him or nor, dependent upon and receiving his chief support from the taxpayer, provided tlie dependent is either (a) under 18 or (b) incapable of self-support because defective. The credit is based upon actual financial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a family. But a father whose children receive half or more of their sup- port from a trust fund or other separate source is not entitled to the credit. INC. 367 TAX Reg. 45, Rev. See Note on page 301. 297 1 a Art. 305. Date Determining Exemption. — The status of the taxpayer 1140 on the last day of his taxable year determines his right to an addi- 1141 tional exemption and to a credit for dependents. If then he is the 3245 head of a family, the personal exemption of $2,000 may he taken. If then he is the chief support of a dependent who is under eighteen years of age or incapable of self-support because mentally or physically defective, the credit of $200 may be taken. But an unmarried individual or a married individual not living with husband or wife, who during the taxable year has ceased to be the head of a family or to have dependents, is entitled only to the personal exemption of $1,000 allowed a single person. A husband and wife living together at the end of the taxable year may receive but one personal exemption of $2,000, divisible as they please, against their aggregate net income. If an individual dies during the taxable year, his executor or administrator in 7naking a return for him is entitled to claim his full personal exemption according to his status at the time of his death. See also section 219 {c) of the statute and articles 346 and 421. If a husband or wife so dies and the joint personal exemption is used by the executor or administrator in making a return for the decedent, an undiminished personal exemption according to the status of the survivor at the end of the taxable year may be claimed in the survivor^ s return. If a taxpayer makes a return for a period other than a taxable year, the last day of such period shall be treated as the last day of the taxable year for the purpose of this article. See section 226 and articles 431 and 1013. 2972 Art. 306 [Art. 305]. Credits to Nonresident Alien Individual. — A 164 nonresident alien individ.ual, similarly to a citizen or resident, is 537 entitled for the purpose of the normal tax to credit dividends from domestic or resident foreign corporations, interest on obligations of the United States, a personal exemption, and $200 for each dependent, except that if he is a citizen or subject of a country which imposes an income tax a personal exemption or credit for dependents is alloived him ^‘only if such country allows a similar credit to citizens of the United States not residing in such country ^Af such country allows a similar credit''’ means if such country in imposing its income tax allozvs a personal exemption or a credit for dependents, as the case may be, and allows it without discrimination to citizens of the United States not residing in such country. For the meaning of '‘^country'’ see article 382. To satisfy the requirement of a similar credit it is not necessary that the personal exemption or credit for dependents, as the case may be, should be the same as that allowed by the United States statute. The status as to residence of an alien individual on the last day of his taxable year determines his right to be treated as a resident or as a nonresident for such year. [A nonresident alien individual, similarly to a citizen or resident, is entitled for the purpose of the normal tax to credit corporate dividends, interest on obligations of the United States, a personal exemption, and $200 for each dependent, except that in the last two cases if he is a citizen or subject of a country which imposes an income tax the credit is allowed only if his country allows a similar credit to citizens of the United States not residing in such country. By “similar credit” is meant the same personal exemption or credit for dependents to citizens of the United States as is allowed citizens of such country, not necessarily the same amount as in the United States statute.] 297 2. a Art. 307. V/hen Nonresident Alien Individual Entitled to Personal 3274 Exemption. — {a) The following is an incomplete list of countries which either impose no income tax or in imposing an income tax allow both a personal exemption and a credit for dependents which satisfy the similar credit requirement of the statute: Argentina; Bosnia; Brazil; Canada; Carinthia; China; Cuba; Dalma'ia; Denmark; France; Herzegovina; I stria; Mexico; INC. 368 TAX Reg. 45, Rev. See Note on page 301. Montenegro; Persia; Portugal; Rouniania; Russia; Serbia; Union of South Africa, {b) The following is an incomplete list of countries which in imposing an income tax allow a personal exemption which satisfies the similar credit requirements of the statute , but do not allow a credit for dependents: Bachka; Banat of Temesvar; Croatia; Italy; Slavonia, (c) The following is an in- complete list of countries which in imposing an income tax do not allow to citizens of the United States not residing in such country either a personal exemption or a credit for dependents and., therefore, fail entirely to satisfy the similar credit requirement of the statute: Australia; Great Britain and Ire- land; Japan; New Zealand; Spain. The former names of certain of the terri- tories are here used for convenience, in spite of an actual or possible charge in name or sovereignty. A nonresident alien individual who is a citizen or subject of any country in the first list is entitled for the purpose of the normal tax to such credit for a personal exemption and for dependents as his family status may warrant. If he is a citizen or subject of any country in the second list he is entitled to a credit for a personal exemption, but to none for dependents. If he is a citizen or subject of any country in the third list he is not entitled to credit for either a personal exemption or for dependents. If he is a citizen or subject of a country which is in none of the lists, then to secure credit for either a personal exemption or for dependents he must prove to the satisfaction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the similar credit required by the statute. NONRESIDENT ALIENS— ALLOWANCE OF DEDUCTIONS AND CREDITS. 2973 Art. 311 [315]. Allowance of Deductions and Credits to Nonresident 165 Alien Individual. — Unless a nonresident alien individual shall render 538 a return of income as required in article 404, the tax shall be collected on the basis of his gross income (not his net income) from sources within the United States. Where a nonresident alien has various sources of income within the United States, so that from any one source or from all sources combined the amount of incomm shall call for the assessment of a surtax, and a return of income shall not be filed by him or on his behalf the Commissioner will cause a return of income to be made and include therein the income of such nonresident alien from all sources concerning which he has inform.ation, and he will assess the tax and collect it from one or more of the sources of income within the United States of such non- resident alien, without allowance for deductions or credits. The benefit of the credits allowed against net income for the purpose of the normal tax may not be received by a nonresident 'alien by filing a claim with the withholding agent, but only by claiming them upon filing a return of income, except as permitted in article 316. See section 216 of the statute and articles 306 and 307. 297 sa Art. 312 [Art. 311]. Who is a Nonresident Alien Individual. — “Nonresident alien individual” means an individual (a) whose residence is not within the United States and (b) who is not a citizen of the United States. Any alien living in the United States who is not a mere transient is a resident of the United States for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to his stay. If he lives in the United States and has no definite intention as to his stay, he is a resident. The best evidence of his [such] intention [ j] is afforded bv the conduct, acts and declarations of the alien. The typical transient is one who stops for a short time in the course of a journey through the United States, sometimes performing labor, sometimes not, or one who enters the INC. 369 TAX Reg. 45, Rev. See Note on page 301. United States intending only to stop long enough to carry out some purpose^ object or plan not involving an extended stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to con- stitute him a transient. • 2974 Art. 313 [Art. 312]. Proof of Residence of Alien. — An alien's state- ments as to his intention with regard to residence are not conclusive but when unequivocal will determine the question of his intention, unless his conduct, acts, or other surrounding circumstances contradict the state- ments. It sometimes occurs that an alien who genuinely intends his stay to be transient may put off his departure from time to time by reason of changed conditions, remaining a transient .though living in the United States for a considerable time. The fact that an alien's family is abroad does not necessarily indicate that he is a transient rather than a resident. An alien who enters this country intending to make his home in a foreign country as soon as he has accumulated a sum of money sufficient to pro- vide for his journey abroad is to be considered a transient, provided his expectation in this regard may reasonably, considering the rate of his sav- ing, be fulfilled within a comparatively short time. 2975 Art. 314 [Art. 313]. Loss of Residence by Alien. — It will be pre- sumed that an alien who has established a residence in the United States, as outlined above, continues to be a resident until he or his family evidence an intention to change their residence to another country by starting to remove. Thus, alien residents who, following the armistice agreement of November, 1918, take steps toward returning to their native countries, as by applying for passports, may for the purpose of withholding [are to] be regarded as residents for that portion of the taxable year which elapsed up to the time such step was taken. But the status of the alien on the last day of his taxable year or period determines his liability to tax for such year or period as a resident or nonresident. See articles 305 and 306. 2976 Art. 315. [Art. 314]. Duty of Employer to Determine Status of Alien Employeer-Aliens employed in the United States are prima facie regarded as nonresidents. If wages are paid without withholding the tax except as permitted in the followhig article, the employer should be provided with written proof of facts which overcome the presumption that such alien is a nonresident. Such facts include the following: (a) If an alien has been living in the United States for as much as one year immediately prior to the time he entered the employment of the withholding agent, or if he has been regularly employed by a resident individual or corporation in the same county for as much as three months immediately prior to any payment by the employer he m.ay be treated as a resident in the absence of facts known to the employer showing that he is in fact a transient, such as one of the types mentioned under article 312. The facts with regard to the length of time the alien has thus lived in the country or county and has been so regularly employed may be established by the certificate of the alien, (b) The employer may also obtain evidence to overcome the prima facie presumption of nonresidence by securing from the alien form 1078 (revised) [properly executed,] or an equivalent certificate of the alien establishing residence. Having secured such evidence from the alien, the employer may rely thereon unless the statement of the alien was false and the employer has reasonable cause to believe it false, and may continue to rely thereon until the alien ceases to be a resident' under the provisions of article 314. An employer who seeks to account for failure to withhold in the past, if he did not at the- 370 TAX INC. Reg. 45, Rev. See Note on page 301. time secure form 1078 (revised) or its equivalent [at the time], is permitted to prove the former status of the alien by any material evidence. 2976a [Art. 315. Allowance of Deductions and Credits to Nonresident Alien. ^ 291 2 >\. 2977 Art. 316. Allowance of Personal Exemption to Nonresident Alien 541 Employee. nonresident alien employee^ provided he is entitled under 3275 section 216 of the statute and articles 301-307 to credit for a personal exemption or for dependents or both, may claim the benefit of such credit by filing with his employer form 1115, duly filled out and executed under oath. See particularly the lists of foreign countries in article 307. On the filing of such a claim the employer shall examine it. If on such examuiation it appears that the claim is in due form, that it contains no statement which to the knowledge of the employer is untrue, that such employee on the face of the claim is entitled to credit, and that such credit has not yet been exhausted, such employer need not until such credit be in fact exhausted withhold any tax from payments of salary or wages made to such employee. Every employer with whom affidavits of claim on form 1115 are filed by employees shall preserve such affidavits until the follow- ing calendar year, and shall then file them, attached to his annual withholding return on form 1042 {revised), with the collector on or before March 1. In case, however, when the following calendar year arrives such employer has no with- holding to return, he shall forward all such affidavits of claim directly to the Commissioner {Sorting Division), zvith a letter of transmittal, on or before March 15. Where any tax is withheld the employer in every instance shall show on the pay envelope or shall furnish some other memorandum showing the name of the employee, the date and the amount withheld. This article applies only to payments of compensation by an employer to an employee. See f urther section 221 and articles 361-376. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. 2977a NOTE. — The revised regulations bearing on partnerships and personal service corporations (^2978 to ^2990) are much the same as the corresponding regulations in the preliminary edition except as to arrangement, in which regard, however, the changes are so extensive that to have indicated these by the use of brackets and italics, as elsewhere in the revision, would have proved annoying rather than helpful. Hence the use of regular Roman type in ^2978 to ^2990. 2978 Art. 321. Partnerships. — [See note at ^2977a.] Partnerships as 168 such are not subject to taxation under the statute, but are required 169 to make returns of income. See section 224 of the statute and articles 411 and 412. Individuals carrying on business in partnership are, however, taxable upon their distributive shares of the net income of such partnerships, whether distributed or not, and are required to include such distributive shares in their returns. The net income of a partnership shall be computed in the same manner and on the same basis as the net income of an individual, except that the deduction of contributions or gifts is not per- mitted. See section 212 and articles 21-26. As to the excess profits tax on partnerships with fiscal years ending in 1918 see section 335 (c). 2978a Art. 322. Distributive Shares of Partners.— [See note at l[2977a.] The distributive share of the net income of a partnership which a partner is required to include in his return is his proportionate share of the INC. 371 TAX Reg. 45, Rev. See Note on page 301. net income of the partnership, either (a) for the taxable year upon the basis, of which the partner’s net income is computed, or (Z?) if the partner’s net income is computed upon the basis of a taxable year different from that upon the basis of . which the net income of the partnership is computed, for the taxable year of the partnership ending within the taxable year upon the basis of which the partner’s net income is computed. Amounts earned and distributed to a partner by a partnership after the end of its taxable year and before the end of his corresponding taxable 3 'ear should be accounted for both by the partnership and by the partner in their returns for their next succeeding taxable years. 2S78b Art. 323. Credits Allowed Partners.— [See note at ®|2977a.] In addition to the credits ordinarily allowed to an individual, a partner is entitled to the following credits: (a) a credit against net income for the purpose of the normal tax only of his proportionate share of such dividends from corporations subject to tax and of such interest not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation as are received by the partnership; and (b) a credit against income tax of the partner’s proportionate share of any income, war profits and excess profits taxes of the partnership paid or accrued during the taxable year to a foreign country upon income derived from sources therein, or to any possession of the United States, subject to the limitations of section 222 of the statute. See section 216 and articles 301 and 381-384. 2979 Art. 324. Taxation of Partners in Partnership with Fiscal Year G3 Ending in 1918. — [See note at Tf2977a.] If the fiscal year of a part- 72 nership began in the calendar year 1917 and ended in the calendar 1674 year 1918, the rates of tax for the calendar year 1917 apply to the 1678 amount of each partner’s distributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1917, and the rates for the calendar year 1918 to the amount of each partner’s distributive share of such net income of the partnership attributable to the calendar year 1918. (a) The amount of each partner’s distributive share of the net income of the partnership for such fiscal year attributable to the calendar 3 ^ear 1917 is found by determining the net income of the partnership for its entire fiscal year in accordance with the law applicable to the calendar year 1917 (see Title I of the Revenue Act of 1916 and Titles I and XII of the Revenue Act of 1917) and the distributive share thereof of each partner, and then taking such proportion of that distributive share as the part of the fiscal year falling within the calendar year 1917 bears to the full fiscal year, (b) The amount of each partner’s distributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1918 is found by determining the net income of the partnership for its entire fiscal year in accordance with the law applicable to the calendar year 1918 and the distributive share thereof of each partner, and then taking such proportion of that distributive share as the part of the fiscal year falling within the calendar year 1918 bears to the full fiscal year. See section 205 (c) of the statute and article 1621. 2980 Art. 325. Application of Different Tax Rates in the Case of Fiscal 72 Year of Partnership Ending in 1918. — [See note at ^2977a.] Any 1678 deductions, exemptions or credits to which the partner in a partner- ship with a fiscal year ending in 1918 is entitled shall first be applied against his income subject to the rates for the calendar year 1918, unless of a kind plainly and properly chargeable against income taxable at the rates for INC. 372 TAX Reg. 45, Rev. See Note on page SOI. the calendar year 1917. The proportionate share of a partner of any excess profits tax imposed upon the partnership under the Revenue Act of 1917 with respect to that part of the fiscal year falling within the calendar year 1917 is plainly and properly chargeable against income taxable at the rate for that year and shall b'e credited against such income of the partner. In determining the rates of tax applicable to the amounts of the distributive shares of the partners attributable to the calendar years 1917 and 1918, respectively, the amounts subject to the rates for the calendar year 1918 shall be placed in the lower brackets of the rate schedule provided in the present statute and the amounts attributable to the calendar year 1917 in the next higher brackets of the rate schedule applicable to that year. See section 206 of the statute and article 1641, and also section 1 of Title I of the Revenue Act of 1916 and sections 1 and 2 of Title I of the Revenue Act of 1917. 2981 Art. 326. Taxation of Partners in Partnership with Fiscal Year 68 Ending in 1919. — [See note at iy2977a.j If the fiscal year of a part- 72 nership began in the calendar year 1918 and ends in the calendar 1674 year 1919, the rates of tax for the calendar year 1918 apply to the 1678 amount of each partner’s distributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1918, and the rates for the calendar year 1919 to the amount of each partner’s distributive share of such net income of the partnership attributable to the calendar year 1919. (< 3 ) The amount of each partner’s distributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1918 is found by determining the net income of the partnership for its entire fiscal year in accordance with the law applicable to the calendar year 1918 and the distributive share thereof of each partner, and then taking such proportion of that distributive share as the part of the fiscal year falling within the calendar year 1918 bears to the full fiscal year, {b) The amount of each partner’s distributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1919 is found by determining the net income of the partnership for its entire fiscal year in accordance with the law applicable to the calendar year 1919 and the distributive share thereof of each partner, and then taking such proportion of that distributive share as the part of the fiscal year falling within the calendar year 1919 bears to the full fiscal year. See section 205 (c) of the statute and article 1621. 2S82 Art. 327. Application of Different Tax Rates in the Case of Fiscal 72 Year of Partnership Ending in 1919. — [See note at '|[2977a.] Any 1678 deductions, exemptions or credits to which the partner in a partner- ship with a fiscal year ending in 1919 is entitled shall first be applied against his income subject to the rates for the calendar year 1919, unless of a kind plainly and properly chargeable against income taxable at the rates for the calendar year 1918. In determining the rates of tax applicable to the amounts of the distributive shares of the partners attributable to the calendar years 1918 and 1919, respectively, the amounts subject to the rates for the calendar year 1919 shall be placed in the lower brackets of the rate schedule provided in the statute, and the amounts attributable to the calendar year 1918 in the next higher brackets of the rate schedule applicable to that year. See section 206 of the statute and article 1641. 2383 Art. 328. Personal Service Corporations. — [See note at 1|2977a.] 177 Personal service corporations are defined in section 200 of the statute. 1305 See articles 1523-1532. Such corporations are not subject to tax as corporations, unless they make returns for fiscal years beginning in 373 INC. TAX Reg. 45, Rev. See Note on page 301. 1917, but they are required to make returns of income. See sections 231, 239 and 304 of the statute and the articles thereunder. An individual stock- holder of a personal service corporation is, however, subject to tax much like a member of a partnership upon his distributive share of the net income of the corporation. The net income of a personal service corporation, as in the case of a partnership, shall be computed in the same manner and on the same basis as the net income of an individual, except that the deduction of contributions or gifts is not permitted. See section 212 and articles 21-26. A corporation which is taxable under section 303 is not a personal service corporation and its stockholders are taxed like stockholders in an ordinary corporation. 2984 Art. 329. Personal Service Corporation with Fiscal Year Ending in 60 1918. — [See note at ^2977a.] If the fiscal year of a personal service 1666 corporation began in the calendar year 1917 and ended in the calendar year 1918, it is subject to tax as a corporation for the part of such fiscal year which falls within the calendar year 1917. The amount for which such a corporation is liable is such proportion of the tax for the entire fiscal year computed in accordance with Title I of the Revenue Act of 1916 as amended and with Title I of the Revenue Act of 1917 as the portion of such fiscal year falling within the calendar year 1917 is of the entire period. An amount previously paid by the corporation on account of the income tax for such fiscal year shall be credited toward the payment of the tax for the portion of the fiscal year falling within the calendar year 1917, and any excess shall be credited or refunded in accordance with the provisions of section 252 of the statute. See section 205 (a) and article 1621. As to the excess profits tax see section 335 (c). 2985 Art. 330. Distributive Shares of Stockholders in Personal Service 179 Corporation. — [See note at 1f2977a.] A stockholder of a personal 1307 service corporation is required to include in his gross income for the taxable year (a) any dividends paid by the corporation in such year out of earnings or profits accumulated since February 28, 1913, and before January 1, 1918; (b) his share of any distribution made by the corporation in such year out of earnings or profits accumulated since December 31, 1917, and since the close of its taxable year ending with or during his next preceding taxable year; and (c) his distributive share of the undistributed net income of the corporation for its taxable year ending with or during his taxable year provided he was at the close of its taxable year a stockholder in the corpora- tion, notwithstanding he might since have ceased to be a stockholder. See section 201 of the statute and articles 1541-1543. In the case of personal service corporations with taxable years other than the calendar year, however,, such distributive shares or distributions may be subject to different rates of tax. 2986 Art. 331. Credits Allowed Stockholders of Personal Service Cor- poration. — [See note at ^2977a.] A stockholder of a personal service corporation is entitled to credit for the purpose of the normal tax only for amounts received in distribution of earnings or profits of the cor- poration accumulated since February 28, 1913, and prior to January 1, 1918. See sections 201 and 216 of the statute and articles 1541 and 301. In addi- tion to the credits ordinarily allowed to an individual a stockholder of a personal service corporation is entitled to the following credits: (a) a credit against net income for the purpose of the normal tax only of his proportionate share of such dividends from a corporation subject to tax and of such interest 374 TAX INC. Reg. 45, Rev, See Note on page 301. not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation as are received by the personal service corporation, and {b) a credit against income tax of the stockholder’s pro- portionate share of income, war profits and excess profits taxes of the personal service corporation paid or accrued during the taxable year to a foreign country upon income derived from sources therein, or to any possession of the United States, subject to the limitations of section 222 of the statute. See articles 381-384. 2987 Art. 332. Taxation of Stockholders of Personal Service Corporation 68 with Fiscal Year Ending in 1918. [See note at *S2977a.] A stock- 72 holder of a personal service corporation with a fiscal year beginning 1674 in 1917 and ending in 1918 is taxed at the rates for the calendar year 1678 1918 {a) on any dividends received in such calendar year out of earnings or profits accumulated since February 28, 1913, and before January 1, 1918 (except as provided under {d) below); {b) on any distribution made in such calendar year out of earnings or. profits accumulated since December 31, 1917; and {c) on his distributive share of the undistributed net income of the corporation for its fiscal year attributable to the calendar year 1918. {d) On his distributive share of the undistributed net income of the corporation for its fiscal year attributable to the calendar year 1917, however, the stockholder is liable to surtax at the rates for the calendar year 1917, but to no normal tax, and any distribution by the corporation subsequently to the close of its fiscal year out of such undistributed net income so taxed to the stockholders is free from any tax. The part of the net income of a corporation for its fiscal year attributable to the calendar year 1918 is found by determining the net income of the corporation for its fiscal year in the same manner as if the fiscal year were the calendar year 1918, and then taking the proportion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. The part of the net income of a corporation for its fiscal year attributable to the calendar year 1917 is found by determining the net income of the corporation for its fiscal year in accordance with the law applicable to the calendar year 1917, and then taking the proportion thereof which the part of such fiscal year falling within the calendar year 1917 bears to the full fiscal year. See section 205 (c) of the statute and article 1621. 2988 Art. 333. Application of Different Tax Rates in the Case of Fiscal 72 Year of Personal Service Corporation Ending in 1918. [See note at 1678 1[2977a.] Any deductions, exemptions or credits to which the stock- holder of a personal service corporation with a fiscal year ending in 1918 is entitled shall first be applied against his income subject to the rates for the calendar year 1918, unless of a kind plainly and properly chargeable against income taxable at the rates for the calendar year 1917. The propor- tionate share of a stockholder of any excess profits tax imposed upon the corporation under the Revenue Act of 1917 with respect to that part of the fiscal year falling within the calendar year 1917 is plainly and properly chargeable against income taxable at the rates for that year and shall be credited against such income of the stockholder. In determining the rates of tax applicable to the amounts of the distributive shares of the stockholders attributable to the calendar years 1917 and 1918, respectively, the amounts subject to the rates for the calendar year 1918 shall be placed in the lower brackets of the rate schedule provided in the present statute and the amounts attributable to the calendar year 1917 in the next higher brackets of the rate schedule applicable to that year. See section 206 of the statute and INC. 375 TAX Reg. 45, Rev. See Note on page 301. article 1641, and also section 1 of Title I of the Revenue Act of 1916 and sections 1 and 2 of Title I of the Revenue Act of 1917. 298 © Art. 334. Taxation of Stockholders of Personal Service Corporation 68 v/ith Fiscal Year Ending in 1919. [See note at ^2977a.j Such part 72 of a stockholder’s distributive share of the net income of a personal 1674 service corporation for its fiscal year ending in 1919 as is attributable 1678 to the calendar year 1919 is taxable at the rates for such calendar year, and such part of such distributive share as is attributable to the calendar year 1918 is taxable at the rates for such calendar year. The part of a stockholder’s distributive share of the net income of a corporation for its fiscal year attributable to the calendar year 1919 is found by determining his distributive share of the net income of the corporation for its fiscal year, whether distributed or not, in the same manner as if the fiscal year were the calendar year 1919, and then taking the proportion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. The part of a stockholder’s^distributive share of the net income of a corpora- tion for its fiscal year attributable to the calendar year 1918 is found by determining his distributive share of the net income of the corporation for its fiscal year, whether distributed or not, in the same manner as if the fiscal year were the calendar year 1918, and then taking the proportion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. The stockholder is also liable to tax on dividends received out of earnings or profits accumulated since February 28, 1913, and before January 1, 1918. See sections 201 and 205 (c) of the statute and articles 1541-1543 and 1621. 2990 Art. 335. Application of Different Tax Rates in the Case of Fiscal 72 Year of Personal Service Corporation Ending in 1919. — [See note at 1678 ^2977a.] Any deductions, exemptions or credits to which the stock- holder of a personal service corporation with a fiscal year ending in 1919 is entitled shall first be applied against his income subject to the rates for the calendar year 1919, unless of a kind plainly and properly chargeable against income taxable at the rates for the calendar year 1918. In deter- mining the rates of tax applicable to the amounts of the distributive shares of the stockholders attributable to the calendar years 1918 and 1919, respectively, the amounts subject to the rates for the calendar year 1919 shall be placed in the lower brackets of the rate schedule provided in the statute and the amounts attributable to the calendar year 1918 in the next higher brackets of the rate schedule applicable to that year. See section 206 of the statute and article 1641. ESTATES AND TRUSTS 2991 Art. 341. Estates and Trusts. — While certain estates and trusts are 180 subject to tax as such and others are not, the fiduciary in every case is 1217 required to make a return of income. See section 225 of the statute and articles 421-425. The net income of an estate or trust shall be com- puted in the same manner and on the same basis as the net income of an individual, except that in place of the deduction allowed individuals of certain gifts or con- tributions there may be deducted from the gross income any part of it which during the taxable year is pursuant to the will or trust deed paid to or perma- ne^itly set aside for the United States, a State, a Territory, or any political sub- division thereof, the District of Columbia, or any corporation or association of the kind described in section 231 (6) of the statute and article 517. See section 376 INC. TAX Reg. 45, Rev. See Note on page SOI. 212 and articles 21-26. The income of a revocable trust must be included in the gross income of the grantor. 2991a Art. 342 [Art. 341]. Estates and Trusts Taxed to Fiduciary. — In the case of {a) estates of decedents before final settlement and of {b) trusts, whether created by will or deed, for accumulation of income, whether for unascertained persons or persons with contingent interests or otherwise [for accumulation] of income, the income is taxed to the fiduciary as to any single individual, except that from the income of a decedent’s estate thei^e may first be deducted any amount of income properly paid or credited to a beneficiary. See section 200 of the statute and articles 1521 and 1522. Where under the terms of the will or deed the trustee may in his discretion distribute the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not affected by the fact that an ultimate beneficiary may be a person exempt from tax. A statutory allowance paid a widow out of the corpus of the estate is not deductible from gross income. As an intestate’s real estate does not pass to his administrator, upon a sale by the heirs, whether before or after settlement of the estate, each heir is taxed individually on any profit derived. 2992 Art. 343 [Art. 342]. Decedent’s Estate During Administration. — The “period of administration or settlement of the estate” is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates. Where an executor, who is also named as trustee, fails to obtain his discharge as executor, the period of administration continues up to the time when the duties of administra- tion are complete and he actually assumes his duties as trustee, whether pursuant to an order of the court or not. No taxable income is realized from the passage of property to the executor or administrator on the death of the decedent, even though it may have appreciated in value since the decedent acquired it. In the event of delivery of property in kind to a legatee or distributee, no income is realized. Where, however, the executor sells property of the estate for more than its value at the death of the decedent, the excess is income taxable to the estate. See article 1562. 2993 Art. 344 [Art. 343]. Incidence of Tax on Estate or Trust. — Liability for payment of the tax attaches to the person of an executor or admin- istrator up to and after his discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether or not such obligations existed. Liability for the tax also follows the estate itself, and when by reason of the distribution of the estate and discharge of the executor or adniinistrator it appears that collec- tion of the tax can not be made from the executor or administrator, the legatees or distributees must account for their proportionate share of the tax due and unpaid. The same considerations apply to other trusts. Where the tax has been paid on the net income of an estate or trust by the fiduciary, such income is free from tax when distributed to the beneficiaries. 2994 Art. 345 [Art. 314]. Estates and Trusts Taxed to Beneficiaries. — In the case of {a) a trust the income of which is distributable periodically, {b) an ordinary guardianship of a minor, and (c) an estate of a decedent before final settlement as to any income properly paid or credited as such INC. 377 TAX Reg, 45, Rev. See Note on page 301. to a beneficiary, the income is taxable directly to the beneficiary or bene- ficiaries. Each beneficiary must include in his return his distributive share of the net income, even though not yet paid him, but if the taxable year on the basis of which he makes his returns fails to coincide with the annual accounting period of the estate or trust, then he need only include in his return his distributive share for [any] such accounting period ending within his taxable year. The regulations governing partnerships are generally applicable to such an estate or trust. See articles 32 1-327. [For the purpose of the normal tax a beneficiary is allowed as a credit against net income his proportionate share of the amount received by the estate or trust as dividends out of taxed or taxable income of a corporation, or as interest not entirely exempt from tax upon obligations of the United States or bonds issued by the War Finance Corporation. See section 216 of the statute and article 301. For matter cut out here see next paragraph.^ 2994a Art. 346. Credits to Trust or Beneficiary. — {a) In the case of an estate or trust taxed to the fiduciary it is allowed the same credits against net income as a single person., including a personal exemption o/ $1,000, but no credit for dependents, {b) In the case of an estate or trust taxed to the beneficiaries £ach beneficiary is allowed for the purpose of the normal tax, in addition to his individual credits, his proportionate share of such dividends from domestic and resident foreign corporations and of such interest not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation ■as are received by the estate or trust. Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income. See section 2\6 of the statute and articles 301-307. PROFITS OF CORPORATIONS TAXABLE TO STOCKHOLDERS. 2995 Art. 351. Profits of Corporations Taxable to Stockholders.— 197 Where a domestic or foreign corporation permits its gains and 746 profits to accumulate for the purpose of preventing the imposition of the surtax upon such income if distributed to its stockholders. It shall not be subject to the income tax as a corporation, but its stock- holders shall be subject to tax in the same way as the stockholders of a personal service corporation, except that the war profits and excess profits tax on the corporation shall first be deducted from its net income before computing the proportionate shares of the stockholders. See section 218 of the statute and articles 328-335. In any case the Commissioner or a col- lector may require a corporation to furnish a statement of its gains and profits and of the names, addresses, and shareholdings of the stockholders If upon the basis of such statement or other evidence the Commissioner certifies that in his opinion its accumulation of profits is unreasonable for the purposes of the business, hut only if he so certifies, the corporation and its stockholders shall make their returns accordingly. • 2995a Art. 352. Purpose to Escape Surtax. — The application of section 220 of the statute depends upon the two elements of {a) purpose to escape the surtax and (b) unreasonable accumulation of gains and profits. Prima facie evidence of (a) exists where a corporation has practically no business except holding stocks, securities or other property and collecting the income therefrom, or where a corporation other than a mere holding company permits its gains and profits to accumulate beyond the reasonable needs of the business. The business of a corporation is not limited to that which it has previously carried on, but in general includes any line of business which it may legitimately undertake. However, a radical change of business when a considerable surplus has been INC. 378 TAX Reg, 45, Rev. See Note on page 301. accumulated may afford evidence of a purpose to escape the surtax. When one corporation owns the stock of another corporation in the sarne or a related line of business and in effect operates the other corporation., the business of the latter may be considered in substance the business of the first corporation. Gains and profits of the first corporation put into the second through the purchase of stock or otherwise may therefore , if a subsidiary relationship is established, constitute employment of the income in its own business. To establish that the business of one corporation can be regarded as including the business of another it is ordinar- ily essential that the first corporation own substantially all of the stock of the second. Investment by a corporation of its income in stock and securities of another corporation is not without more to be regarded as employment of the income in its business. 2995b Art. 353. Unreasonable Accumulation of Profits. — An accumulation of gains and profits is unreasonable if it is not required for the purposes of the business, considering all the circumstances of the case. No attempt can be made to enumerate all the ways in which gains and profits of a corporation may be accumulated for the reasonable needs of the business. Undistributed income is properly accumulated if invested in increased inventories or additions to plant reasonably needed by the business. It is properly accumulated if retauied for working capital required by the business or in accordance with contract obligatio?is placed to the credit of a sinking fund for the purpose of retiring bonds issued by the corporation. In the case of a banking institution the business of which is to receive and loan money, using capital, surplus and deposits for that purpose, undistributed income actually represented by loans or reasonably retained for future loans is not accumulated beyond the reasonable needs of the business. The nature of the investment of gains and profits is immaterial if they are not in fact needed in the business. PAYMENT OF TAX AT SOURCE. 2996 Art. 361. Withholding Tax At Source. — In general withholding 201 is required (a) of a tax of 8 per cent in the case of fixed or deter- 332 minable annual or periodical income (other than dividends from 553 corporations liable to the income tax and interest upon corporate 572 bonds containing a tax-free covenant clause) payable to a non- resident alien individual; (b) of a tax of 10 per cent in the case of fixed or determinable annual or periodical income (other than dividends from corporations liable to the income tax and interest upon corporate bonds containing a tax-free covenant clause) payable to a foreign corpora- tion not engaged in trade or business within the United States and not having any office or place of business therein; and (c) of a tax of 2 per cent in the case of interest payable to an individual or a partnership, whether resident or nonresident, or to a foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein, upon bonds or other obligations of domestic or resident foreign corporations containing a so-called tax-free covenant clause. With- holding in all cases at the highest applicable rate is also required from interest on bonds or other securities where the owner of such securities is unknown to the withholding agent. Bonds issued under a trust deed containing a tax-free covenant are treated as if they contained such a covenant. A foreign corporation having a fiscal agency in this country is required to withhold a tax of 2 per cent upon the interest on its tax-free covenant bonds. See further section 200, 217, 237 and 256 of the statute and articles 1533, 311-316, 601, 1071-1080. INC. 379 TAX Reg. 45, Rev. See Note or. page 301. 29S6a Art. 362. Fixed or Determinable Annual or Periodical Income. — Only {a) fixed or determinable {b) annual or 'periodical income is subject to withholding. Among such income., giving an idea of the general character of \ income intended., the statute specifies interest^ rent., salaries^ wages., premiums, annuities, compensations, rem^unerations and emoluments. But other kinds of income may be included, (a) Income is fixed when it is to be paid in amounts definitely predetermined. On the other hand, it is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained, {b) The income need not be paid annually if it is paid periodically, that is to say, from time to time, whether or not at regular intervals. That the length of time during which the payments are to be made may be increased or diminished in accordance with someone^ s will or with the happening of an event does not make the paym.ents any the less determinable or periodical. A salesman working by the month for a commission on sales which is paid or credited monthly receives determinable periodical income. 2997 Art. 363 [Alt. 362], Exemption from Withholding. — Withholding from interest on bonds or other obligations containing a tax-free covenant shall not be required in the case of a citizen or resident alien individual if he files with the withholding agent when presenting interest coupons for payment, or not later than February first following the taxable year, an ownership certificate on form 1001 (revised) claiming a personal exemption or credit for dependents. See section 216 of the statute and articles 301- 305. To avoid inconvenience a resident alien individual should file a certifi- cate of residence on form 1078 (revised) Vv^ith withholding agents, who shall forward such certificates to the Commissioner (Sorting: Division) with a let- ter of transmittal. See Article 315. [Notv/ithstanding the provisions of section 217 of the statute,] Withholding is required from income of a non- resident individual, except as provided in article 316. No withholding from corporate dividends {other than distributions by a personal service corporation) is required in any case. The income of domestic and resident foreign corpora- tions is free from withholding. 2998 Art. 364 [Art. 363]. Ownership Certificates for Interest Coupons. — The owners of bonds or other obligations, whether or not containing a tax-free covenant, issued by domestic or resident corporations, when presenting interest coupons for payment shall file a certificate of ownership for each issue of bonds, showing the name and address of the debtor corpora- tion, the name and address of the owner of the bonds, whether the payee is married or the head of a family [or has other dependents], the nature of the obligations, the amount of interest and its due date, and the amount of any tax withheld. No ownership certificate need be filed in the case of interest payments on bonds the income from which is not included in gross income, nor in the case of any obligations of the United States. See section 213 (J)) of the statute and articles 74-82. Where in connection with the sale of its property payment of the bonds or other obligations of a corporation is assumed by the assignee, such assignee, whether an individual, partnership, corporation, or a State or political subdivision thereof, must deduct and withhold such taxes as would have been required to be withheld by the assignor had no such sale and transfer been made. 2999 Art. 365 [Art. 364]. Form of Certificate Where Withholding Required. — Form 1000 (revised) shall be used (a) by citizens or residents of the United States when no personal exemption or credit is claimed against interest on bonds containing a tax-free covenant; (b) by nonresident alien INC. 380 TAX Reg. 45, Rev, See Note on page 301. individuals and foreign corporations not engaged in trade or business within the United States and not having any office or place of business therein, whether or not such bonds contain a tax-free covenant; (c) by partnerships, resident or nonresident, in the case of bonds containing a tax-free covenant, [and (d) where coupons are received not accompanied by certificates c f ownership. The first. bank receiving coupons not accompanied by owner- ship certificates will make a certificate, crossing out owner” and inserting ‘‘payee,” and will enter the amount of interest in the space provided for unknown ownership. For matter cut out here see Art. 368, \3001a.] 3000 Art. 366 [Art. 365]. Form of Certificate Where No Withholdmg Re- quired. — Form 1001 (revised) shall be used (a) by citizens or residents of the United States when personal exemption is claimed against interest on bonds containing a tax-free covenant and when presenting coupons from bonds not containing a tax-free covenant; (b) by domestic corporations; (c) by partnerships, resident or nonresident, in the case of bonds not con- taining a tax-free covenant; and (d) by foreign corporations engaged in trade or business within the United States or having an office or place of business therein, whether or not such bonds contain a tax-free covenant. In case a citizen or resident alien individual receives interest on bonds con- taining a tax-free covenant in excess of the amount of personal exemption which the individual may claim, any such ex-^ess must be reported on form 1000 (revised). 3001 Art. 367 [Art. 366]. Use of Substitute Certificates. — Resident collect- ing agents and responsible banks and bankers, receiving interest cou- pons for collection with ownership certificates attached, may present the coupons with the original certificates to the debtor corporation or its duly authorized withholding agent for collection or may detach and forward the original certificates directly to the Commissioner, provided each such collect- ing agent shall substitute for such original certificates its own certificates (form 1058 (revised) or form 1059 (revised) ) and shall keep a complete record of each transaction, showing (a) serial number of item received; (b) date received; (c) name and address of person from v/hom received; (d) name of debtor corporation; (e) class of bonds from which coupons were cut (whether containing a tax-free covenant or not); and (f) face amount of coupons. For the purpose of identification the substitute certificates shall be numbered consecutively and corresponding numbers given the original certificates of ownership. The use of substitute certificates by collecting agents, banks and bankers is not permitted, however, in the case of ownership certificates ' presented with coupons for collection by nonresident alien individuals, partnerships, or corporations. 3001a Art. 368. Interest Coupons Without Ownership Certificates. — 651 Where interest coupons are received unaccompanied by certificates of ownership the first bank shall require of the payee a7i affidavit showing the name and address of the payee, the name and address of the debtor corporation* the date of the maturity of the interest, the name and address of the person from whom the coupons were received, the amount of the interest, and a statement that the owner of the bonds is unknown to the payee. Such affidavit shall be for- warded to the collector with the monthly return on form 1012 {revised). The first hank receiving such coupons shall also prepare a certificate on form 1000 (revised) crossing out ^^owneF^ and inserting ^*payee^* and entering the amount of interest in the space provided for a foreign corporation having no office or place of business INC. 381 TAX Reg, 45, Rev. See Note on page SOI. within the United States^ and shall stamp or write across the face of the certificate Affidavit furnished,” adding the name of the bank. 300 lb Art. 369. Interest on Registered Bonds . — Where a bondholder files 645 no ownership certificate in the case of payments of interest on registered bonds the withholding agent shall make out such a certificate in each instance {a) on form 1000 {revised) if the bondholder is a citizen or resident of the United States or a resident or nonresident partnership and the bonds contain a tax-free covenant, or if the bondholder is a nonresident alien individual or a foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein, and (b) on form 1001 {revised) in all other cases. When so used forms 1000 {revised), and 1001 {revised) need not be signed. 3002 Art. 370 [Art. 357]. Return of Tax Withheld. — (a) Every withholding agent shall make an annual return to the collector of the tax withheld from interest on corporate bonds or other obligations on or before March 1 on form 1013 (revised). He shall also make a monthly return on form 1012 (revised) on or before the 20th day of the month following that for which the return is made. The original ownership certificates, or the substitute certificates where authorized, must be forwarded to the collector with the monthly return, (b) Every person required to deduct and withhold any tax from income other than such bond interest shall make an annual return thereof to the collector on or before March 1 on form 1042 (revised), ac- companied b}^ a separate report on form 1098 (revised) for each nonresident alien individual or foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein, to whom income other than bond interest was paid during the pre- vious taxable year. In every case of both classes the tax withheld must be paid on or before June 15 of each year to the collector. For penalties attach- ing upon failure to make such returns or such payment, see section 253 of the statute and article 1041. 3003 Art. 371 [Art. 368]. Withholding in 1913. — In the case[j-] of payments made prior to February 25, 1919, [the date of the passage of the Revenue Act of 1918,] where a withholding agent pursuant to the Revenue Acts of 1916 and 1917 withheld only 2 per cent from the income of non- resident alien individuals, he need return only such sum. In all such cases where a withholding agent withheld the tax pursuant to the Revenue Acts 'of 1916 and 1917 from the income of foreign corporations' not engaged in trade or business within the United States and not having any office or place of business therein he need return only the sum withheld, to an amount not in excess of the aggregate sum required to be withheld by the terms of the Revenue Act of 1918 from the income paid over by the withholding agent. In the case of every payment made after February 24, 1919, the with- holding agent must withhold at the rates prescribed by the present statute from the whole payment, not merely from that part which applies to the period after February 24, 1919. 30 04 Alt. 372 [Art. 369]. Release of Excess Tax Withheld. — Any sum withheld for tax since December 31, 1917, in excess of the aggregate amount required under the terms of [described by] the Revenue Act of 1918, shall be released by the withholding agent and paid over to the person from whom it was withheld or his proper representative. With reference to how a debtor corporation may release and pay over the amount of tax so withheld INC. 382 TAX Reg. 45, Rev. See Note on page 301. in a case where a bank or other collection agency detached the ownership certificate which accompanied an interest coupon and substituted its own certificate (form 1059), which does not disclose the name and address of the ) bond owner, in such cases the withholding agent shall request the bank or collection agency to disclose the name and address of the owner of the bonds, as shown by the original certificate, and it shall be the duty of the bank or col- lection agency to make such disclosure to the withholding agent. Where withholding agents have so released any excess of tax, an itemized statement showing the names, addresses and amounts refunded should be attached to the annual list return (form 1013), in order to reconcile any discrepancy be- ) tween the aggregate amount of taxes returned as shown by the monthly list returns (form 1012) and the aggregate amount as shown by the annual list return. 3005 Art. 373 [Art. 370]. Use of Information Return Where No Actual Withholding. — Where a debtor corporation or its duly authorized withholding agent has made payments of interest on its bonds^ but in certain instances has been required to withhold no tax^ the ownership certificates on form 1001 {revised) filed in connection with such payments shall be transmitted directly to the CommAssioner {Sorting Division), accompanied by a return on form 1096 showing the number of ownership certificates thus transmitted and the total amount of interest paid. This return shall be made by the 20th day of each month follozuing that for which the return is made and need not be sworn to. An annual return shall be forwarded to the Commissioner not later than March 15 of each year on form 1096 B., on which shall be given a summary of the monthly returns. To the extent that there has been actual withholding of the tax returns should be made in accordance with article 370. [no payments of interest to nonresident alien individuals or foreign corporations not engaged in trade or business within the United States and not having any office or place of business therein, or'to unknown persons, and has withheld no tax from interest payable to citizens or residents of the United States, individuals or partner- ships, whether or not the bonds upon which such interest accrued contained a tax-free covenant clause, the ownership certificates filed in connection with such interest payments shall not be forwarded to collectors, accompanied by a return on form 1012 (revised), but shall be transmitted directly to the Commissioner (Sorting Division), accompanied by a letter of transmittal. This return shall be m.ade monthly and need not be sworn to. The number of ownership certificates thus transmitted and the total amount of interest paid shall be entered in the return.] 300G Art. 374 [Art. 371]. Ownership Certificates in the Case of Fiduci- aries and Joint Owners. — When fiduciaries have the control and custody of more than one estate or trust, and such estates and trusts have as assets bonds of corporations and other securities, a certificate of ownership shall be executed for each estate or trust, regardless of the fact that the bonds are of the same issue. JVhen bonds are owned jointly by several persons., a separate ownership certificate must be executed in behalf of each of the owners. [When bonds are owned jointly by several persons, one of the owners may execute an ownership certificate in behalf of the other owners and indorse on the back thereof their names and addresses and the proportionate owner- ship of each.] 3007 Art. 375 [Art. 372]. Withholding in the Case of Enemies.— Payments made after October 6, 1917, to the alien property custodian are in the same category as payments made to or for citizens or residents of the United INC. 383 TAX Reg. 45, Rev. See Note on page 301. States. Withholding at the source is accordingly unnecessary except in the case of interest payments on corporate bonds or other obligations contain- ing a tax-free covenant where no exemption is claimed. The alien property custodian should use form 1000 (revised) in collecting interest on bonds containing a tax-free covenant and in all other cases should use form 1001 (revised). -No distinction is to be made between payments directly to the alien property custodian and to his depositaries and between interest on registered bonds and interest on coupon bonds. In the case of enemies or allies of enemies holding a license granted under the provisions of the Trading with the Enemy Act, withholding is required as in the case of any nonresident alien not an enemy or ally of enem.y. See article 446. 3007a Art. 376. Return of Income from which Tax Withheld. — The entire 222 amount of the income from which the tax was withheld shallbe included 730 in gross income without deduction for such payment of the tax. But any tax actually so withheld shall he credited against the total tax as com^ puted in the taxpayers return. If the tax is paid by the recipient of the income or by the withholding agent it shall not be recollected from the other, regardless of the original liability therefor, and in such event no penalty will be asserted against either person where no fraud or purpose to evade payment is involved. CREDIT FOR TAXES 3008 Art. 381. Analysis of Credit for Taxes.— (1) In the case of a 226 citizen of the United States, whether resident or nonresident, the 1059 basis of the credit for taxes is as follows: (a) ‘‘The amount of any income, war-profits and excess-profits taxes paid,” or accrued, “during the taxable year * * * to any possession of the United States”; (b) “the amount of any” such taxes paid or accrued, “during the taxable year to any foreign country, upon income derived from sources therein”; and (c) the “proportionate share of” any “such taxes of” a partnership of which he is a partner or of an estate or trust of which he is a beneficiary ’ paid or accrued, “during the taxable year to a foreign country or to any posses- sion of the United States, as the case may be.” (2) In the case of an alien resident of the United States the basis 30C9 of the credit for taxes is as follows: (a) “The am^ount of any income, 223 war-profits and excess-profits taxes paid,” or accrued, “during the 1062 taxable year * * * possession of the United States” (identical with (1) (a) above); (b) “the amount of any such taxes paid” or accrued “during the taxable year to” the country of .which he is a ( citizen or subject, “upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country”; and (c) the “proportionate share of” any “such taxes of” a partnership of which he is a partner or of an estate or trust of which he is a beneficiary paid or accrued “during the taxable year to” the country of which he is a citizen or subject (“if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country”), “or to any possession of the United States, as the case may be.” As to credits for taxes in the case of corporations see section 238 of the statute and article 611. 3010 Art. 382. Meaning of Terms.— “Amount of * * * taxes paid during the taxable year” means taxes proper (no credit being given for amounts representing interest or penalties) paid or accrued during the taxable year on behalf of the individual claiming credit. “Foreign INC. 384 TAX Reg. 45, Rev. See Note on page 301. country’’ includes within its meaning any foreign sovereign state or self-governing colony (for example ^ the Dominion of Canada)^ but does not include a foreign municipality (for example^ Montreal) unless itself a sovereign State (for example, Hamburg) [means any governmental authority, not that of the United States or any part or possession thereof, having power to impose such taxes, and it therefore includes a self-governing colony, such as the Dominion of Canada]. “Any possession of the United States” includes, among others, Porto Rico, the Philippines and the Virgin Islands. As to the meaning of sources see articles 91~93. See also section 1 of the statute [and articles 91 and 311]. 301 1 Art. 383. Conditions of Allowance of Credit.— (a) When credit is sought for income, war profits or excess profits taxes paid other than to the United States, the income tax return of the individual must be accompanied by form 1116, carefully filled out with all the information there called for and with the calculations of credits there indicated, and duly signed and sworn to or affirmed. When credit is sought for taxes already paid the form must have attached to it the receipt for each such tax payment. When credit is sought for taxes accrued the form must have attached to it the return on which each such accrued tax was based. This receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original or a duly certified or authenticated copy, (b) In the case of a credit sought for a tax accrued but not paid, the Commissioner may require as a condition precedent to the allowance of credit a bond from the taxpayer in addition to form 1116. If such a bond is required, form 1117 shall be used for it. It shall be in such penal sum as the Commissioner may prescribe, and shall be conditioned for the payment by the taxpayer of any amount of tax found due upon any redetermination of tax made necessary by such credit proving incorrect, with such further conditions as the Commissioner may require. This bond shall be executed by the taxpayer, his agent or repre- sentative, as principal, and by sureties satisfactory to and approved by the Commissioner. See also section 1320 of the statute. 3012 Art. 384. Re determination of Tax When Credit Proves Incorrect. — In case credit has been given for taxes accrued, or a proportionate share thereof, and the amount that is actually paid on account of such taxes, or a proportionate share thereof, is not the same as the amount of such credit, or in case any tax payment credited is refunded in whole or in part, the taxpayer shall immediately notify the Commissioner. The Commis- sioner will thereupon redetermine the amount of the income tax of such taxpayer for the year or years for which such incorrect credit was granted. The amount of tax, if any, due upon such redetermination shall be paid by the taxpayer upon notice and demand by the collector. The amount of tax, if any, shown by such redetermination to have been overpaid shall be credited against any income, war profits or excess profits taxes, or install- ment thereof, then due from such taxpayer under any other return, and any balance of such amount shall be immediately refunded to him. See section 252 of the statute and articles 1031-1038. INDIVIDUAL RETURNS 3013 Art. 401. Individual Returns. — Every individual whose net income 233 as defined in section 212 of the statute and articles 21-26, is $1,000 or 1142 over for the taxable year must make a return of income unless married and living with husband or wife as defined in article 303. The return INC. 385 TAX Reg. 45, Rev. See Note on page 301. shall he for his taxable year, whether calendar or fiscal. Whether or not an individual is the head of a family or has dependents is immaterial in determining his liability to render a return. If an individual is a married person living with husband or wife, no return need be made where their aggregate net income is less than $2,000; but a separate return must be made by each of them, regardless of the amount of the individual income of each, where their aggregate net income is $2,000 or over, unless they join in a single return. The husband shall include in his return the income derived fro?n services rendered by the wife or from the sale of products of her labor if she does not file a separate return or join with him in a return setting forth her income separately. For returns by partnerships see section 224 and articles 41 1 and 412; by fiduciaries see section 225 and articles 421-425; by personal service corporations see section 239 and article 624; and by other corporations see sections 239 and 240 and articles 621-626 and 631-638. See also sectio7i 227 and articles 441-448. [Every individual having a net income for the taxable year of $1,000 or over must make a return, except only that if married and living with husband or wife as defined in article 303 he need not do so unless their aggregate income is $2,000 or over, and except that a husband and wife living together may make a single joint return. Unless the wife files a separate return of income or joins with her husband in a return which shall set forth her income separately, her husband should include in his return the income accruing to the wife from services rendered by her or the sale of products of her labor.] 3013a Art. 402. — formerly part of Art. 401. Form of Return. — The return shall be on form 1040 (revised), except that it may be on short form 1040 A (revised) where the net income does not exceed $5,000 and the net income subject to the normal tax, that is, after applying the personal exemp- tion and other credits, does not exceed $4,000. The forms are provided by the Commissioner and may be had from the collectors of the several districts. In the case of a person owning State, municipal. United States, far^n loan or W ar Finance Corporation bonds, his return shall contain a statement showing the number and amount of such obligations owned by him, the income received therefrom, and the other information called for in the form. See section 213 (b) (4) of the statute. The return may be made by an agent when by reason of illness, absence or nonresidence the person liable for the return is unable to make it, the agent assuming the responsibility for making the return and incurring liability to the specific penalties provided for erroneous, false or fraudulent returns. See section 253 and article 1041. 3014 Art. 403 [Art. 402]. Return of Income of Minor. — An individual under 21 years of age or under the statutory age of majority where he lives, whatever it may be, is required to render a return of income if he has a net income of his own of $1,000 or over for the taxable year. If he is married • see article 401. If the aggregate of the net income of a minor from any prop- erty which he possesses, and from any funds held in trust for him by a trustee or guardian, and from any earnings for his own use, is at least $1,000, a return as in the case of any other individual must be made by him or by his guardian or some other person charged with the care of his person or property for him. See article 422. If, however, a minor is dependent upon his parent, who appropriates or may appropriate his earnings, such earnings are income of the parent and not of the minor for the purpose of the normal tax and surtax. In the absence of proof to the contrary a parent will be assumed not to have emancipated his minor child and must include in his return any earnings of the minor. INC. 386 TAX Keg. 4o, Rev. Sec Note on page SOI. 3015 Art. 404 [Art. 403]. Return of Income of Nonresident Alien. — A 165 nonresident alien individual shall make or have made a full and 538 accurate return on form 1040 (revised) or form 1040 J {revised) of his income received from sources within the United States, regardless of amount, unless the tax on such income has been fully paid at the source. See section 217 of the statute and articles 311-316. The responsible repre- sentatives of nonresident aliens in connection with any sources of income which such nonresident aliens may have within the United States shall make a return of such income, and shall pay any and all tax, normal and addi- tional, assessed upon the income received by them in behalf of their non- resident alien principals, in all cases where the tax on income so in their receipt, custody or control shall not have been withheld at the source. The agent of a nonresident alien is responsible for a correct return of all income accruing to his principal within the purview of the agency. The agency appointment will determine how completely the agent is substituted for the principal for tax purposes. Where, upon filing a return of income it appears that a nonresident alien is not liable for tax, but nevertheless a tax shall have been withheld at the source, in order to obtain a refund on the basis of the showing made by the return there should be attached to it [the return] a statement showing accurately the amounts of tax withheld, with the names and post-office addresses of all withholding agents. See article 376. 3016 Art. 405 [Art. 404]. Return of Corporate Dividends. — Dividends on stock of domestic corporations or resident [alien] corporations are prima facie income of the record owner of the stock, and such record owner will be liable for any additional tax based thereon, unless a disclosure of the actual ownership is made to the Commissioner on form 1087 (revised) which shall show that the record owmer is not the actual owner and who the owner is and his address. In all cases where the actual owner is a non- resident alien individual and the record o'wner is a person in the United States, the record owner will be considered for tax purposes to have the receipt, custody, control and disposal of the dividend income and will be required to make return for the actual owner, regardless of the amount of the incom.e, and to pa}'^ any surtax found b}^ such return to be due. 3017 Art. 406 [Ait. 405]. Verification of Returns. — All income tax returns must be verified under oath or affirmation. Persons in the naval or military sen^ice of the United States may verify their returns before any official authorized to administer oaths for the purposes of those services. Income tax returns executed abroad may be attested free of charge before United States consular officers. Where a foreign notary or other official having no seal shall act as attesting officer, the authority of such attesting officer should be certified to by some judicial official or other proper officer having knowledge of the appointmient and official character of the attesting officer. 301 7a Art. 407. Use of Prescribed Forms. Formerly Art. 626 and same in 1421 effect. — Copies of the prescribed return forms will so far as possible be furnished taxpayers by collectors. Failure on the part of any taxpayer to receive a blank form will not, hov/ever, excuse him from making a return. Taxpayers not supplied with the proper forms should make appli- cation therefor to the collector in ample time to have their returns prepared, verified and filed with the collector on or before the last due date. Each tax- payer should carefully prepare his return so as fully and clearly to set forth 387 'V tax INC. R eg. 45, Rev. See Note on page 301. the data therein called for. Imperfect or incorrect returns will not be accepted as meeting the requirements of the statute. In lack of a prescribed form a statement made by a taxpayer disclosing his gross income and the deductions therefrom may be accepted as a tentative return, and if filed within the prescribed time a return so made will relieve the taxpayer from liability to penalties, provided that without unnecessary delay such a tentative return is replaced by a return made on the proper form. See further articles 443-446. partnership:returns 3018 Art. 411. Partnership Returns. — Every partnership must make a 238 return of income regardless of the amount of its [gross or] net income. 1298 The return shall be on form 1065 (revised) and shall be sworn to by one of the partners. Such return shall be made for the taxable year of the partnership, that is, for its annual accounting period (fiscal year or calendar year as the case may be), irrespective [regardless] of the taxable years of the partners. See sections [200, 212 and] 218 of the statute and articles 321-327. If the partnership m.akes any change in its accounting period, it shall make its return in accordance with the provisions of section 226 [of the statute] and article 431. See also article 424. 3018a Art. 412. — Formerly part of Art. 411. — Contents of Partnership Return. — ^The return of a partnership shall state specifically (a) the items of its gross income enumerated in section 213 of the statute; (b) the deductions enumerated in section 214 [of the statute], other than the deduc- tion provided in paragraph (11) of subdivision (a) of that section; (c) the amounts specified in subdivisions (a) and (b) of section 216 [of the statute] received by the partnership; (d) the amount of any income, war profits and excess profits taxes of the partnership paid during the taxable year to a foreign country or to any possession of the United States, and the amount of any such taxes accrued but not paid during the taxable year; (e) the names and addresses of the individuals who would be entitled to share in the net income of the partnership if distributed; (f) the amount of the distributive share of such net income of each such individual; and (g) such other facts as are required by form 1065 (revised). See also sections 222 and 227 and articles 381-384 and 441-448. [of the statute. A receiver in charge of the business of a partnership shall make a return for it on form 1065 (revised). See article 424, 113022.] FIDUCIARY RETURNS 3019 Art. 421. Fiduciary Returns. — Every fiduciary, or at least one of 239 joint fiduciaries, must make a return of income (a) for the individual 1168 whose income is in his charge, if the net income of such individual is $2,000 or over if married and living with husband or wife or is $1,000 or over in other cases, or (b) for the estate or trust for which he acts, if the net income of such estate or trust is $1,000 or over or if any beneficiary of such estate or trust is a nonresident alien. The return in case (a) and also in case (b) if the tax is payable by the fiduciary shall be on form 1040 (revised), except that it may be on short form 1040 A (revised) where the net income does not exceed $5,000. The return shall be on form 1041 (re- vised) in case (b) if the tax is payable by the beneficiaries. In such a case the fiduciary shall include in the return a statement of each beneficiary'^ s distributive share of the net income, whether or not distributed before the close of the taxable year for which the return is made. See section 219 of the statute and articles INC. 388 TAX Reg. 45, Rev. See Note on page 30 J, 341-346. If the net income of a decedent from the beginning of the taxable year to the date of his death was $1,000, if unmarried, or $2,000, if married, the executor or administrator shall make a return for such decedent. article 305. 3020 Art. 422. Return by Guardian or Committee. — A fiduciary acting as the guardian of a minor having a net income of $1,000 or $2,000, according to the marital status of such person, must make a return for such minor on form 1040 (revised) or 1040 A (revised) and pay the tax, unless such minor himself makes a return or causes it to be made. A fiduciary ^ acting as the committee of an insane person having an income of $1,000 or $2,000, according to the marital status of such person, must make a return for such incompetent on form 1040 (revised) or 1040 A (revised) and pay the tax. [In either case, if the fiduciary is also acting for other beneficiaries, such a return shall be rendered in addition to the returns required by the preceding article.] 3021 Art. 423. Returns Where Two Trusts.— In the case of two or more trusts the income of which is taxable to the beneficiaries, which were created by the same person and are in charge of the same trustee, the trustee shall make a single return on form 1041 (revised) for all such trusts, notwithstanding that they may arise from different instruments. When, however, a trustee holds trusts created by different persons for the benefit of the same beneficiary, he shall make a return on form 1041 (re- vised) for each trust separately. 3022 Art. 424. Return by Receiver. — A receiver who stands in the stead of an individual or corporation must render a return of income and pay the tax for his trust, but a receiver of only part of the property of an individual or corporation need not. If the receiver acts for an individual the return shall be on form 1040 (revised) or 1040 A (revised). When acting for a corporation a receiver is not treated as a fiduciary, and in such a case the return shall be made as if by the corporation itself. See section 239 of the statute and article 622. A receiver in charge of the business of a partnership shall render a return on form 1065 (revised). A receiver of the rents and profits appointed to hold and operate a mortgaged parcel of real estate, but not in control of all the property or business of the mortgagor, and a receiver in partition proceedings, are not required to render returns of income. In gfmeral, statutory receivers and common law receivers of all the property Of business of an individual or corporation must make returns. See also section 256 of the statute and articles 1071-1080. [Every receiver for an individual, partnership, or corporation, whether or not of all the property or business, must render a return of information under section 256 of the statute.] 3023 Art. 425. Return for Nonresident Alien Beneficiary. — Where a ► citizen or resident fiduciary has the distribution of trust income for which there is a nonresident alien beneficiary, the fiduciary must make a return on form 1040 (revised) or 1040 A (revised) for such nonresident alien and pay the tax. If there are two or more beneficiaries, the fiduciary shall render a return on form 1041 (revised) and also a return on form 1040 (revised) or 1040 A (revised) for each nonresident alien beneficiary. INC. 389 TAX Reg. 45, Rev. See Note on page 301. RETURNS WHEN ACCOUNTING PERIOD CHANGED 3024 Art. 431. Returns when Accounting Period Changed.— No 247 return can be made for a period of more than 12 months. A 1479 separate return for a fractional part of a year is, therefore, required wherever there is a change, with the approval of the Commissioner, in the basis of computing net income from one taxable year to another taxable year or wherever a taxpayer making [makes] his first return of income does so on the basis of a fiscal year. The periods to be covered by such separate returns in the several cases are stated in the statute. The requirements with respect to the filing of a separate return and the payment of tax for a part of a year are the same as for the filing of a return and the payment of tax for a full taxable year closing at the same time. See sections 227 and 250 of the statute and articles 441-448 and 1001. The tax on net income computed on the basis of the [a] period for which a separate return is made shall be paid thereon at the rate for the calendar year in which such period is included, and the credits for personal exemption and dependents shall be such propor- tion of the full credits as the number of months in such period bears to 12 months. See section 216 and articles 305. See further section 212 and articles 25 and 26, and as to corporations see sections 232 and 239 and articles 531 and 626. [See as to corporations sections 223 and 239 of the statute.] TIME AND PLACE FOR FILING RETURN 3025 Art. 441. Time for Filing Return. — Returns of income must be 253 made on or before the fifteenth day of March following the taxable 1472 year, except that returns on the basis of a fiscal year other than the calendar year must be made on or before the fifteenth day of the third month following the close of the fiscal year. Returns on the basis of fiscal years ending in 1918 of taxpayers who made returns on the calendar year basis for the year 1917 shall be made on or before the fifteenth day of March, 1919. See also sections 250 and 253 of the statute and articles 1001- 1013 and 1041. [Returns of individuals can not be accepted prior to the close of the taxable year, except that administrators or executors may im- mediately after their discharge upon final accounting file with the collector a return of income of the estate for the year in which the administration was closed, and should pay the tax found by such return to be due immediately upon receipt of notice and demand for the amount of such tax. There should be attached to this return a certified copy of the ordfer or a certificate under seal, setting forth the fact of final accounting and the discharge of the executor or administrator. An ancillary administrator, being merely an agent of the domiciliary administrator, should transmit to him all informa- tion as to the income of the estate received by the ancillary administrator, to the end that the original administrator may make a return covering the entire income of the estate. In connection with the above, cut out here, see next paragraph.] 3025a Art, 442. Time for Filing Return upon Death or Termination of 1223 Trust. (For former provisions see part cut out in U3025 above). — As soon as possible after his appointment and qualification, without waiting for the close of the taxable year, an executor or administrator shall file a return of income for the decedent. Upon the completion of the administration of an estate and final accounting an executor or administrator shall file a return of income of the estate for the portion of the taxable year in which the adminis^ tration was closed, attaching to the return a certified copy of the order for his 390 TAX INC. Reg, 45, Rev. See Note on page 301. discharge. An ancillary administrator need make no separate return if the domiciliary administrator includes in his return the entire income of the estate. Similarly, upon the termination of any other trust the trustee shall make a return vnthoui waiting for the close of the taxable year. In any such case the require- ments with respect to the payment of the tax are the same as if the return were for a full taxable year closing at the end of the month during which the decedent dies or the estate is settled or the trust is terminated, as the case may be. The payment of the tax before the end of the taxable year in such circumstances does not relieve the taxpayer from liability for any additional tax which might sub- sequently be imposed upon income of the taxable year. 3026 Art. 443 [Art. 442]. Extension of Time by Collector. — It is important that the taxpayer render before the return due date a return as complete and final as it is possible for him to prepare. However, in cases of sickness or absence collectors are authorized to grant an extension of not exceeding 30 days, where in their judgment such further time is actually required for the making of an accurate return. See article 1002. The application for such extension must be made prior to the expiration of the period for which the extension is desired. [Otherwise the return will be considered delinquent and liability to penalty will attach.] The absence or sickness of one or rriore officers of a corporation at the time the return is re- quired to-be filed will not be accepted as a reasonable cause for failure to file the return within the prescribed time, unless it is satisfactorily shown that there were no other principal officers available and sufficiently informed as to the affairs of the corporation to make and verify the return. As a condi- tion of granting an extension of time for filing a return the collector may require the submission of a tentative return and estimate of the tax on form 1040 T in ^ the case of individuals, or on form 1031 T in the case of corporations, and the payment of one-fourth of the estimated amount of tax. \Fcr remainder of the old Art. 442, see next paragraph.] 3026a Art. 444 [442]. Extension of Time by Commissioner. — If before the end of an extension of 30 days granted by the Collector an accurate return can not be made, an appeal for a further extension must be made to the Com- missioner with a full recital of the causes for the delay, [and] The Com- missioner will not grant an additional extension without a clear showing that a complete return can not be made at the end of the 30 day period. The Commissioner will grant no such extension [, thus requested,] beyond the original due date of the third [second] installment of the tax. Either a com- plete or a tentative return, as complete as possible and giving a ground for assessment of the tax, must be submitted on or before the due date as extended, and the tax shown to be due must be paid with the submission of the return. If a complete return can not be made at that time, the facts must be sub- mitted to the Commissioner for such further action as he deems warranted. In exceptional circumstances the taxpayer may apply originally to the Com- missioner for 6 and 305 and articles 591 and 761. [Former Art. 626 — Use of prescribed forms, is now Art. 407, 1f3017^.1 y CONSOLIDATED RETURNS. 3233 Art. 631. Affiliated Corporations. — 4'he provision of the statute 349 requiring affiliated corporations to file consolidated returns is based 1405 upon the principle of levying the tax according to the true net in- c(jme and invested capital of a single business enterprise, even 427 INC. TAX Reg. 45, Rev. Part II-A, See Note on page 301. though the business Is operated through more than one corporation. Where one corporation owns the capital stock of another corporation or other corporations, or where the stock of two or more corporations is owned by the same interests, a situation results which is closely analogous to that of a business maintaining one or more branch establishments. In the latter case, because of the direct ownership of the property, the invested capital and net income of the branch form a part of the invested capital and net income of the entire organization. Where such branches or units of a business are owned and controlled through the medium of separate corpora- tions, It is necessary to require a consolidated return In order that the In- vested capital and net Income of the entire group may be accurately de- termined. Otherwise opportunity would be afforded for the evasion of taxation by the shifting of Income through p'rice fixing, charges for services and other means by which Incom.e could be arbitrarily assigned to one or another unit of the group. In other cases without a consolidated return excessive taxation might be Imposed as a result of purely artificial condi- tions existing between corporations within a controlled group. See articles 785, 791, 802 and 864-869. 3234 Art. 632. Consolidated Returns. — Affiliated corporations, as defined In the statute and in article 633, are required to file consolidated returns on form 1120. The consolidated return shall be filed by the parent or principal reporting corporation in the office of the collector of the dis- trict in which it has its principal office. Each of the other affiliated cor- porations shall file in the office of the collector of Its district form 1122, along with the several schedules indicated thereon. The parent or principal corporation filing a consolidated return shall include in such return a state- ment specifically setting forth {a) the name and address of each of the subsidiary or affiliated corporations included In such return, {b) the par value of the total outstanding capital stock of each of such corporations at the beginning of the taxable year, (c) the par value of such capital stock held by the parent corporation or by the same Interests at the beginning of the taxable year, {d) in the case of affiliated corporations owned by the same interests, a list of the individuals or partnerships constituting such interests, with the percentage of the total outstanding stock of each affiliated corporation held by each of such individuals or partnerships during all of the taxable year, and {e) a schedule showing the proportionate amount of the total tax which it is agreed among them Is to be assessed upon each affiliated corporation. Foreign corporations and personal service corporations need not file consolidated returns. See article 1524. 3235 Art. 633. When Corporations are Affiliated. — Corporations will be 354 deemed to be affiliated {a) when one domestic corporation owns 1410 directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or {h) when substantially all the stock of two or more domestic corporations is owned or controlled by the same Interests. The words “substantially all the stock” cannot he interpreted as meaning any particular percentage^ but must be construed according to the facts of the particular case [shall be deemed to mean 95 per cent or more of the outstanding voting capital stock (not including stock in the treasury) at the beginning of and during the taxable year]. The owning or controlling of 95 per cent or more of the outstanding voting capital stock {not including stock in the treasury) at the beginning of and during the taxable year will be deemed to constitute an affiliation within the meaning of the statute. Con- solidated returns may, however, be required even though the stock ownership is 428 TAX INC. Reg. 45, Rev. Part II-A. See N ote on page 301. less than 95 per cent. When the stock ownership is less than [falls below] 95 per cent, but [is] in excess of 50 per cent, a full disclosure of affiliations should [shall] be made, showing all pertinent facts^ including the stock owned in each subsidiary or affiliated corporation and the percentage of such stock owned to the total stock outstanding [and if it appears that the taxes can not be equitably assessed in such cases on the basis of separate returns, consolidated returns may be required]. Such statement should preferably be made in advance of filing the return with a request for instructions as to whether a consolidated return should be made. In any event such a statement should be filed as a part of the return. The words “[by] the same interests” shall be deemed to mean the same individual or. partnership or the same individuals or partnerships, but when the stock of two or more corporations is owned by two or more indi- viduals or by two or more partnerships a consolidated return is not required unless the percentage of stock held by each individual or each partnership is substantially the same in each of the affiliated corporations. 3236 Art. 634. Change in Ownership During Taxable Year. — When one 355 corporation owns substantially all the stock of another corporation 1411 at the beginning of any taxable year, but during the taxable year sells all or a majority of such stock to outside interests not affiliated with it, or when one corporation during any taxable year acquires sub- stantially all the capital stock of another corporation with which it was not previously affiliated, a full disclosure of the circumstances of such changes in ownership shall be submitted to the Commissioner. In accordance with the peculiar circumstances in each case the Commissioner may require separate or consolidated returns to be filed, to the end that the tax may be equitably assessed. 3237 Art. 635. Corporation Deriving Chief Income from Government 350 Contracts. — In the case of any affiliated corporation organized 140G after August 1, 1914, and not a successor to a then existing busi- ness, 50 per cent or more of whose gross income consists of gains, profits, commissions or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, the net income and invested capital of such corporation shall be taken out of the consolidated net income and invested capital of the group of affiliated corporations and the corporation so segregated shall be separately assessed on the basis of its own invested capital and net income, the remainder of such affiliated group being assessed on the basis of the re- maining consolidated invested capital and net income. See section 1 of the statute and article 1510. 3238 Art. 636. Domestic Corporation Affiliated ~ with Foreign Cor- 350 poration. — A domestic corporation which owns a majority of the 1412 stock of a foreign corporation shall not be permitted or required to include the net income or invested capital of such foreign cor- poration in a consolidated return, but for the purpose of section 238 of the statute a domestic corporation which owns a majority of the voting stock of a foreign corporation shall be entitled to credit its [in respect of any] income j war profits and excess profits taxes with any income, war profits or excess profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any posses- sion of the United States upon income derived from sources without the United States in an amount equal to the proportion which the amount of any dividends (not deductible under section 234) received by such domestic 429 INC. TAX Reg. 45, Rev. Part II-A. See Note on page 301. corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid. But in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year. A domestic corporation seeking such credit must comply with those provisions of subdivision (a) of article 383 which are applicable to credits for taxes already paid, except that in accordance with article 611 the form to be used is form 1118 instead of form 1116. 3239 Art. 637. Consolidated Net Income of^Affiliated^Corporations. — Subject to the provisions covering the determination of taxable net income of separate corporations, and subject further to the elimination of intercompany transactions, the consolidated taxable net income shall be the combined net income of the several corporations consolidated, except that the net income of corporations coming within the provisions of article 635 s\xal\h^ taken [excluded.] Inrespectof the statement of gross income and de- ductions and the several schedules required under form 1120, a corporation filing a consolidated return is required to prepare and file such statements and schedules in columnar form to the end that the details of the items of gross income and deductions for each corporation included in the consolida- tion may be readily audited. 3240 Art. 638 Different Fiscal Years of Affiliated Corporations. — In the 1427 case of all consolidated returns, consolidated invested capital must be computed as of the beginning of the taxable year of the parent or principal reporting company and consolidated income must be computed on the basis of its [fiscal] year. Whenever the fiscal year of one or more subsidiary or other affiliated corporations differs from the fiscal year of the parent or principal corporation, the Commissioner should be fully advised by the taxpayer in order that provision may be made for assessing the tax in respect of the period prior to the beginning of the fiscal year of the parent or principal company. See section 226 of the statute and article 431. TIME AND PLACE FOR FILING RETURNS. 3241 Art. 651. Time and Place for Filing Returns. — Returns of income 358 must be made on or before the fifteenth day of the third month fol- 1471 lowing the close of the fiscal or calendar year, as provided in section 227 of the statute and articles 441-447. A corporation going into liquidation during any taxable year may upon the completion of such liqui- dation prepare a return covering its income for the fractional part of the year during which it was engaged in business and may immediately file such return with the collector. A corporation having an office or agency in the United States must make its return to the collector of the district in which ^ is located its principal office or agency. Other corporations must make their returns to the collector at Baltimore. See also sections 250 and 253 of the statute and articles 1001-1013 and 1041. [A corporation desiring an extension of time within which to file its return should submit to the collector before the time for filing the return a tentative return and estimate on form 1031 T, accom- panied by a remittance of not less than one-fourth of the estimated amount of income and war profits and excess profits taxes for the taxable year. In such a case the collector may grant a reasonable extension of time for filing the complete return, not to exceed thirty days or, in the case of returns for 1918, not to exceed forty-five days after March 15, 1919. See also sections 250 and 253 of the statute and articles 1001-1003 and 1041.] 430 TAX INC. 3242 [Art. 652. Last Due Date. — Is now Art. 447, •[[3028<3.] 3243 Art. 1800.^- Promulgation of Regulations. — In pursuance of the 433 statute the foregoing regulations are hereby made and promulgated 2591 and all rulings inconsistent herewith are hereby revoked. Daniel C. Roper, Commissioner of Internal Revenue. Approved: Carter Glass, Secretary of the Treasury. (Preliminary edition not dated; Released: March 5, 1919.) (Revised edition dated April 17, 1919; Released a few days later.) 3244 Withholding at the New Rates. Liability of Debtors and of Credi- 3003 tors. — Employers of nonresident aliens were not required in making payments prior to February twenty-five, nineteen nineteen, to with- hold more than two per cent of such payments and as to such payments will not be held responsible for more than two per cent unless then actually withheld at a higher rate. This ruling does not affect the tax liability of the nonresident alien who will be liable for tax at the rates prescribed for nineteen eighteen and nineteen nineteen and should make returns accordingly. He is entitled to credit for the amount paid to the Government by withholding agent. (Telegram to The Corporation Trust Company, signed by Com- missioner Daniel C. Roper and dated March 5, 1919.) 3245 Modification of the Ruling Relative to Apportioning the Personal 1140 or Family Exemptions Because of Change in Marital or Family 1 141 Status During the Year. — The status of an Income Tax payer on 2971a December 31 will determine his personal exemption for 1918, as in previous years, according to a new ruling issued to-day by the Treasury Department. The subdividing of personal or family exemptions to cover a person’s changes in status during 1918 is abandoned. Pargaraph three of Section six of the instructions on the new forms for individual returns, is made void by the new ruling. When claiming the personal or family exemption on his return, a taxpayer should be guided by the following schedule of lawful allowances. If married and living with wife (or husband) on the last day of the year, the exemption allowed is $2,000. Any taxpayer who, though unmarried, supported in his household on December 31 one or more relatives who were dependent upon him, may claim the $2,000 exemption. Single persons, also married persons who were living apart on December 3 1 , and who have no dependents, may claim only $1,000 exemption. Additional exemption of $200 is allowed for each person who was dependent upon the taxpayer on December 31 if the dependent is under 18 years of age or is mentally or physically incapable of self-support. (Official announcement by the Bureau of Internal Revenue, dated March 11, 1919.) (T. D. 2797.) 3246 Time of Payment of Tax where a Corporation has Filed a Return 2339 for^a Fiscal Year Ending in 1918. — If a corporation has before Febru- 3031 ary 25, 1919, filed a return for a fiscal year ending in 1918 and paid 3180a or become liable for a tax computed under the Revenue Act of 1917, and is subject to additional tax for the same period under the Revenue Act of 1918, the return covering such additional tax shall be filed at the same INC. 431 TAX time as returns of persons making returns for the calendar year 1918 are due under existing rulings, and payment of such additional tax is due in the*same installments and at the same times as in the case of payments based on returns for the calendar year 1918. If no part of the tax for such fiscal year was due until after February 24, 1919, the whole amount of tax due, including tax due under the original return and additional tax due under the amended return, will be payable in the same installments and at the same times as in the case of payments based on returns for the calendar year 1918. (T. D. 2797, signed by Commissioner Daniel C. Roper, and dated March 11 , 1919.) (T. D. 2796. — Amended.) 3247 Amendment to T. D. 2796. — This Treasury Decision should be 3167 substituted for the previous mimeograph issue of T. D. 2796, the words and figures “September 8, 1916, and the Act of” having been inserted after the word “of” in the eighth line of the third paragraph [seventh line of lf3167]. (T. D. 2796 — Amended, signed by Commissioner Daniel C. Roper, and dated February 27, 1919.) 3248 Computation of Discount and Interest for Taxation Purposes. — 1792 The Commissioner of Internal Revenue has authorized the publica- tion of the following letter written in response to an inquiry from a national bank with reference to the method of reporting discount and interest on time loans for taxation purposes: “Receipt is acknowledged of your letter of February 8, 1919, in which you state: ‘On January 1, 1918, we changed our method of handling discount and interest on time loans. Up to this time all discount and interest charged on loans had been credited directly to discount and interest, but at this date, the actual amount of discount and interest, which had been so credited and was still unearned, was ascertained, credited to unearned account on our books, and thereafter all discount and interest collected in advance was credited to this account, our discount earned receiving credit for each day’s actual earnings.’ “You ask to be advised what course you should pursue in the preparation of your income and war-excess profits tax returns for the year 1918. The method of treating discount and interest on time loans adopted by you on INC. 432 TAX January 1, 1918, has been generally recognized as the correct method of com- puting such income, and the Comptroller of the Currency has suggested the adoption of this method by all national banks. The amount of income from discount and interest on time loans which you should report for the year 1918 is the amount of such income actually earned during that year, and as the amount of such income for the year 1917 and years prior thereto has been computed and reported upon a different method, amended returns should be filed showing the correct amount of such income for each year back to 1909, inclusive, or to the date of the organization of your bank, if it was organized subsequent to 1909.” (Letter to a National Bank, signed by Commissioner Daniel C. Roper, and dated February 11 , 1919. Reprinted from The Federal Reserve Bulletin for March, 1919.) 3249 The Advisory Tax Board Membership. — Commissioner Daniel C. 2652 Roper announced today his appointments to the new Advisory Tax Board of the Bureau of Internal Revenue. Five memberships are announced. The sixth membership has been reserved as a roving com- mission for experts who will be called in from time to time from various industries. The men named today are: Dr. T. S. Adams, Professor of Political Economy of Yale University, and formerly of the Wisconsin Tax Commission. J. E. Sterrett, of New York, Certified Public Accountant, and formerly President of the American Institute of Accountants. Stuart W. Cramer, of Charlotte, North Carolina, engineer, con- tractor and cotton manufacturer; former President of the National Association of American Cotton Adanufacturers. L. F. Speer, former Deputy Commissioner, Bureau of Internal Revenue, Income Tax Division. Fred T. Field, of Boston, Mass., expert tax lawyer, and formerly Assistant Attorney General of Massachusetts. 3250 The chairman of the new board of advisors will be Dr. Adams, who has been active in the Bureau’s affairs for some time. 3251 Particular attention will be given to problems arising where dif- ferences of opinion exist between the taxpayers and the Bureau. Such differences occur not only with individuals, but also with groups and even with classes of industry. 3252 Formal hearings will be given to taxpayers^ in every case where the facts warrant, and it was stated today at the Revenue Bureau that the^ smallest individual or the most eminent legal counsel for the largest corporation shall find a hearing equally accessible. Commissioner Roper has already announced his policy “to employ every means available so that the scales of justice may be held evenly in deciding each case.” 3253 The Board will be called upon to decide questions involving the general aspects of taxation and differentiation of economic activities, accounting, forms of organization, trade customs, industrial manage- ment, legal procedure and administration. Special studies will be made of such matters as they affect Federal taxation. (Official announcement from the Bureau of Internal Revenue, dated March 14, 1919.) (T. D. 2804) 3254 Extension of Time for Filing Returns of Partnerships Whose Fiscal 1507 Year Ended in 1918. — By Treasury Decision 2796 the time for 3 1 65 filing certain classes of returns which are not the basis for an assessment of tax was extended to May 15, 1919, and the time for filing returns of partnerships and corporations having a fiscal year ended on the last day of some month (other than December) in the year 1918, and which had secured extensions of time in which to file returns, such extensions not having expired, was further extended to March 15, 1919. 3255 In view of the fact that necessary forms are not yet available, a further extension to May 15, 1919, is hereby granted all such partner- ships. Individual members of such partnerships, as in the case of partner- ships filing on the basis of the calendar year, will be required to include in their individual returns their distributive shares of the earnings of such partnerships (ascertained or estimated) and pay at least one-fourth of the tax due on March 15th. (T. D. 2804, signed by Commissioner Daniel C. Roper, and dated March 13, 1919.) (T. D. 2805.) 3256 Amended Returns May be Accepted so that the Taxable Year of 1405 Affiliated Corporations will Coincide. — In any case where an affiliated 3233 corporation has made its income tax return on the basis of a taxable year different from that on the basis of which a consolidated excess profits tax return in which it is included has been made under the provisions of Articles 77 .[^[1415] and 78 [1[1417] of Regulations 41 and of T. D. 2662 [1418], an amended income tax return may be made on the basis of the same taxable year as the consolidated return, even though notice was not given within the time prescribed in Articles 211 to 215 [1[1488 to 1495], inclusive, of Regulations No. 33 (revised) or in Regulations 45 [^[2840]. In such a case an amended income tax return shall also be made for any unaccounted for portion of the corporation’s taxable year. 3257 Collectors of Internal Revenue may accept amended returns made under .the provisions of this Treasury Decision. (T. D. 2805, signed by Commissioner Daniel C. Roper and dated March 14, 1919.) Forms for making returns by nonresident aliens. — No 1040-B will be issued for use of nonresident aliens. 1040 or 1040-A will be used. Instructions are now being prepared as to how these forms may be adapted for use of nonresident aliens. (Telegram to a subscriber, signed by Commissioner Daniel C. Roper, and dated March 14, 1919.) International reciprocal personal specific exemption allowances. — Data regarding countries which impose income tax and permit credits to United States citizens not residing in such countries similar to credits provided in Section 216, Revenue Act of 1918, now being collected and will be issued in form of Treasury Decision (Telegram to a subscriber, signed by Commissioner Daniel C. Roper, and dated March 14, 1919.) 3258 538 1435 3015 3168 3259 537 2972 INC. 434 TAX 8 - 24 - 19 . 3260 Specific Penalty will not be Asserted if Delinquent Returns are 1605 Filed by May 1. — In view of the delay in the final passage of the 1471 Revenue Act of 1918 and the short period allowed for filing returns 3025 thereunder, it has been decided that if a return is filed on or before 3041 May 1, 1919, by an individual, partnership or corporation under 3165 the provisions of such Act, the specific penalty of $1,000 will not be asserted. 3261 Where returns of income are filed after the date mentioned above or where returns of information at the source are filed after May 15, 1919, the specific penalty will be asserted unless it can be shown that the delay was due to a reasonable cause, and offers in compromise will be accepted in the minimum amounts stated below: Delinquent returns of income by individuals $5.00 Delinquent returns of income by corporations 10.00 Delinquent returns of information 5.00 3262 Of course it must be borne in mind that the above does not relate to cases where there is evidence of wilful intent or hostility toward the administration of the law. Such cases will be taken care of in the same manner as heretofore. 3263 Cards, Form 7245A, prepared in the manner indicated in Mim. 1480, dated February 26, 1917, should accompany every original delinquent return filed after the dates m.entioned above as the last dates for filing returns before the specific penalty will be asserted. (IT-Mim. 2077, signed by Commissioner Daniel C. Roper, and dated March 13, 1919.) {Decision.) (Act of October 3, 1913.) A Certain Massachusetts Trust Held Not to be an Association Under the Act of October 3, 1913. Supreme Court of the United States. Alvah Crocker et ah. Trustees, Petitioners, vs. John F. Malley, Collector of Internal Revenue. On Writ of Certiorari to the United States Cir- cuit Court of Appeals for the First Circuit. [March 17, 1919.] Mr. Justice FIolmes delivered the opinion of the Court. 3264 This is an action to recover taxes paid under protest to the Collector 1689 of Internal Revenue by the petitioners, the plaintiffs. The taxes 3076 were assessed to the plaintiffs as a joint-stock association within the meaning of the Income Tax Act of October 3, 1913, c. 16, Section II, G. (a), 38 Stat. 114, 166, 172, and were levied in respect of dividends received from a corporation that itself was taxable upon its net income. The plain- tiffs say that they were not an association but simply trustees, and subject only to the duties imposed upon fiduciaries by Section II, D. The Cir- cuit Court of Appeals decided that the plaintiffs, together, it would seem, with those for whose benefit they held the property, were an association, and ordered judgment for the defendant, reversing the judgment of the District Court. 250 Fed. Rep. 817. INC. 435 TAX 3265 The facts are these. A Maine paper manufacturing corporation with eight shareholders had its mills on the Nashua River in Massa- chusetts and owned outlying land to protect the river from pollution. In 1912 a corporation was formed in Massachusetts. The Maine corporation conveyed to it seven mills and let to it an eighth that was in process of construc- tion, together with the outlying lands and tenements, on a long lease, receiv- ing the stock of the Massachusetts corporation in return. The Maine corporation then transferred to the plaintiffs as trustees the fee of the prop- erty subject to lease, left the Massachusetts stock in their hands, and was dissolved. By the declaration of trust the plaintiffs declared that they held the real estate and all other property at any time received by them thereunder, subject to the provisions thereof, ‘for the benefit of the cestui que trusts (who shall be trust beneficiaries only, without partnership, associate or other relation whatever inter sese)’ upon trust to convert the same into money and distribute the net proceeds to the persons then holding the trustees’ receipt certificates — the time of distribution being left to the discretion of the trustees, but not to be postponed beyond the end of twenty years after the death of specified persons then living. In the meantime the trustees were to have the powers of owners. They were to distribute what they determined to be fairly distributable net income according to the interests of the cestui que trusts but could apply any funds in their hands for the repair or develop- ment of the property held by them, or the acquisition of other property, pending conversion and distribution. The trust was explained to be be- cause of the determination of the Maine corporation to dissolve without wait- ing for the final cash sale of its real estate and was declared to be for the benefit of the eight shareholders of the Maine Company who were to receive certificates subject to transfer and subdivision. Then followed a more detailed statement of the power of the trustees and provision for their com- pensation, not exceeding one per cent, of the gross income unless with the written consent of a majority in interest of the cestui que trusts. A similar consent was required for the filling of a vacancy among the trustees, and for a modification of the terms of the trust. In no other matter had the bene- ficiaries any control. The title of the trust was fixed for convenience as The Massachusetts [sic: in fact — Wachusett] Realty Trust. 3266 The declaration of trust on its face is an ordinary real estate trust of the kind familiar in Massachusetts, unless in the particular that the trustees’ receipt provides that the holder has no interest in any specific property and that it purports only to declare the holder entitled to a certain fraction of the net proceeds of the property when converted into cash ‘and meantime to income’. The only property expressly mentioned is the real estate not transferred to the Massachusetts corporation. Although the trustees in fact have held the stock of that corporation and have collected dividends upon it, their doing so is not contemplated in terms by the instru- ment. It does not appear very clearly that the eight Adaine shareholders might not have demanded it had they been so minded. The function of the trustees is not to manage the mills but simply to collect the rents and income of such property as may be in their hands, with a large discretion in the application of it, but with a recognition that the receipt holders are entitled to it subject to the exercise of the powers confided to the trustees. In fact, the whole income, less taxes and similar expenses, has been paid over in due proportion to the holders of the receipts. 3267 There can be little doubt that in Massachusetts this arrangement would be held to create a trust and nothing more. ‘The certificate holders . . . are in no way associated together nor is there any pro- vision in the [instrument] for any meeting to be held by them. The only act which (under the [declaration of] trust) they can do is to consent to an alteration ... of the trust’ and to the other matters that we have INC. 436 TAX mentioned. They are confined to giving or withholding assent, and the giving or withholding it ‘is not to be had in a meeting but is to be given by them individually’. ‘The sole right of the cestui que trust is to have the property administered in their interest by the trustees, who are the masters, to receive income while the trust lasts, and their share of the corpus when the trust comes to an end’. Williams v. Milton^ 215 Mass. 1, 10, 11; ihid, 8. The question is whether a different view is required by the terms of the present act. As by D. above referred to trustees and associations acting in a fiduciary capacity have the exemption that individual stockholders have from taxation upon dividends of a corporation that itself pays an income tax, and as the plaintiffs undeniably are trustees, if they are to be subjected to a double liability the language of the statute must make the intention clear. Gould V. Gould, 245 U. S. 151, 153 [Tf2732]. United States v. Isham, 17 Wall. 496, 504. 3268 The requirement of G. (a) is that the normal tax thereinbefore imposed upon individuals shall be paid upon the entire net income accruing from all sofirces during the preceding year “to every corporation, joint-stock company or association, and every insurance company, organized in the United States, no matter how created or organized, not including partnerhips.” The trust that has been described would not fall under any familiar conception of a joint-stock association, whether formed under a statute or not. Smith v. Anderson, 15 Ch. D. 247, 273, 274, 277, 282. Eliot v. Freeman, 220 U. S. 178, 186. If we assume that the words ‘no matter how created or organized’ apply to ‘association’ and not only to ‘insurance com- pany’, still it would be a wide departure from normal usage to call the bene- ficiaries here a joint-stock association when they are admitted not to be partners in any sense, and wTen they have no joint action or interest and no control over the fund. On the other hand the trustees by themselves cannot be a joint-stock association within the meaning of the act unless all trustees with discretionary powers are such, and the special provision for trustees in D. is to be made meaningless. We perceive no ground for grouping the two — beneficiaries and trustees — together, in order to turn them into an association,, by uniting their contrasted functions and powers, although they are in no proper sense associated. It seems to be an unnatural perversion of a well- known institution of the law. 3269 We do not see either that the result is affected by any technical analysis of the individual receipt holder’s rights in the income received by the trustees. The description most in accord with what has been the prac- tice would be that, as the receipts declare, the holders, until distribution of the capital, were entitled to the income of the fund subject to an unexercised power in the trustees in their reasonable discretion to divert it to the improve- ment of the capital. But even if it were said that the receipt holders were not entitled to the income as such until they got it, we do not discern how that would turn them into a joint-stock company. Moreover the receipt holders did get it and the question is what portion it was the duty of the trus- tees to withhold. 32 70 We presume that the taxation of corporations and joint-stock com- panies upon dividends of corporations that themselves pay the income tax was for the purpose of discouraging combinations of the kind now in disfavor, by which a corporation holds controlling interests in other corporations which in their turn may control others, and so on, and in this way con'centrates a power that is disapproved. There is nothing of that sort here. Upon the whole case we are of opinion that the statute fails to show a clear intent to subject the dividends on the Massachusetts corpo- ration’s stock to the extra tax imposed by G. (a). INC. 437 TAX 3271 Our view upon the main question opens a second one upon which the Circuit Court of Appeals did not have to pass. The District Court while it found for the plaintiffs, ruled that the defendant was entitled to retain out of the sum received by him the amount of the tax that they should have paid as trustees. To this the plaintiffs took a cross writ of error to the Circuit Court of Appeals. There can be no question that although the plaintiffs escape the larger liability, there was probable cause for the defend- ant’s act. The Commissioner of Internal Revenue rejected the plaintiff’s claim, and the statute does not leave the matter clear. The recovery there- fore will be from the United States. Rev. Sts. §989. The plaintiffs, as they themselves alleged in their claim, were the persons taxed, whether they were called an association or trustees. They were taxed too much. If the United States retains from the amount received by it the amount that it .should have received, it cannot recover that sum in a subsequent suit. J udgment of the Circuit Court of Appeals reversed. Judgment of the District Cotirt Affirmed. (T. D. 2810.) 3272 Extension of time in which taxpayers living or temporarily residing 1507 in the Territory of Alaska may, pursuant to the requirements of the 3026 Revenue Act of 1918, file returns of income for the year 1918 with the Collector of Internal Revenue for their respective districts. — Because of the fact that it will be impossible to put into the hands of tax- payers residing or located in the Territory of Alaska the blank forms and instructions prescribed by this Department for the use of taxpayers in making returns pursuant to the new Revenue Act, in time for such returns to be filed on or before the due date — March 15, 1919 — an extension of time to June 15, 1919, is hereby granted to all taxpayers living or residing temporarily in the Territory of Alaska. This extension shall not be construed as extending the payment of the second installment due June 15, 1919, and subsequent installments, therefore two installments will be due June 15, 1919. (T. D. 2810, signed by Commissioner Daniel C. Roper, and dated March 21, 1919.) (T. D. 2811.) 3273 Preliminary edition of Regulations 45 amended (1) by the addition of 3259 a new Article numbered 307, concerning the allowance of credit for a personal exemption and for dependents to a non-resident alien individual, and (2) by the addition of a new Article numbered 316, concerning the allowance of credit to non-resident alien employes. — The preliminary edition of Regulations 45 is hereby amended by the addition of two new Articles, Nos. 307 and 316, respectively, and reading as follows: 3274 Article 307, Credit for a personal exemption and for dependents in 537 case of nonresident alien individual. — (1) The follov.dng is an incom- 2972 plete list of countries which either impose no income tax or in imposing an income tax allow the similar credit required by the Statute: Argentina; Brazil; Canada; Cuba; France; Italy; Mexico; Union of South Africa. (2) The following is an incomplete list of countries which in imposing an income tax do not allow the similar credit required by the Statute: Aus- tralia; Great Britain and Ireland; Japan; New Zealand. A nonresident alien individual who is a citizen or subject of any country on the first list is entitled 438 INC. TAX 3 - 27 - 19 . for the purpose of the normal tax to such credit for a personal exemption and for dependents as his family status may warrant. (See Articles 302-305)* [1l 2969-2972].) If he is a citizen or subject of any country on the second list he is not entitled to any such credit. If he is a citizen or subject of a country which is on' neither list, then to secure credit for a personal exemption or for dependents or both he must prove to the satisfaction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the similar credit required by the Statute. (See Article 306, [There is no such, yet.]) 3275 Article 316. Allowance of credits to nonresident alien employee.— 54] A nonresident alien employee, provided he is entitled under Section 2977 216 of the Statute to credit for a personal exemption or for dependents or both (see Articles 301-307, particularly the list of countries in Article 307, [^3274]), may claim the benefit of such credit by filing with his employer Form 1115, duly filled out and executed under oath. On the filing of such a claim the employer shall examine it. If, on such examination, it appears that the claim is in due form, that it contains no statement which, to the knowledge of the employer, is untrue, and that such employee, on the face of the claim, is entitled to credit, and that such credit has not yet been exhausted, such employer need not, until such credit be in fact exhausted, withhold any tax from payments of salary or wages made to such employee. Every employer with whom affidavits of claim on Form 1115 are filed by employees shall preserve such affidavits until the following calendar year, and shall then file them, attached to his annual withholding return (see Article 367, [^3002]) on Form 1042 (revised), with the Collector, on or before March 1st. In case, however, when the following calendar year arrives, such employer has no withholding to return, he shall forward ail such affidavits of claim, so filed with him by employees, directly with the Commissioner (Sorting division), with a letter of transmittal, on or before March 1. In all other cases benefit of the credits allowed against net income for the purpose of the normal tax may not be received by a nonresident alien by filing a claim with the withholding agent, but only by claiming them upon filing a return of income as prescribed in Article 403 [^3015]. (T. D. 2811, signed by Commissioner Daniel C. Roper, and dated March 22, 1919.) 327 6 Substantial Loss Because of Material Reduction of Value of Inventory II 1-9 for taxable year 1918. — Referring to Subsection 14 of Section 234, 2215 new Revenue Act. Will loss resulting from sale consist of inventory 2963 value at close of taxable year, plus selling expenses, less selling price.^ Or will it consist only of difference between inventory value and selling price Will loss resulting from fall in market value of goods still on hand consist of difference between inventory value at close of taxable year and market value at time of filing claim. (Answer.) Your telegram, February 22. Losses deductible under Section 234 consist of decrease in value of goods inventoried as evidenced by sale or otherwise and do not include selling expenses deductible during taxable year in which sale is made. Loss due to decline in market value of goods on hand is difference between inventory v«alue at end of taxable year and market value at time of filing claim. (Tele- gram to the Department from E. G. Shorrock & Co., Seattle, Washington,, and the reply thereto signed by Commissioner Daniel C. Roper, and dated March 3, 1919.) INC. 439 TAX 3277 Manner of Determining Amount of Exempt Interest From Liberty '975 Bond Holdings. — Referring K (b) Form 1040, client has $30,000 2869 Table 13 (d), column 6, and still owns them; also $100,000 (b) column 6, made up $50,000 Second converted into Thirds from which $2,062.50 interest was received and $50,000 Thirds from which $744.90 interest was received. Please wire me collect, Pasadena, Central Building, if allowed exemption of $50,000 can be claimed against the $50,000 Second Liberty converted into Thirds or whether only $5,000 can be claimed against Second Liberty converted into Thirds and remaining $45,000 claimed against balance of $95,000 of the two issues. If latter is the case would taxable interest be represented by fifty ninety-fifths of total interest received from the two issues less interest on $5,000 Second Liberty converted into Thirds. (Answer.) Your telegram March 7. Exemption may be claimed on interest received from $50,000 principal of Second loan bonds converted into Thirds. (Telegram from Frederick J. Winston, Pasadena, Cal., and the reply there- to signed by Commissioner Daniel C. Roper, and dated March 12, 1919.) 3278 Manner of Determining Amount of Exempt Interest From Liberty 975 Bond Holdings. — Receipt is acknowledged of your letter of March 1, 2869 1919, requesting information as to the exemption which may be 3277 claimed by an individual against interest received on Liberty Bonds held under the following conditions: $100,000 1st Liberty Loan 33^% Bonds, converted into 43^% Bonds issued May 9, 1918, upon which the individual re- ceived $2,125.00 $100,000 3rd Liberty Loan 434% Bonds, issued May 9, 1918, upon which he received 2,125.00 $30,000 4th Liberty Loan 434% Bonds, upon which he re- ceived no interest 3279 In reply you are advised that an individual is exempt from normal income tax upon all interest received on Liberty Loan Bonds. If the individual in question held at the date of filing his return for 1918 the $30,000 4th Liberty Loan 434% Bonds originally subscribed for by him, he will be entitled to exemption from surtax upon the interest received on one and one-half (l34) times this amount, or $45,000, which may be applied against his holdings of First Liberty Loan 334% Bonds converted into 434 % Bonds, and the Third Liberty Loan 434% Bonds. In addition to this he will be allowed exemption from tax upon $5,000 Liberty Loan Bonds, which is provided for in If 7 of the Second Liberty Loan Act, making a total exemption from tax of the interest received upon $50,000 of the $200,000 Bonds of the First and Third series above mentioned. 3280 The taxpayer will, therefore, be subject to surtax upon $3,187.50, the interest received on $150,000 worth of his First Liberty Loan 334 % Bonds converted into 434% Bonds issued May 9, 1918, and his Third Liberty Loan 434% Bonds issued on the same date. (Letter to The Corpo- ration Trust Company, signed by Commissioner Daniel C. Roper, and dated March 20, 1919.) (T. D. 2812.) 3281 Correction in Form 1120 . — Attention is directed to an error in the title of Schedule K, Form 1120, “Corporation Income Profits Tax Return” (Supplementary Page 41). The title of this schedule reads “Changes in invested capital from end of pre-war period to beginning of taxable year not shown in Schedule A.” It should read “Changes in invested capital from end of pre-war period to beginning of taxable year not shown in Schedule D.” (T. D. 2812, signed by Commissioner Daniel C. Roper, and dated March 22, 1919.) INC. 440 TAX 3282 Old ownership certificates acceptable until May 1 or Tune 1, 1919. 650 — Department will accept all ownership certificates on old form 2999 already filed by ov/ners of bonds covering interest on bonds domestic 3000 corporation or foreign items. If not filed old certificates will be , 3060 accepted from bondholders within continental limits of the United States until May 1, 1919, ^nd from bondholders outside the United States until June 1, 1919. (Telegram to Chas. H. Hubbell, First National Bank, Cleveland, Ohio, signed by Commissioner Daniel C. Roper, and dated March 28, 1919.) 3283 Releasing the two per cent, tax withheld against nonresident foreign 3003 corporations on dividends. — Receipt is acknowledged of your letter dated March 11, 1919, requesting information in regard to releasing the 2% tax withheld on account of dividends paid by you to nonresident alien corporations during the year 1918. Ifin reply you are advised that you should release the amount withheld, and pay same to the respective nonresident alien corporations from whom it was withheld, and send a statement of the individual amounts released to the Commissioner of Internal Revenue, Sorting Division, Washington, D. C. (Letter to Bonbright & Company, New York, N. Y., signed by J. H. Callan, Assistant to the Com- missioner, and dated March 24, 1919.) 3284 Manner of determining amount of exempt interest from Liberty 975 Bond holdings. — Referring to our letter March 9 and your tele- 2869 graphic reply dated March 15, also to Instructions K (b) at bottom 3278 of page 2, Form 1040, particularly to that portion of paragraph 2 reading “Periods during which your holdings of that class of obliga- tions remained unchanged.” Are we to understand that taxpayers are deemed to have owned bonds of various classes during the periods covered by coupons clipped from such classes of bonds. ^ Example. Taxpayer bought First in 1917 and has bought no bonds since. On May 15, 1918, he converted his dj^s into First 4s. In this case are we to understand that so far as taxation is concerned the taxpayer ov/ned dj^s until December 15, 1917, and 4s thereafter.^ Are we to understand that from January 1 until December dl was the period in 1918 during which holdings of 4% bonds remained unchanged.^ Please wire reply. (Answer.) Answering your telegram March 17. Individual who on May 15, 1918, converted First Liberty d3^% Bonds into First Liberty 4s held First Liberty 4s for entire year 1918 for purposes of income tax. Any amount paid at time of con- version for adjustment of interest to be subtracted from, amount received at first interest payment after conversion and only the difference between amount received and amount paid to be included in return of taxpayer. (Telegram from Chas. H. Hubbell, First National Bank, Cleveland, Ohio, and the answer thereto, signed by Commissioner Daniel C. Roper, and dated March 25, 1919.) 3285 The 10% Undistributed Profits Tax, Being Considered an Income 2037 Tax, Is Not Deductible. — Replying to your communication of March 2897 14, 1919, you arc informed that the 10% tax which was imposed on corporations’ undistributed net income by Section 10(b) of the Revenue Act of September 8, 1916, as amended by the Revenue Act of October 3, 1917, is not an allowable deduction from the gross income of a corporation shown on an income tax return. ' ' (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated April 1, 1919.) INC. 441 TAX (T. D.[2815.) 3286 Returns of Income By or For Nonresident Alien Individuals. — 538 Nonresident alien individuals or their authorized agents should 543 use form 1040 (revised) or 1040 A (revised) in making returns of 1435 income derived from sources within the United States, regardless 3015 of amount, unless the tax on such income has been fully paid at 3168 the source. If a nonresident alien individual is not liable for any 3258 tax which has been withheld at the source, no refund of such tax will be permitted unless such a return is filed and a statement is at- tached thereto indicating the amounts of ta-x withheld and the names and post ofiice addresses of all withholding agents. Unless a nonresident alien individual shall render a return of income, the t^ix will be collected on the basis of his gross income (not his net income) from sources within the United States. 3287 In filling out form 1040 (revised) or form 1040 A (revised) the income reported in each case should be the income from sources within the United States, as defined in article 91 [1i2876] of Regulations 45, and the deductions taken should be those allowed under article 271 [^2964] of the Regulations. In items 28 and 33 of form 1040 (revised) and in items O and P of form»1040 A (revised) the tax must be computed at 12 per cent instead of 6 per cent. No credit may be taken for item 40 in form 1040 (revised). 3288 A nonresident alien individual, similarly to a citizen or resident, 3259 is entitled for the purpose of the normal tax to credit dividends 3273 from domestic or resident foreign corporations, interest on obli- gations of the United States, a personal exemption, and $200 for each dependent, except that if he is a citizen or subject of a country which imposes an income tax a personal exemption or credit for dependents is allowed him “only if such country allows a similar credit to citizens of the United States not residing in such country.” “If such country allows a similar credit” means if such country in imposing its income tax allows a personal exemption or a credit for dependents, as the case may be, and allows it with- out discrimination to citizens of the United States not residing in such country. To satisfy the requirement of a similar credit it is not necessary that the personal exemption or credit for dependents, as the case may be, should be the satae as that allowed by the United States statute. For countries that allow and do not allow similar credits see T. D. 2811 of March 22, 1919 [113273]. 3289 See generally Title II of the Revenue Act of 1918 and Regulations 45, and particularly articles 2, 91, 92, 271, 305, 311-315, 361-372, 403, 443, 1121, 1131 and 1132. [See blue sheet facing page 300.] (T. D. 2815, signed by Commissioner Daniel C. Roper, and dated April 2, 1919.) (T. D. 2816.) 3290 A Certain Massachusetts Trlist Held not to be an Association under 3264 the Act of Oct. 3, 1913. — -The appended decision of the United States Supreme Court in the case of Alvah Crocker et al., Trustees, v. John F. Malley, Collector of Internal Revenue [for the decision in full, see 1[3264], is published for the information of internal revenue officers and others concerned. (T. D. 2816, signed by Commissioner Daniel C. Roper, and dated April 2, 1919.) INC. 442 TAX i- 18 -id. 329 1 Substantial Loss Because of Material Reduction of Value of Inventoiy 1119 for Taxable Year 1918. — Loss in inventory see Article 261, Regulations 2215 45. Regulation states that after one claim has been allowed no 2963 further claim can be considered. Does this mean that if after claim is made for loss on certain lines of goods losses should be sustained on other lines of goods no claim in respect of those other lines will be con- sidered.? In other words must the first claim cover all loss on all the inven- tory.? Kindly wire. (Answer.) Your telegram April 1. Corporations may file claim for abatement based on revaluation of inventories at time of filing return or any time thereafter during 1919. This does not preclude corporation from filing amended claim during 1919, but after one claim has been allowed no further claim may be made. If any part of the claim is disallowed, the remainder of tax shall on notice and demand be paid by the taxpayer to the Collector, with interest at the rate of one percentum per month from the time the tax would have been due had no such claim been filed. (Telegram from E. G. Shorrock & Co., Seattle, Washington, and the reply thereto signed by Commissioner Daniel C. Roper, and dated April 3, 1919.) 3292 Status of Undistributed Profits, Unduly Accumulated, if Invested 746 in United States Bonds. — In reply to your letter of March 20, 1919, 2995 you are advised that any corporation which permits its gains and .profits to accumulate for the purpose of preventing the imposition of the surtax upon its stockholders and members will be subject to the provisions of Section 220, of the Revenue Act of 1918, regardless of whether or not such gains and profits are invested by the corporation in obligations of the United States. (Letter to The Corporation Trust Com- pany, signed by Commissioner Daniel C. Roper, and dated April 9, 1919.) 3293 Interrogatories on Ownership Certificates to be Answered Fully. — 2999 All information called for on ownership certificates must be supplied. 669 Debtor corporation or its authorized agent will be held responsible for proper execution of certificates but not as to misstatements by bond owners. Payment of bond interest should be refused unless data is complete. Information necessary for efficient administration of Revenue Act. (Telegram to the Southern Pacific Company, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated April 7, 1919.) 3294 Consolidated Returns: Public Service Corporations not Excepted. — 1405 Reply your wire April second. Requirements Treasury Decision 1418 2662 that public service corporations subject to regulation by Public 3233 Service Commission should not make consolidated return not applic- able under Revenue Act of 1918. (Telegram to Miller, Mack & Fairchild, Milwaukee, Wis., signed by Commissioner Daniel C. Roper, dated April 9, 1919.) 3296 Consolidated Returns not Permitted: Stock of Two Corporations 1411 Owned “by the Same Interests,’^ the Percentage of Holdings in the 3235 Two Companies Differing. — [An example of a ruling in a specific case.] Receipt Is acknowledged of your letter dated March 31, 1919, to which you attach a letter from . 1[It appears that there are two corporations, one owning and operating properties In the Hawaiian Islands and the other owning and leasing various pieces of property in Cali- INC. 443 TAX fornia. The stock of the California corporation is held by the members of one family, four male members of the family each owning five-twenty- fourths" and a sister one-sixth of the entire stock. The Hawaiian corporation is held by the same family principally, with the exception that one-sixth of the stock is held by each of the four male members afore-m.entioned, one-sixth j by the sister afore-mentioned and one-sixth by the husband of a deceased sister to the other stockholders. IfThe affairs and operations of the two corporations have in the past been, and are now being, actively conducted bv and in the control of the male m.embers of the family. The two corpora- tions, it is stated, are in purpose and effect only one enterprise. ^In accord- ance with regulations No. 45, v/here substantially all of the stock of two or more corporations is held by the same interests, such holdings must be in ^ substantially the same proportions in order to require a consolidated return. It is therefore held that these corporations should file separate returns. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated April 11, 1919.) 3296 Interest on Food Administration Grain Corporation Notes. — Interest 975 on Food Administration Grain Corporation notes is not exempt from 2868 incomm and excess profits taxes. (Telegram to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated April 13, 1919.) 3297 Exempt Status of Interest on Victory Liberty Loan Notes. — The 3169 Victory Liberty Loan, which will be offered for popular subscription on April 21, will take the form of 4^% three/four year Convertible Gold Notes of the United States, exempt from State and local taxes, except estate and inheritance taxes, and from normal Federal income taxes [^3173]. The Notes will be convertible, at the option of the holder, throughout their life into 3^% three/four vear Convertible Gold Notes of the United States exempt from all Federal, State and local taxes, except estate and inheritance taxes [113172]. In like manner the 3%% Notes will be convertible into the Notes. 3298 The amount of the issue will be ^4,500,000,000, which, with the deferred installments of incom.e and’profits taxes payable, in respect to last year’s income and profits, during the period covered by the maturity dates of Terasury certificates of indebtedness now outstanding, will fully provide for the retirem_ent of such certificates. The issue will be limited to $4,500,000,000 except as it mmy be necessary to increase or decrease the amount to facilitate allotment. Oversubscripitons will be rejected and allotments made on a graduated scale similar in its general plan to that adopted in connection with the First Liberty Loan. Allotment will be made in full on subscriptions up to and including $10,000. 3299 The Notes of both series will be dated and bear interest from IMay 20, 1919, and will mature on May 20, 1923. interest will be payable on December 15, 1919, and thereafter sema-annually on June 15 and December 15, and at miaturity. All or any of the Notes may be redeemed before maturity at the option of the United States on June 15 or December 15, 1922, at par and accrued interest. (Official statement by Secretary of the Treasury Carter Glass, April 14, 1919.) INC. 444 TAX 4 - 21 - 19 . (It; Mim. 2101.) ' ) 3300 Extension of Time for Completing Corporate Returns and for Filing 3158 Certain Returns not the Basis for Assessment of Tax. — In view of 3165 the short time between the date on which forms were available and 3167 the due date (March 15), of calendar year returns required under the Revenue Act of 1918, notice was given through the public press and other- • wise that tentative returns (Forms 103 1-T and 1040-T), accompanied by a first installment of one-fourth of the estimated tax due would be accepted on l) that date, and that in such cases forty-five days would be given in which to file complete returns, but that interest at the rate of one-half of 1% per month upon the amounts by which such installment payments fall short of the correct amounts would be collected. 3301 In the case of corporations which filed Form 103 1-T on or before March 15, a further extension, where needed, to June 15, 1919, in which to file complete returns on Form 1120 is hereby granted, but all such H corporations will be required to pay on or before June 15 a sum sufficient, with the amiount paid on March 15, to equal one-half the tax due as shown bv the return on Form 1120, together with interest at the rate of one-half of 1% per mionth on any defficiency in the first installment. 3302 It is not deemed necessary to grant an extension of time beyond the forty-five days originally granted for the completion of personal returns, except on special request therefor for sufficient reasons given, but the above ruling as to interest on deficient installments applies to them. 3303 An extension of time in which to file returns of corporations making returns for a fiscal year ended either on January 31 or February . 28, 1919, will on request be granted to June 15, 1919, but such extension I shall not operate to extend the due date of any installment of tax after the first. Interest at the rate of one-half of 1% per month will be collected from the time the first installment would have been payable if the extension had not been requested. 3304 The time for filing returns of information (Forms 1096 and 1099) fiduciary returns (Form 1041), withholding returns (Form 1042, accompanied by Form 1098 and Form 1013), returns of partnerships and personal service corporations required to file returns on a calendar year basis, and all other returns required under the income tax and profits tax provisions of the law which are not the basis for the assessment of the tax, ^ is also extended to June 15, 1919. (It.: Mim. 2101, signed by Commissioner f Daniel C. Roper, and dated April 14, 1919.) 3305 Extension of Time to June 15 , 1919 , Applies Equally to Certain 3167 Fiscal Year Corporations. — Replying your telegram April 15, general 3300 extension to June 15 applies to corporations with fiscal years ended in 1918 which filed tentative return on or before March 15 and need additional time for [completion of return. (Telegram to Kennedy M. Thompson, New York, N. Y., signed by Acting Commissioner J. FI. Callan, and dated April 18, 1919.) INC. 445 TAX 3306 Consolidated Returns: Public Service Corporations, Including 1418 Railroads, Not Excepted. — Receipt is acknowledged of your letter, 3233 dated April 8, 1919, in which you state: 3294 (.. “In connection with the Revenue Act of 1917, Title II, the Bureau of Internal Revenue made provision for consolidated re- turns for War Excess Profits Tax purposes. “Treasury Decision 2662 [^[1418], issued March 6, 1918, provided in that railroads, gas, electric, water and other public service corporations, when operated independently and not physically connected or merged — particularly when situated in different jurisdictions and subject to regulation by Public Service Commission — will not be required or permitted, without special permission obtained in advance, to make a consolidated return. “The Revenue Act of 1918, Section 240, makes statutory provision for consolidated returns, both for Income and for War Profits and Excess Profits Tax purposes, setting forth quite definitely just what shall be considered to be affiliated corporations. The amplifying Regulations of the Department as contained in Regulations No. 45, Part II-A, contain nothing indicating that the rule relating to public service cor- porations laid down by the Department in connection with the Revenue Act of 1917 will be held to apply to the Revenue Act of 1918, Section 240. “We shall appreciate word from the Department as to whether or not public service corporations which otherwise would be deemed to be affiliated corporations are to be taken out of that class because of the fact that they are public service corporations and otherwise meet the conditions outlined in Treasury Decision 2662.” 3307 In reply you are advised that subdivision (b) [^1420] of Treasury Decision 2662 issued March 6, 1918, in connection with the Revenue Act of October 3, 1917, does not apply to the Revenue Act of 1918. In other words, public service corporations which otherwise would be deemed to be affiliated corporations are not to be taken out of that class because of the fact that they are public service corporations and otherwise meet the conditions outlined in Treasury Decision 2662. (Letter to The Corporation Trust Company, signed by Acting Commissioner J. H. Callan, and dated April 17, 1919.) 3308 Extension to June 15 is a Blanket Extension. — Comment: To 3300 remove any possible doubt we have requested and have received 3305 official word that a further extension of time to June 15, 1919, for filing complete return on Form 1120, is granted to any corporation, calendar or 1918 fiscal, that filed a tentative return (Form 1031T) on or before March 15, 1919, and that such corporation need not make application for such extension, the extension being automatic and universal. The Government naturally expects that corporations will file their returns as soon as conditions warrant. — The Corporation Trust Company, April 21, 1919. INC. 446 TAX 4 - 30 - 19 . 3309 Claims for Refund may be Filed with the Commissioner Direct. — 2511- I have been advised by the Claim Department of your office that 2526 Claims for Refund should be sent direct to Washington provided 3048 there is attached thereto the actual receipt of the collector. On the other hand I note that Form 46, Revised March, 1918, has printed on the face of it: “Important” “This claim should be forwarded to the Collector of Internal Revenue to whom the tax was paid and must be accompanied by Collector’s receipt therefor.” 3310 (Answer.) Replying to your letter of March 22, 1919, you are advised that claims for refund may be forwarded direct to the Com- missioner of Internal Revenue, Claims Division, Income Tax. (Letter from H. C. Hopson, New York, N. Y., and the reply thereto, signed by J. H. Callan, Assistant to the Commissioner, and dated March 29, 1919.) 3311 Interest on Victory Liberty Loan 4%% Notes Exempt from Income 3169 Tax on Corporations. — [See 7th word, 5th line of ^3297.] In answer 3297 to inquiries the Treasury Department to-day stated that the interest on the per cent notes of the Victory Liberty Loan is exempt from the income tax on corporations, as well as from the normal Federal income tax on individuals. The 4^^ per cent, notes are exempt, under the terms of the Department Circular offering the Victory Liberty Loan for subscription, “both as to principal and interest, from all taxation now or liereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess- profits and v/ar-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations.” (Official announcement by the Treasury Department, April 23, 1919.) 3312 Extension of Time for Filing Returns by Corporations whose Busi- 1533 noss is Transacted and v/hose Books are Kept, Abroad. — Replying 3027 your telegram April 14, advise that Article 443 [now Art. 4-45] Regu- lations 45, relative extensions, applicable in case of domestic cor- poration whose records kept and business transacted abroad. (Telegram to H. C. Hopson, New York, N. Y., signed by ikcting Commissioner J. H. Callan, and dated 7\pril 19, 1919.) 3313 Compensation as Special Counsel, Received from a Municipality, 1013 is not Exempt Income. — A counsellor at law is engaged by a munici- 2875b pality as special counsel, to act in connection with the regular City Attorney in handling a certain piece of litigation. Is he regarded as an officer or employee of a political subdivision of a state, so that his compensation for his services is not taxable under Article 71 of Regulations 45, sentence 2 [now Art. 85].^ (Answer.) In reply to the first question, you are advised that under the ruling of this office, the compensation paid by a State to “special counsel,” such as described above, is taxable income, and not exempt from income tax. (Part of letter from Collins & Corbin, Jersey City, N. J., and the answer thereto, signed by J. H. Callan, Assistant to the Commissioner, and dated April 15, 1919.) IMC. 447 TAX 3314 Interest, on Accounts Current and on Deposits, Accruing to Non- 553 resident Alien Individuals and Foreign Partnerships: Withholding 598 Liability of Debtors. — This office acknowledges receipt of your letter 2996a dated March 17, 1919, in which you request information as to whether commission merchants, private bankers, and others are required under Section 221 (a) of the Revenue Act of 1918, to withhold any part of interest accruing on mercantile accounts current, or upon moneys held on deposit, to nonresident alien individuals or foreign partnerships, if the prin- cipal amounts so due, as well as the interest, are at all times subject to call, and payable on demand. Ifin reply you are advised that interest upon deposits or accounts current, accruing on the books of citizens or residents of the United States, domestic pairtnerships or corporations is subject to the deduction of the tax at the source, only when the recipient is a nonresident alien individual. The amount to be deducted is 8% of the interest credited on the books of the debtor, at the time of crediting same. Such tax as is withheld should be retained by the withholding agent until the end of the calendar year and remitted to the Collector of Internal Revenue, accom- panied by a return on Form 1042 in the usual manner. (Letter to Hughes, Rounds, Schurman & Dwight, New York, N. Y., signed by J. H. Callan, Assistant to the Commissioner, and dated April 22, 1919.) 3315 Consolidated Eetums; Two Domestic Corporations, the one owning 1410 a Foreign Corporation, and the other Owned by that Foreign Cor- 3235 poration. — Receipt is acknowledged of your letter dated April 11, 3238 1919, in v/hich you state; “A client of mine, a New Jersey Cor- poration owns all of the outstanding stock in a foreign corporation, which in turn owns all of the outstanding stock in a New York Corporation. Although under Article 636 [^3238] of Regulations No. 45 relating to the Income Tax a domestic corporation is not required or permitted to file a consolidated return with a foreign corporation, it seems to me that the New Jersey and New York Corporations above-mentioned are affiliated as that term is defined in Article 633 [^3235], and that, on that account the New Jersey Corporation should file a consolidated return for both, under the pro- visions of Section 240 of the Revenue Act. ^Kindly advise me at your earliest convenience whether in the opinion of your office I am correct in this interpretation of the law.” In reply you are advised that in accordance with Section 240 of the Revenue Act of 1918 it wdll be necessary for the New Jersey Corporation and the New York Corporation above-mentioned to file a consolidated return, excluding the foreign corporation. (Letter to a subscriber, signed by Acting Deputy Commissioner P. S. Talbert, and dated April 23, 1919.) 3316 Old Ownership Certificates Acceptable Covering Interest Payments 3282 due May 1, 1919. — Replying your telephone inquiry to-day old forms ownership certificates filed with respect to interest payments, due May 1, 1919, will be accepted by this office. (Telegram to M. F. Frey, Guaranty Trust Company, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated April 29, 1919.) 3317 Installment Sales: Default and Inability to Repossess. — Your 2849 telegram April 23. When vendee defaults in installment payments and vendor is unable to recover personal property sold, the vendor should report as loss on the return for that year the difference between the total amount actually received and the cost plus amounts returned as profits from sale during former years. (Telegram to Greenbaum, Wolff & Ernst, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated April 26, 1919.) INC. 448 TAX 3318 Withholding at the Source on Bond Interest, Tax-Free and Other- wise. — Receipt is acknowledged of your letter dated March 18, 1919, containing several inquiries which are repeated and answered in the order set forth in your letter: ♦ ♦if:***** 3319 “At what rate is the tax to-be actually deducted from coupons paid 553 to non-resident aliens, nonresident corporations, and nonresident 572 partnerships if the bonds are not tax-free?” (Answer.) Such 2996 interest is subject to withholding at the rate of 8% in the case of non- resident alien individuals and 10% in the case of non-resident alien corporations. No tax is required to be withheld from interest when the bonds in question are owned by a non-resident alien partnership. 3320 “At what rate is the tax to be actually deducted from coupons paid 608 to non-resident aliens, nonresident corporations, and nonresident 609 partnerships if the bonds are tax-free?” (Answer.) The normal 610 tax of 2% is required to be withheld in such cases. 2996 3321 “At what rate is the tax to be actually deducted from coupons when 602 not accompanied by an ownership certificate, and the owner is 612 unknown?” (Answer.) When coupons are presented for col- 2996 lection unaccompanied by an ownership certificate, the normal tax 300 la of 2% is required to be withheld if the bonds contain a tax-free covenant clause and the normal tax of 8% if the bonds do not contain such clause. (Part of letter to Mississippi Valley Trust Company, St. Louis, Mo., signed by Acting Commissioner J. H. Callan, and dated April 18, 1919.) 3322 Taxes, on Profits on Sale of Property, Paid by Vendee for the Vendor. 2841 — A vendee of a business agrees that in addition to the purchase price of the business he will pay the income and excess profit taxes of the vendor arising from the sale of said business. Query. • Does the pay- ment of the said taxes by the vendee constitute income to the vendor which the vendor would have to report on his income tax statement and pay a tax thereon? As extremely urgent please reply by telegram as promptly as possible. (Answer.) Your telegram April 30. Income, excess profits and war profits taxes paid by vendee for vendor on profits from sale of prop- erty to vendee constitute additional taxable income to vendor. (Telegram of Inquiry from The Corporation Trust Company, and the reply thereto signed by Commissioner Daniel C. Roper, and dated May 2, 1919.) 3323 Continued Use of Old Ownership Certificates With Respect to Interest 3282 Due on or Prior to September 1 and October 1, 1919. — Pending 3316 modification of ownership certificates revised February, 1919, old forms of ownership certificates may be accepted with respect to in- terest due on and prior to September 1, 1919, when received from contin- ental United States and may be accepted with respect to Interest due on and prior to October 1, 1919, when received from abroad. (Official an- nouncement from the Bureau of Internal Revenue, May 3, 1919.) INC. 449 TAX 3324 Credits to Nonresident Aliens, Citizens of Countries which in Impos- 537 ing Income Taxes Levy no Income Taxes on United States Citizens 2962a not Residing Therein, — Reference is made to your letter of March 3274 22, 1919, in which you refer to Treasury Decision 2811 [1f3273] and ask to be advised concerning the application of the ruling contained therein in cases where an individual is a citzien or subject of a country which imposes an income tax but which tax does not apply to nonresident aliens. ^In reply you are advised that a citizen or subject of a country which imposes an income tax but does not levy a tax on income derived from such country by citizens of the United States not residing therein is permitted to claim the credits provided for in paragraphs (c) and (d), Section 216 of the Revenue Act of 1918 in preparing a return of income derived from sources within the United States. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated May 1, 1919.) (T. D. 2836.) 3326 Tax Exemptions of Liberty Bonds and Victory Notes. - The appended 965 circular, issued under date of April 23, 1919, with reference to the 2868 tax exemptions of Liberty Bonds and Victory Notes, is published for 3169 the information of internal-revenue officers and others concerned. 3297 (T. D. 2836, signed by Commissioner Daniel C. Roper, and dated 3311 May 7, 1919.) 3326 Tax Exemptions of Liberty Bonds and Victory Notes.— Liberty bonds and Victory notes issued undler authority of the acts of Congress approved April 24, 1917, September 24, 1917, April 4, 1918, July 9, 1918, September 24, 1918, and March 3, 1919, are entitled, respectively, to the exemptions from taxation set forth in said acts, from which the statements in this circular are summarized and to which they are subject. I. 4 per cent and 434 bonds are exempt from all Federal, State, and local taxation, except {a) estate or inheritance taxes and {b) Federal income surtaxes and profits taxes, as follows: 1. First Liberty loan converted 4 per cent bonds of 1932-1947 (first 4s). 2. First Liberty loan converted 434 per cent • bonds of 1932-1947 (first 434s, issue of May 9, 1918). 3. First Liberty loan second con- verted 434 per cent, bonds of 1932-1947 (first 434s, issue of October 24, 1918). 4. Second Liberty loan 4 per cent bonds of 1927-1942 (second 4s). 5. Second Liberty loan converted 434 per cent bonds of 1927-1942 (sec- ond 434s). 6. Third Liberty loan 434 per cent bonds of 1928 (third 434s). 7. Fourth Liberty loan 434 per cent bonds of 1933-1938 (fourth 434s). 8. Victory Liberty loan 4^4 per cent convertible gold notes of 1922- 1923 (4J4 per cent Victory notes). II. 4 per centjand 434 bonds are entitled to limited exemptions from Federal income surtaxes aad profits taxes, as follows: 450 TAX Are exempt, both as to principal and interest, from all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority ex- cept {a) estate or inheritance taxes, and {b) graduated additional income taxes, commonly known as sur- taxes, and excess-profits and war- profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or cor- porations. INC. 4 per cent and per cent Liberty bonds (but not 4J^ per cent Victory notes) ^ 't are entitled to certain limited exemptions from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations, in respect to the interest on principal amounts thereof, as follows: ^ $5,000 in the aggregate of first 4s, first (issues of May 9 and October 24, 1918) second 4s and 43^s, third 434s, fourth 4J4s, Treasury certificates, and war-savings certificates. 30,000 of first 434s (issue of October 24, 1918, only), until the expiration of two years after the termination of the war. 30,000 of fourth 434s, until the expiration of two years after the termina- tion of the war. 30.000 in the aggregate of first 4s, first 434s (issues of May 9 and October ber 24, 1918), second 4s and 434s, third 434s, and fourth 434s, as to the interest received on and after January 1, 1919, until the expiration of five years after the termination of the war. 45.000 in the aggregate of first 4s, first 434s (issue of May 9, 1918, only), second 4s and 434s, and third 434s, as to the interest received after Januarv 1, 1918, until the expiration of tv^o vears after the termin- ation of the war; this exemption conditional on original subscrip- tion to, and continued holding at the date of the tax return of two-thirds as many bonds of the fourth Liberty loan. 20.000 in the aggregate of first 4s, first 434s (issues of May 9, and October 24, 1918), second 4s and 434s, third 434s, and fourth 434s, as to the interest received on and after January 1, 1919; this exemption conditional upon original subscription to, and continued holding at the date of the tax return of one-third as many notes of the Vic- tory Liberty loan, and extending through the life of such notes of the Victory Liberty loan. 160,000 total possible exemptions from Federal income surtaxes and profits taxes, subject to conditions aboye summarized. III. 334 cent bonds and per cent notes are exempt from all Federal, State, and local taxation, except estate or inheritance taxes, as follows: 1. First Liberty loan 1 334 per cent bonds of | Are exempt, both as to principal and interest, from 1932-1947. I all taxation (except estate or inheritance taxes) 2. Victory Liberty loan !> now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority. I 3% per cent con- vertible gold notes of 1922-1923. (Circular appended to T. D. 2836.) 3327 Advisable to Make Return even though no Net Income, if Due to 1142 Deductible Losses Claimed. — Reference is made to your letter of 3013 March 10, 1919, in which you ask the following question: “An individual has had a loss determined in 1918 by the Courts that will exceed all income. In view of the fact that the income is large, and my client has always filed a report, would it be wise to file a report this year and thus dispose of the matter rather than to omit such filing and eventually have the Government take up the matter of the non-filing, etc.” Ifin reply you are advised that if this individual’s net income for 1918 was less than INC. 451 TAX the exemption to which he was entitled according to his marital status ori December 31, 1918, he is not required to file an income tax return. However, as you state he has filed a return for all previous years it would be advisable for hirn either to fill out a return showing his total income and deductions, or notify the Collector of the circumstances which precluded his rendering a return for 1918, in order that it may be determined whether the loss, which ( he has sustained, is deductible for income tax purposes. [‘||3328, below, is a part of this same letter.] 3328 Full Credit for all Allowable Deductions to be Taken in Computing 736 Net Income Subject to Surtax.— In reply to your second inquiry r 2829 you are informed that if Item J, page 2 of Form 1040 shows a net loss, the amount of same may be deducted from the total of Items K^a an4 K-b as shown on line L before bringing this item forward to line 15, page 1 of the return. (Letter to Alexander John Lindsay, New York, N. Y., signed by J. A. Callan, Assistant to the Commissioner, and dated May 6, 1919.) (1. T.— Min. 2129.) 3329 Collectors Authorized to Accept Tentative Returns Form 1031 T, 3305 v/hen Filed by Corporations having Fiscal Year ending January 31 and February 28, 1919. — A form letter has been prepared by this office for use in replying to requests of corporations for an extension of time where their fiscal year ends in 1919 for the reason that the return form has not yet been prepared. In granting this extension the corporations are ad- vised that they may file tentative returns on Form 1031 T and pay one-fourth of the estimated tax with interest on such paym^ent from the original due date to the time of filing the tentative return, and that any deficiency in the first instalment as shown by the completed return must be paid together with interest thereon from the original due date at the rate of one-half of one per centum per month at the time of filing the completed return. 3330 The filing of tentative return 1031 T automatically extends the time where needed for filing completed returns, not beyond the due date of the second instalment of the tax. The second instalment will be due five and one-half months after the close of the corporation’s fiscal year ending in 1919. (IT — Mim. 2129, signed by Commissioner Daniel C. Roper, and dated May 6, 1919.) INC 452 TAX 5 - 23 - 19 . (T. D. 2840.) 3331 Due Date for Payment of Second Installment of Income and War 2341 Profits and Excess Profits Taxes Based on Calendar Year Returns.— 3036 Taxpayers and collectors are notified that June 15, 1919, is the date 3037 named for payment of the second installment of income and war profits and excess profits taxes based on returns for the calendar year 1918, and for payment of the second installment of other taxes the first installment of which was due on March 15; but, since June 15 falls on Sun- day, such payments reaching the collector on Monday, June 16, 1919, will be accepted in full without interest or penalty. Taxpayers are urged to make payment on or before that date, and their attention is called to the fact that Section 250 (a) of the Revenue Act of 1918, specifying when tax payments are due, omits the ten-day period of grace allowed under the former law. Failure to pay the second installment on or before June 16, 1919, will necessi- tate the addition of penalties and interest, as provided by law. (T. D. 2840, signed by Commissioner Daniel C. Roper, and dated May 13, 1919.) 3332 Obligation to Render Undistributed Profits Tax Returns by Cor- 746 porations with Fiscal Years ending in 1918.— Receipt is acknow- 2995 lodged of your letter of recent date, in which you inquire whether corporations having a fiscal year ended on July 31, 1918, are required [under Sec. 10 (b). Revenue Act of 1916 as amended by Revenue Act of 1917] to file Corporation Undistributed Net Income Tax Returns (Form 1112) and how the undistributed net income to be shown in the return is to be computed. 1[In reply, you are advised that corporations having a fiscal year ended on the last day of any month subsequent to May 31, 1918, will not be required to render returns on Form 1112 for the period covered by such fiscal year. [Returns of undistributed profits were required to be made within 60 days after end of 6 months after end of taxable year. Time for making returns by corporations with fiscal years ending June 3(), 1918, would have been on or before March 1, 1919. The Revenue Act of 1918, repealing the old law, became effective February 25, 1919.] (Letter to Oppenheim, Collins and Company, New York, N. Y., signed by Acting Deputy Com- missioner P. S, Talbert, and dated May 13, 1919.) 3333 Stock Dividends Under the Act of September 8, 1916. — The Ma- 815 comber vs. Eisner case, argued in April before the Supreme Court, a motion to advance having been concurred in by the Government, was restored to the Docket by the Court on May 19, 1919, for further argu- ment. (Memorandum by The Corporation Trust Company.) (T. D. 2843). 3334 Salaries of State Officials and Salaries and Wages of Employees 2875b of a State are not Liable to Income Tax Imposed by the Revenue Act of 1918. — Section 213 (a) of the Revenue Act of 1918 provides that gross income shall include ‘‘gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid.” 3335 In accordance with an opinion of the Attorney-General, dated May 6, 1919, and based on the well-settled rule that governmental agencies of the States are not subject to taxation by the Federal Government, it is held that salaries of State officials and salaries and wages of employees of a State are not subject to the income tax imposed by the said Revenue Act of 1918. (T. D. 2843, signed by Commissioner D. C. Roper, and dated May 17, 1919.) INC. 453 TAX (T. D. 2844.) 3336 Taxpayers Residing or Traveling Abroad to pay at the Time of Filing 3027 Returns only the Installments of Tax Past Due without Interest at the Rate of One-half of One per Centum per Month and other Install- ments as they Fall Due. — The final edition of Regulations 45 is amended by changing Article 445 to read as follows: Art. 445. Extension of Time in the Case of Persons Abroad. — In view of the disturbed conditions abroad and the consequent interference with the usual channels of communication, an extension of time for filing returns of income for 1918 and subsequent years and for paying the tax is hereby granted in the case of nonresident alien individuals and nonresident foreign corporations, or their proper representatives in the United States, and of American citizens residing or traveling abroad, including persons in military or naval service on duty outside the United States, for such period as may be necessary, not exceeding ninety days after proclamation by the President of the end of the war with Germany. The installments of tax which are actually due must be paid at the time of filing the return and the other installments shall be paid as they fall due. In- all such cases an affidavit must be attached to the return, stating the causes of the delay in filing it, in order that the Commissioner may determine that the failure to file the return in time was due to a reasonable cause and not to wilful neglect and that the return was filed without any unnecessary delay. If the show- ing justifies the conclusion that the failure to file the return in time was excusable, no penalty will be imposed. This extension is granted as a matter' of general expediency to all persons abroad owing income, war profits, and excess profits taxes to the Federal Government and is not granted upon the request of any particular taxpayer. Accordingly, in the case of taxpayers who take advantage of this general extension of time for the filing of returns and the payment of tax no interest will be collected from such taxpayers, but where a request is made by a taxpayer and an extension is granted for other reason's by the Commissioner, interest will be collected at the rate of one-half of one per centum per month from the time the tax would have been due if no extension had been granted. (T. D. 2844, signed by Com- missioner Daniel. C. Roper, and dated May 17, 1919.) INC. 454 TAX (T. D. 2840.) 3 331 Due Date for Pa 3 nnent of Second Installment of Income and War 2341 Profits and Excess Profits Taxes Based on Calendar Year Returns.— 3036 Taxpayers and collectors are^notifiedThat June 15, 1919, is the date 3037 named for payment of the second installment of income and war profits and excess profits taxes based on returns for the calendar year 1918, and for payment of the second installment of other taxes the first installment of which was due on March 15; but, since June 15 falls on Sun- day, such payments reaching the^collector on Monday, June 16, 1919, will be accepted in full without interesbor penalty. Taxpayers are urged to make payment on or before that date, and their attention is called to the fact that Section 250 (a) of the Revenue Act of 1918, specifying when tax payments are due omits the ten-day period of grace allowed under theMormer law. Failure to pay the second installment on or before June 16, 1919, will necessi- tate the addition of penalties and interest, as provided by law. (T. D. 2840, signed by Commissioner Daniel C. Roper, and dated May 13, 1919.) 3332 Obligation to Render Undistributed Profits Tax Returns by Cor- 746 porations with Fiscal Years ending in 1918.— Receipt is acknow- 2995, ledged of your letter of recent date, in which you inquire whether corporations having a fiscal year ended on July 31, 1918, are required [under Sec. 10 (b). Revenue Act of 1916 as amended by Revenue Act of 1917] to file Corporation Undistributed Net Income Tax Returns (Form 1112) and how the undistributed net income to be shown in the return is to be computed. ^In reply, you are advised that corporations having a fiscal year ended on the last day of any month subsequent to May 31, 1918, will not be required to render returns on Form 1112 for the period covered by such fiscal year. [Returns of undistributed profits were required to be made within 60 days after end of 6 months after end of taxable year. Time for making returns by corporations with fiscal years ending June 30, 1918, would have been on or before March 1, 1919. The Revenue Act of 1918, repealing the old law, became effective February 25, 1919.] (Letter to Oppenheim, Collins and Company, New York, N. Y., signed by Acting Deputy Com- missioner P. S. Talbert, and dated May 13, 1919.) 3333 Stock Dividends Under the Act of September 8, 1916. — The Ma- 815 comber vs. Eisner case, argued in April before the Supreme Court, a motion to advance having been concurred in by the Government, was restored to the Docket by the Court on May 19, 1919, for further argu- ment. (Memorandum by The Corporation Trust Company.) (T. D. 2843V 3334 Salaries of State Officials and Salaries and Wiges of Employees 2875b of a State are not Liable to Income Tax Imposed by the Revenue Act of 1918. — Section 213 (a) of the Revenue Act of 1918 provides that gross income shall include “gains, profits, and income derived from salaries, wages, or compensation for personal service * * * whatever kind and in whatever form paid.” 3336 In accordance with an opinion of the Attorney-General, dated May 6, 1919, and based on the well-settled rule that governmental agencies of the States are not subject to taxation by the Federal Government, it is held that salaries of State officials and salaries and wages of employees of a State are not subject to the income tax imposed by the said Revenue Act of 1918. (T. D. 2843, sicned by Commissioner D. C. Roper, and dated May 17, 1919.) (T. D. 2844.) 3336 Taxpayers Residing or Traveling Abroad to pay at the Time of Filing 3027 Returns only the Installments of Tax Past Due without Interest at ' the Rate of One-half of One per Centum per Month and other Install- ments as they Fall Due. — The final edition of Regulations 45 is amended by changing Article 445 to read as follows: Art. 445. Extension of Time in the Case of Persons Abroad. — In view of the disturbed conditions abroad and the consequent interference with the usual channels of communication, an extension of time for filing returns of income for 1918 and subsequent years and for paying the tax is hereby granted in the case of nonresident alien individuals and nonresident foreign corporations, or their proper representatives in the United States, and of American citizens residing or traveling abroad, including persons in military or naval service on duty outside the United States, for such period as may be necessary, not exceeding ninety days after proclamation by the President of the end of the war with Germany. The installments of tax which are actually^ue must be paid at the time of filing the return and the other installments shall be paid as they fall due. In all such cases an affidavit must be attached to the return, stating the causes of the delay in filing it, in order that the Commissioner may determine that the failure to file the return in time was due to a reasonable cause and not to wilful neglect and that the return was filed without any unnecessary delay. If the show- ing justifies the conclusion that the failure to file the return in time was excusable, no penalty will be imposed. This extension is granted as a matter of general expediency to all persons abroad owing income, war profits, and excess profits taxes to the Federal Government and is not granted upon the •request of any particular taxpayer. Accordingly, in the case of taxpayers who take advantage of this general extension of time for the filing of returns ( and the payment of tax no interest will be collected from such taxpayers, but where a request is made by a taxpayer and an extension is granted for other reasons by the Commissioner, interest will be collected at the rate of one-half of one per centum per month from the time the tax w'ould have been due if no extension had been granted. (T. D. 2844, signed by Com- missioner Daniel. C. Roper, and dated May 17, 1919.) 3337 Claims on Account of Inventory Losses.— It is desired to call your 2963 attention to the fact that the telegram addressed by this office to 3291 E. G. Shorrock and Company of Seattle, Washington, which is published in your Income Tax Service [^[3291] and which was in reply to an inquiry from that company in regard to the filing of a claim for abatement as a result of the re-valuation of inventories for the year 1918 was based on the provisions of Article 261 of Preliminary Income Tax Regu- lations 45, which has since been modified by the last edition of the Regu- lations as expressed in Articles 261 to 268 thereof. (Letter to The Cor- poration Trust Company, signed by Commissioner Daniel C. Roper, and dated May 21,'T919.) 3338 On the Use of Ownership Certificates. — Receipt is acknowledged 2999 of your letter dated April 11, 1919, referring to the confusion existing 3000 in the minds of debtor corporations, paying agents and bondholders 3060 in regard to the use of ownership certificates. Forms 1000, 1001 and 1001-A, in connection with interest derived from foreign bonds. Your statement is noted that the wording on Form 1000 would seem to indicate that it may be used by nonresident alien individuals, fiduciaries or corpora- INC. 454 TAX 5 - 29-19 tions, with respect to interest on foreign bonds which do not contain a tax- free covenant clause. 3339 In reply you are advised that Form 1000, Revised February, 1919, in common with other ownership certificates issued during that month, is undergoing modification, and it is believed that the wording of the new forms will clearly show the purposes for which they are intended. 3340 Form 1000 R.evised should only be used by nonresident alien indi- viduals, fiduciaries and corporations, when the bonds are issued 'by domestic or resident corporations, whether or not the bonds contain a tax-free covenant clause. This form is also prescribed for the use of non- resident alien partnerships when the bonds issued by domestic or resident corporations contain a tax-free covenant clause. A foreign corporation not engaged in trade or business within the United States, which has a fiscal agent in the United States is not a resident corporation. Income derived by non-resident alien individuals, fiduciaries, partnerships or corporations, from bonds issued by nonresident foreign corporations or foreign govern- ments is not subject to Federal income tax and Form 1001-A has been devised as the proper form on which to report such income. 3341 Citizens or residents of the United States who do not desire to claim exemption from having tax paid at the source on income derived from bonds containing a tax-free covenant clause issued by nonresident foreign corporations or foreign governments, having a paying agent in this country, should use Form 1000 Revised, and if such individuals wish to claim exemption from having tax paid at the source. Form 1001-A should be used. When a domestic partnership is the owner of such bonds Form 1000 Revised should be executed. (Letter to The Corporation Trust Com- pany, signed by Acting Commissioner J. H. Callan, and dated May 20, 1919.) 3342 Withholding on Deposits of Nonresident Foreign Corporations.— 572 Is withholding of ten per cent required from interest on bank deposits 600 paid or credited to nonresident foreign corporations.^ Please reply 3314 collect. (Answer.) Tax should be withheld at rate of ten per cent from interest credited on and after February 25, 1919, on bank deposits of nonresident alien corporations not having office or place of busi- ness in United States. [Note that the question at 1f3314 relates to indi- viduals and partnerships solely.] (Telegram from The Equitable Trust Company of New York and the answer thereto, signed by Commissioner Daniel C. Roper and dated May 23, 1919.) 3343 Consolidated Return of Fiscal Year Parent and Affiliated 'Calen- 3240 dar Year Public Utility. — We are asking for a ruling relating to consolidated returns on the state of facts contained below, and ask for your ruling by telegram, collect. IfA corporation owns all the capital stock of another corporation. The corporation owning the capital stock makes its Income Tax Return on fiscal year basis ending Mar. 31, 1919 — the other corporation makes its Income;Tax Return on calendar year basis ending Dec. 31st. IfIt is our understanding that under Article 533 such corporations will be deemed to be affiliated, as 95% of the -stock of the cor- poration whose fiscal ’year ends Dec. 31st is owned by the corporation whose fiscal year ends Mar. 31st. ^[Under Article 638 whenever the fiscal year of one of the affiliated corporations differs from the fiscal of the parent or principal corporation the Commissioner should be fully advised by the taxpayer in order that provision may be made for assessing the tax inTespect 455 TAX INC. to the period prior to the beginning of the fiscal year of the parent or principal company. The question therefore arises as to the return for the three- month period of the corporation whose fiscal year ends Dec. 31st and it appeared to us that if your ruling would be to the effect, that the return should be made on the basis of the fiscal year of the parent corporation, such corporation being the corporation holding 95% of the stock of the second corporation, that there should be a return made for the corporation whose year ended Dec. 31st for the period between Dec. 31, 1917, and Mar. 31, 1918, and then a consolidated return made for the year Mar. 31, 1918, to Mar. 31, 1919. lIThe corporation whose taxable year ends Dec. 31st and whose stock is held by corporation having its taxable year end Mar. 31st is a Public Service Corporation. I assume from letter of Acting Commis- sioner J. H. Callan to The Corporation Trust Co., dated April 17, 1919, and found in Corporation Income Tax Service as paragraph 3307, that it would make no difference whether one or both corporations v/ere Public Service Corporations and they would not be taken out of the class of affiliated cor- porations because of that fact. %A tentative return was filed covering cor- poration whose fiscal year ended Dec. 31st with a statement that it was understood that a consolidated return would probably be required, and that an adjustment would be made for the first three months of 1918. There was also a tentative return filed for a corporation whose fiscal year ended Mar. 31, 1918. 1[On the foregoing state of facts will you, therefore, wire us — first: should there be a consolidated return filed; second: shall the cor- poration whose taxable year ends Dec. 31st file an Income Tax report for the period between Dec. 31, 1917, and Mar. 31, 1918; third: should the taxpayer file a statement giving the reasons for filing the return for the period between Dec. 31st and Mar. 31st; fourth: in computing the normal tax on income for the three-month period should the exemption be $500, one-fourth of the $2,000 allowed, under Section 236; fifth: if the company whose stock is owned by the principal company is a Public Service Corpora- tion would a consolidated return be required. (Answer to above Inquiry.) 3344 Your letter sixth. Consolidated return including parent and fully owned public service subsidiary corporation should be filed for fiscal year parent ended March 31, 1918. Tax is computed in first instance on basis of twelve month period ended March 31, 1918, with full deductions under revenue act of nineteen eighteen and then prorated. With return file complete statement facts. (Letter of inquiry from The Cleveland Trust Company, Cleveland, Ohio, and the answer thereto, signed by Acting Com- missioner J. H. Callan, and dated May 20, 1919.) (T. D. 2847.) 3346 Corporations are not Entitled to Deduct from Gross Income the 1102 Amount of Contributions to Religious, Charitable, Scientific or 1118 Educational Corporations or Associations, although such Contribu- 2962 tions may be made to Red Cross or other War Activities. — The 3209 Revenue Act of 1918 contains two sections relating to deductions which may be made in ascertaining net income subject to tax. Sec- tion 214 relates to individuals and allows as deductions: (1) All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, etc. (2) All interest paid or accrued within the taxable year on indebtedness etc., (with certain exceptions). (3) Taxes paid or accrued within the taxable year etc., (with certain exceptions). INC. 456 TAX 6 - 3-19 (4r-10) Certain allowance for losses, bad debts, exhaustion, wear and tear of property of various sorts. (11) Contributions or gifts made within the taxable year to corporations ) organized and operated exclusively for religious, charitable, scientific, or edu- cational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, etc. 3346 Section 234 relates to corporations, and allows as deductions: (1) All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reason- j able allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity. (2) All interest paid or accrued within the^taxable year on its indebted- ness (with certain exceptions). I (3) Taxes paid or accrued within the taxable year, etc., (with certain " exceptions). (4 et seq.) Losses sustained of a certain character, bad debts, allow- ances for exhaustion, wear and tear, etc. ' 3347 The question is presented whether corporations are entitled to deduct from their gross income for the purpose of the income tax, the amount of contributions to religious, charitable, scientific or educational corporations or associations, this question arising most frequently with reference to contributions made to the Red Cross and other war activities. 3348 It will be observed that there is no express deduction permitted corporations of such contributions, as in the case of individuals, and ^ unless, therefore, they fall within the definition of some item of deduction allowed to corporations, they cannot be allowed. The only head within which it might be suggested that such contributions could be included is that of ordinary and necessary expenses paid or incurred in carrying on any trade or business, including reasonable salaries or other compensation, rentals, and payments for use of property, provided for in paragraph 11. Practically these same deductions are permitted in section 214 in the case of individuals, and had such words included the contributions or gifts men- tioned in paragraph 11 of Section 214, it would have been unnecessary to put in such paragraph, as they would have been covered by paragraph 1 of such section. I 3349 The Attorney General, in an Opinion dated May 19, 1919, states the view that ordinary and necessary expenses contemplated by paragraph 1 of sections 214 and 234 were not intended to include all necessary expenses because the two immediately succeeding paragraphs provide for deducting Interest and taxes, both of which are necessary expenses; also the provision in regard to allowance for salaries, compensation, rentals, etc., indicates that all of the expenses, which are contemplated under the terms I used in paragraph 1 of these sections, are expenses incurred directly in the maintenance and operation of the business, and not all those which may be beneficial and even necessary In the broader sense. 3350 In addition to the above considerations and to the fact that there Is express provision for deducting contributions or gifts in the case of individuals, which is wanting in the section providing for deductions to be made by corporations, reference to the legislative history of the Revenue A Act of 1918 (Congressional Record for September 17, 1918), shows that an amendment providing that corporations might make deductions of coii- iNC. 457 TAX tributions or gifts, as in the case of individuals, came to a vote and was defeated, the principal reason assigned in the debate being that it would be dangerous to authorize directors to be generous with the money of their stockholders even for such laudable purposes. 3351 It is concluded, therefore, that corporations are not entitled to deduct from their gross income for the purpose of the income tax the amount of contributions made to religious, charitable, scientific or edu- cational corporations or associations, although such contributions may be made to the Red Cross or other war activities. (T. D. 2847, signed by Commissioner Daniel C. Roper, and dated May 24, 1919.) (T. D. 2849.) ( 3352 Correcting Item 20, Schedule it, Page 2 of Form 1120, Corporation 1096 Income and Profits Tax Return. — Form A, revised (Mining) and Form 2167 N (Oil and Gas) have been prepared for the use of taxpayers engaged in mining or in the production of oil and gas. A sufficient supply will be sent to Collectors of Internal Revenue for distribution. 3353 These forms are prescribed to facilitate the compilation and presen- , tation of certain information required for the audit and examination of the returns of these classes of taxpayers. If, however, It is more con- venient to use other methods of tabulation, the Information so furnished, if complete, will be accepted in lieu of those forms. 3354 The Information called for by these forms should be filed with the returns in complete detail, either on the forms prescribed or In other suitable manner. This requirement is necessary for the reason that deple- tion sustained must be taken into consideration In the computation of Invested capital, regardless of whether or not a deduction for it is claimed or has been claimed for it In the past by the taxpayer. 3355 This requirement applies to individual as well as corporate tax- 1 payers. (T. D. 2849, signed by Commissioner Daniel C. Roper, and dated May 27, 1919.) ( INC 458 TAX 6 - 4 - 19 . 3356 Questions and Answers about Inventory Losses. Compiled and 1119 Arranged by Tax Committee of the Southern Wholesale Dry 2963 Goods Association. — These questions were asked at the Conven- tion of the Southern Wholesale Dry Goods Association, held at Louisville, Kentucky, April 17th. At the suggestion of the Hon. Daniel C. Roper, Commissioner of Internal Revenue, these questions were sub- mitted to the Advisory Tax Board at Washington and explained by a committee from the Association’ composed of Alessrs. W. J. D. Bell, Lynchburg; Harry Dumesnil, Louisville; C. C. Henking, Huntington, and Norman H. Johnson, Richmond. Each of the answers is made by the Advisory Board, and, therefore, is authoritative. 3357 Comment: [The Tax Committee of the Southern Wholesale Dry Goods Association, consisting of W. J. D. Bell, Chairman, W. R. King, Vice-Chairman, Harry Dumesnil, C. C. Henking, C. L. Sanger, James J. Ragan and Norman H. Johnson, Secretary, recently issued a pamphlet entitled “Questions and Answers on Inventories and the Abatement Clause of the Internal Revenue Act of 1918” containing fifty eight questions and the answers thereto. By the courtesy of the Com- mittee, through its Secretary, we are permitted to reproduce below ^ 3358 to T[ 3370. Those questions and answers which we have not reproduced were rather more specific in their character than those we have given; hence their exclusion here. The foreword at ^ 3356, above, is the fore- word of the pamphlet as issued by the Tax Committee. — The Corporation Trust Company.] 3958 Q* 1* Are copies of inventory required by the Department to be filed with return? Ans. No. But it should be understood by all taxpayers that all original ipventqry sheets and all papers which would have an^ bearing on a claim for loss in inventories (including sales slips) should be retained for a period of not less than five years. It is recommended that the taxpayer attach to his return for the taxable year 1918, and for all subsequent years, a summarized analysis of his inventories. 3359 Q* 2. Are these copies of inventory necessary whether a claim in abatement is filed or not? Ans. See answer to Question 1. However, it is recommended to the taxpayer that all such records be maintained in order to facilitate a proper verification of the return at any time deemed advisable by the Commissioner. Loose-leaf ledgers are recommended, whereby control can be secured of each classifica- tion or lot of goods upon which claim is to be made. Therein should be recorded quantities and values as returned on the inventory at the close of the taxable year 1918; and there should be recorded in summary form each day or week, the quantities sold and the values thereof, and all items of sales should be carried forward, according to established classification adopted by the taxpayer, to the time when the quantities as reported in the inventory shall have been accounted for. At the time of filing the return, on or about Jane 15, 1919, the taxpayer should compute his loss from sales to that date, by deducting from the total sales a reasonable and propor- tionate allowance for operating and/or selling expense. I'he net result ascertained should be deducted from the inventory value of the goods included in the 1918 inventory sold to that date, and the resultant loss brought down. The taxpayer should then reduce the balances remaining unsold to the then market value, and add the loss thus ascertained to the losses ascertained from sales. The sum total of these computations would represent the total loss upon which the amount of tax to be claimed in abatement is to be computed and this amount may be de- ducted from the second installment of tlie tax; Provided, proper bond is furnished on Form 1124 in accordance with Article 268 of Regulations 45. Should any goods unsold, upon which claini in abatement has been filed at the time of filing the return, be disposed of by sale at some future period within the taxable year 1919, the taxpayer will continue to record the sales effected, deducting therefrom the proportionate cost of operating and/or selling expense. The gain or loss would then be ascertained by computing the difference between the adjusted sales values and the inventory value established at the time of filing the claim in abatement. INC. 459 TAX If at the close of the taxable year 1919 there remains any commodity unsold, the tax- payer shall adjust the Inventory value to the market price (ignoring mere temporary fluctuations in price or value), at the close of the taxable year and compute the amount of gain or loss. Such gain or loss shall be combined with the gain or loss on sales between the time of filing the return and the close of the taxable year 1919. If it is shown that the taxpayer has sustained a loss additional to that shown In the claim in abatement a claim for refund should be made on Form 46 for the amount of tax overpaid. Should it be shown that the amount deducted in the claim in abatement at the time of filing the return for the taxable year 1918 is in excess of the tax based upon actual losses sustained throughout the taxable year 1919, the taxpayer must remit to the Collector the additional amount of tax involved with interest at the rate of 1% per month from the time of filing the return until the date of filing the final adjustment of taxes for the taxable year 1918 on account of inventory losses. An example is given for the information of your association: Assume an inventory at December 31, 1918, 200,000 yds. at 15c $30,000 00 Assume sales, between January 1, 1919, and June 1, 1919, 100,000 yds. at 12J^c $12,500 00 Cost of manufacturing and/or selling based upon data ascertained from 1918 operations, say in this case 15% of sales values 1.875 00 Net proceeds from sales $10,625 00 The inventory cost at 15c. per yd. amounted to $15,000 00 Net loss upon which tax can be claimed in abatement $4,375 00 Assume that the market price at June 1, 1919 (on the assumption that the taxpayer will prepare his claim on June 1, rather than delay until June 15, 1919), on this class of goods was 12c. There would remain unsold at that time 100,000 yds. originally inventoried at 15c. to be reduced to 12c. or at a loss of 3c. per yd. aggregating 3,000 00 Total amount upon which tax could be claimed in abatement at the time of filing the return on or before June 1, 1919, would be $7,375 00 Now, between June 1, 1919, and December 31, 1919, assume that the taxpayer sells 50,000 yds. at a price of 15c. per yard, amount of sale would be $7,500 00 Deducting therefrom operating and/or selling expense at the same rate of 15% (or, if ascertainable, the adjusted percentage for 1919) 1,125 00 Net proceeds from sale $6,375 00 Cost of this material as adjusted at June 1, 1919, on the basis of 12c. per yd 6,000 00 Gain on these transactions $375 00 Further, assume that the remaining 50,000 yards were unsold at the close of the taxable year 1919, and that the market price had risen to 17c. per yard, the taxpayer would. In this case, have to readjust his Inventory value to the 17c. basis, and account for the element of appreciation, in this case (5c. per yard over adjusted figure as of June 1) 2,500 00 Total gains 2,875 00 Adjusted loss upon which tax Is to be abated or refunded, as the case may be $4,500 00 See also answer to Question No. 27. 3360 Q. 5. Does the claim in abatement apply to all goods charged In 1918, though not received until after inventory? Ans. All goods where title has actually passed to the taxpayer, must be included In the inventory, and as a result thereof are eligible for consideration in any claim in abate- ment. It is necessary that title shall have passed to the taxpayer in 1918, and the goods merely ordered for future delivery and for which no transfer of title has been effected, should be excluded. See Article 1581 of Regulations 45. 3361 Q. 6. Where Inventory is taken on December 1 or 15, can a claim be made for all goods invoiced up to December 31, 1918? Ans. It is presumed that your question refers either to a fiscal year ending November INC. 460 TAX ( / 6 - 4 - 19 . 30, 1918, or, in the second instance, to a calendar year ending December 31, since no fiscal year can be considered except at the close of some month in the year. In the first instance, no goods to which title has not passed to the vendee at and Including November 30, 1918, can be considered as inventory items. In the second instance, all goods to which title has passed to the vendee up to December 31, 1918, must be included in the inventory. Where the fiscal year ended on November 30, 1918, the claim in abatement can only apply to goods which are the preperty of the taxpayer up to that date, but no claim can be made on any materials which have become the property of the taxpayer between Decem- ber 1 and 31, inclusive, of that year. 3362 Q* 14. Can more than one claim be filed? Ans. Two claims may be filed, one at time of filing the return, and one adjusting the entire claim for losses at the close of the taxable year 1919, The first would represent a claim in abatement; the second, a claim for refund. It is possible that an additional amount of tax may become due from the taxpayer with interest at the rate of 1% per month from the time of making the deduction until the time of filing the final statement, which would be brought about by the fact that, in the disposi- tion of unsold goods as to the 1918 inventory after the filing of the original return, and the claim in abatement, gains may result from subsequent sales. It will therefore be necessary for the taxpayeV to prepare a statement which will fully reflect the corrected amount of any claim to which he may be entitled for losses in inventory of 1918, and this statement must definitely embrace the total amount of inventory value as recorded on the books of the taxpayer at the end of the taxable year 1918, and be capable of proper audit. The following is suggested as a possible outline to be used in making final statement of adjustment at the close of the taxable year 1919. This is based upon the illustration given in answer to Question 2 which applies to one item of inventory only, but it must be under- stood that the final statement referred to herein, must cover the entire Inventory value as at the end of the taxable year 1918. Quantity. Value. 1. Inventory close of taxable year 1918 200,000 $30,000 00 2. Sales from 1918 inventory during taxable year 1919 150,000 20,000 00 3. Less deductions from sales for selling expense 3,000 00 4. Net sales proceeds (Item 2 value less Item 3) 17,000 00 5. Balance of 1918 inventory on hand at close of taxable year. . . 50,000 8,500 00 (Quantity Item 1 less Item 2.) (Value priced at market close of taxable year 1919.) 6. Net sales proceeds and balance of Inventory 25,500 00 (Item 4 plus Item 5, values.) 7. Loss (Item 1 value less Item 6 ) 4,500 00 8. Gain 9. Amount of claim in abatement or for refund filed (date ) 7,375 00 (In this illustration an excessive claim in abatement of tax based upon a loss of inventory values, amounting to $2,875 is assumed. Tax upon this amount with interest at one per cent, per month between the date of making the deduction and final statement will be assessed in this case.) Should the taxpayer elect not to file a claim in abatement at the time of filing his return, but rather to wait until the end of the taxable year 1919, then, in that case, but one claim would be filed. 3363 Q* 20. Suppose we arc unable to sell them (Discontinued off colors in broken lots.) ? Ans. If the salable colors had been disposed of and the stock broken before the close of the taxable year 1918, the element of obsolescence if definitely determined should be taken into account in both the inventory made at the close of the taxable year 1918 and that made at the close of the taxable year 1919. If “it is impossible to get the market value for such colors in broken stocks” the taxpayer will be required to await the sale of such broken stocks in order to determine the loss involved; but it is believed that in practically all instances a reasonable and fair estimate of the market value can be made. If the salable colors were disposed of after the close of the taxable year 1918, the ac- companying obsolescence of the remaining stock takes place in the year 1919, and the deduction must be taken not as a loss in inventory, but as obsolescence occurring in the taxable year 1919. 3364 Q* 25. We take stock on January 1. During December we shipped out quite a lot of ginghams at the high price, and in January were forced to rebate our customers on sales made in December. Are we allowed to charge this rebate in our claim? Ans. In cases where rebates have been made on sales reported in the 1918 Income 'I'ax Return, a separate schedule should be submitted and the total tliercof may be included in the taxpayer’s claim in abatement. INC. 461 TAX This schedule should be prepared in such manner as to reflect: (a) The date of each rebate; (b) the name and address of each party securing the benefit thereof; l’(c) a description fo the goods; (d) the quantities; (e) the sales value of each item; and (f) the amount rebated. 3365 Q* 26. Suppose I ship some ginghams at the high price in January and have to rebate my customers; am I entitled to put that on the claim? Ans. Rebates made during the taxable year 1919 on sales made during such year (pro- vided the goods to which the rebate applies were included in the inventory at the close of the taxable year 1918) will be considered as an adjustment of sales values in arriving at the loss on inventories for the taxable year 1918, and will be treated as outlined in Question No. 2. This cannot go in the rebate claim, but the rebate may be considered in determining the sale price for the purpose of determining an inventory loss. It must be understood that rebates made on goods acquired and sold subsequent to the end of the taxable year 1918 cannot be considered in any manner as a 1918 inventory loss. 3966 Q* 27. Do we have to file a complete Inventory of all of our stock, or just the stock on which we ask an abatement? Ans. See Question No. 1. You are required to file with your original claim and at the close of the taxable year 1919, summarized statements covering all adjustments involved. To conform to good accounting practices, the taxpayer should consider these summaries in the light of controlling accounts and the sum totals thereof should equal the total inven- tories , maintained in detail by the taxpayer. It must be understood that claim for losses in Inventories of the taxable»year 1918 are to embrace all items of the taxpayer’s inventory so that gains made in any sales of certain items or classes will be used to offset losses in others and the net result as to the entire inventory determined. Thus if the final computation shows a net gain over all Inventory Items sold, no claim for loss In any particular item or items can be sustained. 3367 Q* 28. How should Inventory have been taken, at cost or market? Ans. The taxpayer is permitted to take his Inventory at the close of the taxable year 1918 at (a) cost or (b) cost or market, whichever is the lower. 3363 Q* 34. When can this claim for abatement be filed? Ans. Claim for net loss cannot be made before November 1, 1919. Claim in abatement for loss in Inventory must be filed at the time of filing the return for the taxable year 1918. 3339 Q* 37. Where the claim In abatement is allowed, what effect has that on 1919 profits? Ans. Where a claim for Inventory loss is finally allowed, this means that the net in- come for 1919 — as established by usual accounting methods — will be correspondingly higher as reported in the return for the taxable year 1919. In other words, an item of loss which would normally find its way into 1919 operating accounts is thrown back against 1918 income. This Department recommends that the accounting records of the taxpayer be not changed, but that any adjustment of inventories be recorded in distinct accounts, supported by adequate detailed schedules. In arriving at the net operating profits for any year, the Income, excess and war profits taxes to be paid on such profits are not taken into consideration. Such taxes, therefore, are theoretically paid out of surplus for the year. If at a subsequent date any of such taxes are refunded, they should not be recorded in the operating accounts, but should be credited directly to surplus. 337 0 Q. 47. Individual income of partnerships. How do you file plea of abate- ment when partnership files no blank or form like a corporation does? Ans. See Article 321 of Regulation 45. A claim in abatement arising from a loss in 1918 partnership inventory must be made by each individual partner as to his distributive share of recomputed net income. To this claim should be attached the statement of the partnership showing the loss in inventory supported In the same manner as such claims are supported by corporations and Individuals. The statement filed as to the partnership as a whole will be used by the Department for the purposes of record and verification and any adjustments which may be found necessary will be spread pro-rata over the claims of the individuals. At the close of the taxable year 1919 a properly authorized member of the partnership shall compile the final state- ment of adjustment in accordance with the methods outlined in Question 2 and elsewhere, attaching thereto the proportionate amounts of adjustment affecting each individual member of the partnership. On the determination of the net result, each individual partner shall file a claim for refund (if any refund is due), or in the event that the claimin abatement was in excess of the actual losses sustained, eaeh individual will remit to the Collector of his District, his share of the additional amount of tax ascertained from the adjusted state- ment, with interest at the rate of 1% per month from the time of deduction from the second installment to the time when such remittance is made. (For source and authority see ^ 3356 and 3357.) INC. 462 TAX (T. D. 2850.) 3371 Instructions Relative to Acceptance of Certificates of Indebtedness 435 in Payment of Income and Profits Taxes Due June 16, 1919. — 2428 Income and profits taxes due June 16, 1919, may be paid in Treasury 3128 certificates of indebtedness of Tax Series of 1919, dated August 20, 1918, maturing July 15, 1919, Series T.2, dated January 16, 1919, maturing June 17, 1919, and Series T.3, dated March 15, 1919, maturing June 16, 1919. No other certificates of indebtedness will be accepted in payment of the taxes due on said date. Certificates of the three series mentioned will be accepted by collectors of internal revenue at par, without interest, when tendered in amounts not in excess of the amount of such taxes due June 16, 1919. They will be so accepted at any time on or before June 16, 1919. If so accepted before June 16, 1919, full interest to June 16, 1919, will be paid as below stated. 3372 Coupons maturing on June 16, 1919, should be detached from cer- tificates of Series T.3, and coupons maturing on or before May 15, 1919, should be detache_d from certificates of the Tax Series of 1919, before presentation to the collector, and should be separately presented for pay- ment in the ordinary course when due. Coupons maturing July 15, 1919, must, however, be attached to certificates of the Tax Series of 1919 and surrendered to the collector with such certificates for cancellation; and col- lectors will not accept any certificates of the Tax Series of 1919 which have not attached thereto the coupon No. 5 maturing July 15, 1919. 3373 Accrued interest on certificates of Series T.2 (which were issued without coupons attached) from January 16, 1919, to June 16, 1919, and accrued interest on certificates of the Tax Series of 1919 from May 15, 1919 (the last coupon payment date), to June 16, 1919, will be remitted to the taxpayer by the Federal Reserve Bank by check and the collector must furnish to the P'ederal Reserve Bank the name and address of the tax- payer and the amount and serial numbers of the certificates presented in each case. 3374 The procedure above provided will automatically adjust accrued interest in respect of all Treasury certificates of indebtedness used in payment of taxes due June 16, 1919, whether presented on or before said date and no other payment or credit will be allowed or made on account of interest in connection therewith, 3375 Interest on Treasury certificates accepted in payment of taxes ceases to accrue on (a) the date of the maturity of tlie certificates, or (b) the date the tax is due — whichever of said dates be earlier. The provisions hereof in relation to the payment of interest to June 16, 1919, do not apply to Treasury certificates of indebtedness accepted in payment of taxes due prior to that date. Any Treasury certificates of indebtedness accepted in payment of taxes becoming due before June 16, 1919, must be dealt witli separately, and accrued interest will be paid only to date the tax the was due and upon surrender with the certificates of any coupons maturing subse- quent to the date the tax was due. Collectors must specially notify Federal Reserve Banks in each case when Treasury certificates are accepted in pay- ment of taxes becoming due prior to June 16, 1919. The 15th day of June being a Sunday, the Bureau of Internal Revenue has ruled that the taxes which by the terms of the Revenue Bill of 1918 are due on that date become due on June 16th. 3376 In order to avoid unnecessary dislocation of funds, it is of importance that Treasury certificates of indebtedness of the three series men- tioned be used by taxpayers to tlic utmost extent possible in payment of their taxes, in preference to making'Jcash payment of their taxes, and l''cdcral Reserve Banks and collectors of internal revenue should use every effort to induce taxpayers who are the holders of such certificates to make such use of them and to facilitate such use in every manner in their power. INC. 463 ^ TAX 3377 The instructions to Collectors dated December 9 , 1918 (T. D. 2778), issued by the Commissioner of Internal Revenue and approved by the Secretary of the Treasury, and the instructions to Federal Reserve Banks dated December 9, 1918, issued by the Treasurer of the United States and approved by the Assistant Secretary of the Treasury, not inconsistent herewith, remain in full force and effect. 3378 There seems to be no reason to anticipate that the amount of taxes paid as of June 16, 1919, will exceed the amount of Treasury cer- tificates maturing on or about that date. It seems that there will be no unexpended cash proceeds arising from the payment of income and profits taxes on June 16, 1919, and therefore no redeposits will be made; nor will payment of income and profits taxes by credit be permitted. 3379 Collectors of internal revenue will, however, be instructed to deposit checks received on and after June 1, 1919, in payment of income and profits taxes, with Federal Reserve Banks and branches, following to that extent substantially the procedure adopted in IMarch. As to this procedure detailed instructions will follow. (T. D. 2850 signed by Com- missioner Daniel C. Roper, and dated AIa> 28, 1919.) (T. D. 2851.) 3380 Authority of Collectors to Accept Uncertified Checks.— Section 1314, 435 Revenue Act of 1918, provides as follows: 2428 “That collectors may receive * * * uncertified checks in 3130 payment of income, war-profits and excess-profits taxes and any other taxes payable other than by stamp, during such time and under such regulations as the Commissioner, with the approval of the Secretary, shall prescribe; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tenderecj shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been tendered.” 3381 The following regulations apply to all Internal Revenue taxes except those payable by stamp: 1. Payment of tax by nneertified checks. — Collectors may accept uncer- tified checks in payment of taxes, except those payable by stamp, provide d such checks are collectible at par, that is, for their full amount, without any deduction for exchange or other charges. The collector will stamp on the face of each check before deposit the w^ords, “This check is in pay- ment of an obligation to the United States and must be paid at par. No Protest,” with his name and title. The day on which the collector receives the check will be considered the date of payment so far as the taxpayer is concerned, unless the check is returned dishonored. If one check is remitted to cover two or more persons’ taxes, the remittance must be accompanied by a letter of transmittal stating (a) the name of the drawer of the check; (b) the amount of the check; (c) the amount of any cash, money order or other instrument included in the same remittance; (d) the name of each person whose tax is to be paid by the remittance; (e) the amount of the payment on account of each person; and (f) the kind of tax paid. 3382 2. Procedure with respect to dishonored checks. — If the bank on which any such check is drawn should refuse to pay it at par, the check should be returned through the depositary bank and be treated in the same manner as a bad check. All expenses incident to the attempt to collect such a check and the return of it through the depositary bank must be paid by the drawer of the check to the bank on which it is drawn, since no deduc- tion can be made from amounts received in payment of taxes. If any tax- payer whose check has been returned uncollected by the depositary bank should fail at once to make the check good, the collector should proceed to collect the tax as though no check had been given. A taxpayer who ten- ders a certified check in payment for taxes is also not released from his obligation until the check has been paid. (T. D. 2851, signed by Com- missioner Daniel C. Proper, and dated Alay 28, 1919.) INC. 464 TAX (L-A4im. 2143.) 3383 Withholding as td Income from Securities whose Owner is Un- 2996 known; Meaning of Term “Highest Applicable Rate.” — It seems 3321 that there has been some misunderstanding as to the meaning of the following sentence in Article 361, Regulations 45: — “Withholding in all cases at the highest applicable rate is also required from interest or bonds or other securities where the owner of such securities is unknown to the with- holding agent.” 3384 The “highest applicable rate” as used above is (a) 2 per cent on interest upon bonds or other obligations of domestic or resident foreign corporations containing a so-called tax-free covenant clause; (b) 8 per cent in the case of fixed or determinable annual or periodical income (other than dividends from corporations liable to the income tax and interest on corporate bonds containing a tax-free covenant clause) payable to an unknown owner. (L-Mim. 2143, signed by Commissioner Daniel C. Roper, and dated June 2, 1919.) (Amendment to T. D. 2847.) 3385 Donations to the Red Cross or other War Activities by Corporations. 3345 — [Comment: T. D. 2847 has been reprinted by the Government with a foot-note reading as follows:] This Treasury Decision should be substituted for the previous mimeograph issue of T. D. 2847, the words “although such contribu- tions may be made to the Red Cross or other war activities” appearing in the last paragraph [1|3351] thereof having been corrected to read “even though such contributions are made to the Red Cross or other war activities.” (T. D. 2847, signed by Commissioner Daniel C. Roper, and dated May 24, 1919.) (T. D. 2856.) 3386 An Extension of Time for Filing Returns of Partnerships, Personal 3329 Service Corporations and Corporations Having a Fiscal Year Ending Either on January 31, February 28, March 31, or April 30*, 1919. — In view of the fact that the necessary forms are not yet available, a further extension of time to July 15, 1919, is hereby granted to partnerships and personal service corporations having a fiscal year ending January 31, Febru- ary 28, March 31, or April 30*, 1919. Corporations other than personal service corporations, having a fiscal year ending January 31, February 28, March 31, or April 30*, 1919, are hereby granted an extension to July 15, 1919, if they have prior to the date of this decision filed tentative return on Form 103 1-T, paying one-fourth of the estimated tax, or if they shall on or before June 15, 1919, file tentative return on 1031-T, paying one-fourth of the estimated tax. Any deficiency in the first installment as shown by the completed return must be paid with interest thereon from the original due date at the rate of one-half of one per centum a month at the time of filing the completed return. *See 1[3388. 3387 This extension, in the case of corporations, shall not operate to extend the due date of any installment of tax after the first. In the case of corporations filing 1031-T, the time for filing a completed return is auto- matically extended as above but not beyond the due date of the second installment of the tax. The second installment will be due five and one-half months after the close of the corporation’s fiscal year ending in 1919. (T. D. 2856, signed by Commissioner Daniel C. Roper, and dated June 7, 1919.) INC. 465 TAX 3388 Extension of Time for Filing Returns of Partnerships, Personal 3386 Service Corporations and Corporations Having a Fiscal Year Ending on April 30, 1919. — [Comment: The words “or April 30, 1919” appearing in T. D. 2856 [1|3386] were inadvertently inserted. Our under- standing to this effect has been confirmed, orally, by the Bureau of Internal Revenue. — The Corporation Trust Company.] (T. D. 2857.) Original Subscription to Victory Notes. — For the purposes of the addi- tional tax exemption for Liberty Bonds granted by Section 2 (b) of the Victory Liberty Loan Act, approved March 3, 1919, Victory notes of either series issued upon conversion of Victory notes of the other series which' were originally subscribed for by any taxpayer will be deemed to have been originally subscribed for by such taxpayer. (T. D. 2857, signed by Commissioner Daniel C. Roper, and dated June 7, 1919.) (T. D. 2859.) 3390 Amendment to Paragraph Numbered (3) of Article 184, Final Edition 2924C of Regulations 45, Dealing with the Cost of War Facilities which may be Amortized. — The paragraph numbered (3) in article 184 of the final edition of regulations 45 which reads as follows: “(3) In the case of other property the basis is the estimated repro- duction cost as of April, 1919, of such property in its then condition. In the final determination such cost will be ascertained under stable postwar conditions, without reference to such date.” / is hereby amended to read as follows: ^ “(3) In the case of other property the basis for amortization calcu- lation shall be the estimated value of the property to the taxpayer in terms of its actual use or employment in his going business, such value in no case to be less than the sale or salvage value of the property, pro- vided, however, that in no case shall the preliminary estimate (for pur- poses of returns to be made in 1919) of the amount of such amortization exceed 25% of the cost of ithe property. In the final determination the amount of the amortization allowance will be ascertained upon the basis of stable postwar conditions under regulations to be promulgated when these conditions become apparent.” f (T. D. 2859, signed by Commissioner Daniel C. Roper, and dated June 10, 1919.) 3391 Amortization Claims for 1918 and for 1919: Amended Returns 2924 Involving Amortization. — Reference is made to your letter of May 21, 1919, requesting information relative to the application of the pro- visions of Section 214 (a) paragraph 9, of the Revenue Act of 1918, and Articles 181 to 188 of Regulations 45, final edition, to the 1918 and 1919 returns of taxpayers. 3393 Your questions, are answered in the order submitted as follows: ( 1 ) A claim for amortization applicable to the portion of the calendar year 1918 covered by the return of the taxpayer for the taxable year 1918 shall be included in such return, and if such amortization is not claimed therein it may not be taken in the return covering the taxable year 1919. The return for the taxable year 1919, shall provide only for the proper amorti- zation applicable to such taxable year ascertained in accordance with the 3389 3179 3326 TNC. 466 TAX 6-17-ld. provisions contained in Article 185 of Regulations 45. However, in cases where it will be impracticable to accurately determine the amortization during the calendar year 1919, any returns made during such period should include amortization allowances tentatively determined in accordance with Articles 184 and 185 of Regulations 45. 3393 (2) Returns made for the taxable year 1918, in cases where the taxpayers are entitled to amortization claims, should include such claims ascertained as provided in the preceding paragraph, and if subsequently the amortization as finally determined differs essentially from the amount claimed in the returns filed, then amended returns should be made. (Letter to The Corporation Trust Company, signed by Commis- sioner Daniel C. Roper, and dated June 9, 1919.) 3394 Duties and obligations of employers, in connection with with- 2976 holding, in the case of non-resident aliens employed in the United 3147 States. — Reference is made to your letter dated April 15, 1919, containing the following inquiries: ‘T. From what date are employers responsible for deductions on nonresident aliens as defined under Treasury Decision 2794? Should the tax have been withheld on this basis during 1918? ***** ***** “4. What should be done with Form 1078 when signed by alien? Should the employer retain it as authority for not withholding tax, or should it be sent to the Collector, and if so, when.^'" 3395 Referring to your first inquiry you are advised that employers will be held liable for the deduction of income tax from salaries, wages, or other fixed or determinable income paid to nonresident aliens since September 17, 1915, the date of issuance of Treasury Decision 2242 [11489, 1[491, 1[493], defining a nonresident alien and prescribing certificate of residence. Form 1078. Employers should be governed by Articles 311 to 316, inclusive. Regulations 45, as to liability to withhold income tax during 1918 from wages paid to alien employees. 3396 Referring to your second inquiry you are advised that eight per 3003 cent income tax is required to be withheld by the employer from wages paid to nonresident alien employees only on and after February 25, 1919. As nonresident aliens were subject to a normal tax of twelve per cent for 1918, and only two per cent was required to be withheld during that year, the balance of tax due should be accounted for in the individ- ual income tax returns. *********** 3397 Referring to your fourth inquiry you are advised that every em- ployer with whom affidavits of claim of Form 1078 are filed by em- ployees, should make a record thereof and forward the certificates to the Commissioner of Internal Revenue, Sorting Division, Washington, D. C., not later than the twentieth day of the month succeeding that during which such certificates were received. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated May 21, 1919.) INC. 467 TAX 3398 Duties and obligations of employers, in connection with with- 2976 holding, in the case of non-resident aliens employed in the United 3147 States. — Reference is made to your letter dated March 25, 1919, transmitting a copy of your letter dated February 28, 1919, in which the following questions are submitted with respect to the duty of operators of bituminous coal mines to withhold income tax from salaries, wages and other compensation paid to nonresident aliens employed in this country. . ‘‘1. For what years will the Department attempt to make collection of such items? ‘‘2. In the absence of any record now existing as to the nationality or intentions of employees who have left the service of a person or corpo- ration which employed them during past years, what action on the part of the employers will be necessary to relieve them from any further liability for this tax? Is not the burden of proof on the Government in this case? Will a canvass of the present employees with a view to ascer- taining their nationality or intentions of becoming resident taxpayers, and a collection of the taxes due from them be a satisfactory solution of the case? If^so, how far back should employers attempt to make this collection? “ 4 . -It is customary in a great many mining districts to let out a certain portion of a mine to some miner who is usually termed a contractor who employs additional labor in the production of coal from the section of the mine assigned to him. These men, usually termed ‘‘back hands” sometimes do not appear upon the payroll and are very frequently not officially known to the operator or employer. Who is responsible for the collection in this case, the operator or the contractor? The operator fre- quently does not know the amount of the earnings of the ‘back hand’ or laborer employed by the contractor and the latter usually keeps no books of account. “5. Many employees, not only in the mining industry but in other industries, are known only by number. Will it be necessary to ascertain their names and intentions as to residence? “6. Does the failure of the employer to make such collections make him liable for the full amount of the tax? If so, how far back of the present will the department attempt to make collections, and in the absence of specific information as to the nationality of past employees, upon what evidence will they base their action during the past period?” 3399 In reply to your first inquiry you are advised that the Depart- ment is not limited to as years in regard to investigations relative to the liability of employers to deduct income tax at the source from fixed or other determinable income paid to nonresident aliens as provided by the Revenue Act of 1918 and the acts for prior years. No effort will be made to hold employers of nonresident aliens liable for tax prior to the issuance of Treasury Decision 2242 [1[489, 11491, 1[498], September 17, 1915, which defined a nonresident alien and not then if such nonresident alien had been employed continuously by the same person or corporation for a period of three months or more. 3400 ■ In reply to your second inquiry you are advised that aliens em- ployed in the United States are prima facie regarded as nonresident aliens, and in case where withholding has not occurred it will be necessary for the employer to furnish written proof of facts which overcome that presumption. The burden of proof is on the employer. The records of a corporation, such as the cancelled checks representing payment to its employees, and the payrolls, are held to constitute written proof. 3401 Referring to your third inquiry you are advised that if an alien has been living in the United States for ns much as one year im- mediately prior to the time he entered the employment of the withholding INC. 468 TAX 6 - 17 - 19 . agent, or if he has been regularly employed by an individual resident in the United States or by a resident corporation in the same city or county for as much as three months immediately prior to any payment by the employer, he may be treated as a resident in deciding as to the necessity of withholding part of such payment, provided no facts are known to the employer showing that he is in fact a transient. The facts with regard to the length of time the alien has thus lived in this country or has been so regularly employed may be established by the certificate of the alien. The employer may also obtain evidence to overcome the prima facie pre- sumption of nonresidence by securing from the alien Form 1078, revised, properly executed or an equivalent certificate of the alien establishing residence. Having secured such evidence from the alien, the employer may rely thereon unless the statement of the alien was false and he has ‘reasonable cause to believe it was false, and may continue to rely thereon until the alien ceases to be a resident. 3402 Referring to your fourth inquiry you are advised that in case the owner or operator of a mine leases a portion thereof to a contractor whose operations are separate and distinct from that of the corporation, the individuals being actually employed by the contractor, the duty to withhold is that of the contractor and not of the corporation. 3403 Referring to your fifth inquiry you are advised that in every case where the employee is a nonresident alien, withholding is required, except for 1918, in which case a claim for exemption may be filed in accord- ance with the provisions of Article 307, Regulations 45.’ The name and ad- dress of such employee should be secured regardless of the fact that for the convenience of the operator, the individual is known by number. 3404 Referring to your sixth inquiry you are advised that this question appears to be covered by the answer to your third inquiry. 3405 Replying to the next to the last paragraph of your letter you are advised that the employer who fails to withhold and account for income tax with respect to income paid to alien employees, may submit any evidence which will substantiate the fact that such employees are residents of the United States within the meaning of Article 312 to 316 of Regulations 45. As to what action will be taken by the Bureau in regard to the collection of income tax at the source, you are advised that any investigations deemed necessary for the proper administration of the revenue acts will be made in order that taxpayers may satisfy their obligations to the Government. 3406 Referring to the inquiry contained in your letter of March 25, 1919, in regard to aliens who have been employed in this country by the corporation for a period of three months, you are advised that such circumstances are held to constitute the individual a resident of the United States for purpose of withholding, and no further tax is required to be withheld at the end of that period provided no facts are known to the employer tending to show that the individual is a transient as described in Article 312, Regulations 45. The amount of tax withheld during the three months should not, however, be refunded to the employe, but should be included in the corporation’s annual list return of income tax withheld at the source. Form 1042. (Letter to W. B. Reed, Accounting Secretary, National Coal Association, Washington, 1). C., signed by Commissioner Daniel C. Roper, and dated May 26, 1919.) INC. 469 TAX 3407 Constructive receipt of income during the taxable year by a dece- 2862c dent prior to his death. — Reference is made to your letter of recent 2862d date, relative to the proper treatment, for income tax purposes, 3019 of income received after the death of an individual in 1918. You state that you represent a decedent who died on June 25, 1918, and whose accounts were kept upon a cash receipt and disbursement basis. On June 1, 1918, dividends were declared on stock which he owned but which were not paid until July 1, 1918, and interest accrued on bonds and mortgages during his lifetime was not paid until after his death. The question presented is whether the dividends and interest referred to should be reported in the return for the period from January 1, 1918 to the date of his death or in the return for the period from the date of his death to December 31, 1918. In this connection you are advised that under Sec- tion 213 of the Revenue Act of 1918, income which is credited to the ac- count of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited* or set apart, although not yet actually reduced to possession. Where in- terest coupons have matured, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless avail- able to the taxpayer and should be included in his gross income for the year during which the coupons matured. Dividends on corporate stock are subject to tax when set apart for the stockholder, although not yet collected by him. Similarly interest on mortgages should be included in gross income for the year in which it becomes due and payable. (Regula- tions 45, Articles 53 and 54.) Therefore, if the income referred to in your letter was made available to the decedent during 1918 so that it could have been drawn upon by him prior to his death it should be reported in the return for the period from January 1, 1918 to June 25, 1918. (Letter to Douglas, Armitage and McCann, New York, N. Y., signed by J. H. Callan, Assistant to the Commissioner (by P. T. Talbert), and dated May 31, 1919.) 3408 Returns of information as to payments to employees in board and 3055 lodging, etc. — Reference is made to your letter of May 19, 1919, in which you present the following inquiry: “As Article 1062, Regulations 45, appeared in the preliminary draft, it contained two sen- tences not included in the Revised and complete regulations. Are we to understand from the omission of the last two sentences that living quarters and board are to be ignored in making returns of information.?” It is assumed that the article of the regulations to which you have reference is Article 1072, which relates to the filing of returns of information in regard to payments made to employees. The portion of Article 1072 of the Pre- liminary Regularions No. 45, to which you refer, was omitted from the last edition of the regulations for the reason that the subject treated in this part of the original article is now covered by Article 33 [Tf2842a], which v/as not contained in the preliminary edition. As stated in the first part of Article 1072, returns of information are required for “all em- ployees to whom payments exceeding $1000 a year are made, whether such total sum is made up of wages, salaries, commissions or compensation in any other form,” which includes those cases where board and lodging are consudered a part of the compensation for the services rendered. (Let- ter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 2, 1919.) INC. 470 TAX 6 - 17 - 19 . (T. D. 2858.) Status of dividends received by a partnership when distributed to the members thereof, under the Act of 1913. 1. Taxability of income derived from or through partnership. A member of a partnership need not include as a part of his net income subject to normal tax such of his income derived from or through a partnership as had been received by the partner- ship in the shape of dividends on stocks owned by it in corpora- tions taxable upon their net income. 2. Construction of the Act. The law is so framed as to deal with the gains and profits of a partnership as if they were the gains and profits of the individual partners. 3. Judgment for defendant. Judgment is rendered in favor of defendant. 4. Judgment of District Court aifirmed. The judgment of the District Court has been affirmed by the Circuit Court of Appeals. 3409 The appended decision of the District Court of the United States for the Northern District of Ohio, Eastern Division, in the case of United States of America, plaintiff, v. Harry Coulby, defendant (251 Fed. 982), which was on January 7, 1919, affirmed by the United States Circuit Court of Appeals, Sixth Circuit, is published for the information of internal revenue officers and others concerned. (T. D. 2858, signed by Acting Commissioner J. H. Callan, and dated June 9, 1919.) IN THE DISTRICT COURT OF THE UNITED STATES, NORTHE RN DISTRICT OF OHIO, EASTERN DIVISION. (Affirmed by Circuit Court of Appeals, January 7, 1919.) United States of America^ plaintiffs vs. Harry Coulby ^ defendant . (Memorandum.) (June 26, 1918.) 3410 WESTENHAVER, District Judge: This is an action at law to recover $588.45, with interest and penalties thereon, alleged to be due as unpaid income tax for the nine months ending December 31, , 1913 under the Federal income tax law of 1913. A jury trial was waived by the parties and the case has been submitted to me for decision upon an agreed statement of facts. Briefly the facts are these: 3411 The defendant, during the period in question, was a member of a partnership by the name of Pickands, Mather & Co. This partner- ship was then the owner of stocks in certain corporations which were tax- able upon their net income under the provisions of section G of the income- tax law. Dividends were declared, and paid by these corporations upon ) the stocks held therein by the partnership. The defendant, in making return of his income for taxation, included as a part of his gross income his share of the profits of the partnership, but deducted therefrom such part thereof as was derived by or through the partnership from dividends on stocks in these corporations taxable upon their net income. 3412 Later, on or about June 27, 1917, the Commissioner of Internal Revenue examined the defendant’s return and disallowed the deduc- ^ tions thus made and assessed the normal tax of one per cent against the defendant on such deduction. Lhe item of $588.45 represents that assess- ment. v.INC. 471 TAX 3413 The exact question presented for decision is whether or not a mem- ber of a partnership must include as a part of his net income sub- ject to the normal tax, such part of his income derived from or through a partnership which has been received by that partnership as dividends on stocks owned by it in corporations taxable upon their net income under section G of the Federal income tax law of 1913. 3414 Plaintiff’s contention that profits thus derived are a part of the partner’s net income, and subject to the normal tax, is based on the following paragraph of Section D: Provided further , That any persons carrying on business in partnership shall be liable for income tax only in their individual capacity, and the share of the profits of a partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid, under the provisions of this section. 3415 An examination of the entire income-tax law convinces me that plaintiff’s contention is erroneous. Section B defines what shall constitute the net income of a taxable person; it includes his gains, profits and income derived, not merely from salaries, wages or compensation for personal service, but also from business, trade, commerce, or sales or deal- ings in property, or the transaction of any lawful business carried on for gain or profit. This plainly includes such gains and profits derived from or through a partnership. 3416 Section B also states v>^hat deductions shall be made from the gross income of a taxable person in order to ascertain the net income for the purpose of levying the normal tax. Among these deductions is 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. 3417J Section provides G for the normal tax upon the entire net income of corporations. It expressly excludes partnerships therefrom. This net income of corporations is subject only to the normal tax, such as is levied on the income of any natural taxable person, and not to the additional tax provided for by subdivision 2 of section A. This income from cor- porations received by a natural taxable person is exempt only from the normal income tax, and not from such additional tax. 3418 Taking these provisions as a whole, the paragraph of section D relating to partnerships above quoted, must be considered and construed in the light of the general scheme thus outlined. No provision is anywhere made requiring a return to be made by a partnership upon its income. This is true notwithstanding section D requires copartner- ships, having the control, receipt, disposal or payment of fixed income of another person subject to tax, to make a return in behalf of that person and to deduct the same. This provision deals with the fiduciary relation- ship of guardians, trustees, executors, and so forth, having the possession and control of other person’s property; but, as regards an ordinary part- nership and its ordinary business, the statement is true that no return is required to be made under the Federal Income Tax Law of 1913 by a partnership. 3419 Partnerships are expressly excluded from section G, requiring re- turns and payment of the normal tax by corporatoins. If Congress had intended that partnerships, as such, should be taxable upon their net income, the logical place to have so provided w^ould have been in section G, and to have excluded from the net income of a natural taxable person, subject to the normal tax, that part of his income derived from a partner- ship just as is provided with respect to his income derived from a cor- poration. INC. 472 TAX 6 - 17 - 19 . 3420 This law, therefore, ignores for taxing purposes the existence of a partnership. The law is so framed as to deal with the gains and profits of a partnership as if they were the gains and profits of the individual partner. The paragraph above quoted so provides. The law looks through ’ the fiction of a partnership and treats its profits and its earniugs as those of the individual taxpayer. Unlike a corporation, a partnership has no legal existence aside from the members who compose it. The Congress, consequently, it would seem, ignored, for taxing purposes, a partnership's existence, and placed the individual partner’s share in its gains and profits on the same footing as if his income had been received directly by him without the intervention of a partnership name. 3421 It follows from these considerations that legally the defendant’s share of the gains and profits of the Pickands, Mather & Com- pany, derived from corporations taxable on their net incomes, is to be treated as if the same had been received by him directly from the tax- paying corporations. 3422 The contrary contention is based on a literal reading of the words “the share of the profits of a partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and tax paid.” This sentence follows language plainly ignoring the existence of partnerships for taxing purposes. Section B had already provided what should be regarded as net income in language sufficiently comprehensive to include the gains and profits from business carried on in a partnership name. The words just quoted evidently apply only to the possibility that a partnership might not divide its gains and profits, but retain them in the firm name or business. It was to meet this possibility that these words were added, and not to provide an unequal and unique method of taxing a partner’s gains and profits from a partnership. 3423 The contention to the contrary is narrow and literal, even if not lacking in plausibility. It is a contention, however, contrary to the spirit and general policy of the Act; it destroys uniformity and equality and should not be adopted unless required by the express language of the statute. In my opinion, the language of the statute does not so require, but, on the contrary, when the entire act is examined, it does give a right to the deduction. 3424 Counsel for plaintiff invoke the legal principles, that an exemp- tion in a tax law must be clearly expressed and will not be im- plied; that power to tax will not be taken away unless the law-making power has done so in clear and unequivocal language and that, inasmuch as uniformity and equality is difficult, if not impossible of attainment in tax laws, the inequality which might result from the Government’s con- tention should not be permitted to control the language of the law. Nu- merous authorities illustrating these legal principles are cited. These principles are well settled, and, I assume ample power in Congress to have assessed defendant’s income derived from a partnership in the manner contended for. It is my opinion, however, that Congress has not done so. 3425 Counsel for plaintiff call attention to the fact that the h'ederal Income Tax Law of September 8, 1916 now provides that mem- bers of partnerships shall be allowed credit for their proportionate share of partnership gains and profits derived from corporations taxable on their net income, and urge that this is a change of the law, and evidences a belief of the law-making body that the 1913 Income Tax Law had pro- vided differently. I do not agree with this contention. In myjopinion, this provision was inserted in the 1916 Act to put at rest the present con- INC. 473 TAX trovefsy rather than to change the law, and is to be regarded only as a legislative recognition of the scope and intent of the prior law. The ap- plicable authorities, in my opinion, are the following: Bailey v. Clark (21 Wall. 284); Johnson v. Southern Pacific Company (196 U. S. 1); Wet- more V. Markoe (196 U. S. 68). 3426 Judgment is rendered in favor of defendant. An exception may be noted on behalf of plaintiff. 3427 Dividends received from foreign corporations subject to income 1125 tax are exempt from normal tax. — Receipt is acknowledged of 2698 your letter dated May 9, 1919, in which you request advice as to whether Article 301 of Regulations 45 contemplated that the normal tax imposed by Section 210 of the Revenue Act of 1918 does not apply to dividends received from foreign corporations deriving any income whatever from sources within the United States, without regard to the character of that income and also without regard to the proportion which such income bears to the entire income of the corporation. In reply you are advised that Section 216 (a) of the Act upon which Article 301 of the Regulations is based, provides that for the purpose of the normal tax only there shall be allowed as a credit ‘‘the amount received as dividends from a corporation which is taxable under this title upon its net income.’’ [See 1[2102 also.] Therefore, Article 301 of the Regulations contemplates that the normal tax imposed by Section 210 of the Act does not apply to dividends, regardless of the amount of such dividends, received from a foreign corporation taxable upon income from sources within the United States, however small such income may be. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 9, 1919.) 3428 Additional capital stock tax imposed by Revenue Act of 1918 as 2037 a deduction. — In reply to your letter of May 21, 1919, you are advised that the capital stock tax imposed by Section 1000 (a) of the Revenue Act of 1918, may, for the purpose of computing other in- come subject to income, excess profits and war profits taxes, be deducted from the gross income for the year for which such taxes accrue, if accounts of the corporate taxpayers are kept on the accrual basis, or may be de- ducted from gross income for the year in which paid, if accounts are kept on the disbursements basis. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 7, 1919.) (T. D. 2865.) 3429 Interest on Victory notes. — All interest accrued on 4^ per cent. 3169 Victory notes at the date of any conversion by the taxpayer into 3^4 3326 per cent. Victory notes will, for the purposes of computing net income, be deemed to be interest upon 4^4 per cent. Victory notes, and will be entitled only to the exemptions from taxation to which interest on per cent. Victory notes is entitled. Any and all amounts received by any tax- payer from the United States by way of adjustment of accrued interest upon conversion of 4J4 per cent. Victory notes into 3J4 per cent. Victory notes will be deemed to be interest upon 4^ per cent. Victory notes. 3430 All interest accrued on 3^4 per cent. Victory notes at the date of any conversion by the taxpayer into 4^ per cent. Victory notes will, for the purposes of computing net income, be deemed to be interest upon 3^4 per cent Victory notes, and will be entitled to the exemptions from taxation to which Interest on 3^4 P^r cent. Victory notes Is entitled. (T. D. 2865, signed by Commissioner Daniel C. Roper and dated June 14, 1919.) 474 TAX INC. 6 - 24 - 19 . 3431 Tax liability and withholding obligation on [bond^linterest collected 613 and paid in year subsequent to that injwhich^the[interest became* due 2862d and payable.— Income tax should be withheld from interest payments 2996 upon bonds at rates in force for year during which payment was actually made, although bond interest is held to represent income for year during which coupons became due and payable. Any tax withheld and paid to government in excess of taxpayer’s liability may be adjusted through claim for refund. (Telegram to the Cleveland Trust Company, signed by Commissioner Daniel C. Roper, and dated June 9, 1919.) (T. D. 2870.) 3432 Amending Article 1567, final edition of Regulations 45, dealing 1910 with exchange of stock for stock having no par value, and fixing an 3107 aliquot part of the capital when required by statute to be stated, as the par value, for the purposes of Section 202, of such so-called “no- par-value” stock. — The final edition of Regulations 45 is amended by changing Article 1567 [1f3107] to read as follows: “Art. 1567. Exchange of stock for other stock of no greater par value. — In general, where two (or more) corporations unite their properties by either (A) the dissolution of corporation B and the sale of its assets to corporation A, or (b) the sale of its property by B to A and the dissolution of B, or (c) the sale of the stock of B to A and the dissolution of B, or (d) the merger of B into A, or (e) the consolidation of the corporations, no taxable income is received from the transaction by A or B or the stockholders of either, provided the sole consideration received by B and its stockholders in (a), (b), (c) and (d) is stock or securities of A, and by A and B and their stockholders in (e) is stock or securities of the consolidated corporation, in any case of no greater aggre- gate par or face value than the old stock and securities surrendered. So-called ‘no-par-value stock’ issued under a statute or statutes which require the cor- poration to fix in a certificate or on its books of account or otherwise an amount of capital or an amount of stock issued which may not be impaired by the distribution of dividends, will for the purpose of this section be deemed to have a par value representing an aliquot part of such amount, proper account being taken of any preferred stock issued with a preference as to principal. In the case (if any) in which no such amount of capital or issued stock is so required, ‘no-par-value stock’ received in exchange will be regarded for pur- poses of this section as having in fact no par or face value, and consequently as having ‘no greater aggregate par or face value’ than the stock or securities exchanged therefor.” (T. D. 2870, signed by Commissioner Daniel C. Roper, and dated June 20, 1919.) (T. D. 2869.) 3433 Alien Seamen; Amendments to Articles 92 and 312 of Regulations 45. — The final edition of Regulations 45 is amended by inserting im- mediately after Article 92 a paragraph to be known as Article 92a as follows: 3434 Art. 92a. When the wages of a non-resident alien seaman are de- 2877 rived from sources within the United States. — While resident alien seamen are taxable like citizens on their entire income from whatever sources derived, nonresident alien seamen are taxable only on income from sources within the United States. Ordinarily, wages received for services rendered inside the territorial United States are to be regarded as from sources within the United States. The wages of an alien seaman earned on a coast- wise vessel are from sources within the United States, but wages earned by an alien seaman on a ship regularly engaged in foreign trade are not to be regarded as from sources within the United States, even though the ship flies the Ameri- can flag, or although during a part of the time the ship touched at United States ports and remained there a reasonable time for the transaction of its business. The presence of a seaman aboard a ship which enters a port for such purposes of foreign trade is merely transitory and wages earned during INC. 475 TAX that period by a nonresident alien seaman are not taxable. There is no with- holding from the wages of alien seamen unless they are nonresidents within the rules laid down in Articles 311 to 315. Even in the case of a nonresident alien seaman, the employer is not obliged to withhold from wages unless those wages are from sources within the United States as defined above. As to when alien seamen are to be regarded as residents see Art. 312a. 3435 The final edition of Regulations 45 is amended by inserting im- 2973a mediately after Article 312 a paragraph to be known as Article 312a as follows: Art 312a. Alien Seaman, When to be regarded as residents. — In order to determine whether an alien seaman is a resident within the meaning of the income tax law, it is necessary to decide whether the presumption of non- residence is overcome by facts showing that he has established a residence in the territorial United States, which consists of the States, the District of Columbia, and the Territories of Hawaii and Alaska, and excludes other places. Residence may be established on a vessel regularly engaged in coast- wise trade, but the mere fact that a sailor makes his home on a vessel flying the United States flag and engaged in foreign trade is not sufficient to establish residence in the United States, even though the vessel, while carrying on foreign trade, touches at American ports. An alien seaman may acquire an actual residence in the territorial United States, within the rules laid down in Article 3 12 although the nature of his calling requires him to be absent from the place where his residence is established for a long period. Ap alien sea- man may acquire such a residence at a sailor’s boarding house or hotel, but such a claim should be carefully scrutinized in order to make sure that such residence is bona fide. The filing of Form 1078 (Revised), or taking out first citizenship papers is proof of residence in the United States from the time the form is filed or the papers taken out, unless rebutted by other evidence showing an intention to be a transient. The fact that a head tax has been paid on behalf of an alien seaman entering the United States is no evidence that he has acquired residence, because the head tax is payable unless the alien who is entering the country is merely in transit through the country. An alien may remain a nonresident although he is not in transit through the country. As to when the wages of alien seamen are subject to tax, see Article 92a. (T. D. 2869, signed by Commissioner Daniel C. Roper, and dated June 20, 1919.) 3436 Refund of amounts withheld from nonresident alien, on status 3406 changing to that of resident. — Reference is made to your telephone call in regard to a letter addressed to you under date of May 26, 1919, upon the subject of the withholding provisions of the Revenue Act of 1918. The inquiry was made as to whether the last sentence of that letter [^3406], which is quoted here, is correct: “The amount of tax withheld during the three months should not, how- ever, be refunded to the employee, but should be included in the corporation’s annual list return of income tax withheld at the source. Form 1042.” 3437 In reply you are advised that where the status of an alien changes during the year from that of a" resident to that of a nonresident, or from that of a nonresident to that of a resident, the status which exists at the end of the taxable year is the one which determines his right to exemption as to the whole year. Where an employer has withheld wages from a nonresi- dent during part of the year and thereafter the employee became a resident (before the employer has paid over to the United States the amount withheld), the employer is authorized on receiving proof of the change to refund to the employee the amounts which had been withheld from him during the earlier part of the taxable year, while his status was that of a nonresident. 3438 The ruling contained in this letter supersedes all other rulings in con- flict [therewith. (Letter to W. B. Reed, Accounting Secretary, National Coal Association, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated June 12, 1919.) INC. 476 TAX 3439 Claims for reftmd or abatement; Procedure to be followed by col- 2472 lectors with respect to claims for refund or abatement — Extension 3045 of Treasury Decision 2688 — Amendment to Article 1036, Regula- tions 45. — (1) Claims for refund or for abatement, pertaining to tax returns which have not at the time been posted to an assessment list, will be numbered to agree with, attached to, and made a part of, the original return so that the total tax as posted on the assessment list will be the admitted tax liability of the taxpayer. If a taxpayer submits an amended return as a claim either for refund or for abatement before the original return has been listed, such amended return will be numbered to agree with and attached to the original return in the same manner. Similarly, errors or omissions in returns discovered by the collector prior to the posting operate as an amendment to the amount of tax liability shown by the return. 3440 In other words, all amendments or changes either increasing or de- creasing the amount of tax liability and whether originated by the taxpayer or by the collector will be reflected on the face of the return itself and the posting to the assessment list will be of the correct amount. In this connection attention is called to the provisions of Mim. 2124. 3441 (2) Amended returns showing a reduced tax liability will not be acted upon by collectors if the original return has been previously entered on the assessment list. All claims pertaining to returns which have been listed for assessment must be submitted on Form 46, if the tax has been paid, or on Form 47, if the tax has not been paid. 3442 (3) The following classes of claims may be included on Form 751 (if for refund), or blanket Form 47 (if for abatement). Separate sheets properly designated of Forms 751 or blanket Forms 47 must be pre- pared for returns on file in the Commissioner’s office and those on file in the collector’s office: (a) All claims for refund or abatement pertaining to Form , 1040-A income returns for the calendar year 1918, or subsequent years. (b) Errors in computation. (These include only mistakes in arithmetic.) (c) Errors in specific exemptions on income returns. (These include such items as failure to deduct exemptions for dependents; the $2,000 exemption for corporations, etc.) (d) Payments in excess of the total amount of tax due as shown by the return. (These include such cases as a remittance of $1,500 covering payment of a tax liability of $1,300, etc.) (e) Amount previously paid on submission of a tentative income return in excess of the total tax liability shown by the final return. (f) Duplicate payments or assessments. (g) All claims for refund on account of nonrevenue remittances forwarded to the collector in error and deposited by him. (These include such items as state or municipal taxes sent to the collector and deposited by him as ‘‘unidentified,” etc.) 3443 (4) All claims for refund or abatement other than those enumerated above will be forwarded to the Commissioner for settlement. However, any claim may be so forwarded whenever the collector does not feel absolutely certain of the law, regulations or precedent involved, or if his disbursing bond is insufficient to enable him to procure an advance on accountable warrant of the requisite amount of funds from which to make payment. INC. 477 TAX 3444 (5) Before forwarding claims to the Commissioner for settlement certification must be made on the claim of the account number, the amount of tax originally due, the dates and amounts of all payments or other transactions affecting such amount, and the balance due as shown by the account on the list. All claims of this nature now on file in the collector’s office and hereafter as received should be certified and forwarded immediately. 3445 (6) Claims submitted by taxpayers direct to the Commissioner will in future be referred to the collector for this certificate as to the status of the account on the assessment list. Until so certified by the collector such claims will not be settled. When certifying claims for refund the collector will make a notation in the “Remarks” column of the date and amount of the refund claim but no record will be made on the tax journals unless a credit balance exists in the taxpayer’s account. In this case, the amount of the claim as certified will be posted to the list and recorded on the journal in the same manner as though payment were made by the collector. 3446 (7) In all cases where abatement claims are certified by the collector, notation will be made on the assessment list of the date on which the abatement claim was filed and the amount thereof, and on the daily journals. Form 769. (See paragraph 49, Manual of Revenue Accounting.) 3447 (8) Blanket claims for abatement of uncollectible items Form 53 may be filed by the collector as heretofore. The same record will be made on the tax journal and on the assessment list as in cases where the tax- payers submit such claims (the only difference being that in the first instance the claim originates with the taxpayer instead of with the collector). 3448 (9) The last two sentences of Article 1036, Regulations 45 (final edi- 3048 tion), are to be replaced by the following; “In certain cases of overpayment by taxpayers the collector may repay the excess after allowance by the Commissioner of a claim for refund, made by the collector on Form 751. The cases in which refund is made through collectors are covered by specific provisions not herein incorporated. The Commissioner has no authority to refund on equitable grounds penalties legally collected.” 3449 (10) All existing regulations in conflict with the above are hereby revoked. (T. D. 2871, signed by Commissioner, Daniel C. Roper, and dated June 21, 1919.) INC. 478 TAX 6 - 27 - 1 9 . (T. D. 2873.) 3450 Bases of Computation of Net Income: Modification of Article 23, 2834 Regulations 45. — Article 23, Regulations 45, is modified to read as follows : 3451 Art. 23. Bases of Computation. — (1) Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. See Section 200 of the statute for definitions of “paid,” “paid or accrued,” and “paid or incurred.” All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer, and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. For instance, in any case in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income except an accrual method. See Section 213 (a) [Tf768] of the statute. A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. See Article 53 [^2862c]. On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through conversion of the property. 3452 (2) For the taxable year 1918 the true income, computed under the Revenue Act of 1918 and — where the taxpayer keeps books of ac- count — in accordance with the method of accounting regularly employed in keeping such books, shall in all cases be entered in the return, even though this results in apparent omissions or duplications of particular items of income or expense. In the ordinary case such omissions and duplications are more apparent than real and are likely to counterbalance one another, so that the change in the basis of reporting calls for no material adjustment. Where, however, the method previously employed by the taxpayer in determining his income subject to the tax, is materially different from the method regularly used by the taxpayer in keeping his accounts, or where for any reason the basis of reporting income subject to tax is changed the taxpayer should attach to his return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change. Where for example a taxpayer who, prior to 1918, has reported on the so-called receipts basis, is compelled under the above rule to report on the so-called accrual basis, he should include in the separate state- ment the following information: Firsts (a) expenses paid before the end of the taxable year 1917 but not accrued at that date; (b) income accrued at the end of the taxable year 1917 but not received at that date; (c) expenses accrued at the end of the taxable year 1917 but not paid at that date; (d) income received before the end of the taxable year 1917 but not accrued at that date; and Second, ^ similar items as of the end of the taxable year 1916. 3453 If in the opinion of the Commissioner such information indicates that the returns for any previous years did not reflect the true income, amended returns for such years will be required. 3454 (3) A taxpayer who changes the method of accounting employed in keeping his books for the taxable year 1919 or thereafter, shall before computing his income upon such new basis for purposes of taxation secure the consent of the Commissioner. Application for permission to change the basis of the return shall be made at least 30 days in advance of the date of filing INC. 479 TAX return and shall be accompanied by a statement specifying the classes of items differently treated under the two systems and specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change. 3455 (4) Bank discounts. — Banks which in'the past have treated discount as income before it was actually earned and during the taxable year 1918 have placed the discount account upon an accrual basis, will be required to submit the information called for in paragraph 2 above and submit an amended return for the taxable year 1917, and will be permitted to submit (or the Commissioner may require) amended returns for all prior years during which the taxpayer was subject to tax. Additional taxes for prior years found to be due upon such reexamination will be paid upon the basis of the amended returns in the ordinary way. Where it appears that prior taxes have been paid in excess of the amount properly due, such excess will to the extent possible be credited against future income and profits taxes under the provisions of Section 252 [^[2488] of the Revenue Act of 1918. (T. D. 2873, signed by Commissioner Daniel C. Roper, and dated June 24, 1919.) {Decision.) (Act of October 3, 1913.) Income from Stocks and Bonds located in the United States, Taxable to Nonresident Aliens. Supreme Court of the United States. Emily R. DeGanay vs. Ephraim Lederer, Collector Internal Revenue. of Certificate from the United States Circuit Court of Appeals for the Third Circuit. [June 9, 1919.] Mr. Justice Day delivered the opinion of the Court. 3456 The Act of October 3, 1913, c. 16. sec. 2a, subdivision 1, 38 Stat. 506 166, provides: “That there shall be levied, assessed, collected 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.” 3457 Under this statutory provision a question arose as to the taxability of income from certain securities of Emily R. DeGanay, a citizen and resident of France. The District Court of the United States for the Eastern District of Pennsylvania held the income from the securities taxable. 239 Fed. 568 [^[2195, Income Tax Service — 1917]. The case is here upon certi- ficate from the Circuit Court of Appeals, from which it appears: That Emily R. DeGanay is a citizen of France, and resides in that country. That her father was an American citizen domiciled in Pennsylvania, and died in 1885, having devised one-fourth of his residuary estate, consisting of real property, to the Pennsylvania Company for Insurance on Lives and Granting Annuities, in trust to pay the net income thereof to her. She also inherited from her father a large amount of personal property in her own right free from any trust. This personal property is invested in stocks and bonds of corporations organ- 6-27-19. ized under laws of the United States and in bonds and mortgages secured upon property in Pennsylvania. Since 1885 the Pennsylvania Company has been acting as her agent under power of attorney, and has invested and reinvested her property, and has collected and remitted to her the net income therefrom. The certificates of stocks, bonds and mortgages had been and were in 1913 in the Company’s possession in its offices in Philadelphia. The Company made a return of the income collected for the plaintiff for the year 1913 both from her real estate, which is not in controversy here, and her net income from corporate stocks and bonds and the bonds and mortgages held by her in her own right. The tax was paid under protest and recovery was sought by the proper action. 3458 The question certified is limited to the net income collected by virtue of the power of attorney from the personal property owned by the plaintiff in her own right. 3459 The power of attorney, which is attached to the certificate, authorizes the agent: “To sell, assign, transfer any stocks, bonds, loans, or other securities now standing or that may hereafter stand in my name on the books of any and all corporations, national, state, municipal or private, to enter satisfaction upon the record of any indenture or mortgage now or hereafter in my name, or to sell and assign the same and to transfer policies of insurance, and the proceeds, also any other moneys to invest and reinvest in such securities as they may in their discretion deem safe and judicious to hold for my account; to collect and receipt for all interest and dividends, loans, stocks, or other securities now or hereafter belonging to me, to endorse checks payable to my order and to make or enter into any agreement or agreements they may deem necessary and best for my interest in the management of my business and affairs, also to represent me and in my behalf, to vote and act for me at all meetings con- nected with any company in which I may own stocks or bonds or be inter- ested in any way whatever, with power also as attorney or attorneys under it for that purpose to make and substitute, and to do all lawful acts requisite for effecting the premises, hereby ratifying and confirming all that the said attorney or substitute or substitutes shall do therein by virtue of these presents.” 3460 The question certified is: “If an alien non-resident own stocks, bonds and mortgages secured upon property in the United States or payable by persons or corporations there domiciled; and if the income therefrom is collected for and remitted to such non-resident by an agent domiciled in the United States; and if the agent has physical possession of the certificates of stock, the bonds and the mortgages; is such income subject to an income tax under the Act of October 3d, 1913.^” 3461 The question submitted comes to this: Is the income from the stock, bonds and mortgages, held by the Pennsylvania Company, de- rived from property owned in the United States.^ A learned argument is made to the effect that the stock certificates, bonds, and mortgages are not property, that they are but evidences of the ownership of interests which arc property; that the property, in a legal sense, represented by the securities, would exist if the physical evidences thereof were destroyed. But we are of opinion that these refinements are not decisive of the congressional intent in using the term “property” in this statute. Unless the contrary appears, statutory words arc presumed to be used in their ordinary and usual sense, and with the meaning commonly attributable to them.' To the general under- standing and with the common meaning usually attached to such descriptive terms, bonds, mortgages, and certificates of stock are regarded as property. By state and federal statutes they are often treated as property, not as mere INC. 481 TAX evidences of the interest which they represent. In Blackstone v. Miller^ 188 U. S. 189, 206, this court held that a deposit by a citizen of Illinois in a trust company in the city of New York was subject to the transfer tax of the State of New York and said: “There is no conflict between our views and the point decided in the case reported under the name of State Tax on Foreign Held Bonds, 15 Wall. 300. The taxation in that case was on the interest on bonds held out of the State. Bonds and negotiable instruments are more than merely evidences of debt. The debt is inseparable from the paper which declares and constitutes it, by a tradition which comes down from more archaic conditions. Bacon v. Hooker^ 177 Mass. 335, 337.” 3462 The Court of Appeals of New York recognizing the same principle, treated such instruments as property in People ex rel, Jefferson v. Smith, 88 N. Y. 576, 585: “It is clear from the statutes referred to and the authorities cited and from the understanding of business men in commercial transactions, as well as of jurists and legislators, that mortgages, bonds, bills and notes have for many purposes come to be regarded as property and not as the mere evidences of debts, and that they may thus have a situs at the place where they are found like other visible, tangible chattels.” 3463 We have no doubt that the securities, herein involved, are property. Are they property within the United States.? It is insisted that the maxim mobilia sequuntur personam applies in this instance, and that the situs of the property was at the domicile of the owner in France. But this court has frequently declared that the maxim, a fiction at most, must yield to the facts and circumstances of cases which require it; and that notes, bonds and mortgages may acquire a situs at a place other than the domicile of the owner, and be there reached by the taxing authority. It is only necessary to refer to some of the decisions of this court. New Orleans v. Stempel, 175 U. S. 309; Bristol V. Washington County, 177 U. S. 133; Blackstone v. Miller, supra; State Board of Assessors v. Comptoir National d’ Escompte, 191 U. S. 388; Carstairs v. Cochran, 193 U. S. 10; Scottish Union & National Ins. Co. v.. Bowland, 196 U. S. 611; Wheeler v. New York, 233 U, S. 434, 439; Iowa v. Slimmer, 248 U. S. 115, 120. Shares of stock in national banks, this court has held, for the ‘purpose of taxation may be separated from the domicile of the owner, and taxed at the place where held. Tappan v. Merchants^ National Bank, 19 Wall. 490. 3464 In the case under consideration the stocks and bonds were those of corporations organized under the laws of the United States, and the bonds and mortgages were secured upon property in Pennsylvania. The certificates of stock, the bonds and mortgages were in the Pennsylvania Com- pany’s offices in Philadelphia. Not only is this so, but the stocks, bonds and mortgages were held under a power of attorney which gave authority to the agent to sell, assign, or transfer any of them, and to invest and reinvest the proceeds of such sales as it might deem best in the management of the business and affairs of the principal. It is difficult to conceive how property could be more completely localized in the United States. There can be no question of the power of Congress to tax the income from such securities. Thus situated and held, and with the authority given to the local agent over them, we think the income derived is clearly from property within the United States within the meaning of Congress as expressed in the statute under considera- tion. It follows that the question certified by the Circuit Court of Appeals must be answered in the affirmative. So ordered. Mr. Justice McReynolds took no part in this case. INC. 482 TAX 7-10-19. (T. D. 2874.) 3465 Simulation of income tax receipts — Decision of court.- — The appended 2465 opinion and charge of Judge Westenhaver in the District Court of the United States, for the Northern District of Ohio, Eastern Division, in the case of United States v. Pittaro, is published for the information of internal revenue officers and others*concerned. [Captions only.] 3466 1 . Receipts to taxpayers — Duty to issue. The fact that Section 251 of the act of February 24, 1919, requires that full written or printed receipts be issued to taxpayers only on request therefor does not limit the collector’s mandatory duty to issue them when requested and does not fail to make them documents required to be issued whenever requested, and the receipts are plainly documents required to be issued by such section. 3467 2. Same — Simulation or fraudulent execution. Such receipts are documents required by provisions of the internal revenue laws and by regulations made in pursuance thereof, within the mean- ing of Section 3451, R. S., making it an offense to simulate or falsely or fraudu- lently execute or sign any document required by the internal revenue laws, or any regulation made in pursuance thereof, or to procure the same to be falsely or fraudulently executed, or to advise, aid in, or connive at such execu- tion thereof. 3468 3. Same — Blanks. The offense may be committed either where the receipt itself is a genuine receipt of the kind kept for that purpose in the office of the internal revenue collector but signed by the defendant without authority, or where, even if not a blank of the kind required to be kept, the blank itself is simulated or falsely or fraudulently executed and issued by a person who has no power or authority to do so. 3469 4. Same — Income tax receipts. Where defendant was charged with violating Section 34-51, R. S.. in that he falsely, fraudulently, etc., simulated and executed and advised, aided in, and connived at the execution of certain income tax receipts required by Section 251 of the act of February 24, 1919, to be given when requested, what defendant told the persons who paid the money is not material, nor is the question whether or not such persons were subject to the payment of an in- come tax, or to assessment and levy of such tax. (T. D. 2874, signed by Commissioner Daniel C. Roper, and dated June 23, 1919.) 3470 Separate ownership certificates required for coupons of differing 659 maturity dates. — Interest coupons represent income to taxpayer when 660 due and payable and are required to be reported in return for taxable 2862d year during which coupons matured. See Article 54, Regulations 45. 2998 Separate ownership certificate will be required for each interest coupon of different maturity date even though of same issue. (Telegram to the Southern Pacific Company, New York, N.Y., signed by Commissioner Daniel C. Roper, and dated June 24, 1919.) INC. 483 TAX 347 1 Withholding at the source on interest on bonds having no tax-free 2996 covenant.- Your telegram May 29. Bonds without tax-free covenant not permitted to be considered tax-free bonds at option of issuing corporations. ^Corporation only allowed to withhold tax at rate of eight and ten per cent, from nonresident alien individuals and nonresident alien corporations respectively. ^Corporation prohibited from paying tax on inter- est derived from such bonds when owned by citizens or residents of United States. (Telegram to the Farmers’ Loan and Trust Company, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated June 2, 1919.) (T. D. 2876) 3472 Income from stocks and bonds located in the United States, taxable 3456 to nonresident aliens. — The appended opinion [For opinion in full, see 1f3456] of the United States Supreme Court in the case of Emily R. DeGanay v. Lederer, Collector, is published for the information of internal revenue officers and others concerned. (T. D. 2876, signed by Commissioner , Daniel C. Roper, and dated June 25, 1919.) ' 3473 Inventories of securities by a bank maintaining a department for the 3113 merchandising thereof. — Reference is made to your letter of May 26, 1919, wherein you ask whether a bank that maintains a branch for the purpose of buying and selling securities has the full status of a recognized dealer in securities. ^In reply, you are advised that a bank or other institution having a regularly established department for the merchandising of securities, even though that department is subordinate in importance to other depart- ments, is entitled^ to the same benefit of using the basis provided for in Article 1585 [1f3 113] of inventorying securities acquired and held for resale, as one who is solely a dealer in securities. 1[In so far as the bank or other institution carry on, with an established place of business, a department for the mer- chandising of securities, it is in respect of such department treated in the same way as any other security merchant. It should be noted, however, that thfe method of inventorying provided for in Article 1585 has no application and can not be extended to taxpayers simply buying and selling securities for in- vestment or speculation. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 28, 1919.) 3474 The use of Form 1001 by foreign governments. — Answering your 3000 telegram July 5. Ownership certificate Form 1001 should be used in connection with interest payments upon domestic bonds owned by foreign governments. Enter amount on line six. (Telegram to the Guaranty Trust Company, New York, N. Y., signed by J. H. Callan, Assistant to the Commissioner, and dated July 7, 1919.) (T. D. 2883) 3476 Extension of Time for Filing Returns of Partnerships and Personal 3386 Service Corporations Having a Fiscal Year Ended Prior to May 31, 1919. — ^An extension of time to August 15, 1919, for filing returns is hereby granted to partnerships and personal service corporations having a fiscal year ended January 31, February 28, March 31, or April 30, 1919. (T. D. 2883, signed by Commissioner Daniel C. Roper, and dated July 9, 1919.) INC. 484 TAX 7 - 16 - 19 . 3476 Sale of personal property on installment plan.— Receipt js acknowl- 2849 ^ edged of your letter of 1919, in which further reference is 3486 made to your letter of March 6, 1919, and office reply dated April 7, 1919, requesting information as to the treatment of amounts owing on installment accounts in connection with making Income tax returns under the Revenue Act of 1918, in cases where only the profits are reported as actually realized as at the date of collection. It is assumed the taxpayer in question has heretofore made returns upon the basis of treating all installment sales as the equivalent of cash. 3477 In reply you are advised — (1) In accordance with provisions of Article 42 [^12849] of Regulations No. 45, the first step to be taken by the taxpayer is to prepare and hie as part of his return an amended balance sheet as at the date of the beginning of the taxable year, in which there shall be excluded from the surplus the unrealized gross profits uj^on the outstanding installment sales contracts at that date. Such amended balance sheet would be in substantially the following form: Balance Sheet as at opening of fiscal year. Assets. Liabilities. Plant and Elquipment $ Capital stock (or individ- Pess Depreciation $ ual’s or partner’s capital) $ Mortgage indebtedness.. . $ Current assets: Current Liabilities: Merchandise as per inv. .$ Bills payable $ Tnstal. sales contracts. . Accounts payable $ Notes receivable $ Wages or other accrued Accounts receivable. ... $ items $ Cash $ Deferred Debit Items: Insurance prem. paid in in advance $ Other items: Deferred Credit Items: Unrealized gross profits upon installment sales contracts$ Surplus $ Total Assets $ Total Liabilities $ 3478 (2) As from the beginning of the taxable year the following accounts should be set up: 3479 (a) Goods purchased which will be charged with the amount of in- ventory of the goods on hand at the beginning of the taxable year and with the expenditures for goods purchased during the year; 3480 (b) Goods sold {cost value)., which will be credited with the cost value of all goods sold during the year; 3481 (c) Installment Sales Gontracts which will be charged with the amount of the outstanding installment sales contracts at the begin- ning of the year and with the amount of installment sales contracts made during the year. 4'his account wdll be credited with all cash collected during the year upon installment sales contracts and with the unpaid installments of defaulted or cancelled contracts. 3482 (d) Unrealized Gross Profits on installment sales contracts^ which will be credited with the amount of unrealized gross profits upon the out- standing installment sales contracts at the beginning of the year, and with the amount of such unrealized gross profit upon Installment sales contracts made during the year. 1 his amount will be computed upon the basis of the total installment sales contracts reduced by the cost or in\ entory value of the goods INC. 485 TAX covered by the contracts, the remaining balance being the amount of the un- realized gross profits. 3483 (e) Realized Profits on installment sales contracts which will be credited from month to month, or at least at the end of the year, with the profits realized by collection upon installment sales contracts. Such profits should be computed by taking the same percentage of the total cash collections upon installment sales contracts during the period as the total unrealized profits on installment sales contracts bears to the total installment sales during the same year. Corresponding debits should be made to un- realized gross profits on installment sales contracts. Any necessary correc- tions to produce a more accurate result can be made as at the end of the fiscal year. 3484 It is believed that sufficient has been said above to indicate the use that is to be made of these special accounts and it is not necessary to discuss any of the other accounts which would normally be maintained. 34 85 It will be noted that the foregoing plan which will be permitted upoft an explicit statement of facts made to the Commissioner of Internal Revenue by a taxpayer engaged in merchandising upon the installment plan is not a change from an accrual basis to a cash received and paid basis. In the opinion of this olfice the income of a merchandising concern cannot be correctly reflected upon the latter basis, as the use of inventories is absolutely essential. The plan herein outlined is, therefore, merely a modification or adaptation of the ordinary accrual method of accounting as in the opinion of this office will enable the accounts of the taxpayer to clearly reflect his net income. Where in the past, another method has been used that has failed to reflect the taxpayer’s net income an amended return or returns for such year may be made. (Letter to The Corporation Trust Company, signed by Com- missioner Daniel C. Roper, and dated July 9, 1919.) 34 86 Sale of personal property on installment plan.— This Department is in 2849 receipt of your letter of July 8 , 1919, requesting amplification of the 3476 instructions contained in Article 42 [^2849] of Regulations No. 45 relative to the applic.''tion of the rule prescribed in said Article that, in the sale or contract for sale of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each install- ment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. 3487 arc advised that the income from installment sales to be returned each taxable year shall consist of: (1) Such part of 1 he installments received during the year (excluding those Installments received on account of property repossessed during the year) as represents realized profit. Install- ments received during the year are to be included whether the sales were ef- fected in an earlier or in the current taxable year. The profit on such install- ments shall be computed by taking the sam.e percentage of the installment receipts as the gross profit to be realized on the total installment sales made during the taxable year bears to the gross contract price (4 all such sales. Any necessary corrections to produce a more acairate result can be made as at the end of the taxable year. 3488 (2) The profit, if any, on contracts which during the year have been cancelled, the goods being repossessed by the vendor. In such cases the entire profit realized on the cancelled contract, less so much thereof as has been returned in previous 5 'ears, shall be returned as profit of the tax- able year in which the goods are repossessed. In estimating such profit the value of the repossessed article (taken at its cost to vendor, less proper al- lowance for damage and use) shall be taken into account, as well as all install- ments received on account of the contract. Where an installment house INC. 486 TAX T-28-19. makes sales which are not on the installment plan, the profit on such com- pleted sales will be determined in the regular manner prescribed in Sections 202 [1fl854] and 203 [1[1861]. 3489 Illustration: In 1917 goods which cost $10,000 are sold on install- ment plan for $20,000. Collections on account: 1917, $10,000; 1918, $9,800. One contract, originally for $500, is defaulted in 1918 and the goods which cost the vendor $250 are repossessed, being then worth $50. In- stallments on this defaulted contract had been paid as follows: 1917, $100; in 1918, $200. The profits to be returned in 1918 are: Under (1) 50% of $9,600 ($9,800 — $200) $4,800 Under (2) total installments received $300 Less — Profit returned in 1917 $50 Shrinkage in goods repossessed ($250 — $50) 200 $250 50 Total profit returnable in 1918 $4,850 3490 For simplicity, the above illustration omits sales in 1918. If sales in 1918 contain a different percentage of profit than those in 1917, some adjustment may be necessary as indicated in the text of the Regulations. 3491 If the vendor chooses as a matter of consistent practice to treat the obligations of purchasers as the equivalent of cash, such a course is permissible. Where the adoption of the method outlined above involves a change in the method of computing net income, the taxpayer’s balance sheet should be adjusted conformably as of the date when the change is effected, and he should conform to the requirements of Article 23 as amended in T reasury Decision 2873 [^3450]. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated July 10, 1919.) 3492 Duty of employer to determine status of alien employee. — Reference 2976 is made to your letter dated June 18, 1919, in regard to Article 315, 3152 R.egulations 45 which is quoted here: ‘‘(b) The employer may also obtain evidence to overcome the prima facie presumption of the non- residence by securing from the alien Form 1078 (revised) or an equivalent certificate of the alien establishing residence. Having secured such evidence from the alien, the employer may rely thereon unless the statement of the alien was false and the employer has reasonable cause to believe it false, and may continue to rely thereon until the alien ceases to be a resident under the provisions of Article 314.” It is noted that you have been advised by the Collector of Internal Revenue at Baltimore that it will be necessary for the employer to obtain Form 1078 for each year that a nonresident 'alien was employed. 3493 In reply you are advised that when Form 1078 is filed'with the em- ployer, the alien may be treated as a resident of the United States in so far as withholding of income tax at source is concerned and it is not neces- sary for the employer to secure from the alien employees new certificates. Form 1078, for each taxable year. The ruling contained in the article quoted herein will govern, namely, that when Form 1078 is filed, the employer may continue to rely thereon until the alien ceases to be a resident under the pro- visions of Article 314. 3494 You are further advised that employers with whom Forms 1078 are 3397 filed, should make a record of the certificates and forward them to the Commissioner of Internal Revenue, Sorting Division, Washington, D, C., not later than the twentieth day of the month succeeding that during which the certificates were received. (Letter to W. B. Reed, Accounting Secretary ,fNational Coal Association, Washington, D. C., signed by Commis** sioner Daniel C. Roper, and dated July 9, 1919.) INC. 487 TAX (T. D. 2892) 3495 Amending Article 307, final edition of Regulations 45, dealing with 2972a non-resident alien individual entitled to personal exemption and credit for dependents. — The final edition of regulations 45 is amended by changing article 307 to read as follows: Art. 307. When nonresident alien individual entitled to personal exemption.— (a) The following is an incomplete list of countries which either impose no income tax or in imposing an income tax allow both a personal exemption and a credit for dependents which satisfy the similar credit requirement of the statute: Argentina; Bosnia; Brazil; Canada; Carinthia; China; Chile; Cuba; Ecuador; Dalmatia; Denmark; France; Herzegovina; Istria; Mexico; Montenegro; Morocco; Nicaragua; Persia; Portugal; Roumania; Russia; Santo Domingo; Serbia; Union of South Africa, (b) The following is an incomplete list of countries which in imposing an income tax allow a personal exemption which satisfies the similar credit requirement of the statute, but do not allow a credit for dependents: Bachka; Banat of Tenesvar; Croatia; El Salvadore; Holland; Italy; Slavonia. (c) The following is an incomplete list of countries which in imposing an income tax do not allow to citizens of the United States not residing in such country either a personal exemption or a credit for dependents and, therefore, fail entirely to satisfy the similar credit requirement of the statute: Australia; Costa Rica; Great Britain and Ireland; Japan; New Zealand; Norway; Spain. The former names of certain of these territories are here used for convenience, in spite of an actual or possible change in name or sovereignty. A nonresident alien individual who is a citizen or subject of any country in the first list is entitled for the purpose of the normal tax to such credit for a personal exemption and for dependents as his family status may warrant. If he is a citizen or subject of any country in the second list he is entitled to a credit for a personal exemption, but to none for dependents. If he is a citizen or subject of any country in the third list he is not entitled to credit for either a personal exemption or for dependents. If he is a citizen or subject of a countiy which is in none of the lists, then to secure credit for either a personal exemption or for dependents he must prove to the satisfaction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the similar credit required by the statute. (T. D. 2892, signed by Commissioner Daniel C. Roper, and dated July 17, 1919.) 3496 Coupons of foreign-owned domestic bonds purchased by a domestic 687 corporation. — In case bank purchases abroad coupons from bonds issued by domestic corporations purchaser held prima facie to be recipient of income. Ownership certificates should therefore be secured from original owners of bonds in order that tax may be withheld as provided in sections two twenty one and two thirty seven revenue act 1918. (Telegram M. F. Frey, Guaranty Trust Company, New York, N. Y., signed by Com- missioner Daniel C. Roper, and dated July 22, 1919.) INC. 488 TAX 7 - 80-19 {Decision.) (Act of Oct. 3, 1913.) 257 Fed. 133. Stock losses as losses incurred in trade. BRYCE et al. v. KEITH, Collector of Internal Revenue. (District Court, E. D. New York. March 26, 1919.) 3497 In Equity. Suit by Peter Cooper Bryce and another, as executors 1066 of the will of Edith C. Bryce, deceased, against Henry P. Keith, Col- lector of Internal Revenue for the First District of New York. On plaintiff’s motion for judgment on demurrer to complaint interposed by defendant. Demurrer overruled, with leave to answer. 3498 GARVIN, District Judge. Plaintiff’s move for judgment upon the demurrer to the complaint interposed by the defendant. The com- plaint sets forth the following facts: That plaintiffs are the surviving executors of Edith C. Bryce, deceased, who died April 29, 1916. That on various dates between October 6, 1908, and February 4, 1910, inclusive, she had traded certain glue and gelatine, glue and gelatine stock, and mach- inery worth $225,000 for 2,250 shares, of the par value of $100 each, of the capital stock of Peter Cooper’s Glue Factory, a corporation, and had sold to said corporation other similar materials worth and at an agreed value of $471,- 594.72. That she had eventually accepted in payment of the agreed purchase price therefor, and of other indebtedness of the corporation to her for rent, interest, and insurance premiums, amounting to $28,405.28, 5,000 other shares of said stock making 7,250 shares thereof altogether, which 7,250 shares were all so acquired by her on and prior to February 4, 1910, at a total cost to her of $725,000 as aforesaid. That on or about June 10, 1914, all of the assets of said Peter Cooper’s Glue Factory were sold for a sum insufficient to pay its debts, and said stock thereupon became entirely worthless, and the said sum of $725,000 was thereupon and during the year 1914 actually charged off as a loss on the books of said Edith C. Bryce. That prior to March 1, 1915, and on or about February 27, 1915, under and pursuant to the provisions of the statute known as the “Federal Income Tax Law,” to wit, section 2 of the Act of Congress, approved October 3, 1913, c. 16, 38 Stat. 114, entitled “An act to reduce tariff duties and to provide revenue for the government and for other purposes,” she duly made to and filed with the defendant as collector of in- ternal revenue of the United States of America for the First district of New York a return of her gross income during the year 1914 and of certain items claimed by her to be properly deductible therefrom in order to determine her net inccme for that year subject to the tax imposed by said statute. The said return stated her gross income to be, as in fact it was, $428,071.67, and claimed as an item properly deductible, the said sum of $725,000, as a loss actually sustained by her during 1914, incurred in trade and not compensated for by insurance or otherwise. That thereafter the Commissioner of Internal Revenue assessed a tax against her in the sum of $12,336.44, which amount was fixed without allowing any deduction whatever for the'said sum of $725,- 000. That the plaintiffs paid this tax involuntarily, under protest, under duress, under threat of distraint against their property, and after the defen- ant, as collector as aforesaid, had demanded the same. 3499 From the complaint it cannot be determined what proportion of the loss sustained by the decedent occurred between March 1, 1913, and June 10, 1914 (that being a matter of proof), and as the only question raised by the demurrer is whether the plaintiffs are entitled to any relief whatever, it is proper to consider at once whether any part of such a loss as the decedent sustained may be deducted. INC. 489 TAX 3500 The return was made for the year 1914 under the act of Congress approved October 3, 1913, paragraph “b’’ of section 2 of which pro- vides: “That in computing net income for the purpose of the normal tax there shall be allowed as deductions: * * * “Fourth, losses actually sustained during the year, incurred in trade or arising from fire, storms, or shipwreck, and not compensated for by insurance or otherwise.” 3501 The defendant claims that no part of the stock loss was a loss “in- curred in trade,” within the meaning of the act. 3502 The transactions by which the decedent became the owner of the stock were carried on over a considerable period, were complicated in character, involved a very large sum of money, and must have required much of her time and attention, and I am of the opinion that they were of the character contemplated by Congress as “incurred in trade.” 3503 The wording of Treasury Decisions, T. D. 1989 [^[1067], dated June 2, 1914, bears out this view: “Losses actually sustained during the year incurred in trade are limited by the language of the act itself. In trade is synonymous with business; business has been defined as that which occupies and engages the time, at- tention and labor of any one for the purposes of livelihood, profit, or im- provement; that which is his personal concern or interest; employment, regu- lar occupation, but it is not necessary that it should be his sole occupation or employment. The doing of a single act incidental or of necessity not pertaining to the particular business of the person doing the same will not be considered engaging in or carrying on the business. It is therefore held that no losses are deductible in a return of income save and only those losses permitted and provided for by the statute, viz., those actually sustained during the year, which are incurred in trade.” 3504 In overruling the demurrer, the question of the amount of, or method of arriving at, the proper deduction, is not decided. 3505 Demurrer overruled, with leave to answer in 20 days from the serv- ice of the order to be entered herein. (257 Fed. 133.) 3506 In determining value of stock as of March 1, 1913, the goodwill of the 2846 corporation is to be taken into consideration. — Receipt is acknowl- edged of your letter of July 2, 1919, in which you refer to the con- sideration to be given to the value of goodwill of a corporation where it is desired to establish the fair market value of its outstanding capital stock on March 1, 1913. In reply, you are advised that the value of the tangible and intangible assets of a corporation, inclusive of the value of goodwill, as of March 1, 1913, is to be taken into consideration, together with such other facts as may be ne- cessary, where it is desired to establish the market value of its outstanding capital stock on March 1, 1913, for income tax purposes. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C.*Roper, and dated July 22, 1919.) INC. 490 TAX 8 - 4 - 19 . 3507 Withholding and tax liability in connection with credit and debit 572 interest items involved in transactions between domestic and foreign 2312 banks. — Reference is made to your letter dated June 30, 1919 re- 3342 lative to withholding of the tax at the source from interest on bank balances of foreign banks on deposit in domestic banks, under the provisions of the Revenue Act of 1918. In many cases the accounts of foreign banks are at times overdrawn and instead of crediting interest to their accounts the domestic bank is obliged to debit interest for the money temporarily advanced to the foreign bank. In some cases foreign banks have two accounts with domestic banks, one a deposit account and the other a borrowing account. You ask whether in such cases the domestic bank should deduct the tax from the entire amount of interest credited to the foreign bank or whether the domestic bank is required to deduct the tax from only the net amount of interest credited to the foreign bank after subtracting the amount of interest debited or only from the excess of the amount of interest credited to the deposit account of the foreign bank over the amount of in- terest charged upon the borrowing account. In this connection you are advised that under the provisions of Sections 221 and 237 of the Act, domestic banks are required to deduct and withhold the tax from the entire amount of interest credited to foreign banks upon their deposits in the domestic banks regardless of the amount of interest charged the foreign banks on money advanced to them through loans or borrowing accounts or on account of overdrafts or otherwise. However if the foreign banks render returns of their total income from all sources within the United States they may deduct in such returns the interest charged upon the money advanced to them by the domestic banks to the extent provided in Sections 214 (a,2) and 234 (a, 2) of the Act. In such cases the foreign bank should include in its gross income the entire amount of the income from which the tax was withheld and paid at the source as well as income from all other sources within the United States without deduction for the tax so paid, but any tax actually so withheld i» to be credited against the total tax as computed in its return. In the event the amount of tax so paid at the source by the withholding agent is in excess of the total tax liability of the foreign bank, a claim for refund may be properly filed for the amount overpaid. (Letter to The Corporation Trust Company^ signed by Commisioner Daniel C. Roper, and dated July 26, 1919.) (T. D. 2903.) 3508 In re laws relating to the giving out, by employees of the Bureau of 403 Internal Revenue, of information contained in returns filed by tax- 3063 payers or in reference to office procedure with respect to the auditing of returns, handling of claims and similar lines of work. — Your attention is directed to the following legislation relating to the divulging of information contained in the returns of taxpayers. Ik 'HT 3509 Section 257 of the Revenue Act of 1918 provides: [1[403]. Section 403 3167 R. S., as amended by Section 1317 of the said Revenue Act of 441 1918, provides: [•[441]. Section 3152, R. S., as amended by Act of 443 March 1, 1879, authorizing the employment of internal revenue agents also provides: ‘‘And all provisions of section thirty-one hun- dred and sixty-seven, * * hc Revised Statutes shall apply to internal-revenue agents as fully as internal-revenue officers.” Section 3173 (R. S., as amended by said Section 1317) of the Revenue Act of 1918 provides that: “It shall be the duty of any person, partnership, firm or association or corporation, made liable to any duty, special tax, or other tax imposed by law, when not otherwise provided for, (1) in case of a special tax, on or before INC. 491 TAX the thirty-first day of July in each year, and (2) in other cases before the day on which the taxes accrue to make a list or return * * *: 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 objects 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. * * *” Section 3176, R. S., as amended by said Section 1317, Revenue Act of 1918, further provides: [1f443]. 3510 Reading these provisions of law together, it is evident that any col- lector, deputy collector, agent, clerk, or other officer or employee of the Bureau of Internal Revenue, including internal-revenue agents, who divulges or makes known in any manner whatsoever not provided by law the amount or source of income, profits, losses, expenditures, or any particulars thereof set forth or disclosed in any income return made by any taxpayer, or by a collector or deputy collector, or by the Commissioner of Internal Revenue, or who permits 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, or who prints or publishes in any manner whatever, not provided by law, any income return or any part thereof, or source of income, profits, losses, or expenditures appearing in any income return, is guilty of a misdemeanor and subject to a fine not exceeding $1,000 or to imprisonment not exceeding one year, or both, at the discretion of the court, and if he be an officer or employee of the United States, to be dismissed from office or dis- charged from employment. 3511 The only provisions of law authorizing the making known of any income return under the Revenue Act of 1918 are those contained in Section 257 of said Act, above quoted. 3512 Similar provisions to those contained in Section 257, Revenue Act of 1918, and Sections 3173 and 3176, as amended by said Revenue Act of 1918, were also contained in the Act of October 3, 1914, and the Act df September 8, 1916. _ _ ^ 3513 You should endeavor in every way possible to impress employees under your supervision with the seriousness of the offenses which are intended to be prevented by this legislation. Any violations of these pro- visions of the law which become known to any officer or employee of the Bureau must be immediately reported for investigation. (T. D. 2903, signed by Commissioner Daniel C. Roper, and dated July 30, 1919.) INC 492 TAX 8-14-19. (T. D. 2899.) ■' 3514 Income Tax — Decision of Court. [Life Insurance — Dividends.]— The appended decision of the United States Circuit Court of Appeals for the Third Circuit in the case of Lederer, collector, v. Penn Mutual Life Insurance Co., is published for the Information of internal-revenue ‘officersx and other concerned. [Captions only.] 3515 1 . Dividends Excluded from Gross Income. — Under the provisions of paragraph G, subdivision (b) of section 2 of the act of October 3, 1913, that “life insurance companies shall not Include as income in any year such portion of any actual premium received from any individual policy- holder as shall have been paid back or credited to such individual policyholder within such year,” a life insurance company is not entitled to exclude from its total income during the taxable year, for the purpose of ascertaining its gross income, any dividends paid or credited to policyholders from whom it did not receive any premium during that year; and as to such policyholders as it did receive premiums from that year it is entitled to exclude only such part of the dividends paid to those policyholders as did not exceed the amount’ received from them, respectively, by way of premiums during that year. 3516 2. Dividends Consisting of Redundancies in Previous Premium Payments. — None of the cash dividends paid by a life insurance com- pany to Its policyholders which represent redundancies in previous premium payments are deductible from gross income in annual tax returns as “sums other than dividends paid within the year on policy * * * contracts.”* (T. D. 2899, signed by Commissioner Daniel C. Roper, and dated July 24, 1919.) (T. D. 2906.) 3517 Income Tax. — Amending Article 307, final edition of Regulations 2972a 45, dealing with nonresident alien individual entitled to personal 3274 exemption and credit for dependents. — The final edition of Regula- 3495 tions 45 is amended by changing Article 307 to read as follows: Art. 307. When nonresident alien individual entitled to personal ex- emption — (a) The following Is an incomplete list of countries which either Im- pose no income tax or In imposing an income tax allow both a personal ex- emption and a credit for dependents which satisfy the similar credit require- ment of the statute: Argentina; Belgium; Bolivia; Bosnia; Brazil; Canada; Carinthia; China; Chile; Cuba; Dalmatia; Denmark; Equador; Egypt; France; Herzegovina; Istria; Mexico; Montenegro; Morocco; Newfoundland; Nicarag- ua; Norway; Panama; Persia; Peru; Portugal; Roumania; Russia (including Poles owing allegiance to Russia) ; Santo Domingo; Serbia; Siam; Spain; Union of South Africa; Venezuela, (b) The following is an Incomplete list of countries which In imposing an income tax allow a personal exemption which satisfies the similar credit requirement of the statute, but do not allow a credit for depend- ents: Bachka; Banat of Temesvar; Croatia; El Salvadore; India; Italy; Slavonia, (c) The following Is an incomplete list of countries which in Im- posing an income tax do not allow to citizens of the United States not resid- ing in such country either a personal exemption or a credit for dependents and, therefore, fail entirely to satisfy the similar credit requirement of the statute: Australia; Costa Rica; Great Britain and Ireland; Japan; The Netherlands; New Zealand. The former names of certain of these territories are here used for convenience, in spite of an actual or possible change in name or sov- ereignty. A nonresinent alien Individual who is a citizen or subject of any country in the first list is entitled for the purpose of the normal tax to such credit for a personal exemptioh and for dependents as his family status may warrant. If he is a citizen or subject of any country in the second list he is entitled to a credit for a personal exemption, but to none for dependents. INC. 493 TAX If he is a citizen or subject of any country in the third list he Is not entitled to credit for either a personal exemption or for dependents. If he is a citizen or subject of a country which is in none of the lists, then to secure credit for either a personal exemption or for dependents he must prove to the satis- faction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the similar credit required by the statute. (T. D. 2906, signed by Commissioner Daniel C. Roper, and dated Augusts, 1919.) (T. D. 2907.) 3518 Instructions relative to acceptance of Treasury certificates of 435 indebtedness for income and profits taxes, supplementing Articles 3128 1731 and 1732, Regulations 45. — Collectors of Internal Revenue 3371 are directed to receive at par United States Treasury certificates of indebtedness of Series T4, dated June 3, 1919, maturing Sepember 15, 1919, and Series T6, dated July 1, 1919, maturing September 15, 1919, in payment of income and profits taxes payable on September 15, 1919, and to receive at par United States Treasury certificates of indebtedness of Series T5, dated June 3, 1919, maturing December 15, 1919, and Series T7, dated July 1, 1919, maturing December 15, 1919, in payment of income and profits taxes payable on December 15, 1919. Collectors are authorized to receive such certificates in payment of such taxes, respectively, prior to the dates when the certificates respectively mature. The certificates of said series have one interest coupon attached, payable at the maturity of the certificates, respectively, but such coupons must in all cases be detached by the taxpayer and collected in ordinary course when due. The amount, at par, of the Treasury certificates of indebtedness presented by any tax- payer in payment of income and profits taxes must not exceed the amount of the taxes to be paid by him, and collectors shall in no case pay interest on the certificates nor accept them for an amount other or greater than their face value. 3519 Deposits of Treasury certificates of indebtedness received in pay- ment of income and profits taxes must be made by collectors with the Federal Reserve Banks of the districts in which the respective collectors’ offices are located, unless otherwise specifically instructed by the Secretary of the Treasury. Specific instructions may be given in certain instances for the deposit of the certificates with Federal Reserve Banks of other districts and with branch Federal Reserve Banks, and the term “Federal Reserve Bank,” where it appears herein, includes such branches. Treasury certifi- cates accepted by the collector prior to the dates when the certificates re- spectively mature, should be forwarded by the collector to the Federal Reserve Bank to be held for account of the collector until the date of ma- turity, and for deposit on such date. Certificates of indebtedness should in all cases be stamped as follows by the Collector, and when so stamped for- warded to the Federal Reserve Bank by registered mail uninsured: “ , 191. . . . “This certificate has been accepted in payment of income and profits taxes and will not be redeemed by the United States except for credit of the undersigned. Collector of Internal Revenue for the district of ” 3520 Collectors of internal revenue are not authorized, unless otherwise notified by the Secretary of the Treasury, to receive in payment of income or profits taxes interim receipts issued by Federal Reserve Banks in lieu of definite certificates of the series herein described. 494 * TAX INC. S-14-19 3621 Collectors should make in tabular form a schedule in duplicate of the certificates of indebtedness to be forwarded to the Federal Reserve Bank, showing the serial number of each certificate, the date of issue and maturity, and face value. Certificates of indebtedness accepted prior to the date of maturity must be scheduled separately. At the bottom of each schedule there should be written or stamped “Income and Profits Taxes $ ,” which amount must agree with the total shown on the schedule. One copy of this schedule must accompany certificates sent to the Federal Reserve Bank, and the other be retained by the collector. Such income and profits tax deposits must in all cases be shown on the face of the certificate bf deposit (National Bank Form 15) separate and distinct from the item of miscellaneous internal revenue collections (formerly called Ordinary), but it is not necessary to give the separation into corporation income, individual income and profits taxes. 3522 Until certificates of deposit are received from the Federal Reserve Banks, the amounts represented by the certificates of indebtedness forwarded must be carried by collectors as cash on hand, and not credited as collections, as the dates of certificates of deposit determine the dates of collections. 3523 For the purpose of saving taxpayers the expense of transmitting such certificates as are held in Federal Reserve cities to the office of the collector in whose district the taxes are payable, taxpayers desiring to pay income and profits taxes by Treasury certificates of indebtedness acceptable in payment of such taxes, should communicate with the collector of the district in which the taxes are payable and request from him authority to deposit such certificates with the Federal Reserve Bank in the city in which the certificates are held. Collectors are authorized to permit deposits of Treasury certificates of indebtedness in any Federal Reserve Bank with the distinct understanding that the Federal Reserve Bank is to issue a cer- tificate of deposit in the collector’s name covering the amount of the cer- tificates of indebtedness at par and to state on the face of the certificate of deposit that the amount represented thereby is in payment of income and profits taxes. The Federal Reserve Bank should forward the original cer- tificate of deposit to the Treasurer of the United States, with its daily transcript, and transmit to the collector the duplicate and triplicate, accom- panied by a statement giving the name of the taxpayer for whom the pay- ment is made in order that the collector may make the necessary record and forward the duplicate to the office of the Commissioner of Internal Revenue. 3524 This Treasury Decision amends and supplements the provisions of Articles 1731 [^[3128] and 1732 [^3129] of Regulations 45. (T. D. 2907. Signed by Commissioner Daniel C. Roper, and dated August 7, 1919.) 3525 Alien employees — Resident and Non-resident — Withholding upon 2976 change of status. — Reference Is made to your letter dated June 30, 3406 1919, which Is quoted here In part: “Referring to our telephone 3436 conversation of this morning, we understand that In the case of the 3492 employment of alien labor that where such labor has been em- ployed for three months or more continuously his status is estab- lished as a resident alien, and there is no liability upon the employer for further withholding from such an employee. In fact, he may refund the amounts withheld prior to that time. Assuming that such an employee has been in the service of an employer continuously for a sufficient time to establish his status as a resident alien until for example November 15th. The employer has paid over to him all of the money which Is due him up to that time. The employee announces his intention to return to the foreign country from which he came, but continues to work for the employer until 495 TAX INC. the first of January. The employer now has information as to the intentions of such an employee. We understand that there is no liability upon him for withholding prior to the time in which these intentions became known; namely, November 15th, and that he should withhold only upon the basis of the earnings of the employee from the time from which the employer knew of the intention of the employee to quit the country.” 3526 In reply you are advised that under the provisions of Article 315, Regulations 45, if wages are paid without withholding the tax, the employer should be provided with written proof of facts which overcome the presumption that such alien is a nonresident. If an alien has been living in the United States for as much as one year immediately prior to the time he entered the employment of the withholding agent, or if he has been regularly employed by a resident individual or corporation in the same county for as much as three months immediately prior to any payment by the employer, he may be treated as a resident in the absence of facts known to the employer showing that he is in fact a transient. 3527 In case tax has been withheld by the employer from wages paid dur- ing three months period while the status was that of a nonresident alien, the amount of tax may be refunded in accordance with the data contained on Form 1115. This form is provided for the purpose of receiving the benefit of personal exemption and credit for dependents in connection with income tax withheld at the source from salaries, wages and similar income. In case tax has been withheld from an alien employee and his status as a resident has been established by the execution of Form 1078, any income tax withheld may be refunded upon receipt of that certificate. The fact, however, that an alien has been employed by a corporation for three months is not in itself sufficient grounds upon which to refund income tax withheld at the source. It was not the intention that Article 315 of Regulations No. 45 referred to herein, should be construed as permitting an employer to withhold from nonresident alien employees for a period of only three months and refund the amount of tax withheld at the end of that period merely because aliens had been employed by him for that period of time. 3528 If the status of a resident employee changes to that of a nonresident alien, the employer should withhold income tax at the rate of eight per cent from all wages paid to the nonresident employee on and after the date on which the employer had knowledge of the change. Although the employee, in such case, will be taxable as a nonresident alien for the entire taxable year during which his status is changed from that of a resident to that of a nonresident alien, the employer will not be held liable for the deduction of income tax with respect to wages paid preceding the knowledge of the employer as to the change in status. (Letter to W. B. Reed, Ac- counting Secretary, National Coal Association, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated August 6, 1919.) 3529 Compromise of penalties arising under income tax laws. — Depart- ment of Justice, June 3, 1919. Sir: I have had under careful con- sideration for some time a request from your predecessor for an opinion as to the power of the Commissioner of Internal Revenue, with the advice and consent of the Secretary of the' Treasury, to compromise claims for certain penalties arising under the income-tax laws. The specific claims mentioned are: (1) Claims for amounts 50 per cent in addition to amounts of income and excess-profit taxes assessed under authority of section 3176 of Revised Statutes, as am.ended by section 16 of the act of September 8, 1916, and of section 212 of the act of October 3, 1917, in cases of failure to make and file returns or lists within the time prescribed by law or by the collector; INC. 496 TAX ^ 14 - 19 . (2) Claims fof amounts 100 per cent in addition to amounts of income and excess-profit taxes assessed under authority of said sections in cases of false or fraudulent returns or lists wilfully made; and (3) Claims for sums oi 5 per cent on amounts of income and excess-profit taxes not paid when due and interest at the rate of 1 per cent per month on said taxes, the collection of which is authorized by sections 9 {a) and 14 {a) of the act of September 8, 1916, and section 212 of the act of October 3, 1917. 3530 The exact question submitted is whether, under the authority of section 3229 of Revised Statutes, the Commissioner of Internal Revenue is authorized to compromise these penalties in cases in which there is no doubt as to the legal liability of the taxpayer or as to the collectibility of the claim, but in which, in the opinion of the Secretary of the Treasury and that of the commissioner, considerations of justice, equity, and public policy warrant a reduction of the amounts to be collected on the ground that the statutory amounts are in the nature of penalties for delinquencies, and that, though such amounts are technically due and are collectible, the collec- tion of them inflicts punishment which is unduly severe in view of the culp- ability. 3531 Section 3229 of the Revised Statutes is as follows; “The Commissioner 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 instead of commencing suit thereon; and, with the advice and consent of the said Secretary and the recommendation of the Attorney General, he may compromise any such case after a suit thereon has been commenced. Whenever a compromise is made in any case there shall be placed on file in the office of the commissioner the opinion of the Solicitor of Internal Revenue, or of the officer acting as such, with his reasons therefor, with a statement of the amount of tax assessed, the amount of additional tax or penalty imposed by law in con- sequence of the neglect or delinquency of the person against whom the taxis assessed, and the amount actually paid in accordance with the terms of the compromise.” 3532 It will be observed that the power to compromise is given in very broad and general terms. Congress has not seen fit to specify the considerations which shall control the commissioner in determining whether a case ought or ought not to be compromised instead of commencing suit, nor to place any limitation upon this exercise of power, except that his action shall be with the advice and consent of the Secretary of the Treasury. After suit is commenced the power is to be exercised only with the advice and consent of the Secretary of the Treasury and the recommendation of the Attorney General. 3533 The act of Congress which, somewhat condensed and shortened, was carried into the Revised Statutes as section 3229 was section 102 of the act of June 20, 1868 (15 Stat. 125, 166) . That act conferred the power to compromise in all cases arising under the internal-revenue laws where, instead of commencing or proceeding with a suit, “it may appear to the Commissioner of Internal Revenue to be for the interest of the United States to compromise the same.” The language just quoted was omitted from section 3229. It will be seen, therefore, that the original act authorized a compromise whenever, in the opinion of the Commissioner of Internal Revenue it was “for the interest of the United States.” These words were by way of limitation upon his power. Their omission from section 3229, there- fore, can not be said to render the power more restricted than it was under the original act. Certainly, then, section 3229 can not be given a narrower meaning than to say that the power is conferred to make any compromise which in the opinion of the commissioner, acting with the advice and consent of the Secretary of the Treasury, and, in the event suit has been commenced,, upon the recommendation of the Attorney (jeneral, will be for the interest INC. 497 TAX of the United States. The fact that the act applies to both civil and criminal cases,, and the further fact that when a compromise is made there shall be placed on file the opinion of the Solicitor of Internal Revenue stating the reasons for the compromise, the amount of tax assessed, the amount of additional tax or penalty imposed, and the amount actually, paid, make it plain that whatever power to compromise is given extends to penalties, such as those mentioned in the request for this opinion. 3534 Opinions of my predecessors touching the nature and extent of. the power of the commissioner to make compromises are more or less conflicting and it will not, I think, serve any useful purpose to review and attempt to reconcile them. I have given them, as well as all decisions of the courts bearing in any way on the question, careful consideration and will content myself with stating my conclusions. 3535 Your request does not relate to compromises of taxes, but only to penalties and interest imposed on account of delinquencies of the taxpayer. I shall accordingly confine my opinion to penalties and interest. 3536 It seems clear that Congress has left it to the judgment and dis cretion of the commissioner to determine when it is to the interest of the United States to compromise such claims instead of commencing or prosecuting suits therefor, and that the only limitation placed upon the exercise of this judgment and discretion is that his action shall be with the advice and consent of the cabinet officers mentioned in the statute. And I am of the opinion that, subject to this limitation, he has the power to compromise the penalties and interest mentioned in the request for this opinion whenever, in his judgment, such compromises are for the interest of the United States. Congress has not said that such compromises may be made only when in the judgment of the commissioner more money can thereby be realized than can be realized by commencing and prosecuting a suit. It can not be said, therefore, as a matter of law, that the power to compromise is limited to cases in which either the liability for the penalty or the collectibility of the claim is doubtful. In these matters I think the judgment of the commissioner as to what is for the interest of the United States is made conclusive. What considerations shall control are fixed by no rule of law, but depend upon his own discretion and sound judgment exercised in good faith. It may be that with respect to the amount of tax to be collected, or the amount of penalty resulting from wilful fraud, the commissioner may never find a case in which he will feel justified in accepting less than can be legally collected, whereas in cases of penalties resulting from accident, negligence, or technical omission, he may honestly believe that the interests of the United States will be best served by accepting less than the full penalty. In such cases, I am of opinion that he has the right to compromise upon any ground which, in his judgment, renders the compromise for the interest of the United States. Respectfully, To the Secretary of the Treasury. A. Mitchell Palmer. 3537 Inventory losses— time for filing claim in abatement. — Acknowledg- 144 ment is made of the receipt of your telegram of July 25, 1919, 2963e asking to be advised if an abatement claim covering loss in inventory 3337 value can be filed by a taxpayer after his return is filed but before 3368 the total amount of tax is collected. In reply, you are advised that as the section of the law covering the matter referred to by you reads that at the time of filing a return for the taxable year 1918, a taxpayer may file a claim for abatement, it is held by this Bureau that the law does not mandatorily provide that the claim shall be filed at the time of rendering the return. Therefore, such an abatement claim will be considered by this Bureau if filed before, or within ten days after, the mailing of the Collector’s notice and demand on Form 17. (Letter to Guaranty Trust Company of New York, signed by Commissioner Daniel C. Roper, and dated August 6, 1919.) INC. 498 TAX 3538yPolicy of the Bureau of Internal Revenue with Regard to Requests for Rulings and Advice Upon Abstract Propositions.— The Bureau of Internal Revenue, in a statement issued yesterday [August 25, 1919] definitely outlines its policy with regard to requests which are received' daily for rulings and advice upon abstract propositions involving questions of income ta^ and profit liability. For example, taxpayers considering the reor- ganization of corporations frequently ask whether the contemplated plans will result in the realization of taxable income. These requests for advance information have become so numerous, that the Bureau deems it advisable to state why it is found necessary to decline to make advance rulingsjin particular cases. The policy of the Bureau, it is announced, will be not to answer such inquiries except under the following circumstances: The transaction must be completed and not merely proposed or planned. The complete facts relating to the transaction, together with abstracts from contracts or other documents necessary to present the complete facts must be given. The names of all the^real'parties interested (not “dummies” usedjin the transaction) must be stated regardless of who presents the question, whether attorney, accountant, tax service or other representative. 3539 The conclusions upon which the rulings are based are as follows: “An examination of the revenue laws setting^forth the duties of the Commissioner of Internal Revenue does not disclose any^function assigned to him by statute which authorizes him to make a decision in any particular case which does not arise in actual course of administering the law. He is authorized, with the approval of the Secretary of the Treasury, to^make regulations, but this would not authorize him even, with the approval of the Secretary, to decide any particular case in advance of its actual presentation of the facts for a decision. 3540 :.“In^the interval between an informal advanceTdecision' and the time when the case is finally presented for actual decision, develop- ments may occur which affect the decision. When a question is actually presented in the regular course of administration for the decision of the Commissioner, the decision must then be in accordance with such light, whether from experience or from judicial decision, as he may then have. Any taxpayer who had relied on an advance decision would necessarily be prejudiced whenever the final decision did not agree with the advance de- cision. The fact that taxpayers asking for advance decisions are usually un- willing tojaccept^an oral opinion shows that taxpayers are intending to rely on such advance decisions, and are likely to be misled by them if change later becomes necessary. 3541 “It is also a matter of practical experience that when facts are pre- sented for advance decision it is practically impossible to present the same facts as will afterwards come up in the regular course for actual decision. Reorganization plans, for instance, when they actually work out, may be changed in some particular which the taxpayer regards as un- important, but which In fact may be decisive of the case. 3542 “The large number of taxpayers which must be dealt with under the present law and the great variety of intricate questions involved requires employes not only of native ability but of special training. Even such a force is taxed to the utmost in dealing with the actual cases as they arise, and every attempt to render an advance decision takes just so much time away from the taxpayers who have a definite right under the law to a consideration of their cases which are ready for final disposal. 3543 “Experience in the past shows that when such questions were con- sidered a single advance decision was not sufficient In most cases. 3544 “It Is realized that the uncertainty which exists In the minds of business men as to the construction of various parts of the law is 499 INC. TAX unfortunate and tends to hamper business development, but since such uncertainty can be resolved only through decisions of the courts, and since an advance decision by the Commissioner is not a real but only an apparent resolution of the uncertainty, it appears that in giving such advance decisions the Commissioner would be doing the taxpayer an injustice rather than’': a favor. 3545 “Where a question presented is not covered by the regulations and is so general that the regulations should contain a provision bearing on it, an amendment of the regulations will be prepared as heretofore. 3546 “The conclusions here stated are the same conclusions that have been reached in practically every instance by bodies whose duty it is to miake decisions based on facts — that it is unsafe and misleading to treat hypothetical questions or to give advance information even on real questions.^’ (Statement by the Bureau of Internal Revenue, dated August 26, 1919.) 3547 Bond Interest Due Prior to March 1, 1913— No Withholding. — 613 Coupons which became due June 1, 1910 presented on behalf of 2862d non-resident alien individual owner. Should the Federal Income 3431 Tax be withheld therefrom.? Please wire reply. (Answer.) Bond interest represents Income to taxpayer when due and payable in accordance with Article Fifty-Four [l[2862d] Regulations Forty-Five. No tax required to be withheld from interest upon bonds due prior to March first Nineteen Thirteen but paid subsequent to that date. (Telegram from Chicago & Northwestern Railway Company and the answer thereto, signed by Acting Commissioner Callan and dated August 26, 1919.) (T. D. 2916) 3548 Providing for the addition of two new articles, Regulations 45, in 2209 regard to the determination of the fair market value and quantity of 2955 timber. — The final edition of Regulations No. 45 is amended by the insertion of two new articles to be known as Article 234 and Article 235 as follows: — Article 234. Determination of Fair Market Value of Timber. — Where the fair market value of the property at a specified date in lieu of the cost thereof is the basis for depletion and depreciation deductions such value must be determined, subject to approval or revision by the Com- missioner, by the owner of the property in the light of the most reliable and accurate information with reference to the condition of the property as it existed at that date, regardless of all subsequent changes such as changes in surrounding circumstances, in methods of exploitation, in degree of utilization, etc. The value sought should be that established assuming a transfer be- tween a willing seller and a willing buyer as of that particular date. No rule or method of determining the fair market value of timber property is pre- scribed, but the Commissioner will give due weight and consideration to any and all facts and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties, market value of stock or shares, royalties and rentals, value fixed by the owner for purposes of the capital stock tax, valuation for local or State taxation, partnership accountings, records of litigation in which the value of the property was in question, the amount at which the property may have been inventoried in probate court, disinterested appraisals by approved methods, and other factors. For depletion purposes the cost of the timber or its fair market value at a specified date shall not in- clude any part of the cost or value of the land. 3549 Art. 235. Determination of Quantity of Timber. — Each taxpayer claiming a deduction for depletion is required to estimate with re- spect to each separate timber account the total units (feet board measure, 500 TAX INC. cords, or other units) of timber reasonably known or on good evidence be- lieved to have existed on the ground on March 1, 1913, or on the date of ac- quisition of the property, as the case may be. The taxpayer, according to his best knowledge and belief and in the light of the most accurate and reliable in- formation, will estimate the number of units of timber actually present upon the specified date; this estimate will state the number of units which would have been found present by a careful estimate made on the specified date with the object of determining 100* per cent of the quantity of timber which the area would have produced on that date if all of the merchantable timber had been cut and utilized in accordance with the standards of utilization prevailing in that region at that time. If subse- quently during the ownership of the taxpayer making the return additional units of timber are found to be available for utilization as the result of the growth of the timber, of closer utilization of the timber, of the utilization of species of trees not formerly utilized, of underestimates of the quantity of timber available on the specified date, etc., which were not taken into account in estimating the number of units for purposes of depletion, or if it shall be found in the course of operation that timber included in the estimate is not merchantable as the result of deterioration through rot or otherwise, or that the original estimate was too great, a new estimate of the recoverable units of timber (but not of the cost or the fair market value at a specified date) shall be made and when made shall thereafter constitute a basis for depletion. In In the selection of the unit or units of estimate the custom applicable to the given type of timber in the given region should be considered. (T. D. 2916, signed by Commissioner Daniel C. Roper, and dated September 5, 1919.) 3650 No taxable profit accrues to the donor in connection with the making 1102 of a deductible charitable contribution in the form of securities 2962 which have increased in value in his hands. — In compliance with your request of July 31, 1919, this office hereby confirms the following telegram addressed to you under date of July 19, 1919: “Your telegram July 17. Where donor is entitled to claim deduction for value of gift as pro- vided in Article 251 regulations he is not required to report as a profit the excess in value of tlie property donated over its cost or fair market value on March 1, 1913.” The above was in reply to your telegraphic inquiry of July 17, which reads as follows: “Article 251 says where charitable gift is other than money basis for calculation of amount to be deducted shall be fair market value of tiling given, Does this mean donor can deduct market value of gift of securities without being treated as having realized as taxable income the difference between such market value and cost of securities to him.^ Flease wire reply our expense.” (Letter to Ropes, Gray, Boyden and Perkins, Boston, INlass., signed by J. II. Callan, Assistant to the Commissioner, by N. T. Johnson, Chief of Section, and dated Aug. 14, 1919.) 355 1 Tax liability and withholding obligation on bond interest collected 2862 d and paid in year subsequent to that in which the interest became 2996 due and payable. — Reference is made to your letter of June 26, 1919, 3431 in wliich you request a ruling in regard to the rate of withholding which attacl cs to interest coupons maturing in one year and presented for paymr-nt in a subsequent year when withholding is required at a different specified rate, state that owing to the German occupation of Belgium during the war and to Ui.e general unsettled conditions in different parts of luiropc, it has been impossible fur foreign owners of American securities to deposit coupons for collection when they became due during the years 1915, 1916, 1917 and 1918, and that in the year 1919, when they were pre- INC. 501 TAX sented for payment, a tax at the rate of 8% was withheld on them. You raise the question as to whether withholding in such cases should have been St the rate specified for the year in which the coupons were presented for payment, or whether it should have been at the rates specified for the years in which the coupons matured. 3552 In reply you are advised that Article 54 of Regulations 45 [1f2862d] states specifically that where interest coupons have matured, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. Hence, withholding on interest coupons which matured during the years 1915, 1916, 1917 and 1918 should have been at the rates specified for the years in whicli such coupons matured, the year in v/hich the coupons were presented for payment having no bearing upon the determination of the rate at which they were subject to withholding. 3553 You are advised further that the owners of the bonds to which you refer may exercise their privilege of filing with the Collector on Form 46 a claim for refund of that portion of the tax withheld which was in excess of their true liability. (Letter to Aforris F. Frey, Guaranty Trust Company, New ork, N. Y., signed by J. H. Callan, Assistant to the Commissioner, and dated September 4, 1919.) 3554 Allowance for obsolescence of good-will, trade marks, and trade 1089 brands in the case of distillers, dealers in liquors, etc. — Receipt is 2105 acknowledged of your letter of Match 12, 1919, in which you request 2912 a ruling to the effect that distillers and dealers in liquors may for the year 1918 take a reasonable amount for obsolescence of good- will, trade-marks, and trade brands, the value of which has been impaired or destroyed by prohibition legislation. In reply you are advised that a reasonable allowance for obsolescence of such assets may be taken by dis- tillers and dealers in liquors against earnings between November 21, 1918, the date upon which the Agricultural Appropriation act, providing for war- time prohibition was enacted, and July 1, 19i9, the date upon which the war- time prohibition is to become effective. To sustain a claim for a deduction for obsolescence in respect of good-will, trade marl-rs, or trade brands, the taxpayer must show that the value of tlie property in question has been destroyed or will be destroyed not later than June 30, 1919, and that the taxpayer is not continuing in any similar trade or business. An allowance will be made only in respect of such assets as are assignable as distinguished from those attaching to the individuals owning or conducting the business or to the premises at which it is being or has been conducted. No allowance for obsolescence will be made in any case where, in connection with the operation of his previous business, the taxpayer has developed a good-will, trade-mark, or trade brand that will be valuable in continuing a lawful business after June 30, 1919. 3555 The values will be based on those as at Alarch 1, 1913, if the good- will, trade marks, or trade brands were acquired or established prior to that date, or at the actual cost thereof, if acquired subsequent to February 28, 1913. 3556 Information helpful in establishing the values would be of the following general character: 3657 A. Where the good-will, trade marks, or trade brands were acquired prior to A4arch 1, 1913: ^ ^ ^ 1. The nature of business (whether distillers, wholesalers, or retailers, or a combination thereof.) 2. Date of foundation of business and whether organized as 502 TAX INC. 9 - 16 - 19 . an individual, partnership, or corporation. Also date and particularff of each change in the ownership or form of organization of the business, such as the admission or retirement of a partner or partners; the incorporation of a company and of each reorganization thereof. 3. In respect to the trade-marks or trade brands for which a deduction is claimed: (a) The date, established and by w'hom. (b) The date of acquisition by the present owners. (c) The price paid therefor and whether paid in cash or stock; if the latter, state the basis of the valuation on which the pur- chase price was determined. (d) Tor each year from 1900 or the date of the establishment of the trade-mark or trade brand, if subsequent to that year to 1919 inclusive: ■ (I) Annual sales (quantity and amount). (II) The gross profit on sales (i. e., the difference be- tween the selling price and the cost price of the merchan- dise sold). (III) The total expenses and losses of the business which, when deducted from the gross profit on sales, will produce — (IV) The net income. Where the records permit, the sales and gross profit on sales should be submitted for each class of merchandise sold and, if possible, for each trade-mark or trade brand in respect of VvTich a deduction is claimed. (V) The amount of capital invested in the business (i. e.,- capital or capital stock and paid in or earned surplus and undivided profits) as at the beginning of each year. (VI) The amount included in the invested capital at the beginning of the period in respect of good-will, trade- marks, or trade brands and the date and amount of each subsequent addition to the good-will, trade-marks, or trade brands. (e) Full details of each offer to purchase any of the trade- marks or trade brands, setting forth in particular the date of each offer, by whom and on whose behalf made: the amount of each offer, and whether payable in cash or stock; and the date or dates on which the purchase price was proposed to be paid, and the amounts to be paid on each such date. 4. Where a deduction is claimed in respect of good-will, as distinct from trade-marks or trade brands, the following information should be submitted: (a) The date of acquisition, and from whom acquired. (b) The amount paid therefor and whether paid in cash of in stock. If the latter, state the basis of the valuation on which the purchase price was arrived at. (c) For each year from 1900 or the date of acquisition, if subsequent to that year, to 1919, inclusive. (I) The annual sales of the business (quantity and amount) classified, if possible, as to the various kinds of merchandise sold. (II) Gross profit on each class of merchandise sold, or if the records do^ not disclose the information, the gross profit of the business as a whole. (III) Total yearly expenses and losses of the business 503 TAX INC. which, when deducted from the gross profit on sales, will produce — (IV) The net income from the business. (V) The amount of capital invested in the business (i. e., capital or capital stock and paid in or earned surplus and undivided profits), as at the beginning of each year. (VI) The amount included in invested capital at the beginning of the period in respect of good-will and the date and amount of each subsequent addition to good-will, trade- marks, or trade brands. (d) Full details of each offer to purchase the good-will, setting forth in particular the date of each offer; by whom and in whose behalf made; the amount of each offer and whether payable in cash or in stock, and the date or dates on which the purchase price was proposed to be paid, and if on more than one date, the amount payable on each such date. 3558 B. Where good-will, trade-marks, or trade brands were acquired Subsequent to February 28, 1913: (1) Dates of acquisition of good-will or of each trade-mark or trade brand. (2) From whom acquired. (3) Purchase price of good-will or of each trade-mark or trade brand. (4) Whether purchased for cash or stock; if the latter, state the basis of the valuation on which the purchase price was arrived at. 3559 Similar information to that suggested in A — 3d and 3e, and in A — 4 should also be furnished for each of the five years prior to the date of acquisition, and for each year thereafter up to and including the year 1919. 3560 C. In the case of good-will, trade marks, and trade brands acquired prior to March 1, 1913, a statement should be submitted showing the development of prohibition and local option laws within the territory of the taxpayer during the five years preceding March 1, 1913. Such state- ment should show each prohibition or local option law enacted by any State or other governmental unit within the business territory of the taxpayer, and should also state the unsuccessful efforts at such legislation during such period. (Letter to iVIr. Levi Cooke, Washington, D. C., signed by Com- missioner Daniel C. Roper, and dated June 21, 1919.) 3561 Allowance for obsolescence of good-will, trade-marks, and trade 3554 brands in the case of distillers, dealers in liquors, etc. — This depart- ment has considered the request contained in your letter of June 23 last for a modification of the ruling relative to obsolescence of good-will, trade-marks and trade brands of distillers and dealers in liquors, the value of which has been impaired or destroyed by prohibition legislation, con- tained in this department’s letter to you of June 21. The particular modi- fication you desire is an extension of the period set forth in the ruling above referred to against the earnings of which the obsolescence may be taken as a deduction. 3562 In reply you are advised (1) that distillers and dealers in liquors are entitled to make a deduction (based upon actual cost or fair mar- ket value as of Alarch 1, 1913) from gross Income, on account of depreciation or obsolescence of their intangibles, such as good will, trade marks, trade brands, etc., such deduction being limited to assignable assets, the value of which has been destroyed by prohibition legislation, and (2) that in arriving at the taxable income for the first taxable year ending on or after January 31, INC. 504 TAX 9 - 24 - 19 . 1918, the obsolescence fully accrued on that date is to be allowed as a deduction in computing the income subject to taxation under the Revenue Act of 1918, plus a further deduction of such proportion of the remaining value of the in- tangible assets as the interval between January 31, 1918, and the end of the taxable year bears to the total interval between January 31, 1918, and January 16, 1920, (unless at an earlier date the taxpayer discontinues his business, in which case such earlier date shall mark the close of the period), and (3) that for any taxable year following the taxable year just referred to a deduction In respect of the value of such intangible assets on January 31, 1918, based upon a ratable distribution will be permissible. 3663 It Is the opinion of the department that the ratification of the 18th amendment in the month of January, 1918, by the States of Massa- chusetts, Maryland, and Kentucky, was the first definite Indication that the prohibition amendment would be ratified by the requisite number of State Legislatures, and therefore that on January 31, 1918, a computable portion of the cost of good will, trade marks, trade brands, or the value thereof, on March 1, 1913, if acquired prior thereto (excluding any Intangibles acquired since that date, the expenditures of which were deductible and had been deducted in computing Income for tax purposes) had become obsolescent. On January 31, 1918, the intangllbe assets had an actual value, viz.: the then present value of the Income to be derived therefrom between that date and January 16, 1920, or at an earlier date should the taxpayer discontinue his business prior thereto. This value as stated above should be distributed ratably over the period from January 31, 1918, to January 16, 1920 (unless at an earlier date the taxpayer discontinues his business, In which case such earlier date shall mark the close of the period). The excess of the cost of the Intangibles or the value thereof, on March 1, 1913, if acquired- prior thereto (subject to the exclusions mentioned above), over the value thereof, as of January 31, 1918, determined as outlined above, will represent the amount of obsolescence that was fully accrued on January 31, 1918. (Letter to Mr. Levi Cooke, Washington, D. C., signed by Acting Commissioner J. H. Callan, and dated August 19, 1919.) 3564 Continued use of old ownership certificates. — Old forms of ownership f3323 certificates may be accepted pending Issuance of Treasury Decision m ^ fnow in course of preparation on the subject. (Letter to The Chase National Bank, New York, N. Y., signed by P. S. Talbert, Acting Assistant to the Commissioner, and dated September 11 , 1919.) (T. D. 2918.) 3565 Further instructions relative to acceptance of Treasury certificates 3518 of indebtedness for income and profits taxes, supplementing Articles 1721 and 1732, Regulations 45. — ^T. D. 2907 [^[3518] approved August 7, 1919, as to the acceptance of Treasury certificates of Indebtedness in payment of Income and profits taxes. Is hereby amended by striking out the first sen- tence in the second paragraph reading “Deposits of Treasury certificates of indebtedness received In payment of Income and profits taxes must be made by collectors with the Federal Reserve Banks of the* districts In which the respective collectors’ offices are located, unless otiuerwise specifically Instructed by the Secretary of the Treasury,” and Inserting in lieu thereof, the following: “Deposits of Treasury certificates of Indebtedness received In payment of income and profits taxes must be made by collectors, unless otherwise speci- fically instructed by the Secretary of the Treasury, with the Federal Reserve Bank of the district in which the collector’s head office is located, or in case such head office is located in the same city with a branch Federal Reserve Bank, with such branch Federal Reserve Bank.” (T. D. 2918, signed by Commissioner Daniel C. Roper, and dated September 12, 1919.) 505 TAX INC. (T. D. 2920.) ^ses Providing for relief of domestic corporations which have assumed 604 payment of income tax in respect to tax-free covenant bonds owned 2997 by non-resident aliens who are entitled to credits for personal exemption and dependents, but whose incomes from sources in the United States do not exceed such credits.— The final edition of Regulations No. 45 is amended by inserting immediately after Article 363, a paragraph which will be known as Article 363a as follows: Article 363a. Personal exemption of non-resident aliens. In case a non- resident alien is entitled to personal exemption and credits for dependents in accordance with Paragraphs (c), (d), (e), of Section 216 of the Revenue Act of 1918, and his gross income from sources in the United States, including bond interest, does not exceed his personal exemption and credits for depen- dents, a certificate. Form 100 IB, should be executed and filed with the with- holding agent, if any part of the gross income is derived from interest upon bonds of a domestic corporation which contain a tax-free covenant clause. The certificate may be filed with the withholding agent at the end of the calendar year but not later than February first of the succeeding year and all such certificates should be attached to the annual list return. Form 1013. The amount of tax due from the withholding agent as shown by Form 1013, may be reduced by 2 per cent of the aggregate amount of interest payments made to the nonresident alien upon tax-free covenant bonds during the calendar year, and the amount of tax represented by the certificates, payment of which was assumed on monthly list return. Form 1012, will not be included in the assessment against the withholding agent. The certificate may be filed only by a citizen or subject of the countries enumerated in Paragraph (a) or (b) of Article 307, as amended [1[3517]. In case tax in excess of a non- resident alien’s tax liability has been withheld from interest upon bonds which do not contain a tax-free covenant clause, the nonresident alien should file or cause to be filed with the collector of internal revenue a return of his gross income from all sources within the United States, accompanied by a claim for refund on Form 46. (T. D. 2920, signed by Commissioner Daniel C. Roper, and dated September 15, 1919.) 3567 Amount of tax paid by debtor on account of tax-free-covenant bond 2841 interest additional income to creditor on whose account the tax 3322 v/as paid. — Pvcceipt is acknowledged of your letter of June 20, 1919, asking for advice in regard to the office ruling which authorizes increase of the.income by the 2% normal tax paid by the debtor corporation on bonds containing a tax-free-covenant clause. reply you are informed that this office holds that the obligor, in pursuance of a contract voluntarily entered into, guaranteed to pay a direct liability of the taxpayer which consisted in paying a certain amount of normal tax for him to the Govern- ment. The reduction of the payment of his tax liability under such a contract constitutes income to him by reducing his expenditures in that amount. The fact that the amount of the liability was paid direct to the Government instead of to the taxpayer and by him to the Cjovernment, does not preclude such an amount from constituting income to the taxpayer. (Letter to Hugh W. Martin, Secretary, Northwestern Trust Company, St. Paul, Minnesota, signed by J. H. Callan, Assistant to the Commissioner, by Geo. V. Newton, Head of Division, and dated September 13, 1919.) INC. 506 TAX 9-26-19. (T. D. 2922.) 3568 Amending Article 307, final edition of Regulations 45, dealing with 2972a non-resident alien individual entitled to personal exemption and 35 1 7 credit for dependents. — The final edition of Regulations 45 is amended ) by changing Article 307 to read as follows: Art. 307. When nonresident alien individual entitled to personal exemp- tion: (a) The following is an incomplete list of countries which either impose no income tax or in imposing an income tax allow both a personal exemption and a credit for dependents [which satisfy the similar credit requirement of the statute; Argentina; Belgium; Pohemia; Bolivia; Bosnia; Brazil; Bukowina; Canada; Carinthia; Carniola; China; Chile; Cuba; Dalmatia; ^ Denmark; Ecuador; Egypt; France; Galicia; Goritz; Gradisca; Herze- govina; Istria; Lower Austria; Mexico; Montenegro; Moravia; Morocco; Newfoundland; Nicaragua; Norway; Panama; Paraguay; Persia; Peru; Portugal; Roumania; Russia (including Poles owing allegiance to Russia); Salzburg; Santo Domingo; Serbia; Siam; Silesia; Styria; Spain; Trieste; Tyrol; Upper Austria; Union of South Africa; Venezuela, (b) The following is an incomplete list of countries which in imposing an income tax allow a I personal exemption which satisfy the similar credit requirement of the statute, but do not allow a credit for dependents: Bachka; Banat of Temesvar; Croatia; Salvador; India; Italy; Slavonia; Slovakia; Transylvania, (c) The following is an incomplete list of countries which in imposing an income tax do not allow to citizens of the United States not residing in such country either a personal exemption or a credit for dependents and, there- fore, fail entirely to satisfy the similar credit requirement of the statute: Australia; Costa Rica; Great Britain and Ireland; Japan; The Netherlands; New Zealand; Sweden. The former names of certain of these territories are here used for convenience, in spite of an actual or possible change in name or sovereignty. A nonresident alien individual who is a citizen or subject of any country in the first list is entitled for the purpose of the normal tax to such credit for a personal exemption and for dependents as his family status may warrant. If he is a citizen or subject of any country in the second list he is entitled to a credit for personal exemption, but to none for dependents. If he is a citizen or subject of any country in the third list he is not entitled to credit for either a personal exemption or for dependents. If he is a citizen ' or subject of a country which is in none of the lists, then to secure credit for either a personal exemption or for dependents he must prove to the satis- faction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the similar credit required by the statute. (T. D. 2922, signed by Commissioner Daniel C. Roper and dated September 18, 1919.) 3569 Tax liability and withholding obligation on bond interest collected 3431 and paid in year subsequent to that in which the interest became 3551 due and payable. — [Comment. In view of the conflict of the follow- ing ruling with that shown at 113551, dated four days earlier, it seemed to us advisable, before reproducing Mr. Talbert’s telegram to A. Iselin & Co., to call both rulings to the attention of the Bureau, specifically, with the request that we be advised which of the two does in fact set forth the attitude of the Government relative to the withholding feature. Having done so, we are now advised, orally, that the ruling given to A. Iselin & Co., that is, the following, controls. The Corporation Trust Company, September 23, 1919.] — Bond interest represents income to taxpayer when due and payable in accordance with article 54, Regulations 45 [1f2862d]. No tax required to be withheld from interest upon bonds due prior to March 1, 1913, but paid subsequent to that date. Interest due on and after March 1, 1913, subject to withholding at rates in force at time of payment but in case excess tax is withheld and paid to (Tovcrnment claim for refund on Form 46 will be con- sidered. (Telegram to A. Iselin & Co., New York, N. Y., signed by P. S., Talbert, Acting Assistant to the Commissioner, and dated September 8, 1919.) INC. 507 TAX (1. T.-Mim. 2221.) 3570 Consolidated returns: Apportionment and payment of tax. — In 1407 connection with the assessment and payment of income and profits 3234 taxes of affiliated corporations, the opinion apparently prevails among taxpayers that the tax must be assessed against and paid by each corporation within an affiliated group. Unless a subsidiary has made a payment, the Bureau greatly prefers that the parent or principal reporting corporation take up and pay the entire tax, making any desired adjustment thereof by charging the affiliated corporations through their own records. 3571 The amount reported by the subsidiary in answer to Question 9, Form 1122, will be used as the basis for assessment and payment. If the subsidiaries have reported an apportionment in this manner, but the parent corporation has paid the tax installments on account of such sub- sidiaries, an amended Form 1122 showing “none” in answer to Question 9, should be filed. If the last condition obtains, but the taxpayer insists upon apportionment, the Collector of the subsidiary’s district will request abate- ment of such portion of the subsidiary’s tax as may have been previously paid by the parent corporation in another district. 3572 As a basis for such advice, the latter Collector will secure from the parent corporation a schedule showing apportionment of the total tax and installments to the respective affiiliated corporations. If a sub- sidiary has filed a tentative return and paid an installment of the tax, it should be assessed the amount shown on Form 1122, and will pay future in- stallments as they fall due. (I. T.-Mim. 2221, signed by Commissioner Daniel C. Roper, and dated August 8, 1919.) (T. D. 2923.) 3573 Authorizing debtor corporations and withholding agents to accept 3323 old forms of ownership certificates with respect to interest due on 3564 and prior to November 1, 1919, when received from continental United States and with respect to interest due on and prior to De- cember 1, 1919, when received from abroad. — 1. In view of the fact that the revised forms of ownership certificates were placed at the disposal of the public over three months ago, this office is of the opinion that a reason- able period of time has elapsed in which to permit the public to have become familiar with them. In order, however, to prevent inconvenience to indi- A'dduals and organizations required to use such forms, old forms of ownership certificates will be accepted with respect to interest due on and prior to November 1, 1919, when received from continental United States, and w'i th respect to interest due on and prior to December 1, 1919, when received from abroad, 3574 2. Banks and collecting agents, debtor corporations, and withhold" ing agents shall refuse to accept the old forms, _ in connection with interest due, after the respective dates named herein, and Collectors of In- ternal Revenue receiving monthly returns accompanied by certificates on the old forms, when it shall appear that^such^ certificates were filed with debtor corporations or withholding agents, with respect to interest due sub- sequent to such dates, shall require the debtor corporation or withholding agent concerned to secure certificates on the revised forms. 3575 3. In order that the fulfillment of the requirements herein provided may cause as little hardships as possible to individuals, banks, col- lecting agents, debtor corporations, etc.. Collectors should satisfy them- selves that they have a sufficient supply of the revised^ forms on hand to meet anticipated demands and^where the supply is not deemed sufficient. INC 508 TAX 9-29-19. requisition should be made without delay for such additional (quantity as may be necessary. Collectors are requested to disseminate this informa- tion throughout their districts as quickly as possible. (T. D. 2923, signed by Commissioner Daniel C. Roper and dated September 24, 1919.) 3576 - Tax liability and withholding obligation on bond interest collected 3551 and paid in year subsequent, to that in which the interest became 3569 due and payable. — Reference is made to office letter of September 5, 1919, [Sept. 4: ^3551] in which you were given a ruling in answer to your inquiry of June 26, 1919, relative to the rate of withholding which attaches to interest coupons maturing in one year and presented for pay- ment in a subsequent year during which withholding is required at a differ- ent specified rate. TfYou are advised that after further consideration of the subject matter of your letter of June 26, 1919, this office is of the opinion that the second and third paragraph of office letter of September 5, 1919 [Sept. 4: 1(3551], should have read: K‘Tn reply you are advised that Article 54 of Regulations 45 [lf2862d] states specifically that where interest coupons have matured but have not been cashed, such interest payment though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year in which the coupons matured. IfArticle 371 [1(3003] states that in the case of every payment made after February 24, 1919, the withholding agent must with- hold at the rates prescribed by the present statute from the whole pay- ment, not merely from that part which applies to the period after February 24, 1919. Hence, in the case of the foreign owners of American securities whose interest coupons matured during the years 1915, 1916, 1917 and 1918 but which were not presented for payment until the year 1919, the amount of these coupons should have been entered as income on their returns ren- dered for the years in which the coupons matured but the withholding agent was required to withhold from these coupons at the rate in force at the time of payment and in case excess tax was withheld and paid to the Govern- ment by reason of this requirement, the owners of the bonds to which you refer may exercise their privilege of filing with the collector on Form 46 a claim for refund of that portion of the tax withheld which was in excess of their true liability.” KTherefore, you will disregard office letter of Septem- ber 5, 1919 [Sept. 4: ^3551] and be governed by the ruling given herein. (Letter to'Morris F. Frey, Guaranty Trust Company, New York, N. Y., signed by P. S. Talbert, Acting Assistant to the Commissioner, by C. R. Trobridge, Acting Head of Division, and dated September 23, 1919.) (T. D. 2924.) 3577 Modification of Articles 1566 and 1567 of Regulation 45. — 1. Article 3106a 1566 of Regulations 45, first authorized April 17, 1919, is considered as not being warranted in law, and is hereby modified to read: ‘‘Art. 1566. Exchange of property and stock. — Where property is transferred to a corporation in exchange for its stock, the exchange constitutes a closed transaction and the former owner of the property realizes a gain or loss if the stock has a market value, and such market value is greater or less than the cost or the fair market value as of Alarch 1, 1913 (if acquired prior thereto), of the property given in exchange. For the rule applicable where a corporation, in connection with a reorganization, merger or consolidation, exchanges property for stock, see Article 1567.” 3578 2. Article 1567 of Regulations 45, as amended by Treasury Decision 3432 2870, is amended to read as follows: “Art. 1567. Exchange of stock for other stock of no greater par value. — In general, where two (or more) corporations unite their properties by either INC. 509 TAX (a) the dissolution of corporation B and the sale of its assets to corporation A, or (b) the sale of its property by B to A and the dissolution of B, or (c) the sale of the stock of B to A and the dissolution of B, or (d) the merger of B into A, or (e) the consolidation of the corporations, no taxable income is received from the transaction by A or B or the stockholders of either, provided the sole consideration received by B and its stockholders in (a), (b), (c), and (d) is stock or securities of A, and by A and B and their stockholders in (e) is stock or securities of the consolidated corporation, in any case of no greater aggregate par or face value than the old stock and securities surrendered. The term ‘reorganization’, as used in Section 202 of the statute, includes cases of corporate readjustment where stockholders exchange their stock for the stock of a holding corporation, provided the holding corporation and the original corporation, in which it holds stock, are so closely related that the two corporations are affiliated as defined in Section 240 (b) of the statute and article 633 [^3235], and are thus required to file consolidated returns. So-called ‘no-pai-value stock’ issued under a statute or statutes which require the corporation to fix in a certificate or on its books of account or otherwise an amount of capital or an amount of stock issued which may not be impaired by the distribution of dividends, will for the purpose of this section be deemed to have a par value representing an aliquot part of such amount, proper account being taken of any preferred stock issued with a preference as to principal. In the case (if any) in which no such amount of capital or issued stock is so required, ‘no-par-value stock’ received in exchange will be regarded for purposes of this section as having in fact no par or face value, and ]con- sequently as having ‘no greater aggregate par or face value’ than the stock or securities exchanged therefor.” (T. D. 2924, signed by Commissioner Daniel C. Roper, and dated September 26, 1919.) [Comment: We are ad- vised orally by the Bureau, in response to our specific inquiry, that the above T. D. 2924 is effective as if the two Articles had been so issued originally in Regulations No. 45. See ^2592. — ^The Corporation Trust Company.] (T. D. 2925.) 3579 Bonds under Sections 214 (a) (12), 234 (a) (14), and 1320 of the Revenue Act of 1918. — Sections 214 (a) (12) and 234 (a) (14) of the Revenue Act of 1918 provide in part as follows [^1119 and ^2215]: “At the time of filing return for the taxable year 1918 a taxpayer may file a claim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other dis- position) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year, or from the actual payment after the close of such taxable year of rebates in pur- suance of contracts entered into during such year upon sales made during such year. In such case payment of the amount of the tax covered by such claim shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory" to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest.” 3580 Section 1320 of the same Act provides, in part [* 2220]: “That wherever by the laws of the Uinted States or regulations made pursuant tliereto, any person is required to furnish any recogniz- ance, stipulation, bond, guaranty, or undertaking, hereinafter called ‘penal bond’, with surety or sureties, such person may, in lieu of such surety or sureties, deposit as security with the official having authority to approve such penal bond. United States Liberty bonds or other bonds of the United States in a sum equal at their par value to the amount of 510 INC. TAX 10 3 - 19 . such penal bond required to be furnished, together with an agreement authorizing such official to collect or sell such bonds so deposited in- case of any default in the performance of any of the conditions or stipu- lations of such penal bond. The acceptance of such United States bonds in lieu of surety or sureties required by law shall have the same force and; effect as individual or corporate sureties, or certified checks, bank drafts^,, post-office money orders, or cash, for the penalty or amount of such penal bond. The bonds deposited hereunder and such other United States^ bonds as may be substituted therefor from time to time as such security^ , may be deposited wdth the Treasurer, * * * United States, * * * which shall issue receipt therefor, describing such bonds sc ' deposited. As soon as security for the performance of such penal bond is no longer necessary, such bonds so deposited, shall be returned to the " depositor.” 3581 Article 268 of Regulations No. 45 [^2963g] provides in part as follows, relative to claims for losses in inventory and from rebates: “In the case of a claim in abatement filed with a return payment of the amount of the tax covered thereby shall not be required until the claim is decided, provided the taxpayer files therewith a bond on Form 1124 in double the amount of the tax covered by the claim, conditioned for the payment of any part of such tax found to be due with interest at the rate; of 12 per cent per annum. The bond shall be executed by a surety company holding a certificate of authority from the Secretary of the.. Treasury as an acceptable surety on Federal bonds and shall be subject to the approval of the Com^missioner.” 3582 The bond executed on Form 1124 [Supplementary Page 50], pur- suant to Article 268 of Regulations No. 45, together with the abate- ment claim, should be forwarded by the collector to the Commissioner of Internal Revenue. When it is received by the Commissioner it will be de- tached from the abatement claim and forwarded the Surety Bond Section of the Treasury Department for certification as to the sufficiency of the sureties. The Surety Bond Section will, after certification, return the bond to the Commissioner for his approval. When he has approved the bond he will cause it to be attached to the abatement claim. 3583 In case the claimant, in accordance with the provisions contained iir. Section 1320 of the Revenue Act of 1918, elects to offer, in lieu of the surety or sureties provided for on Form 1124, United States Liberty- Bonds or other bonds of the United States as security he should execute iru duplicate a bond and agreement on Form 1124a, prescribed below. The original should accompany the United States bonds offered as security; the duplicate should be forwarded by the collector with the abatement claim tO' the Commissioner. If such bond and agreement is executed by a corpora- tion a duly certified copy of the resolution of the board of directors, author- izing the execution, should be attached. The United States Liberty Bonds^ or other bonds of the United States, offered as security, shall at their par value be not less than the amount of the penal sum of the bond executed on Form 1124a, which shall be in double the amoun't of the tax covered by the abatement claim. The bonds so offered as security must be delivered to the Commissioner of Internal Revenue at the obligor’s risk and expense. I Cou- pon bonds cannot safely be forwarded by registered mail unless insured by the obligor against risk of loss in transit. Registered bonds so offered as security must be registered in the name of the obligor and duly assigned; to the Commissioner of Internal Revenue at or before the date of deposit with the Commissioner and need not be insured when forwarded by regis- tered mail, unless the obligor so elects. In connection with effecting in- surance of bonds shipped reference is made to Article 187 (a) of Regulations- No. 2, Revised. INC. 511 TAX '3584 The Commissioner of Internal Revenue will issue a receipt in dupli- • • United States Bonds so deposited with him as security the original of the receipt to be given to the obligor and the duplicate to be retained by the Commissioner for his files. Upon receipt by the Commis- sioner of the United States Bonds so offered as security and upon satisfying himself as to their ownership and as to the sufficiency of the agreement for him to collect or sell, and in case of registered bonds as to the regularity of the assignments, he will approve the bond executed on Form 1124a and aeposit the United States Bonds offered as security with the Treasurer of the United States, as provided in paragraph 7 of Department Circular No. 154 (1919), dated June 30, 1919, and the Treasurer of the United States will, as provided in said circular, give receipt therefor in duplicate describing the bonds so deposited, the original to be delivered to the Commissioner of In- ternal Revenue and the duplicate to be retained by the Treasurer for his hies. 3E85 Bonds of the United States shall be returned to the obligor as soon as the security for the performance of such penal bond is no longer necessary. Registered bonds shall be reassigned to the owner when the lia- bility is cancelled. 3586 These special instructions are prescribed for the guidance of collect- ors of internal revenue pursuant to the provisions of Treasury De- partment Circular No. 154 as to the acceptance of United States Bonds in lieu of surety or sureties on penal bonds. (T. D. 2925, signed by Commis- sioner Daniel C. Roper, and dated September 26, 1919.) 3587 Organization of a Committee of Review and Appeals to take over 3124 the work of the Advisory Tax Board which goes out cf existence ^ on October 1. — Taxpayers in many parts of the country have ex- pressed interest in the plans of the Bureau for continuing the important work entrusted to the Advisory Tax Board. The function of the Board has ' been to review, upon appeal, the administrative decisions of the Income Tax Unit in important income and excess profits cases, particularly cases involving exceptional or unusual conditions with respect to questions of invested capital, amortization, depletion, depreciation, etc. The newly organized Committee on Review and Appeal will take over this highly im- portant function, and taxpayers are assured of the same thoughtful and im- partial consideration of their problems that has been a feature of the w^ork of the retiring Board. 3588 P. S. Talbert, head of the Technical Division of the Income Tax Unit, has been selected as Chairman of the Committee because of his ex- Geptional experience and peculiar qualifications for this important task. Mr. Talbert is one of our leading experts on income tax matters. He worked continuously with the Tax Advisers in drafting the administrative regulations for the enforcement of the 1917 law and has also played an important part in framing the regulations under the Act of February 24, 1919. Mr. Talbert will be relieved from duty as Head of the Technical Division in order that he may devote his entire time to the work of the Committee. 3589 The individual members of the Committee on Review and Appeals will be selected with the greatest care from our most experienced men in order that their combined judgment may represent the best experience and highest intelligence of the Bureau’s personnel. I am confident that this body of men will continue in a most satisfactory manner the work inaugurated by the Advisory Tax Board and taxpayers may be assured of courteous, intelligent and impartial hearings. (Announcement by Commissioner iDaniel C. Roper, dated September 27, 1919.) INC. 512 TAX lO-lMO 3590 Ownership Certificates — DcQning revised forms and old forms. 3573 Referring Treasury Decision 2923, please define Revised Forms and Old Forms. Do you consider Forms 1000 and 1001 Revised February, 1919, as Revised Forms or Old Forms? Please telegraph reply. (Answer) Revised Forms of ownership certificates are those issued February, 1919, and those issued subsequently. . Old Forms are certificates in use prior to February, 1919. Forms 1000 Revised February, 1919, and 1001 Revised February, 1919, considered Revised Forms. (Telegram from The Chase National Bank, New York, N. Y., and the answer thereto signed by Com- missioner Daniel C. Roper, and dated September 29, 1919.) 3591 Interest Coupons Without Ownership Certificates — Affidavit 3100a required. — When interest coupons are unaccompanied by owner- ship certificates affidavits should be secured by first bank as pro- vided in Article three six eight. Regulations forty-five. Such affidavit should accompany the ownership certificates to debtor corporation or withholding agent and should be forwarded to collector Internal Revenue in accordance with usual procedure. Separate affidavit required with respect to each interest payment upon bonds of different issue and with respect to each different due date of same. (Telegram to Boissevain & Co., New York, N. Y., signed by Commissioner Daniel C. Roper, and dated September 18, 1919.) (T. D. 2927.) 3592 Special Excise Tax an Corporations [Act of August 5. :^.9D9] — Decision of Court.— The appended decision of the United States District Court for the District of Connecticut in the case of the United States V. Aetna Life Insurance Company is published for the information of internal revenue officers and others concerned. [Caption only.] 3593 Deductions from Gross Income.— Taxes paid on behalf of Corporation. — Taxes paid to a State by various corporations upon shares of their stock owned by another corporation, are not deductible from gross income of this latter corporation as taxes ‘‘paid by it,’’ such taxes being not paid by this corporation, but being paid in its behalf -by other corporations. (T. D. 2927, signed by Commissioner Daniel C. Roper, and dated September 30, 1919.) (T. D. 2929.) 3594 Modification of Article 163, Regulations No. 45-Depreciation 2912 of intangible property. — Articles 1G3, Regulations No. 45, is 3554 modified to read as follovv^s by eliminating therefrom the last sen- tence reading, “There can be no such allowance in respect of good will, trade names, trademarks, trade brands, secret formulae or processes”: Art. 163. Depreciation of intangible property. —Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses and franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If however, an intangible asset acquire.d through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be estimated fi'om experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the ('Commissioner. (T. D. 2929, signed by Commissioner Daniel C. Roper, and dated October 7, 1919.) INC. 513 TAX (T. D. 29^3.) 3595 New York State transfer (inheritance) tax not deductible as 1058 a “tax”. — The appended decision of the United States District 1256 Court for the Southern District of New York in the case of Elizabeth 2900 S. Prentiss vs. Mark Eisner, Collector of Internal Revenue, is pub- lished for the information of internal-revenue officers and others concerned. The decision confirms and supports the ruling contained in Article 134 [^12900] of Regulations No. 45. (T. D. 2933, signed by Com- missioner Daniel C. Roper, and dated October 9, 1919.) Decision of United States DisUict Court. [Actof Oct. 3, 1913.] Elizabeth S. Prentiss vs. Mark Eisner, Collector, 1. The tax imposed by the laws of New York upon the transfer of pro- perty by will or under the interstate laws is not deductible in ascertaining the taxable net income of the legatee or distributee under the act of October 3, 1913. It is not a “tax”, within the meaning of the provision permitting the deduction of “all national State, county, school, and municipal taxes paid within the year”. (Sec. II, par. B). 2. A tax upon the right to receive an interest in the estate of a decedent is not a charge either against the person receiving the interest or the pro- perty or right accruing to him. The legatee or distributee merely receives the balance due after payment of the tax. He does not receive the entire interest, and then pay the tax; and he is consequently not entitled to deduct the amount as a tax paid by him. 3596 Augustus N. Hand, District Judge: This is a demurrer to a com- plaint whereby the plaintiff seeks to recover income taxes for the year 1913, paid under protest. The objection urged is that the Commis- sioner refused to allow as a deduction transfer taxes which were paid to the State of New York on December 12, 1913, upon an inheritance which vested June 25, 1913. 3597 Paragraph B, Section II of the Act of October 3, 1913, [Revenue Act of 1918, Sec. 213 (a) (3)-(c) If 1055], provides: “That in computing net income for the purpose of the normal tax there shall be allowed as deductions Third, all national, state, county, school and municipal taxes paid within the year, not including those assessed against local benefits ; ” 3598 The Commissioner of Internal Revenue has ruled that [^1058, 111256 ]: “A collateral inheritance tax levied under the laws of the State of New York being, as it is, a charge against the corpus of the estate, does not constitute such an item as can be al- lowed as a deduction in computing income tax liability to either the estate or a beneficiary thereof.” 3599 The plaintiff contends that the New York transfer taxes are excise taxes imposed by the State upon the right to receive an interest in a decedent’s estate, and as such, are within the deductions allowed by statute. The Government, on the other hand, says that these taxes are an appropriation by the State of a portion of the decedent’s estate before the remainder vests in the legatee. This latter contention is in accordance with the decision in United States v. Perkins, 163 U. S. 625, where the Court said at page 630: “The legacy becomes the property of the United States only after it has suffered a diminution to the amount of the tax and it is only upon this condition that the legislature consents to a bequest of it.” INC. 514 TAX 10 - 20-19 3600 This decision which so far as I know has not been questioned can- not be reconciled with any theory that the tax is refused a right of succession already vested in the legatee. 3601 At the outset we have the important fact that property inherited or transmitted by will is not treated as income in the income tax act, but, on the contrary, is not only not included, but specifically exempted. In other words, in the hands of a legatee, devisee, heir or distributee, such property is capital and not income. Under these circumstances, it would seem inconsistent with charges against this capital, which accrued prior to, or simultaneously with, the devolution of it could be deducted from in- come tax returns. Notwithstanding this, the language of the Act would apparently make the transfer taxes a necessary deduction if they are charges against the person receiving the propert}^, or against either the property or the right accruing to him. 3602 The cases are extremely confused and their reasoning is unsat- isfactory. It is admitted by them all that the tax is not upon the property itself which is transmitted. To avoid the unconstitutionality of a direct tax upon the property itself which was not apportioned among the States, the Court of Appeals of New York said as to the Federal Tax of 1898, in Matter of Gihon, 169 N. Y. 443: ' the full amount of the legacy is in law paid to the legatee and the deduction made from it and paid to the state or fed- eral government is paid on account of the legatee from the legacy which he receives.” 3603 It is argued that the personal liability of the executor or adminis- trator under the New York law for the payment of the tax makes the view taken by the foregoing case erroneous, but, as Judge Cullen there said, the obligation of the executor or administrator to pay the tax is a mere rule of administration to insure its payment, and not proof that the tax is either on the right to transmit or upon the property itself. 3604 I do not think it follows because the right to transmit or the right to receive the property of a decedent is a privilege granted by the State, and not a common right, that the tax is imposed upon either right. Judge Gray’s statement in Matter of Swift, 137 N. Y. 77, is an accurate description of what occurs: “What has the State done, in effect, b}^ the enactment of this tax law? It reaches out and appropriates for its use a portion of the property at the moment of its owner’s decease; allowing only the balance to pass in the way directed by the testator, or permitted by its intestate law.” 3605 To say that the legatee, devisee, heir or distributee receives the property without any deduction and then pays the tax is really a most artificial way of viewing the transaction. In the case of personal property he really only gets the balance with a credit as a matter of con- venient bookkeeping to the amount of the tax. In the case of real estate he receives properly speaking an equity. He can pay the tax and get the the land unencumbered, or the State can foreclose the lien and he will receive the balance. In either case the onlv natural way to treat him is as a recipient of a net amount. The condition of the devolution of the property is the receipt of the transfer tax by the State. 3606 In United States v. Perkins, 163 U. S. 625, the testator bequeathed his property to the United States. The Supreme Court held that the New York transfer tax was upon the testator’s right to dispose of his prop- INC. 515 TAX erty, and thus sustained the tax for, if it had been treated as upon any right of succession of the United States, the tax could not have been law- fully imposed. This case has been cited with approval in New York de- cisions both under the old and new transfer tax acts. 3607 I have carefully examined the interesting briefs submitted by counsel and am convinced that the tax cannot properly be regarded as an imposition upon either the property or the right to receive a gross amount of the property of a decedent represented by a legacy, devise or distributive share, but that the property and the right to receive it passed, reduced by the amount of the tax measured by a percentage of the value of the gross share. It is impossible to reconcile the conflicting expressions in judicial opinions, but this treatment of the situation will, I think, accord with the results reached by the various cases. I can see no substantial difference between the New York Transfer Tax Act in operation in 1913, and the earlier Act, and I do not regard any of the Acts as imposing a tax upon the plaintiff’s right of succession which is deductible in her income tax return. 3608 The demurrer is sustained. (Opinion appended to and made a part of T. D. 2933, signed by Commissioner Daniel C. Roper, and dated October_9,"1919.) 3609 Resident and nonresident alien seamen. Execution of 13147 Form 1078. — Receipt is acknowledged of your letter of September I 3433 6, 1919, requesting information relative to the liability of an em- ployer of alien seamen, with respect to withholding part of their wages for income tax purposes, and inquiring whether any exception is made to that part of the regulations requiring that Form 1078, Revised, must be executed before an officer qualified to administer oaths. In reply you are advised that your inquiries are answered in the order in which they are numbered in your letter as follows: 3610 1. Article 92 (a) [If 3434], v/hich is added to Regulations 45 by 3434 Treasury Decision 2869, provides that ^‘Nonresident alien seamen are taxable only on income from sources within the United States,” and further, that “Wages earned by an alien seaman regularly engaged in foreign trade are not to be regarded as from sources within the United States even though the ship flies the American Flag, or although during a part of that time the ship touched at U. S. ports and remained there a reasonable time for the transaction of its business.” It follows therefore that in such cases the wages paid to nonresident alien seamen by an em- ployer are not regarded as income from sources within the United States and the employer is not required to withhold. It should be remembered, however, that for purposes of information such an employer is required by Section 256, Article 1071 [If 3054] thereunder, to render a return to the Commissioner on Form 1099, in all cases where the employer made pay- ment of $1000 or over of wages to resident alien seamen in any taxable year. 3611 2. Article 312 (a) [% 3435], which is added to Regulations 45 by 3435 Treasury Decision 2869, provides in tlie case of alien seamen that “Residence may be established on a vessel regularly engaged in coastwise trade.” This provision, however, merely places alien seamen employed on a vessel regularly engaged in coastwise trade on the same footing with an alien employed within the United States for purposes of proving residence within the United States. The employer should, there- fore, be governed by the requirements of Article 315]j^2976] of Regula- tions 45 mth respect to the necessity for filing Form lOTo, Revised, INC. 516 TAX lO-lO-lO 3612 3. If an officer, qualified to administer oaths, is not reasonably 2976 accessible. Form 1078, Revised, will be accepted if signed in the 3154 presence of an official of the employer company under whose su- pervision the employee’s duties are performed, and one other credible witness. (Letter to Shipowners’ Association of the Pacific Coast, San Francisco, Calif., signed b}^ P. S.* Talbert, Acting Assistant to the Com- missioner, by C. R. Trobridge, Acting Head of Division, and dated Sep- tember 20, 1919.) (Decision.) (Revenue Act of 1916.) 258 Fed. 208. Income Tax Liability of a Trustee in Bankruptcy: In re. Heller, Hirsh & Co. (U. S. Circuit Court of Appeals, Second Circuit.) 3613 Appeal from the District Court of the United States for the Southern 1398 District of New York. In the matter of Heller, Hirsh & Co., a 1429 corporation, bankrupt. A petition by the United States attorney 3205A for an order directing the trustee of the bankrupt to pay to the 3228 collector of internal revenue for the Second district of New York S2,400 as taxes on income under Act Sept. 8, 1916, as a preferred claim, was denied, and the government appeals. Affirmed. Before WARD, ROGERS, AND MANTON, Circuit Judges. 3614 PER CURIAM. The United States attorney filed a petition for an order directing the trustee of the bankrupt corporation to pay to the collector of internal revenue for the Second district of New York the sum of $2,400 under Act Sept. 8, 1916, c. 463, 39 Stat. 756, as taxes upon income for the year 1916, as a preferred claim. The trustee was not carrying on the business of the bankrupt, and the funds said to constitute net income were the result of a compromise made by him with a foreign corporation of a claim for nonpayment of salary and commissions by the foreign corporation to the bankrupt corporation as its agents between the years 1910 and 1914. The referee, John J. Townsend, Esq., recom- mended that the prayer of the petition be denied, and his report, which is set out below [in part], was confirmed without opinion by Judge Hough. We are quite clear that under section 13(c) of the act of 1916 (Comp. St. Sec. 6336m) [1918 Act, If 1429 herein.] only net income earned by a trustee while operating the business of a bankrupt corporation is taxable. 3615 The order is affirmed. 3616 Note. — Referee Townsend’s opinion, referred to in the opinion/ here follows [in part]: ********* 3617 “Carefully prepared briefs have been filed with the Referee by the parties. I find in the briefs no decisions which I deem decisive of the present motion, viz., no decisions where the government asserts a claim for an income tax against a trustee in bankruptcy of a corporation or individual adjudicated a bankrupt and therefore presumably insolvent. I refer below to certain decisions which in my opinion aid in deciding the present motion. INC, 517 TAX 3618 “In my opinion the present motion depends for its determination upon a judicial interpretation of the act of September 8, 1916, a copy of which act accompanies this report. Such interpretation should be a fair one. It is not the dut}^ of this court or of the government au- thorities to resort to Procrustean methods of interpretation against the taxpayer. 3619 “I find nothing in the act of September 8, 1916, to indicate that Congress intended to impose an income tax upon a trustee in bank- ruptcy^ in respect to the assets of a bankrupt corporation which he has taken over to be marshaled and distributed among the creditors of the corporation. To my mind the text of the act of September 8, 1916, does not indicate any such purpose. This view of the act does not deprive the government of its just due. The dividends declared and distributed to the creditors are presumptively income in the hands of the latter subject to an income tax to be assessed against the latter. ********* 3620 “Great stress is laid by the government on the provisions of section 13(c) of the act of September 8, 1916. The presence of subdivision (c) in the act of September 8, 1916, and its absence from the prior act of October 3, 1913, has to my mind no significance in the present case in view of the peculiar language of subdivision (c). 3621 “The language used in subdivision (c) shows that the subdivision was not intended by Congress to apply in the case of receivers or trustees in bankruptcy or assignees who merely marshaled and distributed the assets of an insolvent corporation among its creditors. In terms subdivision (c) applies only in cases where receivers or trustees in bank- ruptcy or assignees ‘are operating the property or business of corporations’ and thus may be in the receipt of a ‘net income’ as defined in the prior sections of the act. I regard the quoted words as of marked significance. 3622 “To my mind the subdivision was inserted in the act to meet the specified case of the profitable operation of the business of a corpora- tion b}^ the officers mentioned; for instance, the operation of the business of a railroad corporation by receivers or the operation of the business of a manufacturing corporation by a trustee in bankruptcy, etc. ********* 3623 “The decisions cited in the brief filed by the government, such as Edwards v. Keith, Collector, 231 Fed. Ill, 145 C. C. A. 298, L. R. A. 1918A, 498 (C. C. A., 2d Circuit), and Towne v. Eisner, Col- lector, 245 U. S. 418, 38 Sup. Ct. 158, 62 L. Ed. 372, L. R. A. 1918D, 254 (January, 1918), turning as they do on what is and what is not taxable income, no question arising in those cases as to the status of the taxes, are not pertinent in my view of the case before me. 3624 “For like reason I have not discussed the correctness of the amount of net income upon which the government claims a tax. This amount, as well as his liability for any tax, is challenged b}^ the trustee in bankruptcy. 3625 “I am of the opinion that the trustee in bankruptcy is entitled to an order den^dng the prayer of the petition filed by the United States attorney for the Southern district of New York, on behalf of the collector of internal revenue for the Second district of New York.” (258 Fed. 208.) INC. 518 TAX 104O-10 3626 Deductibility of losses sustained by estates or trusts and 2901 the bearing of such losses on the taxable income of bene- 2991 ficiaries. — Receipt is acknowledged of your letter of Octol>er 3, 2994 1919, which reads as follows: ‘‘With reference to the letter dated August 9, 1919 — IT:T:RR-FMH — signed by C. P. Trobridge, Acting Head of Division, is it possible to obtain any definite reply to our letter of July 24, 1919, inquiring as to whether or not when a fiduciary sells stock or bonds of a trust estate at a loss, the beneficiary is entitled to a credit, deducting such loss against his income, only paying a tax on the net amount of his taxable income in excess of the loss? Inasmuch as your letter of August 9 stated that the matter was at that time under consideration and we have received no other reply, we thought it possible that the matter might have been overlooked.” ^ In reply you are advised that this office holds that, under the Revenue Act of 1918, (a) any loss resulting from the sale of stocks, bonds or other property, owned by a trust, which would be an allowable deduction from the gross income of an individual, is an allowable deduction from the, gross income of a trust, whether or not the income of such trust is “to be distributed to the bene- ficiaries periodically, whether or not at regular intervals,” and whether or not there is any requirement in the instrument creating the trust, a decree of court, or general law, that the principal of the trust estate be kept intact at the expense of income as against such loss; that (b) such a deduction is not allow^able as against the current or future gross income of the present beneficiaries or of those who will receive the property at the termination of the trust; and that (c) a beneficiary is not required to include in his personal return as a part of “his distributive share, whether distributed or not, of the net income of the . . . trust for the taxable year,” any part of the amounts allowed to the trust as a whole as a deduction for loss resulting from the sale of the property. (Letter to The Equitable Trust Company of New York, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated October 13, 1919.) 3627 Articles 1668 and 1567, Regulations 45: Interpretative com- 3577 ments. — On September 26 the Bureau of Internal Revenue promul- gated Treasury Decision 2924 modifying Articles 1566 and 1567 of Regulations 45. Two questions involving interpretation of the new Treasury Decision are raised. An early expression of an opinion on the first question and confirmation of our view as to the second question, will be appreciated. Meaning of “Market Value.” — Question 1. Article 1566, as amended, provides that where property is transferred to a corpora- tion in exchange for its stock the exchange constitutes a closed transaction and the former owner of the property realizes a gain or loss, if the stock has a “market value, and such market value” is greater or less than the cost or the “fair market value” as of March 1, 1913 (if acquired prior thereto), of the property given in exchange. The question raised is whether the words “market value, and such market value” permit a presumption that the decision contemplates an actual market before the case would be brought within the provision as to profit or loss, or the words “market value, and such m.arket value” are intended by the Treasury Department to mean “fair value.” The use of the words “fair market value as of March 1, 1913” immediately following that part of the Decision under discussion w’ould indicate that the word “fair” was deliberately omitted in the first instance and that the words “market value” were intended to convey the thought that there must be an actual market. This interpretation is 519 TAX INC. further borne out by the fact that if the word ‘^fair^’ be inserted before the word “market’’ in the first instance, the sentence might property have been concluded with the word “loss.” We can conceive of no situation in which property could be transferred in exchange for corporate stock which, under the ruhngs of the Bureau, would be considered to have no “fair value.” (Answer.) In your letter of October 7, 1919, you ask whether the words “market value” as used in Treasury Decision 2924 are used as an equivalent of “fair market value” or whether it is intended that an exchange of property for stock shall not be regarded as a closed transaction unless there was an actual market for the stock so acquired. 1[In reply I beg to say that the words “market value” as used in that Treas- ury Decision are used as an equivalent of “fair market value,” and that stock is to be regarded as ordinarily having a market value, even though no actual market for it can be established. Market value in this sense may, therefore, be regarded as the price which might reasonably be pre- sumed would be agreed upon between a willing bu^ver and a wilhng seller. 3628 Application of the limitation as to *‘no greater aggregate 3578 par or face value. — Question 2. In interpreting Article 1567, as amended, the opinion has been expressed that the phrase “in any case of no greater aggregate par or face value than the old stock and securities surrendered” is a limitation governing only “(e) the consohda- tion of the corporations,” and not a limitation with respect to (a), (b), (c) and (d). The statue indicates that the hmitation intended by the Regula- tions is applicable to (a), (b), (c), (d) and (e). (Answer.) You also ask whether in interpreting Article 1567 of Regulations No. 45, as amended, the phrase “in any case of no greater aggregate par or face value than the old stock and securities surrendered” is a limitation governing only “(e) the consolidation of the corporation,” or a limitation applying to each of the subdivisions (a), (b), (c), (d) and (e). ^ In reply you are advised that this phrase limits not only subdivision (e), but also the pre- ceding subdivisions. This article of the regulations is founded on Section 202 (b) of the Revenue Act of 1918, which would afford no basis for at- taching this qualification to subdivision (e) only. (Letter, embodying inquiries, from Baker and Baker, Washington, D. C., and the letter of reply signed by Commissioner Daniel C. Roper, and dated October 16, 1919.) (T. D. 2935.) 3629 Failure to file returns where tentative returns have been 3026 filed, Article 443 of Regulations 45 amended. — Section 1309 of the Revenue Act of 1918 (approved February 24, 1919) provides in part as follows 2591]: “That the Commissioner, with the approval of the Secretary, is hereby authorized to make all needful rules and regula- tions for the enforcement of the provisions of this Act.” 3630 In pursuance of the foregoing provision of law. Article 443 of Regu- lations 45 3026] is hereby amended to read as follows: Art. 443. Extension of time by collector. — It is important that the taxpayer render before the return due date a return as complete and final as it is possible for him to prepare. However, in cases of sickness or absence collectors are authorized to grant an extension of not exceeding thirty days, where in their judgment such further time is actually required for the making of an accurate return. See Article 1002 [If 3032]. The apphcation for such extension must be made prior to the expiration of the INC. 520 TAX period for which the extension is desired. The absence or sickness of one or more officers of a corporation at the time the return is required to be filed will not be accepted as a reasonable cause for failure -to file -the return within the prescribed time, unless it is satisfactorily -shown that there were no other principal officers available and sufficiently informed as to the affairs of the corporation to make and verify the return. As a con- dition of granting an extension of time for filing a return the collector may require the submission of a tentative return and estimate of the tax on form 1040-T in the case of individuals, or on form 103 1-T in the case of corporations, and the payment of one-fourth of the estimated amount of tax. Where a taxpayer has filed a tentative return and has failed to file a complete return within the period of the extension requested by him the complete return when filed is subject to penalties prescribed for delin- quency. Where a tentative return has been filed and no tine has been fixed within which a complete return must be filed, the collector may at any time send notice to the taxpayer to file a complete return within a period of time therein specified by him, and a taxpayer who fails to comply with such request will incur the penalties prescribed by statute for de- linquency in filing a return. (T. D. 2935, signed by Commissioner Daniel C. Roper, and dated October 16, 1919.) (T. D. 2937.) 3631 Assessments for Drainage.— Article 133 of Regulations 45 is 2899 hereby amended to read as follows: Art. 133. Taxes for local benefits.— So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk and other like improvements, imposed because of and measured b}^ some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public wel- fare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. Assessments under the statutes o{ California relating to irrigation and of Iowa relating to drainage, and under certain statutes of Tennessee relating to levees, are limited to property benefited, and when it is clear that the assessments are so limited, the amounts paid thereunder are not deductible as taxes. When assessments are made for the purpose of maintenance or repair of local benefius, the taivpayer may deduct the assessments paid as an expense incurred in business, if the [payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and main- tenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. Tf the allocation can not be made, none of the amounts so paid is deductible. (T. D. 2937, signed by Commissioner Daniel C. Roper, and dated October 16, 1919.) i INC. 521 TAX 3632 Deduction for depreciation in computing net income of 2910 estates and trusts and the bearing of such deduction on the 2991 taxable income of beneficiaries. — [In connection with the fol- 2994 lowing, ^3626 should be read.] Reference is made to our letter 3626 of May 8, 1919, in which you refe to office letter of April 14, 1919, wherein you are informed that an individual who receives her income from three trust estates is not permitted to deduct in her personal return the amount of depreciation sustained during the year on real estate which forms a part of the assets of these trusts. You now state you note that Article 164 [If 2913] of Preliminary Regulations 45, which had reference to this question, has been eliminated from the last edition of the Regu- lations, and you ask to be advised whether the decision contained in of- fice letter of April 14 has been modified. % In reply you are advised that an individual who receives income from a trust estate is not permitted to claim a deduction in his personal income tax return for any depreciation sustained during the year on real estate or other assets of the estate. Under the Revenue Act of 1918, however, it is permissible for the fiduciary, in ascertaining the net income of the estate or trust for which he acts, to deduct a proper amount for the depreciation sustained during the taxable year, whether or not the terms of the will or agreement creating same or a decree of Court provides for the taking care of depreciation which may be sustained on the property held in trust. (Letter to William R. Conklin, New York, N. Y., signed by J. H. Cailan, Assistant to the Commissioner, by P. S. Talbert, Head of Division, and dated October 6, 1919.) 3633 Return by corporation for taxable year during which its 3205a affairs are placed in hands of receiver, etc., for purposes of 3228 dissolution. — Receipt is acknowledged of your letter dated October 16, 1919, relative to the meaning of Article 547 of Regulations 45. In reply you are advised that your question as to whether, under Article 547 of the Regulations, any profit or loss resulting from the sale of capital assets by the trustees or receivers during the process of liquidation is to be merged with the profit or loss resulting from the- regular business of the corporation during the same taxable year prior to the taking over of the affairs of the corporation by the trustees or by the receiver is answered in the affirmative. ^ For information as to the meaning of the term “taxable year” as used in the Revenue Act of 1918 and for further in- formation as to the requirements of the Statute with respect to the filing of returns by receivers, trustees in dissolution, trustees in . bankruptcy and assignees, your attention is invited to Articles 25 [1|2839] and 622 [^3228] of Regulations 45. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated October 24, 1919.) INC. 522 TAX CflJE CORPORATION TRUST COMPANY’S INCOME. TA:^: .SERVICE,.) INSERT THIS PAGE TO FACE PAGE 522. THE INDEX on the blue sheets at the back of the book indexes the Law and all regulations, etc., relating thereto, to and including page 522 opposite. Page 523 following, and the pages following that page, are unindexed, temporarily. THE RUNNING TABLE OF CONTENTS, on Supplementary Page 129, at the back of the book, should be consulted for matter temporarily unindexed. This table consists of a list of all Treasury Decisions, etc., printed dn the Service, showing the general subject covered by each regulation, ruling or other matter. ItEMOVE THE PINK PAtiK EACINllector. (United States District C.'ourt for the Northern District of Ohio, Eastern Division.) MEMORANDUM 3635 Westenhaver, District Judge: Plaintiff brings this action to recover * income tax paid under protest. The parties have by stipulation in writing waived a jury and submitted their case for decision by me upon an agreed statement of facts. 3636 Plaintiff is the owner of a Minnesota mining lease on iron ore property acquired prior to March 1, 1913, conferring a right to mine and remove all of the ore and requiring the payment of 25 cents a ton royalty on such ore mined and moved. The question of law presented for decision is whether or not the plaintiff is entitled to deduct a reasonable allowance for depletion of iron or(‘ fiom the gross amount of its receipts from all sources in order to determine the net income subject to tax. The answer to this ({uestion turns on the true meaning of Section 12 of the Revenue Act of Septemb(‘r 18, 1916. Th(‘ Covernment’s contention is that the deduction authorized by the s('cond subdivision of this section is allowable only to an operating ownei’ of an ore mine and not to an operating lessee under a lease of the character stated. * Comment: Tlu* present Act makes i)rovision for the equitable apportionment of (kq)letion and d(‘preciation between lessees and lessors, •2171. INC. 523 TAX 3637 I have carefully examined all of the cases decided under the corporation tax act of 1909 and under the several income tax acts and have also carefully studied the several provisions of these several acts so far as they relate to this question. My conclusion is that the operating lessee is en- titled to the deduction as claimed. My engagements are such that it would be impossible for me, without neglecting other work, to prepare and file an extended opinion setting forth my reasons for this conclusion earlier than the latter part of December. There are, however, no disputed questions of fact, and the question of law is so clear-cut and simple, that an entended written opinion would add nothing to the information of counsel. It is sufficient to say that I concur in the reasoning of plaintiff’s brief, particularly its reply brief, and disagree wholly with the reasoning o the brief of defendant. 3638 Judgment will be rendered for plaintiff in accordance with the prayer of its petition. An exception will be noted on behalf of defendant. Cleveland, Ohio, November 3, 1919. D. C. WESTENHAVER, Judge. (T. D. 2944.) Southern Pacific ii. B. Co. v. Muenter ( C. C. A. Oct. 6, 1919). Deduction under Section 38, Act of August 5, 1909, of discount on bonds sold. Where a corporation sold bonds at a discount during 1906, 1907, and 1908 no deduction from gross income for the years 1909, 1910, and 1911 of sums set aside by the corporation to pay such discount at the maturity of the bonds is permitted under the provisions of Section 38, Act of August 5, 1909, authorizing corporations to deduct from gross income “(second) all losses actually sustained within the year * * *” and “ (third) interest actually paid within the year on its bonded or other indebted- ness * * Baldwin Locomotive Works v. McCoach, 221 Fed. 59 explained [1[2078]. 3639 The appended decision of the United States Circuit Court of Appeals 2072 for the Ninth Circuit in the case of Southern Pacific Railroad 3203a Company v. Muenter, is published not as a ruling of the Treasury Department, but for the information of internal-revenue officers and others concerned. (T. D. 2944, signed by Commissioner Daniel C. Roper, and dated November 8, 1919.) In the United States Circuit Court of Appeals for the Ninth Circuit. No. 3286 and 3287, Term, 1919. Southern Pacific Railroad Company, a corporation, plaintiff in error, v. August E. Muenter, formerly collector of internal revenue, et ah, defendants in error. (In error to the United States District Court for the Northern District of California.) 3640 Before GILBERT, ROSS, and HUNT, Circuit Judges. GILBERT, Circuit Judge: The court below sustained a demurrer to the complaint brought b}^ the plaintiff in error to recover certain items of corporation income tax paid under protest upon its net income for the INC. 524 TAX years 1909, 1910 and 1911. The complain-* alleged that during the yean 1906, 1907, 1908 the plaintiff in error borrowed various sums 3f money, and as security therefor issued and sold interest-bearing bonds of the par value of $1,000, drawing interest at 4% per annum, and maturing on the first day of January, 1955, which bonds it was necessary to sell at a discount. The amount involved in the action is the sum of $1,392.22, income tax upon reserved sums of mone.y which the plaintiff in error had set aside as the pro rata amount of the discount ‘or the years in question distributed over the entire period until the maturity of the bonds, the plaintiff in error contending that the discount is to be regarded as a portion of the interest which it pays upon the loans. The question presented is whether or not money so reserved and set aside by book entries to meet the final payment ot the discount could be deducted from net income of the corporation under the Income Tax Law of 1909, 36 Stat. 102, Sec. 38. That act, so far as it pertains to this question, provides that the net income upon which the tax is to be assessed is ascertained by deducting from the gross income, (second) all losses actually sustained within the year and not compensated by insurance or otherwise, (third) interest actually paid within the year on its bonded or other indebtedness. The plaintiff in error refers to Baldwin Locomotive Works v. McCoach, 215 Fed. 967, and the same case on appeal, 221 Fed. 59, as sustaining its contention. In that case the bonds were 31-year bonds, and the assessor thought it proper to deduct 1-31 of the total discount from the gross income of each taxable year. The controverted question in the case, however, was whether or not the corporation could deduct for the year 1910 the total discount upon the bonds which they had sold at 5% discount. The court held that a book charge because of the sale of an issue of bonds at less than par is not a part of the “expenses actually paid within the year out of income’^ so as to be deducted from gross income. There was no discussion of the question whether 1-31 part of the total discount deducted for the year had been deducted lawfully, as that deduction was not involved in the controversy. We think the present case is determined adversely to the plaintiff in error by the plain language of the statute. The money set apart upon the books each year until the maturity of the bonds to meet the loss which came from selling the bonds below par was the application of a prudent and proper system of business, and was a wise provision for the future, but it \vas not the payment of interest, nor did it represent a loss actually sustained within the year. The money was not in fact paid out. Not- withstanding the books of the plaintiff in error the money is still in its possession and subject to its control. A system of bookkeeping will not justify the Government in claiming taxes, nor will it justify the taxpayer in claiming exemption from taxation. The facts must control. Baldwin Locomotive Works v. McCoach, 221 Fed. 59, Mitchell Bros. v. Doyle, 225 Fed. 437. 3611 The judgment is affirmed. 3642 Proceeds of insurance policies paid to partnerships on death 945 of the insured are exempt. — Receipt is acknowledged of your 2864 letter dated October 30, 1919, relative to the meaning of Article 72 [^2864] of Regulations 45. 3643 You call attention to the fact that Article 72 of the preliminary edition of Regulations 45 provided that “upon the death of an INC. 525 TAX insured the proceeds of his life insurance policies, whether paid to his estate or to individual beneficiaries (but not if paid to a corporation or partnership), are excluded from the gross income of the beneficiary” and that the same provision is contained in Article 72 of the final edition of the regulations, with the exception of the clause ‘‘(but not if paid to a corporation or partnership)” being omitted and the words “directly or in trust” substituted therefor. You also point out that Article 541 [^3201] of the regulations establishes the status of the proceeds of life insurance policies paid upon the death of the insured to corporation beneficiaries, but that nowhere in the regulations is a definite statement to the effect that such proceeds paid to a partnership are or are not to be reported in the gross income of the partnership. You ask whether, under the circumstances, the term “individual beneficiaries” as used in Article 72 of the final edition of Regulations 45 also means partnership beneficiaries. 3644 In reply, you are advised that paragraph (1) of Section 213(b) of the Revenue Act of 1918 specifically provides that the term “gross income” does not include the proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estates of the insured. Section 218 of the Act provides that in computing the net income of each member of a partnership “there shall be included his dis- tributive share, whether distributed or not, of the net income of the partner- ship for the taxable year. * * * The net income of the partnership shall be computed in the same manner and on the same basis as provided in Section 212, except that the deduction provided in paragraph (11) of subdivision (a) of Section 214 shall not be allowed.” In Section 212 it is specified “that the term ‘net income’ means the gross income as defined in Section 213, less the deductions allowed by Section 214.” These pro- visions of the Revenue Act of 1918 do not require that the proceeds of life insurance policies paid upon the death of the insured to a partnership be reported in the gross income of the partnership. In other words, the phrase “individual beneficiaries” as used in that Act is held to include partnership beneficiaries. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated November 18, 1919.) (T. D. 2951.) 3615 Verification of returns. — Article 406 of Regulations 45 is hereby 3017 amended [the matter in italics being new] to read as follows: “Art. 406. Verification of returns. All income tax returns must be verified under oath or affirmation, before a7i officer duly authoi'ized to administer oaths either by the laws of the United States or by the laws of the state or tei'ritory ivhere such ojfcer resides. Persons in the naval or military service of the United States may verify their returns before any official authorized to administer oaths for the purposes of those services. Income tax returns executed abroad may be attested free of charge before United States consular officers. Where a foreign notary or other official having no seal shall act as attesting officer, the authority of such attesting officer should be certified to by some judicial official or other proper officer having knowledge of the appointment and official character of the attest- ing officer.” (T. D. 2951, signed by Commissioner Daniel C. Roper, and dated November 19, .1919.) INC. 526 I AX 12 - 3 - 19 . (T. D. 2952.) United States u. Berwiuit% {District Court of T., Oct. ^0, 1919) Income tax returns— Authority to administer oaths.— A com- missioner of deeds is authorized by Section [Article] 406, Regulations 45, Treasury Department, to administer an oath to an income tax return and where such oath is false an indictment for perjury will lie under Section 125 of the Criminal Code of the United States. 8646 The appended decision of the United States District Court for the 3017 Southern District of New York in the case of the United States of 3645 America v. Hyman Benowitz, is pubhshed not as a ruling of the Treasury Department,- but for the information of internal-revenue officers and others concerned. (T. D. 2952, signed by Commissioner Daniel C. Roper, and dated November 19, 1919.) IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. (Decided October 20, 1919.) The United States of America v. Hyman Benowitz. (On demurrer to an indictment for perjury under Section 125 of the Criminal Code. The indictment charged that the defendant had com- mitted perjury by falsely swearing to an income tax return before a com- missioner of deeds of the City of New York.) 8647 HAND, J. D.: It must be conceded that since U. S. v. Curtis, 107 U. S. 671 and U. S. v. Hall, 131 U. S. 50, the crime charged in the first count must stand or fall solely upon whether Section 406 of the Regu- lations under the Income Tax Law authorized commissioners of deeds to take oaths to income tax returns, U. S. v. Morehead, 243 U. S. 608, or whether under Mr. Justice Story's dictum in U. S. v. Bailey, 9 Pet. 238, 253, 257, the oath was taken before such an official ‘‘in conformity with the practice and usage of the treasury department." 8648 Section [Article] 406 begins by the bare statement that all returns must be verified on oath, in that respect merely repeating the statute. Yet it very clearl}^ intended — though it must be confessed it is very blindly worded — to cover the whole matter, because it at once pro- ceeds to particulars, providing that soldiers and sailors may take oaths before anyone generally authorized to administer oaths to soldiers and sailors and that persons abroad may go to consular officers. It is of course absurd to suppose that the section taken as a whole meant to say that only such officers might administer oaths. If so, no one not only need, but no one even could verify his return unless it were soldiers and sailors and persons abroad. This would repeal the statute in substance; indeed such a regulation would be illegal. 3649 Finally, the section concludes with a provision for the certification of oaths taken by “a foreign notary or other official having no seal." This of course directly implies that foreign notaries may take such oaths, and that there are also officials so authorized who have no 'seals other than they. It is perfectly apparent from this language that those who drafted the section must have supposed that the first sentence authorized iome officers to take oaths, for the last sentence from which the question waa taken would be without any conceivable meaning if they did not, just as tbs second and third sentences, while logically possible, would be absurd INC 527 TAX and indeed invalid in law. If so, the only question is as to what officers the scriveners of the section must have meant. Much the most rational, and, so far as I can see, the only possible, interpretation is that they meant to include all such^as^were authorized by the local law to take oaths in their several districts. If I do not so interpret the language, I must sup- pose^* that the regulation which was meant to put the statute into effect illegally defeated it by applying it in a whimsically capricious way. I intei'pret the regulation, therefore, as intended to allow a commissioner of deeds among other officials to take such an oath. 3650 It becomes unnecessary, therefore, to consider the effect of Justice Story’s dictum in U. S. v. Bailey, supra. The second count is concededly good if the first is. Demurrer overruled. [Opinion appended to T. D. 2952, ^[3648. 3651 The filing of Form 1000 by personal service corporations in 2999 collecting interest on tax-free-covenant bond interest.— Reference is made to your letter, dated October 8, 1919 which is quoted here: While the Revenue act of 1918 treats a personal service corporation similar to a partnership, no provision seems to have been made to allow a personal service corporation to take advantage of the tax-free •clause when collecting coupons from bonds. We inquire if a personal service corporation may alter Certificate Form 1000 when collecting coupons from tax-free covenant obligations.” 1|In reply you are advised that per- sonal service corporations are to be treated, so far as practicable, on the same basis as partnerships for the purposes of withholding under Section 221 (b) of the Revenue Act of 1918. Corporations which have received notice from the Income Tax Unit that their returns as personal service corporations have been approved may thereafter, and not before, issue Form 1000 in collecting interest from bonds or other obligations of a corporation containing a so-called tax-free covenant clause in the same manner as and to the same extent that partnerships are authorized to use that form. The form should bear the stamped or written notation “Approved by the Treasury Department as Personal Service Corpo- ration on (blank date)”. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated November 20, 1919.) INC. 528 TAX 12 - 4 - 19 . 3653 Amended returns and refunds for years prior to 1914. — 2497 Receipt is acknowledged of your letter of September 8, 1919, with reference to the question of refund in the case of your client, the Company, , Wisconsin, whose invested capital has been reduced in order to provide for depreciation which had not been deducted during the years 1909 to 1917, inclusive. You state that a letter addressed to the compaliy by the Revenue Agent in charge, on August 15, contained the following paragraph: ‘^On account of the limitation contained in the Revenue Act of 1918, no refund is allowable for any year prior to 1914. For this reason it will be useless for you to file amended re- turns for years prior to 1914.” You question the statement made therein and refer to Sections 3220 [1f2497J and 3223 [^[2315] of the Revised Statutes in support of your con- tention that the company should be entitled to file amended returns for 1909 and all subsequent years. Ifin reply, you are advised that the state- ment of the Revenue Agent is erroneous. 3653 The five-year limitation on assessment and suit contained in Sec- 2360 tion 250 (d) [^[2360] applies only to taxes due under the Revenue Act of 1918. 3654 Section 252 [^[24881 does not operate so as to take away the rights 2488 which a taxpayer has under Section 3228, Revised Statutes [1[2615], 2615 to file a claim for refund whithin two years after the time the cause of action accrued. ^The five-year limitation in Section 252 does not apply to claims for abatement. (Letter to Ernst and Ernst, Washing- ton, D. C., signed by Commissioner Daniel C. Roper, and dated October 9, 1919.) (T. D. 2956.) 3655 Deductions allowed-Depletion after discovery of Oil and 2948 Gas wells. Proven tract or lease. Disproportionate value, 2949 Articles 220 and 221 of Regulations 45, amended. — Regula- tions 45 are hereby amended by substituting for Articles 220 and 221 as they now stand the following three articles: 3656 Art. 220. Oil and Gas Wells. Section 214 (a) (10) and Section 2948 234 (a) (9) provide that taxpayers who discover oil and gas wells on or after March 1, 1913, may, under the circumstances therein prescribed, determine the fair market value of such property at tbe date of discovery or within 30 days thereafter for the purpose of ascertaining allowable deductions for depletion. Before such valuation may be made the statute requires that two conditions precedent be satisfied, (1) that the fair market value of such property (oil and gas wells) on the date of discov- ery or within 30 days thereafter became materially disproportionate to the cost, by virtue of the discovery, and (2) that such oil and gas wells were not acquired as the result of purchase of a proven tract or lease. 3657 Art. 220 (a). Discovery - Proven Tract or Lease - Property Disproportionate Value. (1) For the purpose of these sections of the Revenue Act of 1918, an oil or gas well may be said to be discovered when there is either a natural exposure of oil or gas, or a drilling that dis- closes the actual and physical presence of oil or gas in quantities sufficient to justify commercial exploitation. Quantities sufficient to justify com- mercial exploitation are deemed to exist when the quantity and quality of the oil or gas so recovered from the well are such as to^afford^a reasonable 529 TAX INC. expectation of at least returning the capital invested in such well through the sale of the oil or gas, or both, to be derived therefrom. 3658 (2) A proven tract or lease may be a part or the whole of a proven area. A proven area for the purposes of this statute shall be presumed to be that portion of the productive sand or zone or reservoir included in a square surface area of 160 acres having as its center the mouth of a well producing oil or gas in commercial quantities. In other words, a producing well shall be presumed to prove that portion of a given sand, zone or res- ervoir which is included in an area of 160 acres of land, regardless of pri- vate boundaries. The center of such square area shall be the mouth of the well, and its sides shall be parallel to the section lines established ' by the United States system of public land surveys in the district in which it is located. Where a district is not covered by the United States Land surveys, the sides of said area shall run north and south, east and west. 3659 So much of a taxpayer’s tract or lease which lies within an area proven either by himself or by another is “a proven tract of lease” as"^contemplated by the statute, and the discovery of a well thereon will not entitle such taxpayer to revalue such well for the purpose of depletion allowances, unless the tract or lease had been acquired before it became proven. And even though a well is brought in on a tract or lease not in- cluded in a proven area as heretofore defined, nevertheless it may not entitle the owner of the tract or lease in which such well is located to re- valuation for depletion purposes, if such tract or lease lies within a compact area which is immediately surrounded by proven land, and the geologic structural conditions on or under the land so inclosed may reasonably warrant the belief that the oil or gas of the proven areas extends thereunder. Under such circumstances the entire area is to be regarded as proven land. 3660 (3) The “property” which may be valued after discovery is the “weU”. For the purposes of these sections the “well” is the drill hole, the surface necessary for the drilling and operation of the well, the oil or gas content of the particular sand, zone or reservoir (limestone, breccia, crevice, etc.) in which the discovery was made by the drilling and from which the production is drawn, to the limit of the taxpayer’s private bounding hnes, but not beyond the limits of the proven area as heretofore provided. 3661 (4) A taxpayer to be entitled to revalue his property after March 1 1, 1913, for the purpose of depletion allowances must make a dis- covery after said date and such discovery must result in the fair market value of the property becoming disproportionate to the cost. The fair market value of the property will be deemed to have become disproportion- ate to the cost when the output of such w^ell of oil or gas affords a reasonable expectation of returning to the taxpayer an amount materially in excess of the cost of the land or lease if acquired since March 1, 1913, or its fair market value on March 1, 1913, if acquired prior thereto, plus the cost of exploration and development work to the time the well was brought in. 3662 Art. 221. Proof of discovery of oil and gas wells. In order to 2945 meet the requirements of the preceding article to the satisfaction of the Commissioner the taxpayer will be required, among other things, to submit -the following with his return: (a) a map of convenient scale, showing ther location of the tract and discovery well in question and of the INC. 530 TAX 12 - 26 - 19 . nearest producing well, and the development for a radius of at least three miles from the tract in question, both on the date of discovery and on the date when the fair market value was set; (b) a certified copy of the log of i\' the discovery well, showing the location, the date drilling began, the date of completion and beginning of production, the formations penetrated, the oil; gas and water sands penetrated, the casing record, including the record of perforations, and any other information tending to show the condition of the well and the location of the sand or zone from which the oil or gas is produced on the date the discovery was claimed; (c) a sworn record of pro- duction, clearly proving the commercial productivity of the discovery well; I (d) a sworn copy of the records, showing the cost of the property; and (e) a full explanation of the method of determining the value on the date of discovery or within 30 days thereafter, supported by satisfactory evidence of the fairness of this value. (T. D. 2956, signed by Commissioner Daniel C. Roper, and dated December 2, 1919.) 3663 Re method of computing tax in the case of fiscal year [ 53 121 corporations. — Reference is made to your letter dated October 27, 1919, addressed to the Chairman of Committee on Appeals and Review, and by him referred to this office for reply, after full consideration had been given to the subject matter contained therein. Ifin reply you are advised that the questions presented were carefully considered before the regulations were issued or the forms'^were drafted, and have since that time been the subject of most thoughtful con- sideration and analysis. The view of the Department is expressed in the regulations and the forms now in use. 1[The Bureau, therefore, does not deem it advisable to modify the regulations or to make any change in the forms until such time as it may be [required to do so by a court decision. (Letter|to K. Sheridan Hayes, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated November 5, 1919.) INC. 531 TAX tfi H) »u,if>At 41 'joX iiioxxiqof^vdb 9di 3j44iiiibpiQ * arl^ ir»/x tvrvtt IL. .' 4 rf^ ct 4 '\'K ' ifiiT^ /*'Vvr4'k ‘ .^’.li ** t. .. ^ X-iw 9 di \o R W;^o,,^ 3 ub(>'xq f' ■ .1 '■' Y arf/ sflw^Tq \cl»ari^i«d»ufa '■ -'- ^ i vMq'ditf; Mt'id iM^ dMmiTiMA ^Sbiobat Mi, >a vcido d^wa * f ftV- HZ T8PY to ‘ drft flr-tjji ^M^uqinod' fo Boxfi8'iii'"dk.|;oos I ' f. : i9doi>c/0 eb' ww' d3 eb^irr' at eon^isrsit—.gnbii^ioato^d^ ! S Ib^ i v ’ - " .( at; .a^abi^^ioqtpb ^ i S „.. ^ , wstpfQ«H , bflii X+Rd;f ' hAatirb A* aV#i 'rr^V •'‘'' ' ;fa:-1v,9io]9tsrf.t ' iS/fTf *>?• ^ ainm ‘4^t .B.£4- ^ 9d;t '''-• " A be'oLv df'bb’iid^^ Sd'Y>fiar'ii ^ 903^ 9df *dl sgaBtfo bao^ia ,,>p ,a xiebha^B^JI/'oilia^QiJ) : MQhio^b Sivco iiZX td I^IV fs'- %> : ■ M- -^ r't'f)Zx\i V^uiv‘:> 'b»/ iVV(b4i;jfi|,v.,,v ii .’: ^C bouaI». ‘‘ 25 ^’;};; ji',i Vi i\t.k' 4 iv4v? bv i-bv ^-V:: bya/A 7i;bv4v!: OV ihe Ih'iiv < ■ •t .<• vbe •r; ..trca v.s >>4;. : ■' M. f,x> . f' ■ cV mM Ih?! '■*' TCi^ iyhie 'b^t bbvrdU tbj of dt^r.lvf Ky^. >^ ^av. ^’ ■- ' • • . • 1 L - . pbrUoo,<‘,to ,•1:= ■y,-yf, zz ’• ,» - J'/, ( ‘Uic* so.cb, dis’y.yvifry fM'y^'-XTAmr >v....:. ".:,s i::xfr > 4 '^'‘''* V thp-pi-'-t' i hv- hip crv*^ Ur. Viiv^f'vi 'to. ^ h'^’\yio- (hf{i^Qio?*U0i^ v'h'^rt iii'7‘ r.',' i!»i:v4l of ^v,*' ;' \.v^?J\ C/i o l or 51515$ H rcv 't lui-d pi iX 4»vqi'/i:vd ;«?icjc, . . , : ■ . ‘> , I , 4 .!Va ■ (•m'*\x CO. ■:h un- i: :40f;? ^v^.i ijL-st«i4.*i -Xo vpl-^^^pr^ t;it : k r,o -ci.-) it? : . ir* «. . CfcCv^ v;*! 'i’C.c.tUtuuv <:U4ci>V'5ry bX iU/ "'X 'Vlj^ aurl ’.::ri,'^ vr.-ic;^ ro ■ ‘ tTih'P r.f> ^ •-'■ 'iV O'VeOji'. f'.t Y.%'U4^‘^C ,' -^ U-. ';\n*^‘Kvrk a?«<) i'* ur ■>'■-■ ^r^T ft? 9 17 - 19 . COMMENT The regulations in the body of the book, on pages 55 to 300, consist in the main of the Treasury Decisions (T. D.’s) issued by the Treasury Department through the office of the Commissioner of Internal Revenue from the time of the approval of the original Income Tax Law, Act of October 3, 1913, up to and including February 12, 1919. In addition are given court decisions and numerous letters and extracts from letters emanating from the office of the Commissioner of Internal Revenue, most of which were embodied in The Corporation Trust Company’s Income Tax Service for 1914, for 1915, for 1916, for 1917, or for 1918. ; At this writing (February 18, 1919), the regulations based on the Revenue Act of 1918, have not been issued by the Treasury Department. Therefore, wc have included most of the old regulations which have not been specifically repealed or superseded, even though some of these contain statements inconsistent with the changed provisions of the law. As indicated on page 4, the Income Tax Law is reprinted, begin- ning on page 55, having its paragraphs numbered to correspond with the numbering of the paragraphs of the law as printed as a unit beginning on page 5. On the succeeding pages all regulations explaining, enlarging, or giving specific directions for the enforce- ment of the law provisions in a particular paragraph or group of paragraphs of the law are printed immediately following such law paragraph or group of paragraphs. A generous employment of titles to subjects and sub-subjects throughout the book will facilitate its use. Following each regulation provision is a citation to its source, and the date thereof and on Supplementary Page 106, following, is printed a list of all sources arranged numerically by T. D. number, by article number in the general Regulations No. 33 of January 5, 1914, by article and paragraph number of . Regulations No. 33, Revised, January 2, 1918, by dates of letters and other special matters, showing at what paragraphs these sources appear in this, our 1919 service. Each of the paragraphs reprinted in the Service contained in the government’s several extensive compilations has been listed in the “T. D. and Special Matter Finder” (beginning with T. p. 2090 on Supplementary Page 107) with a very brief summary of paragraph content. General Regulations No. 33 of January 5, 1914, and, in turn. Regulations No. 33, Revised, January 2, 1918, repeated exactly, much of the regulations issued previous to the respective dates of issue. In such cases we have eliminated the earlier rulings. Other exact duplications, definite repealings and revocations, and specific amendments have been similarly handled. Matter applicable solely to the collection of the tax for prior years has not been included. Income Tax Supplemeottry Page 1 TABLE OF FORMS Korm Supplementary Number Reproduced on Page 46 - 3 47 5 47A 53 1000 46 1001 ......30 lOOlA 31 1012 49 1013 32 1031T 7-8 1040 9-14 1040A 15-20 1040C 87 1040F 21-24 1040T 25-26 1041 59 1042 36 1058 33 1059 47 1065 55 1065A 77 1078 34 1087 18 1096 27 1096A 45 1096B 28 1098 35 1099 29 1114 See U 1848 in body of book 1115 51 1116 65 1117 82 1118 83 1120 37-44 I120A 69 1122 48 1124 50 « Income Tax Supplementary Page 2 IXTXKHIL RETINTJ*. rorin <»-R«TlMd Uatcb, UlS. " 160, ooa CLAIM FOR REFUND. TAXES ERRONEOUSLY OR ILLEGALLY COLLECTED'. iU50 AMOUNTTS PAID FOR STAMPS USED IN ERROR OR EXCESS. StMte of. County of. l-zj'' ‘ IMPORTANT. THi cUim should be (onrarded to tbo Collector of Interoal Rereiuw to whom the Tax was paid and imut be accompaoied b; CoUectcr’s Receipt therefor. DaU of filing to It plainly rtamped hert I Write Nu>< H a can b. (Neme ot claimant) (Add^ ot cRdmant; ^ve street ^ nnmbtf as w^as dt7 or tOem, Stt^.) This deponent being dulv sworn according to law deposes and says that this claim is made on behalf of the claimant named ^liove, and that the facts stated bolow witn reference to tho claim are true and complete: 1. Btisiness engaged in by claimant — .......... 2. Character of assessment or tax »-•. — (State Ibr or upon what the tax was assessed or the stamps affixed.) 3. Amount of assessment or stamps $ 4. Amount now asked to bo refunded (or such greater amoimt as Is legally refundable) ... $ 5. Date of payment of assessment or purchase of stamps Deponent verily believes that the amount stated in Item i should bo Cefunded and claimant now asks and demands refund of said amoimt for tho following reasons: And this deponent further alleges that the said claimant iSiflJit indebted to the United States in any amount whatever, and that no claim has heretofore been presented, ex£S^t as .stated herein, for the refunding of the whole or any part of the amount stated in Item 3. Stoom to and tubseribed before me-ihia. Signed: day of 19.. ‘Vrui;;) ' “ (TU« affidavit may be awom to before a Deputy CoUectoc of Internal Revenue without charge.) Income Tax Supplementary Page 3 CERTIFICATES. I certify that an examination of the records of the Pommissioner’s Office shows the following facts as to the assessment and payment of tho tax: Name or taxtateb. Character of assenment and period covered. Ust. Year. Month. Page. Une. Amount. Date paid. District to which paid. $ 1 Asscsmenl Clerk, JrUcmal Revenue Bureau. I certify that the records of my office show tho following facts as to the purchase of stamps: To -wnoM SOLD OB JSSDED. SlDd. Number. Denomination. Date of sale or issue. Amounts 1 If special tai Serial number. stamp, state; Period eommenclDg— Collector J)ittricl Form M. Schedule Number District Allowed or Eeiected Number. (Natnre of tax.) Address ' Claim ciamlncd by— Claim approved by— Chief of Diotsion. Examined .and submitted for action. , Amount claimed $ Amoimt allowed Amount rejected I... , 19 -. COMMITTEE ON CLAIMS.' Income Tax Supplementary Page 4 CLAIM FOR ABATEMENT TAXES ERRONEOUSLY OR ILLEGALLY ASSESSED taSASORY BEPARTMTKT, U. 8. iMTtKNAL Revest*. Ponn 47^ Revised Aprd, iwia Ed. 3W,eOO. State of County of^ IMPORTANT Thu «I«im thouM b« forwarded to the Collector of Internal Revenue from whom notice of aMeee- ment wae received* (Nome of claimimt.) DATE OF FIUNG TO 8E PUJKIY STASiPEOHEHE (Address of claimant; etro street end number as well as city or tovn, and Sui«.) This deponent being duly sworn according to law, deposes and says that this claiin Is made on behalf of the doimant named above, and tbat the facts stated below with reference to said claim are true and complete: 1. Business engaged in by claimant 2. Cbaracter of assessment or tax 3. Amount of assessment S. 4 . Amount now asked to bo abated S. Deponent verily believes that tho amoimt stated in item 4 should be abated, and claimant now asks and demands abatement of said amount for the following reasons: Sworn to and subscribed before mo this day of 19 Signed: (Thia allidAvit may be avrora to before a Deputy Collector of lutomal Revenue without charge.) Income Tax Supplementary Page 5 CERTIFICATE OF ASSESSMENT I certify that an examination of the records of the Commissioner’s Office shows the following facts as to the assessment and payment of the tax : NAME AND ADDRESS. CUARACTER OP PERIOD Assessment or Co\'ered rt Lbt. Year. Month. Page. Article Taxed* Assessment* Assessment Clerh, Internal Revenue Bureau. Abatement Order Ab, Claimant ... Addres.tedno.s< Total 1 » ^ AFFIDAVIT The undersigned, president and treasurer, respectively, of the corporation whose name and address appear at the head of this form, being severally duly sworn, each (or himself deposes and says that the foregoing is a fair estimate of the total amount of the income, war-profits, and excess-profits taxes of the said corporation for the period stated above, and that the above-stated reasons why a completed return can not be filed on or before March 15, 1919, are true. Sworn to and sub- 1 ^ ,9 •cnbed before me | (ProsiJcnt.t (Nam* ^ officer.) (Treasurer.) (OfficUl capacity.) Income Tax Supplementary Page 7 [This Form 1031T — Duplicate (see Supplementary Page 7, for original) is at- tached to the oripnal (perforated), the reverse of both sheets being blank.] DUPLICATE I to be sent to Collec- tor with original Form 1031T-UNITED STATES INTERNAL REVENUE SERVICE TENTATIVE RETURN AND ESTIMATE OF * THIS FORM CORPORATION INCOME AND PROFITS TAXES DULY APPROVED BY THE COLLEaORMUST ACCOMPANY THE TAXPAYER’S COMPLETED RETURN WHEN FILED AND REQUEST FOR EXTENSION OF TIME FOR FILING RETURN PRINT BELOW TAXPAYER’S NAME AND PRINCIPAL PUCE OF BUSINESS PENALTIES Per Making False or Fraudulent Retern. Not exceeding $10,000 or not exceeding one year’s imprisoninent, or both, in the dis- cretion of the court, and, in addition, 50 per cent of the tax evaded. For Failing to Mako Return on Time. Not more than $1,000, and, in addition, 25 per cent of the amount of tax due. Date. (To be enUred by taxpayer.) ' No ; : (To be entered by Clollector.) Collector of Internal Revenue, The amount stated below is remitted herewith in payment of not less than one-fourth of the estimated amount of the income, war- profits, and excess-profits taxes for the year ended of the corporation whose name and address appear at the head of this form An extension ol days in the time allowed for filing a completed return is requested. It is not possible to file a completed return on or before March 15, 1919, for the following reasons: Notb. — A parent company may make a tentative return and pay the first installment o' the tax on behalf of all its subsidiaries without ajbportioning the tax among them until the completed return is filed. Estimated amount of tax $ Amount of remittance herewith Check or draft. Money order Currency or coin Certifleate of Indebtodnoss Total. $ - $ - $ $ $ COLLECTOR’S APPROVAL In consideration of the filing of this tentative return and the payment of not less than one-fourth of the estimated amount of the tax, and for the reasons stated above, the time for filing the completed return of the taxpayer whose name and address appear at the. head of this fonn is hereby extended, by authority of the Commissioner of Internal Revenue, until If the remittance atcompan^ng this tentative return exceeds one-fourth of the tax as computed on the completed return, the excess ^11 be credited against the balance remaining to be paid. If the remittance is less than one-fourth of the tax, the_ balance due, with interest at the rate of six per cent per annum from March 15, 1919, must accompany the completed return. If the amount paid exceeds the total tax as shown by the completed return, the excess will be refunded. Date— a— Moi. Collector of Intamal Revenue. .District of P IncomeTax Sopplementary Page 8 OF INCOME TAXAfil* £ 1918 RATES aiiNiaAOT TVNaaxNi no HOioanoD ox u qnSs dNV aaan Naoiaa Hovxaa Income Tax Supplementary Page 9 Income Tax Supplementary Page 9 Page 1 of Form 1040 income Tax Supplementary Page 10 Income Tax Supplementary Page id Income Tax Supplementary Page id Page 2 of Form 1040 Income Tax Supplementary Page 12 Paee 3 of Form 1' 2 W W«fc TAXPAYER’S WORK SHEET FOR RETURN OF INCOME TAXABLE AT 1918 RATES i A. itHCOME FROM BUSINESS OR PROFESSION. Income Tax Supplementary Page 12 ilJ I I If I s 1 s ! -1 I 1 li . j III § S g 111 s 1 il 1 i I I S. « I = I $■ E 5 ! 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5 ?! l| feii l" iH oil ill oi -Pi p!I 9||5 Pli PlJil ill !#ii illiljl I I S S IF =- I I 1 I I S 1 s S I I L I I t Mu I f I i| 1 I s' ! sU I 3 3 sf I a 3 a *3 g §■ I uM I iUl ll'i I 11 -I I ?i il ll il h '^li si"' ^ b 1 1 * I <|8 Jii lA 2 i J{ iiiiiiiiiiiiii 1 2 SS 28 S§ 8 i§§§i 8 l s "‘"■Ml 1 ili§ii§ S'ssga'IS 1 ill | 2 S 28 g|§ 2 || 2 g||||||g§||^^^^^^ 233 §S| sssssiiiipi^^^ i g 111 irts 1 1 « “ 1 i! iiiiiiiiiiiiiiiiiiiiiiiiiiii ^•‘''^'sszs^fitis^nsisxsiittSiiissxsi 3 g il ^3 1 i iii§iiiiiiiigiiiii?l Income Tax Supplementary Page 13 Income Tax Supplementary Page 13 Page 5 of Form 1040 INSTRUCTIONS FOR FILLING IN TAXABLE INCOME Income Tax Supplementary Page 14 Income Tax Supplementary Page 14 o «4H o VO u 00 e* Income Tax Supplementary Page 14 Fit w«fTi fint Page 1 of Return Form 1040A.— tTNITED STATES INTERNAL REVENUE SERVICE INDIVIDUAL INCOME TAX RETURN FOR NET INCOMES OF NOT MORE THAN $5,000 For Calendar Year 1918 DEUVER OR SEND THIS RETURN WITH PAYMENT TO COLLECTOR OF INTERNAL REVENUE ON OR BEFORE MARCH 15, 1919 DETACH AND KEEP •WORK SHEET AND INSTRUCTION SHEET 1. Did you 2. If so, what address make a re- did you give on turn for 1917? that return? 3. To what col- 4. Give number, if any, assigned to lector’s office^ you for 1917 if it does not appear was it sent? 1 in address at head of return (Give district or city and State.) 6. "Were you in 1918 6. If not, were you the head of a married and living - family as defined in instructions with wife (or husband)? under “Personal Exemption?” ... 8. If you claim any additional exemption on ac- count of dependent persons other than your children, what was their relationship to you ? Do not write in this sjHce FIRST PAYMENT (Caahier’s Stamp.) CASH CHECK M. 0. Examined by 7. How many dependent persons under 18 (or mentally or physically defective) received their chief sup^rt from you during 1918 ?.. 9. Write “R” if this return shows income received, or “A” if it shows income accrued 10. Did your wife (or husband) or minor child make a separate return? (If so, give name and address thereon.) U. Did you oryour wife (or husband) or dependent minor children receive any interest on U. S. Liberty Bonds, or any salary not reported elsewhere in this return or in aseparate return? (If 60 , give sources and amounts.) 12. Enter name and address of each ■organization to which you made ■contributions claimed as deduc- tions, and amount paid to each. 13. Enter in this table details concerning repairs, wear and tear, and property losses, claimed as deductions in Schedules A, E, and I on page 2 of return (see instructions): I. Refer to “A," 2. Kind of property. (If buildings, state also ma- terial ol whicn constructed.) 3. Year ac- quired. 4. Cost of property (or market value March 1, 1913). 5. Repairs not ofiset by claims (or wear and tear •or losses. Wear and tear (depreciation) and depletion charged off — Losses not compensated for by insurance. 6. Rate. 7. Amount pre- vious years. 8. Amount this year. 9. Cause of loss. 10. Amount of loss. t ■ % T $ t 1 1 1 CALCULATION OF TAX Do not write here. M. Net incooe shown on page 2, Item J $ ..J Do not write here. P. Tax doe (6fo on amount of Item 0) $ N. Less personal exemption (see IiulnictioD VI) . O. Balance (ioeonie taxable at 6^1 .. Q. Less normal lax of 2% on Item F 1 1 R. Balance of lax due 1 NOTE.— If the amount on line O exceeds *4,000, the excess is taxable at 12%, I and your return should be made on Form 1040. | — S. Amount of lax paid on submission of return 1 AFFIDAVIT I swear (or affirm) that this return, to the best of my knowledge and belief, is a true and complete statement of all taxable gains, profits, and income received by or accrued to mo (or tho person for whom this return is made) during the year 1918, and that all deductions entered or claimed herein are allowable under the law. (If return U made by agent, tbe reason tberelor must be stated on this line.) Sworn to and subscribed before me this day of 1919. (Signature of individual or agent.) (Blgnature of officer administering oath.) (Address of individual ot agent.) Page 1 of Form 1040A Income Tax Supplementary Page 15 DETACH RETURN HERE AND SEND IT TO COLLECTOR OF INTERNAL REVENUE AT fa|t2ofEeb!7B. RETURN OF TAXABLE INCOME inline of wUe (or lm.b«nd)tnddep#oden»iiiui«r\ \ tliildrea,unle»» reported ia tsporate retiBcs (trelutrsdiM 1) / A. INCOME FROM BUSINESS OR PROFESSION. $ COST OF GOODS SOLD: 4. Labor — $ OTHEP. BUSINESS DEDUCTIONS: 12. Salaries and wages not reported as “Labor” under “Cost of Goods Sold”.. 1 6. Material and supplies 1.?. Ttfint _ 6. Merchandise bought for sale 14. Interest on business indebtedness....... 7. Other costs 15. Taxes on business and business property 16. Repairs, wear and tear, and property losses 8. Plus inventories at beginning of year 0. Total 3 17. Bad debts arising from sales 10. Less ievestories at end of year 18. Other expenses 11. Net Cost or Goons Sold S 19. Total Other Business Deductions $ — 20. Net Cost or Goons Sold P: LU3 Total Other Business Deductions 2 21. Net Income ft.om Business or Profession .. B. INCOME FROM SALARIES, WAGES, COMMISSIONS, BONUSES, DIRECTOR’S FEES, AND PENSIONS. I. By whom received. 2. Occupation. 3. Name and address of employer. 4. Gross income. 1 5. Deductions, 1 if any. | s ! Net IrreoME from S alaries, etc. (total of column 4 minus total of column 5) C. INCOME FROM PARTNERSHIPS, PERSONAL SERVICE CORPORATIONS, AND ESTATES AND TRUSTS (not including amounts reported under F and K). (State name and addross of partnership, etc.). 1 $ -1 D. PROFIT FROM SALE OF LAiN’D, EUILDL’'iGS, STOCKS, BONDS, AfID OTHER PROPERTY. 1. Kind of property. 2. Year acquired. 3. Name of purchaser or broker. 4. Sale price. 6. Original cost or market value March 1, 1913. 6. Cost of subse- quent improve- ments, if any. 7. Depreciation subscquoatly sustained. 1 jS Net Profit from Sales (total of cols. 4 and 7 minus total of | cols. Sand 6) !s E. INCOME FROM RENTS AND ROYALTIES. 1. Kind of property. 2. Name and address of tenant or lessee. 3. Cash or equiva- lent received. 4, Wear, tear, repair?, and pTo^rty losses. 5. Othersxpenses and losses. $ * ? NETlNcOifE FROJI RENTS AND ROYALTIES (total c,f col. 3 min US total of cols. 4 and 5). ? F. INTEREST ON CORPORATION BONDS CONTAINING TAX-FREE COVENANT, ON WHICH A TAX OF 2^ WAS PAID BY DEBTOR C0RP0R.ATI0N G. OTHER INCOME (not including dividonds) (State each source separately). 1. Cash received. o. Deducticfia, if any. $ $ S Net Total (total of column 1 minus total of column 2)..„ 3 1 1 H. TOTAL NET INCOME FROM ABOVE SOURCES. I. GENERAL DEDUCTIONS NOT INCLUDED ABOVE. t paid. , Losses by fire, storm, orcas- ualiy not claimed above. 4 Contribotions . 5. Otbcr deductions, if any. Total J. Total net income on which normal tax is to be caiculatsd (H minus I) (Enter as Item M, page 1) K. Dividends on stock of corporations organized or doing business in the United States (including dividends received through partnerships, personal service corporations, and fiduciaries) L. Total net income (if this amount is over 55,000, make your return on Form 1040) Page 2 cf Form 1040A Income Tax Supplementary Page 16 RETAIN THIS SHEET AND INSTRUCTION SHEET DETACH THE RETURN (CON- TAINING AFFIDAVIT) AND DELIVER OR SEND IT WITH PAYMENT TO COLLECTOR OF INTERNAL REVENUE ON OR BEFORE MARCH 15, 1919 KEEP THIS WORK SHEET AND THE INSTRUCTION SHEET Pag© 1 of Work Sheet Form 1040A.— UNITED STATES INTERNAL REVENUE SERVICE WORK SHEET FOR INDIVIDUAL INCOME TAX RETURN FOR NET INCOMES OF NOT MORE THAN $5,000 For Calendar Year 1918 IF YOU NEED ASSISTANCE GO TO A DEPUTY COLLECTOR OR TO THE COLLECTOR'S OFFICE BUT FIRST READ INSTRUCTIONS AND FILL OUT THIS SHEET (FACE AND BACK) IN PENCIL AS WELL AS YOU CAN 1. Did you 2. If so, what address make a re- did you give on turn for 1917? that return? 3. To what col- lector’s office was it sent ? (Give district or city and State.) 5. Were you in 1918 6. If not, were you the head of a married and living family as defined in instructions with wife (or husband}? under “Personal Exemption ?” — 8. If you claim any additional exemption on ac- count of dependent persons other than your 4. Give number, if any, assigned lo you for 1917 if it does not appear in address at head of return 7. How many dependent persons under 18 (or mentally or physically defective)^ received their chief support from you during 1918?.. 9. Write “K’’ if this return shows income received, or “A” if it children, what was their relationship to you? shows income accrued 10. Did your wife (or husband) or minor child make a separate return? (If so, give name and address thereon.) 11. Did you or your wife (or husband) or dependent minor children receive any interest on U. S. Liberty Bonds, or any salary not reported elsewhere in this return or in a separate return ? , (If so, give sources and amounts.) 12. Enter name and address of each organization to which you made contributions claimed as deduc- tions, and amount paid to each. 13. Enter in this table details concerning repairs, wear and tear, and property losses claimed as deductions in Schedules A, E, and I on page 2 of return (see instructiona): 1. Refer to “A,” "E,” or "I.” 2. Kind of property. (If building, state also ma- terial of wlucn constructed.) 3. Year ac- quired. 4. Cost of property (or market value March 1, 1913). 6. Repairs not oflset by claims for wear and tear or tosses. Wear and tear (depreciation) and depletion charped off— Losses not compensated for by insurance. 6. 1 Rate. 7. Amount pre- I 8. Amount this ' vioiis years. ) year. 9. Cause of loss. 10. Amoimtot loss. 1 CALCULATION OF TAX M. Nelintome shown on page 2,Ileni J H. Less personal exemption (see Instmction VI) 0. Balance (income taxable at 6%) NOTE.-rir the amount on line O exceeds $4,000, the excess Is taxable at 12%, end your return should be mode on Form 1040. P. Tax due (6% on amount of Item 0) Q. Less normal lax of 2% on amount of Item F . R. Balance of lax due S. Amount of lax paid on submission of return .... TAXPAYER’S RECORD OF PAYMENTS PAYMENT. AMOUNT. DATE. CHECK on M. 0. No. RANK OR OFFICE OF ISSUE. First Second ............ Third Fourth f 3 Page 3 of Form 1040A Income Tax Supplementary Page 17 P^e 2 of Work SheoL TAXPAYER’S WORK SHEET FOR RETURN OF TAXABLE INCOME / InclaiSiDf ioconM af vi/e (or IioiImim]) aoJ doprojart mkior \ V thildrep, nnleM raporlta in iepjf«t« rotmiu (too lutuctM I) / A. INCOME FROM BUSINESS OR PROFESSION. 1. Kind of busines* - 2. Bosiness address. 3. Total sales and Income from business or professional servlcea . . . COST OF GOODS SOLD: 4, Labor 6. Material and supplies 6. Mercbandise bought for sale 7. Other costs 8. Plus Inventories at beginning of year 9. Total 10. Less inventories at end of year 11. Net Cost oy Goods Sold OTHER BUSINESS DEDUCTIONS; 12. Salaries and wages not reported as “Labor" tmder “Cost of Goods Sold”_ IL Interest on business indebtedness 15. Taxes on business and business property 16. Repairs, wear and tear, and property 1 rvgctpts 17. Bad debts arising from sales 18. Other expenses 19. Total Othzb Business Deductions 20. Net Cost or Goods Sold Plus Total Othee Business Deductions B. INCOME FROM SALARIES, WAGES, COMMISSIONS, BONUSES, DIRECTOR’S FEES, AND PENSIONS. 1. By whom received. 2. Occupation. 3. Name and address of employer. 4. Gross income. 5. Deductions, if any. $ s i 1 Net Income from Salaries, etc. (total of column 4 minus total of column 5) C. INCOME FROM PARTNERSHIPS, PERSONAL SERVICE CORPORATIONS, AND ESTATES AND TRUSTS (not including amounts reported under F and K). (State name and address of j>artuership,^etc. ) D. PROFIT FROM SALE OF LAND, BUILDINGS, STOCKS, BONDS, AND OTHER PROPERTY. 1. Kind of property. 2. Year acquired. 3. Name of purchaser or broker. 4. Salaprice. 6. Original cost or market value March 1, 1013. 6. Cost of subse- quent improve- ments, if any. 7. Depreciation subsequently sustainw. $ S 1 1 1 1 Net Protit from Sales (total of cols. 4 and 7 minus total of cols. 5 and 6) S 8 1 L... E. INCOME FROM RENTS AND ROYALTIES. i_ 1. Kind of property. 2. Name and address of tenant or lessee. 3. Cash or equiva- lent received. 4. iTp*ir% AB(] property loauc 5. Otberexpenses and losses. J t J Net Income from Rents aitd ROTAiTiEa (total of col. 3 minus total of cols. 4 and 5)- $ j;. t F. INTEREST ON C(H(P0R.kTI0NI (including such interest rea BONDS CONTAINING TAX-FREE COVENANT, ON WHICH A TAX OF 2^ WAS PAID BY DEBTOR CORPORATION sived tlirougli fiduciaries) 1- G. OTHER INCOJvIE (not including dividends) (State each source separately). 1. Cash received. z Dednctlooc, If Afij. J J Net Total (total of column 1 minus total of column 2) I. GENERAL DEDUCTIONS NOT INCLUDED ABOVE. 1. Interest paid on indebt- edness -- . t 3. Losses by fire, storm, or cas- ualty not claimed above. 4. Contributions 1 hn — 5. Other deductions, if any. !l 1 2. Taxes paid Total . J. Total net income on which normal tax u to be calculated (H minus I) (Enter aa Item M, p^e 1) ; ; K. Dividends on stock of corporations organixed or doing business in the United States (including dlvidends-receivecl through partnerships, personal service corporations, and fiduciaries) Total net income (if this amount is over $5,()(X), make your return on Form 1040) . I— Page 4 of Form 1040A Income Tax Supplementary Page 18 Page 1 of Instructions INSTRUCTIONS FOR FILLING INDIVIDUAL INCOME TAX RETURN FOR NET INCOMES OF NOT MORE THAN $5,000 I. HOW TO DECIDE WHETHER TO MAKE A RETURN. 1. Calculate your net income by filling in page 2 of the work sheet according to page 2 of the instructions. 2. Add the nctincomcof your wifc(orhusband)and dependent minor children, if any, except as provided in paragraph 4. 3. The total fateVy income, calculated in accordance with paragraphs 1 and 2, must be reported, either in your return or in a separate return by wife (or hus- band), if it equals or exceeds — (a) $2,000 if you are married and live with your wife (or husband). (b) 51,000 if you are not married or do not live with your wife (or husband). 4. Income of a minor or incompetent, if derived from a sejiarate estate under control of a piardian, tntstee, or other fiduciary, must bo reported by his guard- ian or other legal representative. 1!. ACCRUED OR RECEIVED INCOME. 1. If you keep books showing income accrued and expenses incurred during the year, make your return from your books, but do not fail to include all your income even if it is not entered in your books. 2. If you do not keep books showing income accrued ai)d expenses meurred, report income received and expenses paid. 3. If you report income accrued, you must include all income that, accrued In 1917 but was not received until 1918, unless it was reported in last year’s return. 4. If you report income received, you must include all income constructively received, as bank interest credited to your account. III. RECEIPTS EXEMPT FROM TAX. The following classes of receipts are exempt from income tax, and need not be reported on page 2 of the return: 1. Pay, not exceeding $3,500, for active services in the military and naval forces of tbo United Stales. 2. Gifts (not made as a consideration for service rendered) and money and property acquired' under a will or by inheritance (but the income derivc-d from money or property received by gift, will, or inheritance is taxable and must be 'reporle who received his chief support from you. 3. If you were entitled to any of the foregoing exemptions during a part of the year only, you may claim as many twelfths of the exemptions stated as there were months in such part of the year. Any part of a month may be coimted as a month. 4. The personal or family exemption must be reported on line N, page 1, of the return, and must be supported by answers to questions 5, 6, 7, and 8. 5. A “head of family’' is a person who is the chief support of one or more per- sons li^-ing in his household, who are closely related to him (or her) by blood, marriage, or adoption. VII. V/HEN TO USE FORM 1040 INSTEAD OF THIS FORM. You must make your return on Form 1040— (a) If your net income is over $5,000. (b) If tbe net income reported in this return exceeds $4,000 and the entire family exemption has been claimed in a separate return m.ade by wife (or husband). (c) If this form does not provide for all the facts you have to report (as, for example, if you receive income from a partnership or persona! service corpora- tion with a fiscal year falling partly in 1917 and partly in 1918). VIII. AFFIDAVIT. 1. The affidavit must be executed by the person nhose incomo is reportoef unle.ss he is a minor or incompetent or unless he is ill, abscut from the country, or otherwise incapacitated, in which case the legal representative or agent may c.xecutc the affidavit. 2. The oatii will be admlnislercd witliout charge by any collector or deputy collector of intemrd revenue, or (if you are in the militarj' or naval service of the United States) by any military or naval officer who is authorized to administer oaths for purposes of military or naval justice and administr-.t ion. if .an internal revenue officer is not available, the n lurn should be swom to before a notary public, justice of the peace, or other person authorized to adininis'.oi oaths. IX. WHEN AND WHERE THE RETURN SHOULD BE SENT. Send your rotium to the collector of hitcrnal revenue for the ddstrict in v.’liicii you live or have your place oi business so that it will rcai ii him on or before March 15, 1919. If the address of the coiloctor is iiot pimted on the iciurn and you do not know it, ask at the post ofiice or bank. X. WHEN AND TO WHOM THE TAX MUST BE PAID. 1. The tax should be paid, if possible, by sending or bringing with the return a chock or money order drawn to the order of “Collector of Internal Revenue at [insert name of city and Slate].” ■ 2. Do not send cash through the mail, or pay it in person except at the office of the collector or a regularly established internal revenue stamp office. 3. At least one-tourtb of the tax is due at thesame time that this return isduo. 4. An additional amount sufficient to bring tho total payments up to onc> half of the tax is due on or before Juno 15, 1919. 5. An additional amount sufficient to bring the total payments up to three* fourths of the tax is duo on or before September 15, 1919. C. Tho entire remainder of tho tax is due on or before December 15, 1919. 7. If any payment is not made when duo, a penalty of 5 per cent of tho amount due but impaid will be incurred. The entire unpaid balance of the tax will also become duo 10 days after demand therefor by the coiloctor. 8. If you pay in cash, do not fail to get a receipt at tho time of payment. If you pay by check or money order, your canceled cheek or your money order receipt will serve as a receipt. XI. PENALTIES. For Making False or Fraudulent Return. Not exceeding $10,000 or not exceeding one year’s iraprisomnent; or both. In tho discretion of the court, and, in addition, 50 per cent of tho tax evaded. For Failing to Make Retitm on Time Not more than $1,000, and, in addition, 25 per cent of tho amount of tax duo. For Falling to Pay Tax When Due. Five per cent of tho amount impaid, plus 1 per cent interest for each full month during which it remains unpaid. Page 5 of Form 1040A Income Tax Supplementary Page 19 p,ge2.fi=^ir..no3. INSTRUCTIONS FOR FILLING IN TAX4PLE INCOME A. INCOME FKOM BU5 Eeport bers Income frori— fa) So!e cf merchandise, or of nroduota of manufacturing ccnstnictioa, mirjTig, and agriculture. (For farm income oee Inctruction IV on the of this sheet.) fb) Business service, such as transportation, storage, laundering, hotel and rastaurant service, livery and garage service, etc. , if you own the busfn<^. If you_are^i^i>ged^ia the business as an employee, report, ycur salary or (c) A profession, such as medicine, law. or dentistry, if you practice It oa your o\vn account. If you are employed on a salary, report ycur salary in Schedule B. In general, report In Schedule A any income In the earning of which you incur expenses for labor, rent, etc. Do not report here partnership profits or profits of personal service corporations, which should be entered under C, or dividends from other corporations, which should be entered under K. If you are a fanner (or a farm owner renting ycur farm to another person on shares), enter online 21 your net Income from farming, as shown by year “Schedule of Farm Income and Expenses.” Kind of business.— Enter "grocery,” "retail clothing," "drug store,” "laundry," "doctor,” “lawyer," etc. If you keep hooks showing income rxerued, report such Income instead of cash received, and report expenses incurred Instead of expenses paid. Income received from sale of lands, buildings, eouiprnent, stocks, bonds, and other property not dealt In as a business should be reported under D. Total sales and Income from business or profession. — Report the total amount derived from sales, less any discounts or allowances from the sale price. J.INESS OR PROFESSION. Other bn.stti'.os ded .uiiouv:.— Do not include cost of business oouinment or ',5rn'*u.>-e, cxpead'.tures for permanent improvements to proberty, or living ana family expenses. Do not deduct interest on your own invest- ment in ycur bu.sinass or saiary cr wages for your own services or the serv- ^ c^your family, umeEs these items are included as income In Sehedulo Rent,— r.epcTf: here rent for business oropertv (not including rent for dwelling you oocupy). Interest.— Report here interest on business Indebtedness, Inoluillng In- debtedness incurred to purchase or carry business property. Taxes.— Report here only taxes on business property or for carrying on business. Do not include taxes assessed against local benefits of a fcmd tending to increase the value of the property assessed, as for paving, sewers, etc., nor Federal income frtxes. Repairs, wear and tear, and preperty losses.— Report here (a) ordinary repairs required to keep property in usable condition, (b) depreciation during the year on business property, only to the extent not onset by repairs or losses claimed in this or previous returns, and (c) losses of business property by fire, storm, theft, etc., not compensated for by insurance or othervhse, and for which no claim for insurance is pending. Explain these deductions in table, page 1 cf the return. Item 13. Do not claim depreciation or losses on articles that have been takm Into your inventory at a figure reflecting the reduction la value. Bad debts.- Report here only debts arising from sales that have been reported as income, which have been definitely proved to be worthless end have been charged ofi within the year. Other expenses.- Do not include your personal exemption hero. This is to be reported as Item N. Net loss.— If the net cost of goods sold plus other business expenses is fn excess of the total amount of sales and in«)me from business or professional services, report the duferenep as a loss by using red inkgir a minus sign. B. INCOME FROM SALARIES, WAGES, COMMISSK It salary, wages, or other compensation received by you, your wife (or husband), or dependent child was at the rate of $1,000 or more per annum, report it on a separata line, together with the occupation or position and em- ployer’s name and address. All other Income Irem salaries, wages, com- >NS, BONUSES, DIRECTOR’S FEES, AND PENSIONS. rtdssions, etc., at a rate less than 81,000 per annum should he reported on a . einglolina. Do not leport pay, not exceeding 83,500, for active service In the Army or Navy (see jnstruciions III, paragraph !, on the other side of this sheet). Exnlain deductions in any convenient blank space on the return. Do not enter'your personal exemption here. C. INCOME FROM PARTNERSHIPS, PERSONAL SE3 Report your share (whether received ornot) in the profits cf thepartner- ship or personal service corporation or in the Income ol estate or inist (if placed to your credit), not including t he part of such share that consisted of dividends on stock of ordinarv corporations (to be included in Item K), in- terest on obligations of the Unitoa States (see question 11), cr (in the case \WICE CORPORATIONS, AND ESTATES AND TRUSTS, of estates and trusts) interest on corporation bonds containing a tax-free covenant, upon which a tax of 2 per cent was paht (or will be paid) by the debtor comoration (to be Ineluded la Item F). lieport i h Sched'oie B salary received from partnership or personal servico corporation. D. PROFIT FROM SALE OF LAND, BUILDINC Use this schedule for all sales of real estate, and f(» sales of other prox>erty that you do not deal in as a business. Kind of property.— Describe the nroperty as definitely as you can in a word or two, as “farm," "house," "lot,"*' “stocks," “bonds.” Sals price.— State the actual consideration or price, or. In case of an ex- change, the fair market value of the property received. Cost.- Enter the original cost of the property or, if it was acquired before »S, STOCKS, BONDS, AND OTHER PROPERTY. March 1, 1913. its fair market value on that date. Expenses incidental io the purchase may be included in the cost if never claimed la income tax returns as deductions from income. Enter in column 7 the amount of wear and tear (depreciation) or depletion sustained since March 1. 1913 (or since date of acquisition if subsequent to March 1, 1913). (This is a deduction from cost, though treated for convenience as an addition to the sale pri(».) losses.- If the total of columns 5 and 6 Is In excess cf tha total ofcclumns 4 and 7, report the diSercnce as a loss by using red ink or a minus sign. E. INCOME FROM RE Kind of property.— Describe briefiy, as in D. Cash or equivalent received.— If a tenant rented ycur property on aeesh rental basis, but paid the rent in crops or other property, report the amount of the rent as income for the year in which you M^ived sucii crops or other property (unless your return shows income accrued). NTS AND ROYALTIES. Wear, tear, repairs, and property losses.— See Instructioiis for Schedule A, above. Explain in Item 13, page 1 ol the return. Other expenses and losses. — Report taxes on rented or leased prope^ and interest on indebtedness incurred or continued to purchase or carry it. Do not include taxes assessed against local benefits of a kind tending to increase the value of the property assessed. F. INTEREST ON CORPORATION BONDS COf^FAINING TAX-FREE COVENANT, ON WHICH TAX OF 2fo WAS PAID BY DEBTOR CORPORATION. Thisitemshouldincludeallintcrestreceivoddirectlyorthroughfldudari^ ] not claimed by the owner of the bonds. If oxemntion was claimed, the on bonds of corporations organized Of doing business in the United States, interest received must bo reported in O. (llie amount of tax paid by the containingaclauso by which tbodebtorcorporationagreesto pay theinterest debtor corporation is treated as a credit against the tax due. See Item Q, without any deduction for ta.xes, provided exemption from withholding was 1 page 1 of the rotum.) G. OTHER INCOME (NOT Report in this schedule Interest received on hank deposits, notes, mort- gages, etc., and all other income net reported in Schedules A to F, e.xcept — (a) Dividends received from corporations organized or doing business in the United States (see Item K). (b) Receipts exempt from tax, as stated in Instruction m on the other side of this sheet. r INCLUDING DIVIDENDS). State separately income from each source. Deductions.— Interest paid on loans secured by bonds may ho renorted hero as an oftsot to the interest received. Explain deductions in any ocn- venient blank space on the return. I. GENERAL Interest.- Report hero interest paid on personal indebtedness as distin- guished from business indebtedness (which should be reported under A, E, or O above). Do not include interest on indebtedness incurred for the purchase of bonds and other obligations, the interest on which is exempt from tex (see Instruction HI, page 1). Texes.— Report here taxes paid on your dwelling and household property, not incladine those assessed against local benefits of a kind tending to in- crease the value of the property assessed. Do not include Federal mcome taxes, nor estate or inheritance taxes. Losses.- Report here losses of property not connected with your trade, business, or profession, sustainen during the year from fire, storm, ship- . DEDUCTIONS. wreck, or ether casualty, or from theft, which were not compensated for by Insurance or otherwise, and for which no claim for Insurance is pending. Ex- plain such losses in Item 13 on page 1 of the return. Contributions.— Report hero only contributions made within the year to corporations organized and operated exclusively lor religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, or to the special fund for vocational rehabilitation. The total amount of contributions to bo entered here must not exceed 15 per o«nt ol the net Income computed without the benefit of this deduction. Other deductions.— Bad debts arising ont of personal loans may be re- ported here. Page 6 of Form 1040A § J Income Tax Supplementary Page 20 rorra 1040 S’— TJKTTSD 9TATS8 ETl'ERJ^AL RSVSNUS SERV2C3 SCHEDULE OF FARM INCOME AND EXPENSES TO BE SENT WITH RETURN FORM 1040A OR 1040 TO THE COLLECTOR OF INTERNAL REVENUE ON OR BEFORE MARCH 15. 1919 Name Address INSTRUCTIONS Tbifl work ckoet or schedulo of farm income and espienBes is to be need in determining the net income from a farm bnsiness. It may be used by farm ovmers who work their own farms or rent them out on shares, or by tenants. If you have two or more farms, it may be desirable to fill out a separate sheet for each farm. This schedule is to be delivered to the Collector ef Internal Revenue with your income tax return (Form 1040A or Form 1040). You should keep a copy for reference nest year. Incohs All the farm income from whatever BOtirce must be reported in this schedule. Only income actually received need be included, but this does not mean that the ta.xpayer must receive cash. Anything of value received instead of cash rn’ist be considered income to the extent of its cash value. Thus, the value of groceries, merchandise, etc., received in exchange for eggs, butter, or other produce must be reported as income. The value of farm produce which is consumed by the farmer and his family need not be reported as income; but expenses incurred in raising produce thus consumed must not be claimed as deduc- tions. If timber sold in 1918 was grown in part before March 1, 1913, the income to be reported is the difference between the fair market value of such timber on March 1, 1913, and the price received, less any expenses of growing the timber that have .not heretofore been claimed as deductions. Report such mcome in the same manner as income from sale of land, in Schedule D of Form 1040A or Form 1040. Expenses and Other Deductions Report as farm expenses only amounts actually paid out in carry- ing on the farm bu-sinese. Labor . — Only that part of the board of hired labor which is pur- chased should be included as a deduction. The value of products furnished by the farm and used in the board of hired labor is not a deductible expense. Rations purch^d and furnished to laborers or share-croppers are deductible as a part of the labor expense. Do not deduct the value of your own laborer that of your wL'o or dependent minor children. Do not deduct amounts paid to persons engaged in household work except to the extent that the services of such employees are used in boarding and otherwise caring for farm laborers. Services of employees engaged in caring for the farmer’s own household are not a deductible expense. Fertilizers, manures, etc . — ^Tho cost of manures, commercial ferti- lizers, lime, raw rock phosphate, etc., that were bought during the year may bo included as an expense. Taxes . — Do not deduct inheritance or estate taxes, Federal income taxes, drainage taxes, or taxes for any improvement or betterment tending to increase the value of the property. Be ready to show tax receipts if possible. Do not deduct taxes on your dwelling or household property Interest on indebtedness.-rAil interest paid on farm mortgages^ notes, and other obligations incuaed to carry on the farm business should be deducted. Bad debts . — Report only debts, arising from sales that have been reported as income, whidi have been definitely proved within the year to bo worthless. Repairs and depreciation . — ^Depreciation daime-d should not ex- ceed the actijal cost of the property (or its fair market value March 1, 1913, if acquired before that date) divided by its probable life ia years. Only such depreciation of farm buildings and equipment aa is not offset by repairs may be deducted. Do not deduct repairs or depreciation of the dwelling you occupy, or of your personal or household equipment. Do not claim as a separate item depreciation of live stock or any other propertyi included in your inventory, as such depreciation ia taken care of in the reduced amount of the inventory at the close of the year. Losses . — You may deduct losses of buildings, machinery, and ether property not included in your inventory, resulting from fires' or other casualties and not compensated for by insurance or otherwise. Losses of property included in your inventory are taken care of by the reduced amount of the inventory at the close of the year. Automobile expense.— Yo\i may deduct expenses of operation, repairs, and depreciation of automobiles used exclusively in the farm business. If an automobile is used in the farm business for a part of the time only, a corresponding part of the expense may be deducted. How TO Fill Out This Schedule Enter on pages 2 and 3 tho amounts received from sales of fann crops, animals, and products, and the value of crops, animals, and products that were on hand at the beginning and end of tho year. Go over tho list of farm expenses on page 3 and enter the amount of each kind of expense separately so far as possible. Fill in tho statement of repairs and depreciation of farm buildings, etc., on page 4. In case you have complete farm records already Bu mmari zed, enter the totals from your books in the spaces provided therefor. "When all the receipts and expenses have been entered, bring tho various totals together in the summary on page 4. The figures inclosed in parenthesis are intended as a key to aid you in bringing forward the proper totals. When you have determined the net farm income, tranrfer tho amount to lino 21 in Schedule A of tho income tax return (Fomi 1040A or Form 1040). While this schedule is intended to cover in detail only yonr income from the farm business, there are added at tho bottom of page 4 spaces for making notes regarding income from other sourced. Such income should be reported in detail in Schedules B to.K .ok Form 1040A or Form 1040. Page 1 of Form 1040F Income Tax Supplementary Page 21 Page 2 CROPS SOLD AND ON HAND Kind of prop grown Acres in trop 1 On hand at btginning of year Sold during year i On hand at end of year Quantii7 Inventory value Quantity 1 Sale price < Quantity Inventory value Ter unit Total j jPer unit Total i Per unit Toul • i f 1 1 1 i 1 1 i j 1 1 i I, ” j 1 Totals— 1 1 f (!) ( 2 ; 57 LIVE STOCK BOUGHT, SOLD, AND ON HAND Kind of animats On band at beginning of year Purchased during year Sold during year On hand at end of year Lost during year Nomber K um- ber Inventory value Num- ber Cost Num- ;bcr Sale price Num- ber Inventory value Per imit Total Per unit Total Per unit Total Per unit 1 ToUl Cf)WH $ 1$ Heifers 1 Calves r Bulls Steers. 1 Horsefl-... Mules Colts Ewes Lambs Brood sows. Other hogs ChielrfHH. . Turkeys '■ 1 1 Ducks. _ Bees Totals $ 1 J $ : $ -! 1 ( 4 ) ( 5 > ( 6 ) ( 7 ) Page 2 of Form 1040F Income Tax Supplementary Page 22 Pages -. CROP PRODUCTS SOLD AND ON HAND EXPENSES .. . 'Oebonda ttscgmniniofycar' Sold during year On ban d at end of year Items Amount KiKS Ciiaantity Inventory value Sale price Inventory value Hired labor (regular) $. Quib . j, Per unit Total Quan .y 1 1 1 •f— — Hired labor (extra) 1 I Board of hired labor. Cost of purclidsod — — „ terials furnished labor 1 1 Feed, hay, straw, etc.... — — ... j i 1 1 1 - 1 i ! ......... 5 ^ Feed, grain, concentrates Totals i 1 Feed grinding — (8) (9) (10) LIVE STOCK PRODUCTS SOLD AND ON HAND Klilk 1 5 1 L Silo filling. Butter ! 1 : Corn shredding rr> 1 1 1 1 1 1 Colton ginning. Cheese 1 1 kfilk hauling Egps i j Wool } ! i [ Ice Hides. i Horseshoeing Honey 1 1 Breeding fees ' i 1 ■ i 1 Veterinary ices 1 1 Seed, plants, etc 1 j Fertilizers, manure TojALS t || 1 1 Spray m.aterial.s .. MISCELLANEOUS RECEIPTS Machine work, hire of teams, etc. Totai, ; $. Twine Threshing Baling Machine work hired. Fuel and oil for farm work Barrels, bags, crates . INVENTORY OF SUPPLIES (14J Purchased feeds. Seeds Fertilizers Spray materials.. IsvENTOav Valve Albcc.nhmgof Atcn-lofyear I i Farm insurance... Taxes Water rent Cash rent in'erf't cn fjrm cc!« 3od norlgays I 1: Total. Page 3 of Form 1040F Income 'i’ax Supplementary Page 23 Page 4 REPAIRS AND DEPRECIATION PucBirnoM Cow OF PROFFlltT (or market Tslue Harch 1, 1913) Dkfskutioit Rsrans Rato AsMont j 1 1 f 1 Farm fenceSf drains, ditches, etc... .. Farm machinery and tools . Totals $ $ 1 Ameanl recsireJ ft fum pr*4acU tcU ar auluuijad 1. Crops (2) $ Ferae eipcBiee, etc. 14. Cost of live stock purchased during year...(5) 1.5. ExpeTiHeB (17) ? "2. Livestock (6) 3. Crop products (9) 16. Repairs (1ft) 4. Live stock products (12) 17. Depreciation , ()<>) 6. Miscellaneous (14) 6. Total receipts loTealery value ef Sum crepe, etc, el end ft( rear 7, Crons ... (3) $ 19. Total expenses, etc loTenterp TtVse ei Sum crepe, etc, et kf nalnf el peer 20. Crops . . (1) $ $ 1 T.ive P+orV . (7) 21. Live stock (4) 9. Crop products (10) 22. Crop products . (8) in. T.K’O storV nroniicts (13) 23. Live stock products (11) 11, Supplies. (16) 24. Supplies. (15) 19 Tofnl -invontory st onrl of year $ 25. Total inventory at beginning of vear $ . . .. 13. Totil receipts plus inventory at end of year ^Tipin Tiliifl Tr.pm 1 .. 26. Totalexpcnaeaplusinveatory at begiiiniagof 1 verj* ('ItAra 19 nln^ Itpm ! s.... 1 ■ ■■ ■ — !* ' '' ^ '' ■' — " ^ - — , - 27. Net farm income to be reported in Schedule A, line 21, of Form 1040 A or Form 1040 (Item 13 minus Item 26) I $ ...... OTHER INCOME TO EE REPORTED ON PJLTURN (Form 1010 A or Form 1040) Pescretioit Gross DEPccnoNa 1 ! Net Income from salaries, vages, commissions, bonuses, director’s fees, and pensions (to b** iri H) . .. - $ $ Income from partnerships, personal service corporations, and estates and trusts (to be reported as Item C) . — Income from sale of land, buildings, stocks, bonds, and other property (to be .. . . Xuconio from ronts and royalticB (to bo roportod in Scbodul© £<}... ............... — - Interest on corporation bonds containing tax-free covenant, on which a tax of 2^ was paid by d'^btor /'orporation (to bo Ttfim P) _ (t^ bo . _ Dividends on stock of coroorations organized or doing business in the United Statos (to be reported aa Item K on Form 1040 A, or lv(a) on P'orm 1040) — Interest on obligations of the United States in excess of the exemptions allowed Ijtw (to be reported (bg Item K(b) Form 1040) • i • ^ Page 4 of Form 1040F I ncome 'I’ax Supplementary I’age 24 ORIGINAL THIS FORM WITH DUPUCATE AND REMIHANCE COVERING ONE-FOURTH OF ESTIMATED TAX MOST REACH THE COLLEaOR'S OFHCE ON OR BEFORE MARCH IS, 1919. Form 1046 T^UNITED STATES INTEENAL REVENUE SERVICE TENTATIVE RETURN AND ESTIMATE . OF INDIVIDUAL INCOME TAX FOR 1918 AND REQUEST FOR EXTENSION OF TIME FOR FaiNG RETURN PRINT BELOW rAXPAYER’S INAME AND ADDRESS Do not write in llib spice AMOUNT PAID $ (Cashier’s Stamp) CkctstJnfl CnrescT sr nia Csrtificsis sf iWeheJscs, Date No (To b« entered by taxpayer.) (To be entered by Collector.) Collector 'of Internal Revenue, The amount stated below is remitted herewith in payment of not less than one-fourt,h of the estimated amount of the income tax for 1918 of the individual whose name and address appear at the head of this form. An extension of days in the time allowed for filing a completed return is requested. It is not possible to file a completed return on or before March 15, 1919, for the following reasons: Estimatejl amount of tax $ Amount of remittance herewith; Check or draft. Money order. Currency or coin. Certificates of Indebtedness. Total. I-* $ $ 5 AFFIDAVIT I SWEAR (or aflirm) that the foregoing is a fair estimate of the total amount of the income tax for 1918 of the individual whose name and address appear at the head of this form, and that the above-stated reasons why a completed return can not be filed on or before March 15, 1919, are true. Sworn to ^d sub- 1 , jgx scribed before me) " (Ni^ture of Individual or agent.) (Name of ofBcor.) (Oillcial capacity.) (Address of Individual or agent.) Page 1 of Form 1040T Income Tax Supplementary Page 25 [This Form 1040T — Duplicate (see Supplementary Page 25, for original) is attached to the original (perforated), the reverse of both sheets being blank.] DUPLICATE (to bo sent to Collec- tor with original) THIS FORM DULY AFPRO\TD BY TTIE COLLECTOR MUST ACCOMPANY THE TAXPAYER’S COMPLETED RETURN WHEN HLED Form 1040 T— UNITED STATES I24TEP.NAL REVENUE SERVICE TENTATiVE RETURN AND ESTIMATE OF INDIVIDUAL INCOME TAX FOR 1918 ANO REQUEST FOR EXTENSION OF TIME FOR FILING RETURN PRINT BELOW TAXPAYER’S NAME AND ADDRESS PE^ULTiES For Making False or Fraudulent Return. Not exceeding $10,000 or not exceeding one year’s imprisonment,, or both, in fho dis- cretion of the court, and, in addition, 50 'per cent of the tax evaded. For Failing to Make Return on Tune. Not more than $1,000, and, in addition, 25 per cent of the amount cf tax due. Date No (To be entered by taxpayer.) (To be entered by Collector.) Collector of Internal Revenue, The amount stated below is remitted herewith in payment of not less than one-fourih of the estimated amount of the income tax for 1918 of the individual whoso name and address appear at the head of this form, f. An extension of dAys in the time allowed for filing a completed return is requested. It is not possible to file a completed return on or before March 15, 1919, for the following reasons: Estimated amount of tax $. Amount of remittance herewith: Check or draft. Mocoy or ter. Currency or coin. Certificates ot IndebtC'lnors. Tote!. f $ S i i s ! : 1 : ^ COLLECTOR’S APPROVAL In consideration of the filing of this tentative return and the payment of not lijes than one-fourth of tiie estimated amount of ti:-e tax, and. for the reasons stated above, the time Tor fi!in,g il.e completed return of the taxpayer whose urune and adcireas apj>oar at the heed oi this form is hereby extended, by authority of the Ccmioianoner of. Interna! Revenue, until — If the remittance accolmpanying this tentative return exceeds . cne-fourth of the tax as computed on the completed return, the excess will be credited a^nst the balance rrmaining to be paid. If the rtniitUnce is lees than cne-fouith of the tax, t uc hulance due, with interest at the rate of six per cent per annum from March-15, 1S-I9, must accompany the completed return. If the .amount paid exceeds the total tax as shown by the completed return, the e.xccss wrill be refunded. Date CoUtcLar of Internal Revenue. .District of Income Tax Supplementary Page 26 Form 1096— Rsviszd Fxbruast, m»— UNITED STATES INTERNAL REVENUE SERVICE ANNUAL INFORMATION RETURN OF PAYMENTS OF INTEREST, SALARIES, RENT, ETC., OF $1,000 OR MORE For Calendar Year 1918 THIS RETURN, ACCOMPANIED BY REPORTS ON FORM 1059, MUST BE MAILED TO THE COMMISSIONER OF INTERNAL REVENUE, SORTING DIVISION, WASHINGTON, D. C., ON OR BEFORE MARCH IS 1519 (Data receivad) (Name oi person or organization by whom payments were made) (Street and number or rural route) (PostofiSce) (State) Classes or Income Number or Reports ON Form 1099 Total Amottnt of Interest, rent, salaries, wages, premiums, annuities, compensation, remuneration, , emoluments, or other fixed or determinable gains, pronts, and income of $1,000 or more $ 1 INSTRUCTIONS Every individual or organization, in whatever capacity acting, who made pajonents of income as described above during the calendar year 1918 to any individual citizen or resident of the United States, or domestic partnership, is required to render a return on this form on or before March 15, 1919. The return should be accomMnied by reports on Form 1099, showing the name and business address of the person or organization by whom the payments were made, the full name and address of each individual or partnership to whom the payments were made, the kind of income paid, and the amount. Partnerships and rersonal service corporations should prepare reports on Form 1099 for each member of the partnership or personal aervice corporation. Fiduciaries should make these reports for each beneficiary of the estate or trust. In these cases the word “partnership,” “personal service corporation,” or “ fiduciary” should be entered on the blank line on Form 1099, Income tax returns of partnerships, personal service corporations, and fiduciaries accompanied by reports on Form 1099 should be filed with the Collector of jTitemal Revenue on or before March 15, 1919. Reportt on Form 1099 are not required in the following cases: 1. Interest on the obligations of the United States, of States, Territories, or political subdivisions thereof or of the Bisect of Columbia and compensation paid officers and employees by a State or political subdivision thereof for personal services. 2. Dividends paid by domestic or resident corporations (not including earnings of personal service corporations). - 3. Payments by brokers to their customers. 4. Bills paid for merchandise, telegrams, telephone, freight, storage, and similar charges. fi. Amounts paid to employees for expenses incurred in business. 6. Premiums paid to insurance companies. 7. Annuities representing return of capital. 8. Interest accrued on bank deposits if not credited. 9. Rent paid to real estate agents (but the agent must report payments of rent made to the landlord if they amount 'in the aggregate to $1,000 or nmre for the year). 10. Payments made, by domestic establishments or foreign branch houses thereof to nonresident alien employees for services performed entirely in foreign countries. 11. Salary or compensation of $3,500 or less paid for active services to persons in the military or naval forces of the United States. 12. Interest on bonds of domestic and foreign corporations. (See Forms 1012 and 1096A.) 13. Salaries, wages, etc., paid to nonresident alien individuals and foreign corporations. (See Form 1042.) -The name and address of the individual or organization making reports on Form 1099 may be printed or stamped on each form, but the return Form 1096 must be made under oath. I swear (or afiirm) that to the best of my knowledge and belief the foregoing return and the accompanying reports constitute a true and complete statement of payments of the above-described classes of income made by the person or organization named at the head of tills return during the calendar year 1918. Sworn to and subscribed before me this day (Signature.) ' (State whether in^vidual owner, mem'^r o( firm, or t^bui^g ^oer of Oovernment bureau or offioo, or i f oflloer of corporation give title. ) (Signature.) (Title.) (State address o'[perK>n signing if diflerent from that given at head ol return.) Income Tax Supplementary Page 27 rorm 1096B-UNITED STATES INTERNAL REVENUE SERVICE ANNUAL INFORMATION RETURN PAYMENTS OF INTEREST ON BONDS OF DOMESTIC AND FOREIGN CORPORATIONS AND COUNTRIES AND DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS For Calendar Year 1918 THIS RETURN MUST BE MAILED TO THE COMMISSIONER OF INTERNAL REVENUE SORTING DIVISION WASHINGTON, D. C. ON OR BEFORE • MARCH 15, 1919 (Name of debtor organization.) (Full post-office address.) (Name of bank or paying agent.) (Full post-office address.) (Date received) MONTH A. Interest on bonds and other sinaAR obligations of DOMESTIC and RESIDENT CORPORATIONS B. Interest on bonds of foreign corporations .and countries AND dividends ON STOCK OF FOREIGN CORPORATIONS Number of certificates Amount Number of certificates Amount y^iniiary ... _ ... February. March...... April May - June c July n August 'I'Jf - Rpptember . October November i December • rn • Total $ , ......Ir,:......., This return must be made by debtor corporations, paying agents, or banks, and must show, by months in which the income was paid and reported on monthly returns, the total number of exemption certificates filed with such returns and the total income paid without deduction of tax, as shown by such certificates and returns. . I swear (or afiirm) that this return is a full and complete summary the classes shown above (heretofore reported on monthly returns, which of the number of exemption certificates and amount of income of are hereby made a part of this return), paid during the year 1918. Sworn to and sub^bed before me this day of ,1919. (Signature.) (Signature.) (ritieT) (GapMity in which acting.) (Address in full.) Income Tax Supplementary Page 28 11 10-19 S e «* 5 Q ca . £ § Z S ^ < o 05 O = uj. ^ 2S ca O Si Si uie ® s !_ o 05 S=> o ~s U.O ag U3 P5 O cc'' Oco UjO 05 Q:? §>!;“■ i:- Oco si u - iS CO 111 05 2 &s P» Z2i •"ajCi « ii w •<•? 0(2 5 S •SI ®03 CO 11 IS ^oS €9- ^ ^ €0- a § 5 02 C5 5 o . 2l il la If h O §• J3 5 £ 9 o a © o ii Jo-g «§ |2 '^‘9 x»a it e5 0-2 Income Tax -Supplementary Page 29 Income Tax Supplementary Pag:e 30 I ) L ^ i. 0 U-: V5 U s So 2 52 H 2 C g S § 21 g§ H CO ^ ''2-2 gsi Z H< fc 5S O 9 5^ Q & Z Z'g X ■g|§ Tsi u oS b! So -< gz u S^ i! c ) u, -S| Sa« © 2 al^ 2^ w £p 5«S Pi . t> g o E^ CQ Pi o CO « z o « O Pi Z o z o 5 z -*j o Pi o Pi o H P3 ! I } w §* 2'i 0 T} 4j a S o s ^ pj :2 ■». c> 2^ r a < s 2 ^ I I •Si o *2 §2 rt p. .it T3 rt g B 3 O > Q a 73 ®xl C.« t> 3^3 Sg." > So k SS 0.253 w cs'S § SS.2 •se-t) IfeS tfl i3 3 o .H o o CO ^S.S go.53 l-^IS to «•-*» feel's '3|-§ a5 0-- o-r « 2 2i2 3« ^2 --.Bti Ot) 2 . IP'S 0-0 0-3 a 5 > o g r > 3-3 ts «.9§> og ^.cSg 2^ t, M h O og.2 3 z g '^.B O d SEPTEMBER ^ OCTOBER , ' - ”1 NOVEMBER ^ , ; DF.CF.MBF.R . . : :3- ' TOTALS $ $.. $- . 1 1$ If a withholding agent withheld the tax pursuant to the” Revenue Act of 1917 from interest paid to nonresident alien individuals and foreign -orporations not engaged in trade or business within the United States and not having any office or place of business therein, he need return only the sum withheld. I swear {or affirm) that the above return is a full afid complete summary of the amounts of normal tax Qieretofore reported on monthly returns on Form 1012, which are hereby made a part of this return) required to be withheld from payments made by the above organization during the year IdlS^' Swam to and subscribe before me this day of. . 1919. (Capacity in which acting) i— !j«a (Tilla) . (Address in full) Income Tax Supplementary Page 32 Income Tax Supplementary Page 33 CO w § X} H -K CO K S H* ^ U3 U4 9 esi a 2: IX 2 I O a ►-» * 2 £ W rt ►« be < .s X) '§ O I d ^ I S I’ W ;g U i w 2 “ ’> ^ a " O ~ H j a D «j o ^2^6 2 c?g H D ! I « -k^ OQ ts o 4-> •a t) 'te ® ts o O o « •43^ cl ^ S 0 rt a •S o o -2.S '3 o y3 '*~' o CD Cl^ cS ^ § C/) OJ ts k » S Id O k V o '-'2 o Ci -S'? o 2 ra « a.2 ^ o a O --~vX3 xj zi: o ci dr::3 o rf a a'rp, a o -— ' o X3 z o A p 2 2 S u^g IS ^ O o cl^ W Tin O f-« ptS O 6 cs; .f4 ?! P IP :i^ S >’’. _ w C r H t> . v-t . p ill " 9 2 ci o ^ CO ^ g '9 . rg *a 2 i! 'C o ^ O o I •§ -3 -a S S -55 |.a.s>igS rt S S o 2 ^ 'S s rC -- 1 « s2 II g? V a § 2 ^ w “ t-> o 3 a 3 p a o i-> ^ •| o .2 -3 rt P o d gags 9 rt a o' ^ "rt O "E o "i ^ a - ^ g . d •2 g g „7 Cd r3 -9 H s a xj 5 -r 9 -cr d ‘d d r • gjw'-^'ft-go 5 .3 .2 s I o‘ 8 g 9 'd 2 g 9 o '“' 2 ° & -2 c ^ •2 05 a a 2 s -3 a C't 2 ,a ^ d o c U O 'iJ ^ ^ I'S-g S.&I 8 g 2 o 2 •5^ fiiooinc Tax S\i(>plcincntary Page 35 or pcriodic&l gains, profits, aud income paid and amount of tax withheld. On^efAr urSI fttinp lier« d*le ef filifif if the return U not aceempenieil by reouttencs. Form 1012— itevised February, 1919 UNITED STATES INTEUNAL REVENUE SERVICE ANNUAL RETURN OF NORMAL INCOME TAX TO BE PAID AT SOURCE SALARIES, WAGES, RENT, ETC., PAID TO NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS (NOT ENGAGED IN Trade or business within the united states and NOT HAVING ANY OFFICE OR PLACE OF BUSINESS THEREIN) For the Calendar Year 1918 Do not write In thii «p*t« PAYMENT $ (Caihier’a Stamp) THIS RETURN MUST BE MADE IN DUniCATE TO THE COILEC- TOR OF INTERNAL REVENUE FOR THE DISTRICT IN WHICH CASH CHECK M.O. THE WITHHOLDING AGENT IS (Name of withholding .agent) Examiaed bj LOCATED. ON OR BEFORE MARCH 1. 1919. AND THE TAX MUSI BE RAID ON OR BEFORE JUNE IS. 1919. (Address in lull) INSTRUCTIONS 2— «597 This return is required to be made by all individuals, corporations, and partnerships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and olhcers and employees of the United States having the control, receipt, custody, disposal, or payment of interest, rent, s.alaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of nonresident alien indivddualsor foreign corporations not engaged in trade or business within the United States and not having any office or place of business w^'hin the United States. The law requires that a tax equal to 8 per centum of the amount paid as salaries, wages, rent, etc., to indi\'idual3 and 10 per centum of the amount paid to corporations shall be deducted and withheld. If any tax required to be deducted and withheld is paid by the recipient of the income, it shall not be recollected from the withholding agent. Income derived from dividends on the capital stock or from the net earnings of a corporation, joint-stock company, or insurance company, which is taxable upon its not income under the Revenue Act of 1918 is exempt from with- holding and should not be reported.- ' This return must be accompanied by a report on Form 1093 of income paid for every item entered hereon. I swear (or affirm) that the following is a true and complete return of all paynrents of salaries, wages, interest, rents, etc., made during the cal- endar year 1918 by the above withholding agent and of the tax withheld on pa;^ncnts of income, as above described, to nonresident alien individuals and foreign corporations as defined above, the several items being evidenced by reports which are listed below and inclosed herewith showing the name anj address of the recipient of the income, the kind and amount of income paid, and the amount of tax withheld. I further declare that tb.? amount of tax withheld is $ Sworn to and subscribed before me this day of , 19 (Signature.) (Signature.) (Title.) (Capacity in which acting.) NAME OF INDIVIDUAL OR CORPORATION TO WHOM PAID ADDRESS IN FULL AMOUNT OF INCOME PAID AMOUNT OF TAX WITHHELD .$ ' — Totals $ Income Tax Supplementary Page 36 DELIVER OR SEND THIS RETURN TO COLLECTOR OF LNTERIxAL REVENUE ON OR BEFORE MARCH 15, 1919 IF EXTENSION OF TIME FOR FiLiNG REuIRN HAS liELN GRATO-EIJ TtlE AUTHORIZATION MUST BE ATTACHED TO THIS RETURN Page 1— Sianniary Form X120— tTNITED STATES INTERNAL REVENUE SERVICE CORPORATION INCOME AND PROFITS TAX RETURN FOR CALENDAR YEAR 1918 OR Fiscal Period begun , and ended , 1913 EienJneii by AuJiled by (DO NOT fiAl.e IN THIS rwCE) PAYMENT CHECK M. O. CZXT. OF INd7 (Cashier’s Stamp) SCHEDULE I— NET INCOME. Item. 1911 1 1012 1 L'13 1 VrT Tvr.nur mp PArw Prrwar Yp.ap Ta/i finally rlfiterminArl nn inromp return) 1 2. Pits amount of corporation excise tax paid in each year— - ‘■‘1 1 3. Totals fob 1911, 1912, and 1913 . . _ . s 1 1 !* 1 i L L 4. Less dividends received in 1913 5. Net Total for 1913 _ __ . _ . s S. Average Net Income for Prewar Pebiod (sum of items on line 3 for 1911 and 1912 and Item 5 for 1913, divided by number of years) 7. Net Income for Taxable Year fitem 25, Schedule A, page 2) 1 SCHEDULE ri— INVESTED CAPITAL. IttH. 1911 1 1912 J913 Taxable Year. 1 . Capita), onrpios, and undivided (roflt: at the close of the preceding year at shown by corporotiou's bcf&re an/ adjoatmentt ara mad* tliereiii(froiB diibodiilc £}.. f. $ ' i. 2. Plus adjustments by way of additions (from Schedule F)——.. 3. Total I. $ 1 $ 4. I.ess adjustments by way of deductions tfrom Schedule G) 5 P.vr.Avcp, $— 1 $ 1 1 ■.<; C. Plus or n;inua cliauges iii invested capital during year (from Schedules H aud J) 1 ■ 1 i 1 7 Total (on P.alance) 1 ! 1 , -1 1 k: t 8. Leas deduction ou account of inadmissible assets (from Schedule L) 1 1 1 j 9. Invested Capital for Each Year * 1 L 1 J I......... . 1 10. Avbraoc Invested Capital for Prewar Period (sum of itemi j on line 9 for 1911. 191: 2. and 1913 divided b y number of y ested Cafitai ■ears) 11. Increase on Decrease in Invested Capital for Taxable Year asCompared with Average Prewar I.tv [. (Indicate decrease by “D”). $ SCHEDULE III— EXCESS-PROFITS AND WAR-PROFITS CREDITS. (If this return ia made for a period leas than a full year, Items 3 aud 8 must be reduced as provided in paragraph 1, page 1 of Instructions/ EXCES.VFROFIT.S CREDIT. 1. p^T cent of iDvesU'd capital for taiablo year (Item 9, last cohinin, Schedule ll)......... $ WAU-PROFITO CREDIT. 4. Average net income for prewar period (Item 0, Schedule I). 5. Plus 10^ of increase or'miuus li);6 of decrease shown by Item 11, SehtHlule II $ 9 F.xrTnnlHin 0f>9) - 6. (u) Total OF (or DtrFERENCE Between) Items -1 and 5, or (6) 10^^ of invested capital for taxable year (Item 9j last colnninfSi’hptJiilo in, uliicbovpr in bn-^pr S 3. EtcRss-PRoriTs Ch.cdit iTtcm 1 dIus Item 2) 1 1 7. Exemotion (J3.000) - - 1 War-Profit.s Crp-dit (Item G plus Itora 7) '$ SCHEDULE IV— COMPUTATION OF TAXES. WAR-PROFITS AND EXCESS-PROFITS TAX (Brocksti one end two). (If this return is for a period less than a full year the invested capital must be reduced ns provided in paragraph 1, page 1 of Instructions.] 1. BaACEIRS. 2. Amount or Net Income (Item 7, Schedule!) in Each Braceet. 3. ExcEss-Pnonrfl Credit (ITE.M 3, Schedule HI). I. Balance Suoject to Tax. Rate. 6. Amount or Tat. 1 'Jfit. nvor 9i\^ r>f rapifal t ft 30^ 65 f 2. Over 20% of invested capital.. . . 3. Totals .'. I. % 1 d $ 1 $ 1 WAR-PROFITS AND EXCESS-PROFITS TAX (Breckot three). $ $ 1, 1 7. Eighty per cent of Item 6 J.?. 8. Lees Item 3 coluion 6 (u | smaller than Item 7) 1... Net incomo for taxable year (Item 7, Schedule I) $ I.esB amount of war- profits credit (Item 8, Schedule III) IIai.as'ce Tdtao WAR-PiioriTS AND ICxcESH-PKonTB Tax AS COMPUTED UNDER SECTION 301 (a) (Item 3 column 0 plus Item 9). V.n. 'L VAR-PnortTS and Fxcf.bs-Profitb Tax, if Computed under Section 302, 303, 30-t (c) or 337 (see I nstructions, pago I, psr.^nph.s f> nnd 7)... INCOME TAX. Tax IN Bracket TnnRE (Item 7 minus Item 8 — if Item 8 is the larger, make uo entry). Netlncomcfor taxable year (Item 7, Schedule I). Lui:U!'.rulMtUipti«a«rD. I.Nlii- U itpt (Iko 1, IcWiU i, !).. Vr’ar-profits and execto- prolits tax (Ilea It or II). Exemption (lX.OOO nu' - TAX (Item 12 i«M 1 ten's 13, 14, and 15)- ToTAt. WAII-PROnTB. RxCERS-PROmi, At 17. Tax of 12^ on Item 1C . 18. Item 10 or Item 11 plus Item 17 19. Less in'-ome, war-profits, and exetas- profits taxes paid or Rcerued to foreign countries on incomo arising from sources therein, and to poBei^esiousof tl.o UuitedStales (see Sections 238 aud 210 (c) of l^veuue Act of 1918)... D Income Taxes (except in case of a fiscal year) (llem 18 roiniis Item 1?)— . ADJUSTMENT OF TAX TOR FISCAL YEAR ENDED IN ISIS. That proportion of Item 20 which the Dumber of months within the calondar year 1918 is of the number of mouths In the ontiro period Tkt» prsyonisB of i Ui uayaUl onJor tlis nvonae acU of IJI6 and 1»17 wklrk the nnatoi' of Bontki wlihlu tbo cal.nJar yo» 1917 lo of Ibe nombor of moail^Ui Tax p ai d I On tuheifiBion of tantativo return ( i qilT). ? . . $ $ 23. Total tax (Item 21 ; lus Item 22) 2-1. Lt-p-s total tax alrcad y jiaid for tlic fiscal yeas ended i 2fi. IUeanct: opT.i- ; by reniitlapcc accotn p anyinf} t his return, f . Income Tax Supplementary Page 37 Totai. 1 f A % Page 1 of Form 1120 Page 2— Income Scneatiles SCHEDULE A— TAXABLE NET INCOME. Note. — Railroad corporations, banks, insurance cctapanies, and other corporations required to Eirbmit statements of income and expenses to any natiomd, State, municipal, or other public officer may submit instead of Schedule A a statement of income and expenses in tho form in which submitted to stich officer. In such cases the t?.xab!e net income will be reconciled by means of Schedule B trith the net profit shown by the income and expense statement submitted, an|i should be entered as Item 7, Schedule I, page 1. GROSS INCOME. 1. '^ross sales, less returns and allov-’ances - -f- 2. Beds cost of goods sold, exclusive of expenses, repairs, .and other items called for separately below (from Schedule A2) i . 3. Gross income from operations other than trading or manufacturing, leas allowances (from Schedule A3) 4. Interest on obligations of the United States or its possessions not exempt (from Schedule A4) 5. Interest from other sources (from Schedule A5) 8. Share of net income earned since December 31, 1917, by personal service corporations (whether received or not) . 9. Dividends on stock of foreign corporations (from Schedule A9) 10. Gross income from all other sources except dividends (not including any amount i cellaueous investments — see Item 23, below) (from Schedule AlO). I respect of sales of capital assets or mis- I i . i Total op Items 1 to 10„ DEDUCTIONS. 12. Ordinary and necessary expenses (except amounts reported in Item 2 above or called for separately below, and not includ- ing cost or value oi capital assets or miscellaneous investments sold during taxable year — see Item 23) (from Schedule A12)_ 13. Compensation of officers (including salaries, commissions, and other compensation in whatever form paid) (from Schedule A13). 14. Repairs (including labor, supplies, overhead, and other items properly chaigeable to repairs) (from Schedule A14) 15. Interest (except on indebtedness incurred or coniinued to purchase or carry obligations or securities, other than obligations wni( ’ of the United States issued after September 24, 1917, the interest on which is wholly exempt from income ^x) 16. Taxes (except Federal income, war-profits, and excess-profits taxes, taxes which are a credit under Section 238, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed): - 17. Debts ascertained to be worthless and charged off within the taxable year.. 18. Exhaustion, wear and tear (including ohsplescence) (from Schedule A18) 19. Amortization of war facilities (from Schedule A19) .■ 20. Depletion (if depletion is claimed. Form A (revised) of Mines and Minerals Section should be obtained from the Collector, filled in, and filed) Total of Items J2 to 20 Difference Between Items 11 and 21 ..... 21 . 22 . 23. Profit or loss on sales of capital assets and miscellaneous investments (from Schedule A23) 24. Losses sustained during the taxable year from fire, tlcrm, or other casualty, or from theft, nc ance or otherwise (from Schedule A24) (extend in last column net total of Items 23 and 24) 2.5. Net Income for T.axable Year (total of or difference botween Item 22 and Item 24, la.st column)(to be entered as Item 7, Schedule I, page 1) SCHEDULE B— RECONCILIATION OF NET PROFIT PER BOOKS WITH TAXABLE NET INCOME. 1. Net profit for year per books, before any adjustments are | made therein * 5. Nontaxable income: 2. Unallowable deductions: (a) Donations, gratuities, and contributions ... .... (a) Intereat on oblirotions of the United States and its possessions, wnolly exempt......^... ( J) Incomr , war-proflt«, and eicess-priflts taxes paid or accrued to the UoitedStates. its possese ions, or a foreign countrj (c) Special improvemcTit faxps - (i) Interest on obligations of States, Territories, and political subdivisionB thereof (c) Interest on Farm Loan Bonds issued under Federal Farm T.nan Act (a) Furniture and fixtures, additions, or betterments treated as expenses on the books (d) Dividends on stock of domestic corporations Tleplaepmentfl revered hy depreriation (e) Dividends on stock of personal service corporations declared outof profits earned prior to January 1,1913 (/) Other items of nontaxable income (to be detailed)... ; (/) Insurance premiums paid on the life of any officer or employee for the benefit of the corporation or business. (M Interest on indebtedness inenrred or continued to purchase or carry otiigations or seenrities {other than obligations of the United ^ Btates issued after September iU, 1017) the Interest upon which Is wholly exempt from income tax (h) Additions to reserves for bad debts, contingencies, etc. (to hr drtailrd) (A) i G. Charges against reserves for bad debts, contingencies, etc. (to be detailed) , (^) (2) i : (m) Other unallowable deductions (to be detailed) — {jD 1 7. Amount MCemrT to adjust book profit or loss with the amsnnts reported in Items 23 and 24, Schedule A (unless entry belongs on line S) 8. Taxable net income (Item 25. Schedule A) 1 fo) . 1 .... . 1 3. Amount necessary to hook profit or loss w|lh the amounts reported in Items 23 and 24, Schedule A (unless entry bt-Iocgs on line 7). 4. Total $ 9. Total .'. $ SCHEDULE C— BALANCE SHEETS. Attach hereto balance sheets as of the beginning and end oi the taxable year (preferably in parallel columns), shovTing as nearly as practicable the details called for below: ASSETS. Cash (Ificloding cash in bank and on hand, certiflcatos of deposit, etc.). Trad* accounts and notes receivable (before deducting reserves for losses). Other account* and note* receivable (to be classifled). Inventories: Raw materials. Work In progress. Finished products. Supplies. Inveetmentsf U. S. bonds and obligations (each Issue to be stated separately). Stock of corporations- Foreign. Other. Loan* and advances: To oificers and employees. ASSETS (Continued). Deferred cKarges to future operatkma* Fixed e*set»: Land. Buildings. Machinery. Tools and minor equipment. Delivery equipment. Olhce furniture. Other (state charactw). Total. Less reserve for depreciation. Net Value. Patenti, good will, and other Intanfible aeeeU Paid for in cosh or other tangible property. Paid for in stock (other than stock dividends). Created by stock dividend or otherwise. Discount: On bonds. On slock. Tot!^ LIABILITIES. Notes payable: To officers and stockholders. To others (including bank loans). Accounts payable; Trade, Other. 1 accounts rscelvable. Reserve for losses 9 n notes ai Reserve* for continesnetes, * allowable deductions from I Capital stock outstanding (to be classifiod). Surplus and undivided profits Total, To others. A corporation having a net income of $3,000 or more, which waa in exisjonce during at leaat one full prewar year, ebould also attach to this return similar balance i I parallel columns) as of the bogirming of its full prewar year and as qf December 31, 1913. • ets (preferably SCHEDULE IVANALYSIS OF SURPLUS ACCOUNT. Attach hereto an analj’sio of the corpofation’a eurplua account, ehosriu^ the details of all adjustments of surplus for the taxable year, as nearly as practicable in the following form: 1. Surplus at beginning of year ^r books. Add: 2. Total net profit per books and per &hcdule B (Item I). Deduct: 5. Dividends (state date payable and amount of each, and wheth.cr in cash or in stock). 6. Other debits to surplus (to be detailed). 7. Surplus at end of year per hooka. A corporation having a net income of $3,000 or more, which was in existence during at least one full prewar year, should also attach to Uds return a similar cna’.ysi? of its surplus ^count for Us first full prewar year and for each subsequent year down to the beginning of the taxable year. I 3. Other credits to surplus (to be detailed). 4.lTotal of Items 1, 2, and 3. Income Tax Supplementary Page 38 Page 2 of Form 1120 Pago 3— income Schedules— Concluded SCHEDULES SUPPORTING SCHEDULE A - The sch6oaEcaeions, exclusive of thoee described in the table above. SCHEDULE AS: INTEREST FROM OTHER SOURCES. f.iibmit a sehc-diilr showing the so'zrce, nature, and amount of the principal items included herein, the minor items being grouped in one figure. 'The total of the schedule should he entered as It'cr. 5, S';hed;ilo A. For inUrrst on fori.'(oi bonds submit a' schedule showing (a) name of country; (i) kiiid of obligati' 03 (wbeihor national, state, municipal, or corporate obligations); (f) amount of principal; and (d) amount of interest. SCHEDULE A9: DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS. Submit a scbedulo i howii g (n) name of corporation; (fc) country in which organized; (c) total par value of stock held; and (d) amount of dividends. SCHEDULE Alb: CROSS INCOME FROM ALL OTHER SOURCES EXCEPT DIVIDENDS (not including any amount in respect of capital assets or miscellencr.".'. invettments). Submit a scbHi'le rh-u' irig the soiucc, nature, and amount of the principal items included he.’-' -n, the minor iu-tr ' being grouped in one figure. Tlie total of the schedule should be entered io< If'-m 10, S'-hoduIo A. SaiEDULE A12: ORDINARY AND’nECESSARY EXPENSES (except amounts called for scp.arately in Scliadule A and not including cost or value of capital ass.'ts or miscellaneous investments sold during taxable year). Submit a statement showing character and amount of the principal items included in Item 12, Schedule A. Insurance companies should state se^jaratcly in Schedule A12 (a) the net addition required by law to he made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of sums with State or Terri- torial officers pursuant to law as additions to guarantee or reserve -funds; and (1) the total of sums other than dividends paid -within the year on policy and annuity contri«:t8. Corporations issuing policies covering life, health, and accident insurance oomhined in one policy issued on the weekly premium pajment plan continuiflg for life and not subject to cancellation should report in Schedule A12 such part of the net addition (not required by law) made within the taxable year to reserve funds as is required for the protection of the holders of such policies. Mutual marine insurance companies should report in Schedule A12 amounts repaid to policyholders on account of premiums pre-viously paid by them and interest paid upon such amounts between the ascertainment and the payment thereof. Mutual insurance companies (other than mutual life and mutual marine insurance companies) that require their members to make premium deposits to pro-vide for losses and expenses should report in Schedule Al2 the amount of premium deposits returned to their policyholders and the amount of premium deposits retained tor tho payment of losses, expenses, and reinsurance reservee (unless deducted elsewhere in Schedule A). SCHEDULE A13: COMPENSATION OF OFFICERS. Submit a schedule showing for each officer (1) name, (2)'dutiefl, (3) time devoted to such duties, (4) shares of stock owned,. (5) total annual compensation for the years 1916, 1917, and 1918, and (C) reasons for increasM. SCHEDULE AI4: REPAIRS (including labor, supplies, overhead, and other items properly chargeable to repairs). Submit a schedule showing the nature and amount of the principal items includci\ in Item 14, Schedule A. Incidental repairs, which do not add to the value of appreciably prolong the life of property, are deductible as expenses. Expenditures for new buildings or for pennanent improvements or betterments which increase the value of the property are chargeable to capital account. Expenditures 'for restoring or replacing property are not dcd-actible under this or any other item cf the return. Such expenditures are chargeable to capital account or to depreciation reserves, depending on tho tre^itment of depreciation on the books of tho taxpayer. » SCHEDULE A13: EXHAUSTION, I^TEAR AND TEAR (including obsolescence). Submit a columnar schedule containing, in the most practicable form, substantially the folio-wing information: 1. A classification of depreciable aasets subdi-vided on the bas^h of (a) character, (6) term of useful life. 2. The fair market value of such assets March 1, 1913, if acquired before that date. 3. The cost of such assets if acquired after February 28, 1913. 4. The estimated life or term of reasonable usefulness of such assets from date acquired or from March 1, 1913, as the case requires. Give reasons for your conclusions. 5. For each class of assets state — (a) The total amount of depreciation from March 1, 1913, to the beginning of the taxable year. (5) The total amount of depreciation (exhaustion, wear and tear, including obsolescence) claimed for the taxable year. 6. A reconciliation of all figures shown in this schedule with corresponding figures reflected in the balance sheets. SCHEDULE AID: AMORTIZATION OF WAR FACILITIES. If amortization of war facilities is claimed the taxpayer is required to submit with this return, the information and schedules called for in Articles 181 to 187 of Rcgidations 45. SCHEDULES A23 and A24: PROFIT OR LOSS ON SALES OF CAPITAL ASSETS and miscellaneous investments, and losses sustained during the taxable year from fire, storm, or other casualty, or from theft, not compensBte>iTAL, surplus, and undivided profits as shown by books before any adjustments are made therein. E4. Stock actually outstanding at the cad of tie preceding taxable year should be entered in this schedule to the extent that it is paid up. Jf stock or sharsa were issued at a nominal value or without par value, the entries sbouid reflect the amounts on the books in respect thereof at the close of the preceding taxable year. ES. This item should include paid-in surplus per books at the end of the preceding year. If any amount is claimed under Section 326(a)(2) of the Revenue Act of 1918 or under Article 8.37 of Regulations 45 the amount claimed should be entered under Item 1, Schedule F, and not in this schedule. E7. Reserves which represent allocations of surplus and were not accumulated through deductions made in computing net income as returned in previous years-mayj if properly explained, be entered on line 7. Such entries should be identified and if necessary reconciled with balance-sheet reserves. E9. The cost (or book value if different from cost) of treasury stock held at the end of the preceding taxable year should be deducted on line 9, if the par value of such stock is included in tne amount entered on line 4. Treasury stock includes all stock reacquired by the corporation and not canceled, regardless of the reason for the acquisition. Item. J9U 1912 1913 Taxable Yeas. Capital stock paid up and actually outstanding at the close o( the' preceding y^: 1. T^Srst. prf'fprrFwl $ $_ .. 9 Rornn/I pTA'fpTro/I 3. Common 4. Tatat. . . j $ $ Surplus and undivided profits: 5. Pflul-in .9nrplns , j fi. Pampil mirplns anrl prnfitfl 7. Reserves, additions to which are not deductible in comput- ing net income (to be reconciled with balance-sheet items) 8. Ghand totals op Itek.s 4, 5, 6, and 7 $ 1 s L 9. Deduct cost of treasury stock (or book value if different from cost),, if any is included above as outstanding 1 1 10. Net total (Item 8 minus Item 9) $ i 1 ^ $ SCHEDULE F— ADJUSTMENTS BY WAY OF ADDITIONS. Fl. If an addition to invested capital is claimed in Item 1, Schedule F, submit a state- mentshowing (a) the kind of property, (6) the year in which it was paid in, (c) from whom acquired, explaining his relationship to the corporation, (d) the actual cash value of such property at the date when paid in, («) the par value of stock or shares issued therefor and the amount at which such property is entered in the accounts, and (/) the basis upon which the actual cash value of the property was determined and the date when such determina- tion was made. F2. If an addition to invested capital is claimed in Item 2, Schedule F, submit a statement showing (o) the kind of property, (6) the year in whicli it was acquired, (c) its cost, (d) the amount of depreciation sustained on such property from the date of acquisition to the beginning of the taxable year.- State also whether each item sought to bo restored was actually used or usable at the beginning of the taxable year. Were these expenditures, when made, written off in lieu of depreciation? If so, explain what adjustments' have been made to provide for depreciation, in view of the proposed restoration to surplus. F3. If any addition to invested capital is claimed in Item 3, Schedule F, state specifi- cally the amount of depreciation -written off each year in the books of the company, and the amount allowed as a deduction in computing net income. F4. If any assets of the trade or business in existence during both the taxable year and any prewar year are included in the invested capital for the taxable year but not for such prewar year, or are valued on a different basis in computing the invested capital for the taxable yearand such prewar year, entries should be made in this schedule adjusting the invested capital for each prewar year qgected so as to value such, assets upon the same basis in the prewar period as in the taxable year. Item. 1911 1912 1913 Taxable YeaeI " 1. Actaal cash ralne of tangible property clearly and substantially in excess of par Ta^lne^of stock issued th^efor or of the cash or other eousideratiou paid $ , S 2. Additions to suiplus (Articles 840 to 843) 3. Depreciation charged in the accounts of the corporation but not allowable as a deduction on income tax returns 4. Adjustment of valuation of assets in exbtence both during tax- ypfir nnrl in prpwnr p#irinfl T^rtirlp XXX XXX XXX X X 7 8. Total [ZZl i J SCHEDULE G— ADJUSTMENTS BY WAY OF DEDUCTIONS. Gl. Is any patent, copivight, secret process or formula, good will, trade-mark, trade brand, franchise, or other similar intangible property, paid m for stock, entered on the books of the corporation at a value in excess of its actual cash value when paid in? In excess of the par value of the stock issued therefor? Is the aggregate of such assets acquired prior to March 3, 1917, entered on the books at a value in excess of 25 per cent of the par value of the stock outstanding on March 3, 19177 Is the aggregate of such assets entered on the books at a value in excess of 25 per cent of the par value of the stock outstanding at the beginning of the taxable.year? If the answer to any of the foregoing questions is “yes,” submit a statement showing separately with respect to such assets acquired (1) before March 3, 1917, and (2) on or after that date: (a) Date of acquisition; (6) cash value at that date, with a complete ex- planation of the basis upon which such cash value was determined; (c) par value of the stock issued therefor; (d) par value of total stock outstanding March 3, 1917; (<) par value of total stock outstanaing at the beginning of the taxable year; (/) the value at which such assets are entered on th? books of the corporation. If all the intangibles were acquired before March 3, 1917, the amount by which (/) ex- ceeds (6), (c), 25 per cent of (d), or 25 per cent of (e), whichever is lowest, must be entered as Iteml, ScheduleG, for the taxable year and for each year of the prewar period that is affected. If the intangibles were acquired on or after starch 3, 1917, the amount by which the entry in (/) relating to such intangibles exceeds (b) or (c) relati.ng thereto, or 25 per cent of (e), wnichever is lowest, must be included in Item 1, Schedule G, for the taxable year: Provided, that if intangibles were acquired before March 3, 1917, and also on or after that date, deduction shall be made so that the amount included in invested capital forthe aggre- gate 6f intangibles shall not exceed 25 per cent of the par value of the total stock outstand- ing at' the beginning of the taxable year. Note. — If the stock of the corporation was issued at a nominal value or without par value, for the purpose of the compulation under Item 1 the par value shall be deemed to be the fair market value as of the date or dates of issue. The aggregate value so determined of stock outstanding on March 3, 1917, or at the beginning of the taxable year, shall be the basis for the computation. G2. Is any tangible property, paid in for stock, entered on tlie books of the corporation at a value in excess of its actual cash value when received? In excess of the par value of the stock paid therefor? •Jf the answer to either of the foregoing questions is “yes,” submit a statement showing (a) kind of property; (6) when acquired; (c) par value of the stock paid therefor; (d) actual cash value of the property when paid in; (e) the basis on which that value was determined; (/) value at which the property is entered, on the corporation’s books; and (j) amount by which such value exceeds the allowable value under section 320 (a) (2) of the Revenue Act of 1918. Enter this amount' a,s Item 2, Schedule G, for the taxable year and for each vear of the prewar period that is affected. . - "03. (a) IVas any stock issued by the corporation ever returned as a gif t or for a consider- ation substantially less than its par value? (5) If so, what was the total par vahie of such stock? (c) M hat was the consideration paid for the return thereof? $ (d) MTiatamountof cash or its equivalent was derived from the resale of such stock ? (c) IVhat entries were made in the accounts to evi- dence the return and-the resale of such stock? The excess of (6) over (d) must be entered asTtem 3, Schedule G, for the taxable year and for each year of the prewar period that is affected. However, no deduction is neces- sary if adequate adjustment has been made under Item 2 of this schedule. G4. Was the business reoi^nized or consolidated or was its ownership changed or was there a change in ownership of property after March 3, 1917? If so, answer the following questions: (a) Did an interest of 50 per cent -or more in the business or in the property which changed ownership remain in the control of the same persons, corporations, a&sociations, or partneijships, or of any of them? ^ (b) Were any of the assets entered on the books of the corporation making this return at a higher value than on the books of its'predecessor? (c) I^ such pre-vious owner was not a. corporation attach a statement showing (1) the cost of acquisition to the previous owner of any asset so transferred or received ; (2) expendi- tures subsequent to that date for betterment or development, not deducted as expense or otherwise since March 1, 1913, by such previous owner; (3) the allowance fer depreciation, depletion, or impairment since the date of acquisition by such previous owner. (d) If all, or substantially all, of the property was acquired from a corporation during the taxable year attach hereto balance sheets of such predecessor corporation as of the begin- ning of the taxable year and as of the date immediately prior to the transfer of the property to the corporation making this return, and also a balance sheet or statement of the corpora- tion making this return showing the values at which such property received or transferred was entered on the books. The increase in book value ,of any property acquired by reorganization, con^Udation, or change of ownership, over the amount allowable to the predecessor corporation or over the amount as computed under (c), if the previous owner was not a corporation, must be deducted from the invested-capital for the taxable year as Item 4, Schedule G. GS. Is any property (including physical property, securities, and intangible property) paid for with cash or with other tangible property entered on the books of the corporation at a value excess of the amount of caDi paid therefor or the actual cash value of the tangible property paid therefor? If so, submit a statement showing (a) kind of property; (b) amount of cash paid therefor; (c) actual cash value of other tangible property paid therefor; (d) how that value was determined; («) value at which the property is entered on the books of the corporation; and (/) excess of (<) over (6) or (c).; This excess must be entered as Item 5, Schedule G, for the taxable year and for each year of the prewar period that is affected. G6. Has adequate pro-vision been made in the expense accounts of the company for (a) losses of every kind? ; (6) depreciation? ; (c) obsolescence? (d) depletion of mineral deposits, timber supplies, and the like? If adequate charge has not been made for depreciation, depletion, bbsole.scence, and other losses, and the value of the property has not been maintained by replacements that have been charged to expense, proper additional chargee therefor must be computed for all years in which they were not made on the boqks, and tire total amount of such charges must be entered as Item 6, Schedule G, for the taxable year (and for- each yrar of the pre- war period that -was affected) and deducted in arriving at the surplus and undivided profits. >— sewniofyATi ort/T /^opTotinn 7 i 8. . _ — -• — . i 9. Totai, DEDtrenoNS i $ 1— 1. 1 1 k-...- !s 1 SCHEDULE H— CHANGES IN INVESTED CAPITAL DURING TAXABLE YEAR. 1. Changes in invested capital during the taxable year ordinarily arise in one or more of the following ways; (а) Additions by reason of the sale of capital stock or the issue of capital stock for tangible or other assets. , • (б) Liquidation of part of the capital by retirement of stock or purchase of treas- ury stock not out of current earnings. (c) Payment of cash dividends out of earnings of prior years. (a) Deduction of the amount of Federal income and excess-profits taxes for the previous year. (e) Payment of assessments by stockholders, or creation of paid-in surplus by contribution, of stockholders. Specify (by using rM ink for distributions, or otherwise) whether each item represents an addition or a distribution. 2. Report di’Hdends paid out of profits of prior years but not dividends paid out of profits of the taxable year. Any distribution made during the first 60 days of the taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from the profits for that year to the extent that such profits are sufficient. (See Article 1541.) \ 3. If stock is issued for cash, the actual cash received (but not the amount of dis- count) should be entered in this sihedule. Assets (other than cash) paid in for stock must be valued in accordance with Section 326 (a) (2) of the Revenue Act of 19.18. 4. The amount of Federal income and excess-profits taxes payable should be deducted as of the date when due and payable whether reserves have been set up on the books or not. (See Article 845.) 5. If capital stock of the corporation is reacquired but not paid for out of current profits, the cost of such stock should be deducted from invested capital. 6. The data called for in columns 1 to 5 should be given for all transactions, except that columns 3 and 4 are applicable only to the issue or reacquisition of the corporation’s stock. 7. In Column 6 enter the number of days remaining in the taxable year (including the date of change). 8. The net changes, if not in accordance with the increases or decreases reflected in the balance sheets, should be fully reconciled therewith. I. Natttiie or Additions and Dist«ibutions. 1 . IrroaCASn, 5. Amopnt or Cash or Cash 6. Number State Price Value Actually Received or Days TER Share. or Paid Out. ErrEcnvE. 7. Adjusted Average. ' Column 5 X Column 6 ^ Number ol daysin ta.\ablu year.; 4. 5. SCHEDULE J— CHANGES IN INVESTED CAPITAL DURING PREWAR YEARS. (Compute the net addition or reduction separately for each year. See instructions under Schedule H.) I, Nature or ADDmoNS and Dibtributions.' 2. Date. 3. Number or Shares Sold OR Reacouired. 4. Ir FOR Cash, state Price PER Share. 5. Amount or Cash or Cash Value Actually Received OR Paid Out. 6. No. OF Days Effective. 7. Adjusted Aveeaoe. / Column 6 X column 6\ yMumber ofdaysin year. / 1. S 8 $. I i 1 a. 1 6. |. 7 1 « 1 .. - 1 11 ! - J3" ~ 14 'II' SCHEDULE K— CHANGES IN INVESTED CAPITAL FROM END OF PREWAR PERIOD TO BEGINNING OF TAXABLE YEAR, NOT SHOWN IN SCHEDULE L (See instructions under Schedule H, so far as applicable.) •I. )4atuee or Additioks and Distributions. 2. Date. 3. Number or Shares Soid ok Reacquired. 4. If foe Cash, State Price fer Share. 5. Amount* or Cash or Cash Value Actually Received or Paid Out. j .5 $ I ■3. ’ 6. 1 1 ^ 1 1 .. I 8 0 in. n. . . 12. 13 1 1 ““ Id. 1 izii::; 1 IHJ, Income Tax Supplementary Page 41 Page 5 of Form 1120 Pasre 6— Investea Capital Schedviles (Concluded) and Questions. SCHEDULE L— INADMISSIBLE ASSETS. Has the corporation any inadmissible assets (i. e., stocks, bondr^ and other obligations, except obligations of the United States, the income from which is nr/t taxable)? . — If so, attach hereto a statement showing for 1911, 1912, 19I3„ and the taxable year, separately, the facts called for in Items (a) to (j) of this schedule. If the income from such assets consists in part of gain or profit from the sale or other disposition thereof, or if all or part of the interest derived from, such assefe is in effect included in the net income because of the limitation on the deduction of interest under Section 234 (a) (2) of the Revenue Act of 1918, then a correspomiing part of the capital invested in such assets is deemed an admissible asset. In such esse, set forth in detail — (a) The various kinds of income derived from such assets and die computation of the part of the capital invested therein which is deemed an admissili'n asset. For the purpose of this schedule, inadmissible assets shall be valued at costot acquisi- tion except that if the taxpayer has in previous years been allowed a deductionon account of the fall in the market value of securities, such' assets shall be valued at cost less the deduc- tion allowed. Admissible assets shall be valued as provided in Suctions 326, 330, and 331 of the Revenue Act of 1918 and Articles 831-869, 931-934, and 941 of Regulations 45. The average amount of assets of each kind held during any year may ardinarilj' be- determined by divi din g by 2 the sum of the amount of such assets held.at Jho beginning of the year e, show in detail- and the amount held at the end of the year. In such case the amount of admissible assets may best be determined from (1) the balance sheet as of the beginning of the year adjusted with respect to the items in Schedules F and G, and (2) the balance sheet as of the end of the year correspondingly adjusted. But if at any time during the year a sub- stantial change has taken place in the amount of such assets, the average amount must bo determined as provided in Article 852 of Regulations 45. In such car* ^6) The computation of such amount. (c) Amount of inadmissible assets held at begi nnin g of the year. (a) Amount of inadmissible assets held at end of y^r. (e) Average amount of inadmissible ^ets held during year.- U) Amount of admissible assets held at beginiung of the year. Xq) Amount of admissible assets held at end of year. (A) Average amount of admissible assets held during year. (i) Sum ^ («) plus (A), ■ ich ( on line which should be entered on line 8, Schedule JI. KIND OF BUSINESS. 1. Explain below the nature of the corporation’s business in sufficient d/etail to show in which of the following general classes of activities it falls: (1) Agriculture and related industries, including fishing; (2) mining, quarrying, pd related industries; (3) manufacturing: (4) construction; (5) trading; (6) transportation; (7) storage; (8) other services; (9) banking and insurance. 2. If the business falls in any of the classes from 1 to 5, state the special product or products handled; if in class 5, state whether wholesale or retail, or both: if in class 6, state whether rail, water, or other, whether general or local, and tho special commodities (if any) transported; it in class 7, state the ^cial commodities stored (if any.) or the special kind of storage; if in class 8, state in detail the kind of service rendered; if in class 9, state the branch of banking or insurance engaged in. 3. In all cas-'s state whether the corporation acts as principal (asing its own capital) or as agent or broker (on commission) or as both. QUESTIONS. AFFILIATIONS WITH OTHER CORPORATIONS (TO BE ANSWERED BY EVERY CORPORATION). 11. Do you own directly or control through. closely affiliated interests or by a nominee or nominees over 50 per cent of the outstanding capital stock of another corporation or of (c) Main business... (i) Collateral basinesses, if any.. OTHER CONCERNS IN SAME BUSINESS. 4. Enter on the following lines the names and addresses of five representative con- cerns in your locality or section of the country engaged in the same kind of business; INCORPORATION. 5. Date of incorporation 6. Under the laws of what State or countrj’? PREDECESSOR BUSINESSES. 7. If the corporation was not in existence during tho whole of any one of the calendar years 1911-1913, js its business sul)stantially a continuation of a business carried on dining any one or more of those years? If so, give name under which, and address at which, its business was then carried on other corporations? 12. Is over'50 percent of your capital stock owned by another cotporatioh or by two or more corporations that are affiliated? 13. Is over 50 per cent of your capital stock as well as over 50 per cent of the capital stock of another corporation or of other corporations owned or controlled by the same indi- vidual or partnership or by the same individuals or partnerships? 14. Is this return a consolidated return within the meaning of Articles 631 to 633, in- clusive, of Regulations 45? | 15. Affiliated corporations as indicated in 11, 12, or 13 above must comply with the following requirements: \ 16. If the answer to question 11 is "yes,” submit a statement showing for each of the corporations over 50 per cent of whose stock is owned or controlled by you, either directly or through closely affiliated interests or by a nominee or nominees: — (а) The name and address; (б) The total par value of the outstanding capital stock at the beginning of tho taxable year, and the date and amount of each change therein; (c) The total par value of such outstanding capital stock owned or controlled by you at the beginning of the taxable year, or at the date of acquisition if acquired during the taxable year, and the date and amount of each change ■therein. 17. If the answer to question 12 is “yes,” state — (а) The name and address of such corporation or corporations, (h) The par value and percentage of your stock held by each. 18. If the answer to question 13 is "yes,” submit a statement showing— (al The names and addresses of such corporations; (б) The name or names and address or addresses of the owning or controlling interest or interests; (c) The total par value of the outstanding capital stock of each corporation at the beginning of the taxable year, and the date and amount of each change therein; 1 (d) The total par value of the outstanding capital stock of each corporation owned or controlled by each one of the several individuals or partnerships at the beginning of the taxable year, and the date and amount of each change therein. 19. If the answer to question 14 is “yes,” the information furnished under 16 and 18 should identify the corporations included in the consolidation. 20. If one corporation owns 95 per cent or more of the stock of another, or if 95 per cent or more of the stock of two or more corporations is owned by the same individual or indi- viduals in substantially the same proportion, a consolidated return must be filed, except that the limitations as to consolidation under Article 635 must be observed. If the owner- ship is less than 95 per cent, but exceeds 50 per cent, the parent co^ration or principal corporation of any ^oup of affiliated corporations must furnish the information called for above and in addition must file a statement fully disclosing the details of affiliation other than stock ownership and all other information which will be helpful in determining whether or not a consolidated return should be filed. VALUATION OF CAPITAL STOCK. 21. 'Wbat was the fair value of the total capital stock of tho ebrporation as .determined in the last aaseecment of the capital stock tax (if any)? $ Date of that LIST OF ATTACHED SCHEDULES. Make below a list of aU schedules attached to this return, giving for each a brief title and tho schedule number. ACQUISITION OF MIXED AGGREGATES OF ASSETS.^ 8. Did the corporation ever take over a going business or otherwise acquire a mixed aggregate of tangible property, patents and copyrights, and good will and othqr similar intangible property, and pay for such projierty in whole or in part with stock or other securities? 9. If so, submit a statement showing — (а) The name of the concern taken over (or from which the property was acquired); j (б) The nature of tieWets and liabilities so acquired; (c.) The total par value of the stock issued therefor; .. (■^. Tho value at which each class of assets was carried on the books of the concern from which acquired (if obtainable submit a balance sheet of the prede- ceesor corporation as of the date of acquisition);- (e) Tho value at which each item was entered on the books of the corporation making this return. 10. If patents, cop-vrights, secret processes or formulse, good will, trade-marks, trade brands, franchises, or other intangible property were acquired, state also the basis on which their value was determined and how they were paid for. We, the undersized, president and treasurer of the corporation for which this return is made, being severally duly sworn, each for himself deposes and says that this return, including the accorripanyin" schedules and stHtements, has been examined by him and is to tho best of his knowledge and belief a true and complete return made in good faith pursuant to the Revenue Act of 191S and tho Regulations issued thereunder. Sworn to and sub- 1 ■ scribed before me J ^ day of ., 19. Seal ol oScer lalUni affidavit. (Official capacity.) President. Treasurer: Income Tax Supplementary Page 42 Page 6 of Form 1120 Page 1 of Instructions INSTRUCTIONS REGARDING DETERMINATION OF CREDITS, COMPUTATION OF TAX, ETC. PROVISIONS AFFECTING INVESTED CAPITAL AND CREDITS. | RETURNS FOR PART OF A YEAR. 1. If this return is for a period less than a full year, Items 3 and 8, Schedule III; Items 1 and 2, column 2, Schedtde IV; and Item 15, Schedule IV, shall be reduced to as many twelfths of the figures for a full year as there are months in the period for which the return is made. If the period for which the return is made includes frtictions of months, there shall bo added to the number of complete months as many thirtieths of a month as there are days in the fractional parts of months. CORPORATIONS NOT IN EXISTENCE DURING PREWAR PERIOD. 2. If a corporation was not in existence during the whole of at least one calendar year in the prewar period, provided a majority of its capital stock was not owned or controlled, directly or indirectly, at any time during the taxable year by a corporation in existence during the whole of at least one calendar ye.ar in the prevrar period, and provided its gross income does not include 50 per cent or more of gains, profits, commissions, or other income derived from a Government contract or contracts made after Aprils, 1917, and before November 12, 1918, the war-profits credit shall be (aj the sum of S3, 000 plus (b) the sarno'pcrccnt- age of the invested capital for the taxable year (not less than 10 per cent, however) as the average j)cr cent of net income to invested capital for the prewar period of corporations engaged in a trade or business of the same general class as the taxpayer. 3. Pending a determination of the deduction by the Commissioner, such corporation shall deduct 10 per cent of the invested capital fer the taxable year. (SeeSection 311 (c,d)of the Revenue Act of IGlSand Articles 783 and 784 of Regulations 45.) CREDIT FOR INCOME, WAR-PROFITS, AND EXCESS-PROFITS TAXES PAID OR ACCRUED TO FOREIGN COUNTRY OR POSSESSION OF THE UNITED STATES. 4. If a credit is claimed in Item 19, Schedule IV, a copy of Form 1118, completely filled out and sworn to or affirmed, must be submitted with this return. If credit is sought for taxes already, paid the form must have attached to it the receipt for each such tax payment. If credit is sought for taxes accrued the form must have attached to it the return on which each such accrued tax was based. (See Article 611 of Regulations 45.) 5. When a credit is claimed for accrued taxes, the Commissioner m.ay, as a condition precedent to the allowance of this credit, require the cor- poration to give a bond (Form 1119), with sureties satisfactory to and to be approved by him, in such penal sum as he may require, oonditioned for the payment by the taxpayer of any amount of taxes found due if the taxes when paid differ from the amount claimed in respect. thereof. PROVISIONS AFFECTING COMPUTATION OF WAR-PROFITS AND EXCESS-PROFITS TAX. . 6. Item 10, Schedule IV, is the war-pro.fits and excess-profits tax, unless the taxpayer is entitled to tlie benefits of one or m.oi’e of the following provisions : (o) Limitation on total ta.x. — The maximum war-profits and excess-profits tax imposed shall in no case be more than 30 per cent of the net income in excess of S3, 000 and not in excc-'is of $20,000 plus 80 per cent of the net income in excess of $20,000 (Sec. 302). (6) Tax on profits from sa-o cf mineral deposits. — In the case of a bona fide sale of mines, oil or g.as wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and. discovery work done by the taxpayer, the portion of the war-profits and excess-j)rofits tax attributable to such sale shall not exceed 20 per cent of the sc! ling price of such property or interest, (.^oe Articles 971 and 072 of Regulations 45, and section 337 of the Act.) (c) Tax of corporation engaged in mining cf geld. — If a corjiora- tion was engaged in the mining of gold, its war-profits and excess-profits tax shall be that proportion of Item 10, Schedule IV, which the net in- come not derived from the raining of gold hears to tho total net income (Ai'ticloa 752 and 753 of Regulations 45 — ^Scc. 304). (d) Tax of corporation whose income is derived in part from "personal service.” — If part of the not income (not less than 30 per cent) is derived from a separate trade or budnoss cf tho character of “personal service,” tho tax .shall bo computed in accordance with tho provisions of Articlei 741 to 743 of Regulations 45 (f^c. 303). 7. Statement of basis of claims. — If tho corporation claims tlic benefit of one or more of these provi.sions, it sliould attach to tho return a complete statement of tho basis for such claim and a comput.ation of Lhe tax payable in the event that F.nch claim is allowed. Tho amount of tax 60 computed ahou’d bo entered as Item 11, Schedule IV, but, except in cases Falling umler (a) above, tho taxpayer must nevertheless fill out oU the 3cho 92, 548, and 625 of Regulations 45.) 5. A foreign corporation should fill in and submit all the schedules called for on pages 2 and 3 of the return with respect to its income from sources withiu the United States, and should compute its income tax (Schedule IV), claiming, however, no specific exemption (Item 15). It should enter 50 per cent of its net income as its war-profits and excess- profits tax, pending determination by the Commissioner of the amount of tax a-ssessable (see Instructions, page 1, paragraph 10). 6. Partnerships and personal service corporations. — ^Partner- ships and pci-sonal service corporations must make a return on Form 1005. (See Article 624 of Regulations 45.) CONSOLIDATED RETURNS. 7. Affiliated corporations, as defined in Section 240 of the Act and Articles 632 and 633 of the Regulations, must file a consolidated return. As provided La Article 632, the parent or principal reporting company must file the consolidated return on this form with the collector of the district in which its principal office is located. AU supplementary and supporting schedules should be prepared in columnar form, one column being provided for each corporation included in the consolidation, so that the composition of consohdated net iacomo and consohdated invested capital may be readUy examined. 8. Subsidiary corporations and other affiliated corporations whose net income and invested capital are included in the return of a parent corpora- tion or a principal reporting corporation must fiU in and file Form 1122 with the collector in whose district their principal office is located. PERIOD COVERED. 9. The taxable year is the calendar year 1918 or (if the corporation makes its return for a fiscal period of 12 months ending 6a the last day of some month other than December) the fiscal period ended in the calendar year 1918. 10. A corporation desiring to change the period for which its return is made from a calendar year to a fiscal year or vice versa, or from one fiscal year to another, must give written notice to the collector of such change and the reasons therefor at least 30 days before the duo date of its return on the basis of its existing taxable year and at least 30 days before the due d.at 0 of the return on the basis of the proposed taxable year. (See Articles 26 and 431 of Regulations 45 and Section 226 of the revenue act of 1918.) 11. A new form will be issued for corporations filing returns for fiscal years ending in 1919. TIME AND PLACE FOR FILING. 12. Returns for the calendar year 1918 and for fiscal years ended in 1918 must bo sent to the coUector of internal revenue for the district in which the corporation’s principal place of business is located so as to reach the collector’s office on or before March 15, 1919, unless an extension of time has been granted. ' ' 13. If it is not possible to file a completed return on this form or on Form 1122, as tho case may be, on or before March 15, 1919, an extension of time may be obtained by filing, on or before March 1 5, 1919, a tentative retm-n and estimate of taxes assessable, in duplicate, on Porm 1031 T, and remitting with such return at least one-fourth of tho estimated taxes shown thereon. 11. In case of neglect to file either a ccinplcted return or a tentative return within the prescribed time tho ccilector is authorized to giant an extension of not more than 30 days, provided such neglect was due to absence or sichness, and provided an application for such extension is made in writing prior to the expiration of the period for.wldch an extension may be granted. In meritorious cases the Commissioner is authorized to grant a further extension; ’out no such further extension vrIU be granted (except on account of absence or sickness), unlc-ss a tentative return has been filed on Form 1031 T. and at least ono-feurth of tho esti- mated tax has been paid. (See Articles. 442 to 444 of Regulations 45.) SIGNATURES AND VERIFICATION. 15. Returns must be sworn to by the president, vice president, or other principal oflicer and by the treasurer or assistant treasurer of the cor- poration. Tho return of a foreign corporation having an agent in the United States shall be sworn to by such agent. If receivers, trustees in bankruptcy, or assignees are operating the property or businsss of tho corporation, such receivers, trustees, or assignees shall execute the returns for such' corporations, under oath. PAYMENT OF TAXES. 16. The tax should be paid by sending or bringing with the return a check or money order dravm to the order of “Collector of Internal Revenue at [insert name of city and State].” 17. Do not send cash through the mail or pay it in person except at the office of tho coUector or a regulaily established internal-revenue atamp oflice. 18. At least one-fourth of the tax is due at the same time that the return is due. 19. An additional amount suflicient to bring the total payments up to one-half of the tax must be paid on or before June 15, 1919^ 20. An additional amount siifncient to bring the total payments up to three-fourths of the tax must be paid on or before September 15, 1919. 21 . The entireremainder of the tax must bo paid on or before December 15, 1919. 22. If any payment is not made when duo, the entire unpaid balance of the lax wiU become due 10 days after demand therefor by tho collector. 23. If you pay in cash, do liot fail to get a receipt at the time of pay- ment. If you pay by check or money'order, your canceled check or your money-order receipt %vin service as a receipt. PENALTIES. UNDERSTATEr.IE.NT OF TAXES DUE TO NEGMCE-NCE OR FRAUD. 24. If taxes are undei-stated tlvrough negligence on the part of the tax- payer and wthout attempt to defraud, there shall bo added as part of the tax 5 per cent of the total amount of the deCci. ncy plus interest at tho rate of 12 per cent per annum on the amount of the deficiency of each installment from the time the installment was due. If an understatement is false or fraudulent with intent to evade the tax, there shall he added as part of the tax 50 per cent of the amount of the. deficiency. FOR FAILI.NG TO PAY TAX WHEN Dl'S. 25. If any tax remains unpaid after the date when it is due and ^or 10 days after notice and demand by the collector there shall bo added as part of the tax the sum of 5 per cent of tlio amount due but unpaid, plus interest at the rate of 12 per cent per annum on such amount frem tho time it became due. FOR FAIUNG TO M-UO: RETURN ON TI.ME. 26. A penalty of not more than $1,000 attaches for fiulurc to fib a re- turn or to pay the tax witliiu tho time required by law. If the failure is willful or an attempt is mado to defeat or evade tho tax, tlio penalty is $10,000 or imprisonment for not more than one year, or both, together with cost of prosecution. Income Tax Supplementary Page 44 Page 8 of Form 1120 Form 1096A-UNITED STATES INTERNAL REVENUE SERVICE MONTHLY INFORMATION RETURN PAYMENTS OF INTEREST ON BONDS OF DOMESTIC AND FOREIGN CORPORATIONS AND COUNTRIES AND DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS FOR MONTH OF , 1919 THIS RETl'RN, ACCOMPANIED BY CEKTIRCATES ON FORM lOOI.lflfllA, AND ms. MUST BE MAILED TO THE COMMISSIONER Of INTERNAL REVENUE. SOKHNC DIVISION, WASHINGTON, D.C. ON OR B2F0f.Z THE 20ih DAY OF THE MONTH SUCCFEDING THAT FOR WHICH MADE (Name ol debtor organizatioa) (Full post-office address) (Name ot bank or paying agent) (Full post-office address) (Date received} Class or Income Total Amount of Payments. A. Interest on bonds and other similaj obligations of domestic and resident corporations (provided tax v/as not withlield at source) (FORM 1001) B. Interest on bonds and other eimiJar obligations of domestic and resident corporations (provided tax was not withlicid at iwurce) C. Interest on bonds of foreign corporations and countries and dividends on stock of foreign corporations (FORM 1058) (FORM lOOl.M INSTRUCTIONS A. A certificate on F.orm 1051 should accompany this return for every payment of interest on bonds and other similar obligations of domestic and recent corporations, under the following conditions: 1. Interest on bonds with tux-/re^-ccvenant clauses paid to citizens and residents of the United States (individuals and fiduciaries) cloiming personal exeiMtion, domestic and resident corporations, and foreign corporations haying an office or place of business in the United States. In the absence of ownership certificates mado by individual owneis of tax-free registered bonds the debtor organization shall prepare reports on Form ICOO and forward them to the collector with return Form 1012. If owned by a domestic corpora- tion, or foreign corporation , having an office or place of business in the United States, reports on Form 1001 should be prepared. V.Tien so used the forms need not be signed. 2. Interest on bonds without tax-free-covenant clauses paid to citizens and residents of the United States (individuals and fiduciaries), domestic and rendent partnerslups and corporations, nonresident alien partnerships, and foreign corporations having an office or place cf business in the United States. In the case of registered bonds not baaing tax-free-covenant clauses the debtor organization will prepare reports on Form 1001 and forward them with this rejtiim to the Commieaioner. When so used the form (1001) need not be signed. B. Resident collecting agents, responsible banks aijd bankers receiving interest coupons presented by individual citizens or reeidenta of the United States for collection, may detach certificate Foim 1001 and forveard it directly to the Commissioner of Internal Revenue, provided certificate Form 1058 (revised) is substituted for the certificate detached. The abrogate number of substi- tute certificates, Form 1058, should be entered by the debtor corporation on line B, in the column ‘‘Number of Certificates.” C. A certificate on Form lOOlA should be required by individuals, partnerships, and corporations undertaking as a matter of busi- ness or for profit the collection of interest on bonds of foreign corporations and countr&s and dividends on stock of foreign corporations by means of coupons, checks, or bills of exchange for citizens and residents of the United States (individuals and fiduciaries), domestic and resident partnerships and corporations, and nonresident alien indi'viduals, partnerships, and coroorations. If the payments consist of interest on bonds (and there is no paying agent in thq United States), the last bank or collecting agent handling the item shall detach the certificate. Form lOOlA, and forward it directly to the Commissioner of Internal Revenue, accompanied by a return on this form. If the payments consist of dividends on stock of foreign corporations, the first bank or collecting agent receiving the certificate (Form 1001 A) is required to detach and forward it directly to the Commuidoner of Internal Revenue. The first bank Hh.oll indor£« upon the foreign item “Certificate detached and information furnished (insert name and address of licensee).” Sub- stitute certificates are not permitted to be used in the case of foreign items. K boeds are owned jointly, separate certificates should be made by or for each joint ovmer. Fiduciaries must enter on the certificates under “Owner of bonds” the name of estate, ti-ust, or beneficiary on behalf of whom the exemption is claimed. Licensed banks and coll^-ting agents not acting as withholding or paying agents for debtor organizations may file one return on this form, making no entries in the spaces at the head of the form for name and address of debtor organization. 1 CERTirr that the foregoing return and the accompanying certificates constitute a true and complete statement of payments of the above-described classes of income made by the person or organization named at the head of this return, during the month stated above. Dated (Slg^ture) (Capad'ty lii which acthie} (Addreu In full) Income Tax Supplementary Page 45 OWNERSHIP CERTIFICATE— TAX TO BE PAID AT SOURCE names must be printeo U. S. I’ TERNAL REVENUE. INTEREST ON BONDS AND OTHER SIMILAR OBLIGATIONS OF DOMESTIC AND RESIDENT CORPORATIONS OR WRITTEN PLAINLY. DEBTOR ORGANIZATION | OWNER OF BONDS (Give name in full) I ® P* M 1 ii 1 ij I t 1 i ta a H I 1 1 1 i i 1 1 i >'< < £-1 j J » 1 cc 1 on f? a ko 1 a 1 ^ I to a g bo a 1 1 1 O ■< o 3 , m "S 1 s "S ^ I ' rf3o I Ii: •So S o h X3o 4 ^ 1 — ( '^3 ® O ( 1 1 1 1 1 1 1 O P5 ® o ! 5 © *jC»H 1 1 ■%p m OQ 1 1.. I o 1 o w ^ o ife? 1 1 ^ cA 1 02 a o a 1 ! o W Iz: o a a» ! r 1 1 OT tq « a H a V [ I 1 is !j ! ' ^ w! •2% ■ ■' s 1 oo - $ a M t£ O ilizen or Resident of U. S.; Individual or fiduciary 'Persoual exemption not claimed) ci I © [ a a i pH I cnresldent Alien: Individual or fiduciary a S cc « a e3 PU . Corporation having no office or place of business in U. S.. i . Unknown I Zee o lal B § +A ^ (I> ||o P* o «o (H 9xi 0 ' 0 .« S S ” ^ g a ? G, ^•3 g -a y O H u- S og e-jJ 3 a ^ P c/3 pa HD CO . w O) ID g flis g"H SIS >- • «>CQ J-J S <: 5 EH O Iz; >?. W O > « Q Jz; V (i] SwS w Id “ £ "1 W ^ '-5 « X w g ost-offlc6 address. ) Class. iMTcacsT Pais. Tax trmniEU). 1 s 5 9(0) 2(i) Totam... S $ (Sisnaturo.) (Capacity ja vrSlyh hcucg ) {Address Id lull.) HaMX of PsTYiS. Tax 17|thd«lb. CONTINUE ON FORM 1012A Income Tax Supplcmimtary Page 49. TllASTTRY DEPARTMENT, XSTEXNAL REVEKXJX BCREAU Form 1124. INCOME AND PROFITS TAXES. Bond under sections 214 (a) (12) and 234 (a) (14) of the Revenue Act of 1918. KNOW ALL MEN BY THESE PRESENTS that as principal, and — , as surety, are held and firmly bound unto the United States of America in the sum of dollars, lawful money of the United States, for the payment whereof we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. Whereas, at the time of filing his return of income for the taxable ]^ear 1918 the above-boimden principal has filed or is about to file a claim in abatement based on the fact that he has sijstained a substantial loss resulting from a material reduction (not due to temporary fluctuation) o^ the value of his inventory for such taxable year or from the actual payment after the close of such taxable year of rebates in pursuance of contracts entered into during such year upon sales made during such year; and Whereas, sections 214 (a) (12) and 234 (a) (14) of the Kevenue Act of 1918 provide that in the case of such a claim payment of the amount of the tax covert thereby shall not be required until the claim is decided, but that the taxpayer shaU accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest, and it appears that the amount of this bond is double that of the tax covered by such claim in abatement: Now, THEREFORE, the Condition of the foregoing obligation is such that if the principal shall on notice and demand by the collector duly pay any part of such tax foimd by the Commissioner to be due, with interest at -the rate of twelve per cent per annmn from the time such tax would have been due had no such claim been filed, and shall otherwise well and truly perform and observe all the pro- visions of law and the regulations, then this obligation is to be void, but otherwise to remain in full force and virtue. Witness our hands and seals this day of * , 1919. [l. S.1 Signed, sealed and ddvoered in the ‘presence of— [l. 8.] Principal. II. s.] 8‘urety. Bond approved this day of 1910. Commissioner of Internal Eeven'm, Income Tax. Supplementary Pace 50. The Withholdixo AGEfri OR COIXECTOR IlECEIVINa TREASURY DEPARTMENT Form lllS— United States Internal Revenue Service Do Not WepiR Here This Claim Sn.u-L Enter ■ p.vTE OF Receipt in This Space. . CLAIM BY NONRESIDENT ALIEN INDIVIDUAL For Benefit of Personal Exemption and Credit for Dependents FOR TAXABLK YEAR (Name of withUoldini agent?) " **" * TstrceVacd nuiu'oor?)' (^ty or tovTO.)' - - - (State.) '"1^ Claim is hereby made for benefit of the personal exemption and the credit for dependents (if any) provided under section 216 of the Revenue Act of 1918 by Cor for) — Name of claimant Address in the [ United St ates. | 1. Of what country are you a citizen or subject? ...l 2. Arc you single? 3. Are you married and living with wife or husband ? 4. Are you head of a family ? 5. If head of a family^ give age and relationship of those dependent upon you 6. If iriarried, has your wife or husband derived income during the taxable year to date from sources in the >■ United States separate from your own ? - - — 7. If so, is such income included in the income stated below? — - 8. Ila.ve you filed a return of net income for all or any of the past four years ? 9. If so, state •for which years and the Internal Revenue Districts in which filed INCOME OF CLAIMANT, DURING TAXABLE YEAR TO DATE, FROM SOURCES WITHIN THE UNITED STATES. (1) Salaet or Wages. Name of Employer. Address. Period. 1 Amount. $ (2) Other Income. Name or Source. Address. Period or Date. Amount. $ ' 1 Total income of claimant, during taxable year to date, from sources v;ilhin fho United Stale.-j (X) STATEMENT OF CREDITS CLAIMED. Amount of credits claimed: Personal exemption, $ Credit for dejjcndents, $ Total (Y) 5. Total income of claimant, during taxable year to date, from sources within the United States (item X from above) ^ Balance of credit (item V minus item I swear (or affirm) that the above is, to the best of my knowledge and belief, a true and complete atnic- ment of facts in connection with the claim for credits above made. (If claim I3 made by agent the reason therefor must bo stated on this line. ) Sworn to (or affirmed) and subscribed before me this day of 19 ’ (Sigutluri: of individual or aH'iil.. (Official capaclt;.) COVEU.) ( 'iddriv.s of i.-nivdyil (.,• ) Income Supplementary I’agc 51. PROVKTONS OF REGCLATIONS 45 APPLICABLE TO THE USE OF THIS FORM. ATPUCABILITY OF CREDITS, UNDER SECTION 216 OF REVENUE ACT OF 1918, TO NONRESIDENT ALIEN EMPLOYEE. Aet. 316 (of Regulations 45). Allowance of personal exemption to nonresident alien employee. — A nonresident alien employee, provided he is entitled under section 216 of the statute (see the articles oelow, particularly the lists of countries in Article 307) to credit for a personal exemption or for dependents or both, may claim the benefit of such credit by filing with his employer this form, duly filled out and executed under oath. On the filing of such a claim the employer shall examine it. If on such examination it appears that the claim is in due form, that it contains no statement which to the knowledge of the employer is untrue, that such employee on the face of the claim is entitled to credit, and that such credit has not yet been exhausted, such employer need not until such credit be in fact exhausted withhold any tax from payments of salary or wages made to such employee. Every employer with whom aflidavits of claim on this form are filed by employees shall preserve such affidavits until the following calendar year, and shall then file them, attached to his annual withholding return on Form 1042 (rm/ised), with the Collector on or before March 1. In case, however, when the following calendar year arrives such employer has no withholding to return, he shall forward all such affidavits of claim directly to the Commissioner (Sorting Division), ■with a letter of transnuttal, on or before March 15. Where any tax is witbheld the employer in every instance shall showr on the pay envelope or shall fm'nish some other memorandum showing the name of the employee, the date and the amount withheld. This article applies only to payments of compensation by an employer to an employee. Art. 306 (of Regulations 45). Credits to nonresident alien individual. — A nonresident alien individual, similarly to a citizen or resident, is entitled for the purpose of the noimal tax to credit * ♦ a personal exemption, and $200 for each dependent, except that if he is a citizen or subject of a country which imposes an income tax a personal exemption or credit for dependents is allowed him “ only if such country allows a similar credit to citizens of the United States not residing in such country.” “ If such countiy allows a similar credit” means if such country in imposing its income tax allows a personal ex,emption or a credit for dependents, as the case may- be, and allows it without discrimination to citizens of the United States not residing in such country. * * * Art. 307 (of Regulations 45). When nonresident alien individual entitled to personal exemption. — (a) The following is an incomplete list of countries which either impose no income tax or in imposing an incofne tax allow both a personal exei^tion and a credit for dependents which satisfy the similar credit requirement of the statute: Argentina, Bosnia, Brazil^ Canada, Carinthia, China, Cuba, Dalmatia, Denmark, France,' Herzegovina, Istria, Mexico, Montenegro, Persia, Portugal, Roumania, Russia, Serbia, Union of South Africa. (6) The following is an incomplete list of countries which in imposing an income tax allow a personal exemption which satisfies the similar credit requirement of the statute, but do not allow a credit for dependents: Bachka, Banat of Temesvar, Croatia, Italy, Slavonia, (c) The following is an incomplete list of countries which in imposing an income tax do not allow to citizens of the United States not residing in such country either a personal exemption or a credit for dependents and, therefore, fail entirely to satisfy the similar credit requirement of the Bto.tute: Australia, Great Britain and Ireland, Japan, New Zealand, Spain. The former names of certain of these temtories are here used for convenience, in spite of an actual or possible change in name or sovereignty. A nonresident alien individual who is a citizen or subject of any country in the first list is entitled for the purpose of the normal tax to such credit for a personal exemption and lor dependents as his family status may warrant. If he is a citizen or subject of any country in the second list he is entitled to a credit for a personal exemption, but to none for dependents. If he is a citizen or subject of any country in the third list he is not entitled to credit for either a personal exemption or for dependents. It he is a citizen or subject of a country which is in none of the lists, then to secure credit for either a personal exemption or for dependents he must prove to the satisfaction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the similar credit required by the statute. CREDITS UNDER SECTION 216 (c) AND (d) OF REVENUE ACT OF 1918- PERSONAI, EXEJiPTION. Status ot Taxpayer. Amoont of Credit. Married, and living with husband or wife (see Article 303, below) $2, 000 Head of a family (see Article 302. below) $2, 000 Married, and not living with husband or wife and not head of a family (see Articles 302-303, below) $1, 000 Single, and not head of a family (see Article 302, below) — $1, 000 CREDIT FOR DEPENDENTS. Statra of Dependent. Amount of Credit. For each person (other than husband or wife) who is (1^ (a) under 18 or (6) incapable of self-support because defective, and (2) is deiiendent upon, and receiving the chief support from, the taxpayer (see Article 304, below) — _i H. $200 Art. 302 (of Reflations 45]^. Personal exemption of head of ffiily. — ^A head of a family is a per^n who actually supports and maintains in one household one or more individuids who are closely connected with him by blood relation^p, relationship by marriage, or by adoption, and whose right to exerdse family control and provide for 'these dependent individuals is based upon some moral or l^al obliftion. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the statute must depend on the character of the separation. If a father is absent on business or at war, or a cmid or other dependent is away at school or on a visit, the common home being still maintained, the additional exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with "relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irresiiective of the question of support. A resident alien with children abroad is not the head of a family. Art. 303 (of Regulations 45). Personal exemption of married person. — In the case of a married man c«: married woman the joint exemption replaces the individ^l exemption only if the man lives with his wife or the woman lives with her husband^ In the absence of continuous actual residence together, whether or not a man or woman has a wife or husband living with him or her within the meaning of the statute must depend on the character of the separation. If merely occasionally and temporarily a wife is away on a visit or a husband is away on business, the joint home being maintained, the additional exemption applies. The vmavoidable absence of a wife or husband at a sanatorium or asylum on account of illness does not preclude claiming the exemption. If, however, the hus- band voluntarily and continuously makes his home at one place and the wife hem at another, they are not li'viBg together for the purpose of the statute, irrespective of their personal relations. A resident alien witn a wife residing abroad is not entitled to the joint exemption. ART.a304 (of Regulations 45). Credit for dependents.— A taxpayer receives a credit of $200 for each person (other than husband or wife), whether related to him or not and whether living with him or not, dependent upon and receiving his chief support from the taxpayer^ provided the dependent is either (a) uu-der eighteen or (6) incapable of self-support because defective. The credit is based upon actual financial dependency and not mere legsu de- pendency. It may accrue to a taxiiaycr who is not the head of a family. But a lather wnose children receive half or more of their support from a trust fund or other separate source is not entitled to the credit. • *-*773 Income Tax Supplementary Page 52. TREASURY DEPARTMENT, U. S. Internal Rrvekue. . Form 47 A.— March, 1919. CLAIM FOR CREDIT TAXES PAID IN EXCESS State of County of -1 IMPORTANT This claim should bo forwarded to tho Colloctor of Internal Revenue from whom notice of eseess- ment was received* DATE or riUNC T9 EE PLAINLY stamped HERE (Name of clainlant.) (Address of claimant: give street and number as well as city or town, and State.) . This deponent being duly sworn according to law, deposes and says that this claim is made on behalf of the claimant named above, and that the facts stated below with reference to said claim are true and complete. 1 . Business engaged in by claimant 2; Character of assessment or tax Write Nam« 3. Amount of tax paid S Taxable year 4. Portion of No. 3 claimed as a credit $ 5. Unpaid assessment against which credit is asked $— i Taxable year Deponent verily believes that the amount stated in item 4 should be credited, and claimant now asks and demands credit of said amoimt for the following reasons: (State facts regarding; alleged overpayment.) Sworn to and subscribed before me this Signed: day of , 19. (fllie.) (This affidavit may be awom to before a Deputy Collector of Internal Revenue without < barge.) r-siis Write N.m Income Tax Supplementary Page'53, CERTIFICATES I certify that an examination of the records of tho Commissioner’s Office shows the following facts as to til6 assessment and payment of the tax: ASSESSMENT OVERPAID NAME OF TAXPAYER. Character of Assessment and Period Covered. List. Year. Month. Page. Line. AMOUaNT. IJaie f aid. 1 _ _ _ I Assesiment Clerk, Internal Revenue Bureau. Collector of Internai Revenue. ASSESSMENT TO BE CREDITED NAME AND ADDRESS. Character op Assessment or Article Taxed. Period Covered bt Assessment. L»st. Assessment Clerk, Internal Revenue Bureau. Collector of Internal Revenue. Abatement ..Order Claimant Address CUlns approved CktcJ DicUi&i. Amount claimed, $. Amount allowed, $. Amount rejected, $. Form A7 A District (Nature u( tax.) Examined and submitted for action - , 19 — ^ COMMITTEE ON CLAIMS* »— 877S ( ( (' Income Tax Supplementary Page 54. DELIVER OR SEND Page 1 of Return Form 1066-UNITED STATES INTERNAL REVENUE SERVICE (Dat« rscelved) THIS RETURN TO COLLECTOR OF INTERNAL REVENUE pn$p ilfis pm WE G0!IP0l{ATI0)j IHE TAX UN FOR CALENDAR YEAR 1918 OR Fiscal Period begun , and ended , 1918 Eiaasined by — ■(Print plainly partnership’s or corporation’* name and address) ON OR BEFORE JUNE 15. 1919 Audited by — STATE WHETHER PARTNERSHIP OR CORPORATION N« lax d as(e»abl« oti llus return. Tbe Detubers (idtribuliye shares ofoetiacoseofi/irisersKipi for tbefafl taxable period acdofpersocal service torptfalioosearcedsobse^e&tioDeeeisber 31 , lQl 7 ,are to be r^artedbTlheiat&vidual aenbers thereof QUESTIONS. KIND OF BUSINESS. 1. Eiplaia below the nature of the partnerehip’a or corporation's business in sufficient detail to show in which of the following general classes of actmties it falls: (1) Agriculture and related industries, including fishing; (2) mining, quarrying, and relate industries; (3j manufacturing; (4) construction; (5) trading; (6) transportation; (7) storage; (8) other services; (9) banking and insurance. 2. If the business falls in any of the classes from 1 to 5, state the special product or products bandied ; if in class 5, state whether wholesale or retail, or both ; if in class 6, stato whether rail, water, or other, whether general or local, and the special commoditiee (if any) transported; if in class 7, state the special commodities stored (if any) or the special kind of storage; if in class 8, state in detail the kind of service tendered; if in clase 9, state the branch of banking or insurance engaged in. 3. In all cases state whether the partnership or corporation acts as principal (using its own capital) or as agent or broker (on comminsion) or as both. 4. A pOTonal eeri-ice corporation mast explain its business in sufficient detail to justify its claim to be classed as such. If necessary its statement should be made on a separate sheet, which should be firmly attached to.tnis return- (а) Main buaineea (б) Collateral businesaos, if any- OTHER CONCERNS IN SAME BUSINESS. 6. Attach hereto a list of the names and addresses of five representative concerns in your locality or section of tho country engaged in the same kind of business. ORGANIZATION OR INCORPORATION. TABLE II. l. Class or Obligatidh. J. Haxoium Amoont or Obuoatio.vs. 3. Alinv>tT or Interest. (a) Fir&t Liliertf Lom conrerted 4'8 &nd Secosd Liberty DDCoDTerted (iuiereBt recelrcd dIqco J anuary 1, $ $ (b) First and Sefond Liberty leans conrertd 4i’8 and Third Liberty Loan (dated May 9, 1918) L (e) Rrat Liberty loan eecoad conrerted 41'a (dated October 24,1916) fd) Fborth Libsrty Loan ... ... . (e) Other oblfjations issned since September 21, 1917 (/) Total $ $ i AFFILIATIONS WITH CORPORATIONS. (To be answered by every partnership or personal service corporation). 12. Do you own directly or control through closely affiliated interests or by a nomineo or nominees over 50 per cent of the outstanding capital stock of a corporation or of other corporations? 13. Is over 50 per cent of your capital stock owned by another corporation or by two or more coiporations that are affiliated? 14. Is over 50 per cent of your capital stock as well aeover50 per cent of the capital stock of another corporation or of other corporations owned or controlled by the same individual 6. Dale of organization or incorporation; 7. If incorporated, under the laws of what State nr country? 8. Aro you a successor to or were you formed to take over or conduct part of tho busi- ness of another organization ? ; If BO, state name and address of predecessor or other organization, and in the latter case, the financial, managerial, and contractual relationshijis existing between yourselves and the other organization — , VALUATIONS*OF CAPITAL STOCK. 9. What was the fair value of tho total capital stack-of. the corporation aa determined in the Ust assessment of the capital stoik tax (if any)? Data'of that assessment BASIS OF VALUING INVENTORIES. 10. Stato hero which of the methods described on page 2 of tho Instructions, in the note under tho beading “Schedule A2,” wsotised in valuing inventoriea INTEREST ON LIBERTY BONDS, ETC. 11. Enter in table at top of next column the maximum amountof Liberty Bonds and other obligations of the United States issued since September 24, 1917 (par value), held at any one time, from which interest was derived during tho taxable period, together with tbe amount of such interest (see Instructions Schedule A4). or partnership or by the same individuals or partnerships? 15. ,If any of the conditions indicated in 12, 13, or 14 exist, the following requirements must be complied with. 16. If the answer to Question 12 is “Yes,” eubnfit a statement showing for each of the corporations over 50 Mr cent of vzhose stock is owned or controlled by you, either directly or through closely affiliated interests or by a nominee or nominees; (a) The name and address. (5) The total par value of the outstanding capital stock at tho beginning of tho taxable year, and the date and amount of each change therein. (c) Tho total par value of such outstanding capital stock owned or controlled by you at the beginningof tho taxable year, or at the date of acquisition if acquired during the taxable year, and the date and amount of each charge therein. 17. If the answer to Question 13 is “ Yes,” stato — (a) The name and address of ouch corporation or corporations. (b) The par value and percentage of your stock held by each. 18. If the answer to Question 14 is “ Yes," submit a statement showing — (a) The names and addresses of such corporations. (5) Tho name or names and address or addresses of the owning or controlling intere.st or interests. (c) The total par value of t^^o outstanding capital stock of each corporation at the beginning of the taxable year, and the date and amount of each change therein. (d) The total par value of the outstanding capita! stock of each corporation owned or controlled by qach one of the several individuals or partnerships at the beginning of the taxable year, and tho date and amount of each change therein. LIST OF ATTACHED SCHEDULES. 19. Attach a list of schedules accompan;-ing this return, giving for each a brief title and a schedule number. (See opening paragra;ffi on page 2 of Instructions.) COMPUTATION OF DISTRIBUTABLE INCOME. 20. Enter in the table below, in accordance with paragraphs 10 to 16, page 1 of Instructions, the income and credito to be accounted for by mcctbera'of a partncnjh.ip or shareholders of a personal aorvice corporation filing a return (or the calemlar year 1918 or for a fiscal period ended in tho calendar year 1018. 2. CMh dlrtdcnda. 3. Stock dlvldonds. 4. Interest on Liberty Hrjcds, etr., Issued sinco ^plcmbor 24, 5. Othar Lacomo. 8. tccome, wux-prorUs, Qixtoxcoavprodu, tAxAS fbtilii or accrued to n posso&sloii ol the U. fl. or to a forolpn country. (a) Total iacomc for calcodar or 60cal year computed under Tlevenue Act of 1918. $ $ $ $ (6) Portion anigDablo to 1918 (for rctuma covering fiBcaJ year ended in 1918) (e) Total incomo of partnenihip wboae Cacal year began in 1917, computed under BAVflnnA ArUnMnir»-ini7 X X X X. X X X (if) Portion terignablo to 1917 (for partnership whcee fiscal year began in 1917) 1 XX X X X X r MEMBERS’ SHARES OF INCOMI^, ETC. 21. Enter in the table below the name and address of each member of the iiartnerehip or shareholder of tho personal service corporation and show the share of each in tho income of tho partnership or pcrsrinal service corporation (whether received or not) and his share of any income, war-profits, and o-xecas-profits taxes paid by tho partnership or corporation to a poaspoDon of the United .States or to a foreign country. (See page 1 of instructions, paragraphs 17 to 21 ) 1 . Merobm of pAnuenblp or shareholders of personal service corporation. 2 , Cosh divfdmdj. 3 . Stock dJrldonds. i. Interest on Liberty IlOflfJ., el.'., 12311041 slnin September 24 , li)l 7 . 5 . Other ineoma. 0 . Incomo, war-pronis, andexcAw-pronlstatn paid or accrue'! to a passo 9 slon ol tbe U. 8 . or to a If^rolgocouniry. Kama and addrou of each. $ $ y._ $ $ 1 — Total* 1 $ 1 The undersigned, Ireing severally duly sworn, each lor Inmsclf deposes and says that this return, including tho accompanying schedules and statonionls, has beoti oxaraiiicd by him and ij to the best ol his knowtedgo anti Irelief a truo and complcto return made in good faith pursuant to tho Rovenuo Act of 1918 and the regulations ir-.iicl thcrcumbT. Sworn to and subscrlbod before mo tliie. day of - 19.. Pniiilent of corporation. Member of parlrurthip. Voii*ei»l *-vn * Tnoturer of corporation. Page 1 of Form 1065 Income Tax Supplementary Page 55 Page 2 of Return. SCHEDULE A— INCOME TO BE ACCOUNTED FOR BY MEMBERS. GROSS INCOME. t 1 1 1 i 1 2. Leas cost of goods sold, exclusive of expenses, repairs, and other items called (or separately below (from Schedule A2).. . . . „ ... 3. Gross income from services or from operations other than trading or manufacturing, less allowances (fri 4. Interest on obligations of the United States issued since September 24, 1917 (from Table 11, page 1 — e )m Sche ee page dule A3) 2 of Instruc- : — — 8. Paftnership’e distributive share of net income earned since December 31, 1917, by personai service corporations (whether 1 1 I I I I I 9. Cash divideuds ou stock of domestic and resident corporations (excluding dividends on stocks of personai service corpora- i 10. Stock dividends on stock ol domestic and resident corporations (excluding those ol personal service corporation" .loclared out of 1918 earnings) declared out of earnings accumulated in — (a) 1918, (6) 1917, (c) 1916, (d) From March 1, 1913. j 12. Gross income from all other" sources (not including any amount in respect of sales of capiQ assetsor miscellaneous invest- i ments — see Item 25. below) (from Schedule A12) ..... 1 i 13 TfjTAi. nr Itfms 1 to 12 _ . . $ DEDUCTIONS. 14. Ordinary and necessary expenses (except amounts reported in Item 2 above or called for separately below, and not includ- ing cost or value of capital assets or miscellaneous investments sold during taxable year— see Item 25) (from Schedule A14). 15. Compensation of members (including shareholders of personal service corporation who drew salaries therefrom and salaries, commissions, and other compensation in whatever form paid) (from Schedule A15) 16. Kepairs (including labor, supplies overhead and other items properly chargeable to repairs) (from Schedule A16) 17. Interrat (^xcept on indebtedness immrred or continued to^urchase or carr^obligations or securities, other than obligations » i 1 — 18 Taxes (except Federal income, war-profits, and excess-profits taxes, taxes which are a credit under Section 222 or Section 238, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed) 20 E^lrrD'w^and\llXrfrdmg^oh^l^tre)'^fti Sch^^e '120^ 91 ATnnrti7ntinn of wnr facilitipR Grom Rrbpdnls A91) — $ 22. Depletion (if depletion is claimed, Form A (revised) of Mines and Minerals Section or Form N of Oil and Gas Section should be obtained irom the Collector, filled in. and filed) 23 Total OF Items 14 TO 22 . . . ... 94 DTFPF.REVrF TIfTWF.FV TtFM<; 13 A>JT> 23 . . . . - - * $ I 91 Pro6.orln«on.»lp.nfp,pl„1,"pp,ppn,)mi.p.»11,p,^ (from A91) If 1 26. Losses sustained during the taxable vear from fire, storm, or other casualty, or from theft, not compensated for by insur- ance or otherwise (from Schedule A26) (extend in last column net total ol Items 25 and 26) 27. Total to be Accounted for by Members (Total of or Difference Between Item 24 and Item 26, Last Column). * SCHEDULE B— RECONCILIATION OF NET PROFIT PER BOOKS WITH INCOME SHOWN ON LINE 27, SCHEDULE A. 1. Net profit for year per books, before any adjustments are | made therein i !i 1 i |i 6. Income not to be accounted for by members; 2. Unallowable deductions; j (a) Donations, gratuities, and contributions _j 1 : i Note. — S ubmit a statement for each of the obligations included in items (a), (6), and (c) showing (1) the description, (2) total (par value) held, and (3) the total amount of interest derived therefrom. (a) Interest on obligations of the' United States issued before September 24, 1917, and on obligations of itfl poaopj^sinn-u (6) Income, war-j>rofits, and excess-profits taxes paid or 1 accrued fo the United Staten ' ! ! i $ (f) Incoras, rar-proflts, and ficeas-proflts laTespald er accroedtoa 1 ' ' posaeesioD of the United St&les. or to a f country ...... frf) 5^pftcial iTnprovftTnpnt t-axpR . 1 (<) Furniture and fixtures, additione, or bettermenle treated as expenses on the books. (/) Replacements covered by depreciation. 1 i:zi — ...... (5) Interest on obligations of States, Territories, and political subdivisions thereof (c) Interest on Farm Loan Bonds issued under Federal Farm T,nfin Art .. ! 7;ij ! 1 1 1 1 1 (a) Insnraocepronjionjepaldpnlholiff ofanypartosr.offlrfr.oremploToe for the benefit of tbe partnemtup or corporation or tbe tusinvis .. (d) Other items of nontaxable income (to be detailed) . ! 1 (/A Interest on Indebtedness iocorreil or sonlinoed to purchase or carry oMigatione or eecnriliee 'Other than oblijations of the United States Issned a ffer September 24. 1917) the interest upon which is wholly exempt from income tax 1 (/■).. . . . (t) Addition? to resen-es for bad debts, contingencies, etc. (to hp flptAilfid) be dfttailwD i \ 1 i l_....... 1 fnD (6) 7- fn> Olllpr unallotrahlp dpclnrtions (to hp dptailpd) 8. Amoout oecessaj’T to adjust bool profit or loss with tbe amoxmU reported io Juma 25 and 26. Scbedule A (unless entry belong on line 4).... 1 1 i (0) 1 : 1 !_ 3. Partnership's ili^lribntivc share of net income eirned since December 31. 9. Income lo be accounted for by members (Item 27, Schedule A).. _ 1 4. AmooDt LPCe«3ary l(»a.l.mst hook profit or loss with the amounts reported in Items 2:>auil 26, Schedule A (unless entry belongs on Hue 6) 1 10. Total $ 1 ' n 1 5. Total '$ 1 SCHEDULE C— BALANCE SHEETS. Attach hereto balance sheets as of the beginning and end of the taxable year (preferably in parallel columns), showing as nearly as practicable the details called for below: ASSETS. Ca.K (incladm; cash in t^ok and on hand, eertl&cates of deposit. Kc.). Trade account* and notes receiroble (before deducting reserres for lo^rses). Other account* and note* rMeieable (to be classkied). Inventories; haw matcriats. l-'iubhed pri^ucts, Supplies * Dumeoiic. Bonds— Fxemrt (municipal. State, etc.). Lo To mcniben- anu employees. Toothers. ASSETS (Continued). Deferred charfe* to futuro*operati(ma« FUed a*a«Ui Tools sod minor equipment. Office furniture. Other (state character). Total. Less'resorve for depreciation. N£T Value. Patents, good will, end other Intangible a Paid for i o cash or other taueible property Paid for Id stock (other partnership. Created by stock dividend or othenrbe. Di*counti On bonds. siock.divKknds) or in shares of t LIABILITIES. Note* payable: To members. To others (Including bonk loans) AccounU payable: Trade. Other. Accrued expense* and raaerre*, the Charges creating ahich ar* allowable deductions Irom income (to be deUiled). Raeerea for loaaee on note* and accounts roceivablo. Resereeo for contingencies, etc., the cbcrges Creating which are not allowable deducirans from iocoine (to be detailed). Capital stock outstanding (to be classified) or all partoars' cai>itaJ and current accounts (to m detailed). Surplus and undivided profits* Total. SCHEDULE D— ANALYSIS OF SURPLUS OR PARTNERSHIP NET WORTH ACCOUNTS. Attach hereto an analysis of the surjiius or partnerehip net worth accounts, showing the details of all changes therein during the taxable year, as nearly following form: ■' I practicable fa the J. .'Surplus or partnership net worth at begicnine of year per books. Add; 2. Total net profit per books and per Schedule’li (Item 1). 3 Other credils (to be detailed). 4, Total of Items 1, 2. and 3 Deduct: 5. Withdrawal" or dividends (state date dii'idends payable, amount ol each, , and whether in cash or in stock). 6. Other debits (to be detailed). 7. Surplus or partnerahip net worth at end ol year per books. »— tr. Income Tax Supplementary Page 56 Page 2 of Form 106,S Page 1 of Instructions. GENERAL INSTRUCTIONS. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS REQUIRED TO MAKE A RETORN OF INCOME. 1. PartTUTships — Every domestic partnership and every foreign partnership doing business in the United States must make a return of income on this form regardless of the amount of its gross or net income. (See P.cgulations 45, Articles 321, 1503, and 1505 td 1507 and 1509.) 2. Personal service corporations. — Every personal service corporation, as defined below, must make a return of income on this form regardless of the amount of its gross or net income. (See Article C24 of Regulations 45. ) 3. Personal service corporation de fined. — The term “ phtsonal service corporation ” means a corporation, not expressly exclude, the income of tv^ch is derived from a profession or business (a) which consists principally of rendering, personal service, (5) the earnings 4)f which are to be ascribed primarily to the actimties of the principal owners or stockholders (who are referred to in tnis return as “members"), and (c) in which the employment of capital is not necessary or is only incidental. No definite and conclusive tests can be prescribed by which it can be finally determined in advance of an examination of the corporation 's return whether or not it is a personal service corporation. The general prin- ciples under wliich such determination will be made are laid down in Articles 1523 to 1532 of Regulations 45. 4. Corporations excluded.— Tito following classes of corporations are expressly excluded from classification as personal service corporations: (a) foreign corporations; (5) coiporations 50 per cent or more of whose gross income consists of gains, profits, or income derived from trading as a principal; and (c) corporations 50 per cent or more of whose gross income con- sists of gains, profits, commissions, or other income derived from a Government contract or contracts made ^tween April 6, 1917, and November 11, 1918, inclusive. 5. .Vore than one business.— K corporation engaged in tv/o or more professions or busi- nesses which are more or less related, one of which does not consist of tendering personal service, is not a personal ssrvice corporation unless the nonpereonal service mement is negligible or merely incidental and no appreciable part of its earnings are to be ascribed to such sources. (See also Section 303 of the Statute.) 6. Activities of stockholders . — In determining whether a corporation is a personal service corporation, no weight can be given to the fact that it renders personal services unless (o) the principal owners or stockholders are regularly engaged in the active conduct of its aSairs and are engaged in such a manner that the earnings are to be escribed primarily to their activities, and (6) its affairs are conducted principally by such owners oretockhoftcis. If employees contribute substantially to the services rendered by a corponilibn( it is 'aata personal service corporation unless in every case in which services ate so rendered the value of and the compensation charged for such services are to be attributed primarily to the experience or skill of the princijial owners or stockholders. 7. Slock interest of active members. — No corporation or its owners or stockholders shall make a return in the first instance on the basis of its being a personal service corporation unless at least 80 per cent of its stock is held by those regularly engaged in the active conduct of its affairs. 8. Capital. — In determining whether a corporation is a personal service corporation, no weight can be given to the fact that the invested capital of the corporation under Title III of the statute or the actual investment of the principal owners or stockholders is com- paratively small. If the use of capital is necessary or more than incidental, capital is a material income-producing factor and the corporation is not a personal service corporation. AFFILIATION OF PERSONAL SERVICE CORPORATIONS 9. In order to come under the provisions of Section 218 (<) of the Law, and the Regula- tions relating thereto, a personal service corporation must normally be owned by individuals. Ordinarily afifilialion ot a so-called personal service corporation with another corporation sets up a presumption that such personal service corporation is merely a department or unit of another business organization. The income of such a.corporation shall be included with the income of the corporation or corporations owning its stock. A personal service corpora- tion return will not be accepted if (a) the so-called personal service corporation is in effect merely the selling agency of another corporation or other corporations, or (6) the so-called personal service corporation is used for the purpose of performing any part of the service incident to the busmess of an affiliated coloration principally engaged in trade, or in contracting or manufacturing. INSTRUCTIONS FOR FILLING IN TABLE; 20, PAGE 1. 10. Returns of partnerships and personal service corporations for calendar year 1918 . — On line (a) enter In column .2 the amount of Item 9, Schedule A; in col umn 3, the amount of Item 10(a), Schedule A, in column 4, the amount of Item 4. Schedule A; in col umn 5, the amount of Item 27, Schedule A, less the total of Items 4, 9, and 10 of that Schedule, :n column 6, the amount of 2 (c). Schedule B. 11. Returns of partnerships and personal service corporations for fiscal period beginning in J9/7.— On line (a) enter in column 2 the amount of Item 9, Schedule A; in col umn 3, the amount of Item 10, Schedule A; in column 4, the amount of Item 4, Schedule A; in column 6, the amount of Item 27, Schedule A, less the total of Items 4, 9, and 10 of that Schedule; in column 6, the amount of 2 (c). Schedule B. 12. On line (5) enter in columns 2, 4, 5, and 6 as many twelfths of the amounts entered in the same columns on line (a) as the number of months of the partnership’s or corpora- tion's fiscal year that fell in the calendar year 1918. On line (6) column 3, enter the same number of twelfths of Items 10 (o), Schecfule A.- Note. — L ines (c) and (d) should be used only by partnerships having fiscal periods beginning in 1917. 13. On line (c) of Table 20 enter in columns 2 and 3 the toUl cash dividends and the foul stock dividends, respectively, included in Schedule H, columns 2 to 6, inclusive, of the partnership return for the fiscal period ended in 1918, filed under the Revenue Acts of 1916-1917; in column 4, the amount of Item 4, Schedule A of this return; in column 6, the amount of Item K of the partnership return filed under the Revenue Acts of 1916-1917, less the amounU entered in Schedule E, column "T and Schedule H, columns 2 to 6, inclu- sive, and plus the amount entered in Schedule E, column 6, of that return. 14. Online (d) of Table 20, enter in columns 2 and 3 as many twelfths of the cash divi- dends and stock dividends, respectively, entered in Schedule H, column 6, of the partner- ship return filed under the Revenue Acts of 1916-1917, as the number of months of the partnership’s fiscal year that fell in the calendar year 1917. On line (d) enter in columns 4 and 6 the same number of twelfths of the amounts entered in the same columns on line (c). 15. If the partnership having a fiscal year ended in 1918 made no return under the Revenue Acts of 1916-1917, a return prepared in accordance with the provisions of llioso Acta must be prepared and filed with this return (see par. ^ below). The principal dif- ferences between the provisions of the Revenue Acta of 1916-1917 and that of 1918 are: Amortization of war facilities and obsolescense of plant and equipment are deductible under the 1918 Act but not under the l916-1917 Acts. Income, war profits, and excess-profits taxes paid or accrued to foreign countries or pasMasioos of the United States are deductible from gross income under the 1916-1917 Acts but not under the 1918 Act (under which they are treated as a credit against taxes). All interest on indebtedness incurred or continued to purchase or carry obligations of the United Stales issued since September 24, 1917, is dMuctible under the Rovenuo Act of 1918, while under the Revenue Acta of 1916-1917 such interest is treated as a deduc- tion from the interest received on such obligations (see page 2 of Instructions under Schedule A4). Under the 1916-1917 Acts, cash dividends accumulated in 1913 to 1917 are taxable St the rates applicable to the year in which the dividends were accumulated, while under the 1918 Act all such dividends are taxable at the rates lor the taxable year in which received. 16. If the fiscal period of the partnership included fractions of months, add to the number of twelfths taken under paragraphs IZ'and 14, above, as many thirtieths of one- twelfth as there are days in such fractions of mouths. INSTRUCTIONS FOR FILLING IN TABLE 21, PAGE I. 17. This table Is to be useartner8hip’e or corporation’s books, showing the principal items separately. 4. Other expenses ordinarily charged to manufacturing' coet on the partnership’s or corporation’^ books. (State separately large or unusual items.) 6. ToTiLk Deduct; 6. Inventories at dose of period (to be reconciled with balance sheet) 7. Cost of goods sold (Item 6 lees Item.6). Note. — Inventories should be valued at (a) cost or (6) cost or market, whichever INTEREST FROM OTHER SOURCES (not including interest referred to in Schedule B, Item 6). Submit a schedule showing the source, nature, and amount of the principal items included herein, the minor items being grouped in one figure. The total -of the schedule should be entered ae Item 6, Schedule A. For interest on foreign bonds show (a) name of country; (6) kind of obligations (whether national. State, municipal, pc corporate obligations); (c) amount of principal ; and (d) amount of interest. SCHEDULE A9: CASH DIVIDENDS ON STOCK OF DOMESTIC AND RESIDENT iRPORATIONS. Submit a schedule showing (a) name of corporation; (6) State in which organized: (c) total par value of stock held; and (d) amount of dividends. SCHEDULE All: DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS. Submit a schedule showing (a) name of corporation; (i) country in which organized; (e) total par value of stock held; and (d) amount of dividends. SCHEDULE A12: GROSS INCOME FROM ALL OTHER SOURCES (not in- cluding any amount in respect of sales of capital asseta or miscellaneous investments). Submit a schedule showing the source, nature, and amount of the principal items included herein, the minor items being grouped in one figure. The total of the schedule should be entered as Item 12, Schedule A. SCHEDULE AI4; ORDINARY AND NECESSARY EXPENSES (except amounts called for separately in Schedulk'A and not including cost or value of capital assets or miscellaneous investments sold during taxable year). Submit a statement showing character and amount of the principal items iiided in Item 14, Schedule A. SCHEDULE AIS: COMPENSATION OF MEMBERS OF THE PARTNERSHIP OR CORPORATION. Submit a schedule showing for each member of the partnership or for each eharo- holder who draws a salary from the corporation or is engaged in its business, (1) oamo, (2) duties, "(3) time devoted to such duties, and (4) total aimua! compensation for each of the years 1916, 1917, and 1918'. A personal service corporation should also explain fvUy the manner and degree in which the earnings of the corporation .are dependent on the activities of the active shareholders or “members.” SCHEDULE A16: REPAIRS (including labor, supplies, • overhead, and other items properly chargeable to repairs). Submit a schedule showing the nature and amount of the principal items included in Item 16, Schedule A. Incidental repairs, which do not add to the value or appreciably prolong the life of property, are deductible as expenses. Expenditures for new buildings or for permanent improvements or betterments which increase the value of the property are chargeable to capital account. Expenditures for r^toring or replacing property ate not deductible under this or any other item of the return. Such expenditures are chargeable to capital account or to depreciation reserves, depending .on the treatment of depreciation on the books of the taxpayer. SCHEDULE A2d: EXHAUSTION. WEAR AND TEAR (including obsolsscenes). Submit a columnar schedule containing, substantially the following information; 1. A classification of depreciable assets subdivided on the bases of (o) character, (5) term of useful life. 2. The fair market value of such assets March 1, 1913, if acquired before that date. 3. The cost of such assets if acquired after February 28, 1913. 4. The estimated life or term of reasonable usefulness of such assets from date acquired or from March 1, 1913, as the case requires. Give reasons for your conclusions. 5. For each class of assets state — (а) The total amount of depreciation from March 1, 1913, to the beginning of the ta.xable year. (б) The total amount of depreciation (exhaustion, wear and tofW, including obsolescence) claimed for the taxable year. 6. A reconciliation of all figures shown in this -schedule with corresponding figures reflected in the balance sheets. SCHEDULE A21: AMORTIZATION OF WAR FACILITIES. If amortization of war facilities is claimed the taxpayer is required to submit with this return the information and schedules called ior in Articles 181 to 188 of Regulations 45. SCHEDULES A25 and A26: PROFIT OR LOSS ON SALES OF CAPITAL ASSETS and miccellansoua investments, and losses sustained during the taxable year from fire, storm, or other casualty, or from theft, not compensated for by insurance or otherwise. Submit a columnar schedule setting forth for each sale of capital asseta or of miscellane- ous investments and for each loss during the taxable year the information called for below: 1. Description of property sold or of property in respect of which a loss is claimed. 2. Date acquired. 3. Fair market price or value on March 1, 1913, if acquired before that date, or cost if acquired after February 28, 1913. 4. Coat of improvemcat? ay, since February 28, 1913, or since date of acquisition, if acquired after February 2- 3. 5. Total of Items 3 and > Lees— 6. Depreciation cr d- , ;on of property subject thereto— (a) Per book. (4). Accrued jot on books. 7. Salvage value. /, of property on which a loss is claimed. 8. Amount, of ir' .e or other recovery on property, if any. 9. Proceeds cash value of property received in exchange (for traosactfons falling in Item 23, :;-aedule A) (see Note). 10. Total of Items 6 to 9, inclusive. 11. Profit or loss. 12. Cause of loss (for losses falling in Item 26, Schedule A). Notc. — Submit evidence substantiating the basis used by you in arriving at the cash value of property received in exchange for other property. WORKING PAPERS. Every partnership or corporation should preserve, available for inspection by a revenue officer, working-papers showing — 1. Tho balance in each account on the partnership’s or corporation's books that was used in preparing Schedule A. 2. The amount deducted from each such balance on account of each class of non- taxable income, unallowable deductions, and other adjustments indicated in Schedule B, with a roforence to the number .of the item in Schedule B in which each amount so deducted was included. 3. The remainder of each such balance, analyzed to show tno amount included in each item of Schcdulo.A, with a reference to the number of tho item in Schedule A in which each such amount was included. CAPITAL EMPLOYED IN BUSINESS. If tho balance sheet (Schedule C) of a personal service corporation indicates that a substantial amount of capital (invostod or borrowed) is employed in the buamom, submit" statement explaining why the employment of such capital is incidental and net .-.-ceesary. Income Tax Supplementary Page 58. Page 4 of Form 1065 THIS KOURN IS NOT THE BASIS OF ASSESSMENT AND IS NOT TO BE USED FOR ESTATES IN PROCESS OF ADMINISTRATON. Page 1 of Rotvun. (Date received. DELIVER OR iSEND THIS RETURN TO COLLECTOR OF INTERNAL REVENUE ON OR BEFORE JUNE 15, 1919. FIDl Fiscal p« Form 1041 UNITED STATES INTERNAL REVENUE SERVICE. UCIARY INCOME TAX RETURN. FOR CALENDAR YEAR 1918 OR f nnrl ^ 191A. PRINT NAMES AND ADDRESSES PLAINLY- Name of Esaniined hy Name and address of fiduciary Audited by 1. Did you make a returo on Form 1041 for 1917 on belialf of the estate or trust named above? 2. If BO, to what collector’s office was it sent (give district or city and State)? 3. Enter below all nontaxable income received by (or accrued to) the estate or trust during the year; dukss or Sccuamxs. PaiNcirAL. INTEREST. Class of SEcuamES. PRINCirAL. Interest 1 Amount. Source), | B«oJi of First Liberty Loaa anfanr^rtAit OblintiAnB ot Stateoaai) Territorien. pclitl* 1 cal siibilividinns ttiereof, and the District 1 OtheroMigatiooB of tb« U. 8. iBsned before Sept. 24.19l7.ao<)«bl4ratiMisofU.S.posse8rtbDe divided among them. (5) First and Second Liberty Loans converted into Third And Third T.ih<»rt.y T.nan (c) First Liberty Loan converted into Fourth Loan........ (/fl Fftiirth T.ibprty T.oan (<) Other obligations issued since September 1, 1917 1 C/) Totals ' * - Is ! Is 1, 's Note. — This exemption (maximum $45,000) is limited to ono and one-half times the amount of bonds of the Fourth Liberty Loan originally subscribed for and still held. State here amount of bonds of the Fourth Liberty Loan originally subscribed for and still held $ — 6. Enter in the table below income from partnerships, personal eervice corporations, and other estates and trusts: I. Ni** or PERTHERsatr, Persokae Srrvice ConroBETios, Estate, or Trust. (Ir Estats or Trust, Oivr also Name or Fiduciary.) 2. Period (Enter 1918 OR Date on Wnicn Fiscal Year Ended). 3. Cash Dividends. 4. StocX Dividends. 5. Interest on Tax-Free Bonds (From Estates andTrustsOnlv). 6. Interest on Liberty Bonds, ETc^ Issued S lNCK.SErt. 1, 1917. 7. OTHER Income. 8. Total. , i$ $ t ^Et.ro. ta. B. p^r. 2*" '(o) Totals taxable at 1918 ratee(eee instructions, page 2, under B) $ $ under J(b). $ % . X X X X $ (B) Totals taxable at 1917 rates (see instructions, page 2, under B) * $ f. (c) Amount of stock dividends (column 4) taxable at 1916 rates, $ (rf) Amount of stock dividends taxable at 1913-15 rates,?. DISTRIBUTION OF INCOME. (See Instructions V, page I.) 7. Enter in Ibc table below the name and address of each beneficiary and hbow the rharo of each in the income of the estate or trust (whether received or not), and his share of income, war-profits, and excees-profits taxes paid by the estate or trust to a possctuion of the United States or to a foreign country. 1. Name amo Address or Kacii nrsEnOARV. (Dwlfiuu DonnsIdcDl ollens.) VOTE.-Sl.als «ti»lhAr r.turn was fiM by or tor brnorirljrv, and, It :o. In wlint dPIrlcl. ?. Interest on Tax-Free Bonds ni.FORTin IN BuxK K. 1 3. Cash Dividends. 4. Stoci Dividends. .V Interest on Liberty Bonds, ETC., Issued Sinc k Seftrmrer 1, 1917. «. Other Iniomk. 7. Incomf, War- PROriTS, AND Kxtiss- rhoirr.s T*\fx r.^iD $ 1 $ 1 $ $ $ 1 ..'.... - ^ : : Totaui ,, 1 $ _J| 1 . . 1$ ..1 FORM OF AFFIDAVIT. I swear (or affirm) that the foregoing return, to (ho be«t of my knowledge and belief, contains a true and complete statement of all taxable Rains, profite. aiul inconm received hy or into the custody or control and management of the fidu« iary as stated, during the year for which the return is made; that said beueficiurieH an? entitled, under the Hovenue Act of 1918, to all the deductions entered or claimed therein; and that there is contained therein a true and completo list of the names and aihlresses of all tho iK-noficiarios entitled to absra fn this income, and the amount of each such beneficiary’s share. (.StKiiaturt of Oducurjr or u( ufUrur rvprii-4<>itl>ig nUuciiuy.) Sworn to and subscribed before mo this day of 1919. (AUdi.w.) (OOrial eapartlf.) Income Tax Supplementary Page 59 Page 1 of Form 1041 DETACH RETURN HERE AND SEND IT TO COLLECTOR OF INTERNAL REVENUE Pa|« 2 o( Rtturn RETURN OF TAXABLE INCOME A. INCOME FROM BUSINESS. Kind of busineM.. 3. Total sales and income from business... COST OF GOODS SOLD: 2. Business address 4. Labor 5. Material and supplies 6. Merchandise bought for sale 7. Other costs (submit schedule of principal items at loot of page or on separate sheet) 8. Plus inventories at beginning of year 9. Tox.si, 10. Less inventories at end of year. 11, Net Cost or Goods Sold 20. Net Cost of Goods Sold Pels Other Business Deductions. 21. Net Income from Business OTHER BUSINESS DEDUCTIONS: aries and v Cost of Go 13. Rent 14. Interest on business indebtedness. 15. Taxes on business and business property 16. Repairs, wear and tear, obsolescence, depletion, and I^perty losses (explain in table below) 17. Bad debts arising from sales. 18. Other expenses (submit schedule of principal items at loot of page or on separate sheet) 19. Total Other Business Deductions B. INCOME FROM PARTNERSHIPS, PERSONAL SERVICE CORPORATIONS, AND OTHER ESTATES AND TRUSTS (aaiadodi.Ei.ure.us eo.eoaoi toad, reeei.ed threoEk eiker adocUriet, wblck .koold ke incinded la luai £i dlrideadt, .kick ekoald ke lacluded la Iteat } (a)i latere.t oa .kllEatloai «f Ik. U. S., la.oed dace Sepleoiker 1, 1917, okick .keald k. Iadad.d C. PROFIT FROM SALE OF LAND, BUILDINGS, STOCKS, BONDS, AND OTHER PROPERTY. 1. Kind or Pbopebtt. 2. Year Acquired. 3. Naici anp Apdkess or Pubchaser oa BaoXEa. 4. Salx Paici. 5. Original Cost OB Market Valve QUENT Improve- ments, 9 ANT. 7. DtPkECUTION SUBSEQDENTtT * $ . $ $ Net Profit from Sales (total of columns 4 and 7 minus total of colurane 5 and 6) $ $ * 1 $ D. INCOME FROM RENTS AND ROYALTIES. 1. Kim 0. PkOFEETT. •2. NaUX AND ADDkXSS OT TiNAHT, IXSSEr., ElC. 3. Amount or Rent and Royaltaes. «. Rbpaiw. Weab tMCEBCB. Dy^uow. Mn,x.x„. e. taxe.. 7. Otrcb Expenses. (Explain Below). 1 1. $ 1 Xbt Income fuom Rents and Royalties (total of column 3 minus total of columns 4. 5. ft, and 7) 1, 1 1. 1 ' Is L INTEREST ON CORPORATION BONDS CONTAINING TAX-FREE COVE NANT, ON WHICH A TAJ t OF 2% WAS PAID BY DEBTOR C ORPORATION F. OTHER INCOME (not including dividends, or interest on obligations of the United States). . Qroas Income. ). IWerei’t on bonds, mortgages, and other obligations of domestic and resident corporations except as reported in Item 2. Interest cn bonds of foreign countries and corporations and dividends on stock of foreign corporations 3. Interest on bank deposits, mortgages, etc Xet Total (total of column 1 minus tola! of column 2) $ G, TOTAL NET INCOME FROM ABOVE SOURCES . H. DEDUCTIONS NOT INCLUDED ABOVE ' iDlerest paid or accrued $ Ta.xos paid or accrued ! below) I. 4. Total coDtribiitiuus (explain below). ... ■imounts paid or set aside for U. S., any Slate, etc I Other deductions, if any (explain below) I Total I. NET INCOME $. J (a). Dividends on slock of corporadoos organized or doing bosuMSS in Ibe United Slates (not including income from personal service corporations earned since Jan. 1, 1918) Received directly, $ ; received through partnerships, personal service corporations, and other fiduciaries. $ Total $ J (b). Total amount of interest on bonds and other obligations of the United States issued after September 1, 1917 (see instructions, page 2) L K. Total net income. (If Item I shows minus ejuantity, deduct excess) k ENTER IN THIS TABLE DETAILS CONCERNlNfi REPAIRS. WEAR AND TEAR, PROPERTY LOSSES, ETC., CUIMED AS DEDUCTIONS IN SCHEDULES A, D, AND H ABOVE 2. Ki.stj or PtorERTY ( 7. Amount Pre* 8. Amount tuis . Cav»e or Loss. 10. Amounts EXPLANATI ON O F DE DUCTIONS clainu-J in Schcdulo A, Hpeo 7 and 18; Schedu l e D, coluian 7; Scbt-Jiile F, column 2; aod Schedule H, Items 4, 5, and 6. Income Tax Supplementary Page 60 Page 2 of Form 1041 RETAIN THIS SHEET AND INSTRUCTION SHEET AVAILABLE FOR INSPECTION BY REVENUE OFFICER DETACH THE RETURN (CON- TAINING AFFIDAVIT) AND DELIVER OR SEND IT TO COLLECTOR OF INTERNAL REVENUE ON OR BEFORE JUNE 15, 1919 KEEP THIS WORK SHEET AND THE INSTRUCTION SHEET Page 1 of "Work Sheet Form 1041— UNITED STATES INTERNAL REVENUE SERVICE WORK SHEET FOR FIDUCIARY INCOME TAX RETURN FOR CALENDAR YEAR 1918 OR Fiscal Period Begun and Ended . 1918 PRINT NAMES AND ADDRESSES PLAINLY Name and { address of { fiduciary 1 IF YOU NEED ASSISTANCE GO TO A DEPUTY COLLECTOR OR TO THE COLLECTOR’S OFFICE BUT FIRST READ INSTRUCTIONS AND FILL OUT THIS SHEET (FACE AND BACK) IN PENCIL AS WELL AS YOU CAN 1. Did you make a return on Form 1041 for 1917 on behalf of the estate or trust named above? 2. It to, to what collector's office was it sent (give district or city and State)? - 3. Enter below all nontaxable income received by (or accrued to) the estate or trust during the year: Class or Securities. I Principal. I.VTEREST. CiAss OF Securities. Prlscipal. Interest. Otuer I.scomk (Give Source). AttOtTHT. BuDJe of First Liberty I-oan onfonTerted Obligations of StaleB and Territories, politi- cal tiiibiljvislous thereof, and the District nf rtihiiiihin. OtheroliMfation* nfilie U.S. IsHUe.! bt'fori^ Sept. J ‘ 1 I 1 FoJoral Farm Loan Bonds 4. State amount of stock dividends received by {or accrued to) the estate or trust directly during the year, declared from earnings of domestic or resident corporations accumulated since February 28, 1913, and prior to January 1, 1918; («) Accumulated in 1917, $ (b) Accumulated in 1916, $ (c) Accumulated since February 28, 1913, and prior to J'anuary 1, 1916, f 5. Enter in table below interest on Liberty Bonds and other obligations of the United States issued since September 1, 1917, received by (or accrued to) the estate or trust during the year, and maximum amount of such obligations (par value) held at any one time from whio'n such interest was derived (see instructions, page 2, under J (b); 1. Class or Orlioatios. Holdinos 0? Estate or Trust. Share or Koldinob of Partnerships, i’ERSONAL SERVTCE CORPORATIONS, A.Nu OTHER Estates and Trusts. 0. Total or Columns 3 AND 5. « 7. MAXnitm EixiiPTiOH. 2. Amount 07 Interest. 3. Maximum Amount 07 Obligations. 4. Amount or Jnterest. 5. Maxt^ium Amount 0? OSLIOATIONS. (a) Lib#-rty Loan con ^rted into Second I.fpan and Second^Llbertj * $ $ $ 1 $45,000 USeeNoto.) 30,000 30,000 0 In addition anexemption ot $5,000 may be claimed as to any one o( these classes or may bo divined among them. (^) First and .Second Liberty Leans converted into Third Loan and Third Liberty Loan {e) First Liberty Loan converfed into Fourth T.oan. (JD OTHER PROPERTY. 1. Kind or Pbopemt. a^„u,ed. 3. Nun AX1> ADDEES^ or rURCIUSEB OE Brokeb. Net Profit from Sale.s (total of columns 4 and 7 miTius total of columns 5 and 6) $ 5. ORiGxifAL Cost 6. Cost or Subse- 7. Depbeciation oa VlAEEXT Value quent Iuprovz. Subsequently D. INCOME FROM RENTS AND ROYALTIES. . Kind or rROPERir. » Address or Tenant, Le^^see, Etc, 3. Amount oi Rent and Royalties. (Explain Belov) L INTEREST ON CORPORATION BONDS CONTAINING TAX-FREE COVENANT, ON WHICH A TAX OF 2% WAS PAID BY DEBTOR CORPORATION (jinclnding .surh intorn.^At rccpi vod through nl hor fi luciarics'^ . F. OTHER INCOME (not iricluding dividends, or interest on obligations of the United States). 1. Oaoaa Income. 1. Intereet on bonds, mortgages, and other obligations of domestic and resident corporations except as reported in Item 2. Interest on bonds of foreign countries and corporations and dividends on stock of foreign corporations ... 3. Interest on bank deposits, mortgages, etc Net Total (total of column \ minus total of column 2).. G. TOTAL NET INCOME FROM ABOVE SOURCES H. DEDUCTIONS NOT INCLUDED ABOVE. 1. Interest paid or accrued.. 2. Taxes paid or accrued 3. Loa-ws by fire, storm, etc. (explain in tabic below) $ 4. Total contributions (explain below). 5. Amounts paid or set aside for U. S., any State, etc.. 6. Other deductions, if any (explain below) I. NET INCOME J (a). Divideods es stock of corporations organized or doing business in the United Stales (not including income from personal service corporations earned since Jan. 1, 1918): Received directly, $ ; received through partnerships, personal service corporations, and other fiduciaries, $ Total J (b). Total amount of interest on bonds and other obligations of the United States issued after September 1, 1917 (see instructions, page 2) K. Total net income. (If Item I shows minus quantity, deduct exre8.s) $ ENTER IN THIS TABLE DETAILS CONCERNING REPAIRS, WEAR AND TEAR, PROPERTY LOSSES, ETC., CLAIMED AS DEDUCTIONS IN SCHEDULES A, D, AND H ABOVE r.^B ■D” OR “H.” 2. Kind of Pbopebty (ty Buildings, State also Material or wuicH Constructed). Acquired. 4. Co.^T OF Prop- erty (OR Market Value March 1, 1913), Kxclusive Of Land. 5. Repatrs (not Offset BY Claims 1 Wear and Tear, 0 bsolescence, and Depleiion Charged off. Losses not Compensated for rt Insurance. FOR Wear and Tear AND Losses). 6. Rate. 7. Amoiw Pre- 8. Amount this Year. 9. Cause of Loss. 10. Amount or Loss. $ S $ J $ EXPLANATION OF DEDUCTIONS claimed in .Schedule A, lines 7 and 18; Schedule D, column 7; Schedule F, column 2; and Schedule H, Items 4, 5, and 6. Income Tax Supplementary Page 62 Page 4]^of_Form 1041 Pctge 1 of Instructions. I. RETURNS BY FIDUCIARIES. 1. Returns on Form 1041 for estates and trusts. — Every fiduciary, or at least one of joint fiduciaries, must make a return on this form (Form 1041) for the estate or trust for which he acts, if the income of such estate or trust is distributable periodically, or the tax is pay- able by the beneficiaries, provided (o) the net income of such estate or trust for the taxable year was $1,000 or over or (i) any beneficiary of such estate or trust is amonresident alien. If the sole beneficiary of tbe estate or trust is a nonresident alien Form 1041 may be omitted. 2. Returns on Form 1040 for estates and trusts. — In the case of (o) estates of decedents before final settlement and of (6) trusts, whether created by will or deed, for unascertained persons or persons with contingent interests or income hold for future distribution under' the terms of the will or trust, the income is taxed to the fiduciary as a single person, except that from the income of a decedent's estate there may first be deducted any amount prop- erly paid or credited to a beneficiary. Under those conditions a fiduciary should make a return for the estate or trust on Form 1040 or 1040A. (See section 200 of the statute and Articles 1521 and 1522 of Regulations 45.) As an intestate's real estate does not pass to his administrator, upon a sale by the heirs, whether before or after the settlement of the estate, each heir is taxed individually on any profit derived. 3. Returns on Form 1040 for beneficiaries. — A return on Form 1040 or 1040A should be rendered by the fiduciary in the case of (a) income distributable to a nonresident alien,, (t) an orrlinary guardianship of a minor, and (c) an estate of a decedent before final settle- ment. As to any. income properly paid or credited to a beneficiary, the income is taxable directly to the beneficiary. ’The fiduciary must make a return on Form 1040 or 1040.\ lor each individual whose income is in his charge, if such individual — (а) Received a net income for. the taxable year of $2,000 or over, if married and living with wife or husband; (б) Received a net income for the taxable year of $1,000 or over, if not married or not living with wife or husband, or (c) Is a nonresident alien (regardless of the amount of his income). (d) If part of the income of a trust estate is distributed to beneficiaries and part is retained for the benefit of tlie trust estate, a return should be made on Form 1041 lor tbe entire income of the trust estate and on Form 1040 for the retained portion of the income. 4 . Return for decedent. — If the net income of a decedent from the beginning of the taxable year to the date of his death was $1,000, if unmarried, or $2,000, if married and living with wife or husband, the executor or administrator shall make a return on Form 1040 or 1040A for such decedent. 5 Returns for two trusts. — If two or more trusts, the income of which is taxable to the beneficiaries, were created by the same person and are in charge of the same trustee, the trustee shall make a single return on Form 1041 (revised) for all such trusts, notwithstanding that they may arise from different instruments. If, however, a trustee holds trusts created by different persons for the benefit of the same beneficiary, he shall make a return on Form 1041 (revised) for each trust separately. 6. For definition of a fiduciary and further instructions as to returns and tax liability see Articles 1521 and 1522, 341 to 346, and 421 to 425 of Regulations 45. II. RECEIPTS EXEMPT FROM TAX. 'I’hc following classes of receipts are exempt from income tax, and need not be reported on page 2 of the return. However, nontaxable income of tbe classes described in para- graphs 1, 3, 4, 5, and 6 should be reported in Table 3, page 1 of tbe return. 1. Pay not exceeding $3,,500, for active services in the military and mival forces of the Unit/ d States. 2. Gifts (not made as a consideration for service rendered) and money and property acquired under a will or by inheritance (but the income derived from money or property received by gift, will, or inheritance is taxable and must be reported). 3. Interest on bonds and other obligations of the United States issued before September 1, 1917, and on such bonds and other obligations issued since that date, provided the holdings of the estate or trust do not exceed the exemptions allowed by law. (Sec page 2 of Instructions, Item J (b)). 4. Interest on bonds and o^cr obligations of United States poesesmons (Philippines, Porto Rico, etc.). 5. Interest on bonds and other obligations of States, territories, political subdivisions thereof (such as cities, counties, and townships), and the District of Columbia. 6. Income from securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916. 7. Dividends upon stock of Federal Re-serve Banks. However, dividends paid by member banks arc treate-d like diridends of ordinary corporations. 8. Interrst on bonds issued by the V7ar Finance Corporation only if and to the extenf provided in the acts authorizing the issue thereof. 9. Proceeds of life insurance policies paid to individual beneficiaries on tbe death of the insured, or to the eotate of the insure.d. 10. Amounts received by the insured under life insurance, endowment, and annuity contracts, provid' d such payments do not exceed the premiums paid in. The amount by which the total payments that have been received exceed the total premiums paid in is income and must be reporU-d in Schedule F. 11. Amounts received from accident and health insurance and under workman's compensation acts plus the amount of any damages received b^ suit or agreement on account of injuries or sickness. III. FARM INCOME If sny of the incomo of the estate or trust is derived frrim farming, a "Schedule of ' Form Incomo and Expenses” (Form 1040F) should be filled out and filed with this return. 'Die net Iona income, as nhown by the Schedule, should be included in Item 21 of Schedule A o( this return. IV. PERIOD TO BE COVERED. The return of a taxpayer is made and his income computed for his taxable year, which means his fiscal year, or the calendar year if he has not ostablishod a fiscal year. The term "fiscal year” means an accounting period of twelve months ending on tho last day of any month other than December. No fiscal year will, however, bo recognized unless before its close it was definitely established. as an accounting period by the taxpayer and the books of such taxpayer were kept in accordance therewith. The taxable year 1918 is the calendar year 1918 or any fiscal year ending during the calendar year 1918. See sec- tion 200 of the statute. A taxpayer having an existing accounting period which is a fiscal year within the meaning of the statute not only needs no permission to make his return on the basis of such a taxable year, but is required to do so, regardless of the former basis of rendering returns. A person having no such fiscal year must make return on the basis of the calendaryear. The first return under the present statute of a taxpayer who has here- tofore made return on a basis different from his accounting period will necessarily overlap his next previous return. For the method of adj\isting the tax in such a case see section 205 of the statute and articles 1G21-1C24. Section 22C has no application to this situation. Except in the cases of a return for the taxable year 1918 and of a first return for income tax a taxpayer shall make his return on the basis (fiscal or calendar year) upon which he made his return for tho taxable year immediately preceding unless, with the approval of the Commieeioner, he has changed the basis of computing his net incomo. If a taxpayer changes bis accounting period, and not merely his taxable year to con- - form with his existing accounting period, he shall as soon as possible give to the collector for transmission to the Commissioner written notice of such change and of his reasons thcro- for. The Commissioner will not approve a change of the basis of computing net income unless such notice is given at a time which is both (a) at least thirty days before the due date of the taxpayer’s return on the basis of his existing taxable year and (5) at least thirty days before tho due date of his return on the basis of the proposed taxable year. If tho change in the basis of computing the net income of tho taxpayer is approved by the Com- missioner, the taxpayer shall thereafter make his returns upon the basis of the new account- ing period in accordance with tho requirements of section 226 of tho statute and his net income shall be computed as therein provided. See article 431. V. SEPARATION OF INCOME ASSIGNABLE TO DIFFERENT YEARS. In showing the distribution of income among beneficiaries in Table 7, enter separately the share of each beneficiary in incomo assignable to 1913-1915, 1916, 1917, and 1918 (all other income). VI. TIME AND PLACE FOR FILING. The return for tho taxable year 1918 must be sent to the collector of internal revenue for the district in which the fiduciary resides or has his principal place of business so as lo reach the collector’s office 'on or before Juno 15, 1919, an extension of time having been granted. If vhe fiduciary has no legal residence or principal place of business in tho United States the return should be forwarded to the Collector of Internal Revenue, Baltimore, Ud. (See Articles 441 to 445, Regulations 45.) VI 1. AFFIDAVIT. 1. The affidavit must be executed by tbe individual or organization receiving, or having custody or control and maeagement of, tbe income of tbe estate or trdst. If two or more individuals act jointly as n fiduciary, the affidavit tnay be executed by any ono : of them. • ■ „ ' ■ ' 2. The oath will be administered without cbaigc by any collector or deputy collector of internal revenue. If an internal revenue officer is not available, the return should bo sworn to before a Dolar)- public, justice of the peace, or other person authorized to administer oaths. 3. It is not necessary to show the statement of net incomo to the officer who adnunisicrs the oath. vm. PENALTY FOR FAILING TO MAKE REPORT ON TIME. A penalty of not more than $1,000 attaches for failure to file the return within tho time required by law. If the failure is willful or an attempt is made to defeat or evade the tax, the penally is $10,000 or imprisonment for not more than one year, or both, together with cost of prosecution. IX. WITHHOLDING AND INFORMATION AT THE SOURCE If the fiduciary . has the control, receipt, custody, disposal, or payment of fixed cr determinable annual or periodical gains, profits, and income (other than income received as dividends from a corporation whose income is subject to income tax) of any nonresident alien individual, ho is required to deduct and withhold incomo tax at the rale of 8 per cent from such incomo paid on and after February 25, 1919, and make return thereof on I’orm 1042, aocompauled by Form 1098. Income tax in such cases was required to be wiUiheld at the rale of 2 ])or cent during the year 1918 and up to February 24, 1919. The fiduciary in executing Form 1010 for a nonresident alien should lake credit tlienmn for any lax so withheld. Every fiduciary who, during 1918, paid to any person salary, wages, commis- sions, rentals, etc., of $1,000 or more is requireil lo make a true and accurate return to tho Commissioner of Internal Revenue showing the nature and source of such paymenUs and tho name and address of the jR-r.-on reiuiviiig them. Forms 1090 and 1099, lo' reporting such information, will be furni. hce&5ed against local benefits of a kind lending to increase the value of the property asdf'ssod, ae f<orted as income for 1917, and on which you claimed exemplioD in your 1917 return). (6) Amount of obligali<-DS held by you individually during each such period. (c) Your share of the holdings of each ])arluer»hi|), jK^rsonal service cor|x>ration, estate, and trust during each such period. STATES ISSUED SINCE SEPTEMBER 1, 1917. (d) Totals of amouDta In columns b and c. (e) Amount by which each amount entered in column dexcoedfl tl»e maximum excmi>* tion for that clais of obligations. (J) Interest derived from each amount of principal stated in column 3. If any part of the interest reported in Table 5 waa received tliMuph a partnereliip having a fiscal year falling partly in the calendar year 1917, IIjc taxable iatori>*t n ceived through such partnership should be calculated in a eeparute column <7 of the w hedule. Enter in this column, for each period specified in ctduinn a, oillier ( 1 ) the amount entered in column / or (2) the interest on your sitareuf the partnership's holdings (shown in column c), whichever is the smaller. 4. Enter as Item J (6), on page 2 of the return, tho tola! of column / fiir all classen of obligations, less as many twelfths of the total of column g (if any) as the number of niMt.ihs of the fiurtncrship’s fisi ul year tlial fell in 1917. Kotor the amount dedL('U\l as 1 lent U(6) (column C) on page 1 of Uto return. Income Tax Supplementary Page 64. Page 6 of Form 1041 Form lild— UOTtED BtitES Intebnax Revekite Sebvice. CLAIM FOR CREDIT ON INDIVIDUAL INCOME TAX RETURN FOR TAXES PAID OR ACCRUED TO FOREIGN COUNTRIES OR TO POSSESSIONS OF THE UNITED STATES Name of Claimant. Address (Street and number or rural route.) (City or totvn.) (State.) Ou behalf of the above-named claimant, who ia a citizen or subject of ^ and ia a resident • (Name olcouatry.) of - .credit ia hei-eby claimed, on hia attached income-tax return, which ia based on income (Name of country.) * during the taxable year for taxes paid or accrued' as follows; (Uccelved oraccrued.) (If calendar year give year— if fiscal year give months.) SCHEDULE Al. ^Tax Paid or Accrued' to a Possession of the United States on Behalf of Claimant Individually. Name of possession of U. S Character of tax. Statute imposing tax (Incomo, war-prolits, or e.xcess-prolits.) (To bo named fully and clearly so a.s to bo easily identified.) Date of accrual- Date of payment (if paid) (To bo given even if claim Is based ou payment.) (To be given oven if claim is bas^’ on accruai.) ' 1. Amount of tax® (evidenced by attached receipt or return) •*, which (converted at an exchange (la foreign nirney.) rate of ®) equals in dollars $ SCHEDULE A2. ® Tax Paid or Accrued' to a Possession of the United States on Behalf of Claimant Individually. Name of possession of U. S. . Statute imposing tax.._ Character of tax. (Income, war-profits, or excess-profiCs. ) (To be named fully and clearly so as to be easily identified.) Date of accrual — Date of payment (if paid)... (To be given evenif cMm-ls baaed on payment.) (To l>e given even if claim i* baaed on aocrual.) 1. Amount of tax® (evidenced by attached receiptor return) which (converted at an exchange . (In foreign money.) rate of ®) equals in dollars , $ SCHEDULE Bl. “Tax Paid or Accrued ' to a Foreign Country on Behaif of Claimant Individually. Name of foreign country , Statute imposing tax Chai-actcT of tax. (Income, war-profits, or excess-protits.) (To be named fully and clearly so as to be easily identified.) Date of accrual Date of payment (if paid) (To bo given even if claim ia based on payment.) (To bo given oven if clajm Is based on accrual.) 1. Total net income on which this tax was based 2. That amount of such total net income which was derived from sources in that foreign country' * 3. Ratio of total net income derived from sources in that foreign country- to total net income on which this tax was based (item 2 divided by item 1) 4. Totp.l amount of this tax ® payment or accrual to that foreign country (evidenced by attached receipt or return) * 5. That amoimt of this tax which was based on income derived from source.s in that foreign country (item 3 multi- plied by item 4) which (converted at an exchange rate of ®) equa’.s in dollars.. (In forel.ga money.) SCHEDULE B2. “Tax Paid or Accrued ' to a Foreign Country on Behalf of Claimant Individually. Name of foreign country Character of tax. Statute imposing tax — (Inc'.iuio, wiir-prolits, or excxvjS-prulits.) (To bu Liutucd fully and clearly so us to be easily iilc’iuficd.) Date of accrual Date of payment (ii jiaiii) (To bo given even If claim is bMOxl on payment.) ('i'o bo given even if claim is l>as Kce nots 2, [>ug(j .'!. llbu lUiUi .3, jiagu 3. .Soo IiuLo 1, iKign 3. iT.i:*! liCilu 5, pa^o o. i> SuO UutO C, pHtii 3. 1 iicome Tax Siiifplcmeiitary I'^agic fi.S. __ . — SCHEDULE Cl. . •TaxPaid or Accnied' to« Possossion of the United States on Behalf of a Partnership, Estate, or Trust, in Which Claimant Has as Interest. Partnership, estate, or trust (Name.) (Address) Fiduciary (if estate or trust) ..... (Name.) (Address ) Character and extent of claimant’s interest in partnership, estate, or tnist Name of possession of U. S Charartcr of (ax.. (Income, war-proDls, or exccss-pronts.) Statute imposing tax (To be named fuJ)y acd rlearlv so as to be easily identified.) Date of accrual Date of paxTuent (if paid)..... (To be given even if claim is based on payment.) (To be given even if claim is based on accrual. ) 1. Total net income on which this tax was ba-sod « 2. That amount of such total net income to which claimant 'vould have been entitled as partner or beneficiary had nosuch tax of the partnership, estate, or trust accrued or been paid to that possession (claimant’s share of item 1) * 3. Ratio of that amount of total net income to tvhich claim.anl would have been entitled, to total net income on which this tax xcas based (item 2 divided by item 1) 4. Total amount of this tax ® payment or accrual to that poasessiou (evidenced by attached receipt or return) * 5. That amount of this tax which was based on claimant's eliare of tnc income faxed (item 3 multiplied by item 4 ) which (converted at an exchange rate of *) equals in dollars $ (In foreign money.) SCHEDULE C2. ®Tax Paid or Accrued’ to a Possession of the United States on Behalf of a Partnership, Estate, or Trust, in Which Claimant Has an Interest. (Name.) Partnership, estate, or trust Fiduciary, (if estate or trust) (Name.) Character and extent of claitaant’s interest in partnerebip, estate, or trust (Address.) (Address.) Name of possession of U. S. Character of tax (Income, ■>var-proQts, or eicoss-proflts.) Statute imposing tax - (To be named fully and clearly so as to be easily identified.) Date of accrual — - — Date of payment (if paid) (To b9 given even if claim is based on payment.) (To be given even it claim is based on accrual.) 1. Total net income on which this tax was based * 2. That amount of such total net income to which claimant would have been entitled as partner or beneficiary had no such tax of the partnership, e.state, or trust accrued or been paid to that possession (claimant’s share of item 1) .* 3. Ratio of that amount of total net income to which claimant would have been entitled, to total net income on which this tax w.aa based (item 2 divided by item 1) 4. Total amount of this tax’ payment or accrual to that possession (evidenced by attached receipt or return) ‘ 5. That amount of this tax which was based on claimant’s share of the income taxed (item 3 multiplied by item 4) ■♦, which (converted at an exchange rate of ®) equals in dollars $ (In foreign raccay.) ^ SCHEDULE Dl. . ®Tax Paid or Accrued’ to a Foreign Covmtry on Behalf of a Partnership, Estate, .or Trust in Which Claimant Has an Interest. (Name.) Partnership, estate, or trust Fiduciary (if estate or trust) (Name.) Character and extent of claimant’s interest in partnership, estate, or trust (.Address.) (.Vddross.) Name of foreign country i... Character of tax (Income, war-prolits, or excess-profits.) Statute imposing tax (To bo named fully and clearly so as to be easily identified.) Date of accrual — Date of payment (if paid) : (To be given even if claim is based on payment.) (To be given even if claim is ba>?4 on accrual.') 1. Total net income on which this tax was based ^ ' 2. That amount of such total net income which was derived from sources in that foreign country ’... ‘ S. Ratio of total net income from sources in that foreign country to total net incorrie on which this ta.x was based (item 2 divided by item 1) 4. Total amount of this tax ’ payment or accruaj to that foreign country (evidenced by attached receipt or return) 5. That amountof this tax which was based on income derived from sources in that forei^ country (item 3 multiplied 6. That amount of such total net income derived from sources in that foreign country to which claimant wouhl have been entitled as partner or beneficiary had no such tax accrued or been paid to that foreign country (claimant’s share of item 2) 7. Ratio of that amountof such total net income derived from sources in that foreign country' to which claimant would have been entitled, to such total net income derived from sources in th.at foreign coimtiy (item f> divided by item 2) 8. That amount of this tax which was baaed on claimant’s share of income derived from sources in that foreign country (item 5 multiplied by item 7) ‘’i which (converted at ap exchange rate of (In foreign money.) :®) equals in dollars^ $ ' See note 1, page 3. ’See note 2, page 3. • See note 3 .page 3. ‘ See note 4, page 3. ‘See note 5, page 3. ‘ Sco note «, page 3. ’ See nole 7, page 3, •8— SS09 " Page^2^of Formal 1 16. Income /Fax Supplementary Page 66. SCHEDULE D2. •Tax Paid or Accrued * to a Foreign Country on Behalf of a Partnership, Estate, or Trust in Which Claimant Has an Interest. Partnership, estate, or trust Fiduciary (if estate or trust) (Name.) (Name.) Character and extent of claimant’s interest in partnership, estate, or trust (-■VdcLrcss.) (Address.; Name of foreign country Character of tax {Income, wai-proAts, or cxoess-profits.' Statute imposing tax (To be named fully and clearly so as to be easily identilied.) Date of accrual Date cf payment (if paid) (To be given even il claim is based on payment.) (To bo given even if claim is based on accrue:.; 1. Total net income on which this tax was based * 2. 'That amount of such total net income which was derived from sources in that foreign country^ * 3. Ratio of total net income from sources in that foreign country to total net income on which this tax was based (item 2 divided by item 1) — 4 . Total amount of this tax ^payment or accrual to that foreign country (evidenced by attached receipt cr return) * 5. That amount of this tax which was based on income derived from sources in-that foreign country (item 3 multiplied by item 4) * 6. That amount of such total net income derived from sources in that foreign country to which claimant would have been entitled as partner or beneficiary had no such tax accrued or been paid to that foreign country (claimant’s share of item 2) ♦ 7. Ratio of that amount of such total net income derived from sources in that foreign country to which claimant would have been entitled, to such total net income derived from sources in that foreign countrj^ (item 6 divided by item 2) 8. That amount of this tax which was baaed on claimant’s chare of income derived from sources in that foreign country (item 5 multiplied by item 7) ■*, which (converted at am exchange rate of (In foreign money.) *) equals in dollars.. ? SUMMARY OF CREDITS CLAIMED For Taxes Paid or Accrued ‘ on Behalf of Claimant Individually. To possessions of the U. S.: Item 1 of Schedule Al, $. ; Item 1 of Schedule .Ail, $ ; Total, $ To foreign coimtries: Item 5 of Schedule Bl, $.... ; Item 5 of Schedule B2, $ ; Total, $ For Taxes Paid or Accrued ' on Behalf of Partnership, Estate, or Trust in Which Claimant Has an Interest. To jw.ssessions of the U. S.: Item 5 of Scheduled, $... ; Item 5 of Schedule C2, $ ; Total, $ To foreign countries: Item 8 of Schedule Dl, $ ; Item 8 of Schedule D2, $ ...; Total, $ . Total credit claimed (to be inserted in the attached income-tax return on Form 1040 as item 40) $ I swear (or affirm) that the above is to the best of my knowledge and belief a true and complete statement of facts in. connection with the credit for income, war-profits, and excess-profits taxes above claimed. (If claim is made by agent, the reason therefor must be stated on this line.) Sworn to (or affirmed) and Bubecribed before me this day of (Signature ol individual or agent.) (.Address of individual or agent.) (OflQcial capacity.) • ir attached inoomo-tax retnm is based on income "received,” then "paid or accnied” wherever it appears in this form means “paid,” if based on income "accrued,” then "paid or accrued” means "accrued.” (See Section 200 of the Revenue Act of 1918.) » To secure endit for taxes paid or accrued to possessions of the United States, claimant must be a citizen or resident of the United States. (Seo Section 222 (o) on next page.) *" Amount of tax” means tax proper, excluding any amount that represents interest or penalties. (Seo Article 382 on next page.) If the tax has been actually paid in full, the amount of the tax (excluding interest and pomlties) so paid is the amount to bo entered in this blank, even though tho claim be based on tho accrual cl the tax. ‘ State this item in terms of tho currency used In fnaldng the return on which this tax was based (o. g., pounds, francs, marks). * Claimant mnst here state the rate of exchango used and must also attach a statement describing In reasonable detail why and how he determined upon this particular rate. • To secure credit for taxes paid or accrued to a foreim country, claimant must bo a citizen or resident of tho United States-. Moreover, if he is an alien resident, he mnst be a citizen or subject of such foreign country, and such foreign couutry must allow "a similar credit to citizens of the United States residing in such country." ' (Bee Section 222 (a) on next page.) ’ The person making Uils claim must attach to it a sHtnment, describing in rc-wonablo detail tho method by which he determined the amount of Item 2 ("Tliat et income which was derived from sources in that foreign country"). (OVER) amount of such total net Page 3 of Form 1116. Income Tax Supplementary Page 67, PROVISIONS OF STATUTE AND REGUUTIONS GOVERNING USE OF THIS FORM SECTIOir 222 OF EEVEBTJE ACT OF 1918. Seo. 222. (a) That the tax computed under Part II of this title shall be credited with: (1) In the case of a citizen of the United States, the amount of any income, war-profits, and excess-profit taxes paid during the taxable year to any foreign country, upon income derived from sources therem, or to any possession of tho United States; and (2) In the case of a resident of the United States, the amount of any such taxes paid during the taxable year to any possession of the United States; and (3) In the case of an alien resident of tho United States who is a citizen or subject of a foreign country, the amount of any such taxes paid during the taxable year to such country, upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country; and (4) In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid during the taxable year to a foreign country or to any possession of the United States, as the case may be. (h) If accrued taxes when paid differ from the amounts claimed ?.s credits by tho taxpa 5 ’-er, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine tho amount of the tax due under Part II of this title for the year or years affected, and the amount of tax duo upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such penal sura as the Commissioner may require, conditioned for the payment by the taxpayer of any amoimt of tax found due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as tho Commissioner may require. (c) These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commis- sioner showing the amount of income derived from sources within such foreign country or such possession of the United States, and all other information necessary for the computation of such credits. ARTICLES 382 AND 383 OF REGULATIONS 45. Art. 382. Meaniag of terms. — ‘‘Amount of * * * taxes paid during the taxable yearl..' means taxes proper (no credit being given for amounts represen,,ting interest or penalties) paid, or accrued during the taxable year on behalf of the individual claiming credit. “Foreign country'' includes within its meaning any foreign sovereign state or self-governing colony (for example, the Dominion of Canada), but does not include a foreign mtmicipality (for example, Montreal) unless itself a sovereign State (for example, Hamburg). “Any possession of the United States'' includes, among others, Porto Rico, the Philippines and the Virgin Islands. As to the meaning of “sources” see articles 91-93. See also section 1 of the statute. Art. 383. Conditions of Allowance of Credit. — (a) When credit is sought for income, war-profits, or excess- profits taxes paid other than to the United States, the income-tax return of the individual must be accom- panied by this form, carefully filled out with all the information called for and with the calculations of credits indicated, and duly signed and sworn to or affirmed. WTien credit is sought for taxes already paid the form must have attached to it the receipt for each such tax payment. When credit is sought for taxes accrued the form must have attached to it the return on which each such accrued tax was based. This receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original, or a duly certified or authenti- cated copy. (6) In the case of a credit sought for rf'tax accrued but not paid, the Commissioner may require, as a condition precedent to the allowance of credit, a bond from the taxpayer in addition to this form. If such a bond is required. Form 1117 shall be used for it. It shall be in such penal sum as the Commissioner may prescribe, and shall be conditioned for the payment by the taxpayer of any amount of tax found duo upon any redetermination of the tax made necessary by such credit proving incorrect, with such further conditions as the Commissioner may requhe. This bond shall be executed by the taxpayer, his agent or representative, as principal, and by sureties satisfactory to and approved hy the Commissioner. Seo also •section 1320 of the statute. Rage 4 of Form 1116. Income 'I’ax Supplementary Page 68. DELIVER OR SEND THIS RETURN SO AS TO REACH COLLEaOR OF INTERNAL REVENUE ON OR BEFORE THE 15™ DAY OF THE THIRD MONTH AFTER THE CLOSE OF THE PERIOD IF EXTENSION OF TIME FOR FIUNG RETURN HAS BEEN GRANTED THE AUTHORIZAHON MUST BE ATTACHED TO THIS RETURN Pago 1— Summary Form 1120-A— UNITED STATES INTERNAL REVENUE SERVICE CORPORATION INCOME AND PROFITS TAX RETURN FOR , and ended.... , 1919 Fiscal Period begun II Ika Mr"’'* bum Ik lb* ■aul U remklaj (Print plainly corporation’s name and principal placa of buainais) SCHEDULE I— NET INCOME. Audited by CASH dtECK* KLO. ’cEaTrToFTND.’ (Caahiar’a Stamp) Item. | 1 1911 1012 1913 1. Net Income for Each Prewar Year (as finally determined oi 2. Plus amount of corporation excise or income tax paid in each yea 3. Totals fob 1911, 1912, and 1913 (If in any of theso years 1 r 1 there was a los8,'enter zero s 1 1 3 1 3. 4. Leas dividends received in 1913 . ... , _ S. Net Total FOB 1913 .. $ 6. Average Net I.scome fob Prewar Period (sum of items on line 3 for 1911 and 1912 and Item 5 for 1913, divided by nunfber of years) 3 7. Net Income for Taxable Year (Item 27, Schedule A, page 2) _.l 3 SCHEDULE II— INVESTED CAPITAL. Item. 1911 1912 1913 Taxable Year. - 1. CkplUl.MQrplai^nii nn^iliTjilM proflUatcl(»eoftbeprecfrtiDy^yi*a^Raiih^i^lij $ i' $ $ 2. Plus adjustments by wav of additions (from Schedule F). ... 3. Totai 3 $ $ 3 4. Lees adjustments by way of deductions (from Schedule G) 5. RiMAIVnER... . 3 1 3._......l $ $ 6. Plus or minus changes in invested capital during year (from Schedules J and I!) 7. Total (or REM.tiNnEB) $ 1 % $ 8. Less deduction on account of in^missible assets (from Schedule L) 9. Invested Capital for Each Year 3 s 1 s 3- 10. Average Invested Capital for Prewar Period (suln of items on line 9 for 1911, 1912, and 1913, divided by number of years) Jl. Increase or Decrease IN Invested Capital FOR Taxable Year AS Compared WITH Average Prewar Invested Capital (indicate decreas^by “D”)... $ — Excess-profits credit. 1. Eight' per ctnt of invested capital for taxable year (Item 9, last column, Schedule II) $ WAR-PROFITS CREDIT. 4. Average net income for prewar period (Item 6, Schedule D ... 5. Plus 10% of increase or minus 10% of decrca.s? shown by Item 11, Schedule II ? 2. Exemption, except for foreign corporations (33,000) 6. (a) Total op (or Difference Between) Items -1 and or (b) 10% of invested capital for taxable year (Item 9, last column, Schedule 11), whichever is larger. $ 3. Excess-Profits Cbedit (Item 1-pIua Item 2) 1 1 7, Exemption, except for foreign corporations ($3,000) 1 8. WAR-PROFire Credit (Item 6 plus Item 7) 3 SCHEDULE' IV— COMPUTATION OF TAXES. WAR-PROFITS AND EXCESS-PROFITS TAX (Braekata one and two), an a full year the invested capital must he reduced ae provided in p 1. nurxtTS. 2. Amount or Nxt Income (Item 7. Schedule I) m Each Braceet. 3. ExcE.^PRonT3 Credit (Itf:m 3. SCHEDUT.E III). 4. Reuaikdcr Sfb/ecttoTax. .5. Rate 1919 RATES. 6. Amount or Tax. 7. Rate.l 30% ir.a RATES. I S. Amount or Tax. 1. Not over 20% of in- vroicd capital 5 $ $ 20% ■10% 2. Over 20% of invested capital 05% 3. Totals $.. 1 1 1 1 i...'.... 1 ■' 1 r 4. Net income for taxable year (Item 7, Schedule I) $ 1 7. Fighty per cent of Item 6 , . ^ 6. Lea amount of war-profits credit (Item 8, Schedule III) 8, Less Item 3 column 8 (if smaller than Item 7) 6- Remainder.- . 3 1 9. Tax in Bracket three (Ilcia 7 minus Item 8— if Item 8 is the larger, make no entry) 10. Total at 1918 Rates for W'ar Profits and Excess PROFrrs as Comfuted under Section 301 (a) (Item 3, columns, plus Item 9) $ 1 1 1 11. Total at 1918 Rates fob War Profits and Excess Profits, ip Computed under Section 302 (see Instructions, page 1. paragraphs 6 and 7) $ 1 1 1 12. Total at 1919 Rates for War Profits and Excess Profits, if Computed under Sections 301 (cl and 302 1$ 1 I- 1 TET proportluo u( 1 tcm 10 or II, or that pnjportion uf (lif tax coinpiitod under Section 303, 304, or 337 (se* Instructions, pa^c TTpHra^jraphs B and 7), which the Dumber o( m'mtlie in 1918 is of the number of mmlhs in the period , 1 That proportion of Item 3, column 6, or Item 12, or of the tax computed under Section 303, 301, or 337, which the number of months in 1019 is of the numbed of months in the period Total war-profits and exroy-profits lax (Item 13 plus Item 14) 16. Net income for taxable year (Item 7. Schedule 11 t 17. In UrMt on obi int font frf V. 8. j ftottuinpl(lUfn4,Urh#%luJ* 1 A, pofo 2) IS. Wof'pronii nnd ricrs»-proflU Ux (Itoin 13) 19. Ki«iBptlon,firrp' forRirHicn corporotioiif |2,ono uo«m rtiurn li for than t year fMO pormxraph 1, par* 1, of ImUucUoiu) incomsTTaX. 21. Income tax, 1918 rates, 12%, Item 20..:„ 22. Income tax. 1919 rales, 10%, Item 20 23. That proportion of Item 21 which the number of inonths in 1918 u of the number of months in the period 2f. That proportion of Item 22 which the number of months in 1019 is of Iho number of months in the period, Total income tax (Item 23 plu s It em 2-1) $. War and excero-profiU tax (Item 1.)).. Income tax (Item 25) Total of Itema 26 and 27 I allowable credit for income, war-profits, and i 80, Total Tax (ToUl of Items 28, 27, 28, and 29) 31. Tax.pe^d: Onaubmiaeloo of tentative return (1031T), > . uicb mutt be filled out and attached if audi credit is sought).. by r»miltan(o ncroimianvine tlii» reliini 8 , Income H’ax Supplementary I’agc 69. Page 1 of Form 1120A Page 2— Ineomo Schedules SCHEDULE A— TAXABLE NET INCOME. Note.— R aiUoad corponUjons, Ranks, uigumnce compands, and other corporaliona required to submit statements of earnings and expenses to any national, stale munirinal or other mihtic officer mav stibrnit instead of Schedule A, a statement of eamingsand expenses in the form in which submitted to such officer. In sue h cases the lixal.le net earnings will be rcconcil^ by means of Schedule B with the not prolit shown hy the earimiigs and expense statement submitted, and should ho entered as Item 7, .gebetlule I paen | “ ™ CROSS INCOME. Gross sales, less returns and allowances.....—. —... .... Less cost of goods sold, exclusive of expenses, repairs, and other items called for sepamtcly below (from Schedule A2) — Gross income from operations other than trading or manufacturing, less allowances (from Schedule .'.3)., Interest on obligations of the United .SlaAes or its possessions not exempt (from Schedule Al) Interest from other sources (from Schedule A5) , Rentals Rovallios- * Share of net income carried during period by personal service corporations (whether received or not) Dividends on stock of foreign corporations (from Schedule A9), ; dividends on stock of domestic corporations other than personal service corporations, $.. .; total Grose inroine from all other sources except dividends (not including any amount in respect of sales i cellaneous investmculs— see Item 22, below) (from Schedule AlO) capital assets or mis* Total or Items 1 to 10 ... DEDUemONS. Ordinary and necessary expenses (except amounts reported in Item 2 above or called for separately below, and not includ- ing cost or \aluc of capital assets or miscellatieous in vestments sold during taxable year — sec Item 22) (from fchodule .^12). Compensation of officers (including salaries, commissions, and other compensation in whatever form paid) (from Schedule A13) - Repairs (including labor, supplies, overhead, and other items properly chargeable to repairs) (from Schedule AH) Interest (except on indehtediivsa incurred or coiilimicd to purchase or carry obligations or sccurilics, other than obligations of the United States iR-utd after Scptoiuher 21, 1917, the interest on whic h is wholly e.xempt from income tax) Taxes (exc-ept Federal income, war-protits, and cxccas-proUts taxes, taxes vchn h are a credit under heetton 23o, and laxee assessed against local heuelits of a kind tending to increase the value of the property astessed) Debts ascertained to he worthless and charged off w ithin the taxable year. Exhaustion, wear and tear (including obsolescence) (from iSchcduIe AlSl Depletion. If depletion is claimed hy a mining comjxiuy, the information tailed for by Form .K (recisedl.or if hy an oil or gas company. Form N (which forms can he obtained from the Collector), must he submitted with this return Total or Items 12 to 19 Difference Between Items 11 and 20 . Profit or loss on sales of capital assets and muscellaneous invoitmentsffrom Schedule A22). Losses su.sticmed during the ta.xiiUa year, and deducted under Section 234 (a) (4) (from Sch^ule A22) (extend in laslcolun net total of Items 22 and 23) I cxlcndcdl. 5. I i Net income for taxable year exclusive of deduclioas for dividends and amortization (total of ordifioroncc between Items 21 and id, ikc latte Dividends received from domestic corporatioue, not personal eeryice corporations Amortization of war facilities (from Schedule A26) (extend total of Items 25 and 20) ^ - ..■ I I I Net Income for Taxable Year (Difference between Items 24 and 26, the latter as extended) (to W entoretl as Item 7, SchHule I. pn^o SCHEDULE B— RECONCILIATION OF NET PROFIT PER BOOKS WITH TAXABLE NET INCOME. 1. Net profit for year per books, before any adjustments arc ' Di:idelheji.in 2. ViiidJowable di*diiction5: (a) Donations, j^ratuiiies, and contributions (^) lueoia^ ^vtr•proflu, and esc^nt-iirodta taiei (&id or ^ccraed U I thr i'nitrd Statrif. ild pjshe^oioiii. ui' a luru^'u coualrjr (c) Special improvement ta.xea lending to increase the I value of lUe property aissessed |... (;ations of the United Stat«c3‘and its | pewesioas, wholly o.\( nj]>t $ (б) Iiuorf5i tn obligations of Slates, Territories, and I ^>o!iticaI snbdivivion.i (liereof *. (c) loleresi on Kaim Loan lloi.dts igMied under Federal | I I r'-irui Luiin .4.cl- (wi) Otlier unallowable (ictiuclionT (to he detailed). '3. Diatribulive ahareol net incviLe.i amed dm iiig petiuil liy per- sonal service cor po rations not leceii cdoracci uedoii books... 4. Auoant necee-ary to a.ljU'«t Look prort or lo-s vif h Ibo araoncto reported ia Ucias esaua 22. SLLedulc A (uuleoB ou’.ry taloiijs on line 7) (dj Diviuoiida on slock of domestic corporations (<■) Dividends on slcK'k of per.sonal service corporations dvo-laredoutut prolilsoviruod jwior to laxahic period if) Other items of nontaxahie income (!• l)« detailed).. iy) W - (i 7. t'liai'ges auninst i (to hodut ulcd i VO'S lot had del.'ts, i euciea, etc. 0. Taxable net iiieomc (Item 27, Sdiedule A) 10. Total SCHEDULE C— BALANCE SHEETS. oAttach hereto balance sheets as of the beginning and end of the taxable year (preferably in parallel columns i, showing a* nc;uly as practicable the details callcsl for below. (These balance bhecia should be pr<*]iarcd from tlie books and should be in agreement therewith, or any differences should be reconciled.) ASSETS. Oak (Lncludicg caiih tu bauk ucd ou band, certifi- cates uf dcpiLwl etr.). T/t^e account* and tK>t«» teccWibtc (before deducting Kaw malrriali. >Vork m progress. F lOisbt'd products. JtvjtK af corporaiiuB^- ASSETS fContinued). If at* — C out inued— Bonds— (luumcipel, state, etc.). Loud. Iluillinss. ASSETS (Continued). Fixed Amcu— C ontinued. Less reserve fur dcurcciation. Net V.\lle. Pateat*. lov'd «iUJ, and other intiBithle a«scts: r&id for in cash or otlur tangible iirnperly. Paid for iu slock (other llKin thvidoiiAl Created by stock di . idcud Oi olhe.-^MiR'. Ou bonds. On stock. Total. LLVBILITIES. N.priue» anJ fe*er*c». IhC charjp'S Cffalinp which or# jilouabic doduciiuu-i from income (lo be dciailcd). Kcaer'ct for cooilnjeociet. etc., tho viiargvs rrtaiinc ubkh aro nn| uMuwablO dcc'uttioiis from iucouie (tc be detailed). CaiMiil slock ouutafldlol (lo bc cla:..'idcd). Surplaa and uodbidrd probis. A corporation having a net income of $3,000 or more, which waj in exiatence during at least one full prewar year, should also attach to tliia i I parallel columnu) aj of the beginning of.iis first full prewar year and as of December 31, 1913. iiilar balance shceta (preferably SCHEDULE D— ANALYSIS OF SURPLUS ACCOUNT. Attach hereto an analysis ol the corporation’s surplus account, showing the details ^f all adjustments of surplus for the taxable year, as iivarly a.s practicable in the following form: 1. Surplus at beginning of year pir hooka, I Deduct: 5. Dividends (state date pa'yable and amount of each, and whether in ca-h Add: 2. 'I'utal net prolit per books and per Sehedule B (Item 1). or m stix kV 3. Other credits to surplus (to be detailed). G. Other debits lo surplus (to he dct-ailed). 4. Total of Items 1, 2, and 3. | 7, Surplus At cud. of year per Ixiolm. A corporation having a net ioixime of $3,000 or more, which was in existence during at least one full p war year, slemld als-Aallaclt lo tins return a simHar analysis of its surplus account (or its first lull prewar year and for eat h subeequeut year dow u to the begmuinj of tfia taxable year. ’ ‘ »-«•* Page 2 of Form 1 120A IncoiiK* 'I'ax Siipploinenrary Paire 70. Page 3 — Income Schedules — Conciuo.wii SCHEDULES SUPPORTING SCHEDULE A The •chedule* called for below should be prepared and firmly stapled to ibis return. Deeimate each schedule with the number of the item in Schedule A which it explains. Make schedules on paper of uniform size so far ns practicable. In the space proTided for the purpose on page 6 list all schedules attached to this return, giving the title and schedule number of each. Keferenc.es to Kegulations 45 are to revised edition. SCHEDULE A2: COST OF GOODS SOLD. EXCLUSIVE OF EXPENSES, REPAIRS, AND OTHER ITEMS CALLED FOR SEPARATELY. In mpport of Item 2, Schedule A, curpontioni engaged in manufacturing or trading cperationt should submit an analj-aia, in reaaonable detail, of the coat of goods K)ld. This sutemeut should ordinarily include the following items but should not include any ex- }>*uae items called fur s<>parately in Schedule A. 1. Inventories at beginning of period (to be reconciled with balance sheet). 2. Purchaaea during period. 3. Lsbor and wsgee'ordinarily charged to manufacturing coet on the corporation'e boohs, showing the principal items separately. 4. Other expenses ordinarily charged to manufacturing coet on the corporatioa’a • books. (.State separately large or unusual items.) 5. Total. Deduct: 6. Inventories at close of period (to be reconciled with balance sheet). 7. Coet of goods sold (Item 6 lees Item «). Note. — Inventories should be valued at (o) coet or (o) coet or market, whichever is lower, provided that whichever basis is used must be applied to each item in the inventory and not to a part only. Inventories should be recorded in a legible manner, properly computed and summariaed, and should be preserved as a part of the accounting records of the taxpayer. (See Artklee 1581 to 1585 of Regulations No. 45.) If claims for losses on Inventories or rebates on sales made under Sectiou 214 (a) 12 of the .\ct have been allowed, the opening inventory must be correspondingly adjusted. (Sse Article 266 of Regulations 45.) Stale here which of the abovo-mentioDed bases for valuing inventories is used in this Submit a schedule showing the nature and amount of the principal items included in Item 3, Schedule .4. Life inaurance companiee should enter as Item 3, Schedule A, the total premiums received from policyholders less such portion thereof as has been paid back or credited to, or treated as an abatement of premiums of. such policyholders within the taxable year. (See Articlee 548 and 549 of RegulaUons 45.) Mutual marine iusuraufce companies should report as Item 3, Schedule A, the gross premiums collected and received by them less amounts paid for reinsurance. For exemptions on interest on Liberty Bonds or other obligations of the United States, sec .Vrticles 77 to 82, Regulations 45. .4ttach hereto schedule showing in separate columns the following information with re.-.pect to obligations of the United Slates issued rince September 24, 1917: (1) Close of obligations (list each issue separately). (2) First and lust dates of each period during which the corporation's holdings of that ebsss of ohligaliuiui remained unchanged. (3) Amount of obligations of that class held by the corporation during each such period. (4) Amount by which each amount entered in column (.3) exceeds the ma.^imum exemption for that class of obligations. (5) Rate of interest. (6) Interest derived from each ainount of principal staled in column (4). Enter as Item 4, Schedule A, the total of column (6) for all clasees of obligations. Submit also a lUtement showing the amount of interest derived from bonds and other obligationa of the United Sutes and its poeseesiona, exclusive of thoae described in the table above. SCHEDULE AS. INTEREST FROM OTHER SOURCES. Submit a schedule showing the euiuce, nature, and amount of the principai items included herein, the minor items being grouped in one figure. The total of tho schedule should be entered as Item 5, Schedule A. For interest on foreign bonds submit a schedule showing (a) name of country; (5) kind of obligations ( wlietber national, state, municipal, or corporate obligations); (c) amount of principal; and (i) amount of interest. SCHEDULE A9: DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS. Submit a schedule showing (o) name of corporation; (6) country in which organued; (c> total jiar value of slock held, and ( .dent insurance combined iti one jsrli.y iwued on the weekly premium payment p'an continuing f»r Ills and n..l •uhjer I to cancellation ahould reirort in Sc hedule A12 such part of the net addition (unt requuc-d by law) made within the Uxablu year to roarvo funds as tho CommiaAiom.r fimla U) he lequirr'd for tlie protection of tho holdere of such irolicica. iluiual marine insurance comi^ni.a should rejairt in Schcdulo AI2 amounts leiai.l lo fad i. > holder, on aceoiitil of |.r,-iirimna previously paid by them aiel interest laid uiaoi • uih soeuinia between the s»' • -fsiiiinenl snroi>erty sold or of property in rwpect of which a lo«a Is claimed. 2. Dale acquired. 3. Fair market price or value on March l, 1913, if acquired before that date, or cost if aciiuired after February 28, 1913. 4. Cost of improvements, if any, since February 28. 1913, or since dale of acquLiilion, if acquired after February 28, 1913. 5. Total of Items 3 and 4. Less — 6. Depreciation or depletion of property subject thereto — (u) Per books. (5) -Accrued but not on books. 7. Salvage value, if auy, of property on which a loss u claimed. 8. Amount of iusurauce or other recovery ou property, if any, 9. Procoeds of sale or c;uh value of property received i;i exchange (for traasaclionx falling in Item 22, Schedule .\) (see Note below). 10. Total of Items G to 9, inclusive. 11. Profit or loss. 12. Cause of loss (fur losses falling iu Item 23, Scbcdulo A). Note.— S ubmit evidence substantiating the basis used by you iu arriving at the cash value of property received iu exchange f u other property. SCHEDULE A26: AMORTIZATION OF WAR FACILITIES. Taxpayers making claim for amortisation should spread tho umortisaliou allowance in accordance with the i>ro6ts of the business over the entire amortization periorl in monthly estimates, and should enter as their amortization duduciiou iu this return the aggregate amount assigned to those months of the amortization period which arc included in the fiscal year of the taxpayer. Taxpayers m.ikiiig return for a fi.Hcal year eliding iu 1919 should interpret -Uticlc 185 of Regulations 45 as above m t lonli. Taxpayers will also submit a aehedule eontainiug iiifomialioii called for in .Uliele 188, Regulations 15. COMPENSATION AT RATE OF J3,000 OR MORE PER ANNUM. Submit a schedule showing for each employee (if a slockhohler of the eoriwratioiil, whose eoiupeiiration is at Uic rale of t:i,(K)0 or more per amiuin, fads rimilar to llioru called for iu Schedule ,\13. WORKING PAPERS. Fverr corporation should preserve, available lor jnspeclion by a ravemie ofTiccr, Working pairers ■bowing— 1. The Ijalaneo in each account ou tho corporation x bool'.s that was us'd in pre|mring Sel.edulo A. 2. Tho amount deducted from each such balance on amount of »ai h class of nun- taxable iiieouie, unallowable dedin lious, and oilier adjualnieiiUs iiidicalad in Sehfriulii II, with a reference lo iho miinbcr of the ileiii in Schedule H in which each auioiint so dedueled was inelnded. 3. Thu leinainJcr of eai li am h balain e, analyzed lo tdiow the amount im ludeil in on. b ileni of Silndulo A, with a leleienie to the nninber ot the item in 2i liedid* A in whi..li exi h .m b ainoiinl was iniluJi d a iwi Page 3 of Form I 120A lucotnc 'Tax Siippleiiieiitary Piigc 71 . Page 4 — Invested Capital Schedules SCHEDULE E— CAPITA^ SURPLUs7aND UNDIVIDED PROFITS AS SHOWN BY BOOKS BEFORE ANY ADJUSTMENTS ARE MADE THEREIN. E4. Stock actually outstanding at the end of the preceding taxable year should bo entered in tliis schedule to the extent that it is paid up. If stock or shares were issued at a nominal value or without par value, the entries should reflect the amounts on the books ic rc-spoct thereof at the close of the preceding taxable year. ES. This item should include paid-in su^lus per books at the end of the preceding year. It any amount is claimed under Section 326(a) f2) of the Kevenue Act of 1918 or under Article 837 of Regulations 45 the amount claimed should be entered under Item 1, Schedule F, and not in this schedule. ^ E7. Keaerves which represent allocations of surplus and were not accumulated through deductions made in computing net income as returned in previous yea.eB may^ it prop< rly explained, be entered on line 7. Such entries should he identified and if ncccasary reconciled with balance-sheet reserves. E9. The cost (or book value if different from cost) of treasury stock held at the end of the preceding taxable year should be deducted on line 9, if the par value of such stock is included in the amount entered on line 4. Treasury stock includes all stock rcac and 9X7'^ $ K $. $ 9 Additirtna tn niirpliin ( Arfirl#».q ^14(1 tn R43\ 3. Depreciation cWged in the accounts of the corporation but not nllowRhlA ftfl a dftdiirtion on income tax retiima . . 4. Adjustment of valuation of assets in existence both during tax- nhlft jrARr and in prewar period f Art, irlft 934) . ... XXX XXX XXX X X r 8. Total $ * $ 1 5- J SCHEDULE G— ADJUSTMENTS Cl. Is any patent, copyright, secret process, or formula, good will, trade-mark, trade brand, franchise, or other simi lar intangible property, paid in for stock, carried as an asset by the corporation? It so, is it entered on the books at a value in excess of its actual cash value when paid in? In excess of the par value of the stock issued therefor? Is the aggregate of such assets acquired prior to March 3, 1917, entered on the books at a value in excess of 25 per cent of the par value of the stock out- standing on March 3, 1917? Is the aggregate of such assets entered on the boob at a value in excess of 25 per cent of the par value of the stock outstanding at the beginning of the taxable year? If the answer to any of the foregoing questions is “yes,” submit a statement showing separately with respect to such assets acquired (1) before March 3, 1917, and (2) on or after that date: (a) Date of acquisition; (ft) cash value at that date, with a complete ex- planation of the basis upon which such cash value was determined; (c) par value of the stock issued therefor; (^ par value of total stock outstanding March 3, 1917 ; (e) par value of total stock outstanding at the beginning of the taxable year; (/) the value at which such assets are entered on the books of the corporation. It all the intangibles were acquired before March 3, 1917, the amount by which (J) ex- ceeds (ft), (c), 25 per cent of (d), or 25 per cent of (<), whichever is lowest, must be entered as Item 1, ^edule G, for the taxable year and for each year of the prewar period that is affected. If the intangibles were ^quired on or after March 3, 1917, the amount by which the entry in (/) relating to such intangibles exceeds (ft) or (c) relating thereto, or 25 per cent of (e), whichever is lowest, must be included in Item 1, Schedule G, for the taxable year: Provided, that if intangibles were acquired before March 3, 1917, and also on or after that date, deduction shall be made so that the amount included in invested capital for the aggre- gate of intangibles shall not exceed 25 per cent of the par value of the total stock outstand- ing at the beginning of the taxable year. Note. — If the stock of the corporation was issued at a nominal value or without par value, for the purpose of the computation under Item 1 the par value shall be deemed to be the fair market value as of the date or dates of issue. The a^egate value so determined of stock outstanding on March 3, 1917, or at the beginning of the taxable year, shall be the basis for the computation. C2. Is any tangible property, paid in for stock, carried as an asset by the corporation? If so, b it entered on the bqoks at a value in excess of its actual cash value when received? In excess of the par value of the stock paiitherefor? If the answer to either of the foregoing questions b “yea,” submit a statement showing (a) land of property; (ft) when acquired; Cc) par value of the stock paid therefor; (d) actual cash value of the property when paid in ; («) the basb on which that value was determined ; (/) value at which the property is entered on the corporation’s books; and (g) amount by which such value exceeds the allowable value under section 326 (o) (2) of the Revenue Act of 1918. Enter thb amount as Item 2, Schedule G, for the taxable year and for each year of the prewar period that b affected. C3. (a) Was any stock issued by the corporation ever returned as a gift or for a consider- ation substantially leas than its par value? (ft) If so, what was the total par value of such stock? t (c) What was the consideration paid for the return BY WAY OF DEDUCTIONS. thereof? $ (d) What amount of cash or its equivalent was derived from the resale of such stock? I (e) What entries were made in the accounts to evi- dence the return and the resale of such stock? The excess of (ft) over (d) must be entered as Item 3, Schedule G, for the taxable year and for each year of the prewar period that is affected. However, no deduction b neces- sary if adequate adjustment has Veen made under Item 2 of thb schedule. G4. Was the business reorganized or consolidated or was its ownership changed or was there a change in ownership of property after March 3, 1917? If so, answer the following questions: (o) Did an interest of 50 per cent or more in. the business or in the property which changed ownership remain in the control of the same peiscms, corporations, associations, or partnerships, or of any of them? (ft) Were any of the asseb entered on the books of the corporation making thb return at a higher value than on the bookrof ita predecessor? (c) If such previous owner was not a corporation attach a statement showing (1) the cost of acqubition to the previous owner of any asset so transferred or received ; (2) expendi- tures subsequent to that date for betterment or development, not deducted as expense or otherwise since March 1, 1913, by such previous owner; (3) the allowance for depreebtion, depletion, or impairment since the date of acqubition by such previous owner. (d) If all, or substantially all, of the property was acquired from a corporation during the taxable year attach hereto balance sheets of such predecessor corporation as of the begin- ning of the taxable year and as of the date immediately prior to the transfer of the propcu-ty to the corporation making this return, and also a balance sheet or statement of the coiqwra- tion making thb return showing the values at which such property received or transferred was entered on the books. The increase in book value of any property acquired by reorganization, consolidation, or change of ownership, over the amount allowable to the predecessor corporation or over the amount as computed under (c), if the previous owner was not a corporation, must be deducted from the invested capital for the taxable year as Item 4, Schedule G. G5. Is any property (including physical property, securities, and intangible property) paid for with cash or with other tangible property entered on the books of the corporation at a value in excess of the amount of cash paid therefor or the actual cash value of the tangible propert)' paid therefor? If so, submit a statement showing (o) kind of property; (ft) amount of cash paid therefor; (c) actual cash value of other tangible properly paid therefor; (d) how that value was determined; («) value at which the property b entered on the books of the corporation; and (/) excess of («) over (ft) or (c). 'Thb excess must be entered as Item 5, Schedule G, for the taxable year and for each year of the prewar period that b affected. 06. Has adequate provision been made in the expense accounb of the company for (a) losses of every kind? ; (ft) depreciation? ; (c) obsolescence? ((f) depletion of mineral deposib, timber supplies, and the like? If adequate charge has not been made for depreciation, depletion, obsolescence, and other losses, and the value of the property has not been maintained by replacements that have been chafed to expense, proper additional charges therefor must be computed for all years in which they were not mime on the books, and the total amount of such charges must be entered as Item 6, Schedule G, for the taxable year (and fur each yw of the pre- war period that waa affected) and deducted in arriving at the surplus and undivided profits. Page 4 of Form 1 120A Income Tax Supplementary Page 72. Pago 6— Invcstod Capital Schedules— Continuod SCHEDULE G— ADJUSTMENTS BY WAY OF DEDUCTIONS (Concluded), Item. 1911 1912 1913 Txixblx Ylit. ValuatlsB of patfols^ copyrights,^ swret procosws, or Jormul.c, good’ will. 1 $ 1 ^ s i 1 (9pjytV»]0 prAp^rfy pair! in for Htnrk . . r ■■ 1 1 returned to tho corporation as a gift, etc.. Vlili'tttien of in renrganizationfl 1 1 : 1 j, . T)«pr«M*iikHcin And Heplfition . . 1 1 -- I- Total Deductions. — ». 1 f- 1 1 1 .1 1 » more of the following ways («) AddfrfoiB by T9taQ of part of the capital by retiremeot of stock or purchase of treasury stock not out of current SCHEDULE H— CHANGES IN INVESTED CAPITAL DURING TAXABLE YEAR. (6) If capital stock of the corporation is reacquired but not paid for out of current prodts, the cost of such stock should be deduct^ from Invoatcu capital. (c) Report dividends paid out of profits ol prior years but not dividends paid ou' >f pro.lls qt tha taxable year. Any distribution mode durinp the ftrst 60 days oi the taxable year shai i Ire deemert to have been made from oarninjts or profits accumulated duririx preceding taxable yean; but any dLstrlbutlon rnado during tho remainder of tho taxable year shall 1» deemed to have been made from the profits for that year to the extent that such profits are sufficlont. (ftee Article 1642.) id) The amount of Federal income and excess-profits taxes payable should he deducted as of the date whea duo and paya'oto whether reserves have peon set up ou the books or not. (See Article 646.) 3. The data called for in eolrimna 1 to 5 should t)o given for all transactions, oxcept that columud 3 and 4 are applicable only to the issue or reacquisition of the corporation's (r) Payment of cash dividends out ofcamJngs of prior years, (d) D^uetkm of the amount of Federal income and excess-profits taxes for the previous year. it) Payment of assessments by stockholders, or creation of paid-in surplirs by contribution of stockholders. The chan^ irith respect to taxes probably will occur in every case, and with ro.spnct to dividends in moat cases. Should no changes respecting these be noted, the reasons for their omission should be stated. 2. The foUowing instructions should be followed in making the above adjiintmcnts. Each item shonld be designated aa an addition or distribution, dislribuLiona being desig- nated by red ink or otherwise. (a) U stock fa issued for cash, the actual cash reocivcrl (hut not the amount of discount) should be entered InthbactMdule. Assets (other than cash) paid in for stock must be valued in accordance n'ilh .Sectiou t» (s) (H of the Revenue Act of 1*18. stock. 4. In Column 0 cuter the number of days remaining in the taxable year (inclndiuj; the date of change). 5. The net changes, if not in accordance with tho increases or decreases reflected in the balance sheets, should bo fully reconciled therewith. 1. Kattrac or AnDmOKS arm DisTarauTioxs. 2. Date. 3. Number or Sharks Solo Peacqutreo. 4. IrroaCiBH, State Pnira rER Share. 6. Amocht or Cash or Ca.vh Valoe Actcailt Receitid OE FAin OOT. fl. Number 7. Adjusted Avf.raob. / Column 5 X Column 0 \ ^Number ol days in la\abi© year./ $ , 1 1 S 1 1 1 R 1 1 fl. 1 7. 1 1 9. ...: , 1 SCHEDULE J— CHANGES IN INVESTED CAPITAL DURING PREWAR YEARS. (Compute the net addition or reduction separately for each ye.ar. See instructions under Schedule H.) 1 . Natuii or ADomoHS a.vd Di.sTRiBirnovs. 2 . Pate. X Number or PEACgf/IRED. 4. IrroRCASH, state Price PER Share. 5 . Amoi'nt or Cash or Cato Value Actuaixt Received or Pajo Out. 6. No. or Bats ErTEcrrvE. 7 . Adjusted Avieaoe. / Colomn ft X oohiran «\ y Nuffl bar of dfty 9 la y aar. / 1. $ $ . 1 2. 3. 1 i. 6. 1 6. 1 1 7 I 1 R. .. 1 1 9. 1 i 10 . i 1 1 1 ■ 1 11 J 1 1 13. 1 r" 11 . , i . , 1 1 . SaiEDULE K— CHANGES IN INVESTED CAPITAL FROM END OF PREWAR PERIOD TO BEGINNING OF TAXABLE YEAR, NOT SHOWN IN SCHEDULE D (See infltnjrtiona umlcr aSi-hecrty or interest. (.See Articles 971 and 972 of Kegulalions 45, and Section 337 of tlio Act.) The brat sU'p is to bud tlie war and exceee profits tax cuipiitcd without regard to this pn.visi. u; the second is to find of tho tax thus compuUxl siu h jiurtion as the nut in- come from llic hIc bears lo the bilil net income. If Ibis [mrlioii equals or dixw not exceed 20 per iv-nt of the Belling prii o then no adjuslment is peniiilt. d. ShoiiI J siicli portion exceed 20 per cent of the M-lliiig price, then, I, nit, f iid such jN.rli.iri of the war and execss- (•r ifls isi as tl.e uet in not attributable t'l the salr bi-ars b> the total nut income; and secondly, add to this 20 pur cent ol thu wiling price of Ihu luiouial Uupisdts. f'f) Tax of corporation ensaged in riitning of gold. I f a eurpiratiori was cogugud in the mining ol gi.ld, ifr. war and prof.Li tax Kli;.ll bo that proi«irtii,ii of Ituiii J5, .Schedule IV, which tin- net inr ..me n..l d. rived from tl.e niining nf gold bean In the total net income (Artu It'S 752 sud 7o3, Itegulal lon.x .'■l etiuii :g)| (c) of the Ad.) (r) Tax of cxirporalion wlioss income is derived in part from ** personal serv- ice.’’— If part of tlie net in. oiuo (nut h•■vi than 30 per luiil) w d. rived from a cepatalo l::.ds or businesa of the (diarai ter of ''personal sir'.iii*,'’ thu lax hhall l.u uoni(>ule.| in aci urdai.ee with the proviioiis ol .Vrlickw 711 |.> 743, Itegnlalioicx 15 (I'a-u. of the Act). 7. Statement of basil of claima. — If the corporation claims the benefit of one or more of these provisions, it should attach to the return a complete statement of the basis for such claim and a computation of the tax payable in the event that suchxclaint is allowed. 'The amount of lax so computed should be entered in Schedule IV, but, except in cases falling under (a) above, tlie taxpayer must nevertheless fUT out all tlio schedules of this form. Submit a schedule respecting each Government contract made bet'ween April 6, 1917, and November 11, 1918, both dates incluaive, from which income was derived during the taxable year. In tho case of affiliated compani^, this information should bo shown separately for each company. This schedule will be in the form of Columns, the left-hand column specifying the following information as respects each contract: (а) Amount of contract; (б) Gross income from contract during period; (c) Expenses directly applicable to each contract. Total of each column should be showii. There should also he shown in the inoSt practicable form: (tf) Total gross income of corporation; ■(f) Percentage which total of column (6) is of (oii the minimniu amoiinl of invvsited capital, not, however, exceeding a tax n|s.n tho hasis of .50 ].or cent . i Iho not income. In any of tho aliovc c.isoi the actual ratio when asc.-Ttaiiie.l by the ('.niii li ; i nor will he used in delcriiiiuing Iho correct amonul of the tax. (.See Article 912 of Itcgnl ilioi.s 15.) 11. Returns in special cases. Corporations ol'.ior llia'i I ir. i;.i corporations iiial.iug claim for xvie.isment under .Seclioii 323 of the .\cl i.h inld answer all ipiesliuns and file all ecliedulis) as far as [io,“. iblu aad utlaelilT: lalerne-it cxjilalain'; why it i.r iiiipraetieahiu lo I II out Iho oiilir.. rcinrn. UNDISTRIBUTED PROFITS TAXABLE TO STOCKHOLDERS. 12. If any eor|)or.itioii, however en-aled or organi/. .1, is formed or availoil of f..r (he jiiirpitic ol prcveiiliiig ihe iniposilioii ol iho suilax upon il.s. t.iel.liohlers or iiieiiil.oi < ilii.mgli tho ii.odinm of permillirig il.s gains or j.rolil.s lo ai enniul.ilo iivstoa.l of being divi.li-d or i!i.ilrilinled, Ml. h e..r|«.r.ilioii i liall not I.e snbj. et t.i (he lax iinpo . .1 hy Seeliuii 2 '.0 of the J’...\onne Ai t ol I9IS, hut Ihe utis l.hold.'rs or iiioinhers thon’ol ; hall he .snhjeel to l.ixali i:i under Tide 2 in llin same manner as in dm oa e of stool. holdiTs of a per.sonal serv i> .• eer p' rad III, 0X1 opt that the lax ioi|HiM..| by Tide 3 of the Iti.vi iine Art of IhlS shall be d.' h (Including cosh in Ixink and on hand, certklcatcsof deposit, etc.). Trade accounts and note* receivable (before deducting reserras for losses). Other accounts and notes rscelvable (to bo classlued). Inventoriest Raw materials. Work in progress. Finisitod products. Supplies. y Investments: U. S. bonds and obligations (each Issue te bo stat^ saparately). Stock of corporations— ForcigD. Domestic. Bonds— Exempt (municipal. State, etc.). Other. SCHEDULE C— BAI-ANCE SHEETS. . of the taxable ye.ar (preferably in parallel colunins), ebowingas nearly .aa practicable the details called for below; (These babiii0e agreement tlierewiih, or any differences .should be r«coucilcd.) PafcJ for in cash or other tangible property, raid for in stock (other than stock divkicnds) or In shares cf t partr>ersbip. Created by stock dirldend or otherwise. Discounti On bonds. On stock. Totai.. LIABILITIES. Notes payable! To members. To others (including bonk loans). Accounts payable: Trade. Other. Reserve for losses oi Reserves for contini allowable deduou Capital stock outstandinv (to Surplus and undivided profits. Total, I accounts receivable. r all partners' capMi SCHEDULE D— ANALYSIS OF SURPLUS OR PARTNERSHIP NET WORTH ACCOUNTS. Attach hereto an analysis of the surplus or partucishlp not worth accounts, showing tho details of all changes therein during the taxable year, as nearly as practicable i the follovnng form: I. Surplus or partnenliip net worth at beginning of year per books. Add; 2. Total net profit per books and per Schedule B (Item I). 8. Other creuits (to be detailed). 4. Total of Items 1, 2, and 3. Deduct: 5. Withdrawals or divudends (stale date dividends payable, amount of each, and whether in cash or in stock). C. Other debits (to bo detailed). — — _ 7. Surplus tit partnership net worth at end of year per books. t-ttm Page 2 of Form 1065A. Income Tax Supplementary Page 78. Page 1 of InstructioMi"^ GENERAL INSTRUCTIONS. References to RegiilationsL 45 are to revised edilion, PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS REQUIRED TO MAKE A RETURN OF INCOME. 1. Partnerships,. — Every domestic partnership and every foreign partnership doing business in the United States must make a return of income on this form regardless of the amount of its gross or net income. (See Reguations 45, Articles 321, 1503. 1505-1507 and 1509.) 2. Personal sen-ice pE very personal se^vicecorporation, as defined below, must make a return of income on this fonn regardless of Uie amountof its gross or net income. (See Article G24 of Regulations 45.) 3. Personal sa-' ice corporation defined. — The term “personal service corporation" means a corporation, not expressly excluded, the income of which is derived frr.m a jn-ofession or business (a) which consists prin- cipally of rendering personal service, (5) the eamings pf which are to bo ascribed primarily to the activities of the principal otVr.ers or stock- lioldei-s (who are referred to in this return members''), and (c) in which the employment of capital is not necessary or is only incidental. No definite and conclusive tests can be prescribed by which it can be finally determined in advance of an examination of the corporation’s return whether or not it is a personal service corpore.tion. The general principles under which such d terniinr.tiou will be )nade are laid down in Articles 1523 to 1532 of Reg ilations 45. 4. Corporations exeludcd. — The following classes of corporations are expressly excluded from classification as person.al service corporations; (a) foreign corporaliops; ih) corpwiations 50 per cent or more, of whoso gross income consist - of trains, profits, or income derived from trading as a principal ; and (c) corporations .50 per cent or more of whose gro.ss income h-onsists of gains, profit.s. commis-.ions. or other income derived from a Government contract or contracts made lictweeri April 0. 1917. and Novem- ber 11, 1916, inclusive. 5. More than ore business. — A corporation cr.gag-cd in two or more professions or businesses wliich are .m-re or less related, one. of wbicli does not consist of reiulei ing. personal -ervice. is not a personal service corporation iinle.ss the ncnpei-sonal soi”, i. e element is m-gliglblc or merely incidental and no aiipreciable jiarf of its earnings are to be ascribed to sucli sources. (See also .Section 303 of the Act.) G. Actiritirs of .-tochiuildcr'.. — In determining whether a corporation is a personal service corporation, no weight can bo given to the fact that it renders personal .-ervices unles.s (a; tlie principal owners or stock- holders are regularly engaged in the active conduct of its allairs and are engaged in sueli a manner that the e.arnings are to be ascribed primarily to their activities, and (o) its affairs are conducted principally by such owners or stockholders If employee.s contribute substantially to the services rendered by .r cori'ornticn. it is not .i personrd service corporation imlc;- in every cast i:. v.-riicl, service^ are sc rendered the value of and the compensalioi. charg’d for sucl; services ai-t to bt attributed primarily to the experience or skdl of the principal ownei-s or stockholders. 7. Stock i.ilcre.st cj edive memhirs. — Me, corporation or its owners or stockholders shab make a return in the first instance on the basis of its Ijeing a personr.l service corjioration unless at least 80 per cent of its stock is held by those regularb, ciigaged in the active conduct of its affairs. 6 Copi '"]. — Tr, 'i'-teT-mininv' whcihcr a corporation is a personal serv- ice corporatior.. m, wc.^iit can be given tc the fad that the invested capital of the corpoiatior. iinui-r Title III of the Act or the actual investment of the principal owners oi stockholders is comparatively small If the use of capital is necessary or more than incidental, capital is a materir.l income- producing factor ami the corporetion is not a personal service coi-poration. affiliation of personal 3ERVICF. CORPORATIONS. 9. In order to come under the provisions of Section 216 (c) of the Act. and the Regulations relating thereto, a persofial service corporation must nornia!]y lx owned by individuals. Ordinarily affiliation of a so- called personal service corporation with another corporation (not itself a personal service corporation; sets up a. presumption that such personal BHiA-ice corfiorntion is i.ierely a department or unit of another business org.anization. The income of such a corporation shall be included with the income of tlie corporation or corporations with which it is affiliated, A corfiorntion tan not be treated a.s a personal service corporation if it is {a) in efl'ct merely the selling agency another corporation or other corporations, {b) used for the ]>iirpose of performing any part of the serv- ice incident to thebu .incs.sof an affiliated corporation principally engaged in traile, or in conlrae'ing-or mariufacturing,,or (c) a mere instrumentality which is enabled to do business witliou't capital only because it is finan- eially sujiportcd by affiliated corporations or affiliatedstockliolders. IN.STRUCTIONS FOR FILLING IN SCHEDULE 1, PACE 1. 10. All return-,.— On line (n) enter in column 2 the amountof item 9, Schedule, A ; in coliimii 3. the amount of Item 10, .Schedule A ; in column 4, the .amount of Il'-m -1, .Schedule A: in column 5. the amount of Item 27, .Sdiodulc A,.i • - the total of Iiem.s 4, 9, and 10 of that .Schedule ; in column G, the amount of Item 2 (c), .Schedule B. If the computation of the amount to be entered i n column ,5 resnits in a los.s, the amount should be inriieap-d by red ink or olberwist. 1 1 . lictm : for , ah ndar year — On line ( 5) , columns 2, 4, 5, and C, enter tlic .same amounU as sliown in the corresponiling cohirnns on line (ir). Enter in columns 3, line (5), the amount of stock dividends wliicli were deefared after November 1. 1918, or received after March 2G, 1919. Euler rm line (M aucIi part of the remainder of stock dividends ns were oe. dared out of Ifilr. eaniings, and or. line (d) any .stock dividends not entered upon lines (b) arid (e). 12. Returns for fiscal year ending in 1919.— On line (i>) enter ir. col- umns 2, 4, 5, and C as many twelfths of the amounts entered in the same columns on line (a) as the number of months of the fiscal year that fell in the calendar year 1919. On line ( c ; enter in columns 2,4.5, and 6 a£ many twelftljs of the amounts entered in the same columns on line (a) as the number of months of the fiscal year that fell in the calendar, year 1918. 13. Or. line (6), column 3, enter as many twelfths of the stock divi- dends which were declared after November 1, 1918. or received after March 2G, 1919, as the number of months of the fiscal yer.r that fell in the calendar year 1919. On line (c), column 3. enter the remainder of the stock dividends which were declared after November 1, 1918, or received after March 26, 1919, plus any other stock dividends declared out of 1918 earnings. Enter on line id), column 3, any stock.dividends not entered on lines (i) and (c), INSTRUCTIONS FOR FILLING IN SCHEDULE 15, PAGE 1. 14. This Schedule is to be used for shewing the share of each partner or rriember in the income of the partnership or personal service corporation, whether received or not. Where the ownership of a personal service cor- poration has clianged during the taxable yoar. the distributed portion of the net income is taxable to the recipients, while the undistributed portiou is taxable to th^ owners .ae at tlie end of tl.e taxable year. (See Articles 330 to 335, Regula(,ions 45.) 1.5. The distributive shares of the amounts shown on line (t) of Schedule I are taxable ujion the' returns of the individual members at 1919 rales, those on line (c) at 1916 rates, and tliose on liiic'(tf) at rates from 1913 to 1917, inclusive. T!ie shares of e.ach member should be entered according to the years to which applicable, such years being entered in column 1. If the amount of column 5, Scliedule I. shows a loss, enter the distributive shares of such loss char'gealile to eacli member in the same manner as though a not gain had been realized. 10. If the space provi-.led in Scliedule II is insufficient in which to make the necessary entries, attach a supiiiernental table in the same form as Schedule II. CREDIT FOR INCOME, WAR-PROFITS, AND EXCESS PROFITS TAXES PAID OR .\CCRUED TO K FOREIGN COUNTRY OR TO A POSSESSION OF THE UNITED STATES. IT. If a credit is claimed in coiuran G of Schedules I and II, a copy of Form 1116, completely filled otA and sworn to or affirm.ed, must be raib- niitted with this return. If credit' i's sought' for taxes already paid, the- form must have attached to it the receipt for each such tax payment. If credit is sought for taxes accnled. the form mu.st have att.ached to it the return on which each such accrued tax was based. (See Article Oil Of Regulations 45.) 16. When a credit is claimed for accrued taxes, the .Commissioner may. as a condition precedent to the allowance of this cix>dit, require the taxpayer to give a bond (Form 1119), with Eureties s.atisfi.ctory -to and to be approved by him, in such penal sum as he ma.v require, conditioned for the payment by the taxpayer of any amountof taxes found due if the taxes when paid differ from the amount fciaimed in respect thereof, PERIOD COVERED. 19. The taxable year is the calendar year 1919 or (if the partnership or corporation makes its return for a fiscal period of 12 months-ending on the last day of some month other than December) the fiscal period ended in the calendar year 1919. 20. A partnership or corporation desiring to change the period for which its return is made from a calendar year to a fiscal year or vice versa, or from one fiscal year to another, must give written notice to the Collector of such change and the reasons therefor at lea.st 30 days before the due date of its return on the basis of its existing taxable year and at lea.st 30 days before the due date of the return on the basis of the jiroposed taxable year. (.See Articles 2G, 322-324. 41 1, and 431 of Regulations 45, a 1 Sec- tion 22G of the Revenue Act of 1918.) TIME AND PLACE FOR FILING. 21. -' Returns must be sent to the Collector of Internal Revenue for the district- in which the partnership’s or corporationig principal place of business is located, so as to reacli the Collector’s office on or before the 15tli day of the third month follotving the close of the taxable year, unless an extension of time lias been granted. SIGNATURES AND VERIFICATION. 22. Rctums of partnerships must be sworn to by a memlxr of the partnership. Corporation relurns must be sworn to by the president, vice president, or other jirincipal officer and by the treasurer or assistant treasurer of the corporation. If rrreivers. (nistcos in bankruptcy, or assignees are operating the jiroperlj’ or business of the purlnersliip or conioration, such roeeiver'--. frustec's, or assignee:, shall e.xccutc the rctuiii under oath. PENALTY FOR FAILURE TO FILE RETURN ON TIME. 23. A penally of not more than $1,000 attaches for f.iilure to file a return wiijiin the time required liy law. If the failure js willful or art attemiit is made to defeat or evade, the tax, the penalty is $10,000 or im- prisonment for not more than one year, or Ixith. together with cost^ of prosecution. »-«««* ! ri'-OliK* M'.-ix Supplemen'i ary I’a^e 79. I’ayr 3 of I'orui Page 3 ’of Instructions. SCHEDULES SUPPORTING SCHEDULE A. Tke schedules called for below should be prepared and firmly stapled to this return. Designate each schedule with the number, of the item in Schedule A which it e.xplains. Make schedules on paper of uniform size so far as practicable. Attach a list of schedules accompanying this return, giving for each a brief title and schedule number References to RegulatSms 45 are to revised edition. SCHEDULE A2: COST OF GOODS SOLD, EXCLUSIVE OF EXPENSES, REPAIRS, AND OTHER ITEMS CALLED FOR SEPARATELY. In support of Item 2. Schedule A. partnerships or corporations engaged in manufac- turing or trading operations should submit an analysis, in reasonable detail, of the cost of goods sold. This statement should ordinarily include the following items but should not include any expense items called for separately in Schedule A. 1 Inventories at beginning of period fto be recopcilcd with balance sheet) 2. Purchases during period. 3. Labor and wages ordinarily charged to manufacturing cost on the partnership's or coTKiration’s books, showing the principal items separately 4. Other expenses ordinarily charged to manufacturing cost on the partnership's or corporation’s books. (Stale separately large or unusual items.) 5.. Total. Deduct; 6 Inventories at close of period (to be reconciled with balance sheet) 7 Cost of goods sold (Item 5 less Item 6) XoTE.— Inventories should be valued at (a) cost or (1) cost or market, whichever is lower. Whichever basis is adopted m\i3t be applied to each item of the inventory Inventories should be recorded in a legible manner, properly computed and simimarized. a.ud should be preserved as a part of the accounting records of the taxpayer. If claims for losses on inventories or rebates on sales have been allowed to the indiWdual members lor the taxable year 1918. the opening inventory must bo reduced by the amount of the claims allowed. (See Articles 2CG and 1581 to M.S5 of Kegulations 4.5.) SCHEDULE A3: CROSS INCOME FROM .SERVICES, AND OPERATIONS OTHER THAN TRADING OR MANUFACTURING, LESS ALLOWANCES. Submit a schedule showing the nature and amount of the principal items included in Item 3 Schedule A SCHEDULE A4: INTEREST ON OBLIG.ATIONS OF UNITED STATES ISSUED SINCE SEPTEMBER 24, 1917. Information regarding the amount of tho parlneiship’s or corporation’s holdings of obligations of tho United States issued since September 24, 1917, and the interest received thereon, must bo fiirniohcd in sufficient detail to enable the members of the partnership or personal scnice corporation to report corroctiy tho amounts on their individual returns. Submit a schedule, showing in separate columns tho following information with jcspect to each' class of oblig.ations of tho United States issued since September 24, 1917. 1. Description of obligations. 2. First and last dates of each period during which tho holdings of each class of obligations remained unchanged. 3:. Amount of obligations of each class held during each such period. 4. Rate of interest. 5. Interest derived from each amount of principal staled in column 3. Enter as Item 4, Schedule .V, tho total of column -5 for all classes of obligations. ' I SCHEDULE AIS: COMPENSATION OF MEMBERS OF THE PARTNERSHIP OR CORPORATION. jj Submit a schedule showing for each member of the partnership or tor each share- " holder who drew a salary from the corporation or was engaged in its business. (1) name, I (2) duties, (3) time devoted to speh duties, and (4) total annual compensation. A per- 1 sonal service corporation should also explain fully the manner and degree iu which the j earnings of the corporation are dependent on tho activities of the active shareholders or j fc‘'members.'’ ! ^’SCHEDULE A16: REPAIRS (including labor, supplies, overhead, and other I ^ items properly chargeable to repairs). I 'J Submit a schedule showing the nature and amount of the principal items included ' ftin Item 16, Schedule A. ( 3 Incidental repairs, which do not add to the value or appreciably prolong the life of j- property, are deductible as expenses. Expenditures for new buildings or tor permanent ‘ limprovemcnts or betterpents which increase tho value of the property are chargeable ^ to capital account. Expenditures tor restoring or replacing property are not deductible !; under this or any other item of the return. Such expenditures are chargeable to capital f' account or to depreciation reserr es, depending on the treatment of depreciation on tho fe books of tho taxpayer ^'SCHEDULE A20: EXHAUSTION, WEAR AND TEAR (including obsolescence). i Submit a coUunnar schedule containing in the most practicable form substantially g the following information: 1 A clas-sification of depreciable assets subdivided on the bases of (a) character, end I (6) term of useful life. 2. The year of acquisition of such assets if prior to tax year. If acquired during tax ^ year, give actual date; ■ ‘ 3. Nature and amount of consideration given in payment. 4. Tho fair market value of such assets ll.-j-ch I, 1913. if acqiured before that date. 5. The estimated life or teim of reasonable usefulness of such assets trom date acquired or from March 1, 1913, if acquired prior thereto. Give reasons for your conclusions, t 6. For each class of assets state: ", (a) The total provision lor depreciation made on tho books of the corporation, 'i from date of acquisition to the beginning of the taxable year, f (6) The total amount of depreciation (exhaustion, wear and tear, including : obsolescence) claimed for the taxable year. 7 A rcconciliation'of all figures in this schedule with corresponding figures reflected; in the balance sheets. 8. If any plan of depreciation other than the "straight line" method contcmplatedi by the above instructions is used, a full explanation thereof with justification, should be given. I SCHEDULES A24 and A2S: PROFIT OR LOSS ON SALES OF CAPITAL ASSETS and miscellaneous investments, and LOSSES sustained during the taxable j year from fire, storm, or other casualty, or from theft, not compensated for j by insurance or otherwise. ^ Submit a columnar schedule setting forth for each sale of capital assets or of misceilane- OU3 investments and for each loss during the taxable year the information called for belowt y 1. Description of property sold or of property in respect of which a loss is claimed. 2. Date acquired. 3. Fair market price or value on March 1, 1913, if acquired before that date, or cost if acquired after February 28, 1913. 4. Cost of improvements, if any, since February 28, 1913, or since date of acquisition,. if acquired after February 28, 1913. 6. Total of Items 3 and 4. Submit also a statement in similar form to tho above, with regard to bonds and other obligations not subject to income tax. (See Section 215 (6) (4) of the Act of 1918). SCHEDULE A5: INTEREST FROM OTHER SOURCES (not including intere.t referred to in Schedule B, Item 6). Submit a schedule showing the source, nature, and amount of the principal items Included herein, the minor items being grouped in one figure. Tho total of the schedule should be entered as Item 5, Schedule A. For interest on foreign bonds show (a) name of country; (5) kind of obligations (whether national, State, municipal, or corporate obligations); (c)*mount of principal; and (d) amount of interest. SCHEDULE A9: CASH DIVIDENDS ON STOCK OF DOMESTIC AND RESIDENT CORPORATIONS. Submit a schedule showing (e) name ot cor|>oration ; (b) State iu which organized; (c) total par value of stock held; and (d) amount of dividends. SCHEDULE All: DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS. 6. Depreciation or depletion of property subject thereto— (a) Per books. (5) Accrued but hot on books. 7. Salvage value, if any, of property on which a loss is claimed. 8. Amount of insurance or other recovery on property, if any. 9. Proceeds of sale or cash value of property received in exchange (for transactions falling in Item 24, Schedule A) (see Note). Id. Total of Items 6 to 9, inclusive. 11. Profit or loss. 12. Cause of loss (lor losses falling in Item 25, Schedule A). Note. — Submit evidence substantiating the basis used by you in arriving at th® I value of property received in exchange for other property. I SCHEDULE A26: AMORTIZATION OF WAR FACILITIES. i If a claim for amortization is made, the amortization allowance should be spread in I accordance with the profits of the business over the entire amortization period in monthly ; estimates, and there should be entered as the amortization deduction in this rckurii the I aggregate amounts assigned to those months of the amortization period which are included i in the taxable year. If tho return is made for a fiscal year ending in 1919, Article 185 ot t Regulations 45'should be interpreted as above set forth. The im'ormatioa called for in ! Article 188, Regulations 45, should also be submitted. Submit a schedule showing (a) name of corporation; (6) country in which organized; (e) total par value of stock held; and (d) amount of dixidends SCHEDULE A12: GROSS INCOME FROM ALL OTHER SOURCES (not in- cluding any amount in respect of sales of capital assets or miscellaneous investments) Submit a schedule showing the source, uatvirc, and amount of the principal items included herein, the minor items being grouped in one figure. Tho total of the schedule should be entered as Item 12, Schedule A. SCHEDULE A14: ORDINARY AND NECESSARY EXPENSES (except amounts called for separately in Schedule A and not including cost or value of capital assets or miscellaneous investments sold during taxable year). • Submit 1 ^ statement showing character and amount of tho principal items included Spi Itepi 14; Schedule 4. CAPITAL EMPLOYED IN BUSINESS. If tho balance sheet (Schedule C) of a personal service corporation indicates that a substantial amount of capital (invested or borrowed) is employed in the business, submit a statement explaining why the employment of such capit.al is incidental and not j necessary. ’ WORKING PAPERS. Eve^ partnersliip or corporation should prcscrvxq available for inspection by a revenue' officer, working papers showing— 1 1. Tho balance in each account on the partnership’s or corporation’s books that was used in preparing Schedule A. 2. The amount deducted from each such balance on account of each class of non- taxable income, unallowaljlo deductions, and other adjustments indicated in Schedule B, with a reference to the nunibcl of the item iu Schedule B in which each amount so deducted was included. 3. The remainder of each such '-alance, analyzed to show the amount included in each item of Schedule A, with a reference to the uumhor of the item in Schedule A' in which each euch amount was included. . t-6»» IncomCj^Tax Supplementary Page 80. Page 4 of Form 1Q65A. # 9 9 9 ) ) I tc « s (ca g S o o g 5 ft t3 o W ;2; fad C:^ A <; I I o •♦-» o ■'o' o o C:, o' 0 S 1 ^ u aC'o h, ©— © O ^ M S « 4>»s ^ 2, Jr ^ ce o JO ®®*e fe p •g g*s 3 33 «S © r^os ®5i® •>-> aT ® -S ‘"1-3 «« ^ rt « « •—_«)'©© ^ rtj ** © ^ « S cs o ! -^ © — t£ o - :c* X .Z Ci I . I ^ Id >> •GI-I2 ‘JiiV ‘‘0 \>I— OOO'OOi! P'J •XV JL aIAIO^^[I-^ilIlM:■IAa>l av^aixaj.Ni ‘xxapvxuvciaa AJixibvaax Income 'i’ax Supplementary Page 81 TRELASTRY DEPARTMENT Intermal Revente BimEA0 Form 1117 Income and Profits Tax Bond UNDER SECTION 222 (b) OF THE REVENUE ACT OP 1918 KNOW ALL MEN BY THESE PRESENTS, That we, of , as principal, and of as surety, are held and firmly bound unto the United States op AjueeiCa in the 'stun of Dollars, lawful money of the United States, for the pay- ment whereof we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally, firmly by these presents. Whereas, at the time of filing his return of income for the taxable year 1918, the above-bounden principal claimed a credit on his income tax return for taxes accrued but not paid to foreign countries or to possessions of the United States, and duly attached thereto Form 1116 prescribed for such purpose; and Whereas, Section 222 (b) of the Revenue Act of 1918 provides -that in the case of such a tax accrued but not paid, the Commissioner, as a condition precedent to the allowance of the credit, may require the taxpayer tp give bond, with satisfactory sureties, in such penal sum as the Commissioner may require, conditioned upon the payment by the taxpayer of any amoimt found to be due, and the amount of this bond is equivalent to the amount of the credit claimed, which is in accordance with the Commissioner’s requirements: Now, THEREFORE, the Condition of the foregoing obligation is such that if the principal shall,, on notice and demand by the Collector, duly pay any income, war profits, or excess profits tax found by the Commissioner to be due from the principal, under the Revenue Act of 1918, and shall otherwise well and truly perform and observe all of the provisions of law and the regulations, then this obligation is to be void, but otherwise to remain in full force and virtue. Witness our hands and seals, this day of , 1919. Signed, sealed, and delivered in the presence of-^ (l. s.J Bond approved this day of 1919. Principal. .[L. 8.] Surety. .[l. s.] Commissioner of Internal Bevenue., Income Tax Supplementary Page 82 Form 1118 — TTnited Statm Interval Retenttk Seevtce. CLAIM FOR CREDIT ON INCOME AND PROFITS TAX RETURN OF DOMESTIC CORPORATION FOP TAXES PAID OR ACCRUED TO FOREIGN COUNTRIES OR TO POSSESSIONS OF THE UNITED STATES ■ , - ; Name of corporation Address. (aty or town.) (Street and number.) (State.) On behalf of tho above-named domeetic corporation, credit is hereby claimed, on the attached corporation income and profits ta.7 return, which is based on income ' for the taxable year (Received or accrued.) of the above-named corporation, for taxes as follows: (Paid or accrued.) 'If calendar year; give year; If fiecaf y^, give montbs.) Taxes Paid or Accrued* During the Taxable Year to Possessions of the United States on Behalf of the Corporation. Schedule .A1. .. •- - Name of p<»soe3ion imposing taS: Character of tax (Income, war profits, or excess profits.). Date of accrual Date of pajTnent (if paid) .’.i Statute impoeing tax (To be named fully and clearly so as to be easily Identified.) 1 . Amount of tax pajTnent (e'videnced by attached receipt or return) which (converted (In foreign money.) at an exchange rate of ®) equals in dollars.. Taxes Paid or Accrued* During the Taxable Year to Possessions of the United States on Behalf of the Corporation. Schedule A2. Name of poaeeasion imposing tax Character of tax Date of accrual Statute imposing tax .1. Amount of tax' payment (e^'idenced by attached receipt or return) which (converted (Inoome,.war profits, or excess profits.) Date of payment (if paid) (To be named fully and clearly so as to be easily identified.) (In foreign money.)' ■ - .»t i. , '■ '^5?,^ at an exchange rate of ®) equals in dollars... $ Taxes Paid or Accrued' During the Taxable Year to a Foreign Country on Behalf o/ the Coloration. ' ‘ ' _ ScHEDtTLE Bl. ■ ** . Name of foreign country imposing tax Date of accrual Statute impofling tax ►'I. Total net income on which tax was based . ^ j ^ . ( Income, war profits, or excess profits.), Date of pa3anent (if paid) (. , -.i f •'iOt'i. Li*, r; rj . ■-f ■'* \ (To be" nam'cd fully and clearly so ns to bis easily identlfledj ~~ s V —A •2. Thiit amount of such total net income which was derived from sources in that foreign country * ^ ... ^ J. Ratio of total net income derived from sources in that foreign country to total net income on which tax was , 7.1 1 uv-ri, J (item 2 divided by item 1) I ” 1 ' 4. Total amount of this tax payment or accrual to that foreign country (evidenced by attached receipt or return) . ■■ .1 ' ..j 6. That amount of this tax payment or accrual which was based on income derived from sourcee in tb^ foreign.,;; country (item 3 multiplied by item 4) * which (converted at &n exclhange'yate"'' " (In foreign money.) . ... . . , . of *) equals in dollars See notes on poge 3. [Page 1 of Form 1118. Income-Tax: Supplementary Page 837 . Taxes Paid or Accrued‘ During the Taxable Year to a Foreign Country on Behalf of the Corporation^ Schedule B2. l{ame of foreign country impoaing tax Date of accrual Statute imposing tax Character of tax 'Income, war profits, or excess profits.) Date of payment (if paid) (To be named fully and clearly so as to be easily identified.) 1. Total net income on which tax was 2, That amount of such total net income which was derived from sources in that foreign cotmtry * * 3. Ratio of total net income derived from sourtfes in that foreign country to total net income on which tax was based (item 2 divided by item 1) 1 .4, Total amount of this tax payment or accrual to that foreign country (evidenced by attached receipt or return) ’ *5. That amount of this tax payment or accrual which was based on income derived from sources in that foreign country (item 3 multiplied by item/4} * which (converted at an exchange rate tin foreign money.) of ») equals in dollars $ i.... Taxes Paid® during the Taxable Year to a Foreign Country or a Possession of the United States by a Controlled Foreign Corporation. Schedule C. (N OTE.— No credit can be claimed for taxes paid on behalf of a foreign corporation the dlvldends'frora which are deductible from gross income under section 234 of the Mt.{ Foreign Corporation Name . „ Address (City or town.) Incorporated under the laws of Capital stock (Street and number.) (Jountry.) Preferred Common. Total Number of shares outstanding... Number of shares owned by above-named domestic corporation Has preferred stock voting rights? eyes or no.) l^ame of foreign country or poesesaian of United States imposing tax Character of tax (Income, war profits, or excess profits.) Statute imposing tax ... Date of payment of tax (To be named fully and clearly so os to be easily Identified.) Was any pful of the net income on which this tax was based. derived from sources within the United States? (Yes or no.) 1 Pfirifid f»f or'enia.l of this tax paymont * 2. Amottnt of this tax payment (evidenced by attached mceiptF - - - Total 3. Net income on which this tax was based ® Total 4; Amount received during the taxable year by the above-named domestic corporation as dividends from such foreign corporation 6 Ratio of the amount of such dividends to total net income on which this tax was based (item 4 divided by ^ total items 3}^ .i-'-i.... - (5. That aoKmnt of this tax payment which is available for credit on return of above-named domestic corporation (total items 2 moltipUed by item 5, unless this product is in excess of total items 2, in which case total items 2 must be entered here instead of such product) which (converted at an _ (In foreign money.) exchange rate of .4 *) equals in dollars .V. -— See notes on page 3. [Page 2 of Form 1118.1 Income Tax Supplementarjr Page S4 SUMMARY* OF CREDITS CLAIMED FOR TAXES PAID OR ACCRUED ON BEHALF OF CORPORATION, To a possession of the United States (item 1 of Schedule Al)' : $ To a possession of the United States (item 1 of Schedule A2) $ To a foreign country (item 5 of Schedule Bl) $ To a foreign country (item 5 of Schedule B.2) $ To a foreign country or a possession of the United States on behalf of a controlled foreign corporation (item 6 of Schedule C) $ Total credit claimed (to be entered in Schedule IV of atttached corporation return — as item 19 if return is on Form 1120, as item 29 if return is on Form 1120-A)_ $ We, the undersigned, president and treasurer of the corporation fof which this claim is made, being ^verally duly sworn, each for himeelf deposes and says that this claim has been examined by him and is to the best of his knowledge and belief a true and com- plete statement of facts in connection with the credit for income, war profits, and excess profits taxes claimed herein. Sworn to and subscribed before me this day of 19 Pre^dmt. (Offi^ capacity.) Treoaur^. « Tf attached income tax return is based on income “received ”, then “ paid or accrued ” wherever it appear; in this form (except in Schedule C) moans “paid II based on income “accrued,” then “poid or accrued” means "accrued ” (See section 200 of the Revenue Act of 1918.) * State thisitem in terms of the currency used in making the return oh which this tax was based (e. g., pounds, francs, marks). » Claimant must here state raw of exchange used and must also attach a statement, describing in reasonable detail why and how ho determined updn this particular rate. < The person making this claim must attach to it a statement describing in reasonable detail the method by which ho determined the amount of item 2. » Credit can be claimed for taxes paid on behalf of a forcign-controllcd corporation only in the taxable year during which such taxes aro paid. There is no such credit for taxes accrui-d • Where this tax payment was of taxes accrued during only one year, give dates of beginning and ending of such year in first column (c. g., July 1, 1917— June 30, 1918). Where this tax payment was of taxes accrued during more than one year, give in separate columns the dates of each aimual period during which any part of this tax payment accrued. ’ State in column under each annual period named in item ) the amount of this tax payment which accrued in such period. » State in column under each part of this tax payment as given in item 2 the amount of the net income upon which such part of tho tax payment was based. » Where there are more than two possessions of the United Stales or foreign countries to which taxes are paid by the domestic corporation, or nrore than one controlled foreign corporation, or more than one possassion of the United States or foreign country to which taxes are paid on behalf of a controlled foreign corporation, additional schedules should bo attached, and the credit claimed on each such schedule should bo written Into this Summary. 2 — eoss I [Page 3 of Form 1118.1 ItK:om« Tax Suppdemtntarf Page 85 INSTRUCTIONS REGARDING USE OF FORM 1118 CREDIT FOR TAXES Provisions of Reven ue Act of 191.8 Seo. 238. (a) That in the case of a domestic corporation Ihe total taxes imposed for the taxable year by this title and by Title III shall be credited with the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States. If accrued taxes when paid differ from the amounts claimed as credits by the corporation, or if any tax paid is refunded in whole or in part, the corporation shall at once notify the Commissioner who shall redeter- mine the amount of the taxes due under this title and irnder Title III for the year or years affected, and the amount of taxes due upon such redetermination, if any, shall be paid by the corporation upon notice and demand by the collector, or the amount of taxes overpaid, if any, shall be credited or refunded to the.corpora- tion in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the corporation to give a bond with sureties satisfactory to and to bo approved by him in such penal sum as he‘may requii’e, conditioned for the payment by the taxpayer of any amount of taxes foimd due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require. (b) This credit shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the , United States, as the case may be, and aU other information necessary for the computation of such credit. (c) If a domestic corporation makes a return for a fiscal year beginning in 1917 and ending in 1918, only that proportion of this credit shall be allowed which the part of such period within the calendar year- 1018 bears to the entire period. Sec. 240. (c) For the purposes of section 238 a domestic corporation which owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any mcoine, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States, which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: Providedy That in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year. CoNDraoNs OF Allowance of Credit. — {a) When credit is sought for income, war-profits or excess- profits taxes paid other than to the United States, the income and profits tax return of the corporation must be accompanied by this form, carefully filled out with all the information called for and with the calculations of credits indicated, and duly signed and sworn to. When credit is sought for taxes already paid the form must have attached to it the receipt for each such tax payment. When credit is sought for taxes accrued the form must have attached to it the return on which each such accrued tax was based. This receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original, or a duly .certified or authepticated copy, {h) In the case of a credit sought for a tax accrued but not paid, the Commissioner may require as a condition precedent to the allowance of credit a bond from the taxpayer in addition to this form. If such a bond is required. Form 1119 shall be iLsed for it. It shaV be in such penal sum as the Commissioner may prescribe, and shall be conditioned for the payment by the taxpayer of any amount of tax found due upon, any redetermination of the tax made necessary by such credit proving incorrect, with such further conditions as the Commissioner may require. This bond shall be executed by the taxpayer, its agent or repr^entative, as principal, and by sureties satisfactory to and approved by the Commissioner. See also section 1320 of the Revenue Act of 1918. Articles 611 and 383, Regulations 45. ' [Page34 of Form’ 1118.1 Income StipplcmentaryjPage 86 ORIGINAL For uso of Nonresident Allens as to United States Form KHOC-UNITEB STATES INTERNAL REVENUE SERVICE INDIVIDUAL INCOME TAX RETURN FOR NET INCOMES OF NOT MORE THAN $5,000 For Taxable Period 1919 PRINT NAME AND ADDRESS PLAINLY BELOW Name ^ Address Subject of INCOME FOR PRIOR YEARS VEAR AMOUNT OF INCOME.! TAX DISTRICT IN WHICH RETUR.N WAS FILED $ 1917 1918 INCOME FROM SALARIES, WAGES, COMMISSIONS, BONUSES. ETC., FOR 1S19 1. By whom rocelvid. | 1 2. Occupation, 3. Name and address of employer. 4. Not inromo. 5. Tax wllbbelJ 1,1 tony $ ^ - Total..... $ - CALCULATION OF TAX FOR 1919 0« B«l wnic iKie. A. Nel hitoaie f._ D» M her*. D. Tii due (8% OD aiBwiBl of Ileia C) $ B. Less persoul cicnptioe . . L Lest lu wilhbdil at seme* C Balinre finrome lasahle at RtSl f r. tbiLfirp of Ixi dup . .. f. 1 G. Aieoiial of las paid on tnbiaitsiee of rttam AFFIDAVIT 1 swoar jor uninn) lh;it fliis return, to tho beat of my knowledge and belief, ia a true and complote slatemcnt of all taxable gains, profile, and incoini- Tcceivcd by or accrued lo me (or the person for whom this return ia made) during tlio year 1919, and that ail dr-diietiojw entered or claimed herein arc allowable under the law. (If rotum lx made by ii Notes in lieu of cash. .597 Obligations of corporations defined. .615 Equipment trust notes. .616 . Investment certificates. .617 Scrip.. 618 Municipality purchasing public utilities. .620, 969 Interest coupons for funding bonds. .681 Retirement of bonds . . 682 Privately printed forms. .694 Surtax: husband and wife. .739 Income received through fiducaries. .741, 937 Dividends received through fiducaries. .743, 942 Foreign dividends. .791 Salaries paid by exempt corporations. .861 Living quarters. .862 Clergyman’s fees. .886 Property acquired by gift. .931 Legacies. . 932 Beneficiary to make own return. .943, 1212 Life insurance. .947 Decedent’s salary continued to widow. .962 Premium on fidelity bond. . 1047 Losses: “In Trade” .. 1070 Losses: Book values. . 1079 Depreciation: Farm buildings. . 1090 Agents vs. fiducaries. . 1073 Attorney-in-fact. .1174 Dividends paid by foreign corporations. . 1370 Foreign pensions. . 1388 Duty to make returns: corporations. .1400 Acknowledgments by persons residing abroad. . 1465 Notary’s seal. . 1468 Corporation’s principal place of business. . 1532 ■ ' Corporations in Philippines and Porto Rico. .1534, 1535 Corporations transacting no business during year. . 1707 Corporations in existence but part of year. . 1709 Corporations owning sugar plantations. . 1774 Corporations engaged in agricultural pursuits. . 1775 Fruit growers associations. . 1779 Assessments on capital stock. . 1952 Salaries paid salesmen .. 2004 • Commission to real estate agents. .2005 ’ Taxes assessed against local benefits. .2044 T: D. 2135 (A SYNOPSIS OF DECISIONS ISSUED JANUARY 23, 1915) Citizenship. .485 Withholding: Federal officers. .586 Miscellaneous income defined. .594 Income Tax Supplementary Page 107 T. D. AND SPECIAL MATTER FINDER. T. D. 2135 — Concluded. (The references are to paragraph numbers.) Appointment of paying agent. .625 Filing of return by paying agent. .627 Filing list returns.^. 716 Corporations availed of to avoid surtax. .750 Taxes paid by bank on outstanding stock. .796 Rental payments other than in cash. .852 Trustee’s services. .885 Accident expenses. . 1002 Accident insurance. . 1003 Losses. . 1072, 1080 Expenses of administration. . 1251 Secrecy of returns of withholding agents. .2649 T. D. 2137 (SYNOPSIS OF DECISIONS ISSUED JANUARY 30, 1915) Royalties. .504 Surtax: Husband and wife. .740 Income from private banks. .794, 1733 Private bank owned by individual, .929, 1737 Profits of partnerships as dividends. .797 Dividends paid on insurance policies. .798, 952 Insurance agent’s commissions. .888 Expenses: Non-taxable income. . 1030 Tentative returns by foreign corporations. . 1440 Returns to set forth: Stock. . 1444 • Returns to set forth: Interest bearing indebtedness. . 1446 'Supplementary statements of public service corporations. . 1447 iBooks kept abroad. . 1533 Corporations: Porto Rico. . 1536 Supplementary statements of corporations. . 1644 Corporations formed to hold property to avoid partitioning. . 1713 Corporations owned by exempt corporations. . 1714 Private bank having corporate organization. . 1732 Cost of real estate. . 1881 Interest on capital Invested, . 1962 Additions and betterments made by tenant corporations. . 1967 Fore'gn corporations doing business by agents. .2290 T. D. 2152 (SYNOPSIS OF DECISIONS ISSUED FEBRUARY 12, 1915) Income from private banks. .792 Bonuses. . 859 •Life insurance. ,947 Corporations subject to tax. .1702 Royalties from mines. .1817 Cost of manufactured products. . 1960 Franchise, etc., taxes deductible. .2046 Depreciation: Stocks and bonds. .2127 Income taxes to other countries. .470 REGULATIONS NO. 33 (January 5, 1914) Article Paragraph Article Numbers Numbers Numbers 10. .1135, 1141, 1151 55. . 1385 14.. 1288 57. .1382, 17. .1162 62. . 1387 18. .1166 64. .722 22.. 1461 67. .854 23.. 1503 69. .701 32. .566 72. .1213 33. .589, 725, 2518 73. .1177 34.. 721, 727 83. .2318 35. .714, 717 84. . 1706 37.. 619 95. .1443 38.. 623, 624, 626, 715 112. .1804 39. .659 116. .2295 40. .635 117. .2006 31. .718 126. Income Tax .2101 Paragraph Numbers 1383 Supplementary Page 108 T. D. AND SPECIAL MATTER FINDER. REGULATIONS NO. 33 — Concluded. Article Paragraph Article Paragraph Number Number Number Number 146. .2149 185. .742 173. .1506 186.. 2351 178. .1645 189. .724 179.. 1646 196. .719, 1474 182.. 1940 183.. 1942 197. .2400 REGULATION NO. 33, REVISED (January 2, 1918) Article and Our Article and Our Paragraph Paragraph Paragraph Paragraph Number Number Number Number 3— ARTICLE 63. . 1856 7. .1228 71. . 1013 11. .1270, 1283 8 -ARTICLE 4— ARTICLE 83. .2113 12. .769 84. .2109 13. .1012 86. .1101 14. .879 87. .1103 15. .925 88. .1104 16. .926 89. .1105 17. .927 90. .1105 18. .856 91. .1105 19. .880 92. . 1106 20. .881 93. .2099 21. .849 94. .2091 22. .850 95. .2092 23. .1180 96. .2093 24. .1220 97. .2096 26. .830 98. .2097 27. .773 99. .2098 28. .826 100. . 1951 29. .902 101. . 1042 30. .903 102. . 1250 31. .904 103. . 1043 33. .905 104. . 1038 34. .906 105. . 1953 35. .907 106. . 1954 36.. 908 107. . 1955 37. .909 108. . 1950 38. .911 109. . 1045 39. .912 110. .2017 40. .933 111 . . 1996 41. .934 112. . 1041 42. .788 113. . 1977 43. .928 114. . 1036 44. .935 115. . 1976 45. .948 116. .2038 46. .953 117. .2047 47. . 1014 118. .2054 48. .1282 119. .2055 49. .939 120. . 1081 50.. 1973 121. . 1082 51. .857 122. . 1083 52.. 882 123. . 1092 53.. 883 124. . 1091 54.. 884 125. .2209 55. .871 9— ARTICLE 56. .887 126. .1126 57.. 851 10— ARTICLE 58. . 878 131. .531 5 9.. 889 12— ARTICLE 60.. 827, 1875 141.. 539 61.. 1829 13— ARTICLE 62.. 520 142.. 543 Income Tax Supplementary Page 109 T.ID. AND SPECIAL MATTER FINDER. REGULATIONS NO. 33. REVISED— Continued. Article and Our Paragraph Paragraph Number Number 14— ARTICLE 151. . 1164 152. . 1181 153.. 1130 154.. 744, 1139 156.. 1140 ' 20— ARTICLE 162.. 842 r 22— ARTICLE 165.. 1159, 1502, 1508 23— ARTICLE 166. . 1146 24— ARTICLE 167. . 759 ‘25— ARTICLE 168. . 1634 26— ARTICLE 169. . 1145 170. . 1137 171. . 760 172. . 1528 174. . 1529 175. . 1462 176. . 1466 177. . 1467 178. . 992 179. . 1223 180. . 1224 181. . 1243 182. . 1157 183. . 1156 184. . 1226 27— ARTICLE 185. . 1160 186. . 1197 28— ARTICLE 187. . 545 [29— ARTICLE 188. . 1266, 1268 189. . 1170 190. . 1171 191. . 1172 192. . 1222 193. . 1219 194. . 1245 195. . 1221 197. . 1225 198. . 1182 199. . 1257 200. . 544 201. . 938 202. . 1202 203. . 1163 204. . 1201 205. . 1161 206. . 1229 207. . 1230 208. . 1232 209. . 1246 210. . 940 30— ARTICLE 211. .1284 212. . 1286 213. .1287 Article and Our Paragraph Paragraph Number Number 31— ARTICLE 214.. 1293, 1299 215. . 1300 32— ARTICLE 219.. 495 220.. 528 221.. 563 222. . 733 33— ARTICLE 232. . 1397 34— ARTICLE 233.. 1323 234. . 1327 235. . 1343 35— ARTICLE 236.. 5ee T. D. 2759 237.. 5ee T. D. 2759 238. . 5ee T. D. 2759 239. . 5ee T. D. 2759 36— ARTICLE 240. . 1372 37— ARTICLE 241. . 1377 38— ARTICLE 243. . 2368 244. . 2369 245.. 2592 39— ARTICLE 247. . 2353 248. . 2464 41— ARTICLE 251. . 2427 252. . 2399 253. . 2366 42— ARTICLE 254. . 639 256. . 639 257. . 640 260. . 702 261. . 643 262.. 651 263. . 654 264. . 657 265. . 629 266. . 630 267. . 631 268. . 632 269. . 633 46— ARTICLE 273. . 699 48— ARTICLE 276. . 1380, 1390, 1392 49— ARTICLE 277. . 591 50— ARTICLE 278. . 593 52— ARTICLE 284. . 1579 285. . 1569 286. . 2395 287.. 1478 54— ARTICLE 291.. 1562 Income Tax Supplementary Page 110 T. D. AND SPECIAL MATTER FINDER. REGULATIONS NO. 33, REVISED— Continued. Article and Our Article and Our Paragraph Paragraph Paragraph Paragraph Number Number Number Number 292 . . 1563 294 .. 1565 295 . . 1580 57— ARTICLE 299 .. 1687 58— ARTICLE 300 . . 1688 60— ARTICLE 303 . . 1705 61— ARTICLE 304 .. 1731 63— ARTICLE 306 . . 1271 66— ARTICLE 309 . . 2288 310 . . 2289 311 . . 2312 67— ARTICLE 312 . . 1757 68— ARTICLE 313 . . 1759 314 . . 1760 69— ARTICLE 316 .. 1765 70— ARTICLE 317 . . 1766 71— ARTICLE 318 . . 1767 319 . . 1768 72— ARTICLE 320 . . 1769 321 . . 1770 322 . . 1771 73— ARTICLE 323 . . 1772 324 . . 1773 74— ARTICLE 325 . . 1776 75— ARTICLE 326 .. 1777 327 . . 1778 76— ARTICLE 328 . . 1784 329 . . 1785 77— ARTICLE 330 . . 1786 78— ARTICLE 331 . . 1758 79— ARTICLE 332 .. 1761 333 .. 1762 80— ARTICLE 334 . . 1763 335 .. 1764 81— ARTICLE 336 . . 590 82— ARTICLE 339 . . 1708 83— ARTICLE 341 . . 968 84— ARTICLE 342 . . 970 85— ARTICLE 343 . . 978 344 . . 979 86— ARTICLE 345 . . 1793 346 . . 1794 347 . . 1795 87— ARTICLE 348 .. 997 88— ARTICLE 349 . . 1789 89— ARTICLE 350 . . 2297 90— ARTICLE 351 . . 1790 352 .. 1791 91— ARTICLE 353 . . 1796 92— ARTICLE 354 . . 1797 355 . . 1798 93— ARTICLE 356 . . 1799 94— ARTICLE 357 . . 1838. 1840 358 . . 1839. 1840 95— ARTICLE 359 . . 1828 96— ARTICLE 360 . . 1834 97— ARTICLE 361 .. 1830 362 . . 1831 98— ARTICLE 363 . . 1832 99— ARTICLE 364 . . 1833 101— ARTICLE 366 . . 1901 367 .. 1902 102— ARTICLE 368 . . 1716 369 . . 1717 103— ARTICLE 370 . . 1836 104— ARTICLE 371 . . 1837 105— ARTICLE 372 . . 1835 107— ARTICLE 374 . . 804 375 . . 805 108— ARTICLE 378 . . 1803 109— ARTICLE 379 . . 1815 110— ARTICLE 380 . . 1805 111— ARTICLE 381 .. 1876 112— ARTICLE 382 . . 1877 383 .. 1878 113— ARTICLE 384 .. 1816 114^ARTICLE 385 . . 1792 Income Tax Supplementary Page 111 T. D. AND SPECIAL MATTER FINDER. REGULATIONS NO. 33, REVISED— Continued. Article and Our Paragraph Paragraph Number Number 115— ARTICLE 386 . . 2104 116— ARTICLE 387 . . 1872 388 . . 1873 117— ARTICLE 390 . . 1890 391 . . 1888 392 . . 1889 118— ARTICLE 393 . . 1903 119— ARTICLE 394 . . 1904 120— ARTICLE 395 . . 1891 396 . . 1892 397 . . 1893 121— ARTICLE 398 . . 1800 399 . . 1801 400 . . 1802 122— ARTICLE 401 . . 1824 402 . . 1825 403 . . 1826 123— ARTICLE 404 . . 913 405 . . 914 406 . . 915 407 . . 916 408 . . 917 409 . . 918 124— ARTICLE 410 . . 1905 411 . . 1905 412 . . 1906 413 . . 1907 414 . . 1908 125— ARTICLE 415 . . 1718 416 . . 1719 126— ARTICLE 418 . . 1924 419 . . 1925 420 . . 1926 127— ARTICLE 421 . . 1927 422 . . 1934 423 .. 1935 424 . . 1936 128— ARTICLE 425 . . 1937 426 . . 1938 427 . . 1939 129— ARTICLE 428 . . 1956 429 . . 1957 130— ARTICLE 430 .. 1958 431 . . 1959 131— ARTICLE 432 . . 1966 132— ARTICLE 433 . . 1026 Article and Our Paragraph Paragraph Number Number 133— ARTICLE 434 . . 2011 134— ARTICLE 435 . . 2014 436 . . 2015 135— ARTICLE 437 . . 2012 136— ARTICLE 438 .. 2008 439 . . 2009 137— ARTICLE 440 . . 2010 138— ARTICLE 441 . . 1997 442 . . 1998 443 . . 1999 139— ARTICLE 444 . . 2003 140— ARTICLE 445 . . 1972 446 . . 1974 447 . . 1975 141— ARTICLE 448 . . 2021 449 . . 2022 142— ARTICLE 450 . . 2023 143— ARTICLE 451 . . 2026 144— ARTICLE 452 . . 2018 145— ARTICLE 453 . . 1948 454 . . 1949 146 — ARTICLE 455 . . 2019 456 . . 2020 147— ARTICLE 457 . . 2064 458 . . 1874 148— ARTICLE 459 . . 2067 460 . . 2068 149— ARTICLE 461 . . 2072 150— ARTICLE 462 . . 2075 463 . . 2076 464 . . 2077 151— ARTICLE 465 .. 2094 466 . . 2095 152— ARTICLE 467 . . 2079 468 . . 2080 469 . . 2081 470 . . 2082 153— ARTICLE 471 . . 2071 154— ARTICLE 472 . . 910 155— ARTICLE 473 .. 2084 156— ARTICLE 474 . . 2085 Income Tax Supplementary Page 112 r \ Q ( ( T. D. AND SPECIAL MATTER FINDER, REGULATIONS NO. 33, REVISED— Continued. Article and Our Article and Our Paragraph Paragraph Paragraph Paragraph Number Number Number Number 157— ARTICLE 475 . . 2086 158— ARTICLE 476 . . 2087 159— ARTICLE 477 . . 211-0 478 . . 2111 479 . . 2112 480 . . 2114 160— ARTICLE « 481. .2133 161— ARTICLE 482 . . 2157 483 . . 2158 484 . . 2159 162— ARTICLE 485 . . 2139 486 . . 2140 ] 487 . . 2123 163— ARTICLE 488 . . 2124 164— ARTICLE 489 . . 2152 490 . . 2153 165— ARTICLE 491 . . 2151 166— ARTICLE 492 . . 2162 493 . . 2163 167— ARTICLE 494 . . 2130 168— ARTICLE 495 . . 2132 169— ARTICLE 496 . . 2134 170— ARTICLE 497 . . 2172 498 . . 2173 499 . . 2174 500 . . 2175 501 . . 2176 502 . . 2177 503 . . 2178 504 . . 2179 505 . . 2180 506 . . 2181 507 . . 2182 508 . . 2183 509 . . 2184 510 . . 2185 511 . . 2186 512 . . 2187 513 . . 2187 514 . . 2187 515 . . 2187 516 . . 2187 517 . . 2187 518 . . 2187 519 . . 2187 520 . . 2187 521 . . 2187 522 . . 2187 523 . . 2187 524 . . 2187 525 . . 2187 171— ARTICLE 526 . . 2188 527 . . 2189 528 . . 2190 529 . . 2191 172— ARTICLE 530 . . 2192 531 . .2193 532 . . 2194 533 . . 2195 534 . . 2196 535 . . 2197 536 . . 2198 537 . . 2199 538 . . 2200 539 . . 2201 540 . . 2202 541 . . 2203 542 . . 2204 543 . . 2205 544 . . 2206 545 . . 2207 546 . . 2208 173— ARTICLE 547 . . 2210 548 . . 2211 549 . . 2212 550 . . 2213 551 . . 2214 174— ARTICLE 552 . . 2135 175— ARTICLE 553 . . 2088 176— ARTICLE 554 . . 2089 177— ARTICLE 555 . . 2136 178— ARTICLE 556 . . 2137 179— ARTICLE 557 . . 2138 186— ARTICLE 571 . . .2034 187— ARTICLE 572 . . 2029 188— ARTICLE 573 . . 2030 574 . . 2031 575 . . 2032 576 . . 2033 189— ARTICLE 577 . . 1814 190— ARTICLE 578 . . 2035 192— ARTICLE 581 . . 2050 582 . . 2051 583 . . 2052 584 . . 2053 193— ARTICLE 585 . . 2062 194— ARTICLE 586 . . 2042 587 . . 2043 Income Tax Supplementary Page 113 T. D. AND SPECUL MATTER FINDER. REGULATIONS NO. 33. REVISED— Continued. Article and Our Paragraph Paragraph Number Number 195— ARTICLE 588 . . 2048 197— ARTICLE 590 . . 2306 198— ARTICLE 591 . . 2323 199— ARTICLE 593 . . 2338 594 .. 2329 201— ARTICLE 602 .. 732 , 2324 202— ARTICLE 603 . . 658 604 .. 2316 605 .. 2317 203— ARTICLE 606 . . 1401 608 .. 1402 609 .. 1492 610 .. 1489 204— ARTICLE 611 . . 1490 205— ARTICLE 612 . . 1403 206— ARTICLE 613 . . 1404 208— ARTICLE 617 . . 1710 618 . . 1711 209— ARTICLE 621 . . 1430 622 . . 1431 623 . . 1432 210— ARTICLE 624 .. 1434 625 . . 1439 211— ARTICLE 626 . . 1488 212— ARTICLE 627 .. 1491 213— ARTICLE 628 .. 1493 214— ARTICLE 629 .. 1494 215— ARTICLE 630 . . 1495 216— ARTICLE 631 .. 1436 632 . . 1437 633 .. 1438 217— ARTICLE 634 . . 1496 218— ARTICLE 635 . . 1475 219— ARTICLE 636 .. 1476 ' 220— ARTICLE 637 .. 1477 221— ARTICLE 638 .. 2367 639 .. 2350 222— ARTICLE 640 . . 1504 223— ARTICLE 641 . . 1505 Article and Our Paragraph Paragraph Number Number 224— ARTICLE 642 .. 1509 225— ARTICLE 643 . . 1564 644 . . 1566 645 . . 1567 226— ARTICLE 646 .. 1642 227— ARTICLE 647 . . 1643 228— ARTICLE 648 . . 1559 649 . . 1560 650 . . 1561 229— ARTICLE 651 . . 2648 230— ARTICLE 655 .. 2355 231— ARTICLE 656 . . 2412 233— ARTICLE 658 .. 2370 659 . . 2371 660 . . 2390 234— ARTICLE 661 . . 239 ^ 236— ARTICLE 664 . . 1029 237— ARTICLE 665 . . 1394 666 . . 1395 239— ARTICLE 671 . . 2276 672 . . 2277 673 . . 2231 674 . . 2232 675 . . 2237 676 . . 2278 677 .. 2233 678 . . 2234 679 . . 2235 680 .. 2236 681 .. 2227 682 . . 2228 683 . . 2229 684 . . 2226 240— ARTICLE 685 . . 2238 686 . . 2239 687 . . 2240 688 . . 2241 689 . . 2242 690 . . 2243 691 . . 2244 692 . . 2245 693 . . 2246 694 . . 2250 695 . . 2251 696 . . 2247 697 . . 2248 241— ARTICLE 698 .. 2262 699 . . 2263 700 .. 2257 Income Tax Supplementary Page 114 T. D. AND SPECIAL MATTER FINDER. REGULATIONS NO. 33, REVISED— Concluded. Article and Our Paragraph Paragraph Number Number 701.. 2258 702. . 2259 703. . 2260 242— ARTICLE 705. . 2268 706.. 2269 707. . 2270 708. . 2271 709. . 2272 243— ARTICLE 710. . 2266 244— ARTICLE 711. . 2273 712. . 2274 245— ARTICLE 713. . 2255 246— ARTICLE 714. . 2275 247— ARTICLE 715. . 2540 248— ARTICLE 716. . 2541 717. . 2542 718. . 2543 249— ARTICLE 719. . 2544 720. . 2545 721. . 2546 722. . 2547 723. . 2548 724. . 2549 725. . 2550 250— ARTICLE 726. . 2551 251— ARTICLE 727. . 2552 252— ARTICLE 728. . 2553 253— ARTICLE 729. . 2554 254— ARTICLE 730. . 2555 255— ARTICLE 731. . 2556 256— ARTICLE 732. . 2557 258— ARTICLE 734. . 2499 735. . 2500 736. . 2501 737. . 2502 738. . 2503 739. . 2504 Article and Our Paragraph Paragraph Number Number 259— ARTICLE 740. . 2505 741. . 2506 260— ARTICLE 742. . 2507 261— ARTICLE 743. . 2508 262— ARTICLE 744. . 2509 263— ARTICLE 745. . 2510 264— ARTICLE 746. . 2511 747. . 2512 748. . 2513 265— ARTICLE 749. . 2514 750. . 2515 266— ARTICLE 751. . 2516 752. . 2517 267— ARTICLE 753. . 2522 754. . 2523 268— ARTICLE 755. . 2524 269— ARTICLE 757. . 2525 270— ARTICLE 758. . 2526 271— ARTICLE 759. . 2527 272— ARTICLE 760. . 2528 273— ARTICLE 761. . 2529 762. . 2530 763. . 2531 764. . 2532 765. . 2533 766. . 2534 767. . 2535 768. . 2536 769. . 2537 770. . 2538 771. . 2539 274— ARTICLE 772. . 2521 275— ARTICLE 773. . 2642 774. . 2643 775. . 2644 1918 INCOME-TAX PRIMER Question Paragraph 22. . 847 43^. .843 46. . 1031 48. . 1037 49. . 1039 51. . 1040 52. . 1044 Question Paragraph 54. . 1046 57. . 1035 62. . 2045 80. . 2144 86. . 1113 87. . 1116 104. .642 Income Tax Supplementary Page 115 T. D. AND SPECIAL MATTER FINDER. SPECIAL LETTERS AND TELEGRAMS Paragraph Numbers January 7, 1914 — To the Central Trust Company of New York 667-668 January 12, 1914 — To Frederick L. Allen 955 February 17, 1914 — To Frederick A. Howland 954 March 4, 1914 — To Diplomatic and Consular Officers 488 March 5, 1914 — To Robert Lynn Cox 959 April 23, 1914 — To National Park Bank 664 September 18, 1914 — To the Corporation Trust Company 676 November 23, 1914 — Special Letter 685 December 22, 1914 — To The Corporation Trust Company 1883 December 22, 1914 — To a Collector 2049 December 23, 1914 — To The National Park Bank 679 January 19, 1915 — To Oudin, Kilbreth & Schackno 789 January 29, 1915 — To Clinton H. Scovell & Co 1449 February 2, 1915 — To Industrial Association of Cincinnati 1543 February 9, 1915 — To Wm. S. Lare (Extract) 921 February 18, 1915 — To Beekman, Menken & Griscom (in part) 923 February 18, 1915 — To Beekman, Menken & Griscom (extract) 855 February 26, 1915 — To The Corporation Trust Company 920 March 1, 1915 — To Carey, Piper and Hall (in part) 853 March 2, 1915 — To The Corporation Trust Company (extract) 1255 March 16, 1915 — To Central Trust & Safe Deposit Company of Cin- cinnati (extract) 1010 March 25, 1915 — To Carey, Piper & Hall 2013 March 31, 1915 — To Beekman, Menken & Griscom (extract) 924 April 7, 1915 — To The National Bank of Commerce of St. Louis (in part) 673 July 10, 1915 — To a Subscriber 1806 October 19, 1915 — To Bowers and Sands 1235 January 5, 1916 — To White & Case 684 January 11, 1916 — To Herbert M. Teets 1812 February 1, 1916 — To Carter, Ledyard & Milburn 1205 February 3, 1916 — To The Corporation Trust Company 1204 February 10, 1916 — To Charles J. McDermott 1058 February 18, 1916 — To Curtis, Mallet-Prevost & Colt 1261 February 28, 1916 — To Green, Hinckley & Allen 1285 March 10, 1916 — To The Corporation Trust Company 571 April 1, 1916 — To The Corporation Trust Company 2413 April 5, 1916 — To The Corporation Trust Company 687 April 10, 1916 — To The Corporation Trust Company 560 April 11, 1916 — To a Subscriber 683 June 6, 1916 — To The Corporation Trust Company 2307 June 13, 1916 — To The Corporation Trust Company 1369 June 30, 1916 — To The Corporation Trust Company 1297 July 18, 1916 — To The Corporation Trust Company 2294 November 1, 1916 — To The Central Trust Company of New York 2282 November 21, 1916 — To The Corporation Trust Company 1857 December 6, 1916 — To the Corporation Trust Company (Bonds pur- chased by trustee) 688 December 6, 1916 — To The Corporation Trust Company (Foreign exempt corporations) 2284 December 6, 1916 — To The Corporation Trust Company (Non-resident alien partnerships) 522 December 28, 1916 — To The Corporation Trust Company 546 February 3, 1917 — To Ropes, Gray, Boyden & Perkins 1183 February 8, 1917 — To W. W. Bacon 949 February 9, 1917 — To William Beverly Winslow 1242 March 3, 1917 — To a Subscriber 1899 March 10, 1917— To a Subscriber 1900 March 31, 1917 — To The Corporation Trust Company 552 April 11, 1917 — To a Subscriber 2083 June 22, 1917 — To Kenefick, Cooke, Mitchell & Bass (in part) 848 June 30, 1917 — To Lee, Higginson & Company 785 October 8, 1917 — To Lee, Higginson & Company 980 October 25, 1917 — To Palmer & Series 1345 November 10, 1917 — To Lee, Higginson & Company 2319 Income Tax Supplementary Page 116 S-49-19. T. D. AND SPECIAL MATTER FINDER. SPECIAL LETTERS— Concluded. Paragraph Numbers November 13, 1917 — To Sackett, Chapman & Stevens 628 November 16, 1917 — To First National Bank, Cleveland 2150 November 19, 1917 — To Harris, Forbes & Company 1051 November 21, 1917 — To Simpson, Thatcher & Bartlett 621 November 23, 1917 — To The Corporation Trust Company 1200 November 27, 1917 — To The Corporation Trust Company 1198, 1348 November 30, 1917 — To Greenbaum, Wolff & Ernst 2001 December 14, 1917 — To The Corporation Trust Company 1107 January 28, 1918 — To Lee, Higginson & Company 653 January 30, 1918 — To Lee, Higginson & Company 652 February 5, 1918 — To Kennedy M. Thompson 1340 February 11, 1918 — To Lee, Higginson & Company 665 February 18, 1918 — To S. W. Straus & Co 611 February 27, 1918 — To A. Iselin & Co 1117 February 28, 1918 — To M. F. Frey, Guaranty Trust Co 669 March 5, 1918— T. F. W. Denio 941, 1349 March 8, 1918 — To Hutchins & Wheeler 1262 March 14, 1918 — To The Corporation Trust Company 844 March 22, 1918 — To The Corporation Trust Company 1 147 March 25, 1918 — To Lee, Higginson & Company 1149 March 26, 1918 — To The Columbia Trust Company 660, 670, 675 March 27, 1918 — To Kenefick, Cooke, Mitchell & Bass 1346 March 28, 1918 — To The Corporation Trust Company 1341 March 30, 1918 — To The Columbia Trust Company 671 April 17, 1918 — To Henry W. Beal 551 April 20, 1918 — To Brower, Brower & Brower 2299 April 30, 1918 — To Certified Audit Company of America 858 May 1, 1918 — To Greenbaum, Wolff & Ernst 1433 May 3, 1918 — To the Southern Pacific Company 1515 May 13, 1918 — To Smith, Robertson & Moorhouse 808 May 14, 1918 — To Hornblower and Weeks 801 May 20, 1918 — To First National Bank, Cleveland, Ohio 680 May 23, 1918 — To The Corporation Trust Co 672 May 23, 1918 — To The Corporation Trust Company 1296 May 27, 1918 — To Arthur Young & Company 809 June 6, 1918 — To The Central Trust Company of Illinois 1522 June 25, 1918 — To Internal Revenue Agents 2115 July 12, 1918— To E. G. Shorrock & Co 2148 July 13, 1918 — To The Equitable Trust Company 1525 October 1, 1918 — To The Corporation Trust Company (in part) 521 October 14, 1918 — To First National Bank, Cleveland, Ohio 1358 November 2, 1918 — To Flerbert J. Lyall 2496 November 12, 1918 — To Ropes, Gray, Boyden & Perkins 787 November 26, 1918 — To E. G. Shorrock & Co 1827 November 28, 1918 — To The Corporation Trust Company 1381 December 17, 1918 — To George E. Holmes 1933 January 3, 1919 — To Clark J. Milliron 990 January 8, 1919 — To The Corporation Trust Company 2059 January 13, 1919 — To The Corporation Trust Company (in part) 829 DEPARTMENT LETTERS TO COLLECTORS Paragraph Numbers January 16, 1915 — Mimeograph letter No. 1148 to Collectors 1450, 1486, 1487, 1542 January 28, 1915 — Mimeograph letter No. 1255 2520 February 9, 1915 — Mimeograph letter No. 1160 to Collectors 1541 February 10, 1915 — To Collectors 1498 March 24, 1915 — Mimeograph letter No. 1192 to Collectors 2387, 2391 June 22, 1915 — Mimeograph letter No. 1232 to Collectors 1545 July 8, 1915 — Mimeograph letter No. 1242 644 September 23, 1915 — Mimeograph letter No. 1265 to Collectors .....1570 Income Tax Supplementary Page 117 T. D. AND SPECIAL MATTER FINDER. DEPARTMENT LETTERS TO COLLECTORS— Concluded. Paragraph Numbers October 19, 1915— Mimeograph letter No. 1271 930, 1273, 1734, 1738 November 1, 1917 — Mimeograph letter to Collectors 603 November 1, 1917 — Mimeograph letter to Collectors No. 1663 1322 November 3, 1917 — L. Mimeograph letter No. 1675 to Collectors. . 1581, 1606 January 10, 1918 — Statement to Collectors 811 February 25, 1918 — IT — CLS. Mim. 1795 2492 March 18, 1918— SBC. Mim. 1836— See 901 SPECIAL MATTERS July, 1917 — Oral word to The Corporation Trust Company. Re: ProoFof receipt by mail of Form 17 2407 Second Liberty Loan Act (Sec. 7) 976 Act Supplementing Second Liberty Bond Act (Sec. 1) 981 . Fourth Liberty Bond Act (Sec. 3) 991 Surtax rates for 1913, 1914, and 1915 841 Surtax rates for 1916 and 1917 ! 842 Executive Order: Inspection of Returns 1648 Sample Letter: Offers in Compromise 1613 Section 989 Revised Statutes 2640 Section 3167 Revised Statutes 2645 Section 3172 Revised Statutes 1621 Section 3176 Revised Statutes ‘ 1501, 1549, 1558 Section 3218 Revised Statutes 2540 Section 3220 Revised Statutes 2497 Section 3224 Revised Statutes 2579 Section 3225 Revised Statutes 2590 Section 3226 Revised Statutes 2613 Section 3227 Revised Statutes 2614 Section 3228 Revised Statutes 2615 Section 3229 Revised Statutes 1605 Income Tax Supplementary Page 118 12-4-iy. T. D. AND SPECIAL MATTER FINDER. TABLE OF CASES Paragraph- Allen: Altheimer & Rawlings Investment Co. vs. (248 Fed. 688) 1819 Allen: National Bank of Commerce in St. Louis vs. (223 Fed. 472) .... 1571, 2057 Altheimer & Rawlings Investment Co. vs. Allen (248 Fed. 688) 1819‘ Anderson: Brady vs. (240 Fed. 665) 1184 Anderson: Jacobs and Davies (Inc.) vs. (228 Fed. 505) 2000 Anderson: Mail & Newspaper Transportation Company vs. (234 Fed. 590). 2616. Anderson: Thorne vs. (240 U. S. 115) 2715 Anderson: Tyee Realty Company vs. (240 U. S. 115) 2715 Baldwin Locomotive Works vs. McCoach (221 Fed. 59) 2078- Baltic Mining Co.: Stanton vs. (240 U. S. 103) 2722 Benowitz:’ U. S. vs. (T. D. 2952) 3647 Brady vs. Anderson (240 Fed. 665) 1184 Brady: Dodge vs. (240 U. S. 122) 2719 Brushaber vs. U. P. Railroad Company (240 U. S. 1) 2685 Bryce et al. vs Keith (257 Fed. 133) 3497 Camp Bird (Ltd.) vs. Howbert (249 Fed. 27) 2594 Carter: Union Hollywood Water Company vs. (238 Fed. 329) 1727, 2024- Chicago & Alton Railroad Co. vs. U. S. (53 C. of C. 41) 2073' Cohen vs. Lowe (234 Fed. 474) 745, 2141 Coulby: U. S. vs. (Circuit Court of Appeals, Jan. 7, 1919.) (T. D. 2858) . 3409 Crocker, et a!.. Trustees: Malley vs. (5 Dept. Reports of Mass. 1011) 1689 U. S. Supreme Court decision (249 U. S. 223) 3264 DeGanay vs. Lederer (250 L^. S. 376) 3456 Digest of Recent Decisions of the Supreme Court (Acts of 1909 and 1913). .2742 (The opinions in the cases involving the 1909 Act are not included herein. But see the Digest, paragraph 2742.) Dodge vs. Brady (240 U. S. 122) 2719 Dodge vs. Osborn (240 U. S. 118) 2580 Doyle: Grand Rapids and Indiana Railway Co., vs. (245 Fed. 792) 2025 Eliot Nat. Bank vs. Gill (218 Fed. 600) 2056 Eisner: Macomber vs. (Jan. 23, 1919) 815 Eisner: Peabody vs. (247 U. S. 347) 2802 Eisner: Prentiss vs. (T. D. 2933) 3595 Eisner: Towne vs. (245 U. S. 418) 2738 Fink: Northwestern Mutual Life Insurance Company vs. (248 Fed. 568).. 2605 General Inspection & Loading Co.: U. S. vs. (192 Fed. 223) 1729 General Inspection & Loading Company: U. S. vs. (204 Fed. 657) 2406 Gill: Eliot Nat. Bank vs. (218 Fed. 600) 2056 Gould vs. Gould (245 U. S. 151) 2732 Grand Rapids & Indiana Railway Company vs. Doyle (245 Fed. 792).... 2025 Grand Rapids & Indiana Railway Company: U. S. vs. (239 Fed. 153) 2372 Gulf Oil Corporation vs. Lewellyn: Example of procedure 2621 Supreme Court Decision (248 U. S. 71) 2820 Haiku Sugar Co. et al. vs. Johnstone (249 Fed. 103) 1272 Heller, Hirsh & Co.; In re (258 Fed. 208) 3613 Hornby: Lynch vs. (247 U. S. 339) 2763 Howbert: Camp Bird (Ltd.) vs. (249 Fed. 27) 2594/ Insurance Company of America: McCoach vs. (244 U. S. 585) 2252 Irwin: Rensselaer & Saratoga Railroad Company vs. (239 Fed. 739) (249 Fed. 726) 1720 Jacobs and Davies (Inc.) vs. Anderson (228 Fed. 505) 2000 Johnstone: Haiku Sugar Co. et al. vs. (249 Fed. 103) 1272 Keith: Bryce et al. vs. (257 Fed. 133) 3497 Kohlhamer vs. Smietanka (239 Fed. 408) 2589 Lederer: De Ganay vs. (250 U. S. 376) 3456 Lederer: Penn Mutual Life Insurance Company vs. (247 Fed. 559) 2261 U. S. Supreme Court (T. D. 2899) 3514 Lederer: Philadelphia, Harrisburg & Pittsburgh Railroad Company vs. (242 Fed. 492). 2635 Lewellyn: Gulf Oil Corporation vs. (Example of procedure) 2621 Supreme Court Decision (248 U. S. 71) 2820 Lowe: Cohen vs. (234 Fed. 474) 745, 2141 Lowe: Peck vs. (247 U. S. 165) 2754 Lowe: Roberts vs. (236 Fed. 604) 2633 Lowe: Southern Pacific Company vs. (247 U. S. 330) 2804 Income Tax Supplementary Page 119 T. D. AND SPECIAL MATTER FINDER. TABLE OF CASES.— Concluded. Paragraph Lynch vs. Hornby (247 U. S. 339) 2763 Lynch vs. Turrish (247 U. S. 221) 2776 McCoach: Baldwin Locomotive Works vs. (221 Fed. 59) 2078 McCoach vs. Insurance Company of America (244 U. S. 585) 2252 Macomber vs. Eisner (Jan. 23, 1919) 815 Mail & Newspaper Transportation Company vs. Anderson (234 Fed. 590). ,2616 Malley vs. Alvah Crocker, et. al.. Trustees (5 Dept. Reports of Mass. 1011). 1689 U. S. Supreme Court decision (249 U. S. 223) 3264 Malley: West End Street Railway Company vs. (246 Fed. 625) 1726 Marion Hotel Company: Urquhart vs. (194 S. W. 1) 622 Maryland Casualty Co. vs. U. S. (Feb. 12, 1917) (T. D. 2451) 2253 Mohawk Mining Company vs. Weiss (Nov. 3, 1919) 3635 Muenter: Southern Pacific R. R. Co. vs. (T. D. 2944) 3639 Nashville, Chattanooga & St. Louis Railway: U. S. vs. (249 Fed. 678) 2379 Northwestern Mutual Life Insurance Company vs. Fink (248 Fed. 568) 2605 Oregon- Washington R. & Nav. Co.: U. S. vs. (251 Fed. 211) 1811 Osborn: Dodge vs. (240 U. S. 118) 2580 Peabody vs. Eisner (247 U. S. 347) 2802 Peck vs. Lowe (247 U. S. 165) 2754 Penn Mutual Life Insurance Company vs. Lederer (247 Fed. 559) 2261 U. S. Supreme Court Decision (T. D. 2899) 3514 Philadelphia, Harrisburg & Pittsburgh Railroad Company vs. Lederer (242 Fed. 492) 2635 Pittaro: U. S. vs. (U. S. District Court.) (T. D. 2874) 3465 Prentiss vs. Eisner (T. D. 2933) 3595 Rensselaer & Saratoga Railroad Company vs. Irwin (239 Fed. 739) (249 Fed. 726) 1720 Roberts vs. Lowe (236 Fed. 604) 2633 Smietanka: Kohlhamer vs. (239 Fed. 408) 2589 Southern Pacific Company vs. Lowe (247 U. S. 330) 2804 Southern Pacific R. R. Co. vs. Meunter (T. D. 2944) 3639 Stanton vs. Baltic Mining Co. (240 U. S. 103) 2722 Thorne vs. Anderson (240 U. S. 115) 2715 Towne vs. Eisner (245 U. S. 418) 2738 Turrish: Lynch vs. (247 U. S. 221) 2776 Tyee Realty Company vs. Anderson (240 U. S. 115) 2715 Union Hollywood Water Company vs. Carter (238 Fed. 329) 1727, 2024 U, P. Railroad Company: Brushaber vs. (240 U. S. 1) 2685 U. S. vs, Benowitz (T. D, 2952) 3647 U. S.: Chicago & Alton Railroad Co. vs. (53 C. of C, 41) 2073 U. S. vs. Coulby (U. S. Circuit Court of Appeals, Jan. 7, 1919.) (T. D. 2858) 3409 U. S. V8. General Inspection & Loading Co. (192 Fed. 223) 1729 U. S. vs. General Inspection & Loading Company (204 Fed. 657) 2406 U. S. vs. Grand Rapids & Indiana Railway Company (239 Fed. 153) 2372 U. S.: Maryland Casualty Co. vs. (Feb. 12, 1917) (T. D. 2451) 2253 U. S. vs. Nashville, Chattanooga & St. Louis Railway (249 Fed. 678) 2379 U. S. V8. Oregon-Washington R. & Nav. Co. (251 Fed. 211) 1811 U. S. vs. Pittaro (U. S. District Court.) (T. D. 2874) 3465 Urquhart vs. Marion Hotel Company (194 S. W. 1) 622 Weiss: Mohawk Mining Company vs. (Nov. 3, 1919) 3635 West End Street Railway Company vs. Malley (246 Fed. 625) 1726 Income Tax Supplementary Page 120 4 21 - 19 . RUNNING TABLE OF CONTENTS. PART 11—1919. (Page 301 (f2825) et seq.) Regtdations, Special Rulings, Decisions, etc.. Issued since February 12, 1919. Regulations No. 45, Revised and Enlarged — Parts I, II-A, III, and IV. (Dated April 17, 1919: released April 21, 1919.) Part I. Individuals (Table of Contents, page 301) ^[2825 Part II-A. Corporations (Table of Contents, page 306) ^[3181 Part III. Administrative (Table of Contents, page 307) ^[3031 Part IV. General (Table of Contents, page 309) 1(3073 T. D. Special Feb. Date 13, 1919 2792 i€ 19, <( 2793 €i 20, a 2794 ti 21, €t 2795 ti 26, t€ 2796 it 27, Law Mar. 3, 44 Special « 3, 44 Special 4< 11, 44 2797 « 11, 44 2798 « 11, 44 2799 <€ 12, 44 2800 « 12, 44 2801 « 12, 44 2802 (4 12, 44 2803 44 12, 44 2804 44 13, 44 2805 44 14, 44 Special 44 14, 44 Special 44 14, 44 IT-Mim No. 2077 13, 44 Decision 44 17, 44 2806 44 15, 44 2807 44 18, 44 2808 44 18, 44 2809 44 21, 44 2810- 44 21. 44 2811 44 22. 44 Subject Paragraph Extension of time for filing returns 3138 Extension of time for Hawaii 3146 (Denatured Alcohol.) Meaning of ‘‘nonresident alien” 3147 (Synopsis of decisions. — War Tax Service.) Extension of time for filing returns of information at the source and for certain fiscal year returns, nonresident aliens, foreign corporations, and citizens residing or traveling abroad 3165 Amendment to T. D. 2796 3246 Victory Liberty Loan Act 3169 Supplementary returns and additional tax pay- ments for fiscal years ended in 1918 3180a Modification of the ruling relative to apportion- ing the personal or family exemptions because of changes in marital or family status during the year 3245 Time of payment of tax where a corporation has filed a return for a fiscal year ending in 1918. . 3246 (Bond for extending date of payment of floor taxes. — Distilled Spirits, etc., and tobacco, etc.) (Floor taxes on cigars, cigarettes, tobacco and snuff.) (Liability of railroads under Federal control to Capital Stock Tax. — War Tax Service.) (Floor taxes on distilled spirits, wines, liqueurs, cordials, etc.) (Liberty Bonds in payment of Estate Taxes. — War Tax Service.) (Adulterated butter.) Extension of time for filing returns of partner- ships whose fiscal year ended in 1918 3254 Amended returns may be accepted so that the taxable year of affiliated corporations will coincide 3256 Forms for making returns by nonresident aliens 3258 International reciprocal personal specific exemp- tion allowances 3259 Specific penalty will not be asserted if delin- quent returns are filed by May 1 3260 U. S. Supreme Court. Act Oct. 3, 1913. A cer- tain Massachusetts Trust held not to be an association 3264 (Distilled Spirits in Bond.) (Taxes on cigarette papers and tubes.) (Salaries of Collectors of Internal Revenue.) (Narcotics.) Extension of time for Alaska 3272 International reciprocal personal specific exemp- tion allowances 3273 Income Tax Supplementary Page 121 RUNNING TABLE OF CONTENTS.— Continued. PART 11—1919. (Page 301 (12825) et seq.) Regulations, Special Rulings, Decisions, etc,, Issued since February 12, 1919. Subject Paragraph Substantial loss because of material reduction of value of inventory for taxable year 1918 3276 Manner of determining amount of exempt interest from Liberty Bond holdings 3277 Manner of determining amount of exempt interest from Liberty Bond holdings 3278 Correction in P'orm 1120 3281 (Cigars, Cigarettes, etc.) (Retail Dealers in Leaf Tobacco.) Old ownership certificates acceptable until May 1 or June 1,1919. Releasing the 2% tax withheld against non- resident foreign corporations on dividends. . . Manner of determining amount of exempt Interest from Liberty Bond holdings. 3284 The 10% undistributed profits tax, being con- sidered an income tax, is not deductible. . . . Returns of income by and for nonresident alien individuals Decision, U. S. Supreme Court. A certain Massacl.uselts ^’rnst held not lo be an associa- tion. (Same as ^3264) (Stamps on playing cards. — War Tax Service.) (Dealers in leaf tobacco.) (Denatured alcohol.) Substantial loss because of material reduction of value of inventory for taxable year 1918 3291 Status of undistributed profits, unduly accumu- lated, if invested in United States bonds 329ii' Interrogatories on ownership certificates to be answered fully 3293 Consolidated returns: public service corpora- tions not excepted . . 3294 Consolidated returns: stock of two corporations owned “by the same interests,’' the percentage of holdings in the two companies differing. . . . Interest on Food Administration Grain Corpo- ration notes F.xempt status of interest on \hctory Liberty Loan notes 3297 Extension of time for completing corporate re- turns and for filing certain returns not the basis for assessment of tax 3300. Extension of time to June 13, 1919 applies equally to certain fiscal year corporations. . 33(>3. (Denatured alcohol.) (Distilled spirits — Bonds.) Consolidated returns: public service corpora-! ' -o - tions, including railroads, not excepted. ...... i 3306 T. p. Special Date Mar. 3, 1919 Special 12, “ Special 20, (< 2812 ' 22, 2813' ( i 24, “ 28I4_ C( 24, it Special « c 28, ti Special “ 24, “ Special “ 25, Ct Special April 1, a 2815 2, a 2816 3296 Regulations No. 43, Revised and Enlarged — Parts I, II-A, III, and IV.vp ■ (Datqd April 17., 1919: released April 21, 1919.) “■ A ^ Part 1. Indivoduals (Table of Contents, page 301) 2823 ' Part II-A. Corporations ('Table of Contents, page 306) 3181 Part III, Administrative ('Table of Contents, page 307) 3031 Part IV. General (Table of Contents, page 309).. .. .■ 3073' - -- — (The foregoing Regulations, T. D.’s, and Special Matters are Indexed.) , Income Tax Supplementary P^igc 122 6-2S-19. ... - - . RtrNNING TABLE OF CONTENTS.— Contia?ied. PART 11—1919. (Page 301 (112825) et seq.) Regulations, Special Rulings, Decisions, etc., Issued since Febrasjy 12, 1919. (The following T. D.’s and Special Matters are unindexed temporarily.) T. D. Date Subject Paragraph Special Mar. 22, 1919 Claims for refund may be filed with the Com* missioner direct 3309 Special Apr. 23-, Interest on Victory Liberty Loan 4^% Notes exempt from income tax on corporations 3311 Special 21. ii lixtension of time for filing returns by corpora- tions whose business is transacted and whose books are kept abroad 3312 Special 15, Compensation as special counsel, received from a municipality, Is not exempt income 3313 Special 22, 4i Interest, on accounts current and on deposits, accruing to nonresident aliens and foreign partnerships; withholding liability of debtors 3314 2822 it 19, ii IDistiiled Spirits.) 2823 \ Reg. 46/ 19, (Provisional Regulations 46 relating to tax on employment of child labor.) (Excise Taxes— Sales by the Manufacturer. — War Tax Service.) Reg. 47 May 1, ii Reg. 48 2, (Excise Taxes — Works of Art and Jewelry. — • War Tax Service.) Reg. 49 1, ii (Transportation. — War Tax Service.) Reg. 50 Apr. 29, (Capital Stock Tax. — War Tax Service.) Reg. 51 May 9, ii (Excise Taxes — Toilet and Medicinal Articles. — War Tax Service.) Reg. 52 May 3, (Soft drinks sold in closed containers.) Reg. 53 <( 3, ii (Soft drinks sold at fountains, etc.) 2824 Apr. 22, ii (Containers for denatured alcohol.) Special 23, Consolidated returns; two domestic corpora- tions, the one owning a foreign corporation, and the other owned by that foreign corporation 3315 Special hi 28, ii Old ownership certificates acceptable covering interest payments due Mav 1, 1919 3316 Special 26, ii Installment sales: default and inability to repossess 3317 2825 (( 28, ii (Stamps on indemnity and surety bonds. — War T’ax Service.) 2826 r. ‘' r -.v'^ rbXHw li* -.'■ i C< i i!albii*q'2 ^. -, .. ..... . ... ... . .4»lilr '\i : I'i’Ai -f. .. % ^ar.r-H^lh^r : -lo; '->t: •■ -■ '■ .'■■•■: ••: ' ”, l^tlP lAk-Zf. . ^ , _ . ■- . . " il ci sit.ifv; • '• ', rv :/;.h>^r-r: b) :y 70; 5-. . . z - ; 4;i3. -i,;h Xv f-ibi lu ,b1 . [ititt .r .i . -i i'. i '• -1 ? ■ '.X :; V'' '* ■ . , ..'vV-- ■■■ ■■: '•"'■. ■ - . ’- ■JZ,'. \ - - . <‘ . ^ t>' ' r ■ :■ ■ ■ ’■■d 'P.ti [In Blank at Present] Vir't ■» ■ - ,., ^ ^.r- i;. 3 . i. . " ■ ni Jvitti. , . . . -■ bi:cd no ■ ’ ' - , ■'■ V ic.. • . luo' ■; i.-L ■ . ;i To ■ - 1 ■' ; •. Ll?f ~ • t-: . . . • - r .. icr ■ . ■ • ; ■; r ■ , ■ • - ' iU'w-- INCOME TAX Supplementary Page 1 28 r>:yr ». ... fy.f .<■ ( o 12 - 26-19 RUNNING TABLE OF CONTENTS.— Continued. PART 11—1919 (Page 301 (^2825) et seq.) Regulations, Special Rulings, Decisions, etc.,. Issued since Feb. 12, 1919. D. T. Date Subject Paragraph 2933 0«i. 9, 1919 1 New York State transfer (inheritance) tax not deductible as a tax (Decision: Act of Oct. 3, 1913).. 3595 2934 II 10, II (Distilled Spirits.) Special Sept. 20, Resident and nonresident alien seamen. Execu- tion of Form 1078 3610 Decision May 14, (( Income tax liability of a trustee in bankruptcy. . 3613 Special Oct. 13, Deductibility of losses sustained by estates or trusts and the bearing of such losses on the taxable income of beneficiaries 3628 Special a 16, it Articles 1566 and 1567, Regulations 45 — Inter- pretative. comments 3627 2935 u 16, Article 443, Regulations 45 amended — Failure to file final returns where tentative returns have been filed 362C 2936 t* 16, II (Excise Taxes — War Tax Service.) 2937 u 16, II Article 133, Regulations 45 amended — Assess- ments for drainage 3631 Special 1$ 6. fl Deduction for depreciation in computing net income of estates and trusts and the bearing of such deduction on the taxable income of beneficiaries 3632 Special (( 24. II Return by corporation for taxable year during which its affairs arc placed in hands of receiver, etc , for purposes of dissolution (Insurance. — War Tax Service.) 3633 2938 (( 21, II 2939 Sept. 6, II (Reg. 58: Insurance. — War Tax Service.) 2940 Oct. 29, Cl (Distilled spirits and wines.) 2941 'll 30, Cl (Stamp taxes. — War Tax Service.) 2942 i< 30, 1C (Exci.se Taxes: Toilet and Medicinal articles. — War Tax Service.) All of the foregoing Regulations, T. D’s and Special Matters are Indexed. The following T. D’s and special matters are unindexed temporarily. Subject P. Insolvent corporations: worthless stocks and bonds of. .2909, 3036 Insolvent persons; estates of: delay in^paymentjof tax. .2397, 2413,13036 Inspection of returns. .1636, 1642, 3063 State officers .. 1638, 1658, 3064 Stockholders: corporation returns. .1639, 1654, 3065 Inspectors; internal revenue: duties of .. 1622 Installment plan purchases of Libertv bonds . . 990 Installment sales.. 1890, 2849, 3317, 3476, 3486 Installments: tax payments made in. .2339, 3031 (See “Tax: payment of’’ at 1, Index Page 23.) Insurance, business: method of handling expense of advance premium payments. .2017 Insurance companies: tax on.. 2225, 3206. 3220, 3514 Defined. .3079a Returns by. ,2275, 3229 Insurance: Ufe. .945, 2864, 2875d Insurance on lives of officers and employees . . 1028, 2967a, 3223 Insurance on own life or residence: premiums not deductible. .1045 Insurance reservelby taxpayer against loss on own property, .2018 Intangible proper^: depreciation of.. 2912, 3554, 3594 Interest accrued on bonds purchased between interest dates. .925 Interest accruing prior to incidence of tax.. 613, 1010. 2875d 3431, 3547, 3551, 3569, 3576 Interest allowed on advance payments of 1917 income and profits taxes. .1828 Interest credited on savings bank deposits . . 2862d Interest deductible . . 1049, 2027, 2895, 3211 On deposits: banks. .2035, 3211 On indebtedness as rental . .2034 Interest on bonds received by legatee. .936 Interest on capital invested in business. .1962, 2029, 2896 Interest on domestic obligations: income to foreign corporation. .2296 Interest on domestic obligations: income to nonresident alien. .505, 2876 Case under Act of 1913.. 3456, 3472 Interest on Farm Loan Act securities. .964, 2866 Interest on Governmest obligations (See “U. S Bonds” at 1, Index Page 25.) Interest on State, etc., obligations. .963, 2865 Interest on tax-free covenant obligations: manner of accounting'for . .1824 Interest received and paid by brokers in connection with customers’ .business . .1819 Interest runs for delay in payment of tax. .2397, 3033 When claim for abatement is pending. .2398, 3033 When extension of time has been granted for filine return at taxpayer’s request . . 2346, 3033 Interest: wlthhoMing at the source.. 553. 2996, 3314, 3342 Corporate obligation interest. . 601. 2996, 3060, 3318 Interest paid and collected in year subsequent to that in which due and payable.. 3431. 3470, 3551. 3569. 3576 Internal revenue laws applicable.to income tax. .1620, 3126 Intestate’s real estate. .2991 Invalidating clause. .2667 Inventories. .1861, 2836, 3109, 3451 Dealers in securities. .1864, 1870, 3113 Banks as dealers. . 3473 For 1918: cost or market, regardless of past practice. .31 10 For 1918: loss due to depreciation of since taking. .Ill 9, 2215, 2963, 3276. 3291. 3337, 3356. 3537, 3579 Investment certificates. .617 Irrigation bonds: shrinkage inJvaUie of. .2071 Joint adventures. .8079 Joint fldaciarles 126.6. »01 9 Joint owners of bonds. .661, 3006 Joint returns of husband and wife. .1150, 3013 Joint stock companies defined . .1688, 3074 Judges of U. S. courts: salaries of. .764 Retired pay of. .578, 2842 Judgments. .2087, 2862b, 2893 Jurisdiction of District Courts. .1632 Labor organizations. .1739, 1771 Last due date. .1475, 3028a Leased line certificates: income from . . 1837 Leasehold: purchase of. .1977 Leaves of absence of internal revenue men. .2657 I.«gacles . 932, 961, 3103 Legal holidays in connection with last due date. .1476, 3028a, 3242 Lessees and lessors. .1716, 1836, 1967, 2858, 2891, 3205 Depiction allowance on mines, wells, etc. .1100, 2171, 293‘2 Liberty Bonds and notes (See “U. S. Bonds” at 1, Index Page 25.) Expense of advertising sale of . .3210 Interest on. all Issues: taxable status.. 975, 2869, 3169, 3277, 3278, 3284, 3311, 3325. 3389. 3429 IndcK Page 13. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. l.iberty Bonds and Xotes:— Concluded. Tabulation of exemption status.. 3325 i License for collecting foreign items 1378,3068 Penalty for failure to obtain . . 1391 ' License taxes are deductible . .2046. 2898 i Licenses: depreciation of.. 2912, 3519 , ^ Liens, tax: enforcement of . .3040 Life insurance: return of premiums .. 946, 2864 Life insurance on lives of officers or employees. .1028, 2967a, 3223 . , . Life insurance on own life: premiums not deductible .. 1045 Life insurance policies: Commissions on policies insuring lives of agents. .888 Commissions on renewal premiums . . 887 Dividends paid on. .798, 2857 Proceeds of. .945, 2864 Paid to corporations. 3201 Surrender value as of March 1, 1913..2875d Limited partnerships .. 1274, 3077 Illinois type . .3077 Michigan type . .3077 New York type. .1277, 3077 Pennsylvania type. .1274, 3078 Liquidating corporations. . 1403, 1728, 3205a, 32-11, 3633 Liquidating dividends. .828, 3100, 3101, 3106a Lists of individuals making returns to be posted. .1641 Living expenses. .1024, 2966 Living quarters as part of salary. .862 Lobbying expenses. .2026, 3210 Local benefit taxes or assessments .. 1056, 2041, 2899, 3631 L'Local” organizations in connection with exempt organizations. . 1749, 3198 Lodges. .1742, 1786, 3188 Lodging in lieu of rent . . 852 Loss: basis for determining (See “Gain or Loss: basis for determining” at 1, Index Page 11.) Loss due to depreciated 1918 inventorv or to 1919 rebate payments on 1918 sales on 1918 contracts. .1119, 2215. 2963, 3276, 3291, 3337, 3356, 3537, 3579 Disallowed abatement claims: interest. .3033 >■ — Losses deductible: Corporations. .2063, 3209, 3210a “Damages” recovered less than damages sustained. .1839 Depreciation vs. loss. .2065 Estates and trusts .. 1 247, 2991, 3626 Illegal transactions. .2901 Individuals. .1066, 1084, 1085, 2901 Stock losses as losses incurred in trade: Case under Act of 1913.. 3497 Property requisitioned for war or other uses, or lost through war hazards or other casualties .. 1 840, 2860 Reserves for. .1932, 2101 I.K)sses, net: (See “Net Losses’’ at 1, Index Page 15.) Lunches. . 1044 Macomber vs. Eisner . . 8 1 5 , 3333 Mailing returns. .1477 Manufacturing corporations; gross income .. 1796 March 1, 1913: manner of determining value as of. .1856, 3102 Mineral deposits . . 2196 ' ' : Stock.. 1857, 3506 Timber. .2214 March 1, 1913: property held on this date is capital . .2875d Marine Corps included in term military and naval forces. .1007 Market value, fair: manner of determining .. 1856 In the case of stock.. 1857, 3627 Mineral deposits. .2196 Timber. .2214 Market value of stock received in exchanges for property .. 3577, 3627 Marriage settlement. .2864a Married persons: personal specific exemption. .1129, 2970, 3245 Returns. .1143, 1150, 3013 Maryland ground rents. .2895 Massachusetts trusts. .1689, 3076. 3264, 3290 Masses for the dead: sum.s paid for. .2842 Material (raw) and supplies: cost of. .1958, 2879 Mercantile corporations: gross income of .. 1797 Merchandise: obsolescence of .. 2133, 2903, 2911 Mergers: exchange of stock or securities. .1910, 3107, 3432, 3578, 3627 Michigan limited partnerships. .3077 Michigan partnership associations. .3078 Mileage: government employees and others. .863, 2966 “Military and naval forces of the United States”: term includes. .1007 tmpensation received during the war. .1006 E lension of time for filing returns in certain cases. .1512, 3027, 3168 W It re returns are to be filed . . 1529 Mines: tpletion of (See “Depletion” at 1, Index Page 6.) Mines: d predation of improvements. .1096, 2167, 2952 • »; ( ee “Depreciation at 2, Index Page 6.) Index Page 14. 11-10-19 CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Mines, sale of: maximum surtax. .738, 2831 Minors: Allowances to, by parents. .1038 Employment of, by parents. .1037 Income accruing to through natural guardians. .938, 3014 Returns by. .1142, 3014 Returns for . . 1158, 3014 Miscellaneous corporations: gross income. .1799 Models, drawings, etc.;.. 2088, 2136, 2918 Monthly returns: corporate security interest. .702, 3002, 3005 Municipal bonds. .963, 968, 2865 Return of . . 967 Municipal employees: salaries of.. 1013, 2863, 3334 Municipal taxes deductible. .1055, 2897 ,• utuai organizations of specified kinds are exempt. .1749, 1765, 3198 Mutual savings banks. .1741, 3187 National farm loan associations. .1752 Income from . .964, 2866 Navy Nurse Corps, Female, included in term “Military and Naval Forces”. . 1007 Net income means in the case of Corporations. .1878, 3200 Estates or trusts . . 1247 Foreign corporations. .2285 Individuals. .754, 2832 Nonresident aliens. .501 Partnerships . . 1295 Net loss on line J, Form 1040 is offset against income subject to surtax only.. 3328 1 Net losses.. 1913, 3114, 3119 Partnerships. .1287, 1921 Trusts and estates. .1921 New buildings: amounts expended for. .1025, 2967, 3223 Tenants . ; 1967, 2858, 2891 New corporations. .1706, 3232 New York type of limited partnerships . . 1277, 3077 “No greater aggregate par or face value”: application of the limitation .. 3628 Nonresident aliens.. 492, 2973 2 Accounting period . . 502 Agents acting for. .543, 591, 3015 Beneficiaries. .544, 1215 Brokers vs. agents . . 551 Charter money. .2877 Deductions in general . . 529, 2964 Deductions and credits allowed conditionallv . . 538, 2973 Dependents: allowance for.. 537, 2972, 3274, 3288, 3324, 3495, 3517, 3568 Distraint: property subject to. .542 Dividends on domestic stock as income.. 505. (Case under 1913 Act.. 3456, 3472.) Exception. .2877 No withholding. .560, 2997 Establishing status as resident aliens.. 491, 493, 2973, 2997, 3147, 3394, 3398, 3436, 3492, 3525 Execution of Form 1078. .3612 Refund of amounts withheld, . 3406, 3436. 3525 Seamen. ,3435, 3611 Exempt income. .528, 2877 Exemption: personal specific. . 537, 2972, 3259, 3273, 3288, 3324. 3495. 3517, 3566. 3568 Claiming at the source. .541, 641, 2973, 2977, 2997, 3275 Fiduciaries: domestic. .544, 3019, 3023 Fiduciaries: foreign.. 54 6 Foreign items: claiming exemption. .1357, 1369, 3060 Foreign partnerships: income received through . .521 Freight payments: foreign owned ships. .2877 Gifts made by . . 536, 2964 Gross income. .503, 2876 Information at the source relative to payments to, .3058 Interest deductible. .531, 2964 Interest on domestic obligations as income.. 505. (Case under 1913 Act.. 3456, 3472.) Exception . . 2877 Leaving country. .2425, 3043 Liberty loan bond interest. .991, 2877a, 3180 (See “U. S, Bonds” at 1, Index Page 25.) Losses. .534, 535, 2964 Manufacture and disposition of goods within the United States. .508 Net income of. ,501, 2964 Normal tax. ,497, 591, 2826 Payment of tax: medium . . 552 (See “Tax: payment of” at 1, Index Page 23.) Reciprocal credits by country of citizenship. .2972a, 3274 Rentals on foreign property. .563, 2877 Representatives of. .543, 591, 3016 Index Page 15. CONSULT THB PINK an* GENERAL INDEX. The references are to paragraph numbers. Nonresident aliens — Concluded. Returns by . .638, 2973, 3015, 3268, 8286 Distraint: property subject to . . 642 Extension of time for filing.. 1512, 3027. 3168. 3SS6 Form.. 301 6, 8258, 3286 Where filed . . 540, 3029 Returns for . .643, 691, 3015, 3286 Royalties received by. .504, 671 Salary for services rendered abroad. .663, 1339, 1346, 2877 Seamen. .3433. 3609 Stock: actual vs. record owner of. .3016 Stock: sale of . . 620 Surtax. .500, 591, 2829 Stock actually owned by nonresident alien but otherwise recorded. .3016 Taxes deductible . . 633, 2964 War Finance Corporation bond interest. .991, 2877a, 3180 Wife of . . 492 Withholding of tax at the source.. 553. 609. 2976. 2996. 3314. 3394, 3398, 3436 Exemption claims.. 541, 641, 2973, 2977. 2997. 3275 Income exempt from withholding. .563 Tax-free-covenant bond Interest. .641, 2997, 3566 Normal tax. .471, 2826 Nonresident aliens. .497, 2826 Rates.. 472, 2826 Lower rates on first $4,000 apply to each separate individual . . 2826 Notaries’ fees. .2875b Notes in lieu of cash: withholding. .597 Notice and demand for first installment of tax. .2423, 3036. 3042 For other installments. . 2399, 3036-3037. 3042, 3331 Oaths: officers who may administer. .1452, 3017 Obligations of corporations defined . .615 Obsolescence. .1089, 2103, 2137, 2903 Good will, trade marks, etc., of distillers, dealers in liquors, etc... 3554, 3561 Merchandise or materials. .2133, 2903, 2911 Models, drawings, etc. . .2136, 2918 Old buildings. .2084, 2902 Patents. .2136, 2917 When no depreciation is taken . . 2138 Oil wells: Depletion of (See “Depletion” at 1, Index Page 6.) Operation and maintenance expenses. .1956 Organization expenses. .1945. 3223a Owner not known: withholding. . 602, 612, 651, 2996. 3001a, 3321, 3383, 3591 Ownership certificates. .643, 650. 2998, 3060, 3338 1 Alien property custodian . . 1515, 3007 Different maturities of same issue of bonds.. 660. 3470 Each separate issue of bonds . . 659, 2998 Foreign items. .1356, 3060, 3068 Information at the source. .3057, 3060 Instructions for filling in. .663, 2998 Interrogatories to be answered ftilly . . 669, 2999, 3293 Joint owners. .661, 3006 List of forms . . Supplementary Page 2 May be printed in two languages. 695 None accompanying coupons. .602, 612, 651, 2996, 3001a, 3321, 3383, 3591 Numbers of bonds . .663 Old forms: use of.. 3282. 3316, 3323, 3564. 3573. 3590 Ownership unknown. . 602, 612, 651, 2996, 3001a. 3321, 3383, 3591 Privately printed . . 692 Size and style of . . 689 State and municipal bond interest . . 993, 2998 Substitution . . 629, 3001, 3061 Tax not to be paid at the source. .654, 3000, 8060 Tax to be paid at the source. .651, 2999, 8060 United States bond interest. .993, 2998 “Paid”; “paid or accrued”; “paid or incurred” meaning and construction of. .1923, 3093 Parent as natural guardian: as legal guardian. .938 Partnerships . . 1269, 2978 2 Accounting period changed. .8018 Accounting period of member differing from that of firm . . 1281, 2978a Accounts receivable . . 1285 Banks: private. .1273 California special . .3077 Contributions made by. .1295, 2978 Credited by members. .1296 Credits for income asd profits taxes paid to other jurisdictions. .1063, 2978b, 3008 Dissolution of. .3108a Dividends received by . . 1289, 2978b Under Act of 1913.. 3409 Exemption claims from withholding tax at source. .654, 3000 Fiscal year with different rates. .1290, 1674, 2979, 2980, 31JT Foreign: income of nonresident aliens received through . .Un Hawaiian . . 1272 niincds limited . .3077 ladez'Pftft 16 . CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Partnerships: — Concluded. Income of: manner of computing. .1295, 2978 Information at the source. .1314, 3055a Insurance on lives of members: premiums paid. .1028, 1286, 2967a Proceeds . . 945 Liberty bond interest. .985, 1289, 2874, 2978b (See “U. S. Bonds” at 1, Index Page 25.) Limited .. 1274, 3077 Illinois.. 3077 Michigan. .3077 New York type. .1277, 3077 Pennsylvania type. .1274, 3078 Profits of considered as dividends. .797, 1275 Members: distributive shares taxable. .1280, 2862d, 2978a Credits allowed. .1239, 2978b 1917 profits tax. .1294, 2980 Contributions . . 1296 Parts of income subject to rates for different years. .1678, 2979, 2981, 3122 Dividends under Act of 1913. .3409 Undistributed interest not taxed again when distributed. .1288 Michigan limited . .3077 Michigan partnership associations. .3078 Net losses. .1287, 1921 Participation of profits agreement. .1297 Readjustment of partnership interests. .3108a Receiver for. .3018 Reorganizing into a corporation. .3106a Returns by. .1298, 2978, 3018 Extension*’of time for filing: special for 1918. .3165, 3254, 3304 Special for fiscal year ending in 1919.. 3386. 3475 Virginia partnership associations. .3078 Withholding on tax-free covenant bond Interest. .609, 2996, 3320 Parts of income subject to rates for different years. .1678, 2989 Patents: Depreciation of.. 1816. 2135. 2912, 2917. 3594 Infringement: recovery because of. .2862b Obsolescence of. .2135, 2917 Paid for with stock or securities. .2917 Profit and loss from sale of. .1815, 2086, 2847 Royalties from patent rights. .1816, 2858 Paying agents: appointment of. .624 Payment of taxes (See “Taxes: payment of” at 1, Index Page 23.) Payment of taxes withheld at source. .720, 3002 Penal Bonds: U. S. bonds as ftecurity . . 2220. 3583 Penalties.. 1572, 3016 Ad valorem penalties attach tc income. .1569 Compromises. .1605, 3041, 3261, 3529 Disclosing contents of returns. . 2645, 3066, 3508 Effect of waivers, under prior laws, on ad valorem penalties. .2396 Pailure to file returns on time. .1549, 1572, 3028a, 3034, 3051, 3260 Compromises. .1605, 3041, 3261 Reasonable cause for failure. .1555, 1562, 3034 Specific penalty will not be asserted in certain cases i .1581, 3260 When tentative return has been filed.. 3630 False returns. .1549, 1.572, 2357, 2358, 3035, 3051 License for collecting foreign items: failure to obtain. .1391 Payee other than actual owner of income, ^refusing to supply name and address of actual owner. . 1572, 3062 Specific penalties (fines and imprisonment) . .1572, 3051 Attach to the person. .1579 Not asserted under certain circumstances. .1581, 3260 Suits to enjoin collection of. .2589 Taxpayer planning to leave jurisdiction. .2425, 3043 Tax payments: delay in making. .1572, 2347, 2397, 3033, 3036 When claim for abatement is pending. .2398, 3033, 3036 Understatements in return. .1399, 1538, 3030, 3035 Due to negligence on part of taxpayer. .2357, 3033, 3035 Not due to fault of taxpayer. .2356 Wilfully on part of taxpayer. .1549, 1572, 2358, 3036 Warrant of distraint: $5 penalty if necessary to serve. .2424, 3036 Pennsylvania ground rents.. 2895 Pennsylvania type of partnership. .1274, 3078 Pension funds. .2009, 2890 Pensions. .939, 2008, 2842, 2890 Foreign: no license for collecting. .1388 Per diem allowance in lieu of subsistence: government employees, »8T1 Permanent improvements. .1025, 2967, 3223 Under lease or rental contract. ,1967, 2858, 2891 “Person" defined. .762, 1686, 3073 Personal expenses. .1024, 1031, 2965 Personal service corporations. .1305,'1308,^2983, 3083 Change in accounting period . .3230 Consolidated returns notlrequired . .8234 IndcK Page 17. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Personal service corporations: — Concluded. Corporations failing to distribute profits. .746, 2995 Credit for income and profits taxes paid to other jurisdictions . . 1063, 2986, 3008 Defined .. 1308, 3083 Dividend distributions made by. .772, 2103, 3094, 3095 From most recently accumulated profits. .803 Dividends received by. .1289, 1305, 2986 Exempt from taxation. .1305, 1753, 2983 Exemption claims from withholding at the source. .654, 3000 Fiscal year ending in 1918. .2984 Taxation of stockholders. .2987 Fiscal year ending in 1919. .2989 Extension of time for filing returns. .3386, 3475 Taxation of stockholders . . 2989 Fiscal year with different rates for parts thereof. .1669, 1677, 2988, 2990, 3117 Government contracts. .1312, 3084 Income of: distributed or otherwise. .1307, 2862d, 2983, 2985 Information at the source. .3055a Liberty bond interest. .985, 1289, 2874, 2986 (See “U. S. Bonds” at 1, Index Page 25.) Partial personal service corporations. .2983 Partnerships: personal service corporations treated as, generally. .1306, 2983 Returns by. .1398, 2983, 3227, 3230 Extension of time for filing: special for 1918. .3165, 3304 Stockholders of: how taxed. .1305, 1307, 2985 Credits allowed . . 1289, 2986 Parts of income subject to rates for different years. .1678, 2987-2990, 3122 Philippines: income derived from. .515, 516, 3071, 3072 Philippines: income taxes in. .511, 1534, 3070 In relation to dividends. .517, 3070 Plantations (See “Farms and Farmers” at 2, Index Page 9.) Political subdivisions of State: definition. .970 Porto Rico: income derived from. .515, 516, 3071-3072 Porto Rico: income taxes in. .511, 1534, 3070 In relation to dividends. .517, 3070 - Possessions of United States: defined.. 3010 • Citizens of: how taxed. .509, 3069, 3071 Income accruing to. .1004 Porto Rico and the Philippines .. 511, 515, 516, 1534, 3070-3072 Taxes imposed by authority of are deductible. .1054, 2897 Income and profits taxes to be credited. .1060, 1061, 2334, 3008, 3226 Postage is not a tax. .2897 Poultry farms (See “Farms and Farmers” at 2. Index Page 9.) Power of attorney does not create fiduciary relationship . .1172 Preferred stock: interest payments on. .3211 Premium on bonds sold and redeemed. .2079, 3203a, 3210a Premiums paid on insurance for employees. .2842a Premiums paid on life insurance of officers or employees. .1028, 2967a, 3225 “Present war” defined. .1008 Termination of, for purposes of Act. .1009 President of United States: salary of. .764 Principal place of business of a corporation. .1532 Prior laws: continuing effect of. .2361 Privilege taxes are deductible. .2047, 2898 Professional men: expenses of. .1032, 2881a, 2965 Profit (See “Gain or loss, etc.,” at 1, Index Page 11.) Promissory notes in settlement of accounts . . 853 Salary . . 2842b Property requisitioned for war or other uses or lost or destroyed through war hazards or other casualties . . 1840, 2860 Property sold for stock in a corporation. .3106a Public service corporations: conso’.idated returns. . 3294, 3306, 3343 Public utility income from accruing to State, etc. .1004 Deductible as expense to public utility. .2023, 2875a Public utility intrusted with use meiely of property owned by State. .1727 Public utility: service connections, etc. .2024 Purchase money mortgage: foreclosure of. .2908 Quarters as part of salary . . 862 Railroads: Consolidated returns. .3294, 3306 Expenses deductible and otherwise. .2025 How taxed when under Government control. .1684, 3184 I.,essee and lessor . . 1718 Ranches (See “Farms and Farmers” at 2, Index Page 9.) Real estate: depreciation. .2123, 2911 Real estate: profit or loss from sale of. .1879, 2850 “Cost” of the real estate, .1880 Subdivisions. .1880, 2850 Installment plan sales . . 1890, 2851 Reasonable cause for failure to file returns on time. .1555, 1562, 3034 Rebate payments In 1919 on 1918 sales on 1918 contracts. .1120, 2216, 2963, 3364, 3579 Index Page 18. n-10-19 CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Receipt of income; actual vs. constructive. .857, 919, 2834, 2862c Decedent prior to death during taxable year.. 3 4 07 Receipts for taxes. .2465, 3044 Simulation of receipts. .3465 Received vs. accrued. .755, 768, 1923, 2834, 2893 Change from cash to accrual basis.. 1913, 3452, 3454 Receiver for an individual. .1168, 1242, 3022 Receiver of corporation privileged to examine its return. .3063 Receivers for part of property only . . 1433, 3022, 3228 Receivers; returns by.. 1429, 3022, 32()5a, 3228, 3613, 3633 For partnerships. .3018, 3022 Reciprocal credits to nonresident aliens of foreign countries. .2972a, 3274 Record vs. actual owners of stock. .3016 Records to be kept. .593, 2835 Recoveries for damages. .1838 Recoveries of bad debts. .879, 1805, 2862b Recovery of taxes by suit. .2613, 2614 Second assessments. .2498, 2590, 2593 Redemption of bonds; discount and premium. .2077, 2079, 3203a, 3210a Redemption of stock on stipulated premium basis. .2083 Refund of taxes or penalties erroneously paid.. 2497, 2514, 2615, 3048, 3439 1 Amounts withheld at source. .2318 Discovered on examination of return. .2488, 3045 Filed with Commissioner direct: claims may be.. 3309 Five-year limitation for making claim . . 2489 Inventories and rebates for 1918. .1123, 2963e Rejected claims; reopening of. .2490 Second assessments. .2498, 2590 Burden of proof under statute before present amendment. .2593 Stock dividends under 1913 Act. .2492 Stock dividends under 1916 and 1917 Acts. .2496 Refunds: Change of status: nonresident to resident. .3406, 3436, 3525 Excess amounts withheld at source.. 73 3, 3004, 3283 In connection with deferred collection of bond interest. .3431, 3551, 3569, 3576 Taxes other than income and profits taxes erroneously paid in prior years 2059 Registered interest on registered bonds. .645, 3001b, 3057 Regulations: commissioner authorized to make. .2591 Effective date . . 2592 Policy as to rulings on abstract Questions. .3538 To be complied with. .1620, 3126 Regulations No. 45: promulgation and 'prior regulations revoked. .3137, 3243 Religions organizations. .1745, 3191 Removal of buildings. .2084, 2902 Rent paid by paying dividends and interest. .1716, 3205 Rent paid by paying taxes or making repairs. .851, 2891 Rent; residential property; professional men. .1035, 1036 Rentals: as an expense. . 1022, 2016, 2878, 3209 Rentals on foreign property owned by nonresident alien. .1048, 2891 Rentals: permanent improvements made by lessee. .1968, 2858, 2891 Rentals received: manner of reporting on annual return. .1148 Reorganizations; exchange of stock or securities. .1910, 3107, 3432, 3578, 3627 Repairs: incidental. .1966, 2880 Tenants. .851, 2891 Repairs: permanent improvements. .1025, 2967, 3223 Replacement fund: special on account of compensation for property requisitioned for war or other uses, or for property lost or destroyed through war hazards or other casualties. .1840, 2860 Requisitioned property: compensation for. .1840, 2860 Reserves:! Bad debts, shrinkage in values, contemplated losses, etc.. .1932, 2101 Depletion; dividends from. .830, 3101 Depreciation . . 2152 Diversion of fund. .3159 Dividends. .3101 Expenses, etc.: accruals. .1928 Income and excess profits taxes. .3095 Insurance on own property. ,2018 Retirement of bonds, .2162, 3218 Trading stamps. .2021, 2875e Residence defined in connection with aliens.. 489, 493, 2973, 2997, 3147, 3394, 3398, 3436, 3492, 3525 Residence; loss by sale of taxpayer’s own. .2901 Residents: tax is on income from all sources. .2827 Retired pay of army and navy officers. .878, 2842 Retired pay of U. S. judges. .878, 2842 Returns. . 1434, 8013, 3227 2 Accounting methods. . 1939, 2835, 3450 Change of.. 1933, 3452, 3454 Accounting period changed. .758, 1399, 1479, 2840, 3024, 3232 Accounting period; returns to conform with. .1482, 2839, 3232 Affidavit. .1451, 3017 Agents may make. .1158, 3013 Index Page 19. CONSULT _THE_P1NK_SHEET. GENERAL INDEX. The references are to paragraph numbers. Returns : — Continued. Amended returns. .1938, 2059, 2150 (see 2916), 2834, 2875e, 3256, 3391, 3453, 3455 Not necessary in certain cases where additional tax liability has been revealed 1545 Assistance from collector in preparing. .1497 Collector may make return. .1549, 3032, 3034 Tax may not be paid in installments in such case. .2359, 3032 Commissioner may make return. .1549, 3032, 3034 Tax not to be paid in installments in such case. .2359, 3032 Commissioner prescribes, and may call for a return from any person 1620, 1630 Consolidated returns by corporations. . 1405, 3234, 3239, 3315, 3570 Different fiscal year of affiliated corporations. .1427, 3240, 3257. 3343 Public service corporations. . 3294, 3306, 3343 Contents of, in case^of corporationsjparticularly . .1443 Corporations. .1398, 1434, 3227 Books kept abroad. . 1533, 3027, 3312, 3336 Consolidated returns. .1405, 3234, 3239, 3315, 3570 Public service corporations. .3294, 3306, 3343 Extension of time for filing 1918. .3138, 3158, 3165, 3241 3300, 3308 Final returns. .1403, 1709 Undisturbed profits.. 749, 2995, 3332 Correction of returns at suggestion of collector. .1540 Reasonable time to be allowed . . 1542 Death during taxable year.. 1140, 1180, 2971a, 3019, 3407 Disposition of returns filed. .1634 Enemies and allies of enemies. .1514,53028 Extension of time by Collector. .1501, 3026, 3241 Extension of time by Commissioner. .1507, 3026a. 3312, 3336 Special for 1918 for complete returns generally. .3138, 3158, 3241, 3300, 3308 Special for 1918: Alaska. .3272 Special for 1918: Hawaii. .3146 Special for 1918: corporations with fiscal years ending in [1918 with unexpired prior extensions. .3165, 3300, 3305, 3308 Special for 1918: Information returns, including partnerships on calendar year basis and fiduciaries. .3165, 3304 Special for 1918: partnerships with fiscal years ending in 1918 with unexpired prior extensions. .3167, 3254, 3300, 3308 Special for 1919: fiscal year corporations and partnerships. .3329, 3886. 3475 Failure to file on time. .1549, 1572, 3028a, 3034 3051, 3260 All of tax due on notice and demand . . 1549, 2359, 3032 Compromises. .1605, 3041, 3261 Due to reasonable cause. .1555, 1562, 3034 Specific penalty will not be asserted in certain cases. .1581, 3260 When tentative return has been filed,. 3630 False returns. ,1549, 1572, 2358, 3030, 3035,''3051 No time limitation on collection of tax in such cases. .2360, 3038 What constitutes a false return. .1571 Fiduciaries. .1175, 3019 Extension of time for filing 1918 returns. .3165, 3304 Final returns. .1225, 3025a Final returns: Corporations. .1403, 1709 Fiduciaries. .1225, 3025a “First return” on fiscal year basis . . 1482, 2839, 3232 Fiscal year accounting period; return must conform to. .1482, 2839, 3232 Fiscal year ending in 1918: supplemental under 1918 Act. .3180a, 3246 Foreign corporations. .2312, 3231 Forms. .1434, 3013 Failure to receive from collectors . . 1437 (For list of forms see Supplementary Page 2.) Husband and wife. .1143, 1150, 3013 Individuals. .1142, 1434, 3013 List of those making returns to be posted . .1641 Information at the source. .1314, 3054 Brokers. .1396, 3053 Corporate obligation interest. .1350, 3057 Dividends.. 1393, 3052 Extension for filing 1918 returns. .3165, 3304 Fiduciaries. .1348, 3019, S055a Foreign items. .1352, 3061 Miscellaneous income. .1314, 3054, 3408 Partnerships . . 1314, 3055a Personal ser\ice corporations. .8055a Inspection of returns. .1636, 1642, 8063 Insurance companies. .2275, 3229 Last due date. .1475, 3028a Lists of individuals making, to be posted . .1641 Mailing in time or too late. .1477 Minors.. 1142, 1158, 8014 No taxable Income; return advisable even then in certain cases.. 3827 Index Page 20, 11-10-19 CONSULT THE PINK SHEET, GENERAL INDEX. The references are to paragraph numbers. Betnrns : — Concluded. Nonresident aliens: by.. 538, 2973. 3015, 3258, 3286 Extension of time.. 1510, 3027, 3168, 3336 Nonresident .aliens: for.. 543, 591, 3015, 3286 Extension of time.. 1510, 3027, 3168, 3336 Notice of failure to file . . 719, 1474 Partnerships. .1284, 1298, 3018 Extension of time for filing 1918 returns. 3165, 3167, 3254, 3304 Personal service corporations. , 1398, 2983, 3227 3230, 3304 Profits and losses. .1149 Public records. .1636, 3063 Receivers, trustees In bankruptcy, and assignees .. 1429, 3022, 3228, 3613, 3633 Rentals received .. 1 1 4 8 Secrecy of.. 1637. 2645. 3063, 3066. 3508 Soldiers and sailors. . 1512. 1529, 3027. 3168, 3336 State ofiRcers may inspect. .1638, 1658, 3064 Stockholders may inspect return of corporation. .1639, 1664, 3065 Supplementary statements on returns. .1447, 3017a Tax-free covenant bond interest. .1147 Taxable years: fiscal or calendar. .765, 2833, 2839 Corporations . . 1787 Estates and trusts. .1247 Fiduciaries. .1247 Individuals. .756, 2833, 2839 Nonresident aliens. .502 Partnerships . . 1295 Personal service corporations. .3230 Tentative returns. .1439, 3026, 3017a Special for 1918. .3138, 3158, 3241 Penalty for failure to file final return.. 3 630 Special for 1919: fiscal year corporations. .3329 Understatements; increases by collector. .1399, 1538, 3030, 3036 Appeal from collector’s decision. .1639, 3030 Undistributed profits tax: corporations with fiscal years ending In 1918.. 3332 United States bonds 967, 992, 3013 Verification of correctness of any return. .1631 Jurisdiction of district courts. .1632 When filed . . 1471, 3025, 3241 Where filed. .1526, 3029, 3241 Withholding at the source. .698, 8002 Bond interest. .702, 3002 Miscellaneous income. .700, 3002 “Revenue Act of 1916”; meaning of. .480, 481 Porto Rico and the Philippines. .519 “Revenue Act of 1917”; meaning of. .482, 483 “Revenue Act of 1918”: meaning of. .484 Rights: proceeds from sale of. .1828, 2846 , Royalties: 889, 1816, 1817, 2858 Received by nonresident aliens. .504, 571 Rulings: policy as to the making of rulings on abstract questions. .3588 Sailors: Alien.. 3343, 3609 Allotments under War Risk Insurance . . 2864 Commutation of quarters . . 863 Compensation from Government during war. .1006, 2876c Extension of time for filing returns if abroad. .1512, 3027, 3168, 3336 Salaries continued by employers, while in the service. .2007, 2890 Where returns are to be filed . . 1529 Salaries paid. .1021, 1978, 2882 After service is rendered. .882, 1988, 2842, 2884 Aliens: resident and nonresident. .491, 493, 2973, 2997, 3147, 3394, 3398, 3438, 3492, 3525 Bonus, special compensation, etc. .869, 1979, 2889 Commissions: salary. plus. .884 Deductible item of expense. .1021, 1978, 2882 Exempt organizations; paid by. .861 Government employees; quarters, mileage, light, heat, etc.. 863, 2842 Illegally paid and received. .2887 Medium; paid otherwise than in money. .849, 2842a Paid in stock. .2003, 2842a Paid in notes. .2842b Minors: by parents. .1037 Nonresident aliens: services rendered abroad. .663, 1339, 1346, 2877 Percentage of net profits. .881, |1994, .2842, 2884 Seamen: alien.. 3433. 3609 Self: salary paid to. .1039 Smith-Lever Act: exemption of salaries. .1015, 2875b Soldiers and sailors: while in service, by employees. .2007, 2890 pfi, Soldiers and sailors: by Government. .1006, 2875c State and municipal employees. .1013. 2875b, 3313, 3334 Stockholdings: salaries based on. .1983, 1998, 2883, 2886 Traveling men . . 2966 Index Page 21 CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Salaries paid: — Concluded. Widow of former employee: for short period, ,962, 2010, 2890 Withholding based on calendar year. .596 (See “Withholding at the Source” at 2, Index Page 25.) , “Same interest.^”: meaning of term in connection with affiliated corporations. .3235, 3295 Sample room : traveling men . . 2966 Scientific organizations. .1745, 3191 Scrip. .618 Dividend paid in. .789 Interest paid in . . 928 Seamen, alien., 3433, 3609 Second assessments: abatement and refund. .2498, 2590 Burden of proof under statute prior to present amendment .. 2593 Secrecy of returns. . 1637. 2645, 3063, 3066, 3508 Returns of amounts withheld at source.. 2649 Secret processes and formulae: depreciation of.. 29 12, 3594 Secret societies: fraternal. .1742 Secretary defined . .751 Secured debts: amounts paid to states. .2897 Securities as medium when making deductible gifts.. 3 550 ^ Securities: shrinkage in value of. ,1070, 1074, 2067, 2123, 2904 1 Charging off worthless securities. .2909 Separation agreement. .1012, 2864a, 2965 Ships: income from foreign owned. .2877 Ships used for war purposes: amortization fund .. 1093, 2164, 2922 Shipwreck losses . .1086, 2901 Sickness a cause for securing extension of time for filing return. .1501, 3026 Single persons: Returns by. .1142, 3013 Specific exemption allowed to . .1128, 3245 Sinking fund. .2162, 3218 Investments . . 1814 Smith-Lever Act: exemption of salaries. .1015, 2875b Societies for the prevention of cruelty to animals or children . . 1745 Soldiers: Allotments under War Risk Insurance. .2864 Commutation of quarters, etc., .863 Compensation from Government during war. .1006, 2875c Expenses of. .2965 Extension of time for filing returns if abroad. .1512, 3027, 3168, 3336 Salaries continued by employers, while in the service. .2007, 2890 Where returns are to be filed . . 1529 “Source" defined, .589 Source within the United States: meaning of, in connection with income of nonresident aliens and foreign corporations. .2288 Specific credit of $2,000: corporations, .2330, 3224 Apportioning when accounting period is changed . .1485. 3232 Specific exemption (See “Exemption.' personal specific” at 1, Index Page 9.) Specific penalties. .1572, 3051 Attach to the person . . 1579 Not asserted under certain circumstances. .1581, 3260 Spending or treating money. .2011 Stamp taxes are deductible . . 2898 State, etc.: contract work done for. .1014, 2844 State: income accruing to. .1005, 2875a State obligations. .963, 968, 2865 Interest on paid out as dividends. .788 Political subdivisions defined. .970 Return of . .967 State officers may inspect returns. .1638, 1658, 3064 State taxes are deductible. .1055, 2897 State taxes: covenant in bonds to pay. .3212 States, cities, etc.: salaries paid by.. 1013, 2875b, 3313, 3334 Statistics: annual report by Commissioner. .1661, 3067 Steamship companies: foreign. .2294 Stock acquired as compensation for services rendered. .2842a Stock acquired as gift: sale of. .934 Stock; common as bonus: sale of. .933, 2846 Stock contingently credited to employees. .2862c Stock dividends. .811, 3097 Allocating to prior years. .831, 3098, 3122-3123 Dividends of foreign corporations . . 844 Imposing the tax in such cases. .1678, 3122-3123 Capitalization of good will, increase in value of assets, etc. .800, 826, 3097 Case testing constitutionality under Act of 1916.. 815, 3333 Claims for refund: Act of Oct. 3, 1913 . .2492 Claims for refund: Acts of 1916 and 1917. .2496 Determination of profit or loss on disposition of stock received . .818, 3099 Macomber vs. Eisner.. 815, 3333 Towne vs. Eisner decision. .2738 Effect of on present Act. .812 Refund claims. .2492 Stuck farms (See “Farms and Farmers” at 2. Index Page 9.) Stock redeemed on stipulated premium basis. .2083 Index Page 22. I CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Stock received in exchange for property (sale to corporation). . 3106a, 3577, 3627 Stock received in connection with 'merger, consolidation or reorganization. .1910 3107 3432. 3578, 3627 Stock: record vs. actual owners of. .3016 Stock: sale of by nonresident aliens. .520 Stock: sold from different lots: profit or loss. .827, 1875, 2846 Stock: taxes paid thereon for stockholders by corporations. .796, 2050, 3213 Stock trust certificates: income from . .1837 Stock: value of as of March 1, 1913. includes good will of corporation. . 3506 Stock: worthless .. 2904 Stocks and bonds (See “Securities” at 1, Index Page 22.) Stockholders of corporation may inspect its return. .1639, 1654, 3065 .‘Storm losses. .1086, 2901 Subcontracts in connection with Government contracts. . 1313, 3080a Subsidiaries (See “Affiliated Corporations” at 3, Index Page 1.) Subsidiaries: as agents or branches merely. .1710 Subsidiaries: earnings of, taken up on books of parent month by month. .2104 “Substantially all the stock”: affiliated corporations. .3235 Substitute certificates. .629, 3001 Foreign items. .3061 How entered on monthly list returns. .718, 3002 Suits for collection of taxes: 5-year limitation . .2360, 3038 Prior 3-year limitation , .2364 Suits to recover taxes under second assessment. .2498, 2590 Burden of proof under Sec. 3225 prior to present amendment . . 2593 Suits to recover taxes wrongfully collected . .2613, 2614, 3049 Second assessments. .2498, 2590, 2593 Suits to restrain assessment and collection of taxes. .2579, 3049 Suits to restrain assessment and collection of penalties. .2589, 3049 Sundays in connection with last due date. .1476, 3028a Supplementary statements on returns. .1447, 30i7a Supreme Court cases. .2668 Surtax. .736, 2829 Actual or record owner of stock: dividends. .3016 Beneficiaries: income received through fiduciaries. .741 Computation of tax on specified amounts. .2830 Corporations availed of to prevent imposition of surtax on stockholders. .746, 2996 Corporations are not subject to surtax. .742 Deductions as offset against dividends received. .3328 Maximum limitation: mines or wells. .738, 2831 Nonresident aliens. .500, 591, 2829. . Stock actually owned by nonresident alien but otherwise recorded . 3016 Rates for 1913, 1914, and 1915. .841 Rates for 1916 and 1917. .842 Separate incomes of husband and wife. .739, 2829 Specific exemption: relation to surtax. .744, 1139, 2829 Tax Board: Advisory .. 2652, 3124 Discontinued. .3.587 Membership. .3249 Tax-free covenant obligations: Bonds without covenant may not bo Iroalcd by debtor as tax-free covenant bonds.. 3471 Covenant guaranteeing 1 % tax only. .611 Covenant to pay State taxes. .3212 Debtor not obligated to pav interest free of tax (State Court case) . .622 Exemption claims.. 638. 641. 655. 2997. 3060. 3566 Foreign corporation bonds.. 655. 3060 Interest received by bond holder: manner of returning. .1147, 1824 One form of covenant which does not necessitate withholding. .621 Tax paid additional income to creditor .. 2841, 3567 Taxes withheld are not deductible by debtor. .2061, 3212 Trust deeds containing covenants: bonds issued under. .2996 Withholding the tax.. 604. 655, 2996, 3060. 3225. 3320 Exemption claims by nonresident aliens.. 6 11, 2997, 3566 Tax paid additional income to creditor. . 2841 , 3567 Tax-free obligation.s: interest paid on indebtedness to purchase or carry. .1050, 2028, 2895 Tax liens: enforcement of. .3040 Tax: manner of collecting to be determined by the Commissioner. .592 Tax: payment of. .2339, 3031 All of balance due on demand if 'any installment not paid when due. .2347, 3031 Penalty.. 2397, 3036 All of tax may be paid on or before due date for filing return . .2348, 3031 Assessment of the tax In the first instance. . 2423, 3036, 3042 Subsequent adjustment .. 23 4 9, 3036-3037, 3042 Commissioner making return. .1549, 2359, 3032, 3034 Distraint: collection by . .3039 Estimating the tax for the purposes of the first installment covering 1918 taxes . .3138, 3158 Excess amounts paid: credit or refund. .2488, 3045 Claim to be made within 5 years. .2489 Extension of time for filing return; bearing on first in.stallment . . 2345, 3031. 3336 Fiscal year ending in 1918: additional tax liability under 1918 Act. .3180a, 3246 Fractional part of cent. .2426, 3127 Index Page 23. CONSULT THE PINK SHEET. kii- Vf GENERAL INDEX. ' The references are to paragraph numbers. 1" Tax; payment of: — Concluded. Installments due when. .2840, 3031 Second installment: 1919. .3331 Interest runs on deferred payments due to extension of time for filing return at request of taxpayer. .2346, 3033 Liens: enforcement of . .3040 Notice and demand for first installment. .2423, 3036, 3042 For the other installments. . 2399, 3036-3037, 3042. 3331 Penalty for failure to pay when due. .1572, 2347, 2397, 3033, 3036, 3051 When claim for abatement is pending. .2398, 3033, 3036 Receipts for taxes. .2465, 3044 Amounts withheld at source. .2471 Simulation of tax receipts. . 3465 Recomputation of installments after examination of the return. .2349, 8031, 3042 Second installment: 1919.. 3331 Suits to collect the tax. .2360, 3038 Suita to restrain collection. .2579 Taxpayer planning to leave jurisdiction. .2425, 3043 Treasury certificates of indebtedness. . 2428, 3128, 3371. 3518, 3565 Uncertified checks. . 2428, 3130, 3380 Warrant of distraint: $5 penalty if nece.ssary to serve. .2424, 3036 Withholding at the source.. 720, 3002 Tax rates: corporations. . 1681. 3182 Tax rates; individuals; Normal tax. .471, 497, 2826 Lower rate on first $4,000 applies to each separate individual. .2826 Surtax.. 600, 736, 2830 Proceeds of sale of mine or well . .738, 2831 "Taxable year" defined. .477, 1663, 2839, 3093 First taxable year. .479, 1665, 2839 "Taxpayer”; term defined.. 761 Taxes: assessment of within five years. .2360, 3042 Taxes deductible:. .1052, 2036. 2897, 3209, 3428. 3631 Taxes paid by bank or other corporation for stockholders. . 796, 2050. 3213. 3692 Taxes paid by tenants in lieu of rent.. 851, 1976 Taxes paid by debtor for creditor: tax-free covenant bonds.. 2841, 3567 Taxes paid by vendee for vendor.. 332 2 Taxes (other than income and profits taxes) erroneously paid in one year refunded in anot he year; amended returns. .2059 Taxes; redetermination of, because of adjustment of amortization fund. .1095, 2927 Taxes; redetermination of, because of 1918 inventory depreciation or because of 1919 rebate payments on 1918 sales on 1918 contracts .. 1123, 2963 Taxes withheld at source: payment of. .720, 3002 To be credited against amount of tax otherwise due from creditor. .731, 2322, 2338 Taxes withheld on tax-free covenant obligation interest not deductible by the debtor. .2061 Tenants. .851, 1716, 1836,. 1967 Tentative returns. .1439, 3017a, 3026 For 1918. .3138, 3158, 3241 For 1919: fiscal year corporations .. 3329 Penalty for failure to file final return.. 3630 Timber: depletion of (See "Depletion” at 1, Index Page 6.) Timber and lumber: profit or loss from sale of. .1899 Tips as taxable income . . 2842 Title to property: defending or perfecting. .1954, 2967 Trade marks: depreciation. . 2912, 3594 Distillers and liquor dealers: obsolescence. .3554. 3561 Trading as a principal in relation to personal service corporations. .1311, 3084 Trading stamps: redemption of. .2021, 2875e Transfer (inheritance) tax (New York State) not deductible. .1256, 2900 Travelling expenses. .2966 Treasury certificates of indebtedness .. 2 4 2 8 . 3128, 3371. 3518, 3565 Interest on: exemption of. .975, 2869, 3169 Treasury derisions: effective date of. .2592 Treasury stock.. 1832, 1833, 3202 Truck farms (See "Farms and Farmers” at 2. Index Page 9.) Trust; deed to be irrevocable. .1245, 2991 Trust deeds containing tax-free covenants; bonds issued under. .2996 Trustees in bankruptcy to make returns. .1429, 3022. 3228, 3613. 3633 Trustees' services; compensation for .. 885 Trusts (See “Estates and Trusts” at 1, Index Page 8.) Trusts: business: as corporations. .1687, 3076 Uncertified checks in payment of taxes.. 2428, 3130, 3380 Understatements in returns: Due to negligence on part of taxpayer. ,2357 .3033, 3035 Increases by the collector. .1399, 1538, 3030T;"*t^ Appeal from collector’s decision. .1539, 3030 Not due to fault of taxpayer. .2356 Wilfully on part of taxpayer. .1549, 1572, 2358. 3035 Undistributed distributable interests: Of estates or trusts . . 1207, 2994 Of partnerships . . 1280, 2978-2982 Of personal service corporations. .1307, 2983-29901 Undistributed profits of certain corporations . .746,|2995, 3292 Index Page'24. 11-10-19 CONSULT THE PINK SHEET. h GENERAL INDEX. The references are to paragraph numbers. Umdlstribated profits tax; colorations with fiscal years ending In 1918. .3332 Undisfibuted profits tax not deductible. .3285 Unearned increment in relation to depreciation. .2149 Unenforceable government contracts subsequently ratified. .3080a 1 United States bonds. .965, 2868 Credit of interest for income tax by corporations. .2326, 3224 Credit of interest for normal tax by individuals. .1127, 2968 Partnerships and personal service corporations. .1289, 2978b, 2986 Information at source does not apply to interest payments. .1376 Liberty bonds.. 975. 2869. 3169. 3277. 3278. 3284. 3325 Advertising sale of: expense of. .3210 Beneficially owned by nonresident aliens or foreign corporations. .991, 2877a, 3180 Corporations. .989 Dividends paid in. .774 Cash value of . .786 Income paid in. .848 Installment plan purchases . .990 Partnerships. .985, 1289, 2874, 2978b Personal service corporations. .985, 1289, 2874, 2986 Tabulation of exemption status of Liberty bonds and notes.. 3 325 Trusts. .983, 2994a Ownership certificates not required. .993, 1376 Penal bonds: U. S. bonds as security for.. 2220. 3583 Return of. .967, 992 Victory Liberty Loan notes. . 2872a, 3169, 3297, 3311, 3325, 3389, 3429 Withholding at source on interest: none. .619 “United States” defined.. 2281 United States employees: salaries. .764 Information at the source. .1320 United States possessions (See “Possessions” at 1. Index Page 18.) United States taxes deductible or otherwise. .1053, 2037, 2897, 3209 Validating clause. .2667 Verification by oath or affirmation of returns. .1451, 3017 Verification of correctness of return by Commissioner. .1631 Vessels used for war purposes: amortization fund. .1093, 2164, 2922 Vessels: income from foreign owned. .2877 Victory Liberty Loan Act. .2872a, 3169 Exempt status of interest on notes.. 3297, 3311, 3325, 3389, 3429 Violations of law; collector to report. .2651 Virginia partnership associations. .3078 Voluntary offerings to clergymen, etc. .886, 2842 Waiving 3-year limitation on assessments under prior laws. .2390 War chests: contributions to. .2962 W’ar equipment investments: amortization fund.. 1093, 2164, 2922, 3390, 3391 War Finance Corporation bonds: interest on. .966, 975, 2968 Beneficially owned by nonresident alien individuals and corporations. .991, 2877a, 3180 Credit for income tax by corporations. .2326, 3224 Credit for normal tax by individuals. .1127, 2968 Partnerships and personal service corporations . . 1289, 2978, 2990 Return of. .967, 3013a War hazards; property lost or destroyed: compensation for. .1840, 2860 War-profits taxes (See “Excess Profits Taxes” at 3, Index Page 8.) War Risk Insurance: allotments, allowances, etc.. .2864 War savings stamps: expense of advertising sale of. .3210 War; termination of to be fixed by President’s proclamation. .1009 Warrant of distraint: $5 penalty for causing to be issued . .2424, 3036 Warrants: city, town, etc.. .1803, 2844 Wear and tear (See “Depreciation” at 2, Index Page 6.) Wells; depletion of (See "Depletion” at 1, Index Page 6.) Wells, sale of: maximum surtax. .738, 2831 Widow; statutory allowance paid out of corpus. .2991a Wife, American: of nonresident alien. .492 Wife; separate estate. .1151 (See “Husband and Wife” at 2, Index Page 12.) “Withholding agent” defined . .584, 3093 Indemnifying of , .729 Liability of . .728 — Withholding at the source.. 5 53, 2996 * 1918 specifically.. 3003-3004, 3244, 3394 1919 specifically.. 3003, 3244, 3394 Abatement claims. .2519 Accounts current; interest on.. 331 4 Bond interest (See “Corporate obligation interest” below.) Bank deposits: interest on.. 598, 3314, 3342, 3607 Bonds: advance retirement of within an interest period. ,682 Bonds, foreign owned: coupons belonging to domestic corporation. . 687, 3496 Bonds, foreign owned; usufruct belonging to citizen or resident. .685 Bonds: purchase and sale of between interest dates. .684 Bonds purchased by trustee under mortgage deed of trust but not retired. .688 Citizens and residents: no withholding except on tax-free covenant bonds . .603, 2996, 3060 Collected and paid in year subsequent to that in which it became due and pay- Corporate obligation interest. . 601. 2996, 3060, 3318 able.. 3431, 3547, 3551, 3569, 3676 Defined . .61.5 Index Page 25. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Withholdin«r at the source: — Concluded. Credit for amount of tax withheld. .731, 2322, 2338, 3007a Creditor paying the tax himself . . 734 Waiving of penalties. .735, 3007a Debtor only withholds the tax . . 628 Dividends: no withholding. .560, 2997 Releasing amounts withheld in 1918. .3004, 3283 Exchange of interest coupons for funding bonds. .681 Exemption claims. .650, 654, 2997, 3060 Citizens and residents. .638, 654, 2997, 3000, 3060 Domestic corporations. .654, 3000 Fiduciaries. .680, 3000 More than one estate or trust. .661, 3006 Foreign corporations engaged in business in the United States . .576, 654, 3000, 822i Nonresident aliens.. 541. 641. 2977. 2997. 3275, 3394. 3398. 34.36. 3492. Partnerships (other than tax-free covenant interest) . .654, 3000 Prorating between husband and wife . . 673 Fixed or determinable annual or periodical income defined. .2996a Foreign corporations. . 572, 2996. 3225, 3342. 3507 Engaged in business in U. S. . .576, 654, 2997, 3225 Tax-free covenant obligation interest. . 610, 2996, 3320 Foreign government ..3474 Income on which tax is withheld to be included in return . . 730, 3007 i Indemnifying of wdthholding agents. .729 Interest.. 553. 2996. 3314, 3318. 3342 Corporate obligation interest. .601. 2996, 3060 Collected and paid in year subsequent to that in which It faecame due a«d payable.. 3 431, 3547. 3551, 3569, 3576 Liability of withholding agents . .728 Miscellaneous income: withholding on . . 553, 2996 Defined . . 594 Nonresident aliens.. 553. 2976. 3394. 3398, 3436 All aliens are presumed to be nonresident aliens. .2976. 2997. 3152. 3394. 3898, 3436. 3492, 3525 Seamen. .3433, 3609 Notes in lieu of cash . . 597 Owner not known.. 692, 612. 651. 2996. 3001a. 3321, 3303. 3591 Ownership certificates. .643. 650, 2998, 3060, 3293, 3338, 3470 No ownership certificate accompanying coupons. .692. 612. 651. 2996. 3Wla, 3321. 3383. 3591 (^ee “Ownership certificates” at 1, Index Page 16.) Partnerships: withholding against. .609, 2996 Paying agents: appointment of. .624 Payment of taxes withheld . .720, 3002 Receipts for . . 2471 Refund claims. .2518 Refund of excess amounts writhheld. .733, 3004, 3283 In connection with deferred collection of interest on bonds.. 3431, 3651. 3569, 3576 Refund on change of status: nonresident to resident. .3406. 3436. 3525 Registered interest. .645, 3001b, 3057 Returns of amounts wdthheld. .698, 3002 Bond interest. .702, 3002 Miscellaneous income . . 700, 3002 Notice of failure to file. .719 Return by creditor of income on which tax has been withheld. .730, 3007a Salaries: based on calendar year. .596 Secrecy of returns. .2649 Substitute certificates. .629, 3001 Tax exempt organizations to withhold . .598 Tax-free covenant obligations. . 604, 655, 2996, 3060, 3225, 3320 Bonds without covenant may not be treated by debtor as having covenant. .3471 Exemption claims by nonresident aliens.. 641. 2997, 3566 Tax paid additional income to creditor. , 2841, 3567 Tax withheld to be credited against tax to be paid by creditor . .731, 232 2. 23.38. 3007a United States bond interest. .619, 2998 Withholding agents: definition of term . . 584 Workmen's compensation . . 998, 2864 State: income accruing to fund. .2875a Worthless debts (See “Bad Debts” at 1, Index Page 2.) 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