Coleman Silbert.

Federal income tax primer based on Revenue act of 1921 and on 1922 regulations online

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y: PRIMER



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4652



"ecleral income tax




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Southern Branch
of the

University of California

Los Angeles

Form L-1

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JUL 3 1323

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OEC 16 19*-S4



Form L-9




JUN I


1926


NOV


8 1927


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i!?|R'l.^tS£U



FEDERAL
INCOME TAX PRIMER

BASED ON REVENUE ACT

OF 1921 AND ON 1922

REGULATIONS

BY

COLEMAN SILBERT

OF THE BOSTON BAR




BOSTON
FINANCIAL PUBLISHING COMPANY

1922



e54 8S>0



Copyright 1922 by Financial Publishing Co.



J

1 TABLE OF CONTENTS






INCOME TAX ON INDIVIDUALS



Par. Page

List of abbreviations 1

y, 1. To whom it applies 2

Gross or Taxable Income

2. General definition 2

-^3. Certain non-taxable items 2

jy 4. Year when income is taxable_. 2

W ITEM: INCOME FROM SALARIES, WAGES,

• COMMISSIONS, ETC.

5. Salaries: Not paid in cash — credited, not paid —

} percentage of profits — contingent — gifts — trav-

, eling expenses 3

an 6. Salaries of wife and dependent children 3

7. Non-taxable salaries: State employees — Federal em-

ployees — notary public fees 3

8. Bonuses — when reported 4

J 9. Pensions — gratuities — military pensions 4

10 Expenses: Daily fares and meals — traveling expenses 4
ITEM: INTEREST

(n 11. Interest on bank deposits — coupons 4

^^ 12. Non-Taxable Interest: State bonds — Federal Farm
ffi Loan Bonds — Interest from building and loan

V/ associations — Tax-free covenant bonds 5

' 13. Bonds sold between interest dates 5

ITEM: INCOME FROM PARTNERSHIPS, (PERSONAL
SERVICE CORPORATIONS), AND FIDUCIARIES

14. Partnerships: Loss in the business 5

15. Different fiscal years 5

16. Credits 5

17. Personal Service Corporations: Different fiscal years 6

18, Credits 6

19. Fiduciaries : Gifts 6

20. What must be reported _^ 7

21. Revocable trust 7

22. Different fiscal years 7

23. Credits , 7

ITEM: INCOME FROM RENTS AND ROYALTIES

24. How reported: Lessor's taxes paid by lessee 7

25. Repairs 8

26. Depreciation 8

27. Other expenses ^ 8

28. Interest .' 8

29. Taxes 8

30. Royalties 8

31. Loss in this item 8



ITEM: PROFIT OR LOSS FROM BUSINESS OR

Par. PROFESSION Page

32. General statement: Personal expenses 9

33. Compensation for services extending over more than

one year 9

Total Sales

34. Trade discounts 9

Materials and Supplies

35. Cash basis 9

Merchandise Bought for Sale

36. Trade discounts 9

37. Transportation charges, etc 9

Inventory

38. Where required _. . . . 10

39. What included; Unidentified goods 10

40. How figured: Change in method •.:.••• 10

Salaries and Wages

41. Reasonable allowance for services rendered 10

42. Own salary, wife's and children's 10

43. Not paid in money 11

44. Increases in salary 11

45. Bonuses 11

46. Allowance to widow of employee 11

47. Traveling expenses 11

48 Rent 11

Interest

49. Interest deductible: loans secured by tax-exempt se-

curities — overdue taxes 11

50. Interest not deductible 11

Taxes

51. Taxes deductible: Penalties 11

52. Taxes not deductible 12

53 Repairs 12

Wear and Tear

54. Depreciation: Not temporary fluctuation 12

55. For what property: Not stocks and bonds — personal

use 12

56. How to figure 13

57. When taken '._. 13

58. Obsolescence 13

58a. Depletion '. 13

Losses

59. General statement 13

60. Amount of loss 14

61. Year taken 14

62. Special provision 14

62a. Amortization 14

Bad Debts

63. To what applies 14

64. Two methods 15



Par. Page

65. Charged off wholly 15

66. Charged off in part. 15

67. When charged off .^ 15

68. Reserve for bad debts 15

69. Secured debts 15

Other Expenses

70. Capital charges 16

71. Personal expenses 16

72. Year in which deducted 16

73. Insurance 17

74. Other professional expenses 17

75. Pensions 17

76. Allowance to widow of employee 17

77. Traveling expenses 17

78. Damages for injuries 17

Loss in Business

79. Effect for year 17

80. Deduction of net loss in business against net income

of later years 17

r PROFIT OR LOSS FROM SALE OF REAL ESTATE
ITEMS: \ PROFIT OR LOSS FROM SALE OF STOCKS,
[ BONDS, ETC.

81. General statement: Year loss or profit is taken 19

82. No gain or loss 19

83. Effect of depreciation on sale or disposition of property 19

84. When made on sale of real estate 20

85. Non-deductible losses 20

86. Thirty-day clause 20

86a. Short sales 21

87. Tax-exempt dividends , . 21

88. When the property can't be identified 21

Property Bought or Acquired On or After March 1, 1913

89. Gain on property bought on or after March 1, 1913 21

90. Loss on property bought on or after March 1, 1913. ... 22

91. Gain on gifts acquired from living persons on or after

March 1, 1913 and before January 1, 1921, and gifts
acquired by inheritance on or at any time after

March 1, 1913 22

92. Loss on gifts acquired from living persons on or after

March 1, 1913, and gifts acquired by inheritance on

or at any time after March 1, 1913 22

93. Gain or loss on gifts acquired from living persons on

or after January 1, 1921 22

Property Bought or Acquired Before March 1, 1913

94. Gain on property bought or acquired before March 1,

1913 23

95. Loss on property bought or acquired before March 1,

1913 23

Special Cases

96. Preferred stock with common as bonus .,.. 24

97. Sale of stock after stock dividend 24

98. Stock dividend of different class from original stock 25

99. Sale of unidentified part of stock dividend 25

100. Sale of rights 26

100a. Court decision ^ 26

V



Par. Gain or Loss on Exchange Page

101. No gain or loss ._ .^ 26

102. Rule for other exchanges 27

103. New property substituted for old 27

104. When property received on non-taxable exchange is of

different kinds 27

105. Where part of property received on exchange has a

market value and part has not 27

106. Sale of real estate, taking purchase mortgage 28

107. Foreclosure sale of purchase mortgage •••• 28

108. Property destroyed, stolen, or taken by eminent do-
main or condemned ^ 28

109. Where acquired before March 1, 1913 29

110. Liquidating dividends 29

111. Sale of partnership interest 29

ITEM: DIVIDENDS

112. How taxed .^ 30

113. Definition 30

114. Federal Reserve Bank dividends 30

115. Out of what earnings 31

116. Stock dividends 31

117. Other dividends not in cash 31

118. Dividends by insurance companies to policyholders.... 31

ITEM: INTEREST FROM LIBERTY BONDS, ETC.

119. Exempt from normal tax 31

120. Credits for Liberty Bonds held by fiduciaries, partner-

ships and personal service corporations 32

121. What is wholly tax-exempt 32

122. Second, Third and Fourth Liberty Bonds 32

122a. No need of original subscription 33

123. Victory notes 33

124. Treasury certificates of indebtedness 33

125. War Savings Certificates 33

126. War Finance Corporation Bonds 33

127. How to compute the exemption 33

ITEM: OTHER INCOME

128. What included 33

129. Dividends from foreign corporations 34

DEDUCTIONS

Interest

130. When deductible 34

131. "Originally subscribed" 34

132. Interest on taxes 35

Taxes

133. General rule 35

134. Estate and inheritance taxes 35

Losses

135. Which deductible here ^.. • • 35

136. In what year deducted 36

137. Deductible and non-deductible losses 36

138. Amount of deduction 36



Par. Contributions Page

139. When deductible 36

140. By partnership 36

Bad Debts

141. What included ^1

142. Indorsers and sureties Zl

Other Deductions Authorized by Law

143. Payments to beneficiaries under a will Zl

144. Family or personal expenses ^ 37

COMPUTATION OF TAX

145. Net income 38

146. Returns for less than a year 38

147. Credits 38

148. Personal exemption 38

149. How much a "head of a family" must contribute 39

150. Date for determining amount of exemption 39

151. Normal tax 40

152. Surtax 40

153. Elective tax on profits from sale of capital assets 40

Credits on Tax

154. Tax paid at source 41

155. Foreign income and excess profits taxes 41

Payment of Tax

156. When due 41

157. How made 42

PARTNERSHIPS, PERSONAL SERVICE CORPORATIONS,
AND FIDUCIARIES

158. Partnerships 42

159. Personal service corporations 42

Fiduciaries

160. Definition 43

161. Returns ^ 43

162. Expenses of administration 44

163. Trusts with same founder and same trustee, returns by

trustee 44

164. Sale of capital assets _^ 44

165. When the fiduciary pays the tax 45

166. When the beneficiary pays the tax 45



PART II.
INCOME TAX ON CORPORATIONS

Miscellaneous Provisions

167. Definition of corporation 46

168. Corporations subject to the tax 46

169. Tax-exempt corporations , 46

vii



Par. Returns Page

170. By what corporations made 47

171. When and where made and by whom sworn to 47

172. Consolidated returns 48

173. Special provision for related trades or businesses 48

174. Returns of dividends 48

GROSS INCOME

175. General statement ^ 48

176. Gross sales ._^ 49

177. Cost of goods sold 49

178. Gross income from other operations 49

179. Taxable interest on obligations of the U. S. and War

Finance Corporation Bonds 49

180. Other taxable interest 49

181. Rentals ^. . . 49

182. Royalties ^ 49

183. Earnings from Personal Service Corporations 49

184. Dividends 49

185. Income from other sources SO

DEDUCTIONS

186. Ordinary and necessary expenses SO

187. Compensation of officers SO

188. Repairs SO

189. Interest 50

190. Taxes SO

191. Bad debts Si

192 Wear and tear (depreciation) and obsolescence SI

193. Depletion ,.. SI

194. Amortization 51

195. Profit or loss on sale of capital assets 51

196. Other losses 51

197. Net Loss 51

198. Dividends 52

Computation of Tax

199. Credits for income tax 52

200. Rates 52

201. No elective rate on profits from sale of capital assets.. 53

202. Evasion of surtaxes by incorporation S3

203. Return for less than a year 53

204. Credits against tax 54

205. Payment of tax 54

EXCESS-PROFITS TAX

206. General statement 54

Computation of Invested Capital, Etc.

207. What included 54

208. Excess-profits credit 56

209. How the excess-profits tax is computed 56

210. Examples 56



PART III.

GENERAL AND MISCELLANEOUS PROVISIONS

Par. Page

211. Name of Act and when it took effect 58

RETURNS
Who Must File a Return and On What Forms

212. Net income of $1,000 or more 58

213. Net income of $2,000 or more 58

214. Returns by husband and wife 58

215. Combined net income less than $2,000 59

216. Gross income of $5,000 or more 59

217. Husband and wife 60

218. Return of minor's income 60

219. Returns by agent or guardian 60

220. Definition of net income 60

221. Status 60

222. Forms 61

223. Forms for husband and wife. . . . 61

224. Method of return by husband and wife may be changed 61

225. The income of dependent minors 61

226. Returns by executors and administrators 61

227. Returns by trustees 61

228. Returns by receivers 61

229. Related trades or businesses 61

Returns of Information at Source

230. Who make ^. 62

231. Fixed or determinable income 62

232. What items need not be reported 62

233. Where made out 62

234. Interest on bonds of domestic or foreign corporations.. 62

235. Income withheld from nonresident alien ,. . 63

236. "Foreign items" . 63

237. Returns by brokers 63

When Returns Must Be Filed

238. By nonresident aliens 63

239. Individual, partnership and fiduciary returns 63

240. Executors and administrators 63

241. Trustees 63

242. When separate return for less than twelve months is

made 63

243. Date of mailing 63

244. Extensions ^. 64

245. Where returns are to be filed 64

For What Period Returns Are Filed

246. The taxable year 64

247. Choice of calendar or fiscal year._^ 64

248. Change in accounting period j_ 64

249. After permission granted... ._^... 64

250. Separate return caused by change...... 65

Basis of Returns

251. Cash or accrual basis 65

252. Constructive receipt 65

253. When inventories are required 66

254. Change of basis ^ 66

ix



Par. Withholding at Source Page

255. Eight per cent, deduction _^ 66

256. Ten per cent, deduction (commencing in 1922 twelve

and one-half per cent.) 66

257. Exceptions to withholding in Par. 255 and Par. 256 66

258. Fixed or determinable income 67

259. Annual or periodical ^. 67

260. Two per cent, deduction 67

261. Exemption from 2% withholding 67

262. Owners unknown 68

263. Ownership certificates 68

264. Returns by withholding agents 68

Nonresident Alien

265. Definition 69

266. Proof of residence of alien .^. 69

267. Duty of employers — returns by the aliens 69



PART IV.
ADMINISTRATIVE PROVISIONS

268. Failure to file return on time and fraudulent returns... 70

Payment of Tax

269. Extension of time 70

270. Where taxpayer about to leave the country, etc 70

Additional Assessments

271. Penalties and interest 71

272. When may be made 71

273. Income of decedent .._ 71

274. Notice to taxpayer, appeal, etc.; understated returns..... 72

275. Extension of time for payment 72

276. Examination of books Th

Failure To Pay Tax

277. Penalties ^^ ^. . . 12>

278. What constitutes notice IZ

Suits By Government

279. Time limit ^. 74

280. Suits against stockholders -. ••^' 74

281. Attachments, etc ».. . . 74

282. Compromises 74

Claims for Abatement

283. When made and effect of 74

284. Form of 74

Claims for Credit

285. Purpose 75

286. May be combined with claim for refund 75

287. Effect of claim for credit 75

Refunds

288. When must be made ^ 75

289. How made 75

X



Par. Page

290. To whom made .^ 75

291. On examination of returns , . 76

292. Interest 76

Suits By Taxpayers

293. Requirements and limitations 76

294. Against whom brought 76

295. Interest .^ 11

296.' How the money is obtained after judgment 11

297. Injunctions 11

Miscellaneous Provisions

298. Regulations ^ 77

299. Inspection of returns and copy 11

300. Hypothetical questions 78

301. Committee on appeals and review 78

302. Registration of attorneys, etc 78

303. Reopening of cases 78

304. Final agreement ^^ 78



PART V.



DECISIONS OF THE UNITED STATES SUPREME
COURT ON INCOME TAX AND RELATED STATUTES

SINCE 1913

A. Decisions on general matters 79

B. Decisions relating to taxable and non-taxable income... 80

C. Decisions relating to deductions 86

D. Decisions relating to administrative provisions 87

E. Excess-profits tax decision 88



PART VI.

REVENUE ACT OF 1921.
Titles I, II, III, XIII, XIV.

A. Important changes and new provisions in the Revenue

Act of 1921 89

B. Provisions in the Revenue Act of 1921 not applicable

until 1922 , . 95

C. Provisions in the Revenue Act of 1921 of limited duration 96

D. Text of Revenue Act of 1921: Titles I, II, III, XIII, XIV 97



Index 159



EXPLANATION OF ABBREVIATIONS

Par. — Paragraph of this book.

Sec. — Section of Revenue Act of 1921.

Art.— Article of Regulations 62, 1922.

T. D. — Treasury Decision.

Bull. — Cumulative Bulletins of Decisions of Income Tax
Unit: 1,2,3,4.

37-21-1098. — Reference to Weekly Bulletins issued during
1921 after those contained in Bulletins.

I-l-l, etc. — Reference to Weekly Internal Revenue Bulletins
commencing in 1922.

I. T. — Income Tax Unit.

Ct. D. — Court Decision.

O. D. — Office Decision.

O. or L. O. — Solicitor's Law Opinion.

S. — Solicitor's Memorandum.

Sol. Op. — Solicitor's Opinion.

T. B. M. — Advisory Tax Board Memorandum.

T. B. R. — Advisory Tax Board Recommendation. The Ad-
visory Tax Board is no longer in existence.

A. R. M. — Committee on Appeals and Review Memorandum.

A. R. R. — Committee on Appeals and Review Recommenda-
tion.



INCOME TAX ON INDIVIDUALS

1. To whom it applies. — The provisions herein stated refer
only to citizens and residents of the United States. There
are special provisions for :

(1) Citizens of a possession of the United States (see
Sec. 260 of the Act).

(2) Citizens under Sec. 262 of the Act.

(3) Nonresident aliens (see in particular Sec. 217 of
the Act).

Gross or Taxable Income

2. General definition. — Gross income includes all gains,
profits and income derived from any business, trade, or pro-
fession, from salaries or wages or compensation for personal
service, from sales or dealings in any kind of property, from
rent, interest dividends, or from any source whatever (Sec.
213a and Art. 31).

This includes income from within as well as from without
the United States except as limited in the special cases men-
tioned in Par. 1 (Art. 3).

3. Certain non-taxable items. — Gross income does not in-
clude the following items :

1. Proceeds of life insurance policies paid on death of
insured (Sec. 213b (1) ).

2. The amount received by the insured not in excess
of premiums paid by him or for him under life insurance,
endowment, or annuity contracts (Sec. 213b (2) ). For
the taxability of any excess see Par. 128.

3. Property acquired by gift or inheritance (Sec. 213b
(3) ). The income from such property is taxable.

4. Amounts received through accident or health insur-
ance or under Workmen's Compensation Acts plus any
damages received for personal injury or sickness (Sec.
213b (6) ).

5. Alimony or money paid under separation agree-
ment (Art. 73).

4. Year when income is taxable. — If returns are made on
a cash basis, the income is reported for the year when it is
paid or credited (Art. 52) to the taxpayer. If income is re-

2



ported on an accrual basis, it is reported for the year when it
accrues (Art. 51). See Sec. 213a.

Unliquidated claims are income for the year when liqui-
dated by payment, judgment or agreement (see Art. 51. See
also Par. 7Z).

Contingent claims are income only when the contingency
has occurred (Bull. 3, p. 142; A. R. R. 232). (See also Par.
72.)

Forms 1040, 1040A, and 1041 (see Par. 160)

ITEM: INCOME FROM SALARIES, WAGES,
COMMISSIONS, ETC.

5. Salaries. — All salaries are to be included, even those
from your own business or partnership. If you are paid oth-
erwise than by money, wholly or in part, the market value
of what you receive is to be included (Art. 33). Salaries are
to be reported for the year when credited to you even though
received later (Art. 52). See also Par. ZZ.

Salaries, even if partly non-deductible as a business ex-
pense because excessive (Par. 41), unless they are to be
treated wholly or in part as dividends or capital payments,
must be reported in full (Art. 106).

A salary based on a percentage of profits is to be included
here (Bull. 3, p. 143 ; A. R. R. 346).

Salaries which are purely contingent are not to be included
until the contingency has taken place (Bull. 1, p. 109; O. D.
159).

Gifts are not to be included (see also Par. 9). Supper
money is considered a gift (Bull. 2, p. 90; O. D. 514).

For traveling expenses see Par. 10.

6. Salaries of wife and dependent children. — Any salary
received by a wife should be reported as part of the husband's
income or preferably on a separate return, or joint return
with the husband (Art. 401).

The salaries or wages of dependent minor children should
be included in the parent's return (Art. 403).

7. Non-taxable salaries. — Salaries of officers or employees
of a State, County, City or Town, or any political subdivision
of a State, are not taxable (Art. 88). Salaries of Federal em-
ployees are taxable (Art. 32).

The fees of a notary public are not taxable (Art. 88).

3



8. Bonuses. — Any bonus given during the term of service
or at the end is to be reported as far as it does not exceed
reasonable compensation when added to the regular salary.
Any part over this would be a gift. In this case, of course,
the excess would not be deductible as an expense of the busi-
ness (see Par. 45) (Art. 107).

Of course whatever should be here reported is deductible
as a business expense (see Par. 45) and vice-versa; but the
fact that the employer does not deduct it does not mean that
the employee should not return it if the bonus is allowable as
salary (Bull. 3, p. 144; O. D. 570).

The bonus must be paid or credited during the taxable
year (Bull. 2, p. Ill ; O. D. 497).

9. Pensions. — Pensions paid to retired employees are to be
reported (Art. 108).

Pensions paid to others are gifts and not income (Art. 32).

All allotments, allowance and pensions to those who served
in the military or naval service of the United States or to
their beneficiaries need not be reported (Sec. 213b (9) ).

10. Expenses. — Fares expended in going to and from work
are not deductible (Art. 101a) ; neither is money spent in town
for meals; see Par. 71.

Those who have to pay traveling expenses out of their
salaries are allowed to deduct them in full. Those who in
addition to their salaries are repaid their actual expenses
return the payments as income and deduct them as expenses.
Where any lump sum or per diem allowance exceeds the
actual expenditures, the excess is to be reported as income
(Art. 292).

Traveling salesmen claiming deductions must make out a
statement and attach it as part of the return. The actual
records of the expenditures may be called for (Art. 292).

ITEM: INTEREST

(For interest on Liberty Bonds, etc., see below)

11. Interest on bank deposits, etc. — This is income for the
year when credited on the books (Art. 53).

Likewise interest coupons when due and payable are in-
come, even though not yet cashed (Art. 53). If defaulted they
are income when paid (Art. 53).

4



12. Non-taxable interest. — (1) The interest on State bonds
or any political subdivision thereof or the District of Colum-
bia (213b (4) ).

(2) Interest on Federal Farm Loan Bonds (Sec. 213b (4) ).

(3) Interest not in excess of $300 received from 1922-1926
as dividends or interest from mutual domestic building or
loan associations (Sec. 213b (10) ).

• (4) Interest accrued before March 1, 1913 (Art. 90).

None of these items need be reported on the return.

All the interest from tax-free covenant bonds is to be re-
ported (Sec. 221d) ; for credit for taxes paid at source, see
Par. 154.

Taxes paid on interest from tax-free covenant bonds are not
taxable income (Sec. 234a (3) ).

13. Bonds sold between interest dates. — When the price is
plus accrued interest the seller reports the interest for the
period he held the bond and the purchaser for the period he
holds the bond (Bull. 3, p. 90; Sol. Op. 46).

ITEM: INCOME FROM PARTNERSHIPS, (PER-
SONAL SERVICE CORPORATIONS) AND
FIDUCIARIES

(For partnerships generally see Par. 158)

14. Partnerships. — Partnerships themselves are not taxed.
A partner must return whatever income he received and his
share of any profit he is entitled to, even though it is not
distributed (Sec. 218a). Of course if he pays one year on
any profit not distributed he does not have to pay on it again
when he receives it (see Art. 1570). If there is a loss' in the
business his share of the loss should be entered and subtracted
from any gains in the return (Art. 332).

15. Different fiscal years. — If the partnership year is
dififerent from the partner's, he returns his share for the
entire partnership year which ends before his (Sec. 218a).

For the fiscal years 1920-1 and 1921-2 there is an ad-
justment of the taxes because of the different Revenue
Acts and rates (Sec. 205c and Arts. 334 and 335).

16. Credits. — From the profit of the partnership there
must be deducted his percentage of the interest received

5



from Liberty Bonds held by the partnership and also of
dividends from corporations received by the partnership.
That is, if he gets one-third of the profits, he deducts from
• his profits one-third of such interest and dividends. What
is left from his share of the profits after this deduction is
entered in this item (Sec. 218b).

(For Personal Service Corporations generally see Par. 159)

17. Personal service corporations. — They are not them-
selves taxed until Jan. 1, 1922. Until then they are treated
like partnerships. Therefore each stockholder must return
any dividends he received plus his share of the profits not
distributed at the end of the fiscal year of the corporation
ending at the same time with or before his own (Sec. 218d).
This applies to earnings accumulated from 1918-1921 ; earn-
ings from Feb. 28, 1913 to Jan. 1, 1918 are returned as divi-
dends; see Par. 113 (Sec. 201a).

For the fiscal year 1920-1 see Art. 337.


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