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Federal Taxes on Income
and Profits




fiUiLi



Guaranty Trust Company
of New York



GIFT OF




I



Federal Taxes on Income
and Profits



Imposed by the Revenue Act of 1918



Guaranty Trust Company of New York
140 Broadway

FIFTH AVENUE OFFICE MADISON AVENUE OFFICE

Fifth Avenue and 43rd Street Madison Avenue and 60th Street

LONDON OFFICES LIVERPOOL OFFICE

32 Lombard Street, E.C. 27 Cotton Exchange Buildings

5 Lower Crosvenor PL, S. W.

PARIS OFFICE HAVRE OFFICE BRUSSELS OFFICE

1 & 3 Ruedes Italiens 122 Boulevard Strasbourg 158 Rue Roy ale






^^^



COPYRIGHT, 1920
GUARANTY TRUST COMPANY OF NEW YORK



Foreword

THIS booklet contains a summary of important rul-
ings of the Treasury Department relating to income
and excess profits taxes, imposed under the Revenue
Act of 1918. It has not been possible to cover all regula-
tions which have been issued by the Department, but an
effort has been m^e to cover those which are of the most
general importance, laying special emphasis on those parts
of the regulations which are applicable to the taxable year
1919. Much care has been used in the compilation of this
booklet and although w^e cannot insure the accuracy of all
statements, we believe them to be correct.

We have omitted reference to withholding of tax and
information at the source, and the use of ownership certifi-
cates, these subjects having been treated in a separate
booklet which we have prepared.

In the discussion of the excess profits tax, we have also
omitted reference, so far as possible, to regulations dealing
with the war profits tax, inasmuch as this tax is applicable
only to corporations which report on the basis of a fiscal
year in 1919, ending other than December 31, 1919, and to
corporations which derive during 1919 more than $10,000
from Government contracts. As the majority of the cor-
porations under the first class have already prepared their
returns, and as the number of corporations deriving in-
come from Government contracts, is comparatively few,
we have not deemed it necessary to devote the amount
of space which would be necessary to describe the compu-
tation of tax and the determination of income in such cases.

Guaranty Trust Company of New York

January 23, 1920



PART I. INCOME TAX— IMPOSITION
OF TAX

RATES OF TAX

The statute imposes an income tax upon individuals, including a
normal tax and a surtax. The tax is upon net income, after deduct-
ing from gross income, the allowable deductions.

Normal Tax. — For the calendar year 1919 and subsequent
years the normal tax on individual citizens or residents of the
United States is 4 per centum upon the first $4,000 in excess of allow-
able deductions and credits and 8 per centum 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 a nonresident alien individual the entire net in-
come from sources within the United States, less any allowable
deductions and credits, is subject to the normal tax at the rate of
8 per centum for 1919 and subsequent years.

Surtax* — In addition to the normal tax, a surtax is impose 1
upon the net income of every individual, resident or nonresiden',
in excess of $5,000. In determining the taxable net income for tl )
purpose of the surtax the credits provided by Section 216 of the
statute are not applicable.

The chart on page 2 shows the rates of normal tax and surtax
and the total tax on citizens and residents of the United States on
net incomes of specified amounts. The surtax for any amount of
net income not shown in the chart is computed by adding to the
total surtax for the largest -^fioount shown which is less than the
income, the surtax upon the excess over that amount at the rate
indicated in the table.

Surtax on Sale of Mineral Deposits. — Where the tax-
payer by prospecting and locating claims, or by exploring and dis-
covering 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

II]

415585



INCOME TAX CHART

Ba-Hed on tie Revenue Act of 1918

(Chart shows the cax payable for 1919 and subsequent years by a married person, but

does not take cognizance of the $200 exemption for each dependent child)





Rate of


Rate


1
Amount Subjeci/ to


Amt. oi


Amt. of






••Net


Normal


of


Surtax Between


Norma]


Surtax


Total*


Total


Income


Tax


Surtax


Change of Rates


Tax


onlnstal.


Surtax


Tax


$ 3,000


4%








40






40


4,000


4%








80






80


5,000


4%








120






120


6,000


4%


1%


5,000 to


6,000


160


10


10


170


8,000


8%


2%


6,000 to


8.000


320


40


60


370


10,000


8%
8%


3%


8,000 to


10.000


480


60


110


690


12,000


4%


10,000 to


12.000


640


80


190


830


14,000


5%
6%


12,000 to


14,000


800


100


290


1,090


16,000


8%


14,000 to


16,000


960


120


410


1.370


18,000


8%


7%


16,000 to


18,000


1,120


140


550


1,670


20,000


8%


8%
9%


18,000 to


20.000


1,280


160


710


1,990


22,000


8%


20,000 to


22.000


1,440


180


890


2,330


24,000


8%


10%


22,000 to


24,000


1,600


200


1,090


2,690


26,000


8%


11%


24,000 to


26.000


1,760


220


1,310


3,070


28,000


8%

11


12%


26,000 to


28.000


1,920


240


1,550


3,470


30,000


13%


28,000 to


30.000


2,080


260


1,810


3,890


32,000


14%


30,000 to


32,000


2,240


280


2,090


4,330


34,000


8%


15%


32,000 to


34,000


2,400


300


2,390


4,790


36,000


8%

11


16%


34,000 to


36.000


2,560


320


2,710


5,270


38,000


17%


36,000 to


88.000


2,720


340


3,050


5,770


40,000


18%
19%


38,000 to


40.000


2,880


360


3,410


6,290


42,000


8%


40,000 to


42,000


3,040


380


3,790


6,830


44,000




20%


42,000 to


44,000


3,200


400


4,190


7,390


46,000


8%


21%


44,000 to


46,000


3,360


420


4,610


7,970


48,000


8%


22%


46,000 to


48,000


3,520


440


5,050


8,570


60,000


8%


23%

24%


48,000 to


50,000


3,680


460


5.510


9,190


52,000


8%


50,000 to


52.000


3,840


480


5.990


9,830


64,000


8%


25%


52,000 to


54.000


4,000


500


6,490


10,490


66,000


8%
8%


26%


54,000 to


56.000


4,160


520


7,010


11,170


68,000


27%


56,000 to


58,000


4,320


540


7,550


11,870


60,000


8%


28%


58,000 to


60.000


4,480


560


8,110


12,590


62,000


8%


29%


60,000 to


62,000


4,640


580


8,690


13,330


64,000


30%


62,000 to


64,000


4,800


600


9.290


14,090


66,000


8%


31%


64,000 to


66.000


4,960


620


9.910


14,870


68,000


8%


32%


66.000 to


68,000


5,120


640


10.550


15,670


70,000


8%


33%


68,000 to


70,000


5,280


660


11,210


16,490


72,000


8%


34%


70,000 to


72.000


5,440


680


11,890


17,330


74,000


8%


35%
36%

37%


72.000 to


74.000


5,600


700


12,590


18,190


76,000


8%


74,000 to


76,000


5,760


720


13,310


19,070


78,000


8%


76,000 to


78,000


5,920


740


14,050


19,970


80,000


8%


38%

40^
41%
42%
43%


78.000 to


80,000


6,080


760


14,810


20,890


82,000


8%


80,000 to


82,000


6,240


780


15,590


21.830


84,000


8%


82,000 to


84,000


6,400


800


16,390


22,790


86,000


8%
8%
8%


84.000 to


86,000


6,560


820


17,210


23.770


88,000


86,000 to


88.000


6,720


840


18,050


24,770


90,000


88,000 to


90,000


6,880


860


18,910


25.790


92,000


8%


44%
46^?


90.000 to


92,000


7,040


880


19,790


26,830


94,000


8%


92.000 to


94,000


7,200


900


20,690


27,890


96,000


8%


94,000 to


96,000


7.360


920


21,610


28.970


98,000


8%
8%


47%
48%


96,000 to


98,000


7,520


940


22,550


30.070


100,000


98,000 to


100,000


7,680


960


23,510


31.190


150,000


11

8%


62%
56%
60%


100,000 to


150,000


11,680


26.000


49,610


61.190


200,000


150,000 to


200,000


15.680


28.000


77,510


93.190


300.000


200.000 to


300,000


23.680


60.000


137,510


161,190


600.000


8%


63%
64%


300.000 to


500,000


39,680


126.000


263,510


303.190


1,000,000


8%


500,000 to 1,000.000 |


79,680


320,000


583,510


663.190


over
1,000,000


8%


65%















• Total Surtax is the total of the installments for the income considered.
** Exemption $2,000. No allowance is made for credit for dividends or interest
on Liberty Bonds, if any, included in net income.

f 2)



sale of such property or of the taxpayer's interest therein shall
not exceed 20 per centum of the selling price. Exploration work
alone without discovery is not suflScient 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 deter-
mine 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 taxpay-
er's net income from the sale of the property bears to his total net
income is the portion of the surtax attributable to such sale, and
if it exceeds 20 per centum of the selling price such portion of the
surtax shall be reduced to that amount.

Profits of Corporations Taxable to Stockholders. —

Section 220 of the statute provides that when a domestic or for-
eign corporation permits its 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 stockholders shall be subject to tax in
the same manner as the stockholders of a personal service corpo-
ration, except that the war profits and excess profits taxes of the
corporation shall first be deducted from its net income before
computing the proportionate shares of the stockholders. If, upon
the basis of a statement of profits submitted on request of the
Commissioner or a collector, the Commissioner certifies that in his
opinion the accumulation is unreasonable, the corporation and its
stockholders shall make their returns accordingly.

An accumulation of gains and profits is unreasonable if it is not
required for the purpose of the business, considering all the circum-
stances of the case. No attempt can be made to enumerate all
the ways in which gains and profits of a corporation may be ac-
cumulated for the reasonable needs of the business.

Undistributed income is considered to be properly accumulated
if invested in increased inventories or additions to plant reasonably
needed by the business. It is properly accumulated if retained for
working capital required by the business or in accordance with
contract obligations 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, un-
distributed income actually represented by loans or reasonably

[31



retained for future loans is not accumulated beyond the reasonable
needs of the business. The nature of the investments of gains
and profits is immaterial, if they are not in fact needed in the
business. Thus, the fact that an unreasonable accumulation of
profits is invested by the coq^oration in obligations of the United
States does not remove such corporation from the provisions of
Section 220.

Persons Liable to Tax. — Every citizen of the United States,
wherever resident, is liable to the tax, even though he may have no
assets within the United States and receives no income from sources
therein. 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. Estates and trusts are also
subject to the tax.*

Citizen Defined. — 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.

Nonresident Alien Individual Defined. — "Nonresi-
dent alien individual" means an individual other than a citizen of
the United States whose residence is not within the United States.
Any alien living in the United States who is not a mere transient, and
has no definite intention with regard to his stay, is a resident for
purposes of the income tax. The best evidence of his intention
is afforded by the conduct, acts, and declarations of the alien.
A mere floating intention, indefinite as to time, to return to another
country is not suflScient to constitute him a transient. 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 provide
for his journey abroad is to be considered a transient, provided his
expectation in this regard may reasonably be fulfilled within a
comparatively short time, considering the rate of his savings.

*See page 25.



Income Tax on Corporations. — An income tax is im-
posed upon the net income, after deducting credits, of all cor-
porations, not expressly exempt under Section 231 of the law, at the
rate of 10 per centum for the calendar year 1919 and subsequent years.
The tax is imposed notwithstanding the fact that a domestic cor-
poration has received no income from sources within the United
States. On the other hand, a foreign corporation is taxed only on
its net income from sources within the United States. Personal
service corporations within the meaning of Section 200 of the law
are not subject to taxation, but the individual stockholders thereof
are taxed in the same manner as the members of partnerships and
all the provisions of the law relating to partnerships and the members
thereof, as far as practicable, apply to personal service corporations
and the stockholders thereof. For definition of a personal service
corporation, see page 22.

CREDITS

Individuals

For the purpose of imposing the normal tax, net income, as de-
termined by deducting from gross income the allowable deductions,
is first reduced by the sum of the allowable credits. These include :

(1) Dividends received froM a corporation taxable upon its net
income, or dividends from Si personal service corporation paid out of
earnings upon which income tax has been imposed;

(2) Interest not wholly exempt from tax received upon obliga-
tions of the United States and bonds of the War Finance Corpora-
tion;

(3) Personal exemption —

(a) In the case of single person, or married person not Hving
with husband or wife, $1,000;

(b) In the case of married person living with husband or wife,
or head of a family, $2,000;

(4) Exemption of $200 for each dependent person, other than
husband or wife, under eighteen years of age or incapable
of self-support because mentally or physically defective, receiving
his chief support from the taxpayer.

Personal Exemption of Married Person. — In the case
of a married man or a married woman the joint exemption replaces
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

[5]



statute must depend on the character of the separation. If the
absence of either is only temporary, the additional exemption
applies. The unavoidable absence of a wife or husband at a sana-
torium or asylum on account of illness does not preclude claiming
the exemption. If, however, the husband voluntarily and con-
tinuously makes his home at one place and the wife hers at another,
they are not living together within the meaning of the statute,
irrespective of their personal relations. The personal exemption
may be divided between husband and wife in any proportion
agreed upon by them. A resident alien with a wife residing
abroad is not entitled to the joint exemption.

*'Head of Family" Defined. — A "head of a family" is a
person who actually supports and maintains in one household 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. 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 or a child or other dependent is tem-
porarily away, the common home being still maintained, the ad-
ditional exemption applies. Also, if a parent is obliged to main-
tain 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, ir-
respective of the question of support. A resident alien with child-
ren abroad is not the head of a family.

Credit for Dependents. — A credit of $200 is also allowed
for each person (other than husband or wife), whether related to the
the taxpayer 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) under eighteen or (b) incapable of
self-support because mentally or physically defective. The credit is
based upon actual financial dependency and not mere legal de-
pendency. 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
support from a trust fund or other separate source is not entitled
to the credit.

[8]



Date Determining Exemption. — The status of the tax-
payer on the last day of his taxable year determines the amount
of his credit for personal exemption and exemption for dependents.
If an individual dies during the taxable year, his executor or ad-
ministrator in making a return for him is entitled to claim his full
personal exemption according to his status at the time of his death.
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.

Credits to Trust or Beneficiary. — An estate or trust,
where income is taxed to the fiduciary, is allowed the same credits
against net income as a single person, including a personal exemp-
tion of $1,000, but no credit for dependents. In the case of an
estate or trust taxed to the beneficiaries each 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.

Credits Allowed Partners and Stockholders of Per-
sonal Service Corporation. — In addition to the credits
ordinarily allowed an individual*, a partner or stockholder of a per-
sonal service corporation is entitled to 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 or personal service corporation.

A stockholder of a personal service corporation is also entitled
to credit, for the purpose of the normal tax, for amounts received
in distribution of earnings of the corporation accumulated since
February 28, 1913, and prior to January 1, 1918.

For allowance of credits to nonresident alien individuals and
foreign corporations, see pages 8, 19 and 20.

♦See page 5

[71



Corporations

The net income of a corporation, other than a personal service
corporation, determined by subtracting from gross income the
amount of the deductions defined in the law, is the net income upon
which the excess profits tax is computed, but before the application
of the income tax the following credits against net income are
allowed :

(a) A specific credit of $2,000 (not allowed a foreign corporation) ;

(b) The amount of any war profits and excess profits tax assessed
or to be assessed by the United States for the same taxable year;

(c) The amount of interest received upon obligations of the United
States and bonds of the War Finance Corporation, which is subject
to war profits and excess profits taxes.

For the purpose of the excess profits tax a corporation is not
entitled to the foregoing credits.

Return for Period Less Than a Year, — Where a re-
turn is made for a period less than a year, as in the case of a cor-
poration making its first return of income on the basis of a fiscal
year, or as in the case of a corporation changing its accounting
period, whether from calendar year to fiscal year, from fiscal year
year to calendar year, or from one fiscal year to another fiscal year,
the specific credit of $2,000 shall be reduced to such a proportion
of the full credit as the number of months in the period for which the
return is made bears to twelve months.

CORPORATIONS EXEMPT FROM TAX

The following organizations are exempt from tax under Section
231 of the Law:

(1) Labor, agricultural, or horticultural organizations;

(2) Mutual savings banks not having a capital stock represented
by shares;

(3) Fraternal beneficiary societies, orders, or associations (a) opera-
ing under the lodge system or for the exclusive benefit of the mem-
bers of a fraternity itself operating under the lodge system, and
(b) providing for the payment of life, sick, accident, or other
benefits to the members of such society, order, or association or
their dependents;

(4) Domestic building and loan associations and cooperative banks
without capital stock organized and operated for mutual purposes
and without profit;

(5) Cemetery companies owned and operated exclusively for the
benefit' of their members;

[81



(6) Corporations organized and operated exclusively for religious,
charitable, scientific, or educational purposes, or for the preven-
tion of cruelty to children or animals, no part of the net earnings of
which inures to the benefit of any private stockholder or individual ;

(7) Business leagues, chambers of commerce, or boards of trade,
not organized for profit and no part of the net earnings of which
inures to the benefit of any private stockholder or indidivual;

(8) Civic leagues or organizations not organized for profit but
operated exclusively for the promotion of social welfare;

(9) Clubs organized and operated exclusively for pleasure, recrea-
tion, and other nonprofitable purposes, no part of the net earn-
ings of which inures to the benefit of any private stockholder or
member;

(10) Farmers' or other mutual hail, cyclone, or fire insurance
companies, mutual ditch or irrigation companies, mutual or


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