HJ BOUGHT WITH THE INCOME OF THE SAGE ENDOWMENT FUND THE GIFT OF Sienrg 119. Sage 1891 QgoM-gnu n,\x...v,i,fe., 9306 OLIN \% LIBRARYi?) CORNELL UNIVERSITY LIBRARV 063 659 993 Cornell University Library The original of tiiis book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924063659993 A TREATISE ON THE EEDEEAL INCOME TAX UNDER THE ACT OF 1913 BY ROGER FOSTER of the new york bar, Author op Commentaries on the Constitution op the Cnited States, Treatises TTpon Federal Practice, the Pederai. Judiciary Acts OF 1875 AND 1887, Kemoval of Causes, the Federal Incomb Tax of 1894, LiBEBiT of Contract, Attachment, &c. SECOND EDITION THE LAWYERS CO-OPERATIVE PUBLISHING CO. ROCHESTER, N. Y. 1915 £,V. COFYKIOHT I9I4 BY ROGER FOSTER COPYKIGHT I9I5 BY ROGER FOSTER PREFACE TO SECOND EDITION The purpose of this work is to furnish a practical guide for the aid of lawyers, public officers, bankers, brokers, and other laymen in the United States, in the interpretation and adminis- tration of the statute imposing an income tax, and also to assist students of political science wherever situated, who are inter- ested in the general subject of income taxation in the United States and Great Britain. The author hopes that it contains all the available material that can be of use to them, including the previous statutes of the United States, analogous statutes in the several States and in Great Britain, the rulings of the Treasury Department under this and the former laws, and a complete digest of the decisions concerning income taxation in eases that have arisen in the United States and in England, Scotland, Ireland, and the British Colonies. The pressure for a practical treatise upon the subject pre- pared by a lavyyer in active practice, acquainted with the needs of his professional brethren, was so great that the first edition was rushed through the press immediately after the publication of the forms needed for the returns due in March, 1914, and before the promulgation of the regulations by the Treasury Department. The generous reception by the profession, which put the book twice out of print during less than a month after- its publication, seemed to justify the author's action. The time, however, thus allowed for preparation, was inadequate. The first edition contained many omissions. Subsequent rulings by the Commissioner of Internal Revenue, as well as the Regu- lations, have settled, so far as the administration of the statute is concerned, many questions which were then not discussed or discussed only tentatively. Many of the original forms, especially those connected with the deduction of the tax at the source, have been changed and simplified. The entire book has consequently been rewritten by the author, who has added the new forms, the Regulations, and the substance of all new decisions by the courts and all new rulings by the Commission- er. He has also included additional historical material and ■extracts from the works of economists, as well as references to such authors. . , For the collection of much of this historical and economical material, he is indebted to Seligman's Income Tax, Smith's Federal Internal Tax History from 1861 to 1871, and arguments of Mr. William D. Guthrie, of the New York bar, before the Supreme Court of the United States in the Illinois Inheritance Tax Cases, reported as Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 42 L. ed. 1037, and before Governor Black, of 'New York, in opposition to the Dudley bill, imposing a graduated inheritance or transfer tax. He has also added references to decisions of the Supreme Courts of Hawaii and of a number of British Colonies on in- come taxation and to a number of opinions of the courts and attorneys general under the Corporation Tax Act of 1909 and the present statute, together with the complete text of the Act of 5 & 6 Vict. c. 35, without which the full import of the British cases upon stoppage at the source cannot be appreciated. In the preparation of the second as well as the first edition, he has used much of the material contained in a treatise on the Income Tax of 1894, which was the result of the joint labors of Mr. Everett V. Abbot, of the New York bar, and of himself. As regards the earlier American cases, he wishes to acknowledge his obligations to the notes on the Eevised Statutes by Messrs. •Gould and Tucker. In collecting the English authorities, he las been greatly aided by Dowell's Income Tax Laws, especially Ihe seventh edition, by John Edwin Piper, Esq. Xiberty Tower, New York, December 24th, 1914. PREFACE TO FIRST EDITION. The object of this work is to furnish a practical guide for the aid of lawyers, government officials and laymen, in the interpretation and administration of the new law imposing an income tax. The author hopes that it contains all the available material that can be of use to them, including the previous statutes in the United States, analogous statutes in the several States and in Great Britain, the rulings of the Treasury De- partment under this and the former laws, and a complete digest of the decisions concerning income taxation in cases that have arisen in the United States and in England, Scot- land, Ireland, and the British Colonies. The pressure for an adequate treatise upon this subject has been so great that the author has considered that the profession would be better satis- fied to receive this now than to await the time necessary for deliberation in order to answer the numerous disputed ques- tions that have already been, or may hereafter be raised under the Act of 1913. In the preparation of the book, he has used much of the material contained in a treatise on the Income Tax of 1894, which was the result of the joint labors of Mr. Everett V. Abbot, of the New York bar, and of himself. As regards the earlier American cases, he wishes to acknowledge his obliga- tions to the notes on the Eevised Statutes by Messrs. Gould and Tucker. In collecting the English authorities, he has been greatly aided by Dowell's Income Tax Laws, especially the Seventh Edition, by John Edwin Piper, Esq. Liberty Tower, New York, December ICth, 1918. CONTENTS. THE INCOME TAX OF 1913. PAKTI. COMMEISTTAEIES OF THE STATUTE. CHAPTER I. HISTORY OF THE INCOME TAX. Page § 1. Origin of the Income Tax 1 § 2. History of the Income Tax in Europe 3 § 3. The Income Tax in Great Britain 4 § 4. Income Taxation in the British Colonies and Dependencies ... 9 § 5. Income Taxation in France 11 % 6. Income Taxation in Italy 13 § 7. Income Taxation in Spain 13 § 8. Income Taxation in Germany and Luxembourg 13 § 9. Income Taxation in Austria and Hungary 15 § 10. Income Taxation in Norway, Sweden, and Denmark 15 § 11. Income Taxation in Holland, Java and Belgium 16 § 12. Income Taxation in Switzerland 16 § 13. Income Taxation in Russia and Finland 17 S 14. Income Taxation in Japan 17 § 15. Origin of Income Taxation in America 17 § 16. Income Taxes in the several United States 19 § 17. History of Federal Income Taxes 21 vii Vlll CONTENTS. CHAPTEE 11. CONSTITUTIONAL OBJECTIONS TO THE STATUTE. § 18. Constitutional Objections which may be raised to the Income Tax Law 2T § 19. The Pollock Case 28. § 20. Constitutional Objections to Progressive Taxation 47 § 21. Objections to the Constitutionality of the Income Tax on Ac- count of the Small Number of Persons affected by it ... . 5S § 22. Uniformity of Taxation required by the Constitution 53 § 23. Invalidation of the Tax by the Exemptions 55 § 24. Alleged Unconstitutionality of the Discrimination against Cor- porations 69' § 2S. Constitutional Objection to the Deduction of the Tax at the Source 7S § 26. Constitutional Objections to Extra-territorial Taxation 74 § 27. Constitutionality of Federal Tax upon State Officers, Employees, and Contractors, State or Municipal Bonds and State Cor- porations 77 § 28. Constitutionality of Tax on Salaries of President and Federal Judges 95- § 29. Constitutionality of Taxation of Income previously collected.. 101 § 30. Constitutionality of Provisions concerning Examination of Tax- payers 128; § 31. Constitutionality of the Grant of Power to examine Books of Taxpayers 148. § 32. Constitutionality of Distress Proceedings 150' CHAPTEE III. THE INCIDENCE OF THE TAX. § 33. The Nature of the Tax 152 § 34. Incidence of the Tax with Eespect to Territory and Places Exempted From the Same 152 § 35. Incidence of the Tax with respect to Persons 153' § 36. Meaning of phrase "Residing in the United States" 155. § 37. Meaning of phrase "Income from Property Owned in the United States" 151 § 38. Meaning of phrase "Income from every Business, Trade, or Pro- fession Carried on in the United States by Persons Residing Elsewhere" 160 § 39. Incidence of the Tax with respect to Corporations, Joint-Stock Companies and Associations Wh CONTENTS. IX § 40. Incidence of the Tax upon Foreign Corporations, Joint-Stock Companies and Associations 162 § 41. Exempt Corporations 163 § 42. Incidence of the Tax with respect to Time 176 CHAPTEK IV. INCOME SUBJECT TO TAX. § 43. Statutory Definition of Individuals subject to Normal Tax .... 179 § 44. Income subject to Additional Tax 181 § 45. Statutory Definition of Income of Corporations, Joint-Stock Companies and Associations subject to Tax 184 § 46. Judicial Definitions of Income 188 § 47. Interest 189 § 48. Income accrued but not received 190 § 49. Eents 196 § 50. Sales of Eeal Estate 197 § 51. Sales of Personal Property in General 200 § 52. Sales of Farm Products 201 § 53. Dividends 203 § 54. Income from Professions and Vocations 205 § 55. Incomes derived from Wages or Compensation 208 § 56. Salaries 209 § 57. Property acquired by Gift, Inheritance, or Life Insurance. . . . 210 § 58. Miscellaneous Income of Individuals 212 § 59. Miscellaneous Income of Corporations, Joint-Stock Companies or Associations and Insurance Companies 215 § 60. Necessary Expenses actually paid in carrying on Business .... 220 § 61. Necessary Expenses of Corporations 223 § 62. No Deduction of Personal Living and Family Expenses 225 § 63. Contributions to Capital 226 § 64. Deductions for Depreciation 227 § 65. Deductions by Individuals for Interest 238 § 66. Deductions for Interest by Corporations, Joint-Stock Com- panies or Associations, and Insurance Companies 238 § 67. Deduction for Taxes paid during the Year 246 § 68. Losses Deductible by Individuals from Income 247 § 69. Losses Deductible by Corporations, Joint-Stock Companies and Associations 253 § 70. Deductions by Domestic Insurance Companies 256 § 71. Deductions by Alien Insurance Companies 262 § 72. General and Uniform Deductions 264 § 73. Deductions by Guardians 266 CONTEJSTS. CHAPTEK V. 74. Persons who must make Return 268 75. Returns by Copartnerships 272 76. Corporations, Companies and Associations which must make Return 276 77. Time of the Return 279 78. Place of Return 286 79. Contents of Return by Individuals 297 80. Contents of Returns by Fiduciary Agents 308 81. Contents of Returns of Income Payable at the Source 326 82. Contents of Returns by Corporation, Joint-Stock Company or Association 354 83. Oath, to Return 363 84. Secrecy of Returns 363 85. Discovery 371 86. Entry of Taxpayer's Premises 377 87. Penalties for Default or Fraud as to Return 378 88. Increase of Return 381 CHAPTEE VI. ASSESSMENTS. 89. Assessment List 383 90. Assessment 401 91. Hearing upon the Assessment 406 CHAPTEK VII. § 92. Payers of the Tax 408 § 93. Time of Payment 408 § 94. Manner of Payment 410 § 95. Payment under Protest 411 § 96. Receipts 412 CONTENTS. XI CHAPTEE VIII. DEDUCTION AT THE SOUKCE. § 97. Deduction at the Source in General 414 § 98. Deduction at the Source by Leasees 426 § 99. Deduction at the Source by Employers 428 § 100. Deduction at the Source by Officers and Employees of the United States 429 § 101. Deduction at the Source by Masters, Receivers, Trustees and Referees in Banlcruptcy, Executors and Administrators .... 430 § 102. Deduction at the Source by Guardians, Trustees, Executors, Administrators, Agents and all Persons Acting in Fiduciary Capacity 431 § 103. Deduction at the Source by Corporations Who are Mortgagors or Obligors 434 § 104. Deduction at the Source of Income Derived from Foreign Coun- tries 452 CHAPTEE IX. COLLECTIOISr OF THE TAX. 105. Demand 461 106. Penalties for Default in Payment 471 107. Liens 473 108. Distraint 474 109. Suits by the United States to collect the Income Tax 483 110. Suits by the United States to foreclose Liens for Taxes .... 484 111. Suits in Personam by the United States to collect Internal Revenue Taxes 485 112. Suits to collect Penalties 486 113. Compromises 487 CHAPTEE X. BEMEDIES OF TAXPAYEB. 114. Enumeration of Remedies of the Taxpayer 488 115. Injunctions 488 116. Application for the Writs of Mandamus, Certiorari and Pro- hibition against Collectors and Deputy Collectors of Internal Revenue 491 117. Mandamus against the Commissioner of Internal Revenue.... 492 Xll CONTENTS. § 118. Certiorari against Conmiissioner of Internal Revenue 494 § 119. Writs of Prohibition against Commissioner of Internal Revenue 498 § 120. Action against Commissioner of Internal Revenue 499 § 121. Resistance to Levy 500 § 122. Appeals to the Commissioner for a Return of Taxes 50O § 123. Jurisdiction of Suits by Taxpayers after Payment or Collection 506 § 124. Actions, for Trespass or Conversion against the Collector or Deputy Collector 515 § 125. Suits to Recover Money Paid under Protest 515 § 126. Statute of Limitations to Suits against Collectors 519 § 127. Collection of Judgments against Collectors 520 § 128. Suits directly against the United States for the Repayment of Taxes, after Disallowance of Appeal 521 PAET II. ACT OF OCTOBER 3, 1913. PAET III. ANIsrOTATED STATUTE WITH DIGEST OF EULI;N'GS OF THE TEEASUET DEPAETMEISTT AND OF DECISIONS OF THE COUETS IN FEDEEAL, STATE, BEITISH, SCOTCH, lEISH AND COLO- NIAL CASES. PAET IV. PEEVIOUS INCOME TAX LAWS OF THE UNITED STATES. Act of August 5, 1861 771 Act of July 1, 1862 775 CONTENTS. Xlll Act of March 3, 1863 787 Act of June 30, 1864 789 Joint Resolution of July 4, 1864 806 Act of March 3, 1865 806 Act of July 13, 1866 812 Act of March 2, 1867 820 Act of July 14, 1870 825 Act of August 28, 1894 833 Joint Resolution of February 19, 1895 848 Act of August 5, 1909 849 Revised Statutes 858 Revised Statutes ( Supplemental Sections) 885 PAET V. STATE INCOME TAX LAWS. Hawaii— Session of 1901, Law of April 30, 1901 889 Mass.— R. S. Ch. II, sec. 4 894 :N. C— Bell's Revisal of 1908, p. 5124 895 Okla.— Laws 1907, p. 730 897 S. C— Code of Laws of S. C. 1912, vol. 1 (Civil Code) 899 Tenn.— Code, §§ 690, 710 901 Va.— Laws 1898, p. 20 (Pollard's Sup. 1910), Acts of 1903, ch. 145, p. 155, as amended by Acts 1908, ch. 10, p. 20 902 Wis. — Laws 1911, ch. 658, General Laws 1911, ch. 48a 903 PAET VI. IMPOETAIsTT BEITISH INCOME TAX LAWS. Income Tax Act, June 22, 1842 (5 & 6 Vict. ch. 35) 919 Foreign Dividends Act, Aug. 5, 1842 (5 & 6 Vict. ch. 80) 1093 Income Tax Act, June 28, 1853 (16 & 17 Vict. eh. 34) 1095 Customs and Inland Revenue Act 1878 (41 & 42 Vict. ch. 15) 1126 Finance Act Aug. 9, 1907 (7 Edw. VII. ch. 13) 1127 I'inanee Act April 29, 1910 (10 Edw. VII. ch. 8) 1135 XIV CONTENTS. PAET VIL LEADING CASES. Stella P. Flint, Appt. v. Stone Tracy Co. et al. 220 U. S. 107, 55 L. ed. 389 1146 Amory Eliot v. James G. Freemen, 220 U. S. 178, 55 L. ed. 424 1221 Ary E. Zonne v. Minneapolis Syndicate, 220 U. S. 187, 55 L. ed. 428. . 1231 William McCoach v. Minehill & Schuylkill Haven Eailroad Company, 228 U. S. 295, 57 L. ed. 842 1236 D. W. Alderman, Appt. v. L. L. Wells, County Treasurer, Kespt. 85 S. C. 507, 67 S. E. 781; 21 Ann. Cas. 193, 27 L.R.A.(N.S.) 864 with note 1251 State ex rel. Bolens v. Frear, Secretary of State, 148 Wis. 456, 134 N. W. 673 1264 Samuel Haight, Plff. in Err. v. Pittsburg, Ft. Wayne & Chicago Eail- road Company, 6 Wall. 15, 18 L. ed. 818 1337 Northern Central Railway Company, Plff. in Err. v. John G. Jackson, 7 Wall. 262, 19 L. ed. 88 1341 United States, Petitioner v. Frederick W. Whitridge, 231 U. S. 144, 58 L. ed. 159 1349 PAET VIII. EOEMS OF PEOTEST. For Individuals 1364 For Corporations 1356 PAET IX. TEEASUEY EEGULATIOITS AND EULINGS. Treasury Regulations and Rulings, &c 1358 TJ. S. R. S. § 3220, Refund of taxes, penalties, &e 1424 T. D. 1916. Form of certificates by foreign corporations 1425 T. D. 1920. , Form of signature to certificate 1426 T. D. 1922. No collection at the source from municipal bonds, &c. 1427 T. D. 1946. Special Assessment Districts 1428 CONTENTS. XV Mimeograph letter, Feb. 10, 1914, as to information by Collectors of Internal Revenue 1429 Opinion of Attorney General as to Copartnerships 1430 T. D. 1957. Partnerships to file certificates of ownership 1432 Mimeograph letter to Corporation Trust Company as to income from partnerships 1433 T. D. 1974. Amended regulations as to interest payments upon registered bonds ] 435 Letter to National Parlv Banlc, as to street address upon certificates 1436 Letter to National Park Banlc as to identification of signatures .... 1437 T. D. 1995. Notice of assessment and demand 1437 T. D. 1996. Co-operative dairies, &c 1438 T. D. 1997. Monthly list returns not to be made under oath 1440 T. D. 2005. Loss and depreciation 1441 T. D. 2013. Amended article as to income of non-resident aliens . . . 1443 T. D. 2022. Waiver of requirement of numbers of bonds upon certificates 1445 T. D. 2023. Amended article as to endorsement or stamp upon for- eign coupons, &c 1446 Letter to Corporation Trust Company as to certificates of ownership in connection with coupons 1447 Letter to Irving National Bank, as to endorsement or stamp upon coupon detached from foreign bond 1447 T. D. 2048. Dividends upon net income of corporations, joint-stock companies or associations 1448 T. D. 2049. No stamp tax upon income tax certificates 1449 T. D. 2077. Sale of capital assets 1450 T. D. 2079. Mileage and other allowances to Government oiEcers and employees 1451 Letter to Geo. H. Moore, as to procedure in handling coupons from bonds of corporations exempt from tax 1453 Extract from letter received by collector at Boston, Dec. 11, 1914, as to covenant in bonds to pay taxes 1454 Letter to First Trust and Savings Bank, as to corporation assuming payment of bonds and coupons under mortgage by individual 1455 Synopsis of Treasury Rulings 1456 T. D. 2109. Amendment of Regulation 33 as to non-resident aliens 1487 TABLE OF CASES. MABEL FEEAM. Abrast Realty Co. v. Maxwell, (E. D. N. Y.) 206 Fed. 333, 334-336: 412. Ackerman v. Taylor, 9 N. J. L. (4 Halst.) 65: 646. Addie & Sons v. Solicitor of Inland Revenue, 2 R. 431, 12 Scot. L. R. 271: 237, 611. Admiral Realty Co. v. City of New York, 206 N. Y. 110, 99 N. E. 241: 719. Alderman v. Wells, 85 S. C. 507. Reported in full on p. 1251. Alexander Ferguson & Co. v. Aikin, 4 Tax Gas. 36: 727. Alexandria C. R. & S. B. Co. v. Dist. Col. 5 Mackey, 376: 495, 496. Alexandria Water Co. v. Musgrave, L. R. 11 Q. B. Div. 174: 600, 667. AJianza Co. v. Bell [1906] A. C. 18: 612, 735. Alkan v. Bean, 8 Bissell, 83, 1 Fed. R. 418, 23 I. R. R. 351: 474, 489, 490. Al'?n V. Armstrong, 58 App. Div. 427, 68 N. Y. Supp. 1079, 1081: 191. American Insurance Co. v. Canter, 1 Pet. 511: 210, 430. Ames V. Hager, 36 Fed. R. 129 : 507. Amy V. Dubuque, 98 U. S. 470, 476, 25 L. ed. 228, 231: 190. Anderson v. Dunn, 6 Wheat. 204: 140, 141. V. Richards' Ex'rs, 99 Ky. 661, 37 S. W. 62: 190. Anderson v. Forty-Second Broadway Co. (C. C. A. 2d Ct.) 213 Fed. 777: 225, 245, 739. Andrews v. Mayor of Bristol, 61 L. J. Q. B. N. S. 715: 173, 713. Andreae v. Redfleld, 98 U. S. 225, 25 L. ed. 158: 515. Anglo-Continental Guano Works v. Bell, 70 L. T. N. S. 670: 600, 602, 603. Apthorpe v. Peter Schoenhofen Brewing Co. 80 L. T. N. S. 395: 699. In re Archer, Ben. 427 : 406. Arizona Copper Co. v. Smiles, 29 Scot. L. R. 134: 227, 722. Armitage v. Moore, 2 Q. B. 363 : 555. Arnson v. Murphy, 109 U. S. 238: 474, 502, 518, 520. Ashton Gas Co. v. Attorney General [1906] A. C. 10, 12: 555, 661. Assessor v. Osborn, 5 Wall. 567: 507. Re Assessment Pacific Guano & Fertilizer Co. 16 Haw. 552 : 608. Re Assessment Hackfield Co. L'd. 16 Hawaii, 559: 610. Assets Co. V. Forbes, 24 R. 578, 34 Scot. L. R. 486: 198. V. Inland Revenue, 24 R. 578 : 681. Attorney General v. Black, L. R. 6 Ex. 308: 167, 172, 711, 719. v. Borrodaile, 1 Price, 148 : 569. v. Coote, 4 Price, 183: 156, 562. V. Emerson, L. R. 10 Q. B. Div. 191: 758. V. London County Council, 74 L. J. K. B. N. S. 787: 661. XVll TABLE OF CASES. Attorney General v. London County Council, 76 L. J. K. B. N. S. 454 : 660. V. M'Lean, 32 L. J. Exch. N. S. 101, 1 Hurlst. & C. 750: 155, 562. V. Newcastle-on-Tyne Corpora- tion, 2 Q. B. 384: 757, 758. V. Sulley, 4 H. & N. 769: 160, 566. B. Bailey v. Railroad Co. 22 Wall. 604: 204, 582, 647. V. Railroad Co. 103 U. S. 109: 553, 582. Baird Trustees v. Inland Revenue, 25 Scot. L. E. 533: 172, 713. Baker v. Davis, 3 Campb. 474: 233, 654. Baldwin v. Calkins, 10 Wendell, 167 : 497. Baldwin Locomotive Works v. Mc- Coach (D. C. E. D. Pa.) 215 Fed. 967: 194, 220, 224, 255. Baltimore v. Baltimore R. R. 10 Wall. 543 : 576, 664, 665. Bank v. Carrollton R. R. 11 Wall. 624, 628: 3431. Bank of Kentucky v. Com. 9 Bush (Ky.) 46: 20. Barbour v. Louisville Board of Trade, 82 Ky. 645, 654, 655: 61. Barker v. White, 11 Blatehf. 445, 19 R. R. 117: 519. Barnes v. The Railroads, 17 Wall. 294: 194, 633, 665. V. City of Brooklyn, 22 App. Div. 520. 48 N. Y. Supp. 36, 37: 190. Barney v. Watson, 92 U. S. 449: 515 V. Oelrichs, 138 U. S. 529, 34 L. ed. 1037, 11 Sup. Ct. Rep. 414: 515. Bartholomay Brewing Co. v. Wyatt [1893] 2 Q. B. 499, 62 L. J. Q. B. N. S. 525, 69 L. T. N. S. 561, 42 Week. Rep. 173, 3 Tax. Cas. 213: 705. Bath County v. Amy, 13 Wall. 244: 491. Baur V. Betz, 7 N. Y. Civ. Proc. 233, 1 How. Pr. N. S. 344: 206. Beadel v. Pitt (1865), 11 L. T. N. S. 592: 428, 656. Beaumont v. Bowers, [1900] 2 Q. B. 204: 226, 599. Bebb V. Bunney, 3 H. & M. 213: 189, 421. V. Bunny, 1 Ky. & J. 216: 577, 659. Bell V. Gribble, 1 K. B. 517: 599. V. National Provincial Bank of England [1904], 1 K. B. 149: 728. Benner v. Porter, 9 How. 235; 13 L. ed. 119: 210, 428. Bennett v. Hunter, 9 Wall. 326 (1869) : 552. Re Berkowitz, 173 Fed. R. 1013: 567. Re Bininger, 7 Blatehf. 159: 491. Black V. State, 113 Wis. 205, 90 Am. St. Rep. 853, 89 N. W. 522: 65. Blair v. Allen (1858), 21 Dunlop, 15: 660. Blake v. Banks, 23 Wall. 307: 633. V. Imperial Brazilian Rail. Co. (1884), 1 Times L. R. 68, 2 Tax. Cas. 58: 711, 726. Blakiston v. Cooper, A. C. 104, 78 L. J. K. B. N. S. 135, 100 L. T. N. S. 51, 5 Tax Cas. 347 : 206, 209, 212. Board of Revenue v. Montgomery, etc. Co., 64 Ala. 269: 580, 632. Boehm v. U. S., 21 Ct. CI. 290: 506. Bonaparte v. Appeal Tax Court of Baltimore, 104 U. S. 592: 75, 92, 620. Bonner v. Bassett Mines, Limited, Law Times, Dec. 21st, 1912, p. 179: 237, 735. Bosehoek Proprietary Co. v. Fuke [1906] 1 Ch. 148: 725. Boske v. Comingore, 177 U. S. 459: 371, 756. Bouton V. Brooklyn, 2 Wend. 395: 497. Bowers v. Harding, 1 Q. B. 560, 60 L. J. Q. B. N. S. 474, 64 L. T. N. S. 201, 39 Week. Rep. 558, 3 Tax Cas. 22 [1891]: 225, 597. Boyd v. U. S., 116 U. S. 616, 630: 136, 149-376. TABLE OF OASES. XIX Brice v. Northern Assurance Co., [1912] 2 K. B. 41, 81 L. J. K. B. N. S. 639, 106 L. T. N. S. 323, 27 Times L. E. 279: 693. V. Ocean Accident & Guarantee Corporation, Limited [1912] 2 K. B. 41, 81 L. J. K. B. N. S. 639, 106 L. T. N. S. 323, 27 Times L. R. 279: 693. Briscoe v. The Bank of Kentucky, 11 Pet. 332, 9 L. ed. 738: 81. British India Steam Navigation Co. V. Leslie (1900), 17 Times L. R. 104: 731. Broughton &c. Coal Co. v. Kirk- patrick, L. R. 14 Q. B. D. 491: 679, 736. Brown v. Burt, 105 L. T. N. S. 420, 81 L. J. K. B. N. S. 17, 5 Tax Cas. 667,' 1911 : 156. V. Goodwin, 75 N. Y. 409: 404, 474, 478, 480. V. Watt, 23 Scot. L. R. 403: 252, 606. Re Brown, 3 I. R. R. 134: 672. Brown's Trustees v. Hay ( 1897 ) , 35 Scot. L. E. 34; (1898), 35 Scot. L. R. 877: 757. Burnley Steamship Co. v. Aikin, 21 R. 965, 31 Scot. L. R. 803: 236, 730. Butterworth v. Hoe, 112 U. S. 50: 493. C. Calcutta Jute Mills v. Nicholson, L. R. 1 Ex. D. 428: 155, 695. Caledonian Rail. Co. v. Banks, 8 R. 89, 18 Scot. L. R. 85: 236, 730. California Copper Syndicate v. Har- rison (1904) 6 F. 894, 41 Scot. L. R. 691, 5 Tax Cas. 159: 198, 199. V. Inland Revenue, 6 F. 894: 681. Campbell v. Shaw, 11 Haw. Rep. 112, 124: 19, 59. Carlisle and Silloth Golf Club v. Smith [1912] 2 K. B. 117: 173, 709, 722. Cartwright's Case, 114 Mass. 230, 238: 140. Cary v. Curtis, 3 How. (U. S.) 236: 55, 515, 516, 517, 521, 646. V. San Francisco Sav. Union, 22 Wall. 38: 407, 502, 576, 583. V. Savings & Loan Society, 154 U. S. 615: 576, .583. Central Bldg. L. & Sav. Co. v. Bow- land, 216 Fed. 526: 176, 711. Central Nat'l Bank v. U. S. 137 U. S. 355: 676, 721. Cesena Sulphur Co. v. Nicholson, L. R. 1 Ex. D. 428: 695. Chadwick v. Pearl Life Assurance Co. 74 L. J. K. B. N. S. 671 [1905]: 660. In re Chadwick, 1 Low. Dec. 439: 147, 373, 376. Chandler v. Massachusetts R. R. Co. 141 Mass. 208: 499. Charlton v. Commissioners of Inland Revenue [1890], 17 R. 785: 226, 598. Cheaney v. Hooser, 9 B. Monroe (Ky.) 330: 56, 58. Cheatham v. U. S. 92 U. S. 85: 502, 518, 520. Cherokee Nation v. Kansas Ry. Co. 135 U. S. 641, 657: 133. Chesebrough v. U. S. 192 U. S. 253, 48 L. ed. 432, 24 Sup. Ct. Rep. 262: 411. Chicago, etc., Ry. v. Page, 1 Biss. 461: 581. Chief Justice Marshall in Weston v. Charleston, 2 Pet. 449, 468, 7 L. ed. 481, 488: 92. Christie v. Craik, 2 F. 1287, 37 Scot. L. R. 503: 757. Christie Street Commission Co. v. U. S. 136 Fed. R. 326, 129 Fed. E. 506: 522. Citizens' Telephone Co. v. Fuller, 229 U. S. 322: 67, 707. Citizen's Telephone Co. v. Osborn, 229 U. S. 322, 57 L. ed. 1211, 33 Sup. Ct. Rep. 833: 173. City of Dublin Steam Packet Co. v. O'Brien [1912], 6 Tax Cas. 101: 227, 595. City of Dubuque v. Northwestern L. Ins. Co. 29 la. 9: 552. City of Lexington v. McQuillan's Heirs, 9 Dana (Ky.) 513: 58. XX TABLE OF CASES. City of London Contract Co. v. Styles, 3 Times L. R. 512; 4 Times L. R. 51: 226, 246, 592, 594, 726, 739. City of New Orleans v. Fassmann, 14 La. Ann. 878: 553. V. Fourchy, 30 La. Ann. 910: 55, 67, 69, 627. Clarke v. Patterson, 6 Binney (Pa.) 128: 646. Clayton v. Newcastle-under-Lyme Corporation [1888], 2 Tax Cas. 416: 237, 610. Clennel v. Read (1816), 7 Taunt. 50: 428, 655. Clerical, Medical and General Life Assurance Soc. v. Carter (1889), L. R. 22 Q. B. Div. 444: 577, 601, 692. Clinkenbeard v. U. S. 21 Wall. 65: 403, 404, 407. Clinton v. Englebrecht, 13 Wall. 434, 20 L. ed. 659: 210, 430. Clough V. Curtis, 334 U. S. 361: 492. Coblens v. Abel, Woolworth, 293: 515 Cochran v. Schell, 107 U. S. 625: 521. Coffey V. U. S. 116 U. S. 427: 485. Cohen v. Virginia, 6 Wheat. 399: 510, 511. V. Wright, 22 Cal. 293: 150. Cole V. Le Grange, 113 U. S. 1: 56, 206. Collector v. Day, 11 Wall. 113: 91, 166, 619, 625. T. Hubbard, 12 Wall. 1: 507, 518, 584. Coltness Iron Co. v. Black, L. R. 6 App. Cas. 315: 237, 734. Columbia Conduit Co. v. Common- wealth, 90 Pa. 307: 670. Re Comingore, 96 Fed. 552 : 756. Commissioners v. Pemsel [1891], Appeal Cases, 531: 169, 171, 494, 714. V. Scott, L. R. 2 Q. B. Div. 152 : 714. Commissioners of Inland Review v. Forrest, L. R. 15 App. Cas. 334 (1890) : 173, 713. Commissioners of Northumberland V. Chapman, 2 Rawle (Pa.) 73: 101, 624. Commissioner of Patents v. White- ley, 4 Wall. 522: 492. Commissioners of Sinking Fund v. Buckner, 48 Fed. 533: 581, 674. Commissioner of Taxes for New Zea- land V. Eastern Extension Telegraph Co. A. C. 526: 098. Commonwealth v. American Bell Telephone Co. 129 Pa. 217: 101, 163, 694. V. Erie, etc., R. R. 74 Pa. 94: 583. V. N. Y. etc. R. R. 150 Pa. 234, 24 Atl. 009 (1892): 666. V. Ocean Oil Co. 59 Pa. 61 : 673, 674. V. Pa. Gas Coal Co. 62 Pa. 241: 674. V. Penn Mutual Life Insurance Co. 1 Dauphin Co. Rep. (Appellate Branch Common Pleas Pa.) 233: 686. V. Pennsylvania Co. 145 Pa. 266: 753. V. Pittsburgh, etc., R. R. 74 Pa. St. 84: 582. Commonwealth Use of Titusville v. Clark, 195 Pa. 634, 635, 57 L.R.A. 348, 86 Am. St. Rep. 694, 46 Atl. 286: 59. Concord R. R. v. TopliflF, 21 Int. Rev. Ree. 74: 552. Connecticut River R. R. Co. v. Franklin County Comm'rs, 127 Mass. 50: 499. Cook V. Knott [1887], 4 Times L. R. 164, 2 Tax Cas. 246: 225, 599. Re Cooper, 32 Vt. 253: 142. Re Cooper [1911], 2 K. B. 550, 80 L. J. K. B. N. S. 590, 5 L. T. N. S. 273, 55 Sol. Jo. 554: 421, 428. Cooper Manufacturing Co. v. Fergu- son, 113 U. S. 727: 161. Corbus V. Alaska Treadwell Gold Min. Co. 187 U. S. 455, 47 L. ed. 256, 23 Sup. Ct. Rep. 157: 491. Corke v. Fry, 22 R. 422, 32 Scott. L. R. 341: 206, 569. Corporation v. Lumsden (1913), 77 J. P. 124: 421. Cotton Press Co. v. Collector, 1 Woods, 296: 503. TABLE OF CASES. XXI Council of India v. Scoble [1903] A. C. 299, 302, 72 L. J. K. B. N. S. 617, 89 L. T. N. S. 1, 54 Week. Rep. 675, 4 Tax Cas. 618: 189. County of Greene v. Daniel, 102 U. S. 187: 491. County of San Mateo v. Southern Pacific R. R. Co. 13 Fed. R. 147, 722 : 54, 55, 56, 68, 70, 71. County of Santa Clara v. Southern Pacific R. R. 18 Fed. R. 385: 54, 55, 59, 68, 69. Cox V. Barney, 14 Blatchf . 289 : 521. Credit Mobilier v. Commonwealth, 67 Pa. 233: 583. Crookston Brothers v. Eurtado S. C. 217; 43 Sc. L. R. 134; 5 Tax Cas. 602 (1911) : 162, 699. Gumming v. Bedborough [1846], 15 Mees. & W. 438: 655. Cunard Steamship Co. v. Coulson [1899] 1 Q. B. 865: 731. Gutcliff V. McAnally, 88 Ala. 507, 7 So. 331, 332: 191. Cutting V. Gilbert, 5 Blatchf. 259, 2 I. R. R. 94: 488, 500. D. Dalrymple v. Dalrymple (1902), 4 F. 545: 421, 660. Bandelet v. Smith, 18 Wall. 642: 406. Daniels v. Tarbox, 9 Blatchf. 176: 406. Davenport v. County of Dodge, 105 U. S. 237: 491. Davies v. Arthur, 96 U. S. 148 : 519. V. Crava, 76 L. J. Ch. N. S. 651: 659. Dawson v. Dawson, 11 Jur. 984 (1847) : 421. Day V. Buffington, 3 Cliff, 376: 401, 625. Decatur v. Paulding, 14 Pet. 497: 492, 493. Degge V. Hitchcock, 229 U. S. 162, 57 L. ed. 1135, 33 Sup. Ct. Rep. 639: 498. Delage v. Nugget Polish Co. (1905), 92 L. T. N. S. 682: 555, 658. Delaware R. R. Co. v. Prettymann, 17 I. R. R. 99: 409, 489, 490, 495, 499. Denby v. Moore (1817), 1 Barn. & Aid. 123, 15 Eng. Rul. Cas. 322: 655. De Peyer v. The King, 100 L. T. N. S. 256 (1909) : 421. De Treville v. Smalls, 98 U. S. 517: 150. Dillon V. Corporation of Haverford- west, 1 Q. B. 575: .590. Dinning v. Henderson, 3 De G. & S. 702, 19 L. J. Ch. N. S. 273, 14 Jur. N. S. 1038 (1850): 421. Dobbins v. Commissioners of Erie Co. 16 Pet. 435: 9], 99, 619. Dodge V. Nevada Nat. Bank, 48 C. C. A. 626, 109 Fed, 726: 108. Doll V. Evans, 9 Phila. 364: 379, 406, 409, 473, 495, 499. Dollar Savings Bank v. U. S. 19 Wall. 227: 485, 486, 557. Dorsheimer v. U. S., 7 Wall. 106: 381. Drehman v. Stifle, 8 Wall. 595, 19 L. ed. 508: 119. Drexel & Co. v. Commonwealth, 46 Pa. St. 31: 104, 111, 112, 632. Duke of Norfolk v. Lamarque, L. R. 24 Q. B. D. 485: 222, .590. Duncan's Trustees v. Farmer [1909] S. C. 1212, 46 Scot. L. R. 857, 5 Tax Cas. 417: 209. Dunnegan v. U. S. 17 Ct. CI. 247: 503, 506, 521, 522. Dupasseur v. U. S. 19 Ct. CI. 1 : 504. E. Earnshaw v. U. S. 146 U. S. 60: 516, 646. East Indian Railway v. Secretary of State for India, 74 L. J. K. B. N. S. 779: 189, 578. Eaton V. Union County Nat. Bank, 141 Ind. 159, 40 N. E. 693: 108. Edinburg Life Assurance Co. v. Lord Advocate [1910], A. C. 143: 658, 659. Elsing v. Andrews, 66 Conn. 58, 50 Am. St. Rep. 7.5, 33 Atl. 585, 586: 190. Eliot V. Freeman, 220 U. S. 178: 678. Reported in full on p. 1221. ■ xxu TABLE OF CASES. Eliot Nat. Bank v. Gill, 210 Fed. 933: 222, 247, 382, 750. Elliott V. R. R. Co. 99 U. S. 573: 759 England v. Webb, 67 L. J. P. C. N. S. 1200 {1898] A. C. 758: 157, 563. English Crown Spelter Co. v. Baker [1908], 99 L. T. N. S. 353, 5 Tax Cas. 327: 593. Erichsen v. Last (1881), 8 Q. B. D. 414: 163, 696. Erskine v. Hohnbach, 14 Wall. 613: 515 520 T. Van Arsdale, 15 Wall. 75, 21 L. ed. 63: 412. V. Milwaukee, etc. R'y. 94 U. S. 619: 759. Ewing V. St. Louis, 5 Wall. 413: 274, 495. Exchange Bank of Columbus v. Hines, 3 Ohio St. 1: 71. Express Co. v. Minn. 223 U. S. 335, 56 L. ed. 459, 32 Sup. Ct. Rep. 211: 127. F. Farmer v. Scottish North American Trust, Lim., [1912] A. C. 118: 600, 602, 603. V. ■Scottish Widows' Fund Life Assurance Society [1909], S. C. 1372: 704. Farmers' Co-operative Union v. Thresher, 62 Cal. 407: 499. Farrell v. Sunderland Steamship Co. [1903], 88 L. T. N. S. 741: 607, 727. Fay V. HoUoran, 35 Barb. 295, 297: 191. Finley v. City of Philadelphia, 32 Pa. St. 381: 553. F'irst National Bank of Greencastle V. U. S., 15 Ct. CI. 225: 503, 505. First Nat. Bank v. Kentucky, 9 Wall. 353, 363, 19 L. ed. 701, 704: 73. Flanders v. Seelye, 105 U. S. 718: 521. Fletcher v. Peck, 6 Craneh, 87, 128: 136. Flint V. Stone Tracy Cp. 220 U. S. 107: 22, 65, 106, 118, 119, 120, 122, 168, 365, 627, 679, 710, 717, 718. Reported in full on p. 1145. Foley V. Fletcher, 3 Hurlst. & N. 769: 188, 427, 586. Fong Yue Ting v. U. S. 149 U. S. 698, 728: 139. Forbes v. Scottish Provident Insti- tution (1895) 23 R. 322: 700. V. Scottish Widows' Fund and Life Assurance Society (1895), 23 R. 322: 700. Forder v. Handyside, L. R. 1 Ex. D. 233: 729. Forman v. Board of Assessors, 35 La. Ann. 825: 20. Forty-Second Broadway Co. v. An- derson, 209 Fed. 991: 225, 245, 739. Foster v. Goddard, 1 Black, 506, 514, 17 L. ed. 228, 230: 221. Fowler v. Lindsey, 3 Dall. 411: 491. Fowlkes V. Nashville & D. R. Co. 9 Heisk. 829, 830: 190. Fox v. Stafford, 90 N. C. 296: 480. Frank Jones Brewing Co. v. Al- thorpe, 4 Tax Cas. 6: 699. Frayser v. Russell, 3 Hughes, 227: 489, 491. Freedman v. Sigel, 5 Chicago Legal News, 196: 166, 625. Frerichs v. Coster, 23 Blatchf. 74, 22 Fed. R. 637: 521. Furtado v. Cardonald Feuing Co., Limited [1907] S. C. 36: 198, 721. G. Gaither v. Watkins, 66 Md. 577 : 274. Ex parte Garland, 4 Wall. 333, 378, 18 L. ed. 366, 370: 206, 495. Gateshead Corporation v. Lumsden (1913), 77 J. P. 124: 189. Gelders v. Haygood, 182 Fed. R. 109: 567. General Accident Assurance Corpo- ration V. M'Gowan [1908] A. C. 207, 77 L. J. P. C. N. S. 38, 98 L. T. N. S. 734, 5 Tax Cas. 308 : 724. German Company Bank v. Archbald, 15 Blatchf. 398: 55, 379. German Savings Bank v. Archbald, 104 U. S. 708, 26 L. ed. 901; 15 Blatchf. 398: 55. Gibbons v. Mahon, 136 U. S. 549: 582. TABIite OP CASES. XXIU Gibbs T. Hampton, 19 Pick. (Mass.) 298: 497. Gilbertson v. Fergusson, L. R. 7 Q. B. Div. 562, L. R. 5 Exch. Div. 57: 668, 695. Gillatt V. Colquhoun, 33 Week. Rep. 258: 222, 237, 590, 611. Glasgow V. Rowse, 43 Mo. 479: 20, 113, 115. Glasgow, etc.. Commissioners v. In- land Revenue, 2 Ct. Sesa. Cas. 708: 167, 718. Goerz v. Bell, 73 L. J. K. B. 448; [1904] 2 K. B. 136; 90 L. T. 675; 53 H. R. 64; 20 T. L. R. 348— Chanwell, J.: 695. Goldsmith v. Augusta, etc. R. R. 62 Ga. 468: 188, 558, 681. Gordon v. U. S. 117 U. S. 697: 138. Goslings & Sharpe v. Blake, L. R. 23 Q. B. Div. 324, 58 L. J. Q. B. N. S. 446, 37 Week. Rep. 774, 2 Tax Cas. 45,0 (1889) : 421, 659. Gould V. Curtis, 81 L. J. K. B. N. S. 634 [1912] 1 K. B. 635, 106 L. T. N. 8. 680, 28 Times L. R. 274: 596. Gowan v. Christie, L. R. 2 H. L. Se. App. Cas. 284: 734. Graham v. Norton, 15 Wall. 427: 491. Grainger & Son v. Gough (1896) A. C. 325, 65 L. J. Q. B. 410, 74 L. T. 435, 44 W. R. 561, 3 Cas. 462: 565. Granite Supply Association v. Kit- ton [1905], 8 Fed. 55: 226, 694. Grant v. Hartford, etc., R'y, 93 U. S. 225: 675. Gray v. Darlington, 15 Wallace, 63: 189, 198, 199, 200, 201, 213. v. Wyllie (1904), 6 F. 448: 757. Re Green, Ball & Ellis [1904], W. N. 78: 431, 654. Gresham Life Assur. Soc. v. Bishop [1902], A. C. 287: 703, 705. V. Styles [1892], App. Cas. 309, L. R. 25 Q. B. Div. 351, L. R. 24 Q. B. Div. 500: 554, 601, 603, 676, 712, 723. Gross V. Partenheimer, 159 Pa. 556, 28 Atl. 370, 371: 195, 560. Grove v. Young Men's Christian As- sociation (1903), 67 J. P. 279: 172, 715. Gudgel V. Southerland, 117 Iowa, 309, 90 N. W. 623, 624: 190. Guy v. District of Columbia, 25 App. D. C. 117; 495. H. Haffin v. Mason, 15 Wall. 671: 515. Haight V. Pittsburg, etc. R. Co. 6 Wall. 15, 1 Abb. (U. S.) 81: 436, 666, 670. Report- ed in full on p. 1337. Hall & Co. V. Rickman, 75 L. J. K. B. N. S. 178, 1 K. B. 311, 94 L. T. N. S. 224, 54 Week. Rep. 380, 22 Times L. R. 131: 610. Hancock & Co. v. Gillard, 76 L. J. K.B.N. S. 20 [1907]: 656. Harding v. Woodcock, 127 U. S. 43 : 515. In re Hargreaves, Xiimited, 1 Ch. 347, 48 Week. Rep. 241 : 757. Harris v. Barber, 129 U. S. 366 : 494, 495. V. Corporation of Irvine (1900), 2 F. 1080: 711. Hartford, etc., R. R. Co. v. Grant, 9 Blatehf. 542: 675. Hartman v. Bean, 99 U. S. 393 : 475. Hartshome v. Ross, 13 Ohio Dec. Reprint, 10, 14, 2 Disney (Ohio) 15: 190. Hawaiian C. & S. Co. v. Assessors, 14 Haw. 601, 687: 227, 237, 607. Head Money Cases, 112 U. S. 580, 594; 18 Fed. 135, 139: 55, 115. Heffren v. Jayne, 39 Ind. 463, 13 Am. Rep. 281 : 206. Hendy v. Soule, Deady, 400: 518. Herbert v. McQuade [1902] 8 K. B. 631, 71 L. J. K. B. N. S. 884, 87 L. T. N. S. 349, 4 Tax Cas. 489: 206, 209, 559. Herold v. Park View Bldg. & Loan Ass'n, C. C. A. 210 Fed. 577, 579, 580: 174, 710, 715. V. Mutual Benefit Life Ins. Co. 120 C. C. A. 256, 201 Fed. 918: 194, 257, 258, 262, 263. Heyward v. Farmers' Min. Co. 42 S. C. 138, 46 Am. St. Rep. 702, 28 L.R.A. 48, 19 S. E. 963, 20 S. E. 64: 107. XXIV TABLE OF OASES. Highland Rail. Co. v. Balderston [1889], 26 Scot. L. R. 657: 227, 592. V. Special Oommissioners (1885), 13 R. 199: 727. Hill V. Gregory [1912], 2 K. B. 61, 81 L. J. K. B. N. S. 730, 106 L. T. N. S. 603, 6 Tax , Caa. 39: 657. Hilton V. Merritt, 110 U. S. 97: 515, 646. Hobart v. Tillson, 66 Cal. 210: 499. Re Holbrook Shoe & Leather Co. 165 Fed. R. 973 : 567. Holroyd v. Wyatt, 1 De G. & S. .125 (1847): 421. Home Insurance Co. v. New York State, 134 U. S. 594: 71, 121. Home Mutual. Ins. Co. v. Stoekdale, 16, Int. Rev. Rec. 30: 632. Horn Silver Mining Co. v. New York State, 143 U. S. 305: 93. Howland v. Soule, Deady, 413: 489. Hoyt V. Commissioners, 23 N. Y. 224: 553. Hubbard v. Kelley, 8 W. Va. 46: 412, 502, 503, 507, 518. V. Soby, 146 U. S. 56: 507. Hudson V. Gribble [1903] 1 K. B. 517, 72 L. J. K. B. N. S. 242, 88 L. T. N. S. 186, 51 Week. Rep. 457, 4 Tax Cas. 522: 226, 599. Humble v. Humble, 12 Beav. 43 (1849): 421. Hunter v. Atty.-Gen. 73 L. J. K. B. N. S. 381: 596. Hylton V. U. S. 3 Dallas, 171: 39, 115. I. Imperial, etc.. Association v. Nichol- son, 37 L. T. N. S. 717: 695. Imperial Fire Ins. Co. v. Wilson, 35 L. T. N. S. 271: 605, 723. Improvement Co. v. Slack, 100 U. S. 648: 575. Income Tax Cases, 148 Wis. 456, 134 N. W. 673, 135 N. W. 164, Ann. Cas. 1913A, 1147: 19, 67, 72. Re Income Tax Appeal Cases, 18 Haw. 596: ,227, 237. IngersoU v. Howard, 1 Heisk. 247: 206. Inhabitants of Cheshire v. County Commissioners, 118 Mass. 386: 54, 59. Inland Revenue v. Cadwalader, 42 Scot. L. R. 117, 7 F. 146, 5 Tax Cas. 101, 1904: 156. V. Strang, 15 Scot. L. R. 704: 206, 209, 212, 587. v. Western Steamship Co. [1907], S. C. 1005, 44 Scot. L. R. 715: 596. International Text Book Co. v. Pigg, 217 U. S. 91, 104, 54 L. ed. 678, 684, 27 L.R.A. (N.S.) 493, 30 Sup. Ct. Rep. 481, 18 Ann. Cas. 1103: 161. In re Interstate Commerce Cora- mission, 53 Fed. R. 476: 132, 137. Interstate Commerce Commission v. Brimson, 154 U. S. 447: 131, 137, 138, 140, 146. Re Iron Clad Mfg. Co. 191 Fed. If. 831, 194 Fed. R. 906: 567. Ex parte Ives, 1 Int. Rev. Rec. 145, Fed. Cas. No. 7,114: 375, 580. Jackson v. North. Cent. R. R. 2 I. R. R. 174: 664. James v. Hicks, 110 U. S. 272: 520. V. U. S., 202 U. S. 40], 50 L. ed. 1079, 26 Sup. Ct. Rep. 685: 210, 428. Jarding v. Gillespie [1907], S. C. 77: 226, 598. John Hall, Junior & Co. v. Rickman, 1 K. B. 311: 732. Johnson & Johnson v. Herold, Col- lector, (C. C.) 161 Fed. 593: 412. Jones, etc. Co. v. Commonwealth, 69 Pa. St. 137: 673. K. Kendall v. Stokes, 3 How. 87: 492. v. U. S., 12 Pet. 524: 492, 493. Kennedy v. Burrier, 36 Mo. 128, 130 : 190. Kensett v. Stivers, 18 Blachf. 397, 10 Fed. R. 517 : 489, 490. TABLE on? CASES. XXV Re Kermit Mfg. Co., 192 Fed. E. 392: 567. Kllbourn v. Thompson, 103 U. S. 168, 190: 136, 141. King V. MuUins, 171 U. S. 404, 435, 43 L. ed. 214, 226, 18 Sup. Ct. Rep. 925: 67. V. U. S. 99 U. S. 229 : 402, 485. Kings Co. Sav. Inst. v. Blair, 116 U. S. 200: 412, 518. Kirkland v. Hotchkiss, 100 U. S. 491: 74, 77. Kissinger v. Bean, 7 Biss. 60: 489, 490. Knowles v. McAdam (1877), L. R. 3 Excli. Div. 23: 733. Knowlton v. Moore, 178 U. S. 41, 82, 44 L. ed. 969, 986, 20 Sup. Ct. Rep. 749: 52, 55, 65, 66, 115, 627. V. Massachusetts Ben. Life Ass'n, 171 Mass. 1S3, 50 N. E. 520: 190. Kreider v. Cole, 149 Fed. R. 647: 567. L. Lake Shore, etc., E. R. v. People, 46 Mich. 193: 486. Lamb v. Brewster (]879), L. R. 4 Q. B. Div. 609: 428. Re Lamberton, 124 Fed. 446: 371, 756. Lane County v. Oregon, 7 Wall. 76: 87. Langston v. Glasson, [1891] 1 Q. B. 567, 60 L. J. Q. B. N. S. 356, 65 L. T. N. S. 159, 39 Week. Rep. 476, 3 Tax. Cas. 46: 570. Lanston Monotype Corporation v. Anderson, [1911] 2 K. B. 1019: 592. Last V. London Assurance Co. (1885), L. R. 10 App. Cas. 438: 205, 257, 263, 580, 674, 675, 689, 691. ' y. London Assurance Co. (1884), L. R. 12 Q. B. Div. 389: 690. Lauer v. U. S. 5 Ct. CI. 447: 502, 503. Ex parte Law, Fed. Cas. No. 8,126, 85 6a. 285: 206. Lawless v. Sullivan, 6 Appeal Cases, 373, 378, 370, 382: 254. I Le Conte v. Beverly, 57 Cal. 267 : 499. Lee V. Birrell, 3 Campb. 336: 756. Lehigh, etc., Co. v. Commonwealth, 55 Pa. St. 448: 582. Lehigh Mining & Mfg. Co. v. Kelly, 160 U. S. 327: 567. Leigh's Case, 1 Munf. 468: 206. Leith, Hull, and Hamburg Steam Packet Co. v. Bain, 3 Tax Cas. 560: 730. V. Musgrave, 1 F. 1117, 36 Scot. L. R. 745: 731. Leroy v. Mayor, 20 Johnson, 430: 497. Lexington v. McQuillan's Heirs, 9 Dana (Ky.) 513: 68. Lining v. Charleston, 1 M'Cord, L. 345: 19. In re Lippman, 3 Benedict, 95: 375, 649. Little Miami, etc., R. R. Co. v. U. S. 108 U. S. 277: 402, 485, 729. Liverpool & London and Globe In- surance Co. V. Bennett, [1912] 2 K. B. 41, 81 L. J. K. B. N. S. 639, 106 L. T. N. S. 323, 27 Times L. R. 279: 693. Lloyd V. Inland Revenue, 21 Scot. L. R. 482: 155, 156, 502. Loan Association v. Topeka, 20 Wal- lace, 658: 56, 61, 72. Locke V. New Orleans, 4 Wall. 172: 111. London Bank of Mexico and South America v. Apthorpe, [1891] 2 Q. B. 378: 226, 594. London Contract Corporation v. Styles (1887), 4 Times L. R. 51, 2 Tax Cas. 239 :. 602. London County Council v. Attorney- General [1901] A. C. 26: 188, 653, 658. V. Edwards (1909), 100 L. T. N. S. 444: 237, 733. Lord Advocate v. Corporation of Edinburgh, 6 F. 1: 421. V. Forth Bridge Rail. Co. [1890] 28 Scot. L. R. 576: 662. Lothian v. Macrae [1884], 12 R. 336, 22 Scot. L. R. 219, 2 Tax Cas. 65: 591. Lott V. Hubbard, 44 Ala. 593: 20, 402, 57], 649. V. Rosa, 38 Ala. 156: 553. XXVI TABLE OF CASES. Loughborough v. Blake, 5 Wheaton, 317: 54. Louisiana v. Jumel, 107 U. S. 711: 491. Louisville Public Warehouse Co. v. Collector, 49 Fed. R. 561: 507. Lovell and Christmas v. Commis- sioner of Taxes, A. C. 46: 698. Lowell V. Boston, 111 Mass. 454: 56. Lowrey v. Harbour Commissioners, 3 Times L. Hep. 516: 167, 718. M. Macdonald t. Hedderwick, 3 F. 674, 38 Scot. L. R. 455: 757. Macpherson & Co. v. Moore [1912] S. C. 1315, 49 Scot. L. R. 979, 6 Tax. Cas. 107: 160, 566. Magee v. Denton, 5 Blatchf . 130 : 490, 494, 580, 635, 644, 752. Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283: 52, 65, 628. Maine v. Grand Trunk R. 142 U. S. 217: 104, 127. Mandell v. Pierce, 3 CliflF, 134: 133, 178, 631, 638. Manhattan Co. v. Blake, 148 U. S. 412: 166, 622. Marion R. R. Co. v. Champlain, 37 Kan. 682: 68. Marquette, etc. R. R. Co. v. U. S. 123 U. S. 722: 675. In re Martin, 5 Blatchf. 363: 491. Martin v. Hunter, 1 Wheat. 363 : 509. Massachusetts v. Western Union Tel. Co. 141 U. S. 40: 473, 752. Matson Bridge Co. v. Commonwrealth, 117 Pa. 265: 583. Matter of Application of Mayor, etc., of New York, 49 N. Y. 150 : 646. Matter of Arnot, 71 Misc. 390, 130 N. Y. Supp. 197, affirmed in 145 App. Div. 708, 130 N. Y. Supp. 499, affirmed in 203 N. Y. 627, 97 N. E. 1102: 715. Matter of Baum, 30 N. Y. S. R. 174, 8 N. Y. Supp. 771: 206. Matter of Bootham Ward Strays, 60 L. J. Q. B. N. S. 612: 714. Matter of Burchard, 27 Hun, 429: 206. Matter of De Peyster, 210 N. Y. 216, 104 N. E. 714: 715. Matter of Dorsey, 7 Port. (Ala.) 293: 206. Matter of Field, 71 Misc. 396, 130 N. Y. Supp. 195, affirmed in 147 App. Div. 927, 131 N. Y. Supp. 1114: 715. Matter of Institution of Civil Engi- neers, L. R. 19 Q. B. Div. 610, 20 Q. B. Div. 621: 173, 713. Matter of Meador, 1 Abb. U. S. 317, 2 Am. Law Times, 140 Fed. Cas. No. 9,375: 147, 376. Matter of Mergentine, 129 App. Div. 367, 113 N. Y. Supp. 948, affirmed on opinion below in 195 N. Y. 572, 88 N. E. 1125: 715. Maxwell v. Dow, 176 U. S. 581, 44 L. ed. 597, 20 Sup. Ct. Rep. 448, 494: 109, 117. McAllister v. U. S. 141 U. S. 174, 35 L. ed. 693, 11 Sup. Ct. Rep. 949 : 210, 428. McClung V. Silliman, 6 Wheat. 598: 491, 492, 515. McCoach V. Minehill & Schuylkill Haven R. R. Co. 228 U. S. 295 : 678. Reported in full, p. 1236. McCuUoch V. Maryland, 4 Wheat. 316: 150. McDougall V. Sutherland (1894), 21 R. 753, 31 Scot. L. R. 630: 206, 569. McGhee v. Mathis, 21 Ark. 40: 645, MoGuigan v. Rolft, 80 111. App. 256, 259: 190. Mclntire v. Wood, 7 Cranch 504: 491. In re Meador, 1 Abb. U. S. 317, 2 Am. L. Times, 140, 10 I. R. R. 74: 375, 376, 378. Melchior v. Boston, 9 Met. 73: 19, 93. Memphis etc., R. R. v. U. S. 108 U. S. 228: 576, 666. Mercantile Bank v. New York, 121 U. S. 138: 91, 620. TABLE OF CASES. XXVll Merchants Ins. Co. v. McCartney, 12 I. R. R. 122, 1 Law Dec. 447: 205, 571, 614, 632. Merchiston Steamship Co. v. Tur- ner, [1910] 2 K. B. 923: 252, 606. Mersey Docks, etc., Board v. Lucas, L. R. 8 App. Cas. 891: 167, 595, 711, 718. Mersey Loan, etc., Co. v. Wootton, 4 Times L. R. 164: 576, 601. Michigan, etc., R. R. v. Slack, 22 I. R. R. 337: 665. Miles V. Johnson, 59 Fed. R. 38 : 489. Millar v. Douglass, 42 Tex. 288 : 573. Miller v. Black, 128 U. S. 40, 50, 32 L. ed. 354, 358, 9 Sup. Ct. Rep. 12: 493. V. Fairie (1878), 16 Scott. L. R. 189: 733. V. U. S. 11 Wall. 268: 150. Miller & Lux v. East Side Canal & Irrigation Co. 211 U. S. 293: 567. Minnesota v. Mutual Benefit Life In- surance Co. Minn. Dec. 15, 1909 (unreported, but quot- ed in 198 Fed. 208 ) : 689. Minot V. Winthrop, 162 Mass. 113: 69. Missouri River, etc., R. R. Co. v. U. S. 19 Fed. R. 66: 633. Mitchell V. Koecker, 11 Beav. 380: 371, 756. Moore v. Stewarts and Lloyds, 8 F. 1129: 589. V. Miller, 163 U. S. 696, 41 L. ed. 310: 29, 124. Morant v. Wheal Grenville Mining Co. (1894), 71 L. T. N. S. 758: 237, 735. Morey v. Lockwood, 8 Wall. 234, 19 L. ed. 339: 105. Morgan D. S. Co. v. White, 101 Ind. 413: 16L Mosse V. Salt, 32 Beav. 269: 421, 662. Moyer v. Badger Lumber Co. 10 Kan. App. 142, 62 Pac. 434, 435: 190. Re Muncie Pulp Co., 139 Fed. R. 546: 567. Mundt V. Sheboygan & F. du L. R. Co. 31 Wis. 451, 464: 191. Munroe v. United States (C. C. A.) 216 Fed. 107, reversing 210 Fed. 326: 376. Murray v. Hoboken Land Co. 18 How. 272, 284: 133, 150. Mutual Benefit Life Insurance Co. v. Commonwealth, 128 Ky. 174: 689. V. Herold, 198 Fed. 199: 193, 221, 256, 257, 258, 262, 263, 683, 690, 723, 736, 738. N. Naches v. State, 129 Wis. 190, 8 L.R.A.(N.S.) 121, 108 N. W. 627, 9 Ann. Cas. 711: 65. Napa State Hospital v. Yuba Coun- ty, 138 Cal. 378, 71 Pac. 450, 451: 190. National Bank v. U. S. 101 U. S. 1, 25 L. ed. 979: 30. National Safe Deposit Co. v. Stead, 232 U. S. 58, 58 L. ed. 504, 34 Sup. Ct. Rep. 209: 73. Needham v. Bowers, L. R. 21 Q. B. D. 436: 713. New Orleans v. Hart, 14 La Ann. 815, bb. Forman v. Board of Assessors, 35 La. Ann. 825: 20. V. New York Mail Steamship Co., 20 Wall. 392: 141. Nixon V. U. S. 18 Ct. CI. 448: 504, 505, 506. Nizam's State Ry. Co. v. Wyatt, L. R. 24 Q. B. D. 548: 680, 711, 726. Northern C. R. Co. v. Jackson, 7 Wall. 262. Reported in full 1341, infra. Northern Trust Co. v. M'Coach, 215: 222, 247. Norwich Union Fire Insurance Co. v. Magee (1896) 73 L. T. N. S. 733: 700. N. Y., L. E. & W. R. R. Co. v. Penn- sylvania, 153 U. S. 628: 74, 666. N. Y. Life Ins. Co. v. Styles, L. R. 14 App. Cas. 381: 257, 263, 676, 684, 691. 0. Opinion of Justices, 53 N. H. 634: 90. Osborn v. Bank of U. S., 9 Wheat. 738: 133, 139, 511. Osterberg v. Union Trust Co. 93 U. S. 424: 474. xxvm TABLE OF CASES. P. Pacific Building & Loan Ass'n v. Hartson, 201 Fed. 1011: 174, 176, 711, 715. Pacific Ins. Co. v. Soule, 7 Wall. 433: 30, 99, 635. In re Pacific Railway Commis- sion, 32 Fed. Rep. 251 : 132, 136, 146. Paddington Burial Board v. Commis- sioners of Inland Revenue, L. R. 13 Q. B. D. 9: 172, 711, 713. Padgett V. District of Columbia, 17 App. D. C. 255: 495. Paisley Cemetery Co. v. Reith [1898] 25 R. 1080, 35 Scot. L. R. 947, 4 Tax Cas. 1: 555. Parker v. North British & M. Ins. Co. 42 La. Ann. 428, 7 So. 599: 107. Parkersburg v. Brown, 106 U. S. 487: 56, 66. Park View Bldg. & Loan Ass'n v. Herold, 203 Fed. 876. Mc- Pherson, J. in C. C. A. 210 Fed. 579, 580: 174, 710, 715. Partridge v. Mallandine, L. R. 18 Q. B. D. 276: 206, 570. Passavant v. U. S. 148 U. S. 214: 507, 516, 645. Patton v., Brady, 184 U. S. 608, 46 L. ed. 713, 22 Sup. Ct. Rep. 493: 104. Peacock v. Pratt, 58 C. C. A. 48, 121 Fed. 772: 19. Peninsular and Oriental Steam Navi- gation Co. V. Leslie (1900), 79 L. T. N. S. 118: 731. People T. American Bell Telephone Co. 117 N. Y. 241: 161, 163, 694. V. Equitable Trust Co. 96 N. Y. 387: 694. V. Gold Co. 92 N. Y. 383: 111, 112. V. Horn Silver Mining Co. 105 N. Y. 76: 694. V. San Francisco Sav. Union, 72 Cal. 199, 13 Pac. 498: 195, 560. V. Supervisors, 18 Wend. 605 : 188, 557. V. Supervisors of Niagara, 4 Hill, 20, 7 Hill, 504: 188, 557, 558. People ex rel. Ferguson v. Reardon, 197 N. Y. 236, 243, 27 L.R.A.(N.S.) 141,- 134 Am. St. Rep. 871, 90 N. E. 829: 150. Gas Co. V. Assessors, 76 N. Y. 202: 583. Genesee Co. Bank v. Olmsted, 45 Barbour (N. Y.) 494. Leonard v. Commissioners, 90 N. Y. 148: 622. Lincoln v. Barton, 44 Barbour (N. Y.) 148: 494. Nostrand v. Wilson, 7 N. Y. Supp. 727: 494. Osborn v. Gilon, 9 N. Y. Supp. 212: 494, 497. Otsego, etc.. Bank v. Board of Supervisors, 51 N. Y. 401: 493. Perry v. Newsome, 10 I. R. R. 20: 148, 375. Philadelphia v. Collector, 5 Wall. 720: 412, 518. V. Diehl, 5 Wall. 720, 18 L. ed. 614: 412. Philips V. Beer (1815), 4 Campb. 266: 427, 428, 654. Re Phillips, 10 I. R. R. 107: 147, 373, 376. Phoenix Iron Co. v. Commonwealth, 59 Pa. 104: 583. Plested V. Abbey, 228 U. S. 42, 51, 57 L. ed. 724, 33 Sup. Ct. Rep. 503. Plumer v. Commonwealth, 3 Gra';t. 645: 19. Poindexter v. Greenhow, 114 U. S. 270: 768. Pollock V. Farmers' Loan & Trust Co., 157 U. S. 429, 158 U. S. 601: 22, 23, 30, 32, 35, 37, 41, 42, 64, 93, 115, 118, 120, 168, 491, 621, 627, 707 709, 769. Pommery v. Apthorpe, 56 L. J. R. Q. B. D. 155: 160, 564. Portobello Town Council v. Sulley (1890), 27 Scot. L. R. 8(i3 : 600. Poynting v. Faullcner (1905) 93 L. T. N. S. 367, 21 Times L. R. 560, 5 Tax. Cas. 14 : 206, 209. Pretoria-Pietersburg Railroad v. El- good, 98 L. T. N. S. 741: 675, 680. TABLE OS CASJiS. XXIX Pretoria-PieterBburg Railway v. El- good, 95 L. T. N. S. 468: 678. Price V. State, 8 Dill. (Md.) 295: 492, 499. Public Clearing Houses v. Coyne, 194 U. S. 497, 48 L. ed. 1092, 24 Sup. Ct. Rep. 789. PuUan V. Kinsinger, 2 Abb. U. S. 94: 489, 490. Pumell V. Page, 133 N. C. 125, 45 S. E. 534: 19. Q. Queen ex rel. Pemsel v. Commission- ers, L. R. 22 Q. B. Div. 296: 169, 714. ■Queen v. Commissioners for Spe- cial Purposes of the Income Tax (Copper Mining Com- pany's Case) 21 Q. B. D. 313, 317: 494. Ee Queensland Land and Coal Co., Limited (Davis v. Martin) (1903), (unre- ported) : 431, 663. Queensland National Bank v. Thrift (1909), unreported: 601. Railroad Co. v. Collector, 100 U. S. 595: 75, 76, 205, 665. V. Jackson, 7 Wall. 262: 664, 666. V. Rose, 95 U. S. 78: 76, 552. V. U. S. 101 U. S. 543: 194, 633, 647, 666, 667. V. Whiton, 13 Wall. 270: 512. Railroad Tax Cases, 18 Fed. R. 385: 54. Reed v. Louisville, 97 Ky. 394, 28 L.R.A. 480, 30 S. W. 973: 107, 108. Reid's Brewery Co. v. Male, [1891] 2 Q. B. 1: 251, 606. Religious Tract and Book Society of Scotland v. Forbes (1896), 33 Scot. L. R. 289, 3 Tax. Cas. 415: 172, 714. Remey v. Assessors of Sunset, 80 la. 470: 495. V. Board of Equalization, 80 la. 470: 496. Revell V. Directors of Elworthy Brothers & Co. (1890), 3 Tax Cas. 12: 222, 598, 725. Revell V. Edinburgh Life Insurance Co. (1906), 5 Tax Cas. 221: 577, 693. Rex V. General Commissioners of Taxes for Clerkenwell [1901] 2 K. B. 879: 499, 699. V. Income Tax Commissioners, 91 L. T. N. S. 94: 609. Rhymney Iron Co. v. Fowler [1896], 2 Q. B. 79: 222, 555, 589. Ridgway v. U. s., 18 Ct. CI. 707: 284, 506. Rice V. United States, 122 U. S. 611, 30 L. ed. 793, 7 Sup. Ct. Rep. 1377: 190. Richards v. Bellingham Bay Land Co. 4 C. C. A. 290, 7 U. S. App. 494, 54 Fed. 209, 213: 196, 560. Bobbins v. Freeland, 34 Int. Rev. Rec. 28: 489, 490. Ex parte Robinson, 19 Wall. 505, 510: 140, 141. Robson V. Doyle, 191 111. 566, 61 N. E. 435: 150. Rogers v. Inland Revenue, 16 Scot. L. R. 682: 157, 563. Romeu v. Todd, 206 U. S. 358, 368, 51 L. ed. 1093, 1097, 27 Sup. Ct. Rep. 724: 210, 428. Rondeau v. Beaumette, 4 Minn. 224: 640. Royal Insurance Co. v. Watson [:897] A. C. 1, 06 L. J. Q. B. N. S. 1, 75 L. T. N. S. 334, 3 Tax. Cas. 500: 226, 595. Eunk)e v. Citizens' Ins. Co., 6 Fed. R. 143: 404. Russell v. Town, etc.. Bank, L. E. 13 App. Cas. 418: 222, 554, 591. Ryhope Coal Co. v. Foyer, L. R. 7 Q. B. Div. 485: 726. S. Salt Lake City v. Hollister, 118 U. S. 256, 30 L. ed. 176, 6 Sup. Ct. Rep. 1055: 214. San Francisco Savings, etc.. Society V. Gary, 17 Int. Rev. Rec. 109: 407, 502, 576, 583. Santa Clara County v. Southern P. E. Co. 9 Sawy. 165, 18 Fed. 385: 496. XXX TABLE OF CASES. Satterlee v. Matthewson, 2 Pet. 380, 7 L. ed. 458: 119. Schifferstein v. Allison, 123 111. 662, 15 N. E. 275, 276: 191. Scholey v. Hew, 23 Wall. 331, 23 L. ed. 99: 30. Schulenberg-Boeekeler Lumber Co. v. Town of Hayward, 20 Fed. R. 422: 490. Schuylkill Nav. Co. v. Elliott, 21 I. E. R. 342: 632. Scottish Mortgage Company of New Mexico V. Commissioners of Inland Revenue, 14 E. 98: 702. V. McKelvie, (1886) 14 Reports 98, 24 Scot. L. R. 87, 2 Tax Cas. 165: 162, 705. Scottish North American Trust v. Inland Revenue [1910] S. C. 966: 600. Scottish Provident Institution v. Al- lan [1903] A. C. 129: 157, 163, 563, 703, 704. V. Farmer [1912] S. C. 452: 704. Scottish Shire Line v. Inland Rev- enue [1912] S. C. 1108: 611. Scottish Union and National Assur- ance Co. V. Smiles (1889), 16 R. 461: 691, 692, 724. Scottish Widovrs' Fund Life Assur- ance Society v. Farmer. 11909] S. C. 1372: 157, 704. Seat, Adm'r v. U. S. 18 Ct. CI. 458: 505. Second, etc., Street R'y v. City of Philadelphia, 51 Pa. 465: 753. Secretary of State of India v. Scoble, 72 L. J. K. B. N. S. 617: 188, 578. Selectman of Babbitt v. Selectmen of Savoy, 3 Cush. 530, 533: 221. Re Shaffer & Sterm, 185 Fed. R. 549: 567. Shaw V. Kay, 12 Scot. L. T. R. 495: 757. Shelton v. Piatt, 139 U. S. 591: 489. Sherry v. McKinley, 99 U. S. 496: 150. Simons v. U. S. 19 Ct. CI. 601: 412. Sims's Appeal, 44 Pa. 347: 107. Sioux, City etc., R. R. v. U. S. 110 U. S. 205: 674. Smith v. Adams, 130 U. S. 173: 133. Re Smith, 16 Hawaii, 796: 221. v. King, 14 Oregon 10: 494. y. Law Guarantee and Trust Society [1904] 2 Ch. 569, 73 L."J. Ch. N. S. 733, 91 L. T. N. S. 545: 431, 663. v. Lion Brewery Co. 80 L. J. K. B. N. S. 560: 222, 589. v. Westinghouse Brake Co. 2 Tax Cases 357: 227, 236, 607, 730. V. Whitney, 116 U. S. 167: 499. Smyth V. Stretton, W. N. 90, 90 L. T. N. S. 756, 53 Week. Rep. 288, 5 Tax Cas. 36: 206, 208, 569. Snyder v. Marks, 109 U. S. 189: 489, 490, 515. South Carolina v. United States, 199 U. S. 437: 717. Southern Realty Investment Co. v. Walker, 211 U. S. 603: 567. Southwell V. Savill Brothers, [1901] 2 K. B. 349, 70 L. J. K. B. N. S. 815, 85 L. T. N. S. 167, 49 Week. Rep. 682, 4 Tax Cas. 430: 222, 227, 593. Spears v. Loague, 6 Cold well (Tenn.) 421: 497. Spraigue v. Thompson, 118 U. S. 90: 768. Springer v. U. S., 102 U. S. 586: 30, 115, 150, 151, 475, 480- St. Andrew's Hospital (Northamp- ton) y. Shearsmith, L. R. 19 Q. B. D. 624: 172, 712. Standard Life Assurance Co. v. Al- lan (1901), 3 F. 805, 38 Scot. L. R. 628, 4 Tax Cas. 446; 162, 701. Stanwood v. Fordyce, 13 Int. Rev. Eec. 77: 148. V. Green, 3 Am. L. Times 133, 2 Abb. (U. S.) 184: 147, 373. State y. Bell, 61 N. C. 87 : 105. V. City of Elizabeth, 50 N. J. L. 347, 13 Atl. Rep. 5: 495. V. Commissioners, 1 Mill (S. C.) 55: 499. y. Covington, 35 S. C. 245, 14 S. E. 499: 494. v. Farmers' Bank, 11 Ohio 94- 583. y. St. Paul, etc., R. R. Co., 30 Minn. 311: 681. v. Township of Readington, 36 N. J. Law 66, 70: 56. TABLE OF CASES. XXXI state ex rel. Benedictine Sisters v. City of Elizabeth, 50 N. J. Law, 347: 496. Bolens v. Frear, 148 Wis. 456: 53. Reported in full on p. 1264. Carpenter v. Hastings, 10 Wis. 518: 493. Greenbaum v. Ehoades, 4 Nev. 313: 109. Poe V. Eaine, 47 Ohio St. 447, 25 N. B. Rep. 54: 493, 494. So. Car. R. Co. v. Hood, 15 Rich. L. (S. C.) 177: 677. State of Iowa v. Chicago, B. & Q. E. R. 37 Fed. Rep. 497, 500 : 149. State of Maine v. Grand Trunk Ry. Co.: 122. State of Texas v. Day Land & Cattle Co. 41 Fed. Eep. 228, 230: 149. State Eailroad Tax Cases, 92 U. S. 575: 490. State Tax on Foreign Held Bonds, 15 Wall. 300: 74-77, 666. Stegall V. Thurman, 175 Fed. 813: 371. Stevens v. Bishop, L. R. 20 Q. B. Div. 442: 222 590 v. Hudson's Bay ' Co. ( 1909 ) , 101 L. T. N. S. 96, 25 Times L. R. 709: 198, 681. Stewart v. Barnes, 153 U. S. 456: 412, 518, 519. Stockdale v. Insurance Cos., 20 Wall. 323: 76, 103, 122, 125, 580, 632, 633, 665. Stockham v. Wallasey Urban District Council, 95 L. T. N. S. 834: 728. Stockton V. Baltimore R. R. Co., 32 Fed. R. 9, 14: 93. Stotesbury v. U. S. 146 U. S. 196, 36 L. ed. 940, 13 Sup. Ct. Eep. 1: 504. Strasser v. Staats, 59 Hun, 143, 13 N. Y. Supp. 167, 168: 190. Straus V. Abrast Realty Co. (E. D. N. Y.) 200 Fed. 327: 491. Stratton's Independence v. Howbert, 231 U. S. 399, 58 L. ed. 285, 34 Sup. Ct. Rep. 136: 199, 213, 232. Strong & Co. Limited v. Woodifield, [1906] A. C. 448: 248, 588, 605. In re Strouse, 1 Sawyer, 605: 373, 376. Stutsman Co. v. Wallace, 142 U. S. 293: 515. Sulley V. Attorney-General, 5 H. & N. 711: 160, 563, 566. Sun Insurance OBBce v. Clark, [1912] A. C. 443: 725. Sun Mutual Ins. Co. v. Mayor, 8 N. Y. 241: 677. Sutton's Heirs v. Louisville, 5 Dana, 28, 31: 61. Swatman v. Ambler (1854), 8 Exch. 72, 24 L. J. Exch. N. S. 185 : 428, 655. Swift Co. V. U. S., Ill U. S. 22: 522 Sybrandt v. U. S., 19 Ct. CI. 1: 504. Taylor v. Evans (1856), 25 L. J. Exch. N. S. 269, 1 Hurlst. & N. 101 : 427, 657. Re Taxes Honolulu Rapid Tran- sit & L. Co., 18 Haw. 15, 666: 227. Tebrau (Johore) Rubber Syndicate V. Farmer [1910] S. C. 906, 5 Tax Cas. 658, Ct. of Sess.: 198, 681. Tennant v. Smith, A. C. 150: 206, 556, 569, 586. Tennessee v. Davis, 100 U. S. 257: 509, 515. Ex parte Terry, 128 U. S. 289, 302, 303: 140. Texas Land and Mortgage Co. v. Holtham (1894), 63 L. J. Q. B. N. S. 496, 10 Times L. R. 337, 3 Tax. Gas. 255: 222, 227, 722. The Collector v. Day, 11 Wall. 113, 20 L. ed. 122: 90. Thomas Turner (Leicester) Limited V. Rickman, 4 Tax. Cas. 25 (1898) : 697. Tinckler v. Prentice ( 1812 ) , 4 Taunt. 549: 427, 654. Tischler v. Apthorpe, 52 L. T. R. N. S. 814: 160, 161, 564. Tompkins v. Little Rock, etc., R. R. 15 Fed. R. 6: 557. Troy, etc.. Factory v. Corning, 45 Barb. 231: 188, 558. TABLE OF CASES. Trustees of Psalms and Hymns v. Whitwell (1890), 7 Times L. R. 164, 3 Tax Gas 7: 172, 714. Turnbull v. Inland Revenue, 42 Scot. L. R. 15, 7 F. 1, 1904: 157. Turner v. Cuson, L. R. 22 Q. B. D. 150: 206, 209, 212, 587. Turton v. Cooper, 92 L. T.. N. S. 863, 5 Tax Gas. 138: 207, 209 212 214. In re Tyler, 149 u'. S. 164: 269. Tyler v. Defrees, 11 Wall. 331 : 150, 490. U. Udney v. East India Co. 13 C. B. 733: 560. U. S. V. Allen, 14 Fed. R. 263: 474. V. American Bell Telephone Co. 29 Fed. 17: 161-163, 694. V. Baltimore & Ohio R. R. Co. 17 Wall. 322: 94, 95. V. Barnett, 154 U. S. 076: 505, 506. V. Bcebe, 127 U. S. 338: 485. V. Black, 11 Blatchf. 538: 489, 490. V. Bristow, 20 Fed. R. 378 : 405, 472. V. Brooklyn, etc. R. R. Co. 14 Fed. R. 284 : 380, 486, 672, 676. T. Central Nat'l Bank, 10 Fed. 612, 15 Fed. 222, 24 Fed. 577: 253, 676, 721. V. Dalles Military Road Co. 140 U. S. 599: 485. V. Denieke, 35 Fed. Rep. 407, 410: 149. V. Dollar Savings Bank, 15 I. R. R. 193: 473, 483, 486, 557, 753. V. Eaton, 144 U. S. 677: 143. T. Erie Railway Co., 24 Int. Rev. Ree. 76, 106 U. S. 327, 107 U. S. 1: 75, 76, 205, 380, 665. v. Fears, 3 Woods, 610: 378. V. Ford, 34 Fed. R. 26: 378. v. Frerichs, 124 U. S. 315: 521. V. Frost, 9 I. R. R. 41: 195, 251, 560, 610. V. General Inspection and Load- ing Co. 204 Fed. 657: 406. T. Harley, 130 U. S. 263: 485. T. Harmon, 147 U. S. 268: 503. U. S. V. Hopewell, 51 Fed. R. 798: 507. V. Howell, 9 Fed. R. 674: 475. V. Huck, 8 Pet. 271, 275: 1431. V. Hudson, 7 Cranoh, 32: 140. V. Indianapolis, etc., R'y> 113 U. S. 711: 194, 633, 667. V. Kaufman, 96 U. S. 567: 505, 506, 522. V. Lamar, 116 U. S. 423: 493. V. Little Miami, etc., R. R. Co., 1 Fed. R. 700: 402, 406, 485, 729. V. Louisville, etc., R. R., 33 Fed. 829: 576, 676. Mann, 95 U. S. 580: 378. Marquette, etc., R. R., 17 Fed. R. 719: 675. Mayer, Deady, 127: 251. McDermott, 140 U. S. 157: 208. Mooney, 116 U. S. 104: 507. Myers, 3 Hughes, 239: 407, 502. Nipissing Mines Co. 206 Fed. 431: 232, 235, 678, 729, 733. N. Y. Guarantee, etc., Go. 8 Ben. 269: 380, 486, 672. N. Y. & Cuba Mail S. S. Go. 200 U. S. 488, 50 L. ed. 569, 26 Sup. Gt. Rep. 327: 411. O'Neil, 19 Fed. R. 567: 406. Pacific R. R. Co., 1 McCrary, 1, 1 Fed. R. 97, 4 Dill. 66, 4 Dill. 71 : 404, 474, 490, 753. Philadelphia, etc., R. R. Co., 123 U. S. 113: 402, 403, 404, 486. Railroad Co., 17 Wall. 322: 90, 91, 166, 576, 619, 664, 665, 716. Rhawn, U Phila. 521: 378. Rindskopf, 8 Bissell, .507: 404. Ritchie, 4 Chicago Legal News, 139: 625. Savings Bank, 104 V. S. 728, 16 Gt. CI. 335: 503, 504, 505. Schillinger, 14 Blatchf. 71: 195, 196, 560, 610. Schurz, 102 U. S. 378: 492, 493, 499. Sherman, 98 U. S. 565: 521. Singer, 15 Wall. Ill, 121, 21 L. ed. 49, 51: 55. Smith, 1 Sawy. 277, 12 I. R. E. 138: 200, 213, 552, 557. V. V. V. V. V. V. V. V. V. V. V. V. V. V. V. TABLE OF CASES. XXXXll U. S. V. Snyder, 149 U. S. 210: 474. V. Thompson, 98 U. S. 486: 485. V. Thurber, 28 Fed. 56: 646. V. Tilden, 24 Int. Rev. Ree. 99, 103: 401, 402, 485, 552. V. Tilden, 10 Benedict, 547: 485. V. Whitridge, 231 U. S. 144. Reported in full 1349. V. Wilson, 118 U. S. 86: 476. V. Young, 94 U. S. 258: 491, 494. U. S. ex rel. Boynton v. Blaine, 139, U. S. 306: 493. Dunlap V. Black, 128 U. S. 40: 493. Miller v. Bladt, 128 U. S. 40: 493. Redfield v. Windom, 137 U. S. 636: 493. Stanwood v. Fordyce, 13 I. R. R. 77: 373. U. S. Express Co. v. Minn. 223 U. S. 335, 56 L. ed. 459, 32 Sup. Ct. Rep. 211: 106. Universal Life Assurance Society v. Bishop (1899), 68 L. J. Q. B. N. S. 962: 700. V. Vallambrosa Rubber Co. v. Farmer [1910] S. C. 519: 222, 588. VanBrocklin v. Tennessee, 117 U. S. 151, 178, 29 L. ed. 845, 854, 6 Sup. Ct. Rep. 670: 91, 619. Van Dyke v. City of Milwaukee, 146, N. W. 812: 205. Ex parte Van Orden, 3 Blatchf. 106: 491. VV. Walker v. Reith [3 906], 8 F. 381, 43 Scot. L. R. 245: 206, 209, 556. Re Wall, 13 Fed. 814, 27 Alb. L. J. 91: 206. Ward v. Maryland, 12 Wall. 421, 428: 74. Waring v. Savannah, 60 Ga. 93: 107. Warren v. Charlestown, 2 Gray, 84: 768. Watney v. Musgrave [1880] L. R. 5 Exch. Div. 241, 49 L. J. Exch. N. S. 493, 42 L. T. N. S. 690, 28 Week. Rep. 491, 1 Tax Cas. 272: 237, 611. Watson v. Sandie and Hull (1898) 1 Q. B. 326: 665. Watson Brothers v. Lothian (1902), 4 F. 795: 727. Wells V. Central Ver. R. R. Co., 14 Blatchf. 426: 490. Werle v. Colquhon, L. R. 20 Q. B. Div. 753: 160, 161, 563. Western Union, etc., Co. v. State Board of Assessors, 80 Ala. 273: 553. Western Union Tel. Co. v. City Coun- cil, 56 Fed. 419: 94. Weston V. Charleston, 2 Pet. 449: 119, 620. Westray v. U. S., 18 Wall. 322 : 297, 519. White V. Arthur, 20 Blatchf. 232, 10 Fed. R. 80: 521. Wilcox V. Middlesex County Commis- sioners, 103 Mass. 544: 19, 552 Re Wilder's S. S. Co. 16 Haw. 567: 236. Wilier V. Hawaiian Trust Co., 28 Haw. 589, .593: 178. Wingate v. Webber, 34 Sc. L. R. 699 : 696. Wisconsin & M. R. Co. v. Powers, 191 U. S. 379, 48 L. ed. 229, 24 Sup. Ct. Rep. 107: 126. Wood V. District of Columbia, 6 Mackey, 342: 495. Woolner v. U. S., 13 Ct. CI. 365: 503. Worth V. Wilmington R. R. Co., 89 N. C. 291: 68. Wright V. Blakeslee, 101 U. S. 174: 412, 518, 519. Wvlie V. Eccott, Ct. Sess. S. C. 16 (1913) : 225, 597. Young V. Inland Revenue, 12 Scot. L. R. 602: 157, 563. Ystradyfodwg and Pontypridd Main Sewerage Board v. Bensted [1907] A. C. 264, 76 L. J. K. B. N. S. 876, 97 L. T. N. S. 141, 5 Tax Cas. 230, 23 Times L. R. 621: 554. Z. Zonne v. Minneapolis Syndicate, 220 U. S. 187: 678. Reported in full on p. 1231. THE INCOME TAX OF 1913. PART I. COMMENTARIES ON THE STATUTE. CHAPTER I. HISTORY OF THE INCOME TAX. § 1. Origin of the income tax. An epitaph and a picture in a tomb built near tbe end of the Eighteenth Dynasty show that a tax upon the incomes of public officers was in force in Egypt in the fifteenth century before Christ.^ Ancient history abounds in illustrations of taxes payable in kind proportioned upon the yearly produce of agriculture and the offspring of flocks and herds. The best known of these were the tithes levied upon the Hebrews for the benefit of the priesthood at least as early as the fifteenth century before our era ; ^ but they were imposed in other countries for religious as well as other purposes. Solon imposed a produce tax upon the Athenians, who, for that purpose, were classified in accordance with their § 1. IB. C. 1580 -"It is he who the products of the different indus- levies all taxes on the income." tries payable _ in kind rather than Breasted Ancient Records, II, par. to one upon tfie income of the same. 706, 716, V, p. 31. Mr. Kennan, in his Income Taxation, p. 131, says, . , , . . that Aristotle mentions «, general »™ ^l" 7'^'"»»'" ««' «pv«'^")p«^>', ««. ro,^ income tax upon all employments »'^^"'' "- w- G. Canestrini, La Scienza e prit des Lois, Book XIII, ch. VII. I'Arte di Stato, desunta dagli Atti See, also, Boeckh, Public Economy Officiali della liepublica Fiorentina of the Athenians, Book IV, Ch. 5, e dei Medici. Ordinamenti Econo- pp. 639-665. (Am. Ed.) mici. — Delia Finanza, Parte I, L'lm- 4 Hildebrand's Jahrbucher fill- Na- posta sulla Ricchezza Mobile e Im- tional Oekonomie und Statistik, mohile. Fireme, 1862; Seligman's VIII, 453, Seligman's Progressive Progressive Taxation, 22, 23. Taxation, 12. 8 4 William and Mary, c. 1 ; 9 6 Seligman Income Tax, 41-43. and 10 William and Mary, t. 10. 6 History of Florence, Book IV, Ch. 3. See Ibid., Book VII, Ch. 308. § 2] IM- EUEOPE. 3 century, Louis XIV. enacted the dixieme, a general tax of ten per cent, upon all incomes.® This, which was at one time reduced to five per cent, then gradually enlarged to fifteen per cent, and accompanied by a progressive series of exemptions which made it almost a dead letter, continued until the French Revolution, when it was abolished. ^^ During the same cen- tury, Holland and Saxony established classified progressive in- come taxes, each of which lasted a short period of time.^^ Dur- ing the French Revolution general income taxes were imposed in Paris, Rouen and Lyons. At Paris it was decreed that all incomes over fifty thousand livres should pay one hundred per cent., the tax taking the form of a forced loan. Subsequently, the Convention directed the levy throughout the nation of a forced loan of one thousand million livres, with an exemption of a thousand livres for each member of the family, with cer- tain exemptions for dependent children, and a progression from ten per cent, upon the first thousand livres to one hundred per cent, upon the surplus over nine thousand livres. This severity made its collection difiicult and only about one-fifth of the sum demanded was realized. Similar forced loans based upon in- come were levied under the Directorate.*^ Neither of these taxes had much duration or has been subsequently imitated. All modern income taxes are modeled, in part at least, upon those imposed in England during the wars with Napoleon. § 2. History of the income tax in Europe. In Europe the first approach to the income tax appears in some of the mediaeval town taxes, where the earnings of artisans and trades- men were taxed as evidence of their ability to pay proportion- ally with property and land-owners. Some of the mediaeval states also taxed the rents of land, official salaries and profes- 9 A. D. 1710. 1715, 1742, 1745 and 1747. It va- 10 Houques-Fourcade, Les Impots ried from one to two and one-half sur le Revenu en France au XYIII per cent. That of Saxony was es- Siecle. Histoire de la Dixidme et tablished in 1742 and lasted until de la Cinguantieme, Leur Applica- 1746. The rate varied from one tO' tion dans la G4n4ralit^ de Guyenne. eight per cent. Seligman Progressive Paris, '] 889. Seligman Income Tax- Taxation, 26. ation, 51. l^Seligman, Progressive Taxation, 11 That of Holland was imposed in 30-39. 4 HISTORY OF THE IITCOME TAX. [§ 2 sional' gains.^ These, however, except the tax on rents, which is called a land tax, are termed by the economists faculty taxes rather than income taxes. The first income tax which merits the definition of economists was the catasto, imposed in Florence, which continued under the Medici. ^ This disappeared in the sixteenth century.* Under Louis XIV. in 1710, a dixieme was imposed in France. This was a tax of ten per cent, nom- inally imposed upon all incomes. It was reduced to a vingtieme or twentieth in 1749 and subsequently increased until the French Eevolution, when it was abolished. * In England, anciently, land was taxed at a percentage of the income of its return and personal property at a percentage of its whole amount. Shortly after the English Revolution, holders of offices were required to pay a tax proportionate to their sal- aries. * The first general income tax in Europe was imposed by Pitt in 1799 during the Napoleonic wars. § 3. The income tax in Great Britain. On the failure of his "triple assessment" of the tax on expenditures, Pitt in 1799, introduced and passed an income tax. This required a general return of all incomes; exempted all that were less than £60 a year ; and imposed a graduated percentage upon the rest of one one hundred and twentieth part when it was between £60 and £66, with a rise in the scale up to a tax of ten per cent, on an income of £200 and upwards. ^ This rate of ten per cent., experience taught the English Exchequer to regard as "the natural limit of the tax." ^ There were further exemptions to householders with more than two children. Of these, house- holders with incomes between £60 and £400 had a reduc- tion at the rate of four per cent, for each child; those between £400 and £1,000 at three per cent. ; those between £1,000 and £5,000 at two per cent. ; and those who had £5,000 and upwards I 2. 1 General Property Tax, by dans la O^neraliU de Quyerme. Par- Prof. Edwin R. A. Seligman, 5 Po- is 1889. Seligman's Income Tax, 51. litioal Science Quarterly, 24, 57. 6 Four shillings to the pound; 9 ^ Supra, § 1. and 10 William and Mary, c. 10. 8 Seligman's Income Tax, 47. § 3. l 39 Geo. 3, c. 13. * Houques-Fourcade, Les Impdts 8 This term was given by Lord sur le Revenu en France au XVIII Henry Petty, Chancellor of • Exche- Sidole. Histoire de la Dixiime et de quer, Dowell's Income Tax, 3d ed., la Cinquantiime, Leur Application XXXIII. § 3] IN GEEAT BRITAIN. 5 at one per cent, for each child. ' The tax was relmposed in 1803 by Addington when the war broke out after the peace of Amiens. This retained the exemption of incomes iinder £60, and further exempted the incomes of colleges and halls in uni- versities, hospitals, public schools, and alms-houses, friendless societies and charitable institutions. It was the first statute that established the rule of deduction at the source. In 1805 this tax was increased by one fourth. * In 1806 the Coalition Ministry of Grenville imposed a new income tax, in which the rate was raised to ten per cent. This statute, which seems to have been drawn by Lord Henry Petty, the Chancellor of Exchequer, was the model of the later legis- lation upon the subject. It narrowed the exemption of small incomes to £50, and then only when they belonged to laborers, farmers, members of the trades and professions, officers, pen- sioners, and life annuitants. Laborers and artisans, whose earnings were less than thirty shillings a week, were also ex- empt from the tax, and an abatement of a shilling on a pound allowed on all incomes between £50 and £150. It contained the other exemptions in the former acts slightly extended in the same direction, and continued the practice of deduction at the source. This tax continued until April 5, 1816, when Parliament refused to continue it beyond the end of its statu- tory term. ^ The next income tax in England was imposed by Peel in 1842.® This was drawn by Joseph Timm, Solicitor of Stamps and Taxes. It imposed a tax of seven pence upon the pound, but was in other respects substantially a copy of the Act of 1806, with a few insertions such as specific references to gas-works and railways and the tithe commutation rent charge. Since then, an income tax has become a permanent part of British finance. It was extended by Gladstone in 1853, '' and with few alter- 8 39 Geo. 3, e. 13. '' 16 and 17 Vict., c. 34. His moat * 43 Geo. 3, c. 122, 45 Geo. 3, c. famous speech was that delivered 49. April 18, 1853, in its support. See B 46 Geo. 3, c. 65. the Finance Statements of 1853, 6 5 & 6 Vict. c. 35, printed in full 1860-1863, to which are added a infra, part VI. speech on Tax Bills, 1861, and on 6 HISTOBY OF THE INCOME TAX. [§ 3 ations is the law throughout Great Britain to-day. By the Finance Act of 1907, introduced by Asquith -when Chancellor of the Exchequer, it was increased to one shilling pound, with a reduction to nine pence a pound, upon so much of incomes less than £2,000 and above those absolutely exempt as was earned by the receiver. * By the Finance Act of 1910 first introduced by Lloyd George in 1909 and passed after the House of Lords had once defeated it, there was an increase to one shilling and two pence a pound, with a reduction to nine pence a pound as to earned income paid by the receivers of less than £3,000 and above these exempted altogether.® Certain abatements are also allowed on incomes of less than £500. Incomes under Charities, 1863, by the Et. Hon. W. benefit which he confers upon the E. Gladstone, London, 1863. community. It was said by H. S. 8 Act of Edw. VII. c. 13, quoted in Asquith, Chancellor of the Exche- fuU infra part VI. quer, in his budget speech of April 9 Act of Edw. VII, u. 8, printed 18th, 1907, that when we compare ■infra, part VI. The income tax in two men, one of whom derives an the United States has been criticized income from a safe investment in because of its omission to grant an the funds, which he has obtained exemption or reduced rate of taxa- either by the result of his own sav- "tion to the recipient of earned in- ings or by inheritance, and the other •come. The distinction between a man making the same amount by earned and unearned incomes, be- personal labor in a laborious and tween those which are industrial perhaps precarious profession or and spontaneous, between temporary some form of business, "to say that und permanent incomes, between those two people are, from the point those from personal efforts, and those of view of the State, to be taxed from investments, between uncertain in the same way, is, to my mind, -or variable, and certain or fixed in- flying in the face of justice and com- ^omes, which is the language of the mon sense." (Parliamentary De- Italian statute, or, as said by Glad- bates, A. D. 1907, vol: 172, p. 1198.) .stone, between industrious and lazy The law of Italy taxes incomes that incomes; is recognized by statesmen are in whole or in part derived from as well as by economists. The in- personal exertion at a less rate than <;ome which is earned by a profes- that applied to those Which are un- sional man, or by one who embarks earned or spontaneous. The Select in a trade or risks his capital in Committee, of which Sir Charles W. an industrial enterprise, involves the Dilke was chairman, appointed by exercise of labor, self-denial or a. Parliament on May 4th, 1906, in study of the future needs of man- their report on November 29th, 1906, kind, which it is for the interest recommended such a differentiation of the State to encourage and which by charging upon earned incomes a there is a tendency to discourage tax lower than the normal rate. (The "when such income is subject to tax- Report from the Select Committee on ation. The production of income Income Tax; together with the Pro- that is inherited or invested in se- ceedings of the Committee, Minutes Kinsman's Income Tax, Publications LXIV, Public Laws of the Con- of the Am. Econ. Ass'n, 3d series, federate States of America passed vol. IV, No. 4. at the Fourth Session of the First 26 Act of April 24, 1863, c. Congress, 1863-1864. Edited by XXXVIII, Public Laws of the Con- James M. Matthews. Richmond, federate States of America, passed 1864, p. 209. at the Third Session of the First § 17. l Seligman, Income Tax, Congress, 1863. Edited by James 430. M. Matthews. Richmond, 1863, pp. S 12 Stat, at L., chap. 45, p. 309, 115 et seq. A detailed description §§ 49-51. is contained in Seligman's Income 8 12 Stat, at L., ch. 119, p. 473, Tax, pp. 485-492. §§ 89-93. 27 An act to levy additional Taxes 22 HISTOET OF THE INCOME TAX. [§ IT between $5,000 and $10,000 to seven and one half per cent.; and over $10,000 to ten per cent, upon the excess of income over $600.* The Joint Eesolution of July 4, 1864, imposed a special tax upon the excess of incomes over $600 for the preceding year only.' The Act of March 3, 1865, amended the Act of June 30, 1864, and increased the rate to ten per cent, upon the excess of income over $6,000.® The Act of March 2, 1867, repealed the progressive tax and imposed five per cent, on the excess of income over $1,000 until 1870 ; ' and in 1870 the Act of July 14 reduced this tax to two and a half per cent, for that year and 1871, when the tax expired and was not re-enacted.* The next was the income tax of two per cent, upon the ex- cess of all incomes over $4,000 and upon the incomes of all corporations, companies, and associations other than partner- ships, which was imposed by the Act of August 27th, 1894.^ This was held to be unconstitutional.^" The Act of August 5th, 1909, imposed a tax upon the net incomes, over and above $5,000, received by corporations, joint-stock companies, or asso- ciations organized for profits and having a capital stock repre- sented by shares, and every insurance company, organized in the United States or organized under the laws of a foreign country and engaged in business in the United States, with certain ex- ceptions.^^ This was held to be constitutional.^* The Act of September, 1913, imposes a progressive or graduated tax be- ginning at one per centum upon the net income above $3,000 of individuals; then two per centum upon net incomes between $20,000 and $50,000, three per centum thereupon between $50,000 and $75,000, four per centum thereupon between $75,- 000 and $100,000, five per centum thereupon between $100,- 4 13 Stat, at L., ch. 173, p. 281, 759, 15 Sup. Ct. Rep. 673, 158 U. §§ 116-123. S. 601, 39 L. ed. 1108, 15 Sup. Ct. 5 13 Stat, at L., 417. Rep. 912, § 38. See infra, § 19. 6 13 Stat, at L., ch. 78, p. 479, "36 Stat, at L., 11, chap. 6, U. § 1. S. Comp. Stat. Supp. 1911, p. 741, 7 14 Stat, at L., ch. 169, p. 477. published in full, infra. 8 16 Stat, at L., ch. 255, p. 257, The bill is said to have been draft- §§ 6-17. ed by Attorney General Wickersham. 9 28 Stat, at L., 509, chap. 349. ^^ Flint v. Stone Tracy Co. 220 U. Published in full, infra. S. 107, 55 L.ed. 389, 34 Sup. Ct. Rep. iO Pollock V. Farmers' Loan & 342, Ann. Cas. 1912 B, 1312 pub- Trust Co. 157 U. S. 429, 39 L. ed. lished in full, infra. Part VII.' § IV] FEDEEAL INCOME TAXES. 23 €00 and $250,000, six per centum thereupon between $250,000 and $500,000 and seven per centum upon an income above $500,000, and together with a fixed tax of one per centum upon the net incomes of corporations, joint-stock companies or as- sociations and insurance companies; with certain exceptions and exemptions. This last is the subject of this work.^* IS The bill was drafted by Repre- Finance Committee and referred to sentative Cordell Hull, of Tennessee. Democrat caucus. The following shows the chronologi- July 11 — Bill reported to Senate cal history of the bill. by Chairman Simmons with recom- 1913, January 6 to February 1^ mendation that it pass. Hearings, House Ways and Means July 21 — Made unfinished business Committee. of Senate. April 7 — Bill introduced by Mr. September 9 — Passed by Senate; Underwood and referred to the Ways yeas, 44; nays, 37. and Means. Committee. September 11 — House non-concurs April 22 — Bill reported by Mr. in Senate amendments and bill goes Underwood after Democrat caucus to conference, had approved it. September 26 — Conferees reach May 8 — Passed House of Repre- final adjustment, sentatives; yeas, 281; nays, 139. October 2 — Senate agreed to con- May 9 — Received by the Senate ference report and passed bill as and referred to Finance Committee, amended. June 20 — Bill completed by Senate October 3 — House did the same. President signed bill. The tax collected during the first fiscal year that the act was in opera- tion, namely, that ending June 30, 1914, amounted to $71,381,274.69, distributed as follows: Corporation excise tax $10,671,077.22 Corporation income tax 32,456,662.67 Individual income tax 28,253,534.80 The amount of the income tax collected from corporations was com- puted on net incomes accruing for the calendar year 1913, five-sixths of the tax being reported as income ta'c, and one-sixth as excise tax, as provided in the statute. T^ie excise tax was increased by similar col- lections of taxes assessed on account of business done during prior years and amounted in the aggregate -to $10,671,077,223. individual income tax was computed upon five-sixths of net incomes accruing for the calendar year 1913. The collections from this source as classified to conform to the provisions of the act were as follows: Income tax, normal $12,728,038.02 Income tax, additional: Net incomes exceeding $20,000 and not more than $50,000 2,934,754.40 Net incomes exceeding $50,000 and not more than $75,000 . . 1,645,639.30 Net incomes exceeding $75,000 and not more than $100,000 1,323,022.61 Net incomes exceeding $100,000 and not more than $250,000 3,835,948.40 Net incomes exceeding $250,000 and not more than $500,000 2,334,582.95 Net incomes exceeding $500,000 3,437,850.23 Offers in compromise, &c 13,698.89 Total '. $28,253,534.80 24 HISTOET OF THE INCOME TAX. [§ 17 It appears, consequently, that 55% came from incomes in excess of $20,000 and more than 335% from incomes in excess of $100,000. They have been classified by the Treasury Department as follows: Number Classification. of Returns $2,500 to $3,333.33 79,426 .%333.33 to 5,000 114,484 5,000 to 10,000 101,718 10,000 to 15,000 26,818 15,000 to 20,000 11,977 20,000 to 25,000 6,817 25,000 to 30,000 4,164 30,000 to 40,000 4,553 40,000 to 50,000 2,427 50,000 to 75,000 2,618 75,000 to 100,000 998 100,000 to 150,000 785 150,000 to 200,000 311 200,000 to 250,000 ■ 145 250,000 to 300,000 94 300,000 to 400,000 84 400,000 to 500,000 4 500,000 to 1,000,000 91 1,000,000 to and over 44 Total 357,598 Married women who made separate returns numbered 6,682, the total of all married persons making returns was 278,835; tlie single men numbered 55,212 and the single women 23,551. The receipts from the New York districts were as follows: First, corporation tax, $450,853; individual tax, $635,985; Second, cor- poration tax, $5,889,028; individual tax, $7,950,078; Third, corporation tax, $1,637,026,103; individual tax, $2,761,986; Fourteenth, corporation tax, $485,557; individual tax, $445,184; Twenty-first, corporation tax, $338,982; individual tax, $201,294; Twenty-eighth, corporation tax, $964,849; individual tax, $528,726. New York State contributed the largest share of the income tax as follows : Corporation excise tax $2,318,311.41 Corporation income tax 7,447,600.] £> Individual income tax 12,522,797.34 Total $22,288,708.94 § 17] FEDBEAL INCOME TAXES. 25 The following figures, which were given out by the Secretary, are subject to revision upon the analysis of complete returns: Corporation, Individual excise and income Districts. income taxes. tax. Alabama, including Mississippi $300,796.74 $102,586. 1* Arkansas 110,784.10 41,239.25 1st California, including Nevada 1,517,643.64 605,594.6a 6th California , 584,771.09 282,455.74 Colorado, including Wyoming 399,899.59 119,410.79 Connecticut, including Ehode Island 1,030,935.19 733,450.71 Florida 127,085.22 108,800.43 Georgia 359,845.26 115,874.11 Hawaii 116,912.63 34,822.62 1st Illinois 3,835,403.50 1,915,149.92 5th Illinois 187,289.51 48,855.73 8th Illinois 154,023.85 78,310.31 13th Illinois 116,932.82 33,855.15 6th Indiana 570,586.48 134,489.10 7th Indiana 121,838.74 46,281.66 3d Iowa 388,388.43 141,136.62 4th Iowa (July, 1913) *4,721.49 Kansas 329,087.07 49,960.11 2d Kentucky 34,889.77 10,466.17 5th Kentucky 259,765.27 60,070.01 6th Kentucky 22,814.67 6,524.20 7th Kentucky 44,540.10 17,550.10 8th Kentucky 33,046.49 3,634.14 Louisiana 397,092.96 159,056.91 Maryland, including District of Columbia-; Delaware and eastern shore of Virginia . . . 748,874.45 832,276.1 4 3d Massachusetts 1,933,559.69 1,570,506.61 1st Michigan 1,310,332.61 940,764.69 10th Michigan 271,892.18 71,454.12 Minnesota 1,509,592.88 372,527.41 1st Missouri 990,769.20 487,176.63 6th Missouri 373,823.31 169,882.18 Montana, including Utah and Idaho 419,148.55 80,357.26 Nebraska 237,195.22 76,857.75 New Hampshire, including Maine and Ver- mont 419,520.68 213,861.95 1st New Jersey 278,402.42 201,106.08 5th New Jersey 1,247,387.85 515,509.13 New Mexico, including Arizona 136,618.76 39,061.77 1st New York 450,803.86 635,985.48 2d New York 5,889,028.41 7,950,070.02 3d New York 1,637,026.03 2,761,986.38 14th New York 485,557.88 445,184.64 21st New York 338,982.46 201,294.48 28th New York 964,849.93 528,726.03 4th North Carolina 147,339.68 27,363.86 5th North Carolina 159,846.31 19,202.69 North and South Dakota 122,905.07 32,997.00 1st Ohio 533,680.15 263,035.18 10th Ohio 530,901.70 166,070.72 •Fourth Iowa district consolidated with Third district August 1, 1913. 26 HISTOBY OF THE INCOME TAX. [§17 nth Ohio 243,044.99 69,802.42 18th Ohio 1,093,403.53 395,599.81 Oklahoma 225,065.74 93,082.15 Oregon 235,120.41 909,054.36 1st Pennsylvania 2,852,229.32 2,012,513.61 9th Pennsylvania 452,108.59 261,813.97 23d Pennsylvania 2,791,967.37 901,767.80 South Carolina tl02,126.48 25,816.08 Tennessee 279,341.01 98,277.59 Sd Texas 711,874.32 361,965.21 2d Virginia 304,816.17 70,112.30 6th Virginia 206,615.85 32,525.74 Washington, including Alaska 426,455.59 124,902.39 West Virginia 332,327.75 94,627.97 1st Wisconsin 507,590.21 190,672.91 Totals $43,079,819.42 $28,306,336.69 tSouth Carolina district re-established September 1, 1913, previously having been a part of the Fourth North Carolina district. One-third of the burden of the in- States, New York, Pennsylvania, and come tax fell on the State of New Illinois, was more than $37,000,000, York. Pennsylvania ranked second which means that they paid more with collections of $9,272,400.66. than half the total income tax col- Third in relative rank was Illinois lected. Statement by Secretary of with collections of 6,369,820.79. the Treasury, July 3, published in The collection from these three N. Y. Sun, July 4, and Oct. 23, 1914. CHAPTEE II. CONSTITUTIONAL OBJECTIONS TO THE STATUTE. § 18. Constitutional objections which may be raised to the income tax law. The Act imposing the Income Tax of 1894 was held to be unconstitutional as a direct tax not appor- tioned among the several States in proportion to their inhabit- ants and consequently obnoxious to the provision of the Federal Constitution concerning direct taxation.^ On February 25th, 1913, the Sixteenth Amendment to the Constitution of the United States certified as adopted. This ordains: "Article XVI. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportion- ment among the several States, and without regard to any census or enumeration." ^ Another objection now may be § 18. iPollocJc V. Farmers' Lown Feb. 11, 1911; Kansas, Feb. 18, <£ Trust Go. 157 U. S. 429, 39 L. ed. 1911; Colorado, Feb. 20, 1911; 759, 15 Sup. Ct. Rep. 763, 158 U. North Dakota, Feb. 21, 1911; Michi- S. 601, 39 L. ed. 1108, 15 Sup. Ct. gan, Feb. 23, 1911; Iowa, Feb. 27, Rep. 912. For note on constitution- 1911; Missouri, Mar. 16, 1911; ality of income tax generally, see Maine, Mar. 31, 1911; Tennessee, 27 L.R.A.(N.S.) 864. Apr. 7, 1911; Arkansas, Apr. 22, 2 37 Stat, at L. 1785. The dates 1911; Wisconsin, May 26, 1911; New of the respective ratifications were York, July 12, 1911; South Dakota, as follows: By Alabama, Aug. 17, Feb. 3, 1912; Arizona, Apr. 9, 1912; 1909; Kentucky, Feb. 8 or 9, 1910; Minnesota, June 11, 1912; Louisiana, South Carolina, Feb. 19, 1910; 111- July 1, 1912; Delaware, Feb. 3, inois, Mar. 1, 1910; Mississippi, 1913; Wyoming, Feb. 3, 1913; Mass- Mar. 7, 1910; Oklahoma, Mar. 14, achusetts. Mar. 4, 1913; New Hamp- 1910; Maryland, Apr. 8, 1910; shire. Mar. 14, 1913; New Jersey, Georgia, Aug. 3, 1910; Texas, Aug. Feb. 5, 1913; New Mexico, Feb. 5, 17, 1910; Ohio, Jan. 19, 1911; Idaho, 1913; Vermont, Feb. 19, 1913; Jan. 20, 1911; Oregon, Jan. 23, West Virginia, Jan. 31, 1913. An 1911; Washington, Jan. 26, 1911; account of the proceedings in the California, Jan. 31, 1911; Montana, legislatures of the first nine States Jan. 31, 1911; Indiana, Feb. 6, may be found in Kennan's Income 1911; Nevada, Feb. 8, 1911; North Taxation, 296-300. Carolina, Feb. 11, 1911; Nebraska, 27 28 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 18 made, which has not been decided, namely, that the exemptioB of persons with an income of less than $3,000 is so unreason- able as to make the imposition upon the rest not a tax but confiscation; and consequently unconstitutional as the taking of the taxpayer's property without due process of law.* The validity of the additional tax, or super tax, may also be dis- puted.* The tax may also be contested as not uniform.^ Non- residents may claim exemption upon the ground that Congress has no power of extra-territorial legislation.® Contractors with States and municipalities, as well as State and municipal em- ployees, may deny the power of Congress to tax their emolu- ments.'' It has been contended that the taxation of incomes received before the passage of the Act is unconstitutional,* and that, so are the provisions for the deduction of the tax at the source.^ The provision of the Revised Statutes authorizing the Federal courts to punish as a contempt the disobedience to a summons by a collector, may be attacked as not judicial power, and as consequently a power which cannot be vested in these courts.^" The provision authorizing a collector thus to examine a taxpayer and to compel the production of his booka of account may further be attacked as an infringement of the Fifth Amendment of the Constitution, by compelling a person to testify against himself. ^^ These objections will be considered separately. § 19. The Pollock Case. The student of the strategy of litigation will find much that is instructive in the history of this law suit. Although several counsel were engaged in the attack upon the statute, the credit for the success is due prin- cipally to the efforts of Mr. Joseph H. Choate and Mr. "William D. Guthrie, of the New York bar.^ The obstacles in their path seemed unsurmountable. Income taxes had been levied 3 Infra, § 23. § 19. 1 The late Charles F. Soiith- * Infra, § 20. mayd, Benjamin H. Bristow, Clar- 5 Infra, § 22. ence A. Seward, David Wilcox and 6 Infra, § 26. Mr. Charles Steele were with them on I Infra, § 27. the first brief. Mr. Seward signed 8 Infra, § 29. the separate argument, which con- 9 Infra, § 25. tained the discussion of the proceed- 10 Infra, § 30. ings in the Federal Convention. Mr. II Infra, § 31. Choate thus generoiisly spoke con- § 19] THE POLLOCK CASE. 29 and collected by the United States thronghout the Civil War and for seven years thereafter, a period exceeding a decade. More than six Acts of Congress imposing them had been passed/ and the validity of such legislation had been adjudi- cerning his partner's work: "I might almost say with entire truth that it was Southmayd, who never went near the Court, who won the case. He was then seventy years old; he had retired from practice ten years before, and all that time he had refrained from any legal labor. In fact, as he claimed, he has ceased to be an attorney at law, and when he had occasion to put his name to a brief, he always signed 'Charles F. Southmayd in person.' "What he regarded as the iniquity of the income tax aroused all his old-time energy. By this time he had an ample income of his own which was affected, and he had a strong idea of the right of property being at the foundation of civilized government. Other men have five senses, but he had a sixth — the sense of property — very keen and very powerful; and he also had an abiding allegiance to the Constitu- tion under which the country had 60 long prospered, and an abhorrence of any violation of it. So, when he heard that I was to be in the case, he volunteered to prepare a brief, which proved, when completed, to be the keystone of the whole argu- ment, and, indeed, of the decision which overthrew the act of Con- gress. The Constitution had pro- vided that direct taxes should be apportioned among the States ac- cording to their respective numbers, but this act had levied all taxes up- on income, from whatever source derived, indiscriminately upon all alike, without such apportionment. "To his clear mind, whatever else might be disputed, a tax on land was certainly a direct tax within the meaning of the Constitution, and a tax upon the income of land could by no possibility be distin- guished from a tax on the land itself, for it was a tax on the land from which the rent was derived, and was therefore necessarily a di- rect tax; a tax upon the income of accumulated personal property could not be distinguished in prin- ciple from the tax on rents; and these all being found to be direct taxes, and therefore unconstitution- ally levied, the court in annulling them must find that Congress with- out them would not have enacted the rest of the tax, and therefore must declare the whole act void. "This was the whole argument in a nutshell, and it all rested upon his first proposition, which was ab- solutely unanswerable then and is unanswerable now, and can never be answered, except by an amendment of the Constitution, which I, for one, hope will never be carried through, because it will throw al- most the whole burden of every Federal income tax upon a very few of the larger States. However that may be, it was his masterful brief that drove the entering wedge which by its cleavage demolished the act, while the rest of us who appeared in court, and argued the cause to its final conclusions, on the founda- tion which he had laid, won an un- due share of the glory. I have heard from the Clerk's office that all the judges called for extra copies of his brief, but for none of the others." Memorial of Charles F. Southmayd (Reports of N. Y. City Bar Ass'n 1913, pp. 191-192). Ex- Senator George F. Edmunds, with whom were associated, upon his brief, Messrs. Samuel Shellabarger and Jeremiah M. Wilson, argued the case of Moore v. Miller, No. 915, an ap- peal from the Supreme Court of the District of Columbia, 163 U. S. 696, 41 L. ed. 310, which involved similar questions. 8 12 Stat, at L. ch. 45, p. 309, §§ 49-51; 12 Stat, at L. ch. 119, p. 30 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 19 cated by at least four decisions of the Supreme Court of the United States.^ All of these statutes had imposed a general Income Tax upon the income from real as well as personal property. After an income tax had been collected for six years and some of the decisions which sustained it had been made, the section of the Constitution relating to the apportion- ment of representatives and of direct taxes was amended by the Fourteenth Amendment so as to change the rule as to repre- sentation, but the language concerning direct taxation was left unaltered. Had there been any uncertainty in the minds of lawyers as to the sustentation of similar legislation in the future by the supreme court there can be little room for doubt but that this Amendment would have granted express au- thority to enact the same.* All three of the Departments of the Government, and at least three-fourths of the States, had consequently acquiesced in this construction of the Constitution. The only distinction of importance between these and that which was now attacked consisted in the great increase of the exemption, from six hundred or eight hundred to four thousand dollars. The justifications for such an ex- emption and the economical arguments in support of income taxation had not, as in Germany and France, been the subject of much discussion, and the judges, as well as the people of the United States at large, were consequently not familiar with them. By reason of this exemption, more than four-fifths of the income tax imposed by the Act of 1894 was payable by four of the States, New York, "New Jersey, Pennsylvania and Massachusetts, and in a number of the other States its inci- dence did not affect more than a very few individuals. The public press in those, as well as in some of the other States, made a vigorous attack upon the legislation as an injustice 473, §§ 89-93; 13 Stat, at L. ch. Bank v. U. 8. 101 U. S. 1, 25 L. 173, p. 281, §§ 116-123; 13 Stat. ed. 979; Springer v. U. 8. 102 U. at L. 417; 13 Stat, at L. ch. 78, S. 586, 26 L. ed. 256. p. 479, § 1; 14 Stat. £:t L. ch. 169, 4 See the dissent of Mr. Justice p. 477; 16 Stat, at L. ch. 255, p. White in Pollock v. Farmers' Loan 257, §§ 6-17. & Trust Co., 158 U. S. 601, 715, 3 Pacific Ins. Co. v. Soule, 7 Wall. 39 L. ed. 1108, 1153, 15 Sup. Ct. 433, 19 L. ed. 95; Scholey v. Reic, Rep. 912; Foster on the Constitu- 23 Wall. 331, 23 L. ed. 99; National tion, § 69. § 19] THE POLLOCK CASE. 31 amounting to spoliation.* And most of the leaders of public opinion ignored the argument, that such an immunity amount- ed to no more than a fair allowance for the amount of customs duties and other internal revenue, far disproportionate to their incomes when compared with those of men of larger wealth, which was paid through the increased prices of their purchases by those who were then exempted. It is noteworthy that of such four States, three — New York, New Jersey and Massa- chusetts — together with the State of Illinois, which ranks third in payments under the income tax of 1913, ratified the Six- teenth Amendment empowering Congress to levy such taxes without apportionment. The normal, and strictly legal, method of testing the va- lidity of the legislation would have been either by the pay- ment of the tax under protest and a suit against the collector or the Government for its recovery, or else by resistance to its collection, followed by an action of trespass against the marsh- all who made the levy. But the exercise of neither of these remedies could have resulted in a decision by the Supreme Court at Washington until after fifty millions of dollars in such taxes had been collected and expended by the Government. The ruinous consequences to the public finances of a decision that would have compelled their return from the Treasury must in such a case have exercised a pressure in support of the va- lidity of the statute that could have been resisted by few judicial minds. An injunction against the collection of the tax was forbidden by the Revised Statutes. The counsel in Pol- lock's case brought a suit by a stockholder against his com- pany to enjoin the latter from the payment thereof. And to fore- stall the charge of an attempt to obtain a collusive decree after an inadequate defense, the defendant, whose interests were in sympathy with the plaintiff, retained an eminent advocate, one of the most accomplished rhetoricians of his generation, a man whose character made it impossible to doubt the sincerity of 6 The author frankly admits that tion" § 69; but subsequent study he then shared this economical opin- and reflection have convinced him of ion, vfhich was expressed by him in his error, his "Commentaries on the Constitu- 32 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 19 his opposition, but who was more distinguished for his talent than for his tact. As has been established by subsequent deci- sions, such a suit was within the prohibition of the Revised Statute; but this point was not raised by the nominal defend- ant. It was formally waived by the Attorney General so far as he had the power to make such a waiver.® And this was the reason assigned for its disregard by the Court.' The Department of Justice made no opposition to an advance- ment of the appeal so that it might be heard before the tax was payable, the right of intervention being granted to the Government after a summary decision against the plaintiff be- low. This gave the appellant a great tactical advantage, not only for the reason already stated, but because it left room for the suggestion, that the mind of the Attorney General was not convinced that all doubts as to the constitutionality of such taxation had been so dissipated by an unbroken line of legis- lation and decisions and by public acquiescence in the same that it would be an act of supererogation to reargue the ques- tions thereby involved.' The position upon which the plaintiff first succeeded, namely, that so much of the tax as affected rents was a land tax, and consequently a direct tax, which must be invalid, irrespective of the validity of the tax upon the in- come from personal property, although briefly but fair- ly stated in the bill and the first brief filed at Washington, was first argued at length in a supplemental brief, filed a few days before the case was reached, and it was not discussed at B Pollock V. Farmers' Loan & which I take, and some more facts Trust Co., 157 U. S. 429, 554, 39 that I have not presented and which L. ed. 759, 809, 15 Sup. Ct. Eep. I do not propose to present." Sena- 673; per Fuller, J. tor William E. Borah, of Idaim. 1 "I learn from one of the counsel May 3rd, 1909. Cong. Rec. 61st who presented the case upon the Cong., 1st. Sess., p. 1685. part of the Government in the sec- * Edward B. Whitney, the As- ond case that they did not in the sistant Attorney General, subse- firet place deem it necessary to do quently a Justice of the Supreme more than call the attention of the Court of the State of New York, court to the fact that it did not who had charge of the case under have jurisdiction of the case; that the Attorney General, protested in they supposed it would be practical- the Department of Justice against ly a self-evident proposition. I will the unqualified consent given to the say that I am not speaking without advancement by one of his associates, some facts to support the position § 19] THE POLLOCK CASE. 33 the bar tintil the closing speech for the appellant, when there was no opportunity to reply to the same.' When the cause was heard, upon the oral argument the counsel for the nominal defendant made the mistake of using rhetorical language, which ofFended the Court. He said in his peroration : "These suggestions are all the more weighty and important in those controversies which, like the present, are calculated to arouse the interests, the feelings — almost the passions — of the people, form the subject of public discussion, array class against class, and become the turning points in our general elections. Upon such subjects every freeman be- lieves that he has a right to form his ovra opinion, and to give effect to that opinion by his vote. Nothing could be more unwise and dangerous — nothing more foreign to the spirit of the Constitution — than an attempt to baffle and defeat a popvilar determination by a judgment in a law- suit. When the opposing forces of sixty millions of peo- ple have become arrayed in hostile political ranks upon a question which all men feel is not a question of law, but of legislation, the only path of safety is to accept the voice of the majority as final. The American people can be trusted not to commit permanent injustice ; nor has history yet recorded an instance in which governments have been destroyed by attempts of the many to lay undue burdens of taxation on the few. The teachings of history have all been in the other direction. But if an overwhelming ma- jority, in an effort to accomplish what it believes to be 8 See Brief for United States up- settled by the Supreme Court, and on Petition for Rehearing, pp. 6-8. that the only question open for dis- "When the matter was tested the cussion was that of its uniformity, first suit that was brought to test the After he had made an investigation constitutionality of the income tax in the interest of his client, seeking was brought here in the District of for whatever ground he could fii>! Columbia. Ex-Senator Edmunds ap- to attack the law, he admitted by peared upon the part of those test- his brief that the authority which ing the validity of the law. I they now say was dicta followed by learned from one of the attorneys other cases had settled the question, who argued the case in favor of the so that it was not a debatable ques- law that, upon the first presentation tion in the Supreme Court." Sena- of the case, ex-Senator Edmunds, tor William E. Borah, of Idaho, one of the greatest constitutional May 3rd, 1909. Cong. Rec. 61st. lawyers in the country, admitted by Cong., 1st. Sess., p. 1685. his brief that the question had been Foster Income Tax. — 3. 34 COSrSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 1& justice, finds itself suddenly arrested in its course by an- other majority of a body of half a dozen or more who happen to hold different opinions upon substantially the same questions, but who assume to speak with a different authority,- and to utter the voice of the law, the conse- quences can hardly fail to be disastrous to the stability of the law itself. Such a triumphant majority will find its way to the accomplishment of its ends over the ruins, it may be, of any constitution, or of any Court. We have had some experiences in our history of the futility of at- tempting to convert political into judicial questions, and the result has not added to the authority of this tribunal. It is the part of wisdom for a judicial body to avoid at- tempts at the solution of problems which must and will be finally settled in another forum." Chief Justice Fuller, was on the point of interrupting by a rebuke; when Mr. Justice Field turned to the Chief and remarked, "Rather bad taste." As the Chief Justice con- sidered Judge Field to be more sensitive and quicker tempered than himself, he decided that if his associate considered the words nothing more than a breach of taste there was no cause for interference." Mr. Choate in his exordium thus happily replied : "If the court please. After Jupiter had thundered all around the sky, and had leveled everything and everybody by his prodigious bolts. Mercury came out from his hiding place and looked around to see how much damage had been done. He was quite familiar with the weapons of his learned Olympian friend; he had often felt their force, but he knew that it was largely stage thunder, manufactured for the particular occasion, and he went his round among the inhabitants of Olympus restoring the consciousness, and dispelling the fears, and raising the spirits both of gods and men who had been prostrated by the crash. It is in that spirit that I follow my distinguished friend; but I sliall not undertake to cope with him by means of the same 10 The Chief Justice so informed the autlior, before the first decision Mrs. Fuller, who told the story to of the court. § 19] THE POLLOCK CASE. 3& weapons, because I am not master of tLem. It never would have occurred to me to present either as an opening or closing argument to this great and learned Court, that if in your wisdom you found it necessary to protect a suitor who sought here to cling to the ark of the covenant and invoke the protection of the Constitution which was created for us all, it was an argument against your fur- nishing such relief and protection that possibly the popular wrath might sweep the Court away. It is the first time I have ever heard that argument presented to this or any other court, and I trust that it will be the last." He pressed with great force the argument that more than four-fifths of the tax would be paid by citizens of four States,, whereas the representatives of those States were less than one- f-jurth of the members of the House of Representatives. This- ^int, as appears by the opinion of the Chief Justice, had great influence with the Court. Upon the first argument, the Court unanimously held that so much of the statute as imposed a tax upon the income of State municipal bonds was invalid. About this proposition, in view of the former decisions, there could be but little doubt. A majority, which consisted of the Chief Justice and the As- sociate Justices Field, Gray, Brewer, Brown and Shiras, held further that the tax upon rents was a direct tax and therefore invalid because not apportioned in accordance with the ordi- nance of the Constitution concerning direct taxation. Justices Harlan and White dissented upon this proposition. Mr. Jus- tice Jackson was absent because of illness. The Court was equally divided upon the questions : "1, Whether the void pro- visions as to rents and income from real estate invalidated the whole Act ? 2, Whether as to the income from personal prop- erty as such, the Act is unconstitutional as laying direct taxes ? 3, Whether any part of the tax, if not considered as a direct tax, is invalid for want of uniformity on either of the grounds suggested ? " ^^ The opinion of the Court was delivered by Chief Justice 11 PoHoc?c V. Farmers' Loan d ed. 759, 821, 15 Sup. Ct. Eep. 673. T. Co., 157 U. S. 429, 586, 39 L. 36 CONSTITUTIONAL OBJECTIONS TO THE STATUTE, [§ 19 Fuller. He said: "The men who framed and adopted that instrument had just emerged from the struggle for independ- ence whose rallying cry had been that 'taxation and representa- tion go together.' "The mother country had taught the colonists, in the contests waged to establish that taxes could not be imposed by the sov- ereign except as they were granted by the representatives of the realm, that self-taxation constituted the main security against oppression. As Burke declared, in his speech on Con- ciliation with America, the defenders of the excellence of the English Constitution 'took infinite pains to inculcate, as a fundamental principle, that, in all monarchies, the people must, in effect, themselves, mediately or immediately, possess the power of granting their own money, or no shadow of liberty could subsist.' The principle was that the consent of those who were expected to pay it was essential to the validity of any tax. "The states were about, for all national purposes embraced in the Constitution, to become one, united under the same sov- ereign authority, and governed by the same laws. Eut as they still retained their jurisdiction over all persons and things with- in their territorial limits, except where surrendered to the general government or restrained by the Constitution, they were careful to see to it that taxation and representation should go together, so that the sovereignty reserved should not be im- paired, and that when Congress, especially the House of Eep- lesentatives, where it was specifically provided that all revenue bills must originate, voted a tax upon property, it should be with the consciousness, and under the responsibility, that in so doing the tax so voted would proportionately fall upon the immediate constituents of those who imposed it. "More than this, by the Constitution the states not only gave to the nation the concurrent power to tax persons and property directly, but they surrendered their own power to levy taxes on imports and to regulate commerce. All the thirteen were seaboard states, but they varied in maritime importance, and differences existed between them in population, in wealth, in the character of property and of business interests. Moreover, § 19] THE POLLOCK CASE. 37 they looked forward to the coining of new states from the great west into the vast empire of their anticipations. So when the wealthier states as between themselves and their less favored associates, and all as between themselves and those who were to come, gave up for the common good the great sources of revenue derived through commerce, they did so in reliance on the protection afforded by restrictions on the grant of power." ^'^ He quoted from Madison's report of the debates in Pederal convention: "Mr. King asked what was the precise meaning of direct taxation. No one answered." He then quoted re- marks from Chancellor Livingston and Chief Justice Marshall in the State conventions of ratification, and Sedgwick in the debate upon the Carriage Act, in the House from the argu- ment of Hamilton in the case of the Carriage Tax and the opinions of the Court therein, statements to the effect that a land and capitation tax were direct taxation. He then said: "From the foregoing it is apparent: 1. That the distinction between direct and indirect taxation was well understood by the framers of the Constitution and those who adopted it. 2. That under the state systems of taxation all taxes on real es- tate or personal property or the rents or income thereof were regarded as direct taxes. 3. That the rules of apportionment and of uniformity were adopted in view of that distinction and those systems. 4. That whether the tax on carriages was direct or indirect was disputed, but the tax was sustained as a tax on the use and an excise. 5. That the original expectation was that the power of direct taxation would be exercised only in extraordinary exigencies, and down to August 15, 1894, this expectation has been realized. The Act of that date was passed in a time of profound peace, and if we assume that no special exigency called for unusual legislation, and that resort to this mode of taxation is to become an ordinary and usual means of supply, that fact furnishes an additional reason for circum- spection and care in disposing of the case." ^* After distin- guishing the previous decisions sustaining the income taxes during the Civil War showing that the validity thereof so 12 Ibid. 157 U. S. 556, 557. "Ibid. 157 U. S. 573, 574. 38 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§19 far as they affected rents was not clearly raised upon the rec- ord of a tax in any of them, he then continued: "It is con- ceded in all these cases, from that of Hylton to that of Spring- er, that taxes on land are direct taxes, and in none of them is it determined that taxes on rents or income derived from land are not taxes on land. "We admit that it may not unreasonably be said that logically, if taxes on the rents, issues and profits of real estate are equiva- lent to taxes on real estate, and are therefore direct taxes, taxes on the income of personal property as such are equivalent to taxes on such property, and therefore direct taxes. But we are considering the rule stare decisis, and we must decline to hold ourselves bound to extend the scope of decisions — none of which discussed the question whether a tax on the income from personalty is equivalent to a tax on that personalty, but all of which held real estate liable to direct taxation only — so as to sustain a tax on the income of realty on the ground o/ being an excise or duty. "As no capitation, or other direct tax was to be laid otherwise than in proportion to the population, some other direct tax than a capitation tax (and it might well enough be argued some other tax of the same kind as a capitation tax) must be referred to, and it has always been considered that a tax upon real estate eo nomine or upon its owners in respect thereof is a direct tax within the meaning of the Constitution. But is there any dis- tinction between the real estate itself or its ovTners in respect of it and the rents or income of the real estate coming to the owners as the natural and ordinary incident of their owner- ship? "If the Constitution had provided that Congress should not levy any tax upon the real estate of any citizen of any state, could it be contended that Congress could put an annual tax for five or any other number of years upon the rent or income of the real estate ? And if, as the Constitution now reads, no unapportioned tax can be imposed upon real estate, can Con- gress without apportionment nevertheless impose taxes upon such real estate under the guise of an annual tax upon its rents or income? § 19] THE POLXOCK CASE. 39 "As according to the feudal law, the whole beneficial interest in the land consisted in the right to take the rents and profits, the general rule has always been, in the language of Coke, that ^if a man seized of land in fee by his deed granteth to another the profits of those lands, to have and to hold to him and his heirs, and maketh livery secundum formam chartoe, the whole land itself doth pass. For what is the land but the profits thereof ? ' Co. Lit. 45. And that a devise of the rents and prof- its or of the income of lands passes the land itself both at law and in equity. 1 Jarm. Wills (5th ed.) *798 and cases cited. "The requirement of the Constitution is that no direct tax shall be laid otherwise than by apportionment — the prohibition is not against direct taxes on land, from which the implication is sought to be drawn that indirect taxes on land would be con- stitutional, but it is against all direct taxes — and it is admitted that a tax on real estate is a direct tax. Unless, therefore, a tax upon rents or income issuing out of lands is intrinsically ,so different from a tax on the land itself that it belongs to a wholly different class of taxes, such taxes must be regarded as falling within the same category as a tax on real estate eo nom- ine. The name of the tax is unimportant. The real question is, is there any basis upon which to rest the contention that real estate belongs to one of the two great classes of taxes, and the rent or income which is the incident of its ownership belongs to the other ? We are unable to perceive any ground for the al- leged distinction. An annual tax upon the annual value or an- nual user of real estate appears to us the same in substance as an annual tax on the real estate, which would be paid out of the rent or income. This law taxes the income received from land and the growth or produce of the land. Mr. Justice Paterson observed in Hylton v. United States, 3 Dall. 171, 1 L. ed. 556, 'land, independently of its produce, is of no value ; ' and cer- tainly had no thought that direct taxes were confined to un- productive land. "If it be true that by varying the form the substance may be changed, it is not easy to see that anything would remain of the limitations of the Constitution, or of the rule of taxation and representation, so carefully recognized and guarded in favor of 40 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 19 the citizens of each state. But constitutional provisions can- not he thus evaded. It is the substance and not the form which controls as has indeed been established by repeated decisions of this court. "Nothing can be clearer than what the Constitution in- tended to guard against was the exercise by the general govern- ment of the power of directly taxing persons and property with- in any state through a majority made up from the other states. It is true that the effect of requiring direct taxes to be appor- tioned among the states in proportion to their population is necessarily that the amount of taxes on the individual taxpay- er in a state having the taxable subject-matter to a larger extent in proportion to its population than another state has, would be less than in such other state, but this inequality must be held to have been contemplated, and was manifestly designed to operate to restrain the exercise of the power of direct taxation to extraordinary emergencies, and to prevent an attack upon accumulated property by mere force of numbers. "It is not doubted that property owners ought to contribute in just measure to the expenses of the government. As to the states and their municipalities, this is reached largely through the imposition of direct taxes'. As to the Federal government, it is attained in part through excises and indirect taxes upon luxuries and consumption generally, to which direct taxation may be added to the extent the rule of apportionment allows. And through one mode or the other, the entire wealth of the country real and personal, may be made, as it should be, to con- tribute to the common defense and general welfare, "But the acceptance of the rule of apportionment was one of the compromises which made the adoption of the Constitution possible, and secured the creation of that dual form of govern- ment, so elastic and so strong, which has thus far survived in unabated vigor. If, by calling a tax indirect when it is essen- tially direct, the rule of protection could be frittered away, one of the great landmarks defining the boundary between the nation and the states of which it is composed, would have dis- appeared, and with it one of the bulwarks of private rights and private property. § 19] THE POLI.OOK CASE. 41 "We are of opinion that the law in question, so far as it levies a tax on the rents or income of real estate, is in violation of the Constitution, and is invalid." ^* Both sides moved for a reargument. This, Mr. Justice Jack- son left his death bed to attend. A majority of the court, Jus- tices Harlan, "White, Brown, and Jackson, dissenting, then ad- hered to the opinion that taxes on the rents or income of real estate were direct taxes. The same majority. Judge Shiras, who on the former hearing had voted to the contrary, now voting with them,^* held further that taxes on personal property or on the income of personal property were likewise direct taxes, and that the invalidity of these parts of the tax invalidated the re- mainder since the statute constituted one entire system of tax- ation.^® Upon the reargument Mr. Justice Shiras, who had voted upon the former decision against the proposition that the pro- 14 Ibid. 157 U. S. 582, 583. the judges, who finally held the law 15 The official report does not state to be constitutional, was wavering- how he voted upon the first decision ; in the first decision, this distin- but that his vote was cast in favor guished Judge Shiras went to him of the validity of the statute was and implored him to stand by the- published in the newspapers of the constitutionality of the law and day has never been contradicted, argued the case with him to sustain His classmate, Theodore Bacon, of the law; that on the second hearing- the Rochester bar, told the writer Judge Shiras never gave this man that he, between the two decisions, nor the court to understand that he argued with Judge Shiras that the was himself being revolutionized or latter's position was unsound. The had been revolutionized; that the- change of the Judge's vote made court was as much astonished as him the target of much abuse in the country at his extraordinary the newspapers and In Congress, but somersault, and when he did do it this did not impair the esteem in he gave no evidence or reason, but which his character was held by quietly and without an opinion gave those who knew -him. The following his voice for the overriding of the extract from a speech made by Ben- very law which he had voted to sus- ton McMillin, of Tennessee, in the tain a few days before." (Cong. House March 2nd, 1897, states a Rec, 2d Sess., 54th Cong., 2656.) fact not generally known, but the For defenses of Judge Shiras, see truth of which, so far as the pres- speeches in the House by Frank H. ent writer's researches have extend- Bartlett, of New York, Fby. 20, 1897 ed, has never been challenged: "If (Cong. Rec, 2nd Sess., 54th Cong., the gentleman reaches to the bot- 2067 ) , and John Dalzell, of Penn- torn of this case and gets at the real sylvania (Cong. Rec, 2d Sess., 54th fact, I will get him to come to me Cong., 2653) March 2nd, 1897. candidly or to the House candidly ^^ Pollock v. Farmers' Lawn & and say whether he has not found Trust Co. 158 U. S. 661, 39 L. ed.. these to be the facts. When one of 1134, 15 Sup. Ct. Rep. 912. 42 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§19 visions as to rents and income from real estate invalidated tlie whole Act, asked the Attorney General whether the latter saw any distinction so far as the constitutionality of the statute was concerned between a tax upon rents and one upon the in- come of personal property. Mr. Olney promptly replied that he did not. Had a strong argument been made in support of such distinction, it is not impossible that the vote of Judge Shiras would have been cast as it was before. It is not unlikely, however, that the Administration preferred to have the whole Act set aside rather than to have the same enforced with a dis- crimination in favor of landowners. The arguments then presented in support of the legislation are easily accessible. They may be found in the dissenting opinions contained in the reports together with the briefs and speeches of counsel therein summarized.'''' The subsequent his- torical discussion by Professor Edwin E,. A. Seligman, the reader may find it convenient to have here included. "The critical question in the convention was that of the basis of represention. The larger states naturally demanded a rep- resentation which should be proportioned either to wealth or to population, or to some similar criterion; the smaller states, on the other hand, held out strongly in favor of equal repre- sentation. The first contest took place over the representation in the upper House. * * * The real fight came not over West and East, but over Worth and South. The committee of five recommended the apportionment in the first legislature of twenty-six members to the South and thirty members to the North. This recommendation was referred back to another committee composed of one representative from each state, and the report of this committee on July 10 changed the numbers to thirty-five to the North as against thirty to the South. After vain efforts on the part of the southern states to increase their numbers, the recommendation was adopted. Then arose the question of future representation. According to the report of the committee of five, the matter was to be left in the hands of 17 The most complete abstract is 1119) which is much more full contained in the Lawyers Edition than that in the offioial reports ( 157 Annotated (39 L. ed. 763-809, 1109- U. S. 442-553, 158 U S. 602-617). § 19] THE POLLOCK CASE. 43 the legislature. But as a majority of the legislature had now been decided to consist of northern members, the North would have the whip-hand. Eandolph accordingly proposed an amend- ment whereby the legislature should 'cause a proper census and estimate to be taken once in every term of years.' This, however, failed of adoption. On July 11 Williamson, of North Carolina, introduced a substitute motion providing that a periodical census should be taken of the free inhabitants of each state, 'and three-fifths of the inhabitants of other de- scription,' and that representation should be apportioned ac- cordingly. The three-fifths clause was thus again brought to the attention of the convention, and was attacked by the radics- als, both northern and southern. Tor the extreme southerners now wanted to have all the slaves counted equally with the whites, and the extreme northerners were equally insistent up- on having none of the slaves counted. Through a combina- tion of these radicals, both North and South, Williamson's reso- lution was voted down, and the convention seemed to have arrived at a dead-lock. "It was at this juncture that, on the morning of July 12, when the whole fate of the convention appeared to hang upon the decision as to the representation of slaves, Gouverneur Morris introduced his famous motion to add to the clause em- powering the legislature to vary the representation according to the principles of wealth and numbers of inhabitants, a pro- viso 'that taxation shall be in proportion to representation.' This was an entirely new suggestion, although the proposition in its reverse form — that representation should be proportioned to taxation — had occasionally been advanced, both in the Con- tinental Congress and in the convention. The aim of Morris was to overcome the objections of the extremists on both sides. He hoped that the southerners might be induced to accept the three-fifths proposition, rather than to insist upon full repre- sentation, because it would then proportionately diminish their quota of contribution; and that, on the other hand, it would appeal to the extremists of the North, on the ground that if the three-fifths clause passed, the South would have to pay some- thing, at all events, for their slaves. As Madison puts it : 'The 44: CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§19' object was to lessen the eagerness on one side for, and the op- position on the other side to, the share of representation claimed by the southern states on account of the negroes.' Morris himself, who was a strong nationalist, and not disposed to re- strict the powers of the new government in any way, stated subsequently that he had 'only meant the clause as a bridge to- assist us over a certain gulf.' "It was, however, at once pointed out by Mason, who ad- mitted the justice of the principle, that the clause was badly worded, in that it might drive Congress to resort to the dis- credited plan of requisitions. Morris, who thereupon conceded, that his motion was open to these objections, 'supposed they would be removed by restraining the rule to direct taxation,' and added: 'With regard to indirect taxes on exports and im- ports, and on consumption, the rule would be inapplicable.'' Wilson as well as Pinckney approved of the suggestion, and Morris, having varied his motion by inserting the word 'direct,' the convention unanimously accepted it so that it read 'pro- vided always that direct taxation ought to be proportioned to representation.' "From this recital of the facts two points are clear. First,. the introduction of the words 'direct taxes' had no reference to any dispute over tax matters, but was designed solely to solve the difficulty connected with representation ; and secondly, direct taxation, according to Morris's motion, was to be proportioned, not to population alone, but to wealth as well as population. "After the adoption of the amendment, the southerners de- sired to have the matter more precisely determined. Pinckney stated that he wanted the rule of wealth to be ascertained, and not left to the pleasure of the legislature. Eandolph lamented that such a species of property as slaves existed; but inasmuch as it did exist, the holders of it would require this security. He thereupon made a motion which, after a slight amendment by Wilson, was adopted by the convention. This made Morris's clause read as follows: 'Provided always that the representa- tion ought to be proportioned according to direct taxation ; and in order to ascertain the alterations in the direct taxation which may be required from time to time by the changes in the rela- § 19] THE POLLOCK CASE. 45 tive circumstances of the states, Resolved that a censiis be taken within two years from the first meeting of the legislature of the United States, and once within the term of every — years afterwards, of all the inhabitants of the United States, in the manner and according to the ratio recommended by Congress in their resolution of the 18th of April, 1783, and that the leg- islature of the United States shall apportion the direct taxation accordingly.' The ratio referred to, it will be remembered, was that of counting a negro as three-fifths of a freeman. "On the next day final action was taken. The original prop- osition, it must not be forgotten, had been to regulate represen- tation according to wealth and numbers. In the meantime that convention had just adopted Randolph's resolution that repre- sentation should be proportioned to direct taxation, and that direct taxation should be proportioned to population. Randolph therefore now moved that the original motion be amended by striking out the word 'wealth.' Gouverneur Morris objected strongly to the amendment, but it was adopted by an almost unanimous vote. Thus the matter was settled that representa- tion should be proportioned to direct taxation, and that direct taxation should be proportioned to population, counting a negro as three-fifths of a freeman. On July 16, the report of the grand committee, which contained this amendment, was adopted by a bare majority, and thus the great compromise was effected. * * * "The term 'direct tax' is used in one other clause of the Con- stitution, where it is put in connection with the capitation tax. On August 6 the committee on detail reported a resolution that 'no capitation tax shall be laid imless in proportion to the census hereinbefore provided to be taken.' This originated in the con- test over the slave-trade and the possible import duty on slaves. The southerners evidently feared that Congress, with its north- ern majority, might decide to make an arbitrary computation of population, and thus saddle the south with an undue share of taxation through a tax on slaves. It was in order to prevent this that the capitation clause was introduced. It awakened no objection at all, since it was practically a confirmation of the compromise that had been adopted, and it came before the con- 46 CONSTITUTIONAL OBJECTIONS TO THE STATUTE, [§19 vention for final vote on September 14. In the meantime vari- ous suggestions had been made looking toward the securing from the delinquent states payment of the old requisitions for which they had been liable under the Confederacy. Eeade, of Dela- ware, in order to obviate this, or to use his own words, in order to prevent the attempt 'to saddle the states with the readjust- ment by this rule of past requisitions of Congress,' moved that the words 'Or other direct tax' be inserted after the word 'cap- itation.' He maintained 'that his amendment, by giving an- other cast to the meaning, would take away the pretext,' and his motion was adopted without any discussion. * * * "From the above review of the origin of the direct-tax clause it is clear that it was due simply and solely to the attempt to solve the diificulty connected with the maintenance of slavery. But for that struggle Gouverneur Morris would never have in- troduced the term 'direct tax,' and there would have been no reason to introduce it anywhere else. * * * "In the light of actual history, as it has been explained above, all these statements must be characterized as essentially erro- neous. It is true that when the Constitution was submitted to the different states for ratification, some jealousy of the powers granted to Congress was in a few instances manifested. But there was no difficulty in overcoming this objection. In the convention itself, however, which framed the Constitution, there was no trace of any such conflict in connection with the taxa- tion clause, just as we have seen that there was no effort and no disposition on the part of the convention to restrict the gen- eral tax powers of the government. The states did not even question the advisability of abandoning their rights to impose import duties, and every one agreed that the old system of re- quisitions must be done away with. There was no jealousy of large states on the part of small states that manifested itself at all in the discussion over the tax provisions; the sporadic allusions to the future development of the western states were found, as we have seen, only in the discussion of the original clauses affecting representation, and they played no role at all in the tax discussion. The introduction of the words 'direct tax' in the phrase 'no capitation or other direct tax' had, as we § 20] PEOGEESSIVE TAXATIOIT. 47 know, nothing whatever to do with the compromise of which Mr. Choate and the court speak. Far from being a question of the small states against the large states, or of the seaboard states against the western states, or of the states in general against the Federal government, the compromise . was due sole- ly to an effort of the slave states to protect the three-fifths rule. "That the Supreme Court of the United States was misled by the counsel into an historical interpretation which is beyond all doubt erroneous, is deplorable." ^° § 20. Constitutional objections to progressive taxation. It seems that objections to the validity of the statute because it imposes progressive taxation levying an additional tax upon incomes in excess of $20,000, which is gradually increased from one to six per centum as the income exceeds specified amounts, cannot be sustained. Progressive taxation has been severely criticised by many statesmen arid economists.^ The 18 Seligman's Income Tax, pp. 548, 649-553, 554-555, 556, 557- 58. See also the speech, of Senator Borah May 3 and 4, 3909, Cong. Eecord 61st. Cong. 1st. Sess. 1682- 1699. § 20. 1 There is some dispute as to whether Solon imposed a progres- sive tax upon the produce of land. Boeckh Puilic Economy of the Athe- niwns. Am. Ed., Book IV, Ch. V. Seligman Progressive Taxation, 2d ed., p. 11. But a progressive In- come Tax proportioned as to classes seems to have prevailed in Athens (B. C. 380) when Nausinicus was Archon. Hildebrand Jahrbiicher fiir Nationul-Oekonomie und Statis- tilc, viii, 453 et seq. Seligman Pro- gressive Taxation, 12. M. G. Platon La Democratie et le Regime Fiscal a Athenes, a Rome et de nos Jours, pp. 210-211; Boeckh's Public Econ- omy of the Athenians, 669; Parieu's Traiti des Impots, i, 416. Seligman Progressive Taxation, 13. Progres- sion is also found in some of the taxes during the middle ages, which were proportioned upon both prop- erty and income. Seligman Progres- sive Taxation, 15, 16. A graduated Poll Tax appears in the middle ages. but it was graduated in accordanc« with the class to which the individu- al belonged, instead of with the amount of property that he owned. Seligman Income Tax, 6. In Flor- ence, in 1443, the progressive rate was first applied to the tax upon income known as the decina graziosa, and, in 1480, to the Scala, a tax up- on rents. [Supra, § 1.) During the early part of the eighteenth century, progressive in- come taxation is also found in Hol- land and Saxony. Seligman, Pro- gressive Taxation, 2d ed. 26. Dur- ing the French Revolution, in 1793, the Convention levied a progressive tax upon the incomes of those in excess of 1,000 livres for each mem- ber of the family, which confiscated the entire surplus over 9,000 livres. (Gomel, Histoire Finamciere de la Legislative et de la Convention, i, (1902), 114-121, Seligman, Progres- sive Taxation, 30.) Under the Di- rectorate, progressive taxation in the form of forced loans was levied twice in 1795 and 1798. Neither of these, however, was successful in raising much revenue. In 1796, in Holland, a progressive income tax was levied which for a year varied 48 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 20 from 3 to 37i per cent., in propor- tion to the income. In Austria, a progressive class tax was imposed in 1799, which continued until 1830, with the rates varying from 2J to 20 per cent. (Parieu, Histoire des Jm.pots generoMX sur la Propri4t6 et le Revenu, 152-154. Of. also his TraiU des ImpSts, i, pp. 442 et seq. Seligman, Progressive Taxation, 2d ed. 38, 39.) It seems first to have been in- troduced in the United States by the War Income Tax. The Act of July 1, ]862, increased the tax from three to five per cent, whra the income exceeded $10,000. 12 Stat, at L. 432, § 90, quoted infra. That of March 3, 1865, which raised the tax to 'five per cent, on incomes between $600 and $5,000, imposed a duty of ten per cent, on the excess over $5,000. Act of March 3, 1865, § 1, 13 Stat, at L. 469, 479. The Act of March 2, 1867, repealed all graduation upon in- comes in excess of $1,000, below which sum there was an exemption. Act of March 2, 1867, § 13, 14 Stat, at L. 471, 477. There was no other graduated taxation of incomes by the United States before the Act of October 3, 1913, although a grad- uated tax upon legacies was con- tained in the Act of July 6, 1797, 2 Stat, at L. 148, chap. 17; Act' of July 1, 1862, chap. 119, §§ 1, 2, 12 Stat, at L. 433, 485 (U. S. Comp. Stat. 1901, p. 2040), and the Ware Revenue Act of June 13, 1898, chap. 448, §§ 29, 30, 30 Stat, at L. 448 (U. S. Comp. Stat. 1901, p. 2286). In England, there is no progres- sive graduated income tax, although a super-tax is imposed upon incomes in excess of £5,000, with a slight progression in the taxation of in- comes below that sum. 10 Edw. 'VII, e. 8, pt. I'V. A progressive graduated income tax exists in most countries in Europe. See Seligman, Progres- sive Taxation, passim, supra, § 13. During the Civil War, Progressive Income Taxes were imposed in North Carolina (N. C. L. of 1861 ) Georgia (Laws of 1863, Extra Sess., Title XVIII, § 156) and West Virginia (L. 1862-1863, Ch. 64, § 8). The result was, in many instances, gross oppression. A brewer in Georgia had invested fifty dollars and made fifteen hundred dollars within the year, his tax was assessed at twenty two hundred and twenty-five dol- lars. When he said that this was more than all the property which he owned, the tax collector replied, "Very well, give me all you have and I will take a note for the rest." (Southern Watchman, June 17, 1863, quoted in Seligman, Progressive Taxation, 2nd ed., p. 105, note.) When Turgot was ofi'ered a project of progressive taxation, he wrote on the margin: "II faut executer I'au- teur, et non le projet." The author, not the project, should be executed. Paul Leroy-Beaulieu said: "L'impot progressit a pour mgre I'envie et pour fille I'oppression." (Traite d'Economie Politique, 2nd ed., 1896, iv, p. 764.) The mother of the pro- gressive tax is envy and her daugh- ter oppression. These and othei criticisms are quoted and cited in Seligman's Progressive Taxation, pp. 141, 142, and passim. Lecky "Democracy and Liberty," Vol. 1, p. 286, et seq: "It is ob- vious that a graduated tax is a di- rect penalty imposed on saving and industry, a direct premium of- fered to idleness and extravagance. * * * It is at the same time per- fectly arbitrary. When the princi- ple of taxing all fortunes on the same rate of computation is aban- doned, no definite rule or principle remains. At what point the higher scale is to begin, or to what degree it is to be raised, depends wholly on the policy of Governments and the balance of parties. The ascend- ing scale may at first be very mod- erate, but it may at any time, when fresh taxes are required, be made more severe, till it reaches or ap- proaches the point of confiscation. No fixed line or amount of gradua- tion can be maintained upon princi- ple, or with any chance of finality. The whole matter will depend upon the interests and wishes of the elec- tors; upon party politicians seeking § 20] PKOGKESSIVE TAXATIOIT. 49 for a cry and competing for the votes of very poor and very ignor- ant men. Under such a system all large properties may easily be made unsafe, and an insecurity may arise which will be fatal to all great finan- cial undertakings. The most serious restraint on parliamentary extrava- gance will, at the same time, be taken away, and majorities will be invested with the easiest and moat powerful instrument of oppression. Highly graduated taxation realizes most completely the supreme danger ■of democracy, creating a state of things in which one class imposes on another burdens which it is not .asked to share, and impels the State into vast schemes of extravagance, under the belief that the whole cost will be thrown upon others. The belief is, no doubt, very fallacious, but it is very natural, and it lends itself most easily to the claptrap of ■dishonest politicians. Such men "will have no difBculty in drawing impressive contrasts between the luxury of the rich and the necessi- ties of the poor, and in persuading ignorant men that there can be no harm in throwing great burdens of exceptional taxation on a few men, who will still remain immeasurably richer than themselves. Yet no truth of political economy is more certain than that a heavy taxation of capital, which starves industry and employment, will fall most se- verely on the poor. Graduated taxa- "tion, if it is excessive or frequently raised, is inevitably largely drawn from capital. It discourages its ac- cumulation. It produces an insecu- rity which is fatal to its stability, and it is certain to drive great masses of it to other lands." McCulloch on "Taxation" {Ixm- don, 1845), pp. 140, 1«, et sei?. "It is argued that, in order fairly to proportion the tax to the ability of the contributors, such a graduated scale of duty should be adopted as should press lightly on the smaller class of properties and incomes, and increase according as they become larger and more able to bear taxa- tion. We take leave, however, to Foster Income Tax. — 4. protest against this proposal, which is not more seductive than it is un- just and dangerous. * * * If it eitlier pass entirely over some classes, or press on some less heavily than on others, it is unjustly im- posed. Government, in such a case, has plainly stepped out of its proper province, and has assessed the tax, not for the legitimate purpose of ap- propriating a certain proportion of the revenues of its subjects to the public exigencies, but that it might at the same time regulate the in- comes of the contributors; that is, that it might depress one class and elevate another. The toleration of such a principle would necessarily lead to every species of abuse. That equal taxes on property or income will be more severely felt by the poorer than by the richer classes is undeniable; but the same is true of every imposition which does not subvert the subsisting relations among the different orders of socie- ty. * * » Let it not be supposed that the principle of graduation may be carried a certain extent, and tlien stopped. * * * In such matters the maxim of obsta principiis should be firmly adhered to by every pru- dent and honest statesman. Gradu- ation is not an evil to be paltered with. Adopt it and you will effectu- ally paralyze industry and check ac- cumulation; at the same time that every man who has any property will hasten, by carrying it out of the country, to protect it from con- fiscation. The savages described by Montesquieu, who to get at the fruit cut down the tree, are about as good financiers as the advocates of this sort of taxes. Wherever they are introduced security is at an end. Even if taxes on income vpere otherwise the most unexcep- tionable, the adoption of the prin- ciple of graduation would make them about the very worst that could be devised. The moment you abandon, in the framing of such taxes, the cardinal principle of ex- acting from all individuals the same proportion of their income or of their property, you are at sea 60 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§20 without rudder or compass, and there is no amount of injustice and folly you may not commit." Bastable "Public Finance" (1895), pp. 292, 293, 294, 555. "It is en- tirely arbitrary. The possible scales are infinite in number, and no sim- ple and intelligible reason can be as- signed for the selection of one in preference to its competitors. * * * There is no self-acting principle by which to determine the scale of pro- gression. * * * All depends on the will of the legislature, i. e. in most modern societies, on the votes of persons who will not directly feel the charges placed on the higher in- comes and will probably believe that they will be gainers by them." "But behind any actual scale or progres- sion lies the unavoidable danger of arbitrary extension in the future. There is" as yet no limiting principle discovered which will determine up to what point progressive death- duties shall be carried, and at which their advance should cease. Appeals to the supposed natural rights of owners, or to the equally imaginary rights of the State, can supply no solution of this problem." Leroy-Beaulieu "Traits d'Economie Politique" (1896), vol. IV, pp. 750, 764. "L'impSt progressif constitue une veritable spoliation. II viole de plus la rSgle, 6tablie par toute la civilisation, que I'impOt doit 6tre librement consent! par le contribua- ble: car, il est bien clair que, dans ce cas, c'est la masse des contribu- ables qui rejette le gros poids de I'impOt sur quelques-uns, et que ceux-ci ne consentent pas, meme ta- citement, a la surcharge dont on veut les grever. Quand le taux de I'impOt est 6gal pour tons, on peut considSrer que le vote de Timpflt par les Chambres comporte un acquiesce- ment implicite de tons les contribu- ables; autrement, non. * ♦ * Tout syst6me d'impSt progressif, si attS- nug qu'il soit, est inique et dangere- reux." Leroy-Beaulieu "Science des Fi- nances," vol. I, pp. 139, 140. "Ainsi, la thfiorie de I'impSt progressif n'est pas rationnelle; elle ne sort pas d'une analyse exacte des faits so- ciaux; elle est superflcielle ; elle n'est pas une doctrine scientifique.. Cette thSorie est en outre dange- reuse, parce que, partant du principe de regality de sacrifice, elle a une tendance invincible a vouloir corriger les inSgalitSs sociales; il y a li un. entralnement qui est fatal." Paul Beauregard "Elements d'Eco- nomie Politique," p. 313. "Ce sys- teme, encore prSconisg aujourd'hui dans certains milieux, a sfiduit jadis- de grands penseurs comme Montes- quieu et J.-B. Say. II prSte pour- tant aux critiques les plus graves. II est injuste, car il ne proportionne pas la charge au benefice obtenu et rejette sur les uns les dSpenses qui doivent profiter aux autres: incon- venient particuli6rement grave dans un pays de suffrage universel, oil les. dSpenses publiques sont votSes par des dfiputfis nommSs par tous les citoyens. II est dangereux, car, ab- sorbant une forte portion des gros revenus, il tend a dficourager I'esprit d'entreprise et le gout de I'Spargne. Enfin il est arbitraire, car on ne peut determiner rationellement la progression susceptible d'Sgaliser les. charges imposfies a chacun." R6n6 Stourm "Dictionnaire d'Eco- nomie Politique" vol. II, p. 21.. "D'une part, la progression, livrSe a. elle-mSme, aboutit plus ou moins a la spoliation. D'autre part, si les gouvernments veulent corriger le jeu- excessif de son mfichanisme spontanS, I'arbitraire devient la seule rfegle.. Spoliation ou arbitraire, tels seraient done les derniers mots de I'impOt progressif." liid. pp. 24, 25. "Telles sont done les consequences possibles du sys- t6me progressif: nivellement des for- tunes, abolition des heritages, en un mot, spoliation arbitraire s'abritant derrifere un tarif fiscal. * * * Sous, la Revolution, les emprunts forces et progressifs absorbSrent la totalite des revenus qualifies de superflu; ils prirent 50 p. 100 des revenus abon- dants et 100 p. 100 des revenus su- perflus. Renouveles a trois reprises differentes, en 1793, 1795 et 1799, ces emprunts progressifs provoqufe- rent tant de recriminations, d'injus- tices et de souffrance ^u'on attribua. § 20] PEOGEESSIVE TAXATIOIT. 51 en grande partie, au dernier d'entre great want and destitution. Equali- eux la recrudescence de mgcontente- ty and manhood therefore demand ment public qui prficfeda le coup and require uniformity of burden in d'Etat du 18 Brumaire. Ce sont 13. whatever is the subject of taxation." les dangers extrSmes qui,' a. juste See also argument of W. D. Guthrie titre, font reculer devant I'applica- before Governor Black of N. Y. tion, mSme nijderge, du principe de against Dudley Bill May 6, 1897. la progression." Professor Edwin R. Seligman aays : "To tax the larger incomes at a "While progre&sion of some sort is. higher percentage than the smaller, demanded from the standpoint of is to lay a tax on industry and earn- ideal justice, the practical difficul- ing; to impose a penalty on people ties in the way of its general appll- for having worked harder and saved cation are well nigh insuperable, more than their neighbors. It is Progression is defensible only on the- partial taxation, which is a mild theory that the taxes are so ar- form of robbery. A just and wise ranged as to strike every individual legislation would scrupulously ab- on his real income. In default of stain from opposing obstacles to the a single tax on incomes, however, acquisition of even the largest for- which is visionary, practicable tax tune by honest exertions. Its im- systems can reacli individual in- partiality between competitors would comes only in an exceedingly rough consist in endeavoring that they and round-about way. Under such should all start fair, not that, practical conditions it is doubtful whether they were swift or slow, whether greater individual justice they should all reach the goal at will be attained by a system of pro- once." Mill's Political Economy, II, gression than by the simple rule of Book, II, Sec. 3. proportion; and it is highly ques- Bavid A. Wells "The Communisn tionable whether the ideal advan- of a Discriminating Income Tax," tages of progression would not be North American Review, CXXX, outweighed by its practical short- 236, 239. "If it were proposed to comings. For the United States at levy a tax of five per cent, on an- all events, the only important tax to nual incomes below $2,000 in which the progressive scale is at all amount, and to exempt all incomes applicable at present is the inherit- above that sum, the unequal and ance tax. For the future develop- discriminating character of the tax ment of the idea we must rely on would be at once apparent; and yet an improvement in the tax adminis- an income tax exempting all incomes tration, on a more harmonious meth- below $2,000 is equally unjust and od of correlating the public revenues discriminating. In either case the and on a decided growth in the exemption cannot be founded or de- alacrity of individuals to contribute fended on any sound principles of their due share to the common bur- free constitutional government. It dens." Progressive Taxation, 2n(J is a simple manifestation of tyran- ed., p. 324. See Max West, Inheri- nical power, under whatever form of tance Tax, Columbia College, 1893, government it may be enforced." pp. 124-132. Ibid. 245, 246. "It is a vital and On the other hand. Progressive constitutional question, demanding Taxation has been defended by absolute equality that is here in- Thomas Payne, Rights of Man^ volved and at stake.. Any exemp- 1791 ; by Adolf Wagner, Finantwis- tions whatever, small or great, ex- senschaft, Vol. ii, 1880, 2nd ed. 1890; cept to the absolutely indigent, is by Francis A. Walker, Political purely arbitrary; and the principle. Economy, 1st ed. 1883, pp. 479-480; once allowed, may obviously be car- by W. W. Marshall, The Industrial ried to any extent. Any exemption Hand Book, Garden City, 1888, Cu- of any portion of the same class of mulative Taxation, Winfield, Kan., property or incomes is an act of 1890, The Tax Solution, Berlin, Pa., charity which every American ought 1893, The Graduated Tax Payer, vol. to reject upon principle and witli I, no. 1, to vol. Ill, no. 2, Berlin, scorn, except under circumstances of Pa., 1895-1897, Industrial Charts 53 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§20 Supreme Court of the United States, however, has sustained progressive inheritance taxes, both State^ and Federal.^ In the latter case the court said: "The review which we have made exhibits the fact that taxes imposed with reference to the ability of the person upon whom the burden is placed to bear the same have been levied from the foundation of the govern- ment. So, also some authoritative thinlcers, and a number of economic writers, contend that a progressive tax is more just and equal than a proportional one. In the absence of consti- tutional limitation, the question whether it is or is not is legis- lative and not judicial. The grave consequences which it is asserted must arise in the future if the right to levy a progres- sive tax be recognized involves in its ultimate aspect the mere assertion that free and representative government is a failure, and that the grossest abuses of power are foreshadowed unless the courts usurp a purely legislative function. If a case should ever arise, where an arbitrary and confiscatory exaction is im- posed bearing the guise of a progressive or other form of tax, it will be time enough to consider whether the judicial power can Showing at a Single Glance the Bad ers, contend that a progressive tax Efjects of Monopolistic Over-Profit- is more just and equal than a pro- ing, the Prevention of the Same, and portional one. In the absence of con- the Good Results to Follow, Berlin, stitutional limitation, the question Pa., 1895, Deprofitization, Chicago, whether it is or is not is legislative 1899; and by Lieutenant-Governor and not judicial. The grave conse- Percy Danial, The Sunflower Tangle quences vfhich it is asserted must over Problems of Taxation, Girard, arise in the future if the right to Kan., 1894, A Crisis for the Hus- levy a progressive tax be recognized handman with Supplement contain- involves in its ultimate aspect the ing Graduated Tax Bill, Girard Kan., mere assertion that free and repre- 1889, A Lesson of To-day and a ques- sentative government is a failure." tion of To-morrow, Girard, Kan., Mr. Wayne McVeagh quotes this and 3892; and by a number of French says: "Capitalists exhibit a aingu- and other continental economists, lar stupidity in resisting every at- See Dufay, L'Impot Progressif en tempt to impose upon them their France, 1904; J. W. von der Lith, proper share of the public burdens." Meue vollstandig ermesene Abhand- North American Eevievf, CLXXXII lung von den Steuern, 1766, sec. .S6; p. 825. ' ' von Scbeel, Die progressire Besteue- Non nobis tantas componere lites. rung, and others. Ihey are well col- ^ Magoun v. Illinois Trust & Sav. lected in Seligman's Progressive Bank, 170 U. S. 283, 42 L ed 10.37' Taxation, passim. 18 Sup. Ct. Rep. 594; Nunnemacher The present Chief Justice of the v. State, 129 Wis. 190, 9 L.R.A (N United States in Knowlton v. Moore, S.) 121, 108 N. W. 627 9 Anii Gas" 178 U. S. 41, 109, no, 44 L. ed. 969, 711. ' 996, 997, 20 Sup. Ct. Rep. 747, said : 3 Knowlton v. Moore, 178 U S 41 "So, also some authoritative think- 44 L. ed. 969, 20 Sup.' Ct. Rep. 747*. erg, and a number of economic writ- § 22] UNIFORMITY OF TAXATION. 53 afford a remedy by applying inherent and fundamental prin- ciples for the protection of the individual, even though there be no express authority in the Constitution to do so." * The su- preme court of Wisconsin has sustained a progressive income tax.* § 21. Objections to the constitutionality of the income tax on account of the small numbers of persons affected by it. An objection to the validity of the income tax may be raised because its burden is confined to persons having an in- come of above $3,000. It thus excludes from its incidence a large portion of the population of the United States, and is; in effect class legislation confined to those who, if not conceded to be wealthy, must at least be admitted to be well-to-do. It may consequently be contended that the tax is a violation of that provision of the Constitution which requires that "all' Duties, Imposts, and Excises shall be uniform throughout the United States ; " ^ and also to the Fifth Amendment, which provides that no person shall "be deprived of life, liberty, or property without due process of law ; nor shall private property be talcen for public use without just compensation." The claimi is further made that it denies the persons taxed "the equali protection of the laws." But that language is to be found only in the Fourteenth Amendment, which is a limitation upon the powers of the States alone. § 22. Uniformity of taxation required by the Constitu- tion. The Constitution provides that "all duties, imposts, and excises shall be uniform throughout the United States." * Thi^ provision was not contained in the report to the Federal Con- vention of the Committee of Detail. In the subsequent dis- cussion in the Convention of the clause granting Congress the power of taxation, McHenry of Maryland and General Pinck- ney of South Carolina submitted a proposition which gave to the Congress no power to fix ports of entry, except where the State legislature had refused to act upon the subject and re- inid. 178 U. S. 41, 109, 110, L. ed. 400, 34 Sup. Ct. Rep. 272, 44 L. ed. 969, 996, 997, 20 Sup. Ct. printed in full infra, Part V. Rep. 747. § 21. 1 Constitution, Article I, s State ex rel. Bolens v. Frear, 148 § 8. Wis. 456, 134 N. W. 673, 135 N. W. § 22. l Constitution, Article I,. 164, Ann. Gas. 1913A, 1147, writ § 8. See supra, § 7. of error dismissed 231 U. S. 616, 58 54 COITSTITUTIOWAI, OBJECTIONS TO THE STATUTE. [§ 22 quired that "all duties, imposts and excises, prohibitions and restraints, laid or made by the Legislature of the United States shall be uniform and equal throughout the United States." These with other propositions were referred to a committee com- posed of a member from each state.* A few days later the com- mittee reported a recommendation of the following clause: "jN"or shall any regulation of salaries or revenues give prefer- ence to the ports of one state over those of another, or oblige vessels bound to or from any state to enter, clear, or pay duties in another, and all tonnage, duties, imposts and excises laid by the Legislature shall be uniform throughout the United States." ' In the discussion upon this recommendation the word "ton- nage" was stricken out as comprehended in "duties." * "On the question on the clause of the report . . . (and all duties, imposts, and excises, laid by the Legislature, shall be uniform throughout the United States), it was agreed to nem. con." Sub- sequently, the clause now under consideration was by common consent annexed to the clause concerning the power of taxation with the word "and" changed to "but." * The uniformity in duties, imposts, and excises must exist throughout the whole territory of the United States, including the Territories and the District of Columbia; while in the ap- portionment of direct taxes Congress has discretion to relieve the Territories or the District of Columbia from such taxation.® It has been said that uniformity of taxation means an equal .■share in the burdens of the same, and includes not only uniform- ity in tie rate of percentage, but also in the mode of assessment prescribed by law.'' A tax is uniform under the Constitution of the United States, when it operates with the same force and ef- 2 MadifitHi Papers, Elliott's De- 6 Loughborough v. Blake, 5 Wheat, ibates, 2d ed. vol. V., p. 479. 317, 5 L. ed. 98. ■S Ilid, p. 483. 1 BaiVroad Tax Cases (County of ■4 Madison Papers, Elliott's De- Saaita Clara v. Southern Pacific B. fcates, 2d ed. vol. V., p. 503. In the B. Go.) 9 Sawy. 165, 18 Fed. 385; printed journal. New Hampshire County of San Mateo v. South&m and South Carolina entered in the Pacific B. B. Co. 8 Sawy. 281, 13 negative. Madison states that their Fed. 147; County of San Mateo v. opposition was confined to the clause Southern Pao. B. B. Co. 8 Sawy. 238, which forbade Congress to oblige 13 Fed. 722, 735; Exchange Bank of vessels to enter, clear, or pay duties Golumius v. Bines, 3 Ohio St. 1, 14; in another state than that to or Inhabitants of Cheshire v. County from which they were bound. Ibid, Gomanissioners, 118 Mass. 386, 28 p. 503. L. ed. 798, 802, 5 Sup. Ct. Kep. 247. Blbid., p. 543. •■§ 23] EXEMPTIONS. feet in every place where the subject of it is found.* There are, however, dicta in judicial opinions which intimate that this con- stitutional provision prevents discrimination against individu- als as well as against localities.' A tax is uniform which operates with uniformity upon all persons of the same class, engaged in the same trade, or owners •of the same property." It has been held that uniformity of tax- ation exists, although persons holding less than a specified small amount of the property affected are exempted from its opera- tion." Thus, a tax on a bank of all deposits under a specified sum was held uniform. The court there, however, laid stress upon the fact that the tax was in name a tax on the bank and not on the depositors.'^ § 23. Invalidation of the tax by the exemptions. A more serious objection arises under the claim that the new law is in 8 Head Money Cases, 112 U. S. York, New Jersey, Pennsylvania, 580, 594, per Mr. Justice Miller: Ohio, Illinois and California — pos- "The uniformity here described has sessed forty per cent of the assessed reference to the various localities property of the United States, and in which the tax is intended to oper- had just about forty per cent of the ate. 'It shall be uniform throughout population. But at the same time the United States.' Is the tax on these same seven states had fully tobacco void, because in many of three-fourths of the entire income the states no tobacco is raised or tax levied by the Federal Govern- manuf actured ? Is the tax on dis- ment upon the entire country; or, to tilled spirits void, because a few put it differently, the states which states pay three-fourths of the rev- had sixty per cent of wealth and enue arising from it? The tax is population of the country paid only uniform when it operates with the about one-fourth of the entire tax." same force and effect in every place Is the Existing Income Tax Law In- where the subject of it is found, stitutional? by David A. Wells. The The tax in this ease, which, as far Forum, January, 1895, p. 541. An as it can be called a tax, is an excise ingenious argument that the exemp- duty on the business of bringing tion of agricultural stock or produce passengers from foreign countries consumed by the family of the pro- into this, by ocean navigation, is ducer made a law not uniform uniform, and operates precisely alike and so not constitutional, is made in every port of the United States by Amasa J. Parker, Jr., in 50 Alb. where such passengers can be land- L. J. 421. ed." So held also in Knowlton v. 10 Head Money Cases, 112 U. S. Moore, 178 U. S. 41, 44 L. ed. 969, 580, 584, 28 L. ed. 798, 800, 5 Sup. 20 Sup. Ct. Eep. 747. Ct. Pep. 247. 9 Caa-y V. Curtis, 3 How. 236, 242, n German Savings Bank v. Arch- 245, 11 L. ed. 576, 579, 581 ; German hald, 15 Blatchf . 398, Fed. Cas. No. Gompa/ny Bank v. AroKbald, 15 5,364. See City of 'New Orleans v. Blatchf. 398, Fed. Cas. No. 5,364; Fourchy, 30 La. Ann. 910, quoted United States v. Singer, 15 Wall, infra, § 8, note 26. Ill, 121, 21 L. ed. 49, 51. "In the l^ German Savings Bwnk v. Arch- case of the income tax enacted dur- hald, 15 Blatchf. 398, 401, Fed. Cas. ing the war period, seven states in No. 5,364. the year 1869 — ^Massachusetts, New 56 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 23 effect not a tax upon the persons whom it seeks to subject to its operation, but a confiscation of their property. The denomina- tion of a levy as a tax does not make it such.* Thus, it has been held that a levy of money by a state, although equally assessed, is not a tax when its proceeds are devoted to private and to public purposes.^ It has been held also to be an equally essential attribute of a tax that its burden be equally apportioned among the persons or the property which are subjected to it. The Su- preme Court of New Jersey said : "Taxation operates upon a community, or a class in a com- munity, according to some rule of apportionment. When the amount levied upon individuals is determined without regard to the amount or value exacted from any other individual or classes of individuals, the power exercised is not that of taxa- tion, but of eminent domain. A tax upon the persons or prop- erty of A., B., and C. individually, whether designated by name or in any other way, which is in excess of an equal apportionment among the persons, or property of the class of persons or kind of property subject to the taxation, is, to the extent of such excess, the taking of private property for a pub- lic use without compensation. The process is one of confisca- tion, and not of taxation." ' So, the Supreme Court of Kentucky said, speaking through Chief -Justice Robebtson : "An exact equalization of the bur- den of taxation is unattainable and Utopian. But still there are well-defined limits within which the practical equality of the Constitution may be preserved, and which, therefore, should be deemed unfavorable barriers to legislative power. Taxation may not be universal, but it must be general and uniform. Thus, if a capitation tax be laid, none of the class of persons thus taxed can. be constitutionally exempt upon any other §23. ^ Loan Association V. Topeka, Wall. 655, 20 L. ed. 455; Lowell v. 20 Wall. 658, 20 L. ed. 455 ; Gheamey Boston, 111 Mass. 454, 15 Am. Rep. V. Hooser, 9 B. Mon. 330; County 39; Cole v. LeGrange, 113 U. S. 1, of San Mateo v. Southern Pacific 28 L. ed. 896, 5 Sup. Ct. Eep. 416; R. R. Go. 8 Sawy. 238, 13 Fed. 722; Parkerslurg v. Brown, 106 U. S. County of Santa Clara v. Southern 487, 27 L. ed. 238, 1 Sup. Ct. Eep. Pao. R. R. Co. 9 Sawy. 165, 18 Fed. 442. 385 ; Lexington v. McQuillan's Heirs, 3 State v. Tovmship of Readington, 9 Dana, 513, 35 Am. Dec. 159; State 36 N. J. L. 66, 70; quoted with ap- V. Township of Readington, 36 N. J. proval in County of San Mateo v. L. 66, 70. Southern Pacific R. R. Co. 8 Sawy. z Loan Association v. Topeka, 20 238, 13 Fed. 722, 735. § 23] EXEMPTIONS. 57 ground than that of public service ; and, if a tax be laid on land, no appropriated land within the limits of the state can be con- stitutionally exempted, unless the owner be entitled to such immunity in consequence of public service. The legislature, in the plenitude of its taxing power, cannot have constitutional authority to exact from one citizen, or even one county, the entire revenue for the whole commonwealth. Such an exaction, by whatever name the legislature might choose to call it, would not be a tax, but would be undoubtedly the taking of private property for public use, and which could not be done consti- tutionally without the consent of the owner or owners, or without restitution of the value in money. The distinction between con- stitutional taxation and the taxing of private property for public use by the legislative will may not be defensible with perfect precision. But we are clearly of the opinion, that whenever the property of a citizen shall be taken from him by the sovereign will, and appropriated, without his consent, to the benefit of the public, the exaction should not be considered as a tax, un- less similar contributions be made by that public itself, or shall be exacted rather by the same public will from such constituent members of the same community, generally, as own the same kind of property. Taxation and representation go together, and representative responsibility is one of the chief conservative principles of our form of government. When taxes .are levied, therefore, they must be imposed on the public in whose name and for whose benefit they are required, and to whom those who impose them are responsible. And, although there may be a discrimination in the subject of taxations, still persons in the same class, and property of the same kind, must generally be subjected alone to the common burden. This alone is taxation according to our custom of constitutional taxation in Kentucky. And this idea, fortified by the spirit of our Constitution, is, in our judgment, confirmed by so much of the twelfth section of the tenth article as declares, 'ISTor shall any man's property be taken or applied to public use without the consent of his rep- resentatives, and without just compensation of his representa- tives, and without just compensation being previously made to him.' The object of this great guaranty was to secure every citizen against spoliation by a dominant faction or by a ra- pacious public power, acting in obedience to the will of a con- 58 CONSTITUTIOITAL OBJECTIONS TO THE STATUTE. [§ 23 stituent body for whose use his property may be taken, and from whom a similar contribution is required. It intended that pub- lic responsibility and the power of exaction for public use should be, in some degree, commensurable, and, therefore, it should be understood as providing that the public shall not take the property of any citizen for its own use without his consent or an equivalent in money or in similar contributions by itself. If this be not its practical effect, it is a mere brutum fulmen, and may always be evaded by exactions made in the false semblance of taxation." * In a later case the same court said, speaking through Chief- Justice Maeshall: "Conceding to the General Assembly a wide range of dis- cretion as to the objects of taxation, the kind of property to be made liable, and the extent of territory within which the local tax may operate, it is argued, in the opinion referred to, that there must be some limit to this legislative discretion; which, in the absence of any other criterion, is held to consist in the discrimination to be made between what may reasonably be deemed a tax, for which a just compensation is provided in the objects to which it is to be devoted, and that which is palpably not a tax, but which, under the form of a tax, is the taking of private property for public use, without just compensation. If there be such a flagrant and palpable departure from equity, in the burden imposed ; if it be imposed for the benefit of others, or for purposes in which those objecting have no interest, and are, therefore, not bound to contribute, it is no matter in what form the power is exercised — ^whether in the unequal levy of the tax, or in the regulation of the boundaries of the local govern- ment, which results in subjecting the party unjustly to local taxes, it must be regarded as coming within the prohibition of the Constitution designed to protect private rights against aggression, however made, and whether under the color of recognized power or not." * "When such exaction is made without reference to common ratio, it is not a tax, whatever else it may be termed; it is 4 City of Lexington v. McQuillwn's 6 Chewney v. Hooser, 9 B. Mon. ffetrs, 9 Dana, 513, 517. 330, 338. §23] EXEMPTIONS. 59 rather a forced contribution, amounting, in fact, to simple confiscation." * An exemption of a certain kind of property either directly or by a law reducing the assessment was held void where the state Constitution required that all taxes be "proportional and reasonable." '' In Pennsylvania, a statute imposing a license tax upon dealers in real estate transactions whose business was $1,000 or more and exempting those whose business was less, was held to be unconstitutional.' There, however, the State constitution provided : "All laws exempting property from tax- ation, other than the property above enumerated, shall be void." In Hawaii, an income tax which exempted incomes of less than $1,000 and taxed the whole amount of larger incomes was held to be unconstitutional.^ The court then said: "The attributes of equality and uniformity inhere, however, to some extent in the very idea of a tax." "The inhibition to tax in any other way than that which accomplishes the result that each member of society bears only his proportion or share of the whole expense of government, does not differ essentially from a provision that taxation shall be equal and uniform. Certain- ly the taxing of A upon property of the same value as that of B more than the tax laid upon B would be compelling A to pay more than his 'proportion or share' and the taxation would not be 'equal and uniform.' In the light of this reasoning to tax A one per cent, of his entire annual income, if it exceeds the sum of four thousand dollars, and to tax B on only two thousand dollars of his income if the whole does not exceed four thousand dollars, and to impose no tax at all upon C if his income be less than two thousand dollars would be obliging A to pay more than his 'proportion or share' of the tax, and such taxation would not be 'equal and uniform.' To this it is replied that the legislature has the power to exempt from taxation such subjects as it deems proper. But by all the authorities the exemptions must be sup- ported by public considerations and tend to promote the general welfare. Of this character is the exemption from taxation long 6 Mr. Justice Field, in County of v. Clarh, 195 Pa. 634, 635, 57 L.R.A. Santa Clara v. Southern Pacific R. 348, 86 Am. St. Rep. 694, 46 Atl. Co. 9 Sawy. 165, 18 Fed. 585, 400. 286. 1 1nhabitants of Cheshire v. Coun- 9 Campbell v. Shaio, 11 Haw. Hep. ty Commissioners, 118 Mass. 386. 112, 124. 8 Commonvyealth, Use of Titu^ville 60 CONSTITUTIOKTAL OBJECTIONS TO THE STATUTE. [§ 23 existing in this country to every taxpayer property to the value of three hundred dollars, the obvious purpose being not to tax at all those who are so poor as to possess property of only that value or less. But the statute in question does not exempt from taxation all incomes to the amount of two thousand dollars, but imposes upon him who receives over $4,000 a year a tax of one per cent, upon the whole amount, whereas the person whose in- come is less than four thousand dollars pays only on the excess of income over two thousand dollars. It is well settled that the legislature has the power to classify objects of taxation, but it is equally well settled that selections cannot be made out of a class for taxation and others of the same class be exempted.. The effect of this section of the Act would be to place the burden of this tax upon those whose annual incomes are over four thou- sand dollars, and who constitute a minority of the community. It is argued that the exemption of incomes of two thousand dol- lars is reasonable and in furtherance of a public purpose, because the sum of two thousand dollars is the average annual cost of living of a family. This is a mere supposition and not to be taken for granted as true in our community. But if it be once conceded that exemptions so large as this can be made as a pub- lic benefit then exemptions of a much larger amount can be made which might place the whole burden upon the rich and if pushed to an extreme be a confiscation and not the proportional taxation authorized by the Constitution." ^° In accordance with these views is the concurring opinion of Mr. Justice Field in the Pollock case : "Exemptions from the operation of a tax always create inequalities. Those not exempted must, in the end, bear an additional burden or pay more than their share. A law containing arbitrary exemptions can in no just sense be termed uniform. In my judgment, Congress has rightfully no power, at the expense of others, owning property of a like character, to sustain private trading corporations, such as building and loan associations, savings banks, and mutual life, fire, marine, and accident insurance companies, formed under the laws of the various States, which advance no national pur- pose or public interest and exist solely for the pecuniary profit of their members. 10 Ibid. § 23] EXEMPTIONS. 61 "Where property is exempt from taxation, the exemption, as has been justly stated, must be supported by some consider- ation that the public, and not private, interests will be advanced by it. Private corporations and private enterprises cannot be aided under the pretence that it is the exercise of the discretion of the legislature to exempt them. Loan Association v. Topeka, 20 Wall. 655, 22 L. ed. 455 ; Parkersburg v. Brown, 106 U. S. 487, 27 L. ed. 238, 1 Sup. Ct. Eep. 442; Barbour v. Louisville Board of Trade, 82 Ky. 645, 654, 655 ; Lexington v. McQuil- lan's Heirs, 9 Dana, 513, 516, 517 ; and Sutton's Pleirs v. Louisville, 5 Dana, 28, 31. "Cooley, in his treatise on Taxation (2d ed. 215), justly ob- serves that: 'It is difficult to conceive of a JTistifiable exemp- tion law which should select single individuals or corporations, or single articles of property, and, taking them out of the class to which they belong, make them the subject of capricious leg- islative favor. Such favoritism could make no pretense to equality; it would lack the semblance of legitimate tax legis- lation.' "The income law under consideration is marked by discrim- inating features which affect the whole law. It discriminates between those who receive an income of four thousand dollars and those who do not. It thus vitiates, in my judgment, by this arbitrary discrimination, the whole legislation. Hamilton says in one of his papers (the Continentalist), 'the genius of liberty reprobates everything arbitrary or discretionary in tax- ation. It exacts that every man, by a definite and general rule, should know what proportion of his property the State demands ; whatever liberty we may boast of in theory, it cannot exist in fact while (arbitrary) assessments continue.' 1 Hamilton's Works, ed. 1885, 270. The legislation, in the discrimination it makes, is class legislation. Whenever a distinction is made in the burdens a law imposes or in the benefits it confers on any citizens by reason of their birth, or wealth, or religion, it is class legislation, and leads inevitably to oppression and abuses, and to general unrest and disturbance in society. It was hoped and be- lieved that the great amendments to the Constitution which followed the late civil war had rendered such legislation im- possible for all future time. But the objectionable legislation reappears in the act under consideration. It is the same in 62 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 23 essential character as that of the English income statute of 1691, which taxed Protestants at a certain rate, Catholics, as a class, at double the rate of Protestants, and Jews at another and separate rate. Under wise and constitutional legislation every citizen should contribute his proportion, however small the sum, to the support of the government, and it is no kindness to urge any of our citizens to escape from that obligation. If he contributes the smallest mite of his earnings to that purpose he will have a greater regard for the government and more self-respect for himself feeling that though he is poor in fact,. he is not a pauper of his government. And it is to be hoped that, whatever woes and embarrassments may betide our peo- ple, they may never lose their manliness and self-respect. Those qualities preserved, they will ultimately triumph over all re- verses of fortune. "There is nothing in the nature of the corporations or asso- ciations exempted in the present act, or in their method of doing business, which can be claimed to be of a public or benevolent nature. They differ in no essential characteristic in their busi- ness from 'all other corporations, companies, or associations doing business for profit in the United States.' Act of August 15, 1894, c. 349, § 32. "A few words as to some of them, the extent of their capital and business, and of the exceptions made to their taxation: "1st. As to mutual savings ha/riks. — Under income tax laws prior to 1870, these institutions were specifically taxed. Under the new law, certain institutions of this class are exempt, pro- vided the shareholders do not participate in the profits, and in- terest and dividends are only paid to the depositors. Wo limit is fixed to the property and income thus exempted — it may be $100,000 or $100,000,000. One of the counsel engaged in this case read to us during the argument from the report of the Comptroller of the Currency, sent by the President to Con- gress December 3, 1894, a statement to the effect that the total number of mutual savings banks exempted was 646, and the total number of stock savings banks was 3*78, and showed that they did the same character of business and took in the money of depositors for the purpose of making it bear interest, with profit upon it in the same way; and yet the 646 are exempt § 23] EXEMPTIONS. 63 and the 378 are taxed. He also showed that the total deposits in savings banks were $1,748,000,000. "2d. As to mutual insurance corporations. — These compan- ies were taxed under previous income tax laws. They do busi- ness somewhat differently from other companies ; but they con- duct a strictly private business in which the public has no inter- est, and have been often held not to be benevolent or chari- table organizations. "The sole condition for exempting them under the present law is declared to be that they make loans to or divide their profits among their members, or depositors or policy-holders. Every corporation is carried on, however, for the benefit of its mem- bers, whether stockholders, or depositors, or policy-holders. If it is carried on for the benefit of its shareholders, every dollar of income is taxed ; if it is carried on for the benefit of its policy- holders or depositors, who are but another class of shareholders it is wholly exempted. In the State of New York the act exempts the income from over $1,000,000,000 of property of these com- panies. The leading mutual life insurance company has prop- erty exceeding $204,000,000 in value, the income of which is wholly exempted. The insertion of the exemption is stated by counsel to have saved that institution fully $200,000 a year over other insurance companies and associations, having simi- lar property and carrying on the same business, simply because such other companies or associations divide their profits among their shareholders instead of their policyholders. "3d. As to building and loan associations. — The property of these institutions is exempted from taxation to the extent of millions. They are in no sense benevolent or charitable insti- tutions, and are conducted solely for the pecuniary profit of their members. Their assets exceed the capital stock of the national banks of the country. One, Dayton, Ohio, has a capital of $10,000,000, and Pennsylvania has $65,000,000 invested in these associations. The census report submitted to Congress by the President, May 1, 1894, shows that their property in the United States amounts to over $628,000,000. Why should these institutions and their immense accumulations of property be singled out for the special favor of Congress and be freed from their just, equal, and proportionate share of taxation when others engaged under different aames, 'n similar business, are 64 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§23 subjected to taxation by this law ? The aggregate amount of the savings to these associations, by reason of their exemption, is over $600,000 a year. If this statement of the exemptions of corporations under the law of Congress, taken from the careful- ly prepared briefs of counsel and from reports to Congress, will not satisfy parties interested in this case that the aot in ques- tion disregards, in almost every line and provision, the rule of uniformity required by the Constitution, then 'neither will they be persuaded, though one rose from the dead.' That there should be any question or any doubt on the subject surpasses my comprehension. Take the case of mutual savings banks and stock savings banks. They do the same character of business, and in the same way use the money of depositors, loaning it at interest for profit, yet 646 of them, under the law before us, are exempt from taxation on their income and 378 are taxed upon it. How the tax on the income of one kind of these banks can be said to be laid upon any principle of uniformity, when the other is exempt from all taxation, I repeat, surpasses my com- prehension. . . . The inherent and fundamental nature and character of a tax is that of a contribution to the support of the government, levied upon the principle of equal and uni- form apportionment among the persons taxed, and any other exaction does not come within the legal definition of a tax. "This inherent limitation upon the taxing power forbids the imposition of taxes which are unequal in their operation upon similar kinds of property, and necessarily strikes down the gross and arbitrary distinctions in the income law as passed by Congress. The law, as we have seen, distinguishes in the taxation between corporations by exempting the property of some of them from taxation and levying the tax on the property of others when the corporations do not materially differ from one another in the character of their business or in the protec- tion required by the government. Trifling differences in their modes of business, but not in their results, are made the ground and occasion of the greatest possible differences in the amount of taxes levied upon their income, showing that the action of the legislative power upon them has been arbitrary and capri- cious and sometimes merely fanciful." *' The subsequent de- il Pollock V. Farmers' Loan & 600, 39 L. ed. 759, 824-826, 15 Sup. Trust Co. 157 U. S. 429, 595-599, Ct. Eep. 673. § 23] EXEMPTIONS. 65 cision which sustained the corporation income tax of 1909 seems inconsistent with these positions.^'* The Supreme Court of Wisconsin has held that an inheritance tax was void that exempted estates of less than $10,000 in value. ^^ But taxes upon inheritances, State ^' and Federal,^* which were progressive in their nature, imposing a larger percentage Tipon inheritances of greater value, have been sustained, al- though in one case there was an exemption of an estate worth less than $20,000,^* and in another there was on exemption of an estate worth $10,000 or less.'^ The Supreme Court then, however, used the following significant language: "The re- view which we have made exhibits the fact that taxes im- posed with reference to the ability of the person upon whom the burden is placed to bear the same have been levied from the foundation of the government. So, also some authoritative thinkers, and a number of economic writers, contend that a progressive tax is more just and equal than a proportional one. In the absence of constitutional limitation, the question whether it is or is not is legislative and not judicial. The grave conse- quences which it is asserted must arise in the future if the right to levy a progressive tax be recognized involves in its ultimate aspect the mere assertion that free and representative govern- ment is a failure, and that the grossest abuses of power are foreshadowed imless the courts usurp a purely legislative func- tion. If a case should ever arise, where an arbitrary and con- fiscatory exaction is imposed bearing the guise of a progressive or other form of tax, it will be time enough to consider whether the judicial power can afford a remedy by applying inherent and fundamental principles for the protection of the individual, llaii'Jmt V. stone Tracy Co. 220 li Etwwlton v. Moore, 178 U. S. U. S. 108, 55 L. ed. 389. 41, 44 L. ed. 969, 20 Sup. Ct. Kep. 19 Black V. State, 113 Wis. 205, 747. 90 Am. St. Rep. 853, 89 N. W. 522. 15 Magoun v. Illinois Trust & Sav- For note on classification of inherit- ings Bank, 170 U. S. 283, 285, 42 ancea or gifts for purposes of sue- L. ed. 1037, 1039, 18 Sup. Ct. Eep. cession tax, see 6 L.R.A.(N.S.) 732. 594. 13 Magoun v. Illinois Trust & Sav- 16 Knowlton v. Moore, 178 U. S. ings Bank, 170 U. S. 283, 42 L. ed. 41, 61, 44 L. ed. 969, 977, 20 Sup. 1037, 18 Sup. Ct. Rep. 594; Naches Ct. Rep. 747. V. State, 129 Wis. 190, 8 L.R.A. (N.S.) 121, 108 N. W. 627, 9 Ann. Gas. 711. Foster Income Tax. — 5. 66 CONSTITUTIOBTAL OBJECTIONS TO THE STATUTE. [§ 28- even though there be no express authority in the Constitution, to do so." " The Supreme Court of Wisconsin moreover held an income- tax to be valid which exempted an income of $800 of a wife, of $1,200 of a husband and wife, of $200 of each child under eighteen, and of $200 of each additional person legally and wholly dependent upon the taxpayer for support; giving, how- ever, no exemption to non-residents, nor to firms, corporations or joint stock companies. This was a progressive tax of one- per cent, upon the first thousand, steadily increasing with each $1,000 until it reaches the aggregate of six per cent on any sum exceeding $2,000. The Court said : "It is said under this^ head that the allowance of exemptions to individuals and the denial of them to partnerships is unjust discrimination. The- question depends, of course, upon whether there is any valid ground for classification. Is there such a substantial difference between the classes as to reasonably suggest or call for the pro- priety of different treatment ? We are clearly of opinion that this question must be answered in the affirmative. A partner- ship ordinarily has certain distinct and well known advantages- in the transaction of business over the individual, arising from the fact that it allows a combination of capital, brains, industry,. and thus makes it possible to accomplish many things which an individual in the same business cannot accomplish. Further than this, however, there is another consideration. If the part- ner have individual income from other sources than the partner- ship business (as many do), his exemptions will be allowed to him out of the individual income, and thus, if he were also al- lowed exemptions from the partnership income, he would be al- lowed double exemptions. Altogether there seems to be ample reason for the classification. The exemptions themselves do not seem to be seriously attacked, nor do we see any reason they should be. The most striking exemption is that of life in- surance to the amount of $10,000 in favor of one legally de- pendent on the deceased, but while this is somewhat large we cannot say that it is unreasonable, nor that there is not ample ground for classifying legally dependent persons, and extend- 17 Knowlton v. Moore, 178 U. S. 41, 109, 110, 44 L. ed. 969, 906, 997, 20 Sup. Ct. Rep. 747. § 23] EXEMPTIONS. 67 ing an exemption to them which is denied to others." ^* "Ob- jection is also made to the provision that the income of a wife living with her husband shall be added to the income of the husband, and the income of each child under eighteen years of age living with its parent or parents shall be added to that of the parent or parents. This is another case of classification, and it is only justifiable in case there is some substantial dif- ference of situation which suggests the advisability of difference of treatment. We think there clearly is such a difference, in this, that experience has demonstrated that otherwise there' will be many opportunities for fraud and evasion of the law, which the close relationship of husband and wife or parent and child makes possible, if not easy. The temptation to make colorable shifts and transfers of property in order to secure double or even triple exemptions, if there were not some provision of this, kind in the law, would unquestionably be very great. There' is no such temptation or opportunity in the case of the single- man, or the man and wife who are living separately." ^® The Supreme Court has sustained the provision of a State constitution which provided for the forfeiture of tracts of one thousand acres or more for failure of the owner to place the same upon the land books for taxation, while exempting from such forfeiture tracts with an acreage of less than one thousand acres ; ^° and a State tax upon the property of telephone com- panies which exempted those whose gross receipts did not ex- ceed $500." It is true that the courts recognize the validity of some ex- emptions from taxation. Property which is considered to be used in a way beneficial to the community, such as the prop- erty of religious or charitable corporations, may be exempted from taxation. So, persons whose means are insuiBcient to en- able them to contribute to the expense of the support of the government may also be exempted.^* It may well be claimed, however, that the limit of this exemption, although largely 18 Income Tax Cases, 148 Wis. 456, 21 Citieens' Telephone Co. v. Ful- 511, 512, 134 N. W. 673, 135 N. ler, 229 U. S. 322, 57 L. ed. — , 33 W. 164, Ann. Cas. 1913 A, 1147. Sup. Ct. Rep. 833. 19 nid. 22 City of New Orleans v. Foivrc}vy„ 20 King v. Mullins, 171 U. S. 404, 30 La. Ann. 910. 435, 43 L. ed. 214, 226, 18 Sup. Ct. Rep. 925. 68 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§23 within the discretion of the Legislature, cannot be so abso- lutely. "Absolute equality and uniformity may not be attainable in practice, but an approximation to them is possible, and any plain departure from the rule will defeat the tax." ^^ Suppose that Congress should enact a law imposing an income tax upon a single individual, selecting for that purpose the richest man in the United States, or some other. In either case, the courts would undoubtedly hold the attempted imposition not a tax, but a confiscation, and consequently invalid.^* Is there any difference in principle between such a law and one which should exempt from liability all persons having less than a specified income, which income was possessed by but one individual in the United States ? If such an act would be concededly unconstitutional, upon what distinction rests the validity of a tax law which exempts all individuals having less than a specified income, and includes in the exemption many who are amply able to contribute to the support of the govern- ment, so that it is clearly the intention of the law-maker to leg- islate against specified classes of the community, and to im- pose upon them more than their fair share of the burden of supporting the government ? If an act is constitutional which exempts all whose annual income is less than $4,000, and taxes those whose income is .greater, why might not Congress exempt those with the greater income and confine the tax to those with an annual income less than $4,000 ? The danger of such legislation is not chimer- ical, for on the statute books of Arkansas may be found an exemption of those manufacturers and miners whose monthly income exceeds a specified sum.^* The questions here suggested are interesting and important, but the writer expresses no opinion as to their ultimate an- swers.^° 23 Mr. Justice Field in County of supra, cited with approval in County San Mateo v. Southern Pacific R. of San Mateo v. Southern Pacific R. R. Co. 8 Sawy. 238, 13 Fed. 722, R. Go. 8 Sawy. 238, 13 Fed. 722, 734. See, also. Worth v. Wilming- 734 ; County of Santa Clara v. South- ton R. R. Co. 89 N. C. 291, 45 Am. em Pacific R. Go. 9 Sawy. 165, 13 Eep. 679 ; Marion R. R. Co. v. Cham- Fed. 385, 400. plain, 37 Kan. 682, 16 Pac. 222. 25 Arkansas Acts of 1871 ; Cooley ZiLeaeington v. McQuillan's Heirs, on Taxation, 2d Ed. 171. S Dana, 513, 35 Am. Dec. 159, quoted 26 In Massachusetts a succession § 24] DISCEIMINATIOW AGAINST COEPOEATIONS. 69 § 24. Alleged unconstitutionality of the discrimination against corporations. The act may be further attacked from a similar point of view, because it discriminates against corpo- rations, joint stock companies and associations by taxing all their profits without that deduction of $3,000 which is allowed in the case of individuals. Mr. Justice Field and Judge Saw- yer, in the San Mateo Tax Case, held the provision of the Cali- fornia Constitution which provided that in estimating their property for the purpose of taxation, railroad and other quasi- public corporations should not be entitled to a deduction of the amount of mortgages, although such deductions were allowed to individuals, to be unconstitutional as an infringement of the Fourteenth Amendment to the Federal Constitution.^ Mr. Justice Field said, speaking of the Fourteenth Amendment: "The concluding clause of its first section was designed to cover all cases of possible discrimination and partial legis- lation against any class, in ordaining that no state shall deny any person within its jurisdiction the equal protection of the laws. Equality of protection is thus made the constitutional right of every person; and this equality of protection implies not only that the same legal remedies shall be afforded to him for the prevention or redress of wrongs and the enforcement of rights, but also that he shall be subjected to no greater burdens or charges than such as are equally imposed upon similar prop- erty of others, similarly situated, and thus made to bear an unequal share of the public burdens. Property may indeed be classified, and different kinds be subject to different rates. Keal property may be taxed at one rate and personal property at another. Property in particular places may be taxed for tax, which exempted successions of $1,000 income was constitutional be- $10,000 or less, was held constitu- cause there was no proof that such tional. Minot v. Winthrop, 162 exemption was in fact allowed. "True Mass. 113, 26 L.R.A. 259, 38 N. B. there was a law of the state au- 512. See, however, the strong, dis- thorizing and directing such exemp- senting opinion of Judge Lathrop. tion, but non constat that the city In Louisiana an exemption of per- did so, especially if the doing so sonal property worth $500 was held would be unconstitutional." not to be a violation of the require- § 24. l County of San Mateo v. ment of uniformity under the State Southern Pacific R. R. Go. 7 Sawy. Constitution. City of New Orleans 517, 13 Fed. 145; County of Santa V. Fourchy, 30 La. Ann. 910 (1878), Clara v. Southern Pacific R. R. Co. Spencer, J. The court avoided the 9 Sawy. 165, 18 Fed. 385. question whether an exemption of 70 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§24 local purposes, while property situated elsewhere is exempt. Licenses may also vary in amount, according to the calling or business for which they are exacted. But arbitrary distinctions not arising from real differences in the character or situation of the property, or which do not operate alike upon all property of the same kind similarly situated, are forbidden by the amend- ment. Equality in the imposition of burdens is the constitu- tional rule as applied to the property of individuals, where it is subject to taxation at all ; and this imports that a uniform mode shall be followed in the estimate of its value, and that the con- tribution exacted shall be in some uniform proportion to such value prescribed, according to the nature or position of the property. All state action, constitutional or legislative, im- pinging upon the enforcement of this rule, must give way before it-' "The Fourteenth Amendment of the Constitution, in declar- ing that no statute shall deny to any person within its juris- diction the equal protection of the laws, creates a limitation up- on the exercise of all the powers of the state which can touch the individual or his property, including among them that of taxation. Whatever the state may do, it cannot deprive any one within its jurisdiction of the equal protection of the laws. And by equal protection of the laws is meant equal security under them to every one on similar terms, in his life, his lib- erty, his property, and in the pursuit of happiness. It implies not only accessibility by him, on the same terms with others, to the courts of the country for security of his person and prop- erty, the prevention and redress of wrongs, and the enforce- ment of contracts, but also an exemption from any greater bur- dens or charges than such as are equally imposed upon all others under like circumstances. "Unequal exactions in every form, or under any pretence, are absolutely forbidden; and, of course, unequal taxation, for it is in that form that offensive burdens are usually laid. It is not possible to conceive of equal protection under any system of laws, where arbitrary and unequal taxation is permissible; where different persons may be taxed on their property of the 2 OovMty of San Mateo v. Southern Pacific B. R. Co. 7 Sawy. 517, 13 Fed. 145, at pp. 150, 151. :'§ 24] DISCEIMINATION AGAINST COEPOEATION6. 71 same kind, similarly situated, at different rates ; -where, for in- stance, one may be taxed at one per cent, on the value of his property, another at two or five per cent, or where one may be thus taxed according to his color, because he is white, or black, ■or brown, or yellow, or according to any other rule than that of a fixed rate proportionate to the value of his property.* As the foundation of all just and equal taxation is the assessment of the property taxed, that is, the ascertainment of its value, in •order that the tax may be estimated according to some ratio to the value, uniformity of taxation necessarily requires uni- formity in the mode of assessment, as well as in the rate of taxation, or, to quote the language of the Supreme Court of Ohio expressing the same thought: 'Uniformity in taxing im- plies equality in the burden of taxation, and this equality of Ijurden cannot exist without uniformity in the mode of assess- ment as well as in the rate of taxation.' (Exchange Bank of Columbus V. Hines, 3 Ohio St. Eep. 1.)" * In a later case the Supreme Court of the United States said, speaking through the same Justice : "The amendment does not prevent the classification of prop- erty for taxation, subjecting one kind of property to one rate of taxation, and another kind of property to a different rate — - ■distinguishing between franchises, licenses, and privileges, and visible and tangible property, and between real and personal property. ISTor does the amendment prohibit special legisla- tion. Indeed, the greater part of all legislation is special, ■either in the extent to which it operates, or the objects sought to be obtained by it. And when such legislation applies to artificial bodies, it is not open to objection if all such bodies are treated alike under similar circumstances and conditions, in respect to the privileges conferred upon them and the lia- bilities to which they are subjected." ° The Eevised Statutes provide that "All persons within the jurisdiction of the United States shall have the same right in every state and territory to make and enforce contracts, to S County of San Mateo v. Southern 5 Home Insv/rance Co. v. Neio York Pacific Railroad Company, 8 Sawy. State, 134 U. S. 594-606, 33 L. ed. 238, 13 Fed. 722, at page 733. 1025-1029, 10 Sup. Ct. Rep. 593. * County of San Mateo v. Southern Pacific B. B. Co. 8 Sawy. 238, 13 Ted. 722, at page 733. 72 CONSTITUTIONAL OBJECTIONS TO THE STATUTE. [§ 24r sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens, and shall be subject to like punishment, pains, penalties, taxes, licenses, and exac- tions of every kind, and to no other." ' In sustaining the Wisconsin income tax, the Supreme Court of that state said: "Much complaint is made of that part of sec. 1087to — & which provides a different rate of taxation for the income of corporations from the rate prescribed for individuals, and this- also is said to be unjust discrimination. Again the question is whether there be substantial difference of situation between individuals and corporations which suggest and justify this- difference in treatment, and again it seems that the answer must be Yes. The corporation is an artificial creation of the state endowed with franchises and privileges of many kinds which the individual has not. It might be said with truth that the clause could be justified on the ground that it is an amend- ment to every corporate charter, which the legislature has the undoubted right to make, but it is not necessary to rely on that proposition. The corporate privileges, which are exclusively held by corporations, and the real differences between the situ- ation of a corporation and an individual, among which may be mentioned the fact that the corporation never is obliged to pay an inheritance tax, plainly justify a difference of treatment in the levying of the income tax. Were the income tax a tax upon property, there could be no difference in rate, for taxation of property must still be on a uniform rule, but, as has been here- tofore noted, it is not a tax upon property within the meaning of our constitution." '' Neither the Fourteenth Amendment nor any part of the Revised Statutes are, of course, directly binding upon Con- gress. They may, however, perhaps be considered as some evi- dence of the opinions of the American people upon those limits to legislative powers which are said to be necessarily implied in all constitutional governments irrespective of the express pro- visions of a written Constitution.* 6 U. S. Rev. Stat. § 1977, U. S. 8 Loan Association v. Topeha, 20 Comp. Stat. 1901, p. 1259. Wall. 658, 22 L. ed. 459. T Income Tax Cases, 148 Wis. 456, 134 N. W. 673, 135 N. W. Ib4. § 25] DEDUCTIOJT AT THE SOUECE. 73 § 25. Constitutional objection to the deduction of the tax at the source. So much of the statute as provides that debtors shall in certain cases deduct and pay the tax at the source has been attacked as unconstitutional. The objection seems to have been first suggested by Mr. Albert H. Walker, of the New York bar.^ It has since been raised in the different suits brought to obtain a decision setting aside the statute as unconstitutional. It is well settled that Congress has the power to enact that a tax due from one person shall be paid by an- other.* This is the usual method adopted by the States for the taxation of the shares of national banks.^ The Supreme Court has sustained the power of the State to compel safe de- posit companies to assist in the collection of an inheritance tax.* It would seem, however, that such a provision, if it im- posed an excessive and unreasonable burden upon the party required to deduct and pay the tax at its source, might be de- clared to be invalid as taking his property without diie process of law. Under the Treasury Regulations as originally promul- gated, an expense was entailed upon those compelled to de- duct and pay which was out of all proportion to the amount collected. Many banks and trust companies were obliged to employ new staffs of clerks for the sole pur- pose of attending to such matters. In one or two in- stitutions this is said to have cost as much as $25,000 during the first year.^ In most cases, it might be argued that the benefits from the use of the sums retained during the in- terval before the tax is paid was a sufficient indemnity. In many instances the consequent expense was much greater than the taxes which were thus collected. Whether such a dispropor- tionate expense is a necessary result of the tax or can be obviated by other Treasury Regulations, is a matter which will receive consideration when the validity of these parts of the statute is argued in the courts. § 25. 1 Income Tax Law, Ana- 8 First Wat. Bcmk v. Kentucky, 9 lyzed and Clarified by Albert H. Wall. 353, 363, 19 L. ed. 701, 704. Walker, p. 26. 4 National Safe Deposit Go. v. 2 First Nat. Bank v. Kentucky, 9 Stead, 232 U. S. 58, 58 L. ed. 504 34 Wall. 353, 363, 19 L. ed. 701, 704; Sup. Ct. Rep. 209. National Safe Deposit Go. v. Stead, 8 N. Y. Times, Jan'y. 25, 1914. 232 U. S. 58, 58 L. ed. 504, 34 Sup. Ct. Eep. 209. V4 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 26 § 26. Constitutional objections to extra-territorial tax- ation. The act provides for the levy of the income tax, "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 resid- ing in the United States though not a citizen thereof * * * and a like tax shall be assessed, levied, collected, and paid annu- ally upon the entire net income from all property owned a,nd of every business, trade, or profession carried on in the United States by persons residing elsewhere." ' It may be claimed that so much of this tax as affects non-resi- dents is invalid as extra-territorial taxation.^ This claim, how- ever, seems to be without support. There are dicta of the Su- preme Court of United States, which have been claimed to sup- port the doctrine that the States have no power of extra-terri- torial taxation.^ A critical examination of these cases, however, will show that the acts in question were held void, because in one case, the statute, passed subsequent to an indebtedness by a •domestic corporation to a citizen of another State, authorized the corporation to deduct from the interest which he promised to pay to such creditor the amount of the tax paid to the State, and thus impaired the obligation of its contract ; * and in another because the tax discriminated against citizens of other States ; * and in a third because it was held to be an unreasonable regu- lation of the right to maintain a railroad in the taxing State to oblige a foreign railroad company to collect a tax out of the interest due at its home office without the State to residents of 5uch State, and to be, moreover, an impairment by the State of the obligation of its contract by which it first admitted the for- eign railroad.^ The Supreme Court has held that a State may •compel one of its own citizens to pay a tax upon personal prop- erty, such as mortgages executed and secured by a lien in an- other State,' and upon the bonds of another State exempted by § 26. 1 Act of Oct. 3, 1913, sub- * State Tax on Foreign-held Bonds, •section A, aubd. 1. 15 Wall. 300, 21 L. ed. 179. 2 State Tax on Foreign-held-Bonds, 5 Ward v. Maryland, 12 Wall 421 15 Wall. 300, 21 L. ed. 179; Ward 428, 20 L. ed. 449, 452. V. Maryland, 12 Wall. 418, 428, 20 e jr. y. L. E. & W. B. R. Co. v. Tj. ed. 449, 452. Pennsylvania, 153 U. S. 628, 38 L. Sff. y. L. E. & W. R. R. Co. V. ed. 846, 14 Sup. Ct. Rep. 952. Pennsylvania, 153 U. S. 628, 38 L. 1 Kirlcland v. Hotchkiss, 100 U. ed. 846, 14 Sup. Ct. Rep. 952. S. 491, 25 L. ed. 558. f 26] EXTEA-TEEEITOUIAL TAXATION. 75 the latter from taxation.* Whatever may be the limitations upon the power of the States in this respect, the taxing power of the United States is not thus limited. Congress may tax all persons within the United States and all property within the United States, whether owned by resi- dents or non-residents, including debts due by residents of the United States to non-resident aliens, which may be collected from the debtor under a statute authorizing him to deduct the amount of the tax from the sum due his debtor.^ This last power is not possessed by the several States.^" 8 BonaprAL OBJECTIONS TO STATUTE, [§ 28 oompensation, which shall not be diminished during their con- tinuance in office." * Under these sections of the Constitution, the question arises whether Congress can evade the constitutional prohibition by an indirect diminution of the salary of the president and judges through a deduction which is denominated a tax. The question has never been judicially decided, but the better opinion, which is supported by high authority, is that this cannot be done to officers who were appointed or elected before the passage of the statute. Those subsequently elected or appointed may, however, be subject to the tax if that is the intent of the statute. The former income tax acts contained no such express exemption. At first the amount of the tax was deducted from the salaries ■of the president, the justices of the Supreme Court and the other Federal judges. Chief Justice Tanet filed the following protest against the deduction : "Washington, February 16, 1863. "Sie: — I find that the act of Congress of the last session, imposing a tax of three per cent, on the salaries of all officers in the employment of the United States, has been construed, in your department, to embrace judicial officers, and the amount of the tax has been deducted from the salaries of the judges. "The first section of the third article of the Constitution provides that 'The judicial power of the United States shall be vested in one Supreme Court, and such inferior courts as ■Congress may from time to time ordain and establish. The judges of both the supreme and inferior courts shall hold their offices during good behavior, and shall at stated times receive for their services a compensation, which shall not be diminished ■during their continuance in office.' The act in question, as you interpret it, diminishes the compensation of every judge three per cent. ; and if it can be diminished to that extent by the name of a tax, it may, in the same way, be reduced from time to time at the pleasure of the legislature. "The Judiciary is one of the three great departments of the Government created and established by the Constitution. Its ■duties and powers are especially set forth, and are of a character S Article, III, § 1. § 28] TAX ON SALARY OF PRESIDENT AND JUDGES. 97 that requi res it to be perfectly independent of the other depart- ments. And in order to place it beyond the reach, and above even the suspicion, of any such influence, the power to reduce their compensation is expressly withheld from Congress and excepted from their powers of legislation. "Language could not be more plain than that used in the Constitution. It is, moreover, one of its most important and essential provisions. For the articles which limit the powers of the legislative and executive branches of the Government, and those which provide safeguards for the protection of the citizen in his person and property, would be of little value without a judiciary to uphold and maintain them which was free from every influence, direct or indirect, that might by possibility, in times of political excitement, warp their judg- ments. "Upon these grounds, I regard an act of Congress, retaining in the treasury a portion of the compensation of the judges, as unconstitutional and void; and I should not have troubled you with this letter, if there was any mode by which the question could be decided in a judicial proceeding. But all the judges of the courts of the United States have an interest in the question, and could not therefore with propriety undertake to hear and decide it. "I am, however, not willing to leave it to be inferred, from my silence, that I admit the right of the legislature to diminish, in this or any other mode, the compensation of the judges when once fixed by law ; and my silence would naturally, perhaps necessarily, be looked upon as acquiescence, on my part, in the power claimed and exercised under this act of Congress, and would be regarded as a precedent establishing the principle that the legislature may at its pleasure regulate the salaries of the judges of the courts of the United States, and may reduce their compensation whenever Congress may think proper. "Having been honored with the highest judicial station under the Constitution, I feel it to be more especially my duty to uphold and maintain the constitutional rights of that depart- ment of the Government; and not by any act or word of mine have it to be supposed that I acquiesce in a measure that dis- places it from the independent position assigned to it by the statesmen who framed the Constitution. And in order to guard Foster Income Tax. — 7. 98 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 28 against any such inference, I present to you this respectful, but firm and decided remonstrance against the authority you have exercised under this act of Congress. And request you to place this protest upon the public files of your office, as the evidence that I have done everything in my power to preserve and main- tain the Judicial Department in the position and rank in the Government which the Constitution has assigned to it. "I am, sir, very respectfully yours, "K. B. Taney." Hon. S. P. Chase, Secretary of the Treasury. The Secretary of the Treasury took no notice of the letter from Chief Justice Tanbt. Thereupon the Chief Justice procured the following order to be passed by the Supreme Court of the United States : Supreme Court of the United States^ December Term, 1862. Order of the Court: Ordered, upon the request of the Chief Justice, that the following letter from him to the Secretary of the Treasury be entered on the records of the court. lOtb March, 1863.* It was deemed unpatriotic by the Federal judges during the war, to resist the collection of this tax, even if it would not have seemed improper for them to raise such a question in time of peace, since it was impossible to obtain its decision by a dis- interested tribunal. The tax was collected until 1869, when Attorney-General E. E. Hoar, formerly a justice of the Su- preme Court of Massachusetts, rendered an opinion in accord- ance with that of Chief Justice Taney. "Attoenby-Genekal's Office, "October 23, 1869. "Your letter of Sept. 30th, 1869, received, asking my opinion upon the question 'whether the law is constitutional which imposes a tax upon the salary of the President of the United States and upon the Judges of the Supreme Court.' I find no law which in express terms imposes a tax upon the salary of i * Tyler's Life of Taney, pp. 432-435. § 28] TAX ON SALARY OB" PEESIDENT AND JUDQESl 99 either of these officers. But as several of the statutes which provide for the assessment and collection of internal revenues contain provisions for taxing the salaries of all civil officers of the United States, and thus include in their liberal application the salaries of the President and the Judges of the Supreme Court, the question may perhaps be stated in this form: Are those statutes to be construed as authorizing the imposition of a tax upon the salaries of the officers in question? The first section of the second article of the Constitution of the United State contains this provision: 'The President shall at stated times receive for his services a compensation which shall neither be increased nor diminished during the period for which he shall have been elected.' The first section of the third article contains the provision that 'The judges both of the Supreme- and inferior courts shall hold their offices during good behavior^ and shall at stated times receive a compensation which shall not be diminished during their continuance in office.' "A specific tax by the United States upon the salary of an' officer to be deducted from an amount which otherwise would; by law be payable as such salary is, in my opinion, a diminu- tion of the salary to be paid to him which in the case of the President and the judges would be prohibited by the Constitu- tion of the United States, if the act of Congress levying the tax were passed during the official term of the President or of the judges respectively concerning whom the question would arise. "It was held in the case of Dobbins v. The Commissioners of Erie Co. 16 Pet. 435, 10 L. ed. 1022, that the compensation of an officer of the United States was not subject to taxation under State authority, because the effect of such a tax would be to diminish the compensation which the officer was by law entitled to receive. Such a tax was held to interfere with the provision made by the United States for the due execution of the powers and functions of the National Government by means of officers; which it appointed and paid. In the case of the Pacific Ins. Co. V. Soule, 7 Wall. 434, 19 L. ed. 95, it was decided that an income tax was an excise or duty imposed by a statute of the United States relating to internal revenue. Congress being prohibited by the Constitution from diminishing the salaries to be paid tO' the judges of the Supreme Court and the President during their respective terms of office, can no more do it by levying an ex- 100 OOlTSTITUTIONAIi OBJECTIONS TO STATUTE. [§28 cise or duty upon these salaries and deducting the amount thereof from them than could a state from that of an officer of the United States under the doctrine of the case in 16 Peters Reports. The tax operates directly as a diminution of the compensation of the officer. "I am therefore of the opinion that no income tax could be lawfully assessed and collected upon the salaries of the Presi- dent or any of the judges who were in office at the time the statute imposing the tax was passed. In regard to the salary of a subsequent President or judges subsequently appointed, the constitutional objection would not arise if it were clearly the intention of the legislature that the tax should be imposed upon the officers whenever by new appointments or a new elec- tion there would be no constitutional difficulty in the application of a previously existing law. But I am of the opinion that this would not be a safe and just rule of construction. Statutes imposing taxes are in their nature temporary and subject to frequent modification and repeal. When Congress imposes a tax upon the salaries of all civil officers, this language, although general, must necessarily be construed to mean all civil officers ■except those whom Congress has not the constitutional power to subject to such a tax. "As the language of the statute could have no application to the President and judges holding their offices at the time it was passed, there would seem to be sufficient reason for holding that ithere was no intention that it should apply to those offices. "If it were supposed applicable to the salary of the President, tlie singular result would follow in this case that as the Con- stitution prohibits the increase as well as the diminution of his salary during his term of office, if at the time when his official term commenced his salary was subject to a deduction in the nature of a tax, it would not be competent for Congress during his term of office by a repeal or diminution of the tax to in- crease the amount paid to him. So that if the law imposing an income tax were repealed, the President alone of all the citizens of this country would continue liable for its payment during the term for which it had been originally imposed, if his official term so long continued. And in the case of the judges, as the amount of income tax laid upon salary should be varied from time to time, one judge might be liable only to the § 29] TAXATION OF INCOME PEEVIOUST.Y COLLECTED. 101 amount of part of the income tax which the law imposed on salaries generally, and different members of the same court would be receiving different compensations. "I think it the more reasonable view that the class of officers over which Congress has not the taxing power by the Consti- tution, should not be held to be embraced within the general phrase 'all salaries of civil officers' and have therefore come to the conclusion that the just construction of the law does not require or permit any deduction of an income tax from the sal- aries of the President or the justices of the Supreme Court. "Very respectfully, "Your obedient servant, "E. E. HoAB." Hon. Geo. 0. Boutwell, Secretary of the Treasury.^ Subsequently the exemptions were allowed in accordance with this opinion. § 29. Constitutionality of taxation of income previously collected. It seems to be the opinion of Senator Root that so much of the tax as affects income previously received is invalid. His argument upon the subject is as follows : "I have intro- duced a brief amendment to the tariff bill, which I shall ask to have referred to the Committee on Finance; but I wanted to call the Senators' attenton to the precise point of the amendment. It is an amendment to the provision that the income tax shall be computed on incomes accruing from March 1 to December 31, 1913. "I think the provision will encounter very serious question. The change I propose is to have the income for the first year computed from the passage of the act, rather than from a fixed date — March 1, 1913. "The reason why I think it would be wise to make the change is that all direct taxes must be appor- tioned unless they come within the amendment relating to the income tax. We can impose a tax upon incomes without appor- 5 13 Opinions of Attorney-generals, hibition against the diminution of 161. Contra, the Supreme Court of his salary during his official term. Pennsylvania has held that a tax Commissioners of Northimib&rland upon a judge's salary, imposed sub- County v. Chapman, 2 Kawle, 73, sequent to his appointment, is not A. D. 1829, Gibson, J. a violation of a constitutional pro- 102 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§29 tioning it because of the amendment, but we can not impose any other direct tax without apportionment. When income is re- ceived it immediately becomes principal. The income that was received the 1st day of July of the present year, having been received, became principal, and no law hereafter can tax it with- out apportionment, any more than we can fix now the income that was received 10 years ago without apportionment. "So if the bill becomes a law with the provision in it that has been re- ported from the committee you will find yourselves endeavoring in one sentence to tax income that comes under the amendment, and to tax past income, income received, reduced to possession, and turned into principal before the passage of the act, and that you ■ can not do without apportionment. "It is to avoid that difficulty, which I am sure is very serious, that I propose the amendment which I now ask 'to have referred to the Committee on Finance.' " ^ The following opinions to the contrary were presented to the Senate of the United States : THE INCOME TAX. "Memorandum prepared by Eepresentative Hull, of Tennessee, August 5, 1913. "The amendment proposed by Senator Root on July 18, 1913, is based upon the theory that the proposed income-tax law can Hot reach for taxation any income accruing prior to the date of its taking effect, which was required to be taxed under the rule of apportionment under the decision in the Pollock case, even though such income accrued subsequent to the ratification and promulgation of the income-tax amendment to the Constitution. The essence of this contention is that within the meaning of the proposed tax law the tax is limited to the particular income as a specific fund out of which the tax is to be taken, and also that such income becomes principal whenever received, and that principal, therefore, can only be reached for taxation by appor- tionment, notwithstanding the effect of the recent amendment and the usual method of levying and measuring income taxes by § 29. 1 Cong. Record, p. 2788, A. D. 1913. § 29] TAXATION OF INCOME PEBVIOUSLY COLLECTED. 103 the rule of uniformity as embraced in the proposed law and in former laws and practices of the United States Government. Prior to the Pollock decision Congress had exercised the broadest power to impose the tax on incomes by the rule of uni- formity, from whatsoever source derived. The great question raised in the Pollock case did not go to the power of Congress to impose the tax, but to the question of whether the power had been exercised according to the method prescribed by the Con- stitution — that is to say, whether a power to tax, limited only by one exception and two qualifications, was being used accord- ing to the restrictions as to the method prescribed for its exer- cise. The Pollock decision held that only certain classes of in- comes were excise taxes and as such leviable by the rule of uni- formity, while certain other classes, viz., rent of real estate, and incomes derived from invested personalty, were of such a nature that a tax laid upon the same constituted a direct tax, and which must fall under the rule of apportionment. Prior to this deci- sion the policy of the Government and the decisions of the courts were to the effect that all taxes upon incomes being considered excise taxes might be levied under the rule of uniformity and might be measured by the income accruing during the preced- ing year or preceding years. "The income-tax act of August 5, 1861, provided that the tax should be assessed 'upon the annual income for the year preced- ing the 1st of January, 1862,' thus including the income that had accrued during the seven months next preceding the passage of the law. The act of July 14, 1862, required the tax to be im- posed upon the income that had accrued during the previous six and one-half months of that year prior to the date of the passage of the act. "The English act of June 28, 1853, likewise applied to all income accruing from the 5th day of the preceding April. "In the case of Stockdale v. Insurance Co. (20 Wall., 331, 22 L. ed. 348) the Supreme Court 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 years, can not 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 104 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 29 tax of 5 per cent, on all income of the preceding year, although one tax on it had already been paid; and no one doubted the validity of the act or attempted to resist it.' "The soundness of this language was later sustained in the case of Patton v. Brady (184 U. S. 608, 46 L. ed. 713, 22 Sup. Ct. Eep. 493). "In the case of Maine v. Grand Trunk E. (142 U. S. 217- 229, 35 L. ed. 994, 3 Inters. Com. Eep. 807, 1 Sup. Ct. Eep. 121, 163) the Supreme Court suggested that income for one year might properly be taken for the measure of all future years. "Again — 'unless the Constitution prohibits restrospective legislation, the basis of the assessment of taxes may as lawfully be retro- spective as the reverse ; that is to say, it may as well have regard to benefits theretofore received as to those that may be assessed thereafter.' (Cooley on Taxation, 3d ed. 492). "Eetrospective legislation is not prohibited. In Drexel & Co. v. Commonwealth (46 Pa. 31, at p. 40) the Supreme Court said: " 'It is clearly constitutional as well as expedient in levying a tax upon profits or income to take as a measure of taxation the profits or income of the preceding year. To tax is legal, and to assume as a standard the transactions immediately prior is certainly not unreasonable.' "Additional authorities might be cited to the same effect. As stated, these authorities only had in mind the imposition of an income tax as an excise or indirect tax by the rule of uni- formity, whereas it should be borne in mind that under the Pollock decision incomes from rent of real estate and invested personalty are direct taxes, and until the ratification of the recent amendment could only be levied by apportionment. The recent amendment, however, provided that Congress might im- pose a tax on incomes without apportionment, whether consid- ered as direct or indirect taxes. It is evident, therefore, that in so doing the rule of uniformity must govern. The question then arises as to whether Congress may thus impose a tax upon all incomes from whatever source derived, whether considered direct or indirect taxes, in the same manner in all essential respects that it had, previous to the Pollock decision, imposed § 29] TAXA-TION OF INCOME PREVIOUSLY COLLECTED. 105 the tax upon incomes as an excise and under the rule of uniform- ity. If SO, it necessarily follows that the tax may be measured by all income accruing from and after the ratification of the constitutional amendment. "Does not the very nature and purpose of a tax on incomes accord with the foregoing view ? In the broad and usual sense of tax laws the Government, for example, might impose a tax upon property according to its value by a direct and specific levy upon the property itself, and in concrete form, either real or personal ; this would be done by apportionment ; or if it was sought to impose a capitation tax, which is one upon the person solely, without any reference to his property, real or personal, this would be effected by apportionment, while, upon the other hand, a tax laid upon any business, or franchise, or employment, or income would fall under the rule of uniformity. "The Pollock decision held the income tax invalid not on the ground that income could become capital and escape the tax, but on account of its origin ; that it was, in effect, a tax on real- ty and personalty. The only proper inquiry in the light of the recent amendment, therefore, is not as to the origin or disposi- tion of the income in question, but what amount of income ac- crued to a taxable individual during a given period. It must follow that the account of annual income required of a citizen is for the purpose solely of ascertaining what amount of tax ought to be imposed upon him in consequence of his having made profits and collected by the Government not necessarily out of the specific income in question, but from the general property of the taxpayer as well. State v. Bell, 61 N. C. 87. "This view refutes the theory both that income may become principal, and thereby escape taxation, and also the objection as to retrospective legislation. "In the language of the Supreme Court Morey v. Lockwood, 8 Wall. 234, 19 L. ed. 339 : "(The tax is payable by the person because of his income, ac- cording to its amount and without reference to the way in which it was obtained). "The proposed measure would require no act of the citizen until the 1st of January next. It would assess and collect a tax off the individual during next year. Until the 1st day of January the citizen could not balance off against his gross profits 106 OOWSTITTJTIOITAL OBJECTIONS TO STATUTE. [§ 29 his losses, expenses, etc., and ascertain his net income for the preceding year. Until the close of the year the citizen could not know whether his income would be absorbed by losses, expenses, etc., or otherwise disposed of without even being received, nor in fact could he know whether he would have any net income until he had balanced his receipts and expenditures after the end of the year. Within the meaning of the proposed tax the cumu- lating items of profit must necessarily remain in abeyance until the expenditures for the year are deducted therefrom at the end of the year before it could be known whether there was any sum remaining that would or could iecom,6 capital. "The framers of the Constitution prescribed two great classes ■of taxes. The sole practical basis for this division related to the method of their imposition, viz., those that were to be ap- portioned, were called direct taxes, while those to be levied by the rule of uniformity were called indirect taxes. Wo court has ever inquired whether a tax is direct or indirect except for the purpose of determining whether it shall be levied under the one or the other rule just stated. Income from real estate and invested personalty is now as fully exposed to the taxing power of the Government under the rule of uniformity as is income from trades, professions, etc. The inquiry is not whether profits from any source are property, but are they income. If so, they are taxable. "The Pollock decision held that as to certain classes such profits were property and not income; but the recent amend- ment, in its necessary effect, revoked this doctrine and said they shall be treated as any other kind of income for the purpose of an income tax. "Under the proposed measure income is both the subject and the measurement of the tax. The recent amendment gives Con- gress the power to tax all classes of income without apportion- ment. Certainly, then. Congress may measure the tax by the same income. The Supreme Court has held that where the power to lay a tax exists it may be measured by the income from property not in itself taxable. Flint v. Stone Tracy Co. 220 U. S. 107, 55 L. ed. 389, 31 Sup. Ct. Eep. 342, Ann. Cas. 1912 B, 1312; U. S. Express Co. v. Minn. 223 U. S. 335, 56 L. ed. 459, 32 Sup. Ct. Rep. 211. "The constitutional amendment simply exempts the entire tax § 29] TAXATION OF INCOME PEEVIOUSLY COLLECTED. 107 to which it relates from the rule of apportioninent. It then be- comes utterly immaterial to inquire whether the tax is direct or indirect or as to the origin or source of the income or its dis- position — the only inquiry pertinent and necessary is, What amount of net income accrued to an individual during a given taxing period? The tax is thereupon measured by the same and collected out of his general property. "From any viewpoint it must be agreed that Congress would impose a tax with respect to the annual net income of the citi- zen, and the tax to be measured by such income, whether the same or parts thereof be considered property or otherwise. Had the recent amendment been a part of the Constitution when the Pollock Case was decided there is no reason to suppose that even for the purpose of income taxation any class of income would have been held to be property in the taxing sense what- ever its character or nature may have been considered in other senses. Before the recent amendment the direct tax was con- sidered a tax in terms on property, real or personal, whereas all other taxes related to business, privileges, franchises, etc., though measured by different methods. "These latter taxes are taken from the general property of the citizen, just as the former, though not imposed in terms thereon. The recent amendment simply transferred certain categories of income from one of the great classes of taxes to the other, to all intents and purposes if not in name. This trans- fer makes all incomes conform to the tax-meaning definition of the same as prescribed by all the courts, text writers, commen- tators on the Constitution, and acts of Congress prior to the Pollock decision. "Income has been defined as 'the gain which proceeds from labor, business, or property of any kind ; the profits of commerce or business.' Sims's Appeal, 44 Pa. 347; Parker v. North British & M. Ins. Co. 42 La. Ann. 428, 7 So. 599 ; Heyward v. Farmers' Min. Co. 42 S. C. 138, 46 Am. St. Eep. 702, 28 L.E.A. 48, 19 S. E. 963, 20 S. E. 64. •'Also, an income tax is defined as 'a tax which relates to the product or income from property or from business pursuits.' Waring v. Savannah, 60 Ga. 93; Eeed v. Louisville, 97 Ky. 394, 28 L.R.A. 480, 30 S. W. 973. 108 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 29 "It is a tax upon a person in respect of his income imposed in consideration of the amount of his net profits. " 'A tax on the yearly profits arising from property, profes- sions, trades, and oSices.' (Black's Law Dictionary.) " 'One which relates to the product or income from property or business pursuits.' Eeed v. Louisville, 97 Ky. 394, 28 L.R.A. 480, 30 S. W. 973. "Under the general property laws of the States the taxable status of property, real and personal, relates to the date fixed by law for its assessment. The assessment, when later made, must fix its value as of this date. This may be any day during a tax- able year. Eaton v. Union County Nat. Bank, 141 Ind. 159, 40 W. E. 693 ; Dodge v. Nevada ISTat. Bank, 48 G. C. A. 626, 109 Eed. 726. "An income tax is assessed and collected during the year sub- sequent to the accrual of the income returned and by which the tax is measured. Under a tax imposed with respect to net incomes the citizen may be required to return for the purpose of the measurement of the tax either his income for the preced- ing year, or his average income for a designated number of preceding years, or his estimated income for the current year. That view is sustained by previous citations herein. "It therefore follows that Congress at least during any period of the present year may impose and collect a tax on all incomes accruing subsequent to the promulgation of the recent constitu- tional amendment, and it is strongly probable that the constitu- tional amendment had the effect to empower Congress to meas- ure the tax by all income accruing from the 1st day of Janu- ary last. The power to impose the tax has existed during the entire year, and there has been no impediment to its imposition under the rule of uniformity during most of the year, and under the weight of authority in the States, together with the con- struction placed upon the National Constitution by the Su- preme Court in the Legal Tender, and other cases, no reason ap- pears why the tax now proposed could and should not be meas- ured by the income accruing from the first of the year. "Such latter provision would provide for the doing of no act prior to December 31 next which would otherwise have been done by the citizen. It would undo nothing; it would neither § 29] TAXA.TIOIT OF INCOME PEEVIOTTSLY COLLECTED. 109 take away nor impair any vested right. State ex rel. Green- baum V. Ehoades, 4 Nev. 313. " 'The language of a constitutional amendment should be read in connection with the known condition of affairs out of which the occasion for its adoption may have arisen, and then con- strued if there be therein any doubtful expressions, in a way, so far as is reasonably possible, to forward the known purpose or object for which the amendment was adopted.' Maxwell v. Dow, 176 U. S. 681, 44 L. ed. 59Y, 20 Sup. Ct. Eep. 448, 494." "Depaetment oi' Justice, "Office of the Attorney Geneeal, "Washington, D. C, August 6, 191S. "Hon. F. M. Simmons, "United States Senate. "Mt Deae Senatoe: Replying to your letter of July 30, in which you inclose an amendment offered by Senator Root to the income section of House bill 3321, together with his re- marks at the time of its introduction, and asking for my views with reference to the Senator's contention, permit me to say : "I am sending you two separate memorandums, one which Congressman Hull very kindly prepared upon my request, and the other prepared by one of the assistants in the depart- ment. I hope they will answer your demands. "It seems to me that the Senator's proposition is not well founded. The practice in the past, the necessity for moving along practical lines with respect to tax matters, together with the other suggestions contained in the inclosed memorandums, are adequate to overthrow his contention. "With best wishes, faithfully, yours, "J. 0. McEeynolds, "Attorney General. "ee me. eoot's peoposal to amend income-tax law. [Memorandum for the Attorney General by T. M. Gordon, July 31, 1913.J "Mr. EooT suggests that the income-tax law must be amend- ed to operate only from the date of passage. His theory is that income, once accrued, becomes principal. Hence there can be no such thing as an 'income tax' on past income. Such a tax is a 110 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 29 tax on principal, a direct tax, still requiring apportionment, despite the fifteenth amendment. I do not agree with Mr. EooT. "The whole question turns upon what the words 'taxes upon incomes from whatever source derived' mean as used in the six- teenth amendment. "An income tax is sui generis. It is a legal fiction, a purely metaphysical conception, very difficult to define or classify. It seems to me, however, that it must be treated in a practical sort of way, and that the definition which Mr. Root's argument assumes builds up an unduly elaborate legal fiction, unwar- ranted by authority and very unfortunate in its results. "Of course Mr. Hoot can not have in mind that a tax to be an income tax must actually be collected, or even assessed, be- fore income ceases to be income. Such a requirement would be wholly impossible to comply with. For example, such a re- quirement would render it improper to assess the tax upon in- come for the preceding year, as is done by this law, and as is the universal custom of income-tax laws both in this country and in England. "Apparently Mr. Root does assume, however, that a tax can not be a 'tax upon income' unless the law levying the tax is in active operation at the precise instant that the income accrues, so that it may then seize upon the income constructively j i. e., in legal fiction. The law is conceived as a sort of invisible net interposed between the individual and his source of income. The Federal 1 per cent, is caught, branded, and turned loose again, as it were, to be counted and collected at a later day by the assessor. Of course physical analogies can not express pre- cisely how the legal fiction solves such difficulties as the fact that any individual's yearly income can not be known till the end of the year, or the situation of the merchant who may gain in one transaction and lose in the next; nevertheless it must be admitted that such a conception of a tax on income, though very refined and metaphysical, is intellectually possible. "I do not think, however, that usage, as evidenced by prior laws upon the subject and by judicial decisions, has ever re- stricted the meaning of the words to tax laws which might be conceived to operate in such a fashion. "I. First, as to the word 'income/ I do not think that word § 29] TAX&.TION OF INCOME PBEVIOUSLY COLLECTED. Ill necessarily implies a specific fund from which the tax must be taken. A man who possessed no vested right to anything might properly say, 'My present income is $5,000 a year.' If that is his 'present income,' why may he not be taxed upon it ? "II. That leads to the significance of the word 'upon.' This word is used in such a wide variety of ways that it is very diffi- cult to define exactly what we do mean when we say a tax 'upon' anything. Taxes, generally speaking, are really contributions from persons, who are classified for tax purposes with refer- once to various characteristics, as ownership of land, carrying on a certain kind of business, etc. The factor or factors with reference to which individuals are classified is usually said to be the thing 'upon' which the tax is levied. (24 Harvard Law Eeview, pp. 41—42). Thus Mr. Kennan, in his recent book on Income Taxation, defines an income tax as 'a tax the amount of which is determined with reference to the income of the tax- payer' (p. 9). In other words, 'upon' usually means 'with ref- erence to,' or 'based upon,' or 'measured by.' And an income tax is a tax based upon income or measured by income, not carved out of a specific fund of income. "In this sense a tax can be 'upon' a thing which a person no longer owns or a state of things which has now ceased to exist. As Mr. Cooley says (Cooley, Taxation 3d ed. pp. 492, 493, 494): " 'Unless the Constitution prohibits retrospective legislation the basis of an assessment of taxes may as lawfully be retro- spective as the reverse ; that is to say, it may as well have regard to benefits theretofore received as to those which may be assessed thereafter. Locke v. New Orleans, 4 Wall. 172, p. 492, 18 L. ed. 334. « <* * * jq-Qj. £j^ apportioning the tax between iadividu- als is there any valid objection to making it on consideration of a state of things that may now have come to an end; as where a tax is imposed on the extent of one's business for the preceding year instead of upon an estimate of the business for the year to come. Drexel v. Commonwealth, 46 Pa. 31 ; People v. Gold Co. 92 ]Sr. Y. 383. * * * One may he taxed upon prop- erty which he has long ceased to own when the tax is levied' (pp. 493-494). "Locke V. New Orleans, 4 Wall. 1T2, 18 L. ed. 334, cited 112 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 29 supra, held a State statute imposing an additional tax on prop- erty according to the assessment for the previous year, and also according to the assessment for the year before that, but not exceeding the tax already imposed according to those assess- ments, was constitutional. "Drexel v. Commonwealth, 46 Pa. 31, also relied on by Mr. Oooley, related to an income tax. The court said (p. 40) : " 'This act clearly intended to levy a tax of 3 per cent, on the profits or income of the business and was not meant to tax capi- tal. Profits must necessarily be the net profits of the business, and the Commonwealth was to receive of them 3 per cent. It was in fact a tax upon the income of the business in which the defendants were engaged. The English income tax and the United States income tax are based upon the incomes received in preceding years. The present United States income tax is laid upon the income of 1862, and the act of Congress of the 5th of August, 1861 (12 Stat, at L. 309, chap. 45), expressly declares that 'the tax herein provided shall be assessed upon the annual income of the persons hereinafter named, for the year next preceding the 1st of January, 1862, and the said taxes, when so assessed and made public, shall become a lien upon the property or other sources of said income for the amount of the same, with the interest and other expenses of collection until paid.' " 'It is clearly therefore perfectly constitutional as well as expedient, in levying a tax upon profits or income, to take as the measure of taxation the profits or income of a preceding year. To tax is legal, and to assume as a standard the transactions immediately prior is certainly not unreasonable, particularly when we find it always adopted in exactly similar cases. The tax is graduated upon each individual upon his individual re- ceipts.' "In People ,v. Gold Co. 92 IST. Y. 383, a tax upon the fran- chises of corporations, based upon dividends for the year pre- ceding the passage of the law, was upheld. " 'The fact that the amount of the tax may in some cases be fixed by reference to the business of the company during the year does not make the act retrospective. The burden it imposes is future and for future expenditures. It is competent for the legislature to adopt such method of valuing the franchises or § 29] TAXATION OF IlsrCOME PREVIOUSLY COLLECTED. 113 property of corporations for the purpose of taxation as it deems proper' (pp. 390-391). "In Glasgow v. Eowse, 43 Mo. 479, an additional tax on in- comes, levied according to the assessment of the preceding year, was upheld. The court declared this to be 'in entire harmony with the then existing revenue law, which provided that the taxes collected for any year should be based on an assessment made for the previous year' (p. 488). "III. As appears from the cases supra, the courts do not go through an elaborate fiction to prove that the income is still income at the time the tax attaches. An income tax is still an income tax whether it is levied on this year's income or last year's income or (as has actually been done in the ease of pro- fessional incomes by the English income-tax statutes since earliest times) on the average income for a period of years. "Furthermore, every one of the earlier Federal income-tax statutes and every one of the English statutes that I have ex- amined not only based each year's tax upon the income for the preceding year, but also based the tax for the first year upon income which had already accrued before the passage of the act. It is only fair to assume that the kind of income tax to which the sixteenth amendment refers is the kind of income tax which had been called an income tax in Federal statutes and levied and collected many times theretofore. "The Federal income-tax laws are as follows : Act of August 5, 1861 (12 Stat, at L. 292, chap. 45) : 'The tax herein provided shall be assessed upon the annual income of the persons hereinafter named for the year next pre- ceding the time for assessing said tax, to wit, the year next pre- ceding the 1st of January, 1862/ (12 Stat, at L. 309, sec. 49, chap. 45). Act of July 1, 1862 (12 Stat, at L. 473, 474, chap. 119) : * * * 'The duty herein provided for shall be assessed and collected upon the income for the year ending the 3 1st day of December next preceding the time for levying and collecting such duty; that is to say, on the 1st day of May, 1863, and in each year thereafter.' Act of June 30, 1864 (13 Stat, at L. 223, 281, 283, chap. 173): 'And the duty herein provided for shall be assessed, col- Foster Income Tax. — 8. 114 CONSTITUTIOl^AL OBJECTIONS TO STATUTE. [§29' lected, and paid upon the gains, profits, or income for the year ending the 31st day of December next preceding the time for levying, collecting, and paying such duty (p. 281, sec. 116). * * * Shall be levied on the 1st day of May' (p. 283, sec. 116). Eesolution of July 4, 1964 (13 Stat, at L. 417) : * * * 'There shall be levied, assessed, and collected, on the Ist^day of October, ISdJ/., a special income duty upon the gains, profits, or income for the year ending the -Slst day of December next preceding the time herein named.' "Act of March 2, 1867 (14 Stat, at L. 471, 478, 480, chap. 169): 'And the tax herein provided for shall be assessed, collected,, and paid upon the gains, profits, and income for the year end- ing the Slst day of December next preceding the time for levy- ing, collecting, and paying the tax (p. 478). "Provided, That the tax on incomes for the year 1866 shall' he levied on the day this takes effect' (p. 480). Act of July 14, 1870 (16 Stat, at L. 256, chap. 225) : * * * 'the tax hereinbefore provided shall be assessed' upon the gains, profits, and income for the year ending on the- Slst day of December next preceding the time for levying and collecting said tax, and shall be levied on the 1st day of March,, 1871.' "Act of August 27, 1894 (128 Stat, at L. 553, § 27, chap.. 349, U. S. Comp. Stat. 1901, p. 2260) : 'Tax to be levied January 1, 1895, on income for the year ending December 31 next preceding time of levy' (§1 and §: 30). "English income-tax laws are as follows : Act June 22, 1842 (5 and 6 Vict. c. 35) : Taxed income from' April 5, 1842. Act June 28, 1853 (16 and 17 Vict. c. 34) : Taxed income- from April 5, 1853. Since 1860 the English tax has been re-enacted annually (16- Halsbury's Laws of England, 609). The act of April 29, 1910- (10 Edward VII and 1 Geo. V, c. 8, § 65), is an example, which provides '(1) Income tax for the year beginning on the 6th day of April, 1909, shall be charged at the rate of Is. 2d. § 29] TAXATION OF INCOME PEEVIOUSLY COLLECTED. 115 '(2) All such enactments as were in force on the 5th day of April, 1909, shall, subject to the provisions of this act, have full force and effect with respect to any duties of income tax hereby granted." "IV. The economic conception of an income tax is against Mr. Root's interpretation. From the economist's point of view the income tax is a con- tribution by each individual, based upon his ability to pay, measured by his income. A man's income for the preceding year is the most natural measure of his ability. And, as we have seen above, all previous income-tax measures have been levied on that basis. Nor would it make the tax a 'capitation' tax to consider it in this way. 'Capitation' taxes, in the constitutional sense, are poll taxes, levied upon all men equally, without regard to wealth or extrinsic circumstances. (Cooley, Taxation 3d ed. p. 28; Hylton V. U. S. 3 Ball. 171 ; Springer v. U. S. 102 U. S. 586, 26 L. ed. 253 ; Head Money Cases, 18 Fed. 135, 139 ; Glas- gow V. Eowse, 43 Mo. 480). It is true that in Pollock v. Farmers' Loan & Trust Co. 158 U. S. 601, 39 L. ed. 1108, 15 Sup. Ct. Eep. 912, the court stated the economic theory and expressly refused to follow it to its logical conclusion in the case of income from property, insist- ing upon the necessity of considering also the source whence the income was derived. (See p. 629.) But that holding does not help Mr. Root's contention. The holding was that a tax upon the income of property is a tax upon the property itself, not because the income is property, but because the tax reaches back through the income to the source from which it springs. Knowl- ton V. Moore, 178 U. S. 41, 82, 44 L. ed. 969, 986, 20 Sup. Ot. Rep. 749. Therefore the sixteenth amendment, which was passed with the express purpose of escaping that decision, must be held to give power to levy a direct tax on a property, at least that hind of a direct tax on property which is measured by its income. As was suggested above, if the sixteenth amendment is really designed to permit a tax on property measured by in- come, there is no reason why income already accrued may not be taken as the standard. V. The usefulness of the tax as a war measure. "This was one of the reasons most persistently urged for the 116 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 20 adoption of the sixteenth amendment Mr. Root's interpre- tation would seriously impair its effectiveness, however. How could large amounts of money be raised with any degree of quickness if Congress must wait a year for income to accrue? And of course Mr. Eoot's objection would apply to an increase in the rate of taxation as well as to the original imposition of a tax. That this is a consideration of real substance is shown by the fact that the income tax of 1861, for instance, was aimed at income for the entire year of 1861, though passed on August 5 of that year. (12 Stat, at L. 292, chap. 45. And as the war proceeded it was found necessary to levy (Resolution July 4, 1864) a special income tax on income for the whole year 1863. (13 Stat, at L. 417). It would be very unfortu- nate if the sixteenth amendment would not permit such a war measure, and for Congress to assent to such a construction by amending the law at this time would be a contemporaneous leg- islative interpretation of some weight if the question ever arose hereafter. Faithfully, Thuelow M. Gordon, Special Assistant to the Attorney- General. Opinion of Senator John K. Shields. "The argument, advanced to support the contention of the Senator is predicated solely upon the assumption that profits, dividends, and other moneys, constituting an income, when received, immediately become 'principal,' or, in other words, is incorporated into the corpus of the estate of the taxpayer, and therefore not subject to direct taxation without apportionment This involves the further assumption that the tax imposed can only be collected out of the income of the taxpayers, or, in other words, that his general estate can not be subjected to its payment. 'The question whether or not an income accrued immediately and automatically becomes principal or a part of the general estate of the owner, whether sound or unsound in economics or financial evolution, is not in my opinion material to the ques- tion involved. But it is unsound. An income is defined to be: 'That gain which proceeds from labor, business, property, or capital of any kind, as the produce of a farm, the rent of houses, the proceeds of professional business, or money or stock funds, § 29] TAXATION OF INCOME PEEVIOUSLY COLLECTED. 117 etc. ; salary, especially the receipts of a private person or a cor- poration from property.' This is the natural and obvious sense of the term, and it is so used in the constitutional amendment and in this bill. The gain, profit, or acquisition constituting the income when it ac- crues and is ascertained becomes an entity and property as much as a farm, bonds, corporate stocks, or other property from which it may have had its source. That it may automatically immediately become incorporated into the estate of the owner or invested thereafter to yield an income, or is spent, given away, or consumed, does not destroy the property entity of the value it had when it accrued. The fact that the property ex- isted and was owned by the taxpayer at one time is indestruc- tible. I suppose the objection of the Senator goes only to compu- tations on incomes arising from property, real and personal,, and not to those on incomes from business. The question really presented for consideration is whether the provision of the bill for the tax for the current year is retro- active in its operation and imposes a liability for taxes before the enactment of the law, and is for this reason unconsti- tutional. The constitutional amendment under which this tax in part is imposed without apportionment ordains : 'The Congress shall have power to lay and collect taxes on incomes from whatever source derived, without apportionment among the several States and without regard to any census or enumeration.' It is well settled that — 'The language of a constitutional amendment should be read in connection with the known condition of affairs out of which the occasion of its adoption may have arisen, and then con- strued, if there be therein any doubtful expressions, in a way, so far as is reasonably possible, to forward the known purpose or object for which the amendment was adopted.' Maxwell v.. Dow, 1T6 U. S. 597, 44 L. ed. 603. It is a part of the history of this country that much of the? personal property owned by everyone, and the great accumu- lations of wealth in the hands of the few, had for years escaped: taxation. They could not be taxed direct without apportion- 118 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 29 ment, whicli was not deemed advisable. The income-tax law of 1894 was enacted to remedy this injustice and to make this property bear its just proportion of the expenses of the Gov- ernment. The Supreme Court of the United States held that tax, in so far as it was imposed upon incomes received from real estate and personal property, to be a direct property tax and, being levied without apportionment, unconstitutional. The tax upon incomes which arose from other sources, and upon which an excise tax could be imposed, was not held void for that reason, but the contrary conceded. Pollock v. Earmers' Loan & Trust Co. 158 U. S. 618, 630, 39 L. ed. 1119, 1123, 15 Sup. Ct. Eep. 912. The sixteenth amendment to the Constitution was proposed and adopted to authorize Congress to impose a tax like that of 1894, after which this is modeled, and which is proposed to be enacted under that power, in so far as it taxes incomes arising from real and personal property. Congress already had the power to impose a tax without apportionment on incomes aris- ing from gains, profits, or other acquisitions in a business or- dinarily called an excise tax. Flint v. Stone Tracy Co. 220 U. S. 107, 55 L. ed. 398, 31 Sup. Ct. Eep. 342, Ann. Cas. 1912 B, 1312. There are two grounds upon which, in my opinion, the tax for the current year can be sustained. First. The Congress has general power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States, unlimited save that duties, imposts, and excises shall be uniform throughout the United States, and no capitation or other direct tax shall be laid unless in proportion to the census or enumeration, directed to be taken decennially, nor on articles exported from other States. (Constitution, Art. I, sees. 8 and 9). The Constitution contains no provision prohibiting the Con- gress from imposing a tax upon property owned or business done by the taxpayer previously to the enactment of the law levying the tax. The general rule is that the Congress, within constitutional limitations, has absolute power to determine the objects of taxation and the method of the assessment of the tax. § 29] TAXATION OF INCOME PEEVIOUSLY COLLECTED. 119 Cooley's Con. Lim. 737; Flint v. Stone Tracy Co. 220 U. S. 167, 65 L. ed. 420, 31 Sup. Ct. Eep. 342; Weston v. City of Charleston, 2 Pet. 466, 7 L. ed. 487. Therefore if the bill be construed to impose the tax for cur- rent year on account of the ownership of incomes received — property owned and business done previous to the enactment of the law — it is within the power of Congress, without con- stitutional objection, and valid. There is no constitutional prohibition of retroactive legisla- tion which will affect this tax. Black's Con. Law 753 ; Cooley's Con. Lim. 529 ; Satterlee v. Matthewson, 2 Pet. 380, 7 L. ed. 458; Drehman v. Stifle, 8 Wall. 595, 19 L. ed. 508. If the constitutional amendment changes or authorizes Con- gress to change the classification of a tax on incomes derived from property from that of a direct tax to that of an excise tax, and the tax here imposed is one of the latter class, then the provision for computing incomes before the enactment of the bill is clearly a mere method of assessment and not only al- lowable, but usually done in assessing excise taxes. The au- thorities authorizing this manner of assessment of excise taxes will be hereafter stated. Second. The provision of the bill requiring incomes received by the taxpayer from all sources, from March 1, 1913, to be computed in ascertaining the tax to be paid for the current year is not the imposition of a retroactive tax, but the method of assessment of the tax imposed for that part of the current year after the enactment of the law, consisting in part of a property tax and in part of an excise tax, and is valid and constitutional. It is immaterial what the tax is called. The courts will treat it according to its correct classification as ascertained by the leg- islative intent disclosed in the bill when construed in the light of its legislative and judicial history. I am inclined to think the tax imposed is a property tax in part and excise tax in part. It is a property tax so far as imposed upon incomes accruing to the taxpayers from real and personal property, and an excise tax so far as laid upon incomes arising from all other sources. I do not think the constitutional amendment was intended to change the classification of the tax, but merely to allow it to be imposed without apportionment. In so far as it is a property tax, it is imposed upon the tax- 120 CONSTITUTIONAI, OBJECTIONS TO STATUTE. [§29 payer as the owner of so nmcli property — that certain portion in value of his property which he acquired as an income from real and personal property — during certain periods for the current year, from March 1 to December 31, and thereafter annually. The extent of the property — the portion of the estate of the taxpayer upon which he is taxed — is thus measured by the in- come received during said periods, to be ascertained and fixed as in the bill prescribed. This, under the Pollock cases, is a direct tax, but it is now authorized, without apportionment, by the constitutional amendment under which it is proposed to be enacted. It is an excise tax so far as it is imposed on incomes from all other sources, as has been decided by the Supreme Court in many cases. There seems to be no valid objection to imposing the two classes of taxes in the same law. This was done in the act of 1894 and not considered objectionable. The court, referring to it in the Pollock cases, expressly stated that this point did not affect its decision. Pollock v. Farmers' Loan & T. Co. 158 U. S. 636, 39 L. ed. 1125, 16 Sup. Ct. Kep. 912. The Congress, within constitutional limitations, has plenary power to select the objects of taxation and the methods by which the tax imposed shall be levied, assessed, and collected. It may, with proper uniformity, tax all the property of the tax- payers or only a portion or a certain kind of it. It may impose an excise tax on all business, avocations, or on part of them. It also has almost unlimited power in providing for the se- lection of the property to be taxed, and all necessary machinery for the assessment of the same for taxation and for the col- lection of the tax. These principles are elementary. Cooley's Con. Lim. 737, 739; Cooley's Taxation, vol. 1, 602-604. In the case of Flint v. Stone Tracy Co. 220 U. S. 167, 55 L. ed. 420, 31 Sup. Ct. Eep. 342, it is said: 'We must not forget that the right to select the measure and objects of taxation devolves upon the Congress and not upon the courts, and such selections are valid unless constitutional limitations are overstepped.' All the authorities agree that the basis of an assessment for taxation may be retrospective. Oooley on Taxation, vol.. 1, p. 492. § 29] TAXATION OF INCOME PREVIOUSLY COLLECTED. 121 The same method, it is true, is here provided for assessing the property tax and the excise tax imposed, but I can see no objectiob. to the bill on this account. It is equally applicable to both taxes and makes the machinery less complicated and easier of operation. Direct taxation by reason of the ownership of property and an excise tax upon business are merely different methods by which the same end is reached ; that is, by which the taxpayer is made to contribute out of his property to the sup- port of the Government. As before stated, the provision of the bill requiring the com- putation of incomes received by taxpayers during the periods mentioned in the bill is merely the basis for the assessment of the tax, and it is well settled that incomes received before the law is passed may be considered in ascertaining the tax to be paid for the first year. The excise cases decided by the Supreme Court of the Unit- ed States sustain these conclusions. They are directly in point in so far as the property taxed arises from incomes from busi- ness subject to an excise tax and clearly analogous where the income arises from real and personal property, both of which are to be found in this bill. The court has held in all these cases that the tax to be col- lected may be measured by the business done, the profits made, the dividends accrued, and the gains made for periods previous to the enactment of the law imposing the tax, in some other cas- es a part of the year, like the present law, and in others the year previous to that in which the law was enacted. It is also held that where the basis fixed for the assessment is a percentage on the capital stock or business done by a corpo- ration, and that in this way assets which are exempt from tax- ation and business not taxable are included in making the as- sessment, the validity of the tax imposed is not affected. In Home Ins. Co. v. IT. Y. 134 U. S. 594, 33 L. ed. 1025, 10 Sup. Ct. Eep. 593, the tax in question was imposed upon the privilege of the complainant to do business as a corporation within the State and was measured by the extent of the divi- dends of the corporation of the current year upon the capital stock, some two million dollars of which were invested in bonds of the United States exempt from taxation. The tax was at- tacked because this mode of assessing the same included the 122 COITSTITUTIOWAL OBJECTIONS TO STATUTE. [§ 29 value of exempt property. The court, in sustaining the tax, said: 'It is not a tax in terms upon the capital stock of the com- pany, nor upon any bonds of the United States composing a part of the stock. The statute designates it a tax upon the 'cor- porate franchises or business' of the company, and reference is only made to its capital stock and dividends for the purpose of determining the amount of the tax to be enacted each year. The validity of the tax can in no way be dependent upon the mode which the State may deem fit to adopt in fixing the amount for any year which it will exact for the franchise. No constitu- tional objection lies in the way of a legislative body prescribing any mode of measurement to determine the amount it will charge for the privilege it bestows.' The case of the State of Maine v. Grand Trunk Ey. Co. in- volves an excise tax levied by the State upon railroad corpo- rations for the privilege of exercising their franchise within the State, the tax being fixed by a certain percentage of the trans- portation receipts of the company, including interstate and for- eign commerce, for the previous year. The tax was assailed upon the ground that it was a burden upon interstate commerce and the business done in a former year. The court sustained the tax. In the opinion, among other things, it is said: 'The character of the tax or its validity is not to be deter^ mined by the mode adopted in fixing its amount for any specific period or the time of its payment. The whole field of inquiry into the extent of revenue from sources at the command of the corporation is open to the consideration of the State in deter- mining what may be justly exacted for the privilege. * * * 'And if the inquiry of the State as to the value of the privi- lege were limited to the receipts of certain past years instead of the year in which the tax is collected it is conceded that the validity of the tax would not be affected ; and if not, we do not see how a reference to the results of any other year could affect its character. There is no levy by the statute on the receipts themselves, either in form or fact; they constitute, as stated above, simply the means of ascertaining the value of the privi- lege conferred.' In Stockdale v. Atlantic Ins. Co. 20 Wall. 341, 22 L. ed. 354, an excise tax assessed upon dividends declared by the § 29] TAXATIOIT OS INCOME PREVIOUSLY COLLECTED. 123 company previously was held to be valid. Mr. Justice Miller in his opinion 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, can not be doubted ; much less can it be doubt- •ed 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 5 per cent, upon all incomes 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.' Flint V. Stone Tracy Co. 220 U. S. 142, 55 L. ed. 410, 31 Sup. Ct. Eep. 342, Ann. Cas. 1912 B, 1312 — the corporation- tax case — is the latest excise-tax case. All the cases where ex- cise taxes have been attacked, because in the measurement or assessment of the tax property nontaxable, and profits, in- •comes, and business accruing previous to the passage of the law, were included and valued, are reviewed, and it is there held that the Government may use these methods in measuring or assess- ing the tax imposed without affecting the validity of the tax. I think the principle controlling all these cases is the same here involved, and sustains the tax proposed to be imposed. There is nothing in the amendment requiring the tax to be paid or collected out of the specific moneys constituting the income accruing during said periods, and what the taxpayer does with the moneys constituting his income is immaterial. It can not have the effect to relieve him of the tax imposed upon him as the owner of property of its value. This tax, like all other taxes, is a debt due to the Government, and collectible out of any of the taxpayer's property that may be found. If the law was otherwise, the payment and collection of the tax would be dependent upon the ability of the taxpayer to dis- pose of his income before the authorities could seize it for the payment of his just contribution to the expenses of the Gov- ernment. The statutes of a majority, if not all, of the States provide that property shall be assessed against the owners upon some certain day of the year and that transfers after that shall not affect the assessment. The owner of the property upon the day of the assessment is liable for the tax thereon according 124 CONSTITUTIOITAL OBJECTIONS TO STATTJTE. [§ 29 to the assessment made, notwithstanding the general assembly, municipal council, or other taxing power may levy the tax on a subsequent day of the year. The property of the citizens taxed for that year is here measured by that which they own on the day fixed for the assessment, and which is made as of that day. These laws have never been questioned so far as I can find. The provisions of this bill upon this question are not different from the income-tax laws of England and those heretofore en- acted in this country. The English income tax enacted June 28, 1853, provided that the same should be operative and effective from and- after April 5, 1852, and of course included incomes accruing pr*^ vious to its, enactment. The income tax imposed by Congress August 5, 1861, ex- pressly provided that — "the tax herein provided shall be assessed upon the annual in- comes of the persons hereinafter named for the year next pre- ceding the 1st of January, 1862, and the said taxes when so assessed and made public shall become a lien upon the property or other sources of said income for the amount of the same, with the interest and other expenses of collection until paid." (12 Stat, at L. 309, chap. 45): Here the tax was imposed upon the incomes accruing be- tween January 1, 1861, and August 5 of that year, the day of the enactment of the law. The act of July 14, 1862, superseding the one above stated, provided for the assessment upon incomes received from and after January 1 of that year, or for a period of six months be- fore the act was passed. The income tax of 1894, enacted in August of that year provided for the taxation of incomes from the beginning of the current year and was attacked upon this ground. The question was not decided in the cases which reached the Supreme Court of the United States, but it was held by the Supreme Court of the District of Columbia in the case of Moore v. Miller, decided January 23, 1895, that there was nothing in the objection. In that case Hagner, J., said : 'This provision is of the same character as those appearing in the former income acts of the United States. § 29] TAXATION OF INCOME PEEVIOUSLY COLLECTED. 125 'The first act, passed on the 5th of August, 1861, declared that from and after the 1st of January, 1862, there should be levied an income tax, which should be assessed in the first in- stance 'upon the annual income for the year preceding the 1st of January, 1862,' thus including in return the income that had accrued during the seven months next preceding the pas- sage of the law. 'The act of the 14th of July, 1862, which superseded the first law, declared that the tax should be levied on the 1st of May, 1863, upon the income of the preceding year ending the 51st of December, 1862, including thereby the six months and a half of the year that had expired at the time the act was passed. 'The English act of 1853, passed on the 28th of June, 1853, declared that the income tax thereby established should be oper- ative from and after the 5th day of the preceding April. 'No authority was quoted in support of this contention, and I have been unable to discover any if it exists. 'But the very point appears to have been decided the other way in 20 Wall. 331, 22 L. ed. 351, Stockdale v. Ins. Co., where Mr. Justice Miller said: 'The right of Congress to have im- posed this tax by a new statute, although the measure of it was governed by the income of the past years, can not 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 5 per cent on all incomes of the previous year, although one tax on it had already been paid; and no one doubted the validity of the act or attempted to resist it' In a Pennsylvania case, in which a tax in substance was im- posed upon incomes, a similar question was presented and held not to affect the validity of the law : 'This act clearly intended to levy a tax of 3 per cent on the profits or income of the business, and was not meant to tax capital. Profits must necessarily be the net profits of the busi- ness, and the Commonwealth was to receive of them 3 per cent. It was in fact a tax upon the income of the business in which the defendants were engaged. The English income tax and the United States income tax are based upon the incomes received in 126 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 29* preceding yeart. The present United States income tax is laid upon the income of 1862, and the act of Congress of the 5th of August, 1861 (12 Stat, at L. 309, chap. 45), expressly declares that the tax herein provided shall he assessed upon the annual income of the person hereinafter named, for the year next preceding the 1st of January, 1862, and the said taxes, when so assessed and made public, shall become a lien upon the property or other resources of said income for the amount of the same, with the interest and other expenses of collection until • paid. 'It is clearly, therefore, perfectly constitutional, as well as expedient, in levying a tax upon profits or income, to take as the measure of taxation the profits or income of a preceding year. To tax is legal, and to assume as a standard the trans- actions immediately prior is certainly not unreasonable, partic- ularly when we find it always adopted in exactly similar cases. The tax is graduated upon each individual upon his individual receipts.' The Wisconsin income tax law went into effect July 5, 1911, but provided for taxing all incomes received during that year. The act was attacked, among other grotmds, upon the conten- tion that it was retroactive and void under the constitution of that State. The court is disposing of this question said : 'One further objection we overrule, here without comment, for the reason that it seems very unsubstantial, namely, the objection that the law is retroactive and valid, because assessed on income received during the entire year 1911, while it did not go into effect until July 15 of that year, and also because it includes profits derived from the sale of property purchased at any time within three years previously.' (Income Tax eases, 148 Wis. 456, 514, 134 K W. 673, 135 IST. W. 164, Ann. Cas. 1913A, 1147. In Wisconsin & M. E. Co. v. Powers (191 U. S. 379, 48 L. ed. 229, 24 Sup. Ct. Eep. 107) a statute was sustained which made the income of the railway company within the States, including interstate earnings, the prima facie measure of the value of the property within the State for the purpose of taxa- tion. In the course of the opinion the court said : 'In form the tax is a tax on 'the property and business of such railroad corporation operated within the State,' computed upon § 29] TAXATION OP INCOME PEEVIOUSLY COLLECTED. 127 certain percentages of gross income. The prima facie measure of the plaintiff's gross income is substantially that which was approved in Maine v. Grand Trunk K. Co." 142 U. S. 217, 228, 35 L. ed. 994, 995, 3 Inters. Com. Eep. 807, 12 Sup. Ct. Eep. 121, 163. The statute of Minnesota, passed for revenue purposes in 1905, levied a property tax to be computed upon the gross receipts of corporations doing both domestic and interstate business, the last of which, of course, could not be taxed by the State, as such a tax would be a burden upon interstate com- merce and in violation of the commerce clause of the Federal Constitution. The Supreme Court of the United States sus- tained this statute and upheld the tax. In the opinion de- livered for the court by Mr. Justice Day it is said: 'Upon the whole we think the statute falls within that class where there has been exercise in good faith of a legitimate tax- ing power, the measure of which taxation is in part the pro- ceeds of interstate commerce, which could not in itself be taxed and does not fall within that class of statutes uniformly con- demned in this court, which show a manifest attempt to burden the conduct of interstate commerce, such power, of course, being beyond the authority of the State.' Express Co. v. Minn. 223 U. S. 335, 56 L. ed. 459, 32 Sup. Ct. Eep. 211. These two last cases seem to be directly in point. They in- volved statutes imposing property taxes, measured or assessed by methods which involved in part the computation of property and incomes not within the taxing power of the State. This was but an application of the general principle that the legis- lature has the power to prescribe any method of assessment of property for taxation that may be deemed wise and efScieat and illustrates the important distinction between the subject of tax- ation and the method of assessment of taxation. I think the amendment without merit and the provision of the bill called in question constitutional." ^ A similar provision in Wisconsin was held by the Supreme Court of that State to be valid. "One further objection we overrule here without comment, for the reason that it seems very Cong. Record, A. d. 1913, Aug. 26, 1913, pp. 4183-4189. See Senate Boc, 171. 128 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 29 unsubstantial, namely, the objection that the law is retroactive and void, because assessed on incomes received during the entire year 1911, while it did not go into effect until July 15th of that year, and also because it includes profits derived from the sale of property purchased at any time within three years previously." ' § 30. Constitutionality of provisions concerning exami- nation of taxpayers. The constitutionality of the sections of the Eevised Statutes which apply to the collection of the in- come tax, have also been attacked. It has been claimed that the provisions authorizing the court to punish disobedience to the collector's summons as a contempt are not judicial, and con- sequently cannot be vested in one of the courts of the United States; and furthermore are a denial to the taxpayer of his right to trial by a jury, which is guaranteed him by the Sixth Amendment. The provisions for the examination of the tax- payer and his books have been also criticised as a violation of the Fifth Amendment to the Constitution, by compelling a person to be a witness against himself in a case which is in its nature criminal. The sections as amended are as follows: "Section 3173 : — It shall be the duty of any person, part- nership, firm, asKoeiation, or corporation, made liable to any duty, special tax, or otlier tax imposed by law, when not other- wise provided for, in case of a special tax, on or before the thirty-first day of July in each year, in case of income tax on or before the first day of March in each year, and in other cases before the day on which the taxes accrue, to make a list or return, verified by oath or affirmation, to the collector or a deputy collector of the district where located, of the articles or objects, including the amount of annual income, charged with a duty or tax, the quantity of goods, wares, and mer- chandise made or sold and charged with a tax, the several rates and aggregate amount, according to the forms and regu- lations to be prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, » Income Tax Cases, 148 Wis. 456, 514, 134 N. W. 673, 135 N. W. 164, Ann. CaR. 1913 A, 1147. § 30] EXAMINATIOIT OF TAXPAYERS. 129 for whicli such person, partnership, firm, association, or cor- poration is liable: Provided, That if any person liable to pay any duty or tax, or owning, possessing, or having the care or management of property, goods, wares, and merchandise, articles or objects liable to pay any duty, tax, or license, shall fail to make and exhibit a list or return required by law, but shall consent to disclose the particulars of any and all the property, goods, wares, and merchandise, articles, and objects liable to pay any duty or tax, or any business or occupation liable to pay any tax as aforesaid, then, and in that case, it shall be the duty of the collector or deputy collector to make such list or return, which, being distinctly read, consented to, and signed and verified by oath or affirmation by the person so owning, possessing, or having the care and management as aforesaid, may be received as the list of such person : Provided further. That in case no annual list or return has been ren- dered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suita- ble age and discretion, if such be present, otherwise to deposit in the nearest post-ofiice, a note or memorandum addressed to such person, requiring him or her to render to such collector ■or deputy collector the list or return required by law, within ten days from the date of such note or memorandum, verified by oath or affi[rmation. And if any person, on being notified or required as aforesaid shall refuse or neglect to render such list or return within the time required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax fails to do so at the time re- quired, or delivers any return which, in the opinion of the col- lector, is false or fraudulent, or contains any undervaluation •or understatement, it shall be lawful for the collector to sum- mon such person, or any other person having possession, cus- tody, or care of books of account containing entries relating to the business of such person, or any other person he may •deem proper, to appear before him and produce such books, at Foster Income Tax. — 9. 130 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 30 a time and place named in the summons, and to give testimony or answer interrogatories, under oath, respecting any objects liable to tax or the returns thereof. The collector may sum- mon any person residing or found within the state in which his district lies ; and when the person intended to be summoned does not reside and cannot be found within such state, he may enter any collection district where such person may be found, and there make the examination herein authorized. And to this end he may there exercise all the authority which he might lawfully exercise in the district for which he was com- missioned." "Section 8174. — Such summons shall in all cases be served by a deputy collector of the district where the person to whom it is directed may be found, by an attested copy delivered to such person in hand, or left at his last and usual place of abode, allowing such person one day for each twenty-five miles he may be required to travel, computed from the place of service to the place of examination; and the certificate of service signed by such deputy shall be evidence of the facts it states on the hearing of an application for an attachment. When the summons requires the production of books, it shall be sufficient if such books are described with reasonable certainty." * "Sec. 3175. — Whenever any person summoned under the two preceding sections neglects or refuses to obey such summons, or to give testimony, or to answer interrogatories as required, the collectors may apply to the judge of the District Court or to a commissioner of the Circuit Court of the United States for the district within which the person so summoned resides for an attachment against him as for a contempt. It shall be the duty of the judge or commissioner to hear the application, and, if satisfactory proof is made, to issue an attachment, directed to some proper ofiicer, for the arrest of such person, and upon his being brought before him to proceed to a hearing of the case; and upon such hearing the judge or commissioner shall have power to make such order as he shall deem proper not inconsistent with existing laws for the punishment of con- tempts, to enforce obedience to the requirements of the sum- § 30. 1 XJ. S. Rev. Stat, spction the production of corporate books to 3174' (U. S. Comp. Stat. 1901, p. aid in assessing holder of stock, see 2067). For note on power to compel 8 L.R.A. (N.S.) 788. § 30] EXAMINATION OF TAXPAYERS. 131 mens and to punish such person for his default or disobe- dience." * That Congress may grant the courts the power to make an order compelling testimony before the commissioner, or the production of books in a proper case, is established by the de- cision sustaining the constitutionality of the analogous pro- visions of the Interstate Commerce Law.* The twelfth section, of that act provided that : "For the purposes of this act the commissioner shall have power to require, by subpoena, the attendance and testimony of witnesses and the production of all books, papers, tariffs,, contracts, agreements, and documents relating to any matter- under investigation. "Such attendance of witnesses and the production of such documentary evidence may be required from any place in the United States, at any designated place of hearing. Aud in case of disobedience to a subpoena the commissioner, or any party to a proceeding before the commissioner, may invoke the aid of any court of the United States in requiring the attend- ance and testimony of witnesses and the production of books,, papers, and documents under the provisions of this section. "And any of the Circuit Courts of the United States withiu the jurisdiction of which such inquiry is carried on may, in cases of contumacy or refusal to obey a subpoena issued to any common carrier subject to the provisions of this act, or other person, issue an order requiring such common carrier or other person to appear before said commissioner (and produce books and papers if so ordered) and give evidence touching the matter in question; and any failure to obey such order of the court may be punished by such court as a contempt thereof." * The Circuit Court of the United States dismissed an appli- cation for an order compelling the attendance and testimony of witnesses, and the production of books before the commissioner, 2 U. S. Rev. Stat. § 3175. For 3 Interstate Gormmerce Commission' note on contempt in refusing to pro- v. Brimson, 154 U. S. 447, 38 L. ed. duce tooks and papers in response 1047, 4 Inters. Com. Rep. 545, 14 to subpoena upon ground that they Sup. Ct. Rep. 1125. contain private matter, see 29 L.R.A. 4 26 Stat, at L. chap. 128, p. 743 (N.S.) 716. (U. S. Comp. Stat. 1901, p. 3163) > 132 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§30 on the ground that this was not a controversy in law or equity, the determination of which could be vested in a court of the United States, and that consequently the section was void.' This decision was reversed upon appeal to the Supreme Court by a majority of five to three. Justices Haelan, Geay, Beown, Shieas and White voted in the affirmative; Chief Justice FuLLEE and Justices Beewee and Jackson in the negative. Mr. Justice Field, who was not present at the argument, took no part in the decision, but his opinion in the previous case of In re Pacific Railway Commission, 32 Fed. 267, indi- cates that he would have joined the minority. The reasoning upon which the decision was based is to be found in the following extracts from the opinion of Mr. Justice Haelan : "It is to be observed that independently of any question concerning the nature of the matter under investigation by the Commission — however legitimate or however vital to the public interests the inquiry being conducted by that body — the judg- ment below rests upon the broad ground that no direct pro- ceeding to compel the attendance of a witness before the Com- mission, or to require him to answer questions put to him, or to compel the production of books, documents, or papers in his possession relating to the subject under examination, can ibe deemed a case or controversy of which, under the Constitu- tion, a court of the United States may take cognizance, even if such proceeding be in form judicial. And the theory upon which the judgment proceeded is applicable alike to corpora- tions and individuals, although by the established doctrine of the courts a railroad corporation may, under legislative sanction and upon making compensation, appropriate private property for the purposes of its right of way, because and only because its road is a public highway established primarily for the convenience of the people and to subserve public objects, and, therefore, subject to governmental control. Cherokee Nation 6 In re Interstate Commerce Com- Commission, 32 Fed. 251, 267, per mission, 53 Fed. 476, per Gresham, Mr. Justice Field, Sawyer and Sa- J. See also In re Pacific Railway bin, JJ. § 30] EXAMHTATION OF TAXPAYEES. 133 V. Kansas Railway Co. 135 U. S. 641, 657, 34 L. ed. 295, 302, 10 Sup. Ct. Rep. 965. "What is a ease or controversy to which, under the Constitu- tion, the judicial power of the United States extends? Refer- ring to the clause of that instrument, which extends the judicial power of the United States to all cases in law and equity arising under the Constitution, the laws of the United States, and treaties made or that shall be made under their authority, this court, speaking by Chief Justice Marshail, has said: 'This clause enables the judicial department to receive juris- diction to the full extent of the Constitution, laws, and treaties of the United States when any question respecting them shall assume such a form that the judicial power is capable of acting on it. That power is capable of acting only when the subject is submitted to it by a party who asserts his rights in the form prescribed by law. It then becomes a case, and the Constitu- tion declares that the judicial power shall extend to all cases arising under the Constitution, laws, and treaties of the United States. Osborn v. Bank of the United States, 9 Wheat. 738, 819, 6 L. ed. 204, 223. And in Murray v. Hoboken Co. 18 How. 272, 284, 15 L. ed. 372, 377, Mr. Justice Cuetis, after observing that Congress cannot withdraw from judicial cog- nizance any matter which, from its nature, is the subject of a suit at the common law, or in equity or admiralty, nor, on the other hand, bring under judicial power a matter which, from its nature, is not a subject for judicial determination^ said: 'At the same time there are matters involving publie rights which may be presented in such form that the judicial power is capable of acting on them, and which are susceptible of judicial determination, but which Congress may or may not bring within the cognizance of the courts of the United States, as it may deem proper.' So, in Smith v. Adams, 130 U. S. 173, 32 L. ed. 897, 9 Sup. Ct. Rep. 566, Mr. Justice Field, speaking for the court, said that the term 'case' and 'contro- versies' in the Constitution embraced 'the claims or contentions of litigants brought before the courts for adjudication by regu- lar proceedings established for the protection or enforcement of rights, or the prevention, redress, or punishment of wrongs.' "1?esting the present proceeding by these principles, we are 134 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§30 of opinion that it is one that can properly be brought under judicial cognizance. "We have before us an act of Congress authorizing the Interstate Commerce Commission to summon witnesses and to require the production of books, papers, tariffs, contracts, agreements, and documents relating to the matter under in- vestigation. The constitutionality, of this provision, assuming it to be applicable to a matter that may be legally entrusted to an administrative body for investigation, is, we repeat, not disputed and is beyond dispute. Upon every one, therefore, who owes allegiance to the United States, or who is within its jurisdiction, enjoying the protection that its government affords, rests an obligation to respect the national will as thus expressed in conformity with the Constitution. As every citi- zen is bound to obey the law and to yield obedience to the constituted authorities acting within the law, this power con- ferred upon the Commission imposes upon any one, summoned by that body to appear and to testify, the duty of appearing and testifying, and upon any one required to produce such books, papers, tariffs, contracts, agreements, and documents the duty of producing them, if the testimony sought, and the books, papers, etc., called for, relate to the matter under inves- tigation, if such matter is one which the Commission is legally entitled to investigate, and if the witness is not excused, on some personal ground, from doing what the Commission requires at his hands. These propositions seem to be so clear and indisputable that any attempt to sustain them by argument would be of no value in the discussion. Whether the Commis- sion is entitled to the evidence it seeks, and whether the refusal of the witness to testify or to produce books, papers, etc., in his possession, is or is not in violation of his duty or in derogation ,of the rights of the United States, seeking to execute a power expressly granted to Congress, are the distinct issues between that body and the witness. They are issues between the United States and those who dispute the validity of an act of Congress and seek to obstruct its enforcement. And these issues, made in the form prescribed by the act of Congress, are so presented that the judicial power is capable of acting on them. "The question so presented is substantially, if not precisely, that which would arise if the witness was proceeded against § 30] EXAMINATION^ OF TAXPAYERS. 135 by indictment under an act of Congress declaring it to be an offence against the United States for any one to refuse to testify before the Commission after being duly summoned, or to produce books, papers, etc., in his possession upon notice to do so, or imposing penalties for such refusal to testify or to produce the required books, papers, and documents. A prose- cution for such offence or a proceeding by information to re- cover such penalties would have as its real and ultimate object to compel obedience to the rightful orders of the Commission, while it was exerting the powers given to it by Congress. And such is the sole object of the present direct proceeding. The United States asserts its rights, under the Constitution and laws, to have these appellees answer the questions pro- pounded to them by the Commission, and to produce specified books, papers, etc., in their possession or under their control. It insists that the evidence called for is material in the matter under investigation; that the subject of investigation is within legislative cognizance, and may be inquired of by any tribunal ■constituted by Congress for that purpose. The appellees deny that any such rights exist in the general government, or that they are under a legal duty, even if such evidence be impor- tant or vital in the enforcement of the Interstate Commerce Act, to do what is required of them by the Commission. Thus has arisen a dispute involving rights or claims asserted by the respective parties to it. And the power to determine it directly, and, as between the parties, finally, must reside some- where. It cannot be that the general government, with all the powers conferred upon it by the people of the United States, is helpless in such an emergency, and is unable to provide some method, judicial in form, and direct in its operation for the prompt and conclusive determination of this dispute. "As the Circuit Court is competent under the law by which it was ordained and established to take jurisdiction of the par- ties, and as a case arises under the Constitution or laws of the United States when its decision depends upon either, why is not this proceeding judicial in form and instituted for the deter- mination of distinct issues between the parties, as defined by formal pleadings, a case or controversy for judicial cognizance, within the meaning of the Constitution? It must be so re- garded, unless, as is contended, Congress is without power to 136 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§30 provide any method for enforcing the statute or compelling obedience to the lawful orders of the Commissioner, except through criminal prosecution or by civil actions to recover pen- alties imposed for non-compliance with such orders. But no limitation of that kind upon the power of Congress to regulate commerce among the states is justified either by the letter or the spirit of the Constitution. Any such rale of constitutional interpretation, if applied to all the grants of power made to Congress, would defeat the principal objects for which the Con- stitution was ordained. As the issues are so presented that the judicial power is capable of acting on them finally as be- tween the parties before the court, we cannot adjudge that the mode prescribed for enforcing the lawful orders of the Inter- state Commission is not calculated to attain the object for which Congress was given power to regulate interstate com- merce. It cannot be so declared unless the incompatability be- tween the Constitution and the act of Congress is clear and strong. Fletcher v. Peck, 6 Cranch. 87, 128, 3 L. ed. 162, 175. In accomplishing the objects of a power granted to it, Congress may employ any one or all the modes that are appro- priate to the end in view, taking care only that no mode em- ployed is inconsistent with the limitations of the Constitution. "We do not overlook these constitutional limitations which, for the protection of personal rights, must necessarily attend all investigations conducted under the authority of Congress, Neither branch of the legislative department, still less any merely administrative body, established by Congress, possesses, or can be vested with, a general power of making an inquiry into the private affairs of the citizen. Kilbourn v. Thompson, 103 U. S. 168, 190, 26 L. ed. 377, 386. We said in Boyd v. United States, 116 U. S. 616, 630, 29 L. ed. 746, 751, 6 Sup. Ct. Eep. 524 — and it cannot be too often repeated, — that the principles that embody the essence of the constitutional liberty and security forbid all invasions on the part of the government and its employees of the sanctity of a man's home, and the privacies of his life. As said by Mr. Justice Field, In re Pa- cific Eailway Commission, 32 Fed. 241, 250, of all the rights of the citizen, few are of greater importance or more essential to his peace and happiness than the right of personal security, and that involves, not merely protection of his person from as- § 30] EXAMINATION OF TAXPAYEES. 137 sault, but exemption of his private affairs, books, and papers from the inspection and scrutiny of others. Without the en- joyment of this right, all others would lose half their value." * "Without the aid of judicial process of some kind, the reg^a- lations that Congress may establish in respect to interstate commerce cannot be adequately or efficiently enforced. One mode, as already suggested, — the validity of which is not ques- tioned, — of compelling a witness to testify before the Inter- state Commerce Commission, to answer questions propounded to him relating to the matter under investigation and which the law makes it his duty to answer, and to produce books, papers, etc., is to make his refusal to appear and answer, or to produce the documentary evidence called for, an offence against the United States punishable by fine or imprisonment. A criminal prosecution of the witness under such a statute, it is conceded, would be a case or controversy within the meaning of the Constitution, of which a court of the United States could take jurisdiction. Another mode would be to proceed by in- formation to recover any penalty imposed by the statute. A proceeding of that character, it is also conceded, would be a case or controversy of which a court of the United States could take cognizance. If, however. Congress, in its wisdom, authorizes the Commission to bring before a court of the United States for determination the issues between it and a witness, that mode of enforcing the act of Congress, and of compelling the witness to perform his duty, is said not to be judicial, and is beyond the power of Congress to prescribe. "We cannot assent to any view of the Constitution that can- cedes the power of Congress to accomplish a named result, in- directly, by particular forms of judicial procedure, but denies its power to accomplish the same result, directly, and by a different proceeding judicial in form. We could not do so without denying to Congress the broad discretion with which it is invested by the Constitution of employing all or any of the means that are appropriate or plainly adapted to an end which has unquestioned power to accomplish, namely, the protection 8 Interstate Commerce Commission L. ed. 1056-10,58, 4 Inters. Com. V. Brimson, 354 U. S. pp. 474-479, 38 Eep. 545, 14 Sup. Ct. Eep. 1125. 138 CO^fSTITUTIOBTAL OBJECTIONS TO STATUTE. [§ 30 of interstate commerce against improper burdens and discrim- inations." ' "The present proceeding is not merely ancillary and advisory. It is not, as in Gordon's case,* one in which the United States :seeks from the Circuit Court of the United States an opinion that 'would remain a dead letter, and without any operation upon the rights of the parties.' The proceeding is one for de- termining rights arising out of specified matters in dispute that •concern both the general public and the individual defendants. It is one in which a judgment may be rendered that will be •conclusive upon the parties until reversed by this court. And that judgment may be enforced by the process of the Circuit Court. Is it not clear that there are here parties on each side of a dispute involving grave questions of legal rights, that their respective positions are defined by pleadings, and that the cus- tomary forms of judicial procedure have been pursued? The performance of the duty which, according to the contention of the government, rests upon the defendants, cannot be directly -enforced except by judicial process. One of the functions of a ■court is to compel a party to perform a duty which the law re- quires at his hands. If it be adjudged that the defendants are, in law, obliged to do what they have refused to do, that deter- Tnination will not be merely ancillary and advisory, but, in the v?ords of Sanborn's case, will be a 'final and indisputable basis of action,' as between the Commission and the defendants, and will furnish a precedent in all similar cases. It will be as much a judgment that may be carried into effect by judicial pro- cess as one for money, or for the recovery of property, or a judg- ment in mandamus commanding the performance of an act or •duty which the law requires to be performed, or a judgment prohibiting the doing of something which the law will not sanc- tion. It is none the less the judgment of a judicial tribunal ■dealing with questions judicial in their nature, and presented in the customary forms of judicial proceedings, because its eifect juay be to aid an administrative or executive body in the per- formance of duties legally imposed upon it by Congress in ■execution of a power granted by the Constitution. "> Interstate Commerce Commission L. ed. 1060, 4 Inters. Com. Rep. 545, V. Brimson, 154 U. S. 485, 486, 38 14 Sup. Ct. Rep. 1125. 8 Gordon v. U. 8., 117 U. S. 697. "§ 30] EXAMINATION OF TAXPAYEKS. 139 "This view is illustrated by the case of Fong Yue Ting v. United States, 149 U. S. 698, Y28, 87 L. ed. 905, 918, 13 Sup. Ct. Eep. 1016, which arose under the act of May 5, 1892, c. 60, prohibiting the coining of Chinese persons into the United States. The act provided for the arrest and removal from the United States of any person of Chinese descent unlawfully with- in this country, unless such person shall establish, by affirmative ^roof, to the satisfaction of a justice, judge, or commissioner of the United States before whom be might be brought and tried, his lawful right to remain in the United States. It also authorized the arrest of such person by any customs official, col- lector of internal revenue, or United States marshal, and taken before a United States judge. This court said : 'When, in the form prescribed by law, the executive officer, acting in behalf of the United States, brings the Chinese laborer before the judge, in order that he may be heard, and the facts upon which depends his right to remain in the country be decided, a case is duly submitted to the judicial power; for here are all the ele- ments of a civil case — a complainant, defendant, and a judge — actor, reus et judex. 3 Bl. Com. 25 ; Osborn v. Bank of the United States, 9 Wheat. 738, 819, 6 L. ed. 204, 223. No formal complaint or pleadings are required, and the want of them does not affect the authority of the judge or the validity of the statute.' "Another suggestion thrown out in argument against the validity of the twelfth section of the Interstate Commerce Act, in the particular adverted to, is that the defendants are not accorded a right of trial by jury. If, as we have endeavored to show, this proceeding makes a case or controversy within the judicial power of the United States, the issue whether the defendants are under a duty to answer the questions pro- pounded to them, and to produce the books, papers, documents, ■etc., called for, is manifestly not one for the determination of a jury. The issue presented is not one of fact, but of law ex- clusively. In such a case, the defendant is no more entitled to :a jury than is a defendant in a proceeding by mandamus to •compel him, as an officer, to perform a ministerial duty. Of course, the question of punishing the defendants for contempt could not arise before the Commission ; for, in a judicial sense, there is no such thing as contempt of a subordinate adminis- 140 CONSTITUTIO]SrAL OBJECTIONS TO STATUTE. [§30 trative body. ■'No question of contempt could arise until the issue of law, in the Circuit Court, is determined adversely to the defendants and they refuse to obey, not the order of the commission, but the final order of the court. And, in matters of contempt, a jury is not required by 'due process of law.' From the very nature of their institution, and that their law- ful judgments may be respected and enforced, the courts of the United States possess the power to punish for contempt. And this inherent power is recognized and enforced by a statute expressly authorizing such courts to punish contempts of their authority when manifested by disobedience of their lawful writs, process, orders, rules, decrees, or commands.^ Surely it cannot be supposed that the question of contempt of the au- thority of a court of the United States, committed by a disobe- dience of its orders, is triable, of right, by a jury. "We are of opinion that a judgment of the Circuit Court of the United States determining the issues presented by the petition of the Interstate Commerce Commission, and by the answers of the appellees, will be a legitimate exertion of ju- dicial authority in a case of controversy to which, by the Con- stitution, the judicial power of the United States extends. A final order by that court dismissing the petition of the Com- mission, or requiring the appellees to answer the questions pro- pounded to them, and to produce the books, papers, etc., called for, will be a determination of questions upon which a court of the United States is capable of acting and which may be en- forced by judicial process." ^^ Mr. Justice Beewee delivered the following strong dissent- ing opinion with the concurrence of the Chief Justice and Mr, Justice Jackson. "I agree as to the power of the United States over interstate commerce, but that throws no more light on the real question involved herein than an inquiry into the power of Congress to 9 Rev. Stat. § 725, 1 Stat. 83, chap. L. ed. 405, 408, 9 Sup. Ct. Rep. 77; 20, 4 Stat. 487, chap. 99 (U. S. Cartwright's Case, 114 Mass. 230, Comp. Stat. 1901, p. 583 ) ; United 238 ; Foster's Fed. Pr. 5th ed. §§ States V. Hudson, 7 Cranch, 32, 3 428-437. L. ed. 259; Anderson v. Dunn, 6 ^o Interstate Cornmerce Commis- Wheat. 204, 227, 5 L. ed. 242, 247; sion v. Brimson, 154 U. S. 487-489, Ex parte Robinson, 19 Wall. 505, 38 L. ed. 1060, 1061, 4 Inters. Com. 510, 22 L. ed. 205, 207; Ex parte Rep. 45, 14 Sup. Ct. Eep. 1125. Terry, 128 U. S. 289, 302, 303, 32 § 30] EXAMINATION OF TAXPAYEES. 141 enact laws would upon the question determined in Kilboum v. Thompson, 103 U. S. 168, 26 L. ed. 377, of the right of the House of Eepresentatives to punish as for contempt one who refused to disclose the business of a real estate partnership of which he was a member. The power of Congress to use all reasonable and proper means for exercising its control over interstate commerce carries with it no right to break down the barriers between judicial and administrative duties, or to make courts the mere agents to assist an administrative body in the prosecution of its inquiries. For, if the power exists, as is affirmed by this decision, it carries with it the power to make courts the mere assistants of every administrative board or executive officer in the pursuit of any information desired or in the execution of any duties imposed. It informs Congress that the only mistake it made in the Kilbourn case was in itself attempting to punish for contempt, and that hereafter the same result can be accomplished by an act requiring the courts to punish for contempt those who refuse to answer questions put by either house, or any committee thereof. "It must be borne in mind that this is purely and soley a proceeding for contempt. Wo action is pending in the court to enforce a right or redress a wrong, public or private. No in- quiry is being carried on in it with a view to the punishment of crime, nothing sought to be done for the perpetration of testimony or in aid of any judicial proceeding. The delinquent is punished for a contempt of court in refusing to testify before a commission in aid of an investigation carried on by such commission. What is this power vested in courts of punish- ment for contempt, and for what purpose is it vested ? It is a power of summary punishment and existing to enable the courts to exercise their judicial duties. 'Contempt of court is a specific criminal offense.' New Orleans v. New York Mail SS. Co. 20 Wall. 392, 22 L. ed. 357. In Anderson v. Dunn, 6 Wheat. 204, 227, 5 L. ed. 242, 247, it was said that 'Courts of justice are universally acknowledged to be vested, by their very creation, with power to impose silence, respect and decorum in their presence and submission to their law- ful mandates.' So in Ex parte Eobinson, 19 Wall. 505, 510, 22 L. ed. 205, 207: 'The power to punish for contempts is inherent in all courts; its existence is essential to the preser- 142 CONSTITUTIOIirAI. OBJECTIONS TO STATUTE. [§30 vation of order in judicial proceedings, and to the enforce- ments of the judgments, orders, and writs of the courts, and consequently to the due administration of justice. The moment the courts of the United States were called into existence and invested with jurisdiction over any subject, they became pos- sessed of this power.' And in Ee Cooper, 32 Vt. 253, 257: 'The power to punish for contempt is inherent in the nature and constitution of a court. It is a power not derived from any statute but arising from necessity; implied because it is nec- essary to the exercise of all other powers.' "A contempt presupposes some act derogatory to the power and authority of the court. But before this proceeding was initiated the only authority disregarded was that of the com- mission. The court treats such acts derogatory to the powers of the commission as derogatory to its own, and punishes, as for a contempt of its own authority, one who disobeys the order of the commission. It is no sound answer to say that the court orders the witness to testify and punishes for disobe- dience of that order. The real wrong is in not testifying before the commission, and that is the ground of the punishment. Otherwise any disregard of any duty can be treated as a con- tempt of court and punished as such. It will be sufficient to cite the delinquent and order his punishment as for a contempt of court unless he discharges that duty. His failure to obey the order of the court is only the nominal, while the failure to discharge the prior duty is the real ground of punishment. No forms of statement can change the substantial fact that the inherent power of courts to punish for contempt is exercised, not to preserve the authority of the court, not in aid of pro- ceedings carried on in them, but to aid a merely administrative body, and to compel obedience to its requirements. It makes the courts the mere assistants of a commission. "It is said that this proceeding is substantially, if not pre- cisely, similar to that which would arise if Congress had passed an act imposing penalties on parties refusing to testify before- a commission and a proceeding was commenced to recover such penalties. But surely the differences are vital. If such pro- ceeding was a criminal prosecution, defendants would have the constitutional guarantee of a trial by jury, and this, too, in an action at law if the amount of the penalty exceeded $20. By § 30] EXAMINATIOK OF TAXPAYERS. 143^ making it a proceeding for contempt, these constitutional pro- tections are evaded. Further, there is no penalty prescribed.. Refusal to answer is not made an offense, misdemeanor, or felony. "Suppose a law was enacted making criminal the refusal tO' answer questions put by a commission (and a statute would be necessary before such refusal could be adjudged criminal, for there are no common-law offenses against the United States- —United States v. Eaton, 144 U. S. 677, 36 L. ed. 591, 12 Sup. Ct. Rep. 764), would it not be necessary that the stat ute define the questions, or at least the scope of the questions- to be asked ? Would not an act be void for indefiniteness and lack of certainty which simply made criminal the refusal to- answered relevant questions in any proper investigation carried on before a commission? Would it not be like the famous- Chinese . statute : " 'Whoever is guilty of improper conduct, and of such as is contrary to the spirit of the laws, though not a breach of any specific part of it, shall be punished at least forty blows; and when the impropriety is of a serious nature, with eighty blows.' "Could it be left to the commission to select the matter of investigation, determine the scope of the inquiry, and thus,, as it were, create the crime? "Can all these difiiculties be avoided by bringing the refusal to testify before a commission within the reach of the com- prehensive inherent power of the courts to preserve their authority by proceedings for contempt? "But again, it is said that the act of Congress imposes upon all persons and corporations engaged in interstate commerce a duty to answer every proper question which the commission may see fit to ask, and that a refusal to answer constitutes a refusal to discharge a duty upon rightful demand. It is true that authority is conferred upon the commission to obtain information, but the act does not impose the duty to furnish it upon all persons interested in interstate commerce; and Con- gress cannot invest the commission with discretionary power to- create or not create a duty. If, when a question is asked, a duty is established, then the court would have no power to do any- thing except to enforce the act of the commission, if valid, or 144 OONSTITTTTIONAI^ OBJECTIONS TO STATUTE. [§30 punish its violation without inquiry, which, as has been stated, would make the court the mere ministerial agent of the com- mission. If the duty is not established, then the court is called upon to take part in a mere inquiry as to whether it would be lawful or expedient that the duty be established. It is not pre- tended that the court can take cognizance of the whole investi- gation on petition, and this application is not a part of any ju- dicial proceeding, nor could the order adjudicate anything. It is clear that the duty, if it exists at all, is a political and not a judicial duty. Would mandamus lie to compel the discharge of this duty ? Yet mandamus is the recognized proceeding for the enforcement of a duty. "It may be that it is the duty of every citizen to give infor- mation to the commission when demanded, but it is no more a duty than it is to avoid murder or other crimes ; to lead a life of social purity; to avoid fraud in business transactions, or neglect of other duties of good citizenship. Will it be pre- tended that these obligations can be enforced by the courts through proceedings as for contempt ? "To say that there is a case, something that calls for judicial action, because there are parties on the one side or on the other, is a breadth of definition hitherto unrecognized. Every effort at administrative or executive action, which is not voluntarily assented to by those whom it affects creates a dispute between parties. Can it be that every such dispute justifies an appeal to the courts, and presents a case for judicial action? If so, there is nothing which any administrative body or executive officer shall attempt to do which cannot be carried into the courts, and every failure to comply with the orders of such body or orncer makes the delinquent subject to punishment by the process of contempt. Hitherto the power to punish for contempt has been regarded as a power lodged in judges and courts to compel obedience to their orders, decrees, and judg- ments, and to support their authority. "This is something more important than a mere question of the form of procedure. It goes to the essential differences between judicial and legislative action. If this power of the courts can be invoked to aid the inquiries of any administrative body, or enforce the orders of any executive officer, why may uot the power to punish for contempt be vested directly in the § 30] EXAMINATION OF TAXPAYEES. 145 administrative board or in the executive officer? Why call in the court to act as a mere tool ? If the. interstate commerce commission can rightfully invoke the power of the courts to punish as for contempt those "who refuse to answer their ques- tions, why may not like power be given to any prosecuting at- torney, and he be authorized to summon witnesses, those for as well as those against the government, and in advance com- pel them, through the agency of the courts, to disclose all the evidence they can give on any expected trial ? If these ap- pellees have committed crime, punishment therefor comes only through the courts, and by the recognized procedure of infor- mation or indictment. They cannot be tried by the commission for any act done. "One often declared difference between judicial and legis- lative power is that the former determines the rightfulness of acts done ; the latter prescribes the rule for acts to be done. The one construes what has been; the other determines what shall be. As said in Cooley's Constitutional Limitations, side page 92: " 'In fine the law is applied by the one, and made by the other. To do the first, therefore, — to compare the claims of parties with the law of the land before established, — is in its nature a judicial act. But to do the last — to pass new rules for the regulation of new controversies — is in its nature a legislative act ; and if these rules interfere with the past, or the present, and do not look wholly to the future, they violate the definition of a law as "a rule of civil conduct ;" because no rule of conduct can with consistency operate upon what occurred before the rule itself was promulgated.' "So, for whatever the appellees have done in the past, whether they have violated any law of the land or not, an in- quiry is to be made in and by the courts. The judicial power cannot be invoked to sustain an investigation into past conduct which, when disclosed, may or may not be at the will of an administrative board or executive officer presented for judicial consideration or action. It is not meant to be affirmed that no inquiry can be made into past conduct or actions except through the power and processes of the courts. On the contrary, the full power of legislative or executive departments to inquire into what has been is conceded. But if designed to aid legisla- Foster Income Tax. — 10. 146 CONSTITtTTIOlirAL OBJECTIONS TO STATUTE. [§30 tive or executive action it must be by legislative or executive proceedings. Can the courts be turned into commissions o£ inquiry in aid of legislative action? "In short, and to sum it up in a word: If these appellees have violated any lavir their punishment should be sought in the ordinary way, by prosecution therefor in the courts. If they have violated no law, and the simple purpose is to elicit information for the guidance of the commission or the legisla- ture, let that information be sought by the ordinary processes of legislative or administrative bodies. "Take a familiar illustration : Once in ten years a census is ordered by authority of Congress, and the scope of that census, constantly enlarged, is to elicit from the citizens of the United States information as to a variety of topics. No thought of punishment for past misdeeds enters into such an inquiry. In- formation, and that only, is sought. It is unquestionably the duty of every citizen to respond to the inquiries made by the census officers and furnish the information desired. Can it be that courts can be authorized to make the refusal of a citizen to furnish any such desired information a contempt of their authority and to be punished as such? There is no question of the lawful power of Congress to elicit this information; possibly none as to its power to provide that a refusal to give the information shall be deemed a misdemeanor and prosecuted and punished as such. But it seems to me to obliterate all the historic distinction between judicial and legislative or adminis- trative proceedings to say that the courts can be called upon to punish as for a contempt of their authority a mere refusal to respond to this administrative inquiry as to facts. "This question was fully considered by Mr. Justice Field, while holding the Circuit Court, Ee Pacific K. Com. 32 Fed. 251, and the power of Congress to make the courts the mere assistants of an investigating committee was most emphatically denied. "I am authorized to say that the Chief Justice and Mr. Justice Jackson concur in the views herein expressed." ^^ On account of the division in the Supreme Court upon the il- Interstate Commerce Commission v. Brimson, 155 U. S. 1, 39 L-. ed. 49, 35 Sup. Ct. Eep. 19. § 30] EXAMINATION OB' TAXPAYEES. 14:7 question, it is possible that the point might be reconsidered. The Interstate Commerce Act is, however, in this respect, far different from the Revised Statutes regulating examinations under the Income Tax. By the Interstate Commerce Act, upon the failure of a witness to obey a subpoena, application is made to the court by the commission, through the district attorney, for an order directing the appearance of the witness. This order is not granted until the witness has had an opportunity to an- swer setting up his objections and a trial of the issue thus raised. It is not until after disobedience to the court that the witness may be punished for a contempt. On the other hand, section 3175 of the Revised Statutes of the United States provides that an attachment may be issued by the court, as for a contempt upon the disobedience of a taxpayer to a summons issued by the collector. Upon the return of that attachment with the body of the taxpayer, the court is directed to hear the case, "and upon such hearing the judge or commissioner shall have power to make such order as he shall deem proper, not incon- sistent with existing laws for the punishment of contempts, to enforce obedience to the requirements of the summons and to punish siich person for his default or disobedience." If this statute be construed in accordance with its apparent meaning, to authorize the court to punish a party for contempt in disobe- dience to the summons of the collector, and not to authorize the court to enter an order, directing the appearance and testi- mony of the taxpayer, and subsequently thereto, to punish the taxpayer for disobedience of the order, not for disobedience of the summons, it might be held to be unconstitutional as im- pairing the right of the taxpayer to trial by jury for the offense of disobeying the collector's summons, as well as for other reasons. Under the old act, the question was never brought to the Supreme Court of the United States. It was held, that notwithstanding the language of the statute, directing the issue of an attachment upon proof by the collector of disobedience to the summons, it was the better practice to proceed by an order to show cause. *^ Other decisions hold the act constitutional." IS In re Ohadimck, Lowell, 439, Fed. Cas. No. 11,097; Matter of infra Meador, 1 Abb. U. S. 317, 2 Am. 13 See Re Phillips, 10 Int. Eev. Law Times, 140; Fed. Cas. No. 9,375 ; Rec. 107, 3 Am. Law Times, 154, Btanmood v. Green, 2 Am. Law 148 CONSTITUTIOlirAL OBJECTIONS TO STATUTE. [§30 The question, however, deserves, and will undoubtedly receive, the careful consideration of the Supreme Court when brought before it by means of a writ of habeas corpus, or otherwise. § 31. Constitutionality of the grant of power to examine books of taxpayers. A further question arises concerning the power conferred upon the collector to examine a taxpayer and the latter's books of account in case of a failure to render a list or return. The Revised Statutes as amended in the Act of October 3, 1913, provide, "That in case no annual list or return has been rendered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suitable age and discretion, if such be present, otherwise to deposit in the nearest post office, a note or mem- orandum addressed to such person, requiring him or her to render to such collector or deputy collector the list or return required by law within ten days from the date of such note or memorandum, verified by oath or afl5rmation. And if any person, on being notified or required as aforesaid, shall refuse or neglect to render such list or return within the time required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax fails to do so at the time required, or delivers any return which, in the opinion of the collector, is false or fraudulent, or contains any undervaluation or understatement, it shall be lawful for the collector to summon such person, or any other person having possession, custody, or care of books of account containing entries relating to the business of such person, or any other person he may deem proper, to appear before him and produce such books, at a time and place named in the summons, and to give testimony or answer interrogatories, under oath, respecting any objects liable to tax or the returns thereof. The collector may summon any person residing or found within the State in which his district lies; pud when the person intended to be Times, 133, Fed. Cas. No. 1^,301; v. Fordyce, 13 Int. Rev. Eec. 77, Perry v. Newsome, 10 Int. Rev. Rec. Fed. Cas. No. 13,300. 20, Fed. Cas. No. 11,009; Stanwood § 31"] EXAMINATION OF BOOKS. 149 summoned does not reside and can not be found within such State, he may enter any collection district where such person may be found and there make the examination herein au- thorized. And to this end he may there exercise all the au- thority which he might lawfully exercise in the district for which he was commissioned." ^ The act provides: "That if any person, corporation, joint- stock company, association, or insurance company liable to make the return or pay the tax aforesaid shall refuse or neg- lect to make a return at the time or times hereinbefore speci- fied in each year, such person shall be liable to a penalty of not less than $20 nor more than $1,000.'' The object of such examination is consequently to ascertain whether the examined party is liable to a penalty for failing to make a return; that is, to a punishment for a violation of the law. It has been held that "suits for penalties and for- feitures incurred by the commission of offenses against the law, are of this g-wast-criminal nature ; we think that they are within the reason of criminal proceedings for all the purposes of the Fourth Amendment of the Constitution, and of that portion of the Fifth Amendment which declares that no person shall be compelled in any criminal case to be a witness against him- self; and we are further of opinion that a compulsory pro- duction of the private books and papers of the owner of goods sought to be forfeited in such a suit is compelling him to be a witness against himself, within the meaning of the Fifth Amendment to the Constitution, and is the equivalent of a search and seizure — and an unreasonable search and seizure — within the meaning of the Fourth Amendment." * A section of a New York statute imposing a tax upon trans- fers of shares of stock of corporation was held to be unconsti- tutional because it made it criminal for a stockbroker to refuse to permit the Comptroller to inspect his books to ascertain what transfers had been made upon which the tax had not been paid, § 31. lU. S. Eev. Stat. § 3173, 634, 635, 29 L. ed. 752, 753, 6 Sup. U. S. Comp. Stat. 1901, p. 2065, as Ct. Rep. 524 ; see also State of Texas amended by Act of Oct. 3, 1913, Sub- v. Day Land & Cattle Co. 41 Fed. section I. See also U. S. Rev. Stat. 228, 230; State of Iowa v. Chicago § 3176. B & Q. B. Co. 3 L.R.A. 554, 37 Fed- 2 Subsection F. 497, 500 ; United States v. Denicke, S Boyd V. United States, 116 U. S. 35 Fed. 407, 410. 150 CONSTITUTIONAL OBJECTIONS TO STATUTE. [§ 31 for the purpose of procuring information to base an action for the recovery of the tax and any penalty thereby incurred.* § 32, Constitutionality of distress proceedings. The provisions of the Revised Statutes authorizing a collection of taxes by distraint and sale ^ have been held constitutional.* The Supreme Court said, speaking through Mr. Justice SwATNE : "The proceedings of the collector were not in conflict with the Amendment to the Constitution which declares that no person shall be deprived of life, or pro'perty, without 'due process of law.' The power to distrain personal property for the payment of taxes is almost as old as the common law, Cooley, Tax. 302. The Constitution gives to Congress the power 'To lay and collect taxes, duties, imposts and excises. Except as to exports, no limit to the exercise of the power is prescribed. In McCuUoch v. Maryland, 4 Wheat. 316, 4 L. ed. 579, Chief Justice Maeshall said, 'The power to tax involves the power to destroy.' Why is it not competent for Congress to apply to realty, as well as personalty, the power to distrain and sell when necessary to enforce the payment of a tax? It is only the further legitimate exercise of the same power for the same purpose. In Murray v. Hoboken L. Co. 18 How. 274, 15 L. ed. 373, this court held that an act of Congress authorizing a warrant to issue, without oath, against a public debtor, for the seizure of his property, was valid ; that the warrant was con- clusive evidence of the facts recited in it, and that the proceed- ing was 'due process of law,' in that case. See also, De Treville V. Smalls, 98 U. S. 517, 25 L. ed. 174; Sherry v. McKinley, 99 U. S. 496, 25 L. ed. 330; Miller v. U. S. 11 Wall. 268, 20 L. ed. 135 ; Tyler v. Defrees, 11 Wall. 331, 20 L. ed. 161. "The prompt payment of taxes is always important to the p'lblic welfare. It may be vital to the existence of a govern- ment. The idea that every taxpayer is entitled to the delays of litigation is unreason. If the laws here in question involved 4 People ex rel. Ferguson v. Rear- § 32. 1 U. S. Eev. Stat. §§ 3187, don, 197 N. Y. 236, 243, 27 L.R.A. 3192, U. S. Comp. Stat. 1901, pp. (N.S.) 141, 134 Am. St. Rep. 871, 2073, 2075. 90 N. E. 829. See Rolson v. Doyle, 2 Springer v. V. 8. 102 U. S. 586, 191 111. 566, 61 N. E. 435. 26 L. ed. 253. § 32] BISTEESS PEOOEEDINGS. 151 any wrong or unnecessary harshness, it was for Congress, or the people who make congresses, to see that the evil was cor- rected. The remedy does not lie with the judicial branch of the Government." ' 8 Springer v, V. B. 102 U. S. 580, 26 L. ed. 253. CHAPTEE III. INCIDENCE OF THE TAX AND EXEMPTION OF TERRITORY AND PERSONS FROM THE SAME. § 33. The nature of the tax. The incidence of the tax is ordinarily upon the recipients of the income affected. In a large number of cases, however, it falls directly upon property by compelling the payment of the tax by debtors, collecting agents and persons acting in a fiduciary capacity, and author- izing their deduction of the same from the amount of income paid to its ultimate recipient.^ § 34. Incidence of the tax with respect to territory and places exempted from the same. The tax applies to all cit- zens of the United States, wherever resident, to all residents of the United States irrespective of their citizenship, to the in- come of all property owned and of every business, trade or profession carried on, in the United States by persons residing elsewhere.'' It is levied in Alaska, the District of Columbia, Porto Rico and the Philippine Islands.^ But it is "provided that the administration of the law and the collection of the taxes imposed in Porto Rico and the Philippine Islands shall be by the appropriate internal revenue officers of those govern- ments, and all revenues collected in Porto Kico and the Philip- pine Islands thereunder shall accrue intact to the general gov- ernments, thereof, respectively." * The Act expressly directs : "That the word 'State' or 'United States' when used in this section shall be construed to include any Territory, Alaska, § 33. 1 An interesting metapliysi- and was reprinted with a few cal discussion of the nature and in- changes in §§ 17 and 18 of the first cidence of the tax with respect to edition of the present work, property, written by Mr. Everett V. § 34. l Act of October 3, 1913, Abbot, of the New York bar, is to Sec. II, Subsection A, subd. 1. be found in Foster and Abbot on the 2 Hid. Subsections H and N. Income Tax of 1894, §§ 21 and 22, S IMd. M. 152 § 85] "WITH EESPECT TO PEKSONS. 153 the District of Columbia, Porto Kico, and the Philippine Is- lands, when such construction is necessary to carry out its pro- visions." * Although there might be gTound for argument that the phrase "any Territory" applies to the Hawaiian Is- lands, it was the evident intention of Congress that the resi- dents of Hawaii, at least when not citizens of the United States, are exempt from the tax, for the reason that the Legislature of Hawaii has imposed an Income Tax upon all residents of that territory.^ § 35. Incidence of the tax with respect to persons. The statute provides "that there shall be levied, assessed, collected and paid annually upon the entire net income arising or accru- ing 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." ^ 4 Ihid. H. of expatriation as "the natural and 5 Hawaii Law of April 30, 1901, inherent right of all people, indis- Session of 1901, Act 20, quoted in pensable to the enjoyment of the full, infra. Part V. rights of life, liberty, and the pur- § 35. 1 Act of Oct. 3, 1913, II, guit of happiness." U. S. Rev. Stat. Subsec. A. The result of the enact- § jggg^ u. S. Comp. Stat. 1901, p. ment has been to make a number of i269, 1 Fed. Stat. Anno. 788, Americans, resident abroad change pjerce's Fed. Code, § 1590. The Act their citizenship to that of the coun- ^j ^^^^^ ^ ^g^^ provides: "When tries of their residence. According , i- , ... t, i, t to the N. Y. Times of March I any naturalized citizen shal have 1914, five Americans, reiidciit in Lon- '"^^I'l''? ^"-^ t^°, yf ars m the foreign don, renounced their citizenship state from which he came, or for five during February, 1914. These were J^'ars m any other foreign state David Albert Seligman, Robert i* shall be presumed that he has James Wilson, Max Rink, Philip ceased to be an American citizen, Augustus Lange and Jeannie Baikie and the place of his general abode Clarke. That such would be the shall be deemed his place of resi- result of the income tax of 1894 dence during said years: Provided, was • prophesied by Senator Morrill however. That such presumption (Cong. Globe 1st Sess. 38th Cong, may be overcome on the presenta- 1863-1864, p. 1877, col. 2 ) . The Re- tion of satisfactory evidence to a vised Statutes recognize the right diplomatic or consular officer of the 154 INCIDENCE OE THE TAX. [§ 35 Under that section four possible cases may arise. Two are of citizens, with reference to their residence or nonresidence, and two are of aliens, with reference likewise to their resi- dence or nonresidence. There is no question as to the first United States, under such rules and regulations as the Department of State may prescribe: And provided also, That no American citizen shall be allowed to expatriate himself when this country is at war." 34 Stat, at L. 1228, chap. 2534, U. S. Comp. Stat. Supp. 1911, p. 490; Pierce's Fed. Code, § 1594. The following letter has been sent by the Secretary of State to the diplo- matic service. Depaetment or State, Washington, D. C, March 18, 19U- To THE AmEEICAN DIPLOMATIC AND Consular Officers ( Including CoNSTJLAE Agents). Gentlemen : The Department has received sev- eral inquiries concerning the pay- ment of the income tax under the provision of Section 2 of the Act of October 3, 1913, by persons resid- ing abroad who claim American cit- izenship. These inquiries involve particularly two questions : ( 1 ) Whether a naturalized American cit- izen who has brought upon himself the presumption of expatriation, under the provision of the second paragraph of Section 2 of the Act of March 2, 1907, by protracted resi- dence abroad, and has failed to over- come such presumption under the established rules is required to pay the income tax as an American citi- zen, and (2) whether a naturalized American citizen residing abroad can overcome the presumption of ex- patriation by payment of the income tax. The question as to liability of u, particular person to pay the in- come tax must be determined not by this Department but by the Treas- ury Department, under which the income tax law is administered. Persons making inquiry concerning this point should, therefore, be ad- vised to apply to the Treasury De- partment for information. With reference to the second in- quiry mentioned above your atten- tion is called to the fact that natu- ralized citizens of the United States who have brought upon themselves the presumption of expatriation, under the provision of the second paragraph of Section 2 of the Act of March 2, 1907, by protracted resi- dence abroad, may overcome such presumption only upon presenting "satisfactory evidence to a diplo- matic or consular officer of the Unit- ed States, under such rules and reg- ulations 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 per- son 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 in- come tax, this fact will receive due consideration in connection with other evidence submitted to over- come the presumption of expatria- tion under the established rules, and particularly with regard to the ques- tion 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 pro- tection 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. — I ani, Gentlemen, Your obedient Servant, W. J. Bryan. '^ 36] KESIDING IN UNITED STATES. 155 two, that the whole income of every citizen whether residing at home or abroad is taxed ; it is so specifically provided in the act. Similarly, it is expressly provided in the act that every person residing in the United States shall pay a tax upon all his income, from whatever source derived, which without ques- tion includes all resident aliens. Whatever, therefore, the power of Congress may be, its intent is clear, that in case of non-resident aliens the only measure of the tax is income derived •within the United States. With reference to aliens, therefore, it must be determined "whether they are resident in which case they must pay the tax ■on their whole income; or if not resident whether they own property or carry on a business, trade or profession in the United States. In the latter case, they are taxable only with reference to income earned or paid in this country. If they are non-resident and do not derive an income from any source within our terri- tory of course they are not taxable at all. In the first place, then, who is a resident? § 36. Meaning of phrase "residing in the United States." It has been said in England : "There is not much difficulty in ■defining the residence of an individual; it is where he sleeps and lives. * * * 'Reside' does not mean an artificial resi- dence. It means an actual residence. * * * Registration, like the birth of an individual, is a fact which must be taken into consideration in determining the question of residence. It may be a strong circumstance, but it is only a circumstance." * The question is often very difficult of solution. A learned Scotch judge said that "a man cannot have two domiciles at the same time, but he certainly can have two residences," ^ a, rule that seems to be well recognized in Great Britain. Ac- cording to Chief Baron Pollock^ "The word 'reside' does not necessarily mean dwell." ' According to Baron Maktin, § 36. 1 Calcutta Jute Mills v. 8 Lord Inglis in Lloyd v. Inland Nicholson, L. R. 1 Exch. Div. 428, Revenue, 21 Scot. L. E. 484. 45 L. J. Exch. N. S. 821, 35 L. T. 8 Attorney-General v. McLean, 1 N. S. 275, 25 Week. Rep. 71, 1 Tax Hurlst. & C. 750, 761. Cas. 83 (1876). 156 II^CIDEJSrCE OF TPIE TAX. [§ 3G "There was strong ground for contending that one who spends the day at his shop attending to his business, and may there be seen and conversed with on matters of business, and does not choose to be communicated with elsewhere, is 'residing' there." * It has been held that the British Government may collect a tax on the income of a man domiciled and carrying on business abroad, when he owns an estate in England and lives there five months of the year.^ And, e contra, it was held that under a statute exempting persons "actually in Great Britain for some temporary purpose only, and not with any view or intent of establishing his or her residence therein, and who shall not have actually resided in Great Britain for the period of six successive calendar months," one who bought a house in London, furnished it, left a woman in charge of it during his absence, and took his retinue to and from it, was taxable as a resident of Great Britain and not within the exemption, although he occupied the house only ten weeks in the year and spent the rest of his time at his estate in Ireland, which is not a part of "Great Britain." ® So an American citizen who practised law in New York, but held a shooting in Scotland for a term of years and spent two months there annually, was held to reside in Great Britain for the purpose of the income tax.' An American citizen was held to be a resident of the United King- dom when, for twenty years, he had lived on board his own yacht, anchored near the shore, in tidal navigable waters, within a British port, obtaining provisions and necessaries from the nearest village, although the yacht had always been kept fully manned and ready to go to sea at any moment.' The mere fact of presence in, or absence from, the place claimed to be the residence would seem not to be a controlling element. Thus it was held that a sailing master who was absent from his ilhid, p. 761. 42 Scot. L. E. 117, 7 F. 146, 5 Tax 6 Lloyd V. Inland Revenue, 25 Scot. Cas. 101, 1904. L. K. 782. 8 Brown v. Burt, 105 L. T. N. S. e Attorney-Oeneral v. Coote, 4 420, 81 L. J. K. B. N. S. 17, 5 Tax Price, 183. Caa. 667, 1911. "> Inland Revenue v. Cadwalader, i5 37] INCOME FROM PKOPEETY IN U. S. 157 home for all but eighty-eight days in the year was yet a resi- dent of the place where he hired a house and his family lived/ and similarly when he was absent the whole year.^" But a British merchant was held not to be assessable as a resident of the United Kingdom, although his wife and children had lived there for a number of years, occupying latterly a house bought in the wife's name with the money of both husband and wife, and the husband lived with them when in Great Britain, but he carried on business at Madras, India, usually resided there, and during the year of assessment was never in the United Kingdom.'^ § 37. Meaning of phrase "income from property owned in the United States." Non-resident aliens must pay a tax upon the net income of all property owned in the United States.^ When the property is tangible, the liability to the tax is easy of ascertainment. When the property is a chose in action, the question is more difficult of solution.^ Is interest due to a non-resident alien upon the obligation of a resident of the United States, whether the debtor is a citizen, an alien or a domestic corporation, subject to the tax? And is there any difference in this respect between debts evidenced by specialties, that is, bonds or other instruments under seal, and debts due upon promissory notes or other written, but un- sealed, promises to pay? And is there a difference in this respect between debts not evidenced in writing and promises that are merely oral ? Does the location of the instrument within the United States make any difference in this re- spect ? * 9 Young v. Inland Revenue, 12 ness in Victoria, but loaned money Scot. L. R. 602. there on the security of land, was 10 Rogers v. Inland Reverme, 16 ^eld to be taxable on the income Scot. L. R. 682. therefrom. England v. Webb, 67 L. 11 Turnbull v. Inland Revenue, 42 j^ p q j^ g ^goo [1898] A. C. 758. ^''o^iP" ■^'c^^,! ^ ?'•■■'■' "'a^*'*'i, J T Cf. Scottish Provident Institution Ib .,,^t" T 'A^f f ^RQ^ V Allen, 72 L. J. P. C. N. S. 70, HBy the Income Tax Act of 1895, rion^i I n ^oa of the Colony of Victoria a tax is L^^^fJ f'.^l'- , \ ■ s. c . r. imposed on ail income derived by any ^ ^s to this last point, see Scotch person from the produce of property Widows' Fund Life Assurance So- within Victoria. An insurance com- ciety v. Farmer [1909] S. C. 1372, pany which did no insurance busi- 46 Scot. L. R. 993, 5 Tax Cas. 502; 158 INCIDENCE OF THE TAX. [§ sr In accordance with an opinion by Attorney General McReyn- olds,* who has since been elevated to the Supreme Court of the United States, it has been ruled that this principle applies ta the dividends on the stock of domestic corporations owned by Scotch Provident Institution v. Far- mer [1932] S. C. 452, 49 Scot. L. R. 435, 6 Tax Cas. 34. 4 Op. A. G. Oct. 23, 1913. The reader may be interested in the fol- lowing acrimonious passage from the pamphlet upon "The Unconstitu- tional Character and the Illegal Ad- ministration of the Income Tax Law," by Mr. Albert H. Walker: "On November 15, 1913, I wrote and mailed a letter to Mr. W. H. Os- born. Commissioner of Internal Rev- enue, Washington, D. C, in which I called his attention to page 9 of the pamphlet of 'Regulations' which he had issued on October 25, 1913, and in which I pointed out that his 'Regulation' on that page, ex- pressly announced that .'non-resident foreigners owning interest bearing bonds are not subject to taxation on income from such bonds,' provid- ed they will sign and furnish certifi- cates for themselves to the effect that they are non-resident foreign- ers. I also pointed out to Mr. Os- born in that letter, that that pro- posed exemption of non-resident ali- ens from United States income taxes on the interest drawn by them from corporations organized and doing business in the United States, was a discrimination in favor of those non-resident aliens, as against all American citizens; and I also stated to the Commissioner in the same let- ter that no such discrimination was expressed in the income tax statute, and that it was plain enough, in the absence of any statutory authority therefor, that no administrative of- fioer was justified in making any such discrimination. "On November 20, 1913, not hav- ing received any reply to my letter of November 15 to Mr. Osborn, I wrote to him again upon the same subject, and called his attention to that decision in the Erie case which was written more than thirty years ago by Mr. Justice Bradley in the Supreme Court of the United Stat§&- and which, as I told him, is printed on pages 703, 704 and 705 of Vol- ume 108 of the Reports of the Su- preme Court of the United States- I told Mr. Osborn in that letter, that that decision was based upon, the Civil War income tax statute,, and that it related to the question, of the taxability under that statute, of coupons upon bonds which had. been issued by the Erie Railway Company, and which bonds and cou- pons were owned by non-resident aliens. I also told the Commission- er that the decision held that money due on those coupons to those non- resident aliens was 'property in the United States,' and was taxable ab- such under the United States in- come tax statute of that time. I also pointed out to Mr. Osborn that the income tax statute of October 13, 1913, also prescribes its taxa- tion upon 'property owned in the United States' by persons residing elsewhere, and that the intention of Congress to include the bonds of corporations doing business in the United States in the category of 'property owned in the United States,' is indicated by the fact that in several places in the income tax statute the phrase 'capital in- vested within the United States' is- used as an equivalent for the phrase 'property owned in the United States.' "Having thus, in two successive letters, fully presented this vastly important matter to Mr. Osborn, I summed up my statements in the following paragraph : " 'For these reasons, it is perfect- ly plain and it is undeniable, that your proposal to exempt non-resi- dent foreigners, owning interest' bearing bonds, issued by corpora- tions in the United States, from that income tax, which everybody else owning such bonds must pay, is a proposition which is contrary § 37] INCOME FEOM PEOPEETY IN U. S. 159 nonresident aliens and that it makes no difference in this re- spect whether such bonds or stock certificates are physicially located "within or without the United States.* The regula- tions provide: "Art. 8. The income of nonresident aliens subject to the normal tax of 1 per cent, shall consist of the total gains, prof- its, and income derived from all property owned, and from every business, trade, or profession carried on within the United States (to be designated as gross income), less deduc- tions (1 to 8, inclusive) specifically enumerated in Paragraph B of the Act (see Art. 6), in so far as said deductions relate to said gains, profits, etc. The specific exemption in Para- gTaph C of the Act cannot be allowed as a deduction in com- puting the normal tax of nonresident aliens. Nonresident aliens are subject to additional or surtax the same as pre- scribed in the case of citizens of the United States or persons residing in the United States. The responsible heads, agents, or representatives of said nonresident aliens who are in charge of the property owned or business carried on shall make full and complete return of said income and shall pay the tax as provided herein." "The person, firm, company, copartnership, 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 periodical gains, to the plain meaning of the statute writer operator, who really wrote itself, and is also contrary to the the letter. But whoever may have decision of Justice Bradley, which I been the author of the communica- am bringing to your knowledge in tion, he did his work so carelessly this letter.' that he dated the letter 'November "I never received any reply to 6, 1913,' instead of December 6, either of my letters to Mr. Osborn 1913. Moreover, that letter, in re- on this subject until twenty-one sponse to my elaborate communica- days after the 'first of them was tion of November 15 and November written which was sixteen days 20, was merely perfunctory, as will after the second one was written, appear from reading its forty-five That reply reached me on December words, as follows: 7, 1913, and though it was signed "'This office is in receipt of your 'W. H. Osborn, Commissioner,' it letter of the 20th ultimo, in which evidently was not composed by him, you express yourself forcibly as to for it had written upon it the ini- the matter of exempting interest tials of deputy commissioner Lu- income from American corporations ther F. Speer and also the initials to nonresident aliens from the pay- of three clerks, and it had in type- ment of the income tax. Your sug- writing, the initials of another in- gestion will be given consideration.' " dividual, who was probably the type- 5 T. D. 2017, Aug. 25, 1914. 160 INCIDEBTCE OF THE TAX. [§37 profits and income, of whatever kind, to a nonresident alien, under any contract or otherwise, and which payment shall rep- resent income of a nonresident alien from the exercise of any trade or profession within the United States, shall make return for such nonresident alien on form 1040 and shall pay any and all tax — normal and additional tax — chargeable upon the said income of such nonresident alien." ^ § 38. Meaning of the phrase "income from every busi- ness, trade or profession carried on in the United States by persons residing elsewhere." It was said by a British judge: "I agree with the opinion expressed by the late Lord Chief Justice Cockbuen in Sulley v. Attorney-General, 5 H. N. 711, that it is probably a question of fact where the trade is carried on. * * * If it is a question of fact in each case, it will be impossible to make an exhaustive definition of what constitutes carrying on a trade." ^ There are some report- ed decisions in Great Britain which in default of decisions in this country under the old law may be of service. In the case of mercantile trades the distinction is taken between buying and •selling. To buy in a country is not necessarily to do business there. Thus a member of a New Tork firm, residing in Eng- land, was held not taxable with respect to the firm profits made by the firm in the exportation of goods from England, on the ground that the firm was only a customer in England and did not carry on a trade there.^ On the other hand it is well settled in England that to keep an agent for the sale of goods in a for- eign country is to transact business in that country.^ This has been held to be the case, although the agent takes the lease in his own name, transacts no other business, pays the rent and clerk hire and sells the foreign country upon a del credere commission guaranteeing the collections.* 6T. D. 2013, Aug. 12, 1914. Apthorpe, 52 L. T. N. S. 814, and § 38. iLord Esher, M. R., in Werle v. Colquhon, L. R. 20 Q. B. Werle v. Colquhon, L. E. 20 Q. B. Div. 753. For note on establishing Div. 753. As to what constitutes agency to handle a corporation's doing business within the state by products within the state as doing a foreign corporation generally, see business therein, see 18 L.R.A. note in 24 L.R.A. 295. (N.S.) 142. 2 Sulley V. Attorney-General, 5 * Tischler v. Apthorpe, Q. B. D. Hurlst. & N. 711 (]8fi0); reversing 1885; 52 L. T. N. S. 814; MacPher- Attorney-General v. Sulley, 4 Hurlst. son d Co. v. Moore [1912] S. C. & N. 769 (1859). 1315, 49 Scot. L. R. 979, 6 Tax Gas. 3 Pommery v. Apthorpe, 56 L. J. 107. Q. B. N. S. 155; and see Tischler v. § 39] WITH RESPECT TO COEPOEATIONS. 161 It is a significant circumstance to prove the carrying on of business that the taxpayer's name is in the city directory,' or on the door of an agent's premises,® or that he has an office for his private use with his agent.'' There is a statute of frequent occurrence in substantially the same phraseology in the various States of the Union requir- ing foreign corporations to file certificates as to certain facts -of their incorporation, place of business, and the like, "before they shall be allowed to do business within the state." Under such a statute isolated single transactions do not constitute do- ing business in the state where the transaction occurred.' Nei- ther is it transacting business in a State to lease telephones to a licensee who is to sublet them, even if the licensor have the privilege of collecting the rent from the sub-lessees if necessary.' But the maintenance of an agent within a State to solicit con- tracts, constitutes "doing business" there.'" § 39. Incidence of the tax with respect to corporations, joint-stock companies and associations. The tax is im- posed upon the entire net income arising or accruing from all sources to every corporation, joint-stock company or association, and every insurance company, with certain exceptions, "organ- ized in the United States, no matter how created or organized, not including partnerships ; but if organized, authorized, or ex- isting under the laws of any foreign country, then upon the amount of net income accruing from business transacted and capital invested within the United States during such year." ' Whether the phrase "organized in the United States" includes corporations organized in the District of Columbia, Hawaii, 6 Werle v. Colquhon, L. E. 20 Q. 9 U. 8. v. Am. Bell Telephone Co. B. Div. 753. 29 Fed. 17 ; People v. American Bell 6 Werle v. Colquhon, L. R. 20 Q. Telephone Go. 117 N. Y. 241, 22 N. B. Div. 753 ; Tischler v. Apthorpe, 52 E. 1057 ; Commonwealth v. American X. T. N. S. 814. Bell Telephone Co. 129 Pa. 217, 18 7 Tischler v. Apthorpe, 52 L. T. Atl. 122. IT. S. 814. 10 International Text Booh Co. v. »D. 8. Morgan & Co. v. White, Pigg, 217 U. S. 91, 104, 54 L. ed. lOlInd. 413; Cooper Manufacturing 678, 684, 27 L.R.A.(N.S.) 493, 30 Co. V. Ferguson, 113 U. S. 727, 28 Sup. Ct. Kep. 481, 18 Ann. Caa. 1103 L. ed. 1137, 5 Sup. Ct. Eep. 739. (a correspondence school). See Foster's Fed. Pr. 5th ed. §§ 88, § 39. l Act of Oct, 3, 1913, Sub- 164. For note on single or isolated section G (a), transaction by foreign corporation as doing business within the state, see 10 L.R.A.(N.S.) 693. Foster Income Tax. — 11. 162 INCIDENCE OF THE TAX. [§ 39 Porto Eico, the Philippine Islands and Alaska, is not expressly stated.* § 40. Incidence of the tax upon foreign corporations^ joint-stock companies and associations. A corporation, joint-stock company or association, organized, authorized or ex- isting under the laws of a foreign country, is taxed only upon the amount of net income accruing from business transacted and capital invested within the United States.^ In determining the meaning of the phrase "business transacted," the cases where individual taxpayers were concerned are applicable.* Where a foreign mining company, with its head office and mines in a foreign country, employed agents to sell its products in Great Britain, with authority in the agents to fix the prices at any sum above a minimum fixed by the company, the agents being paid by commission, and the appointment of sub-agents by them to be subject to the company's approval, deliveries to be made in a foreign country under contracts for payment "by cash in London," but all payments in fact being made by crossed checks, payable in some cases to the company and in others to the agents, and in every case forwarded with any requisite en- dorsements by the agents to the company at its home office, where they were deposited ; it was held that the company did not exer- cise a trade in the United Kingdom and that these profits were not subject to the income tax.* It has been held that entries of receipts in the course of bookkeeping, when cancelled by entries on opposite columns, are not sufficient to establish that the money was actually received at the place stated in the books ; * but that when a payment due from a branch in one country to another corporation under lease executed by it in another State from the former, and then charged off by an entry of the pay- ment of a sum due by the latter to the former upon another account, thus saving the expenses of cross remittances, there is a constructive remittance, and, in Great Britain, it has been taxed as income received by the former from the latter.* Where a foreign marine cable company had cables terminat- 2 But see ihid. Subsection G. Allen (1901) 3 F. 805; 38 Scotch L. § 40. 1 Subsection G (a). R. 628; 4 Tax Gas. 446. 2 Bupra, % 22. 5 Scottish Mortgage Co. of New S Grookston Brothers v. Furtado Mexico v. McKelvie (1886) 14 Re- (1911) Scotch Cases 217 ; 43 Scotch ports 98; 24 Scotch L. R. 87; 2 L. R. 134; 5 Tax Gas. 602. Tax Gas. 165. * Standard Life Assurance Co. v. § 4:1] EXEMPT COEPOEATIONS. 163 ing in Great Britain and offices there where it received messages for transmission to other countries, it was held that the receipts from messages received in that country were subject to the British income tax, although its main office was in a foreign country and it made no profits from telegraphing over the British land.^ It has been held that a telephone company is not "doing business in" a State where telephones are used by another corporation under lease executed by it in another State upon a rental of a percentage of the royalties received by the lessees for the use of the telephones, although the lease au- thorizes the lessor, in case of default by the lessee, to collect, these royalties in the name of the latter. '' The question as to what constitutes "doing business in the- United States," has also been discussed with reference to non- resident aliens.* § 41. Exempt corporations. The statute exempts certain corporations from the income tax as follows: "That nothing in this section shall apply to labor, agricult- ural,"^ or horticultural organizations, or to mutual savings banks, not having a capital stock represented by shares, or to fraternall beneficiary societies, orders, or associations operating under the- 6 Erichsen v. Last, L. E. 8 Q. B. bers and patrona for milk, but any- D. 414. amount retained at the end of the- 7 People V. American Bell Tele- year over and above expenditures phone Co. 117 N. Y. 24] j 22- N. E. will be returned as net income upon 1057; Commonwealth v. American which the tax vcill be computed andl Bell Telephone Co. 129 Pa. 217, 18 assessed. In so far as Article 92, Atl. 122. See also S. American Bell hereinbefore referred to, is in con- Telephone Co. 29 Fed. 17, per Mr. flict with this ruling, it is herebj- Justice Jackson. It was held that revoked, and collectors will require- an insurance company was not car- all organizations of this character rying on a trade in a colony where to make returns of annual net in- it invested in mortgages but did not come and in other respects comply insure. "Their trade is not to in- with the requirements of the Fed- vest but to insure." Scottish Prov. eral income tax law as it applies to Institution v. Allen, 72 L. J. P. C. corporations, joint-stock companies, N. S. 70, [1903] A. C. 129. See or associations, and insurance comT Foster's Fed. Pr. 5th ed. §§ 88, 164. panics. In so far as applicable, 8 Supra, % 36. this ruling also applies to mutual § 41. 1 "Co-operative dairies, no or co-operative telephone companies, matter how organized, do not ap- farmers' insurance companies, and pear to fall within any of these like organizations." T. D. 1996, exempted classes, and will, there- June 15, 1914, Article 92 was as fore, be required to make returns, follows: In the preparation of their returns "Art. 92. Co-operative dairies not co-operative dairies may include in issuing stock and allowing patrons their deductions from gross income dividends based on butter fat in the amount actually paid to mem- milk furnished are not liable. la 164 INCIDENCE OF THE TAX. [§ 41 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, and other benefits to the members of such societies, orders, or associations and depend- ents of such members, nor to domestic building and loan asso- ciations, nor to cemetery companies, organized and operated ex- clusively for the mutual benefit of their members,^ nor to any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational * purposes, no part of the net income of which inures to the benefit of any private stockholder or individual, nor to business leagues, nor to chambers of commerce or boards of trade, not organized for profit or no part of the net income of which inures to the benefit of the private stockholder or individual ; nor to any civic league or organization not organized for profit, but operated exclusive- ly for the promotion of social welfare: Provided further. That there shall not be taxed under this section any income derived from any public utility or from the exercise of any essential such case the 'dividends' are the this State In particular," was not purchase price of the raw material an educational corporation; and furnished." that it might not prove by name 2 "Art. 89. A society or association that it was engaged in educational "operating under the lodge system' work not authorized in its charter is considered to be one organized or by-laws. Estate of De Peyster, under a charter, with properly ap- 210 N. Y. 216, 104 N. E. 714. Un- pointed or elected officers, with an der the same statute it was held, adopted ritual or ceremonial, hold- that the Arnot Art Gallery was not ing meetings at stated intervals, and an educational corporation (Matter ■supported by fees, dues, or assess- of Arnot, 71 Misc. 390, 130 N. Y. ments." Supp. 197, afif'd. 145 App. Div. 708, 3 "Art. 90. Cemetery companies or- 130 N. Y. Supp. 499 ) , aff'd. 203 N. Y. ganized and operated exclusively for 627, 97 N. E. 1102; but that the the mutual benefit of their members Metropolitan Museum of Art, which are exempt. The provisions of the was incorporated "for the purpose law clearly indicate that companies of establishing and maintaining in which operate cemeteries for profit said city of New York" a museum are liable to the tax. The status and library of art, of encouraging of cemetery associations under the and developing the study of fine arts law will, therefore, depend upon the and the application of arts to manu- character and purpose of the organi- facture and practical life, of advanc- zation and what disposition is made ing the general knowledge of kin- of the income." dred subjects and to that end of * Under a New York tax law it furnishing popular instruction and was held, that the New York His- recreation, and which gave instruc- torical Society which was incorpo- tion upon those subjects, was an rated "for the purpose of discover- educational institution. (Matter of ing, procuring and preserving what- Mergentime, 129 App. Div. 367, 113 ever may relate to the natural, civil, N. Y. Supp. 948, aii'd. 195 N. Y. literary and ecclesiastical history of 572, 88 N. E. 1125.) the United States in general and of § 41] EXEMPT COEPOEATIONS. 165 governmental function accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State, Territory, or the District of Columbia, nor any income accru- ing to the government of the Philippine Islands or Porto Kico, or of any political subdivision of the Philippine Islands or Porto Eico: Provided, That whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, has, prior to the passage of this Act, entered in good faith into a contract with any person or corporation, the object and purpose of which is to acquire, construct, operate or maintain a public utility, no tax shall be levied under the pro- visions of this Act upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, or the District of Columbia, or a political subdivision of a State or Territory; but this provision is not intended to confer upon such person or cor- poration any financial gain or exemption or to relieve such per- son or corporation from the payment of a tax as provided for in this section upon the part or portion of the said income to which such person or corporation shall be entitled under such contract." ^ The Treasury regulations provide: "Art. 88. All corporation? and all beneficiary societies enumerated above shall by affidavit, or otherwise, at the request of the collector or Commissioner of Internal Eevenue, establish their right to the exemption provided, in which case it will not be sufficient to merely declare that they are exempt, but they must show the character and purpose of the organization, the manner of distributing the net income, if any, or that none of the net income inures to the benefit of any private stockholder or individual. In the absence of such a showing, such organiza- tions may, at any time, be required to make returns of annual net income or disclose their books of account to a revenue officer for examination in order that the status of the company may be determined." "Art. 91. Any corporation, concerning whose status under the law there is any doubt, or which does not clearly come with- in one or another of the classes of those specifically enumerated 5 Act of October 3, 1913, II. Sub- section G ( a ) . 166 INCIDENCE OF THE TAX. [§4:1 as exempt, should file a return (in blank if desired) and attach thereto a statement setting out fully the nature and purpose of the organization, the source of its income, and what disposition is made of it, and particularly of any surplus." The Treasury Department has ruled that the exemption re- lieves all such corporations, joint-stock companies and associa- tions from any obligation to deduct the tax at the source of in- come belonging to persons not exempt.^ The statute was carefully drawn to avoid any possible inter- ference with the revenues of States and their municipalities. In subsection B it allows a deduction from net income of indi- viduals of all "State, County, School and Municipal taxes paid within the year, not including those assessed against local bene- fits." In Subsection G it provides that in the ascertainment of the net income of a corporation, joint-stock company, or asso- ciation, or insurance company, whether domestic or foreign there shall be deducted all sums paid by it within the year for taxes imposed under the state or authority of any State of the United States. And in subsection B it further provides that in computing net income there shall be included the compensa- tion of all oificers and employees of a State or any political subdivision thereof except when such compensation is paid by the government of the United States. These provisions illus- trate the anxiety of the framers of the act to avoid constitu- tional questions. Even if omitted, however, the last exemptions at least might perhaps have been obtained upon constitutional grounds.'' Within the principle of the decisions last cited below it is doubtful, whether the Federal Government can even indirectly reduce the income of the State or municipal corpora- tion; as, for example, by a tax on the capital or income of a corporation in which such a State or corporation holds shares.* 6 T. D. 1967. Governor Hughes quoted supra, T Collector v. Day, 11 Wall. 113, § 29. 20 L. ed. 122 ; Freedman v. Sigel, 8 But see Manhattan Co. v. Blake, 5 Chicago Leg. News, 196, Fed. Cas. 148 U. S. 412, 37 L. ed. 504, 13 No. 5,080; V. S. v. Ritchie, 4 Chi- Sup. Ct. Eep. 640, where it was cago Leg. News, 139, Fed. Cas. No. held that a tax on the average 16,1 68 ; U. 8. v. Railroad Go. 1 7 amounts of deposits in a bank is Wall. 322, 21 L. ed. 597; and see collectible. Although part of the de- also various opinions of Attorneys- posits were State funds the tax was General, 12 Ops. Atty.-Gen. 277; on the bank and not on the State, Ibid. 376; Ibid. 439; 13 Ops. Atty.- and did not diminish the State rev- Cten. 67. But see the message of enues. See supra, § 27. § 41] EXEMPT COEPOEATIONS. 167 Under the Corporation Tax Law of 1909, the Attorney Oeneral expressed the opinion that corporations organized in the Philippine Islands were not organized under the laws of the United States or of any State or Territory of the United States, or under the laws of any foreign country.® The present law expressly exempts the Government of the Philippine Is- lands or Porto Rico, and any political subdivision of the Philip- pine Islands or Porto Pico, as well as any political subdivision of a State, Territory or the District of Columbia, in any in- come accruing to the Governor of the Philippine Islands or Porto Pico.'" The term "political subdivision" also includes counties, towns and townships, parishes when made a political unit, hundreds, wards, precincts, school districts, levee districts and special assessment districts, created under the laws of the several States for public purposes, such as the improvement of streets and public highways, the provision for sewerage, gas and light, and the reclamation, drainage or irrigation of bodies of land within the same when the districts are created for the public use.'* There is in England a numerous class of gtfast-public corpo- rations of which in this country we have only a few examples, such, for instance, as the corporations known as the Trustees of the New York and Brooklyn Bridge. These corporations are institutions for the management of public works, such as docks ■on the seaboard, in which the community as such has a more or less definite interest. The English theory of such bodies seems to be that, although they may have revenues, they are not taxable with respect thereto unless the revenues are derived otherwise than from tolls levied for the use of their property by the mem- bers of the community they were created to serve. Revenues ■derived by way of tolls upon citizens are not regarded as prof- its.'^ It is immaterial, however, if profits are earned by such a corporation, that they are devoted to the payment of its funded debt in order that the tolls upon citizens are to be reduced. A profit is a profit irrespective of the mode of its application.*^ 9 29 Op. A. G. 164. Attorney-General v. Black, L. R. 6 10 II Subsection G (a). Exch. 308. 11 Opinion of Attorney General 1^ Mersey Docks, etc.. Board v. McReynolds January 30, 1914, cited Lucas, L. E. 8 App. Cas. 831; Low- T. D. 1946. f^y V. Harbour Commissioners, 3 12 Glasgow, etc.. Commissioners v. Times L. R. 516. Inland Revenue, 2 Ct. Sess. Cas. 708; 168 INCIDENCE OF THE TAX. [§ 41 It has been said by the Supreme Court of the United States speaking through Mr. Justice Day : "It is no part of the essential governmental functions of a State to provide means of transportation, supply artificial light, water and the like. These objects are often accomplished through the medium of private corporations and though the pub- lic may derive a benefit from such operations, the companies carrying on such enterprises are, nevertheless, private compa- nies, whose business is prosecuted for private emolument and advantage. For the purpose of taxation they stand upon the same footing as other private corporations upon which special franchises have been conferred." '* The act of 1913, however, expressly exempts any income de- rived from any public utility as well as from the exercise of any essential governmental ftinction accruing to any State, Territory, including the Philippines and Porto Pico or the Dis- trict of Columbia, or to any municipality or other subdivision of the same.''^ The prior exemption of income from a contract between such a public corporation and any person or corporation for the construction and operation of a public utility, was in- serted for the benefit of the City of New York which had made such a contract for the construction of subways.^^ The provision for the exemption of corporations organized for charitable, religious or educational purposes and of mutual benefit societies, labor organizations, cemetery companies and building and loan associations were not contained in the stat- utes prior to 1894, and there are no decisions in the courts of the United States directly bearing upon the subject except as regards the constitutionality of such exemptions. In the case which decided that the Act of 1894 was unconstitutional, Mr. Justice Field expressed the opinion that the exemption of mu- tual savings banks and loan associations, was unjustifiable and invalid." It has been subsequently held, however, that similar exemptions from the Corporation Income Tax of 1909 are valid.^' 1* Flint V. Stone Tracy Co. 220 U. " Pollock v. Farmers' Loan & S. 108, 172, 55 L. ed. 389, 421, 31 Trust Go. 157 U. S. 429, 598, 599, Sup. Ct. Rep. 342, Ann. Gas. 1912B, 39 L. ed. 759, 825, 826, 15 Sup. Ct. 312. Rep. 673. 15 Subsection G (a.). l^ Flint v. Stone Tracy Co. 220 U. 16 Sen. Doc. 1st Sess. 63, Cong. S. 108, 172, 55 L. ed. 389, 421, 31 Briefs and Statements filed with Sup. Ct. Rep. 342, Ann. Cas. 1932B, Committee of Finance, 2053. 312. Printed in full infra, Part VII. § 41] EXEMPT CORPOEATIONS. 169 Questions have been discussed in England which may be of value in ascertaining the construction of the Act of 1913. The law of that country exempted the incomes of corpora- tions established for "charitable purposes," and very learned arguments are to be found in the English reports with reference to the meaning of those words. The question was, whether "charitable purposes" was to be used in its popular signification of aid to the poor, or whether it was to receive the broader con- struction given to them in the common law, that is, whether "charitable purposes" was to be considered as meaning "charit- able uses" as that phrase is used in the statute 43 Eliz., Ch. 4, and in the common law. The latter construction was finally adopted in the case which held that the income of a trust for the support of the children of Moravian ministers, certain single persons of the Moravian faith and Moravian missionary estab- lishments was exempt as devoted to charitable purposes. ^^ The distinction may be a matter of moment under our own act. The statute 43 Eliz., Ch. 4, commonly known as the statute of charitable uses, reads (so much of it as is ma- terial) as follows : "An act to redress the mis-employment of lands, goods, and stocks of money heretofore given to certain charitable uses. "I. Whereas lands, tenements, rents, annuities, profits, her- editaments, goods, chattels, money, and stocks of money have been heretofore given, limited, appointed, and assigned as well by the Queen's most excellent majesty, and her most noble progenitors, as by sundry other well-disposed persons ; some for relief of aged, impotent and poor people, some for maintenance of sick and maimed soldiers and mariners, schools of learning, free schools, and scholars in universities, some for repair of bridges, ports, havens, causeways, churches, sea-banks, and high- ways, some for education and preferment of orphans, some for or towards relief, stock, or maintenance for houses of correc- tion, some for marriages of poor maids, some for supportation, aid, and help of young tradesmen, handicraftsmen, and persons decayed, and others for relief or redemption of prisoners or ^^ Commissioners v. Pem^el [1891] Pemsel v. Commissioners, L. R. 22 A. C. 531, affirming Queen ex rel. Q. B. Div. 296 (1888). 170 IlfCIDElTCE OF THE TAX. [§4:1 ■captives, and for aid or ease of any poor inhabitants concern- ing payments of fifteens, setting out of soldiers, and other taxes ; which lands, tenements, rents, annuities, profits, hereditaments, goods, chattels, moneys, and stocks of money, nevertheless have not been employed according to the charitable intent of the givers and founders thereof, by reason of frauds, breaches of trust, and negligence in those that should pay, deliver, and ■employ the same : for redress and remedy whereof, be it enacted by authority of this present parliament. That it shall and may be lawful to and for the lord chancellor or keeper of the great seal of England for the time being, and for the chancellor of the duchy of Lancaster for the time being for lands within the 'County palatine of Lancaster, from time to time to award com- missions under the great seal of England, or the seal of the coun- ty palatine, as the case shall require, into all or any part or parts of this realm respectively, according to their several ju- risdictions as aforesaid, to the bishop of every several diocese and his chancellor (in case there shall be any bishop of that •diocese, at the time of awarding of the same commissions), and to other persons of good and sound behavior, authorizing them thereby, or any four or more of them, to enquire, as well by the •oaths of twelve lawful men or more of the county, as by all other good and lawful ways and means, of all and singular such gifts, limitations, assignments, and appointments aforesaid, and of the abuses, breaches of trusts, negligences, misemployments, not employing, concealing, defrauding, misconverting, or mis- government of any lands, tenements, rents, annuities, profits, hereditaments, goods, chattels, money, or stocks of money, here- tofore given, limited, appointed or assigned or which hereafter shall be given, limited, appointed, or assigned, to or for any of the charitable and godly uses before rehearsed: and after the said commissioners, or any four or more of them (upon calling the parties interested in any such lands, tenements, rents, annui- ties, profits, hereditaments, goods, chattels, money, and stocks of money), shall make inquiry by the oaths of twelve men or more of the said county (whereunto the said parties interested shall and may have, and take their lawful challenge and chal- lenges), and upon such enquiry, hearing, and examining thereof, set down such orders, judgments, and decrees, as the said lands, -tenements, rents, annuities, profits, goods, chattels, money, and •§ 4:1] EXEMPT OORPOEATIONS. 171 stocks of money, may be duly and faithfully employed, to and for such of the charitable uses and intents before rehearsed re- spectively, for which they were given, limited, assigned, or ap- pointed by the donors and founders thereof : which orders, judg- ments, and decrees, not being contrary or repugnant to the orders, statutes, or decrees of the donors or founders, shall by the authority of this present parliament stand firm and good, according to the tenor and purport thereof, and shall be executed •accordingly, until the same shall be undone or altered by the lord chancellor of England or lord keeper of the great seal of England of the chancellor of the county palatine of Lancaster, respectively, within their several jurisdictions upon complaint by any party grieved to be made to them. "II. Provided always. That neither this act, nor anything therein contained, shall in any wise extend to any lands, tene- ments, rents, annuities, profits, goods, chattels, money, or stocks of money, given, limited, appointed, or assigned, or which shall be given, limited, appointed, or assigned to any college, hall, or house of learning within the universities of Oxford or Gamr bridge or to the colleges of Westminster, Eaton or Winchester , or any of them, or to any cathedral or collegiate church within this realm. "III. And provided also, That neither this act, nor anything therein, shall extend to any city, to town corporate or to any the lands or tenements given to the uses aforesaid within any such city or town corporate, where there is a special governor or governors appointed to govern or direct such lands, tene- ments, or things disposed to any the uses aforesaid, neither to any college, hospital, or free school, which have special visitors or governors, or overseers appointed them by their founders." It will be observed that the kinds of trusts listed in the pre- amble to the foregoing act are in many cases neither religious nor educational. In the case of Commissioners v. Pemsfil,*" the trust claiming the exemption was a trust for the benefit of Moravian missionaries, which under our own law would be clearly exempt under the word "religious." Many foundations might be thought of, however, whose work was neither to assist the poor, to educate, nor to instruct in religion, which would 80 Hid. 172 INCIDENCE OF THE TAX. [§41 nevertheless be properly regarded as devoted to "charitable- uses," and it may well be that they are exempt under subsection G. It has been held in Scotland that the word charitable pur- poses applies to the relief of poverty and that a religious trust is therefore, not exempt as devoted to charitable purposes."^ A burial board, organized under a general statute intended tO' protect the public health by securing proper burial in villages, was held not a charitable corporation. The board charged fees for all burials, and although they did not profit themselves,, nevertheless the village did, because the fees were applied in reduction of parish rates. The element of gain to the ratepay- ers was present.^^ Under our statute cemetery companies are only exempt when "organized and operated exclusively for the- mutual benefit of their members." ^^ In Great Britain the rule further seems to be that where a. society or association organized for charitable purposes makes a profit by the transaction of business, those profits are income- subject to the tax.^* This rule has been applied to profits from the publication of hymn books, bibles and religious literature,^*' from a restaurant ^® and from a hospital ; ^^ even when the profits were used for charitable purposes.^' The application of the profits to charitable purposes does not exempt the same from the income tax when the corporation or association is otherwise- taxable.*® On the other hand, merely incidental benefits would seem not to deprive such trusts of their exemption. Thus the- House of Lords held that a society of engineers, the income of which was in fact devoted to the promotion of science should SlBffiird Trustees v. Inland Rev- ^"^ St. Andrews' Eospital {North- enue, 25 Scot. L. R. 533 (1888) ampton) v. Shear smith [1887] L. R. Sc^^Ct. Sess. 39 Q. B. Div. 624, -where the hospital "' Paddington Burial Board v. was under state supervision and the- s, L. R. 13 Q. B. D. 9. services of the physicians were- 23 Act of Oct. 3, 1913, G (a). gratuitous, 57 L. T. N. S. 413, 35, 2* Religious Tract and Book So- Week. Rep. 811, 2 Tax Cas. 219. ciety of Scotland v. Forbes (1896) ^^ lUd. 33 Scot. L. R. 289, 3 Tax Cas. 415. ^^ lUd. See Attorney-General v. ^^ Trustees of Psalms and Hymns Black (1871) L. R. 6 Exeh. 308 40 V. Whitwell (1890) 7 Times L. R. L. J. Exch. N. S. 194, 25 L. T. N S 164, 3 Tax Cas. 7. 207, 19 Week. Rep. 1114, 1 Tax Caa> 26 Grove v. Young Men's Christian 52. Association (1903) 67 J. P. 279, 88 L. T. N. S. 696, 19 Times L. R. 491, 4 Tax Cas. 613. [§ 41] EXEMPT COEPOBATIONS. 173 not be taxed, under a statute exempting income "legally appro- priated and applied * * * for the promotion of science," although it also appeared that the professional interest of its members was incidentally advanced. Such a holding would extend to the numerous scientific and professional societies of ■our own country.'" It was held in England that a public libra- ry was not exempt as a literary or scientific institution ; ^^ but the income of a society of engineers was exempted as applied for the promotion of science.^^ "Mutual telephone companies, mutual insurance companies, and like organizations, although local in character, and whose income consists largely from assessments, dues and fees paid by members, do not come with- in the class of corporations specifically enumerated as exempt. Their status under the law is not dependent upon whether they are or are not organized for profit. In coming within the statutory exemption, all organizations of this character will be required to make returns of annual net income, and pay any income tax thereby shown to be due. For this purpose the surplus of receipts of the year over expenses will constitute net income upon which the tax will be assessed." '^ As to clubs, it has been ruled that they are not subject to the tax, when they have been "organized and operated exclu- sively for pleasure, recreation and other nonprofitable pur- poses" and they have no "net income inuring to the benefit of any private stockholder, individual, or member.^* But it has been held in England that a golf club is taxable so far as con- cerns the income received from visitors, not members, for the use of its green. '^ 30 Commissioners of Inland Bev- tion of such companies, see Citizen's enue v. Forrest, L. R. 15 App. Cas. Telephone Go. v. Osbom, 229 U. S. 334 (]890). 322, 57 L. ed. 1211, 33 Sup. Ct. Rep. 31 Andrews v. Mayor, etc. of Bris- 833. toi, 61 L. J. Q. B. N. S. 715 (1892). 34 Commissioner Osborn to Lee, ^^Commissioners of Inland Rev- Higginson & Co. Mar. 4, 1914. See enue v. Forrest, L. R. 15 App. Cas. also Acting Commissioner Williams 334 (1890), H. L. affirming Matter to Crescent Athletic Club Jan'y. 17, of Institution of Civil Engineers, L. 1914; Deputy Commissioner Speer R. 20 Q. B. Div. 621 (1888), which to N. Y. Athletic March 2, 1914. reversed ». u. L. E. 19 Q. B. Div. 610 35 Carlisle and Silloth Golf Club (1887). V. Smith, [1912] 2 K. B. 177, 81 L. 33 Regulations, Art. 80. As to J. K. B. N. S. 581, 106 L. T. N. S. the validity of a statutory exemp- 573, 6 Tax Cas. 48. 174: INCIDENCE OF THE TAX. [§ « Under the Corporation Tax Act of 1909, it was held: that the qualifying clause "No part of the net income of which inures to the benefit of any private stockholder or individual"' did not qualify the whole proviso, but only the immediately" preceding clauses, namely, "ITor to any corporation or associa- tion organized and operated exclusively for religious, charitable,, or educational purposes ; " ^^ and that building and loan associa- tions were exempt as organized and operated exclusively for the mutual benefit of their members, although they issued both prepaid and instalment stock; the prepaid stock being granted a fixed dividend, payable only out of the earnings of the as- sociation.^'' The Circuit Court of Appeals said: "We arc 36 3erold v. Park View Bldg. & Loan Ass'n, C. C. A. 210 Fed. 577, 579, 580; affirming Park View Bldg. & Loan Ass'n v. Ilerold, 203 Fed. 876. MePherson, J. in C. C. A. 210 Fed. 579, 580: "As pointed out in the association's brief, section 2 of the Income Tax provisions of the Act of October 3, 1913, lends force to the construction that con- fines the italicized clause to the fourth group. Section 2 in clause S of the Act of 1913 repeals section 38 of the Act of 1909, the reason being that an earlier clause (6) is in effect a substitute for section 38, and that Congress did not intend to impose two taxes of the same nature at the same time, one by the Act of 1913, and the other by the Act of 1909. Being a substitute, therefore, clause G also contains an excepting proviso, and this is as follows: [quoting the same] We think it is clear that the repeated use here made by Congress of the negative clause — 'no part of the net income of which inures to the benefit of any private stockholder or individual'— throws light upon the previous use of the same clause in the Act of 1909, and strengthens the construc- tion we have adopted. We agree that the argument is somewhat weakened by the possibility of sup- posing that Congress was trying to make more clear in the Act of 1913 what may have been thought obscure in the Act of 1909; and we wish to- avoid even the appearance of evad- ing this consideration. But cer- tainly both constructions are avail- able, and one seems as likely to be- correct as the other. We believe the view we have indicated should be adopted." But see Pacific Build- ing & Loan Ass'n v. Hartson, 201 Fed. 1011. 37 Berold v. Park View Bldg & Loan Ass'n, C. C. A. 210 Fed. 577; afiirming Park View Bldg. & Loan Ass'n V. Eerold, 203 Fed. 876. In the Circuit Court of Appeals Judge- McPherson said (210 Fed. 580) : "But there is another reason for be- lieving that the clause in italics- could not have been intended to ap- ply to the group of 'domestic build- ing and loan associations organized and operated exclusively for the mu- tual benefit of their members.' And the reason is this: Such application leads to a conclusion that may fair- ly be described as absurd. Every building association is organized and operated for the mutual benefit of its members; this benefit is attained by profits; and profit is gained by the use of its funds — whether de- rived from instalments, premiums, interest, or fines — supplemented by forfeitures, and by such dealing in real estate as it may be permitted or obliged to undertake. In every year of its normal operations it expects to have a net income, and' § 41] EXEMPT COEPOEATIONS. 1Y5 persuaded that Congress intended the word 'mutual' to mean 'substantially equal,' and that a building association is organ- ized and operated for the mutual benefit of its members when they share in the profits on substantially the same footing. Ex- act equality is probably not possible, where part of the stock is prepaid, and part is instalment; but an approximate equal- ity, sufficiently close for all purposes, is certainly not beyond the reach of calculation. We have no doubt that such a calcu- lation is always made before the terms are adopted upon which prepaid stock is allowed to share in profits." ^* According to the Treasury regulations, under the present statute : of course this net income belongs, or inures, to its members. Now, while the members can hardly be described accurately as 'private' stockholders (the word seems to be contrasted with some other relation to a particular association), they are certainly 'individuals'; and therefore, if the right of a building association to be exempted by the proviso is to be tested by the fact that no private stockholder or in- dividual receives any benefit from its net income, the inevitable result will follow that the proviso has no effect upon building and loan asso- ciations at all, and that no such association can be exempted. We have said that in our opinion this conclusion comes near to absurdity, and we think that result is too plain to require further discus- sion." In the District Court Judge Orr said (203 Fed. 879): "The plaintiff is clearly a domestic build- ing and loan association. If, there- fore, it be 'organized and operated exclusively for the mutual benefit' of its members, it would seem to come within the proviso of the stat- ute. It will be observed that under the law each member has the same right to dictate the policy of the association. It does not increase his influence to own many shares of stock, because his right to vote does not depend upon the number of shares that he may hold, but simply upon his membership. There is therefore in the association, under the law, no means by which a single stockholder, or a group of stock- holders, by the acquisition of the majority of the shares, could con- trol the association as against a. majority of the members of the as- sociation. There is therefore a mu- tuality of right with respect to the control of the corporation. Nor do we think that the mere provision in the fifty-third section of the act for agreements to pay 5 per cent, in- terest to shareholders who pay the full par or maturity value of their shares affects the mutuality. It is not contemplated by the act that the shareholders who pay in advance shall have any priority in distribu- tion of assets. There is therefore mutuality between the shareholders with respect to the assets of the corporation. Each person intending to become a member of the associa- tion has the right to prepay the full par or maturity value and take a fixed sum as his share of the annual profits of the association. The mere fact that there may be an inequality in the returns to the prepaying shareholder and the other share- holder in favor of the one or the other does not seem to the court to destroy the mutuality among the shareholders required by the pro- viso of the Act of Congress. The word 'mutual' cannot always be con- sidered a synonym of 'equal.' Mu- tual credits are not necessarily equal credits; mutual debts need not be equal in amount." 38/6i(J. 210 Fed. 582, 583, per McPherson, J. 176 INCIDENCE OE THE TAX. [§ 41 "Domestic building and loan associations are among those enumerated as exempt from the requirements of the law. A do- mestic building and loan association is held to be one organized under and pursuant to the laws of the United States, or of a State or Territory thereof, or under the laws applicable to Alaska or the District of Columbia. Mutuality in operation and in the distribution of profits and benefits is essential to exemp- tion. Therefore, in order to come within the exempted class such associations must not only be "Domestic," as defined, but they must be organized and operated exclusively for the mutual benefit of the members ; that is, all the profits and benefits pro- vided for in the articles of association and by-laws must be ratably distributed among all members regardless of the kind of stock held, according to the amount of money they have on deposit. An association issuing different classes of stock upon which different rates of interest or dividends are guaranteed or paid, does not come within the exempted class." ^^ § 42. Incidence of the tax with respect to time. The income tax upon individuals is "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 December thirty-first nineteen hundred and thirteen said tax shall be computed on the net income accruing from March first to De- cember thirty-first, nineteen hundred and thirteen, both dates inclusive, after deducting five-sixths only of the specific ex- emptions and deductions herein provided for." ^ The income tax upon a corporation, joint-stock company, association, or in- surance company, is "computed upon its entire net income ac- 39 Tr. Eeg. 87. Under a simi- of the association could not be lar provision of the Corporation Tax loaned profitably "to cancel any Law of August 5, 3909, it was held outstanding certificates of general that a building and loan association stock not borrowed upon," paying was not exempt when the articles the holder the book value of the of incorporation authorized "lending stock so cancelled. Pacific Building the shareholders of such association tC- Tjoan Ass'n v. TJartson, 201 Fed. and others, the funds so accumu- 1011, 1016. So when authorized to lated," and the by-laws authorized loan to nonmemhers and borrow from the issue of preferred stock, or stock thera, see Central B'llg. L. d Hav. Co. the interest upon which was guar- v. HoicZand, 216 Fed. 526. anteed, and authorized the direct- § 42. 1 Act of Oct. 3, 1913, Sub- ors upon finding that the income section D. § 42] WITH EESPECT TO TIME. 177 crued within each preceding calendar year ending December thirty-first: Provided, however, That for the year ending De- iiember thirty-first, nineteen hundred thirteen, said tax shall be imposed upon its entire net income accrued within that por- tion of said year from March first to December thirty-first, both dates inclusive, to be ascertained by taking five-sixths of its entire net income for said calendar year: Provided further. That any corporation, joint-stock company or association, or insurance company subject to this tax may designate the last day of any month in the year as the day of the closing of its fiscal year and shall be entitled to have the tax payable by it computed upon the basis of the net income ascertained as herein provided for the year ending on the day so designated in the year preceding the date of assessment instead of upon the basis of the net income for the calendar year preceding the date of assessment; and it shall give notice of the day it has thus desigTiated as the closing of its fiscal year to the col- lector of the district in which its principal business office is located at any time not less than thirty days prior to the date upon which its annual return shall be filed." * "Provided fur- ther. That all excise taxes upon corporations imposed by sec- tion thirty-eight, that have accrued or have been imposed for the year ending December thirty-first, nineteen hundred and twelve, shall be returned, assessed, and collected in the same manner, and under the same provisions, liens, and penalties as if section thirty-eight continued in full force and effect: And provided further, That a special excise tax with respect to the carrying on or doing of business, equivalent to 1 per centum upon their entire net income, shall be levied, assessed, and col- lected upon corporations, joint-stock companies or associations, and insurance companies, of the character described in section thirty-eight of the Act of August fifth, nineteen hundred and nine, for the period from January first to February twenty- eighth, nineteen hundred and thirteen, both dates inclusive, which said tax shall be computed upon one-sixth of the entire net income of said corporations, joint-stock companies or asso- S Subsection G (c). See Tr. Reg. 165-171, 173-176. Foster Income Tax. — 12. 178 INCIDENCE OE THE TAX. [§42 ciations, and insurance companies, for said year, said net in- come to be ascertained in accordance with the provisions of subsection G of section two of this Act : Provided further. That the provisions of said section thirty-eight of the Act of August fifth, nineteen hundred and nine, relative to the collection of the tax therein imposed shall remain in force for the collection of the excise tax herein provided, but for the year nineteen hundred and thirteen it shall not be necessary to make more than one return and assessment for all the taxes imposed here- in upon said corporations, joint-stock companies or associations, and insurance companies, either by way of income or excise, which return and assessment shall be made at the times and in the manner provided in this Act." ' The reason of the exemp- tion of income received during January and February, 1913, was because the Sixteenth Amendment authorizing the impo- sition of an income tax was not adopted before the latter part of February of that year.* The validity of the tax upon income received before the passage of the act is previously discussed.* When an individual dies within the year the tax must be paid on so much of his income as accrued within the year and before his death.® It has been held: That the same deductions are made from the income accruing before his death that woiald have been made if he had lived ; ' but that when corporations go into liquidation or consolidation during the year, they are liable for the income received during the months prior to such liquidation or consolidation as the case may be.* 3 Ibid. Subsection S. not taxable during the period during i Supra, § 18. which, pursuant to the terms of his 6 § 29, supra. will, it is allowed to accumulate in 6 Mandell v. Pierce, 3 Cliff. 134, the hands of a trustee. Wilier v. Fed. Cas. No. 9,008 (1868). Cf. In Hawaiian Trust Co., 28 Haw. 589, re Ihe Income Tax Acts, 23 Vict. S93. L. R. 58. '' Ibid. It has been held in Hawaii that ST. D. Synopsis 1742. the income of a decedent's estate is CHAPTEE IV. INCOME SUBJECT TO TAX. § 43. Statutory definition of income of individuals sub- ject to normal tax. Different rules regulate the ascertain- ment of the income subject to the tax when imposed upon indi- viduals and when imposed upon corporations, joint-stock com- panies and associations. The income tax imposed upon indi- viduals is of two kinds : the normal tax ; ^ and the additional tax, which, in England, is called the super-tax. The Act provides as to individuals: "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 real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful business carried an for gain or profit, or gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise, or descent : Provided, That the proceeds of life insurance policies paid upon the death of a person insured or payments made by or credited to the insured, on life insurance, endowment, or annui- ty contracts, upon the return thereof to the insured at' the ma- turity of the term mentioned in the contract, or upon surrender of contract, shall not be included as income." "That in computing net income for the purpose of the normal tax there shall be allowed as deductions: First, the necessary expenses actually paid in carrying on any business, not includ- ing personal, living, or family expenses; second, all interest § 43. lAct of October 3, 1913, Subsection A, subd.. 2. 179 180 INCOME SUBJECT TO TAX. [§43 paid within the year by a taxable person on indebtedness ; third, all national, State, county, school, and municipal taxes paid within the year, not including those assessed against local bene- fits ; fourth, losses actually sustained during the year, incurred in trade or arising from fires, storms, or shipwreck, and not compensated for by insurance or otherwise; fifth, debts due to the taxpayer actually ascertained to be worthless and charged off within the year; sixth, a reasonable allowance for the ex- haustion, wear and tear of property arising out of its use or employment in the business, not to exceed, in the case of mines, 6 per centum of the gross value at the mine of the output for the year for which the computation is made, but no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made: Provided, That no deduction shall be al- lowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate; seventh, the amount received as dividends upon the stock or from the net earnings of any corporation, joint-stock company, association, or insurance company which is taxable upon its net income as hereinafter provided; eighth, the amount of income, the tax upon which has been paid or withheld for payment at the source of the income, under the provisions of this section, provided that whenever the tax upon the income of a person is required to be withheld and paid at the source as hereinafter required, if such annual income does not exceed the sum of $3,000 or is not fixed or certain, or is indefinite, or irregular as to amount or time of accrual, the same shall not be deducted in the personal return of such person." "The net income from property owned and business carried on in the United States by persons residing elsewhere shall be computed upon the basis prescribed in this paragraph and that part of paragraph G of this section relating to the computation of the net income of corporations, joint-stock and insurance companies, organized, created, or existing under the laws of foreign countries, in so far as applicable." "That in computing net income under this section there shall be excluded the interest upon the obligations of a State or any political subdivision thereof, and upon the obligations of the United States or its possessions; also the compensation of the § 44] INCOME SUBJECT TO ADDITIONAL TAX. 181 present President of the United States during the term for which he has been elected, and of the judges of the supreme and inferior courts of the United States now in office, and the compensation of all officers and employees of a State or any political subdivision thereof except when such compensation is paid by the United States Government." * "That there shall be deducted from the amount of the net income of each of said persons, ascertained as provided here- in, the sum of $3,000, plus $1,000 additional if the person making the return be a married man with a wife living with him, or plus the sum of $1,000 additional if the person making the return be a married woman with a husband living with her ;, but in no event shall this additional exemption of $1,000 be- deducted by both a husband and a wife : Provided, That only one deduction of $4,000 shall be made from the aggregate: income of both husband and wife when living together." * § 44. Income subject to additional tax. "In addition to the income tax provided under this section (herein referred to as the normal income tax) there shall be levied, assessed and col- lected upon the net income of every individual an additional in- come tax (herein referred to as the additional tax) of 1 per cen- tum per annum upon the amount by which the total net income exceeds $20,000 and does not exceed $50,000, and 2 per centum per annum upon the amount by which the total net income ex- ceeds $50,000 and does not exceed $75,000, 3 per centum per annum upon the amount by which the total net income exceeds $75,000 and does not exceed $100,000, 4 per centum per an- num upon the amount by which the total net income exceeds $100,000 and does not exceed $250,000, 5 per centum per an- num upon the amount by which the total net income exceeds $250,000 and does not exceed $500,000, and 6 per centum per annum upon the amount by which the total net income exceeds $500,000. All the provisions of this section relating to indi- viduals who are to be chargeable with the normal income tax,, so far as they are applicable and are not inconsistent with this subdivision of paragraph A, shall apply to the levy, assessment, and collection of the additional tax imposed under this section. .Every person subject to this additional tax shall, for the pur- s/Sid. ilUd. Subsection C. 182 INCOME SUBJECT TO TAX. [§ 44 pose of its assessment and collection, make a personal return of his total net income from all sources, corporate or otherwise, for the preceding calendar year, under rules and regulations to be prescribed by the Commissioner of Internal Revenue and ap- proved by the Secretary of the Treasury. 'For the purpose of this additional tax the taxable income of any individual shall em- brace 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 companies, 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, joint-stock company, or associa- tion 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 fraudulent purpose to escape such tax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not be construed as evidence of a purpose to escape the said tax in such case unless the Secretary of the Treasury shall certify that in his opinion such accumulation is unreasonable for the purposes of the business. When requested by the Commissioner of Internal Revenue, or any district collector of internal reve- nue, such corporation, joint-stock company, or association shall forward to him a correct statement of such profits and the names of the individuals who would be entitled to the same if dis- tributed." * This tax is not paid by a corporation, joint-stock company or association. This subdivision is obscure in its failure to define the mean- ing of the phrase "net income," upon which the amount of the additional tax is based. The only point upon which it makes a distinct proviso is that the tax shall be based upon the "net income from all sources, corporate or otherwise" and the share to which the taxpayer would be entitled of the gains and profits, whether divided or distributed or not, of all corpo- rations, joint-stock companies or associations, formed for the I 44. lAct of October 3, 1913, Subsection A, subd. 2. § 44] INCOME SUBJECT TO ADDITIONAL TAX. 183 purpose of pennitting the gains and profits to accumulate, in- stead of being divided or distributed. It is clear that the ad- ditional tax is imposed upon the income derived from the dividends of corporations which have already paid the normal tax upon their own net income.^ As regards the subject of deductions and exemptions, this subdivision merely refers to the provisions of the act relating to individuals chargeable with the normal income tax, so far as they are applicable and not inconsistent with this sub- division. The following subdivision, B, begins with the defini- tion of net income. "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 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 acquired by gift, bequest, devise, or descent: Provided, That the proceeds of life insurance policies paid upon the death of a 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 surrender of contract, shall not be included as income." This undoubtedly applies. Then follows the statement begin- ning, "that in computing net income for the purpose of the normal tax there shall be allowed as deductions," followed by the deductions which have been previously quoted.^ Are these deductions to be considered as incorporated by reference into subdivision A, so as to apply to the additional tax? It is the usual custom to allow them.* If not, such tax will be estimated upon the gross income with the following exceptions. The concluding paragraph of subdivision B provides : "That 2 See § 52, infra. This additional 3 Supra, § 42. tax is imposed upon nonresident as 4 See Tr. Eeg. 8. well as resident aliens. Tr. Eeg. 8j T. D. 2013. 184 INCOME SUBJECT TO TAX. [§44: in computing net income under this section there shall be ex- cluded the interest upon the obligations of a State or any politi- cal subdivision thereof, and upon the obligations of the United States or its possessions; also the compensation of the present President of the United States during the term for which he has been elected, and of the judges of the supreme and in- ferior courts of the United States now in office, and the com- pensation of all officers and employees of a State or any politi- cal subdivision thereof except when such compensation is paid by the United States Government." It seems clear that this exclusion should be made when the additional tax is assessed. A question has been mooted concerning subdivision C, which provides "that there shall be deducted from the amount of the net income of each of said persons, ascertained as provided herein, the sum of $3,000, plus $1,000 additional if the person making the return be a married man with a wife living with him," &c. It has been suggested that inasmuch as this para- graph is by its terms not confined to the normal income tax, persons subject to the additional income tax are entitled to two deductions of this $3,000 ; once when the normal tax is assessed and again upon the assessment of the additional tax, so that in fact the additional tax is not imposed unless the total net in- come exceeds $33,000, or in the case of marriage, when the parties live together, $24,000.* This point has not yet been decided; but if the rulings of the Department are in accord- ance with the opinion of the deputy, Mr. Luther F. Speer, as expressed in his pamphlet, there will be no such deduction in the assessment of the additional tax.^ And that is the practice in the Second District of ^ew York, and it is believed in all the revenue districts. § 45. Statutory definition of income of corporations, joint-stock companies and associations subject to tax. As to corporations, joint-stock companies and associations, the statute provides : "Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, joint-stock com- pany or association, or insurance company, received within the year from all sources, (first) all the ordinary and necessary ex- penses paid within the year in the maintenance and operation of 5 The suggestion was made to the 6 Speer's Pamphlet, 23, 26. author by Mr. R. G. Babbage of the New York bar. § 45] INCOME OF COEPOEATIOiS'S. 185 its business and properties, including rentals or other payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year and not compensated by 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 rea- sonable allowance for depletion of ores and all other natural de- posits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made ; and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided, That mutual fire insurance companies requiring their members to make premi- um deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such por- tions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves : Provided further. That mutual marine insurance companies shall include in their return of gross in- come gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof and life insurance companies shall not in- clude as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; (third) the amount of interest acciiied and paid within the year on its indebtedness to an amount of such indebtedness not exceeding one-half of the sum of its interest- bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of its indebtedness not exceeding the amount of capital employed in the business at the close of the year : Provided, That in case of indebtedness 186 IlfCOME STfBJECT TO TAX. [§ 45 wholly secured by collateral the subject of sale in ordinary busi- ness of such corporation, joint-stock company, or association, the total interest secured and paid by such company, corpora- tion, or association within the year on any such indebtedness may be deducted as a part of its expense of doing business : Pro- vided further, that in the case of bonds or other indebtedness, which have been issued with a guaranty that the interest pay- able thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed ; and in the case of a bank, banking association, loan, or trust company, in- terest paid within the year on deposits, or on moneys received for investment and secured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan or trust 'Company ; (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof, or imposed by the gov- ernment of any foreign country : Provided, that in the case of a corporation, joint-stock company or association, or insurance company, organized, authorized, or existing under the laws of any foreign country, such net income shall be ascertained by deducting from the gross amount of its income accrued within the year from business transacted and capital invested within the United States, (first) all the ordinary and necessary ex- penses actually paid within the year out of earnings in the maintenance and operation of its business and property within the United States, including rentals or other payments required to be made as a condition to the continued use or possession of property; (second) All losses actually sustained within the year in business conducted by it within the United States and not compensated by insurance or otherwise, including a rea- sonable allowance for depreciation by use, wear and tear of property, if any, and in the case of mines a reasonable allow- ance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made ; and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity con- tracts : Provided further, that mutual fire insurance companies requiring their members to make premium deposits to provide § 45] IN-COME OP COEPOEATIONS. 187 for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium de- posits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided further. That mutual marine insurance companies shall include in their return of gross income gross premiums col- lected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums pre- viously paid by them, and interest paid upon such amounts be- tween the ascertainment thereof and the payment thereof and life insurance companies shall not include as income in any year such portion of any actual premium received from any indi- vidual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, vyithin such year; (third) the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding the proportion of one-half of the sum of its interest- bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the capital em- ployed in the business at the close of the year which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and with- out the United States: Provided, That in the case of bonds or other indebtedness which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed; (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof or the District of Columbia. In the case of assessment insurance companies, whether domestic or foreign, the actual deposit of sums with State or Territorial ofScers, pursuant to law, as additions to guarantee or reserve funds shall be treated as being payments required by law to re- serve funds." ' § 45. lAct of October 3, 3913, Subsection G (b). 188 INCOME SUBJECT TO TAX. [§ 46- § 46. Judicial definitions of income. It was said by Lord Chancellor Halsbuey of England : "I think it cannot be- doubted, upon the language and the whole purport and meaning- of the income tax acts, that it never was intended to tax capital * * * as income at all events." * Lord Macnaghten : "In. every case the tax is a tax on income, whatever may be the standard by which the income is measured. It is a tax on 'profits or gains' in the case of duties chargeable under Sched^ (A.), and the expression 'profits or gains' is constantly applied without distinction to the subject of charge under all the Sched- ules." * There are a few dicia in the State courts to the contrary. "Strictly speaking, 'income' means that which comes in or is received from any business or investment of capital without reference to the outgoing expenditures." ' Accordingly, in a Georgia case "annual income" was construed as meaning "gross- income." * So, "property may have an annual value 'without any income.' " ' And the term "profits or income" has been construed as meaning "gross profits" or "gross income," and not "net profits" or "net income." * By the rule of construction, noscitur a sociis, however, the words in this statute must be- construed in connection with those to which it is joined, name- ly, gains and profits; and it is evidently the intention, as a general rule, to tax only the profits of the taxpayer, not his- whole revenue.' Accordingly, money received as the result of the change of an investment, or as the proceeds of a sale with- out profit, is not income. Thus, when a vendor received the- purchase-money in annual installments, it was held in Eng- land that such installments were principal and not taxable a& "annual payments" or income.' So, too, an increase of capital § 46. 1 Secretary of State, in 5 Judge Miller, in Troy Iron & Council of India v. Scohle [1903] 'Nail Factory v. Corning, 45 Barb. A. C. 299, 302; 72 L. J. K. B. N. S. 23], 247. 617, 89 L. T. N. S. 1, 51 Week. Rep. 6 People v. Supervisors, 18 Wend. 675, 4 Tax Cas. 618. 605. 2 London County Council v. Atty. 7 But see Senate Debate August Gen. [1901] A. C. 26, 70 L. J. K. B. 26, 1913 Cong. Record Vol. 50, p. N. S. 77, 83 L. T. N. S. 605, 49 4193. Week. Rep. 686, 4 Tax Cas. 265. ^ Foley v. Fletcher, 3 H. & N. 3 Judge Bronson in People v. 8u- 769. pervisors, 4 Hill. 20, 23. * Goldsmith v. Augusta, etc. R. B. Co. 62 Ga. 468. '§ 47] INTEREST. 189 when realized cannot justly be called profit or income. Ex- amples are the increase in the value of real estate, or personal property, such as stocks, unless expressly provided in the :statute. "Mere advance in value in no sense constitutes the •gains, profits, or income specified by the statute. It consti- itutes and can be treated merely as increase of capital." ' § 47. Interest. In estimating the taxable income, interest received by the taxpayer is included.^ There are allov^ed as deductions also "all interest paid within the year by a taxable person on indebtedness." * It is unsettled whether interest paid as damages and not by express contract is subject to the tax.* But it has been held in England, that the interest included in the income includes interest for a less period of time than a jear, paid by a purchaser who defaulted on the date of pay- ment.* Where the Indian Government bought a railway and paid for the same, instead of a gross amoimt, a semi-annual sum for a term of years, with interest on the balance remaining un- paid ; it was held : that these semi-annual payments represented partly an instalment of the purchase money and partly interest on the amount of the purchase money outstanding; that the former was capital and not income, and that the latter alone was subject to the tax.° According to Deputy Commissioner Speer, interest accrued and due to the taxpayer, if good and collectable at the end of the year should be returned as income, whether actually collected or not.^ Mr. Walker disputes this position saying that the form- er has overlooked the difference between tie word "accrued" and the statutory term "derived."'' Any Department reg-ula- tions upon the subject will be discussed in the next chapter. 9 Mr Justice Field, In Gray v. B Secretwry of State in Council of Darlington, 15 Wall. 63, 21 L. ed. India v. Seoble [1903] A. C. 299, 72 45 " L. J. K. B. N. S. 617, 89 L. T. N. S. § 47. lAct of October 3, 1913, 1, 51 Week. Rep. 675, 4 Tax Cas. Subsection B. 618; East India Railway v. Secre- 2 Ibid. ' tary of State for India [1905] 2 K. 3 See ' Gateshead Corporation v. B. 413, 74 L. J. K. B. N. S. 779, 93 Lumsden (1913) 77 J. P. 124. L. T. N. S. 220, 54 Week. Rep. 4. ^Bebb V. Bunney, 3 Hen. & M. 6 Speer's Pamphlet. 213. 7 Walker's Pamphlet, n. 66. 190 INCOME SUBJECT TO TAX. [§ 4S § 48. Income accrued but not received. The statute tax- es "the entire net income arising or accruing from all sources in. the preceding calendar year ;" ^ and in the case of corporations, joint-stock companies or associations, and insurance companies, there is a second direction, "the tax herein imposed shall be compiited upon its entire net income accrued within each pre- ceding calendar year." ^ The adjective accrued is omitted from the definition of net income, which, when belonging to a tax- able person, is defined as including "gains, profits and income derived," with an allowance, amongst other deductions, of "all interest paid within the year" by a taxable person on indebted- ness and on "taxes paid within the year." * In the case of a corporation, joint-stock company or association, or insurance company, income "received." * The provision concerning re- turns by individuals states that they shall set forth "the gross amount of income from all separate sources and from the total thereof," omitting the word now under discussion. That concerning returns by corporations, joint-stock companies and associations, directs that it shall contain "the gross amount of its income received during such year from all sources, and if organized under the laws of a foreign country the gross amount of its income received within the year from business transacted and capital invested within the United States," deducting,, amongst other things, "the amount of interest accrued and paid within the year with certain exceptions." ^ A dispute has arisen concerning the meaning of the word "accruing." The word "accrue" as defined in the reports has at least four meanings : To arise as a growth or result ; * to become vested ; '' to become enforceable ; ' to become due and payable. *' § 48. III. A, subd. 1; G (a). See Napa State Hospital v. Yuha Gown- also G (c). ty, 138 Cal. 378, 71 Pae. 450, 451. ilbid. G (e). « Amy v. Dubuque, 98 U. S. 470, ^Ibid. B. 470, 25 L. ed. 228, 231; McGuigan v. *Ibid. G (b). Rolft, 80 111. App. 256, 259; Eising ^Ibid. G (c). V. Andrews, 66 Conn. 58, 50 Am. St. e Anderson v. Richards' Ex'rs, 99 Rep. 75, 33 Atl. 585, 586; Fowlkes- Ky. 661, 37 S. W. 62; Strasser v. v. Nashville & D. R. Co. 9 Heisk. Staats, 59 Hun, 143, 13 N. Y. Supp. 829, 830; Barnes v. City of Brooklyn, 167, 168 ; Gudgel v. Southerland. 1 17 22 App. Div. 520, 48 N. Y. Supp. 36, Iowa, 309, 90 N. W. 623, 624; 37 : Kennedy v. Burrier, S6 Mo. 128, Knowlton v. Massachusetts Ben. Life 130; Rice v. United States, 122 U. S. Ass'n, 171 Mass. 193, 50 N. E. 520. 611, 30 L. ed. 793, 7 Sup. Ct. Rep. T Ha/rtshorne v. Ross, 13 Ohio Dec. 1377. Reprint, 10, 14, 2 Disney (Ohio) 15; 9 Uoyer v. Badger Lumber Co. 10> § 48] ACCRUED INCOME NOT EEOBIVED, 191 Mr. Cordell Hull, who originally drafted the bill, said in his address to the New York State Bar Association: "There are two methods of computing net income — what is known as the book or credit or accrued basis, and the cash basis. Differences of opinion among Members of the two Houses of Congress and expert accountants and others are responsible for the lack of harmony of terms prescribing in each instance the exact basis upon which accounting shall be made. I think the ac- crued or credit basis will apply to corporations and associa- tions with most convenience, and the cash basis will be more desirable for individuals. The taxpayer is entitled to employ the same basis in accounting for his income and in making claim for deductions, otherwise an injustice would result. I have the impression that the Treasury Department will ad- minister the law on the accrued or credit basis." ^°' Mr. Albert H. Walker expresses the opinion that no income is taxable which has not been received, saying: "Where the word 'accruing'' is similarly used, the implication is that a net income 'accrues' from a gross income; though the gross income is everywhere said to be 'derived' or 'received' from the various sources of income which are specified in the statute. The statutory use of the word 'accruing' is accurately proper, for the net income to which it is applied does 'accrue' from the gross income, through a process of successive deductions, which is prescribed by the statute as the proper method of ascertaining the amount of the net income which accrues from the gross income." ^'' "The statute nowhere expresses or implies the idea that any gross income includes anything which has not been actually received." ^^ Commissions upon renewal pre- miums for insurance are treated by the Department as income when received and income for the period in which they are received.*^ Kan. App. 142, 62 Pac. 434, 435; 9a N. Y. State Bar Ass'n Report, CutcUff V. McAnally, 88 Ala. 507, 1914, p. 139. 7 So. 331, 332; Fay v. Holloran, 35 10 The unconstitutional character Barb. 295, 297 ; Schifferstein v. Al- and the illegal administration of the lison, 123 111. 662, 15 N. E.,275, 276; Income Tax Law, demonstrated by Mundt V. Sheboygan & F. du L. R. Albert H. Walker, pp. 44, 45. Co. 31 Wis. 451, 404; Allen v. Arm- 11 Ibid. p. 65. See, also. Ibid. strong, 5S App. Div. 427, 68 N. Y. p. 67. Supp. 1079, 1081. 12 T. D. 2011, July 28, 1914. 192 INCOME SUBJECT TO TAX. [§48 In a letter to tlie collectors, Acting Commissioner Williams instructed them as follows: "Returnable and taxable income is that actually realized during the year, that is, that which is evidenced by the receipt of cash or its equivalent. Until any appreciation taken up on the books has been so realized, it vs^ill not be required to be returned as income. Hence, in the prepa- ration of returns and in the examination of books for the pur- pose of verifying the same, mere book entries of appreciation in the value of capital assets will be disregarded." ^* Upon the other hand, the instructions of the Treasury De- partment, endorsed upon their forms, direct as follows: "A person receiving fees or emoluments for professional or other services, as in the case of physicians or lawyers, should include all actual receipts for services rendered in the year for which return is made, together with all unpaid accounts, charges for services, or contingent income due for that year, if good and collectible." ^* "Amounts due or accrued to the individual members of a partnership from the net earnings of the partner- ship, whether apportioned and distributed or not, shall be in- cluded in the annual return of the indi-idual." ^^ "Interest received upon the obligations of a State or any political subdi- vision thereof and upon the obligations of the United States or its possessions should be included in gross income, as well as all other interest due and accrued during the period for which return is made." ^^ In returns by corporations : "Ac- crued interest is considered to be interest due and payable, except in the cases of banking or other similar institutions which close their accounts on the basis of the interest earned. In all cases the accrued interest shall be reported on the basis on which the books are closed." ^' "The gross income of mer- cantile corporations should be ascertained in the following manner: From the sum of the total sales during the year plus the sum of the inventory at the end of the year, deduct the 13 Letter of Aug. 14, 1914. members thereof before their divi- 14 Form 1040, Instruction 14; sion, this instruction seems to be "Form. 1041, Instruction 12. well founded. IB Form 1040, Instruction 15; « Forms 1030, 1031, 1032, 1033, Form 1041, Instruction 14. Since the 1034, 1035, Instruction 18. net earnings of the partnership are 1'' Ibid. Instruction 19. jointly in the possession of all the § 48] ACCEUED IITCOME NOT EECEIVED. 193 sum of the inventory at the beginning of the year plus the cost of the goods and materials purchased during the year; to this difference add the income received from any other source and the result will be the gross income to be reported under Item No. 3 of the return." ^* "Gross income in the case of a manu- facturing corporation shall include the total receipts from the sale of all manufactured goods sold during the year plus any increase in the inventoried value ascertained through an accounting of the finished and unfinished product, raw ma- terial, etc., on hand at the close of the year." ^® "To the income thus ascertained there should be added the income arising, ac- cruing, or received from any and all other sources, the aggre- gate thus ascertained to be the gross income to be returned under Item No. 3 of the return form. Since the gross income thus ascertained represents the total receipts as well as the in- ventoried value of finished and unfinished products, raw ma- terial, etc., the corporation will include in its deduction under Item No. 4 all expenditures for material, labor, fuel, and other items going to make up the cost of the goods sold or inventoried at the end of the year." ^^ It has been said that when land or a security is bought be- fore the rent or interest upon the same falls due, the vendee is not liable for the tax upon what accrued before he acquired the title ; ^' but when in such a case the tax is deducted at the source, a complication might arise. ^^ The Corporation Tax Law of August 5th, 1909, did not in this connection contain the adjective, "accruing," but directed simply that every person subject to the tax should pay a tax ^'upon the e;ntire net income over and above $5,000 received by it," &c. In the construction of this statute it was held that nothing was taxed as income, except what was actually received. Judge Cross said: "It seems almost to border upon absurdity to speak of income as including that which has not been re- ceived, and which in the ordinary uncertainties of business may never be received." ''* In a later case under that same statute, 18 Form 1035, Instruction 21. tion to Am. Bar Ass'n, A. D. 1914, ^9 Hid. Instruction 22. p. 5. 20 /bid. Instruction 23. i2 Infra, § 97. 21 Report of Committee on Taxa- 23 Mutual Benefit Life Ins. Co. v. Foster Income Tax. — 13. 194 INCOME SUBJECT TO TAX. [§48 it was held that an increase in the book value of the assets of a corporation, caused by a revaluation of its property, did not constitute any part of its "income received within the year." "* The earlier statutes contain no general provisions for the taxation of income that has accrued but some of them spe- cifically provide for taxation of dividends at the source when they are declared due.^^ Some also contain a provision: "In estimating the annual gains, profits or income of any person, the interest over and above the amount of interest paid upon all notes, bonds, and mortgages, or other forms of indebtedness, bearing interest, whether due and paid or not, if due and col- lectible, shall be included and assessed as part of the income of such person for each year." ^* The Act of August 28th, 1894, contained no reference to accruals in the general provision for the tax, but expressly stated: In estimating the gains, profits and income, there should be included "interest received or accrued upon all notes, bonds, mortgages, or other forms of indebtedness, bearing in- terest, whether paid or not, if good and collectible, less the in- terest which has become due from said person or which has been paid by him during the year." These acts contained no provision concerning accrued income, except in the case of interest. Under them it was held that the amount of a promissory note, taken in one year and payable in another, was not taxable as income of the latter year, al- though it might, perhaps, hav-e been so had it fallen due in the EeroU, 198 Fed. 199, 216, affirmed L. 256, 257, similar to the statute as Herald v. Mutual Benefit Life Ins. just cited. Go. 120 C. C. A. 256, 201 Fed. 918; 26 Act of June 30, • 1864, See. 117, certiorari denied in 231 U. S. 755, 13 Stat, at L. 223, 275 ; Act of March 58 L. ed. 468, 34 Sup. Ct Eep. 323. 3, 1865, Sec. 1, 13 Stat, at L. 469, Zi Baldmn Locomotive Works v. 479 (U. S. Comp. Stat. 1901, p. McCoach (D. C. E. D. Pa.) 215 Fed. 3701); Act of March 2, 1867, Sec. 967. 13, 14 Stat, at L. 471, 477; Act of 8S Act of July 1, 1862, Sec. 82, 12 July 14, 1870, Sec. 7, 16 Stat, at L. Stat, at L. 432 (U. S. Comp. Stat. 256, 257. See Barnes v. The Rail- 1901, p. 186) ; Act of June 30, 1864, road, 17 Wall. 294, 21 L. ed. 544; Sec. 120, 13 Stat, at L. 223, 275; Railroad Co. v. United States, 101 Act of July 13, 1866, Sec. 9, 14 Stat. U. S. 543, 25 L. ed. 1068; United at L. 98, 135, which makes the simi- states v. Indianapolis & St. L. R. Co. lar provision for the deduction at the 113 U. S. 711, 28 L. ed. 1140, 5 Sup. source of the tax upon coupons; Act Ct. Eep. 724. of July 14, 1870, Sec. 15, 16 Stat, at § 48] ACCEUED INCOME NOT EECEIVED. 195 former year and been allowed to remain unpaid.*'' In another case Judge Drummond said: "It might be true in many cases where a man made a charge on his books for debts due as the result of the year's business, they would constitute assets, and come within the definition of gains or profits. For example, instead of money, he might re- ceive promissory notes, bills of exchange, bonds or mortgages, or different kinds of securities, and these, if good, might prop- erly become a part of his income. Even treasury notes and national bank notes were not actually money, but only the rep- resentatives of money, though treated as such by the commercial world, and with them the government is carried on and alone supported, except by what gold is received through the customs. Many kinds of securities — as bonds of the United States, for instance — are considered as money or available assets, because convertible at once into money, and therefore when any of these are received as the result of a year's business, they are legit- imately a part of a year's income. The rule would be the same, of course, if instead of them, it were property real or personal. In all these cases there are real gains or profits. But when a man, at the end of the year, found upon his books amounts charged without having actually received any portion of the same or had bills receivable unavailable, it seemed to be a misnomer to call them gains or profits, which were not, and never might be, realized." *' It has been held that the phrase "accruing interest" means interest which is accumulating but not due,^' and that it does not mean interest overdue and unpaid.^" A State court held that interest due but not paid, and in- terest accrued but not due, although secured by mortgage, were not "surplus profits" of the creditor. ^^ 27 United States v. ScUlUnger, 14 88 United States v. Frost, 9 Int. Blatehf. 71, Fed. Cas. No. 16,228 Rev. Eee. 41, Fed. Cas. No. 15,172, (1876, C. C. S. D. N. Y.) Johnson, Dkiimmond, J. J. In an earlier case it was said 29 Qross v. Partenheimer, 159 Pa. that the tax could not be evaded 556, 28 Atl. 370, 371. by leaving a good debt uncollected. 80 IMd. United States v. Frost, 9 Int. Rev. 31 People v. San Francisco Sav^ Rec. 41, Fed. Cas. No. 15,172 (D. C. Union, 72 Cal. 199, 13 Pac. 498. N. D. 111). Deummond, J. 196 INCOME SUBJECT TO TAX. [§ 48 The Wisconsin Tax Commissioners in their instructions in sending the administration of the Income Tax Law of that State*^ direct: ''18. Merchants, manufacturers and business men generally will report sales on account or for credit as gross income of the year when the sales are made. 19. Bookkeeping: The purpose of the law is to ascertain the taxable net income. Any method of bookkeeping which fairly attains this result is acceptable." 1. Making returns: (a) Section 1087m— 10.3 requires every corporation to make a return "whether taxable under this act or not." (b) The fact that a corporation did no business or received no income during the year 1913 does not relieve it from making a return. (c) Every question should be answered. If there is no amount or information to be given opposite a question write in the word "none." It has been held that an accruing right is "one that is in- creasing or enlarging or augmenting." ^* In another case Judge Johnson said : "In the absence of any special provision of law to the contrary, income must be taken to mean money, not the expectation of receiving it, or the right to receive it at a future time." ^* Speaking of promissory notes, "until they were paid they were not income but only the ground of expecting income." ^° § 49. Rents. The act specifically provides that taxable in- come shall include rents.^ Where land was leased for a term of years, the lessee covenanting to erect a building thereupon, the title to which, subject to the use of the lessee during the term, immediately vested in the lessor; it was ruled that the cost of erecting the building was in the nature of rent and should 32 Wise. Laws 1911, chap. 658. Blatehf. 71, Fed. Cas. No. 16,228, Printed in full in Part V. per Johnson, J. 33 Richards v. Bellingham Bay 36 Ihid. Land Oo. 4 C. C. A. 290, 7 U. S. App. § 49. 1 Act of October 3, 1913, 494, 54 Fed. 209, 213. Subsections A. B. 8* United States v. Schillinger, 14 § 50] SALES or EEAL ESTATE. 197 be returned as such by the lessor.* Produce paid as rent must be included.* § 50. Sales of real estate. The act provides that "the net income of a taxable person shall include accounts, profits and income derived from * * * sales, or dealings in prop- erty, whether real or personal, growing out of the ownership or use of or interest in real or personal property." Sales may be of real or personal property. Personal property may con- sist of farm produce or other personal property. Sales of both real and personal property may be individual transactions or part of a business carried on by the taxpayer. Different rules regulate the liability to taxation of the profits derived in these different ways. The earlier statutes provided that the net profits of sales, realized by sales of real estate purchased within the year, should be chargeable as income.^ By the Acts of 1870 ■ and 1894, taxable income included "profits realized within the year from sales of real estate purchased within two years pre- vious to the year for which income is estimated." ^ The pres- ent statute is silent upon that point. The draughtsman of the bill said : "My judgment would be that as to an occasional pur- chase of real estate not by a dealer or one making the buying and selling a business, this bill would only apply to profits on sales where the land was purchased and sold during the same year." * According to the British rule, the profits made by a 8 6 Int. Rev. Ree. 130. 3 5 Int. Rev. Rec. 154. § 50. lAct of June 30, 1864, § 116; Act of March 3, 1865, § 1; Act of March 2, 1867, § 13. 8 Act of July 14, 1870, § 7; Act of August 28, 1894, § 28. 3 Mr. Cordell Hull in the House of Representatives, April 26th, 1913: "In the phrase commonly used in the creation of trusts — 'rents, issues and profits' — the word 'profit' does not include a profit realized by con- version of any part of the principal fund (39 Cyc. 444), unless the trust fund is invested in trade. "The act, however, speaks of 'gains, profits and income' derived from 'sales or dealings in property, wheth- er real or personal, growing out of ownership or use of or . interest in real or personal property.' "The act does not differentiate ac- cording as the property is or is not bought or sold in the course of a regular business having dealings for profit for its object. The income of a person engaged in a mercantile busi- ness, or in the business of buying or selling real estate, or in the busi- ness of placing securities, depends of course on such profits. "A problem arises, however, where property is bought for investment or for use and enjoyment, and is subse- quently sold because no longer need- ed, or in order to obtain funds, or because there is a chance of making a profit. The Prussian Income Tax Law specifies as income only the 198 INCOME SUBJECT TO TAX. [§ 50 sale of real estate, are considered to be a change in the invest- ment of capital and are not assessable as income,* unless the sale was part of a business or vocation in which the taxpayer was engaged.* Thus the sale of land by a fur company* and the sale of a plantation by a rubber company,** were held not to be a part of their business and consequently the profits there- from were not assessed as income. On the other hand, it was held that the profit upon the sale of a mine, received in the shares of the capital stock of the vendee, when made by a com- pany formed to purchase and develop mining properties, was profits realized from the sale of secu- rities as a matter of speculation (Sec. 12), and apparently does not count as income profits derived from the sale of real estate (Sec. 13). "The terms of the present act, while somewhat obscure, are appar- ently wide enough to cover as income any profit made by a sale. However, under a previous income tax act the United States Supreme Court, rely- ing upon the wording, 'there shall be levied ♦ * * annually upon the income • * *' (also found in the present act), held, contrary to the views of the Treasury Depart- ment, that a profit of $20,000 re- alized upon bonds held for four years, could not be treated as in- come of the last year {Gray v. Dar- lington, 15 Wall. 63, three judges dissenting)) and the act contains no provision to reach the income of former years legally taxable during those years. "A letter of L. F. Speer, Deputy •Commissioner of Internal Revenue, to a firm of lawyers in New York •of January 20, 1914 (printed in the ■Chronicle of January 24, 1914), .says "it ( With respect to property sold, it is held that if the property has been owned for a number of years and the presumption may be fairly made that the increase in value has been con- stant during those years, then the profit received from the sale of the property should be prorated and such portion as shall belong to the period of time in which the income tax was in operation should be reported as income for the year during which the sale was made. The same would be true of losses.' "In view of the questions raised under the former law it would have been appropriate to formulate some • definite rule in the new law, or to make it clear that such profits are not intended to be taxed as income. The letter cited suggests a compro- mise and not a solution, and it is not the function of the Treasury De- partment to supplement the defects of the act. This is one of the points that should be dealt with in a re- vision of the act." Report of Com- mittee on Taxation to Am. Bar. Ass'n, A. D. 1914, p. 6. * Stevens v. Hudson's Bay Co. (1909) 101 L. T. N. S. 96, 25 Times L. R. 709, 5 Tax. Cas. 424; Tebrau Jehore Rubber Syndicate, Limited V. Farmer [1910] S. C. 906, 47 Scot. L. R. 816, 5 Tax. Cas. 658. See As- sets Co. V. Forbes (1897) 24 R. 578, 34 Scot. L. R. 486, 3 Tax. Cas. 542. 6 California Copper Syndicate v. Harrison (1904) 6 F. 894, 1 Scot. L. R. 691, 5 Tex. Cas. 159. But see Furtado v. Cardonald Feuing Co. Limited [1907] S. C. 66, 34 Scot. L. R. 66. 6 Stevens v. Hudson's Bay Co. (1909) 101 L. T. N. S. 96, 25 Times L. R. 709, 5 Tax. Cas. 424. «» Tebrau Jehore Rubber Syndi- cate, Limited v. Farmer [1910] S. C. 906, 47 Scot. L. R. 816, 5 Tax Cas. 658. § 50] SALES OF EEAL ESTATE. 199 taxable as income.'' The proceeds of the sale of ore are income of the operator of the mine.* Under the Treasury Eegulations the profits "upon the sale of capital assets" of corporations, joint-stock companies and associations, and insurance companies, after deducting the pro- portionate amount for the years previous to January 1st, 1909, if the capital was owned before that date, are considered to be taxable income.® It has been suggested by Mr. Black that the Act might be construed by reading the word "or" into the clause before the words "personal" and "growing," and that then by a slight transposition of some of the other terms it would lay a tax upon the "unearned increment of land," namely, an in- crease in its market value accruing within the year from any other cause than its improvement by the owner.^' This siigges- tion does not commend itself to the present writer." Under the Treasury Eegulations, when there has been a change in the book value of the capital assets of a corporation resulting from a reappraisal of the property, the consequent gains are considered as income, after deducting the pro rata gain for the years that any part of such property has been owned 7 California Copper Syndicate v. February 5, and reprinted in the Harrison (1904) 6 F. 894, 41 Scot. Chronicle of February 7, p. 426, that L. R. 691, 5 Tax. Cas. 159. increase in the value of securities 8 Stratton's Independence v. How- will be regarded as an increase in lert, 231 U. S. 399, 58 L. ed. 285, assets and should be accounted for 34 Sup. Ct. Rep. 136 (under Act of as income, provided always that the Aug. 5, 1909). taxpayer has kept his business ac- 9 Arts. 107, 108, 109. counts in the manner mentioned, i. e., 18 Black, § 45. has made a record of the fact of 11 Cf. Tr. Reg. 146. But see § 41, increase in his ledger." infra. Mr. Cordell Hull said in the There is not the slightest intima- Houae: "Unless the unearned incre- tion in the act itself that the mere ment is expressly made income, it is manner of bookkeeping can affect the not considered income in any sense character of appreciation as income, of the word, but simply increase of and a, treasury ruling cannot control value or capital." (Cong. Rec. April the matter. If the act itself were 26, 1913.) explicit with regard to unrealized "Where property appreciates in appreciation, the question would re- value while remaining in the hands main whether Congress has the con- of the owner, the notion that mere stitutional power to treat it as in- appreciation in value, not realized come. In Gray v. Darlington, 15 through sales, could be taxable as Wall. 63, 21 L. ed. 45, Justice Field income might be dismissed as fanci- said: "Mere advance in value in no- ful, if it were not for an alleged wise constitutes the gains, profits or ruling of the Treasury Department income specified by the statute." reported by the New York Times of 200 INCOME SUBJECT TO TAX. [§ 50' by the taxpayer previous to January 1st, 1909.^^ The in- structions endorsed upon the forms of returns by individuals provide : "Estimated advance in value of real estate is not re- quired to be reported as income, unless the increased value is taken up on the books of the individual as an increase of as- sets." " § 51. Sales of personal property in general. Profits de- rived from the sale of personal property are not ordinarily taxable as income unless the property was purchased and sold within the same year.'' Where, however, such sales are part of a business carried on by the taxpayer, the profits must be included in the taxable income, although the property was purchased in a former year.^ This was the ruling of a divided court in which the doctrine was thus stated by Mr. Justice FiELD^ after quoting the language of the former statute : " 'Gains, profits, and income for the year ending the 31st day of December next preceding the time for levying, collecting, and paying said tax.' This language has only one meaning, and that is that the assessment, collection, and payment prescribed are to be made up on the annual products or income of one's property or labor, or such gains or profits as may be realized from a business transaction begun and completed during the preceding year. There are exceptions, as already intimated, to the general rule of assessment thus prescribed. * * * Another exception is implied from the provision of the statute which requires all gains, profits, and income derived from any source whatever, in addition to the sources enumerated, to be included in the estimation of the assessor. The estimation must, therefore, necessarily embrace gains and profits from trade and commerce, and these, for their successful prosecution, often require property to be held over a year. In the estimation of gains of any one year, the trader and merchant will, in con- sequence, often be compelled to include the amount received up- 12 Arts. 109, 111. 16,341, and the rulings cited infra, 13 Form 1040. See infra, § 79. § 52. § 51. 1 Gray v. Darlington, 15 2 Gray v. Darlington, 15 Wall. 63, Wall. 63, 63-67, 21 L. ed. 45, 46. 65-67, 21 L. ed. 45, 46. But see But see United States v. Smith, 12 United States v. Smith, 12 Int. Rev. Int. Eev. Rec. 138, Fed. Cas. No. Rec. 138, Fed. Cas. No. 16,341, and the rulings cited infra, § 55. § 52] SALES or FAEM PEODUCTS. 201 on goods sold over their cost, which were purchased in a pre- vious year. Indeed, in the estimation of gains and profits of a trading or commercial business for any one year, the re- sults of many transactions have generally to be taken into ac- count which originated previously. Except, however, in these and similar cases, and in eases of sales of real property, the statute only applies to such gains, profits, and income as are strictly acquisitions made during the year preceding that in which the assessment is levied and collected. The mere fact that property has advanced in value between the date of its acquisition and sale does not authorize the imposition of the tax on the amount of the advance. Mere advance in value in no sense constitutes the gains, profits, or income specified by the statute. It constitutes and can be treated merely as increase of capital. The rule adopted by the officers of the revenue in the present case would justify them in treating as gains of one year the increase in the value of property extending through any number of years, through even the entire century. The actual advance in value of property over its cost may, in fact, reach its height years before its sale; the value of the property may, in truth, be less at the time of the sale than at any previous period in ten years, yet, if the amount received exceed the actual cost of the property, the excess is to be treated, according to their views, as gains of the owner for the year in which the sale takes place. We are satisfied that no such result was intended by the statute." * § 52. Sales of farm products. The Act of 1894 provides that in estimating the gains, profits and income of the tax- payer, shall be included "the amount of sales of live stock, sugar, cotton, wool, butter, cheese, pork, beef, mutton, or other meats, hay, or corn, or other vegetable, or other productions, being the growth or produce of the estate of such person, less the amount expended in the purchase or production of said stock or produce, and not including any part thereof consumed directly by the family." ^ Former statutes had a similar pro- 3 Gray v. Darlington, 15 Wall. 63, § 52. 1 Act of August 28, 1894, 65-67, 21 L. ed. 45, 46. But see § 28. the rulings cited infra, § 55. 202 INCOME SUBJECT TO TAX. [§ 52 vision without an express exemption of the amount expend- ed in the purchase or production of said stock or produce.^ Under these it was ruled: that the farmer in returning his in- come should enter all amounts received for the wool, hides and carcasses of animals that had died, provided the same were sold ; that he might then deduct the sums actually paid for purchase money for animals sold within the year or which had died with- in the year ; but that if the animals were raised on the farm, no deduction should be allowed.^ That expenditures for labor in one year could not be deducted from the proceeds of the crop sold subsequently.* That the profit realized on a sale of stand- ing or felled timber was taxable without reference to the time when the land was purchased.* That the profits thereupon should be assessed by estimating the value of the land after the timber was removed, adding thereto the net amount received for the timber and from this sum, deducting the estimated value of the land the previous year.* That rent for land bought for produce is income and that the expenses of carrying on premises so leased shoiild be deducted from the income of the lessee only and could not be deducted the second time by the lessor.'' The Act of 1913 has no provisions upon this subject; but the de- fendant has to a certain extent approved the practice under the former statutes, in the following instructions endorsed upon the original form for an individual's returns: "11. The farmer, in computing the net income from his farm for his annual return, shall include all moneys received for produce and animals sold, and for the wool and hides of animals slaughtered, provided such wool and hides are sold, and he shall deduct therefrom the sums actually paid as purchase money for the animals sold or slaughtered during the year. When animals were raised by the owner and are sold or slaughtered he shall not deduct their value as expenses or loss. He may deduct the amount of money actually paid as expense for producing any farm products, live stock, etc. In deducting 8 Act of March 2, 1867, § 13 ; Act * 4 Int. Eev. Rec. 12. of July 14, 1870, § 7. See, also, Act 5i int. Rev. Rec. 171. of June 30, 1864, § 117; Act of 6 2 Int. Rev. Rec. 61, amending 1 March 3, 1865, § 1. Int. Rev. Rec. 171. S 3 Int. Rev. Rec. 100. ' 5 Int. Rev. Rec. 154. § 53] DIVIDENDS. 203 expenses for repairs on farm property the amount deducted must not exceed the amount actually expended for such repairs dur- ing the year for which the return is made. (See page 3, item 6.) The cost of replacing tools or machinery is a deductible expense to the extent that the cost of the new articles does not exceed the value of the old." Under the Wisconsin statute the Commission of that state has directed as follows: "(a) The value of farm products consumed by the family must be included as gross income, (b) Money spent for new fences, new buildings and other permanent improvements which increase the value of the farm cannot be deducted as expenses, (c) The cost of fattening cattle may not be specially deducted in comput- ing the profit when such cattle are sold. Such costs are taken care of properly when the costs of feed and seed, hired labor, etc., are deducted, (d) Share rent may not be deducted. Full allowance is made for share rent when the costs of raising the produce (wages and other cash expenditures) are deducted, (e) Estimated losses — such as failure to realize expected profits through drought, low prices, etc. — cannot be deducted. Full al- lowance is made on this account when the costs of labor, etc., are deducted." ' Under the Virginia statute, income includes : "The amount of sales of wood, butter, cheese, hay, tobacco, grain and other vegetables and agricultural productions during the pre- ceding year, whether the same was grown during the preceding year or not, less all sums paid for taxes and for labor, fences, fertilizers, clover or other seed purchased and used upon the land upon which the vegetable and agricultural productions were grown or produced, and the rent of said land paid by said person, if he be not the owner thereof." ' § 53. Dividends. The Act specifically directs that in de- termining the net income of a taxable individual shall be in- cluded gains, profits and income derived from dividends.^ The following clause, however, provides that in computing net in- come, for the purpose of the normal tax, there shall be allowed as deductions: "Seventh. The amount received as dividends * Infra, § 60. § 53. 1 Act of Oct. 3, 1913, Bub- sVa. L. 1903, chap. 145, p. 155. section B. 204 INCOME SUBJECT TO TAX. [§ 53 upon the stock or from the net earnings of any corporation,, joint-stock company, association, or insurance company which is taxable upon its net income as hereinafter provided." * It was said by Mr. Victor Moeawetz, that the holders of preferred stock of corporations thus escape the burden of the normal in- come tax, which falls solely upon the holders of common stock and the bondholders.* But the Treasury Department might, contend that their dividends are taxed at their source as income derived from the obligation of a corporation.* The law pro- vides: "Every person subject to this additional tax shall, for the purpose of its assessment and collection, make a personal return of his total net income from all sources, corporate or otherwise, for the preceding calendar year, under rules and regulations to be prescribed by the Commissioner of Internal Eevenue and approved by the Secretary of the Treasury." ^ The person liable to the additional tax must consequently pay the same upon his share of the income of a corporation, al- though such corporation has already paid the normal tax upon the same at its source. This is an intentional discrimination against holding companies.® Dividends received from a foreign corporation, or from any other corporation which is not taxable upon its net income, are subject to the normal tax.'' A railroad or other corporation which has leased its proper- ties in consideration of a rental equivalent to a certain rate of 2 Thid. Bar Association. N. Y. Bar Ass'n 3 New York Sun, May 8, 1913. Eeport, 1914, p. 139. * Act of Oct. 3, 1913, subsection Professor Seligman says of thia E. See § 70, infra. discrimination: "While this is not 6 Act of Oct. 3, 1913. Subsection the place to express any opinion as A, subd. 2. to desirability or the economic legiti- 6 "The corporation excise-tax law macy of holding companies in gen- was merged into the new law. The eral, it is quite clear that, in the case same administrative machinery and of railroads at least, some form of substantially the taxing provisions holding company of non-competitive of the former are retained. Only a lines may be entirely compatible with few changes were made. One change the best public interests; and in any is designed in effect to impose a event the attempt to combine fiscal graduated tax upon corporations and prohibitive ends in the same holding stock in other corporations, measure is of doubtful wisdom." by reason of the superior business Seligman Income Tax, 2d ed. 685. advantages derived therefrom. This '' Bailey v. Railroad Co. 106 U. S. is not an unreasonable graduation." 109, 27 L. ed. 81, 1 Sup. Ct. Rep. Representative Cordell Hull, of Ten- 62; distingushing s. c. 22 Wall. 604, nessee, before the New York State 22 L. ed. 840. . See Merchants' In- § 54] PEOFESSIONS AND VOCATIONS. 205 dividends on its outstanding capital stock and the interest on the bonded indebtedness, and such rental is paid by the lessee directly to the stock and bondholders, should, nevertheless, make a return of annual net income showing the rental so paid as hav- ing been received by the corporation.* Under the former stat- utes it was ruled, that stock dividends, which represented earn- ings of a corporation during previous years,, were not taxable as dividends. Whether dividends payable to foreign stockholders are taxed is not specifically stated. If the legislative history of the bill is to be conclusive, it would seem to be the intention of Congress not to tax the same.® Mutual life insurance, fire insurance and marine insurance companies, and also many insurance companies that are not mu- tual in their nature, are accustomed to return or credit to their policyholders every year sums which are termed in insurance nomenclature "dividends." So far as these consist of a return to the policyholder of the loading or excessive premium charge, made to meet contingencies, in the case of life insurance compa- nies and mutual fire and marine insurance companies, they are by the statute expressly deducted from the income of the corpo- ration liable to taxation,^" and probably they are not taxable as part of the income of the stockholders, although they may prop- erly be deducted from any credit he may claim for payments on account of insurance. Actual profits paid to participating policyholders might, however, be held to be taxable as part of their income, when no tax upon the source was paid." § 54. Income from professions and vocations. The statute further taxes income from professions, and vocations.* surance Co. v. McCartney, 1 Low. when the profits were earned by the Dec. 447, Fed. Cas. No. 9,443. corporation; they became income to 8 Tr. Reg. 80. the stockholders when distributed as 9 Ruling 7 Int. Rev. Eec. 155. But dividends; but not before. Van Dyke see Railroad Co. v. Collector, 100 U. v. City of Milwaukee, — Wis. — , S. 595, 25 L. ed. 647; United States 140 N. VV. 812. V. Erie Ry. Go. 106 U. S. 327, 27 L. l" Act of Oct. 3, 1913, subsection ed. 151, 1 Sup. Ct. Rep. 223. Under G (6). See infra, % 70. the Wisconsin Income Tax Law it " See Last v. London Assurance has been held that dividends de- Corporation (1885) L. R. 10 App. clared and distributed after the law Cas. 438, 55 L. J. Q. B. N. S. 92, went into effect, out of surplus on 53 L. T. N. S. 634, 34 Weelily Rep. hand prior to that date, are taxable 233, 2 Tax. Cas. TOO. in the hands of the recipient, on § 54. 1 Subsection B. the ground that it was immaterial 206 INCOME SUBJECT TO TAX. [§ 54r It may be contended that an attorney is an officer of a State^ and that his compensation is consequently exempt. In Eng- land, the profits of a professional bookmaker on the races were held taxable as income from a vocation.' In Great Britain the rental value of an apartment, in a bank building given to the officer of a bank, was held not to be taxable as income.* . Profits credited to an employee upon the books of his em- ployer are taxable as income if he has an absolute right to re- ceive them in the future, even it has been held, when that de- pends upon the performance' by him of certain conditions ; ® but not, when he has no right to receive them until the latter's capital has been repaid him.'' The customary Christmas pres- ents to clerks are considered as income from their vocation and taxable as income.* Easter offerings^ and other voluntary contributions^" by parishioners to their clergymen, and pay- ments by a Clergy Sustentation Fund *^ and a Stipend Aug- mentation Fund ^^ created for the purpose of increasing the annual compensation of clergymen were held to be taxable as income; but not grants by a Curates' Augmentation Fund in recognition of faithful service for a period of time,^^ nor 8 See Ex parte Garland, 4 Wall. Gas. 335, set out under § 163, post. 333, 378, 18 L. ed. 366, 370; Be Wall, 6 Smyth v. Stretton (1904) W. N. 13 Fed. 814, 27 Alb. L. J. 91; Bx 90, 90 L. T. N. S. 756, 53 Week. Eep. parte Law, 35 Ga. 285, Fed. Cas. No. 288, 5 Tax Gas. 36. 8,126, 6 Am. L. Eep. N. S. 410, e lud. note; Matter of Dorsey, 7 Port. t Walker v. Reith (1906) 8 F. (Ala.) 293; Cohen y. Wright, 22 Cal. 381, 43 Scot. L. R. 245. 293 ; Heffren v. Jayne, 39 Ind. 463, 8 7 Int. Rev. Rec. 35. 13 Am. Rep. 281; Matter of Burch- 9 Blakiston v. Cooper [1909] A. C. ard, 27 Hun, 429; Matter of Baum, 104, 78 L. J. K. B. N. S. 135, 100 30 N. Y. S. R. 174, 8 N. Y. Supp. L. T. N. S. 51, Tax Gas. 347. 771; Baur v. Betz, 7 N. Y. Civ. Proc. l'> Inland Revenue v. Strar.g Rep. 233, 1 How. Pr. N. S. 344 (af- (1878) 15 Scot. L. R. 704, 1 Tax firmed in 99 N. Y. 672 ) ; Ingersoll Gas. 207. But see Turner v. Cuxon, V. Howard, 1 Heisk. 247; Leigh's L. R. 22 Q. B. Div. 150. Case, 1 Munf. 468. H Beriert v. McQiiade [1902] 2 K. » Partridge v. Mallandaine, L. R. B. 631, 71 L. J. K. B. N. S. 884, 87 18 Q. B. Div. 276. L. T. N. S. 349, 4 Tax Cas. 489. iTennant v. Smith [1892] A. G. ^ Poynting y. Faulkner (1905) 93 150, 61 J. L. P. G. N. S. 11, 66 L. T. L. T. N. S. 367, 21 T. L. R. 560, N. S. 327, 3 Tax Cas. 158. Also 5 Tax Cas. 145. see McDougal v. Sutherland (1894) ^3 Turner v. Cuwson (1888) L E 21 E. 753, 31 Scot. L. E. 630, 3 Tax 22 Q. B. Div. 151, 58 L. J. Q. B. Cas. 261; and Gorke v. Fry (1895) K. S. 131, 60 L. T. 17. S 332 37 22 E. 422, 32 Scot. L. E. 341, 3 Tax Week. Rep. 254, 2 Tax Cas. 422. § 54] PEOFESSIONS AND VOCATIOiNS. 207 Sunday collections paid to the incumbent because be was poor." According to the instructions of the Treasury Department endorsed upon the forms of returns for individuals : "Persons receiving fees or emoluments for professional or other services, as in the case of physicians or lawyers, should include all actual receipts for services rendered in the year for which return is made, together with all unpaid accounts, charges for services, or contingent income due for that year, if good and collecti- ble." ^* This is in accordance with the opinion previously ex- pressed by Mr. Speer : "Persons receiving fees or emoluments for professional or other services, as in the case of physicians or lawyers should include all actual receipts for services rend- ered in the year for which return is made, together with all un- paid accounts, charges for services, or contingent income due for that year, if the same are considered good and collectible. Should any such accounts prove to be bad or uncollectible, the amount of same are deductible from income for the year in which they are ascertained to be losses and are so treated and acknowledged by the taxable person." ^* Mr. Walker disputes this position as follows: "The idea that the statute obliges a lawyer or a doctor to somehow raise money with which to pay, during the month of June of each calendar year, an income tax upon the as yet unpaid fees which he earned during the preceding calendar year, even though he has not received and may never receive payment of those fees, is an extraordinary idea, which cannot be supported by reference to the statute. On the contrary, the statute provides, in the third paragraph that the items which are to be included in the gross income of a person, are such items of gains, profits, and income as that person 'derived' from any source whatever. In the English language, the verb 'derive' is a synonym of the verb 'receive ; ' and the adjective 'derivable' is a synonym of the adjective 'receivable.' If the statute had used, in its third paragraph, the adjective 'derivable,' or the adjective 'receiva- ble' Mr. Speer's pamphlet would have been right on this liTurton v. Cooper (1905) 92 L. 15 Form 1040, Instr. 13. T. N. S. 863, 5 Tax Cas. 138. 16 Speer's Pamphlet, 208 INCOME SUBJECT TO TAX. [§ 5^ point." " Under the Wisconsin statute the Tax Commission has directed: "Doctors, lawyers and professional men will report their fees or earnings when collected." § 55. Incomes derived from wages or compensation. The Act specifically taxes incomes derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions and vocations, when in excess of $3,000 a year.* The salaries of the present Presi- dent of the United States during the term for which he has been elected, of the Judges of the Supreme and inferior courts of the United States in office at the time of the passage of the Act, and the compensation of all ofiicers and employees of a State or any political subdivision thereof, are exempted ; ex- cept, in the last case, when such compensation is paid by the United States Government.* Where the salary of a Federal of- ficer exceeds $3,000 or $4,000 annually, in case the taxpayer is or is not married and living with husband or wife, as the case may be, the paymaster or other disbursing officer takes the amount of tax from the amount of salary.^ When the salary is paid by a private employer, he does the same.* It has been held that travel pay or mileage and commutation for the subsistence of naval or military officers of the United States, to the extent of the surplus, if any, over actual expenditures therewith con- nected, must be treated for the purposes of the tax as additions to their salaries.^ When a tax has been illegally deducted from the salary of a Federal officer, he can recover it from the United States by a suit in the Court of Claims.^ It has been held in Great Britain that sums annually placed to the credit of a school teacher, which were payable to him upon his retirement or resignation, under certain conditions, were in true effect additions to his salary upon which the tax 17 Walker's first pamphlet on the * Ibid. Income Tax Law, p. 65. See, also, B Attorney General OIney, 21 Op. Walker's second pamphlet on the In- Atty. Gen. p. 112. come Tax Law, p. 44; and § 48, 6Jud. Code, 36 Stat, at L. 1087, supra. chap. 231, § 145, U. S. Comp. Stat. §55. lAct of October 3, 1913, Supp. 1911, p. 128; United States y. Subsection B. See supra, § 28. McDermott, 140 U. S. 157, 35 L. ed. eiUd. 394, 11 Sup. Ct. Eep. 746; Foster's 8/6id. Subsections C, E. Fed. Pr. 5th ed. § 671. :§ 56] SALARIES. 209 must be paid,'' but that sums credited to an employee's account, "which could not be withdrawn until the whole amount of the master's capital had been repaid, were not ; ' that annual grants made to a clergyman out of a Clergy's Sustentation Fimd or Stipend Augmentation Fund, destined to raise the income of benefices up to a specified yearly amount, for the purpose of in- creasing his compensation,^ and voluntary Easter offerings given by parishioners to the vicar in response to a request by the bish- op asking churchmen to mitigate the hardships of the underpaid clergy generally, were profits and gains of the profession of the clergymen ; " but that parts of the Sunday collections paid to the incumbent, which would not have been made unless he had heen poor,^^ and a grant to a curate in recognition of faithful service for more than fifteen years,^^ and an annuity payable to an infirm minister who had retired, were not.^' The customary Christmas presents to clerks are considered as compensation for services rendered and taxable as income.^* § 56. Salaries. Salaries when in excess of $3,000 are ex- pressly taxed as income,^ unless the payee thereof is married and lives with wife or husband, as the case may be. In such case the salary in excess of $4,000 only is taxed; but if hus- band and wife both live together, only one deduction on $4,000 is made from the aggregate income.^ This applies to officers and employees of the United States, as well as those employed by private individuals.' The tax is paid by the employer,* un- less the compensation is not fixed or certain, or is indefinite or 7 Smyth V. Stretton, W. N. 90, 90 u Turton v. Cooper, 92 L. T. N. S. L T. N. S. 756, 53 Week. Rep. 288, 863 5 Tax Cas 138. ^ TcV 0»« Sfi ^* Turner v. Cuxson, L. R. 22 Q. e:t¥i' 5^S6? ' '''' '' ?31,°^0- EV^^M i. ^l si f T N. S. 34974 Tax Cas. 489;' [1909] S. C. 1212, 46 Scot. L. R. 857, Poynting v. Faulkner (1905) 93 L. 5 Tax Cas. 417. ^^„ -,.„■ T. N. S 367, 21 Times L. R. 560, l* Ruling, 1 Int. Rev. Rec. 150; 5 Tax Cas 145 Ruling, 7 Int. Rev. Rec. 35. 10 Blakiston v. Cooper [1909] A. § 56. 1 Act of October 3, 1913, C 104 78 L. J. K. B. N. S. 135, 100 Subsections B, C. L T N S 51, 5 Tax Cas. 347. See 2 IMd. Subsection C. InUnd Revenue v. Strang, 15 Scot. & Ibid. Subsection D. h. R. 704, 1 Tax Cas. 207 (1878). *IUd. Subsection E. Foster Income Tax. — 14. 210 INCOME SUBJECT TO TAX. [§ 56 irregular as to amount or time of accrual. In the ]att,er case it is paid by the individual.* The statute exempts from the tax "the compensation of the present President of the United States during the term for which he has been elected, and of the judges of the supreme and inferior courts of the United States now in ofSce, and the 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." * This exemption so far as it applies to the present President and United States judges vpould probably be made by the courts under the Con- stitution, even if not contained in the statute.' Whether the salaries of State officers and of political subdivisions of States, such as municipalities, are taxable under the Sixteenth Amend- ment, is an undecided question.* Whether the exemption ex- tends to the judges of the courts of the Territories and District of Columbia, such as the District Court of Alaska, the District Court of the United States for Porto Eico, the District Court of Hawaii, the Supreme Court of the Philippines, the United States Court for China, the Supreme Court of the District of Columbia and the Court of Appeals of the District of Columbia ; may be doubted. These are not usually considered to be courts of the United States.' The same doubt exists concerning the salaries of members of the Board of General Appraisers and the fees of United States Commissioners. § 57. Property acquired by gift, inheritance, or life insurance. The tax is imposed upon "the income from but not the value of property acquired by gift, bequest, devise, or de- scent: Provided, That the proceeds of life insurance policies ilUd. Subsection B, D. 1079, 26 Sup. Ct. Rep. 685; Romeu- 6 Ibid. Subsection B. v. Todd, 206 U. S. 358, 368, 51 L. ed. 7 See § 28, sitpro. 1093, 1097, 27 Sup. Ct. Rep. 724; 8 See § 27, supra. ( United States Court for Porto 9 American Insurance Go. v. Can- Eico). But it bas been held that ter, 1 Pet. 516, 7 L. ed. 244; Benner the Supreme Court of the District V. Porter, 9 How. 235, 13 L. ed. 119; of Columbia is a court of the Unit- Glinton v. Englelrecht, 13 Wall. 434, ed States within the meaning of 20 L. ed. 659; McAllister v. United U. S. Rev. Stat. § 714, U. S. Comp. States, 141 U. S. 174, 35 L. ed. 693, Stat. 1901, p. 578. See Foster's Fed. 1 1 Sup. Ct. Rep. 949 ; James v. Unit- Pr. 5th ed. § 2. ed States, 202 U. S. 401, 50 L. ed. § 57] GIFTS AND BEQUESTS. 211 paid upon the death of the person insured or payments made by or credited to the insured, on life insurance, endowment, or an- nuity contracts, upon the return thereof to the insured at the maturity of the term mentioned in the contract, or upon sur- render of contract, shall not be included as income." ^ "The act specifies 'the income from, but not the value of, property acquired by gift, bequest, devise or descent.' Perhaps such a provision was believed to be called for in view of the income tax act of 1894, which taxed as income the principal of property so acquired. A question must, however, arise under the present wording with respect to gifts or bequests of annuities. To the recipient they are 'property acquired by gift, bequest, devise or descent' and hence according to the letter of the law not taxable, yet there is room for the contention that annuities are income, particularly in view of the requirement of the deduc- tion at the source of the tax on 'annuities' in paragraph 2 of E." * Mr. Theodore M. Taft, of the New York bar, is said to have expressed the opinion, in which Mr. Henry W. Jessup con- curred: that an annuity and the income of a trust estate be- queathed to the beneficiary for his life prior to the passage of the Act is not subject to the tax; but it has been the usual cus- tom of trustees to deduct the tax from such income at its source whenever the same exceeds the statutory exemption. The Treasury Regulations concerning corporations, joint- stock companies, associations, including limited partnerships, and insurance companies, provide: "Art. 120. 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, are proper de- ductions as 'ordinary and necessary expenses ; ' gifts or gratui- ties to employees in the service of a corporation are not prop- erly deductible in ascertaining net income. "Art. 121. Donations made for purposes connected with the operation of the property when limited to charitable institu- tions, hospitals, or educational institutions, conducted for the § 57. 1 Act of October 3, 1913, 2 Report of Committee on Taxation Subsection B. to Am. Bar Association, p. 8. '212 INCOME SUBJECT TO TAX. [§ 57 benefit of its employees, or their dependents, shall be a proper deduction for ordinary and necessary expenses." In Great Britain, payments to clergymen out of Sunday collections, made because they are poor,* and grants by a Cur- ates' Augmentation Eund in recognition of faithful service, are considered to be gifts and not income ; * but voluntary contribu- tions by parishioners,* including voluntary but customary East- er offerings,* are taxed as income from a profession. The cus- tomary Christmas presents to clerks are considered as compen- sation for services rendered and taxable as income.^ § 58. Miscellaneous income of individuals. The stat- ute, after enumerating special kinds of taxable income, then taxes all gains, profits and income derived from any source whatever, including the income from, but not the value of, prop- erty acquired by gift, bequest, devise or descent: "Provided^ That 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 surrender of contract, shall not be included as income." ^ According to the Treasury Regulations : Ordinary copartnerships are not, as such, subject to the tax imposed by this act, but the individual members of any such partnership are liable for income tax only in their in- dividual capacity on their respective shares of the earnings of such partnership, whether such earnings be distributed or not." The instructions direct that pensions received from the United States shall be returned as income.* Besides the incomes specif- ically enumerated above, all other kinds of annual profits are taxable. The proceeds of the sale of ore are income of the iTurton v. Cooper (1905) 92 L. 104, 78 L. J. Q. B. N. S. 135, 100 T. N. S. 863, 5 Tax Cas. 138. L. T. N. S. 51, 5 Tax Cas. 347. i Turner v. Ciuoson (1888) L. E. 7 Ruling, 1 Int. Rev. Ree. 150; 22 Q. B. Div. 150, 58 L. J. Q. B. Ruling, 7 Int. Rev. Ree. 35. N. S. 131, 60 L. T. N. S. 332, 37 § 58. l Act of October 3, 1913, Week Rep. 254, 2 Tax Cas. 422. subsection B. 6 Inland Revenue v. Strang ( 1878 ) 2 Tr. Reg. 94. 15 Scot. L. R. 704, 1 Tax Cas. 207. 8 Form 1040, Instruction 16. 6 Blakiston v. Cooper [1909] A. C. § 58] MISCELLANEOUS INCOME. 213 operator of the mine.* It was ruled that the profits, on the sale of a patent right, or fraction thereof, are taxable as income ; and are to be estimated by subtracting from the amount received the sums actually expended in purchasing the right, obtain- ing the patent and perfecting the invention, or a ratable pro- portion of the same, but no allov^ance can be made for the time, labor, or personal expenses of the inventor.^ Under previous statutes, it was held, in an inferior court that gains derived from speculation in stocks should not be considered as gains in business, without reference to the time of the purchase there- of.° Interest and dividends derived from stocks which had not been sold, were considered as income derived from fixed invest- ments, without reference to the time during which said stocks- had been held.' When gains derived from the sale of stocks, included interest received or accrued, the gains were regarded, as derived from the business alone.* Profits realized during the year were returned and assessed without regard to the fact that they had been produced by the labors of previous years.*' Commissions upon renewal premiums for insurance are treat- ed by the Department as income when received and income for the period in which they are received.^" In a letter to the Collect- ors, Acting Commissioner Williams instructed them as follows :. "Eeturnable and taxable income is that actually realized during; the year, that is, that which is evidenced by the receipt of cash or its equivalent. Until any appreciation taken up on the booksi has been so realized, it will not be required to be returned as income. Hence, in the preparation of returns and in the ex- amination of books for the purpose of verifying the same, mere book entries of appreciation in the value of capital assets will be disregarded." ^^ iStratton's Independence v. Bow- 139. But see Gray v Darlington bertTln U. S. 399, 58 L. ed. 285, 15 Wall. 63, 65-67, 21 L. ed. 45, 46, 34 Sup. Ct. Eep. 136 (under Act of quoted supra, § 51. Aug. 5, 1909). 7 3 Int. Rev. Eec. 188. 5 Ruling of the Commissioner, 1 8 3 Int. Rev. Rec. 188. Int. Rev.°Rec. 188, of. § 51, supra. 9 2 Int. Rev. Rec. 144. ev 8 y. Smith, 12 Int. Rev. Rec. 10 T. D. 2011, July 28, 1914. 135, 138, Fed. Cas. No. 16,341; 3 matter of Aug. 14, 1914, supra. Int. Rev. Rec. 188; 1 Int. Rev. Rec. § 45. 214 INCOME SUBJECT TO TAX. [§ 58 "The farmer, in computing the net income from his farm for his annual return, shall include all moneys received for produce and animals sold, and for the wool and hides of ani- mals slaughtered, provided such v^ool and hides, are sold, and he shall deduct therefrom the sums actually paid as purchase money for the animals sold or slaughtered during the year. When animals were raised by the owner and are sold or slaughtered he shall not deduct their value as expenses or loss. He may deduct the amount of money actually paid as expense for producing any farm products, live stock, etc. In deducting expenses for repairs on farm property the amount deducted must not exceed the amount actually expended for such repairs during the year for which the return is made. (See page 3, item 6.) The cost of replacing tools or machinery is a de- ductible expense to the extent that the cost of the new articles does not exceed the value of the old." ^* All of the produce which is paid to a landowner for rent must be included in his income if rents are taxable. The ex- pense of producing it may be deducted by the lessee, but cannot be deducted a second time by the lessor.^* Under the former internal revenue laws, it was held that a corporation did not escape the tax because it was engaged in a business that was ultra vires}* In England the profits of a bookmaker at the races were taxed. '^ A Kentucky collector is said to have held that the tax may be assessed upon a man's winnings from cards without deduct- ing his losses.*^ Damages recovered for torts are not profits." In Great Britain, it has been held that portions of the Sunday collections, which were paid to the incumbent because he was poor, but which otherwise he would not have received, were not subject to the income tax.^' In Victoria, the value of free board and lodging allowed to IS Form 1040, 1041. Instruction 11. IB 3 Int. Rev. Eec. 100. See supra, It was so ruled under a former stat- § 41. ute. 16 Collector Breckenridge, A. D. 13 1 Int. Eev. Kec. 154. 1894. 14 Salt Lake City v. Hollister, 118 17 7 Int. Eev. Eec. 60. U. S. 256, 30 L. ed. 176, 6 Sup. Ct. 18 Turton v. Cooper, 92 L. T. N. Eep. 1055. S. 863, d Tax. Cas. 138 (1905). § 59] MISCELLANEOUS INCOME. 215 the taxpayer by a relation is not a part of the former's taxable income." § 59. Miscellaneous income of corporations, joint-stock companies or associations, and insurance companies. The Treasury Regulations provide as follows: "Art. 78. 'Corporation' or 'corporations,' as used in these regulations, shall be construed to include all corporations, joint- stock companies or associations, and all insurance companies coming within the terms of the law, and such organizations will hereinafter be referred to as 'corporations.' "Art. Y9. It is immaterial how such corporations are created or organized. The terms 'joint-stock companies' or 'associa- tions' shall include associates, real estate trusts, or by whatever name known, which carry on or do business in an organized capacity, whether organized under and pursuant to State laws, trust agreements, declarations of trusts, or otherwise, the net income of which, if any, is distributed, or distributable, among the members or share owners on the basis of the capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share of capital which each has in- vested in the business or property of the organization, all of which joint-stock companies or associations shall, in their or- ganized capacity, be subject to the tax imposed by this act." "Art. 86. Limited partnerships are held to be corporations within the meaning of this act and these regulations, and in their organized capacity are subject to the income tax as corpo- rations." "Art. 96. The following definitions and rules are given for determining the gross income of various classes of corporations : "Gross income of banks and otlp^er financial institutions con- sists of the total revenue derived from the operation of the busi- ness, including income, gains, or profits from all other sources, as shown by the entries on the books of account, within the cal- endar or fiscal year for which the return is made. "Art. 97. Gross income of insurance companies consists of the total revenue derived from the operation of the business, in- cluding income, gains, or profits from all other sources, as shown 19 /» re The Income Tax Act, 20 Vict. L. K. 435, 19 A. L. T. 131. 216 INCOME SUBJECT TO TAX. [§ B& by tlie entries on the books of account within the calendar or fiscal year for which the return is made, except as modified by the express exemptions of the articles which apply to mutual fire, mutual marine and life insurance companies." "Art. 104. Gross income of manufacturing companies shall consist of the total sales of manufactured goods during the year covered by the return, increased or decreased by the gain or loss as shown by the inventories of finished and unfinished products,, raw material, etc., at the beginning and end of the year. To this amount should be added the income, gains, or profits from all other sources as shown by the books of account. "Art. 105. Gross income of mercantile companies shall in- clude the total merchandise sales during the year, increased or decreased by the gain or loss as shown by the inventories of merchandise at the beginning and end of the year for which the return is made ; to this amount should be added the income, gains, or profits derived from all other sources as shown by the books of account. "Art. 106. Gross income of miscellaneous corporations con- sists of the total revenue derived from the operation and man- agement 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 as shown by the books of account. "Art. 107. It will be noted from these definitions that the 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 appreciation in values of assets, if taken up on the books of account as gain ; also profits made from the sale of assets, investments, etc. "Art. 108. For the purpose of determining the income re- sulting from the sale of capital assets and the amount to be accounted for as income under this act, there shall be included any and all profit resulting from such sale and which may be apportioned to the period during which the corporation tax law (sec. 38, act of Aug. 5, 1909) was in force and effect, which was not returned as income during that period. "Art. 109. In ascertaining net income derived from the sale § 59] MISCELLANEOUS INCOME. 217 of capital assets, if such assets were acquired subsequent to January 1, 1909, the difference between the selling price and the buying price shall constitute an item to be added to or sub- tracted from gross income according to whether the selling price was greater or less than the buying price. If the capital assets were acquired prior to January 1, 1909, the amount of profit or loss representing the difference between the selling and buying price is to be prorated to determine the proportion of the gain or loss arising subsequent to January 1, 1909, and the propor- tionate part belonging to the years subsequent to January 1, 1909, shall be added to or deducted from the gross income for the year in which the sale was made. "Art. 110. For the purpose of determining the profit or loss arising from the sale of such assets, there shall be added to the price actually realized from the sale any amount which has heretofore been set aside and deducted from gross income by way of depreciation since January 1, 1909, which has not been paid out in making good such depreciation on the property sold. "Art. 111. In the case of changes in book values of capital assets resulting from a reappraisal of property, the consequent gains or losses shall be computed for the return in the manner prescribed above in the case of the sale of capital assets. "In cases wherein there is an annual adjustment of book values of securities, real estate and like assets, and the increases and decreases in -^-alues, thus indicated, are taken up on the books and reflected in the profit and loss account, such readjusted values will be taken into account in making the return of annual net income and no prorating will be required. If such adjust- ment had been made annually prior to March 1, 1913, the book value of the assets at that date will be taken as the basis for determining gain or loss resulting from subsequent sale, ma- turity, or adjustment. The adjustment referred to will com- prehend assets which have increased in value as well as those which have decreased. "Art. 112. Where a corporation is engaged in carrying on more than one class of business, gross income derived Irom the different classes of business shall be ascertained according to the definitions above, and which are applicable thereto." 218 INCOME SUBJECT TO TAX. [§ 59 Cominissioner Speer defends the inclusion of the increase in the value of the property as income : "Income from increased property values is a question which has heretofore given rise to considerable discussion as to whether or not an increase in property values actually consti- tutes income. There is much of merit on both sides of the dis- cussion. However, for the purposes of the income tax such in- creases would appear to be properly returnable as income for the following reasons: First, the law provides that accrued income shall be reported. Second, an allowance for depreci- ation of property is made. As to the first, accruals which are known and ascertained, such as the income which a corpora- tion may derive from any source, which income is definitely ascertained, appears to be returnable. Accruals which arise from an increase in property values are largely a matter of opinion and judgment. The Bureau of Internal Revenue has held in such cases that the matter should be largely within the discretion of the corporation itself. If the corporation recog- nized an increase in value in any of its properties and recorded such increase in value in its books of account, then such cor- poration should also report the amount of such increase as income for the year in which the increase was recognized on the books of the corporation. "That iacreases in value recognized by book records of such in- creases should be reported as income is clearly evident in the con- sideration of the second reason — that is that an allowance for depreciation is provided for by law. This depreciation is based upon the value of the property affected. If this increase in value were not required to be reported or accounted for as income, an irresponsible corporation could, at will, increase the value of its physical assets by recording the fact of such increase on its books from time to time and then absorb the full net income of each year in the allowance for depreciation of such property upon the basis of value as shown upon its books of record. To attempt to ascertain the true net income of more than three hundred thousand corpora- tions upon any such basis would be a practical impossibility." ^ Mr. Walker thus replies, to this proposition : "The first of these 'reasons' is destitute of foundation; for the gross income of a per- son or corporation, according to the statute, does not include any- thing but income 'derived' or 'received,' and because, according to § 59. 1 Speer's Pamphlet, pp. 37, 38. § 59] MISCELLANEOUS INCOME. 219 the statute, the net income of a person or corporation includes noth- ing not included in the gross income thereof. The second of Mr. Speer's 'reasons/ is destitute of foundation in logic; for the de- preciation of property which is allowed for by the statute, is express- ly confined to physical depreciation, due to depletion or exhaustion, or to wear and tear, arising out of the use or employment of prop- erty. There is no analogy, by way of contract or otherwise, between ±he statutory allowances for physical depreciation of property, and Mr. Speer's proposition to charge the owner of property with every increase in the value of property, as if that increase were income which ought to be taxed. Property may decrease in physical value, or it may decrease in market value without decreasing in physical value. On the other hand, very few kinds of property ever increase in physical value, except as a result of expenditure of other prop- erty thereon. But Mr. Speer, if permitted, will tax an increase of the market value of a piece of property, as if it were income ; and he undertakes to justify such taxation by an argument from analogy; which argument he draws from the fact that the statute allows de- ductions from incomes, on account of decreases in physical value of property. But the supposed analogy being absent, the conclusion drawn therefrom is logically vitiated." * A recent ruling of the Treasury Department provides : "Eeturn- able and taxable income is that actually realized during the year, that is, that which is evidenced by the receipt of cash or its equiva- lent. Until any appreciation taken up on the books has been so realized, it will not be required to be returned as income. Hence, in the preparation of returns and in the examination of books for the purpose of verifying the same, mere book entries of appreciation in the value of capital assets will be disregarded. "It should be understood, however, that in the event of the sale of the assets, the increase in whose value has been taken up on the books, the profit or income to be returned as a result of the sale will be determined upon the basis of the difference between the cost and the selling price of t'-c assets; that is to say, in the case of a sale, book values will be ignored save and except as such book values rep- resent the actual cost of the properties. "The instructions hereinbefore given will not in any way afEect the 'reasonable allowance for depreciation, if any,' which the law authorizes as a deduction from gross income, provided that in com- puting such 'reasonable allowance for depreciation,' any portion of the book value representing the value of 'Good will,' shall be elim- inated from the calculation, an allowable depreciation deduction being an amount properly written off and charged against income to measure the loss due to wear and tear, exhaustion and obsolescence of physical property. '■ Walker's Pamphlet, pp. 72, 73, giving illustrations. 220 INCOME SUBJECT TO TAX. [§59- "Any rulings previously made by this office and in conflict with the holdings hereinbefore made are superseded by this letter." ' Under the Corporation Tax Law it was held that an increase in the book value of the assets of a corporation or a revaluation of property, does not constitute any part of its income received within, the year.* The Regulations further provide: "A railroad or other corporation which has leased its properties- in consideration of a rental equivalent to a certain rate of dividends- on its outstanding capital stock and the interest on the bonded in- debtedness, and such rental is paid by the lessee directly to the stock and bondholders, should, nevertheless, make a return of annual net income showing the rental so paid as having been received by the- corporation." ^ "A railroad company operating leased or purchased lines shall include all receipts derived therefrom, and, if bonded indebtedness- of such lines has been assumed, such operating company may deduct the interest paid thereon to an amount not exceeding one-half of the sum of its interest-bearing indebtedness and its paid-up capital stock outstanding at the close of the year."® "Corporations operating leased lines should not include the capital stock of the lessor corporations in their ovm statement of capital stock outstanding at the close of the year. The indebtedness of such lessor corporations should not be included in the statement of the indebtedness of the lessee unless the lessee has assumed the same.. Each leased or subsidiary company will make its own separate re- turn, accounting for therein all income which it may have received, by way of dividends, rentals, interest, or from any other source." ' "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." ' § 60. Necessary expenses of individuals actually paid in carrying on business. The necessary expenses actually paid in carrying on any business, not including personal, family or living expenses,^ are deductible.^ Business is "that "which oc- cupies and engages the time, attention, and labor of anyone for the purpose of livelihood, profit, or improvement ; that vyhicb is 3 Mimeograph letter to collectors 6 Tr. Eeg. 81. Aug. 14, 1914, explaining T. D. 2005. T Tr. Eeg. 82. * Baldwin Locomotive Worlcs v. 8 Tr. Eeg. 83. McCoach, 215 Fed. 967. See § 45, § 60. 1 See § 62, infra, supra. 2 Act of October 3, 1913, subsec- 5Tr. Eeg. 80. tion B. § 60] NECESSAEY BUSIK"ESS EXPENSES. 221 his personal concern or interest, employment or regular occupa- tion ; but it is not necessary that it should be his sole occupation or employment." ^ These do not include contributions to capital;* nor, it has been held in Hawaii, the original cost of toils of trade.' Such necessary expenses do, however, include the expense of ordinary renewals of office furniture, uniforms of attendants, rugs, awnings, office hardware, door-mats, window-shades, lamps, meters and electrical wires, used in the transaction of the tax- payer's business,^ and the replacing of worn-out tools or mach- inery, so far as the new articles do not exceed the value of the old, but any excess is considered to be a permanent improvement and cannot be deducted.' "Art. 131. Incidental repairs which neither add to the value of the property nor appreciably prolong its life, but keep it in a,n operating condition, may be deducted as expenses." The cost of storage and advertising when connected with a business should also be deducted.* Premiums for fire, marine, credit and casualty insurance, when connected with a business, are also proper deductions.^ So also probably would be premiums upon a life insurance policy, payable at the death of a partner or employee for the benefit of his associates or employer, or at the death of a debtor for the benefit of a creditor whose business is loaning money; but not life insurance premiums paid for the benefit of a man's father or other dependents, nor fire insurance premiums under a policy covering the dwelling- house of the insured. "Costs of suits and other legal proceed- ings arising from ordinary business may be treated as an ex- pense of such business, and may be deducted from the gross income for the year in which such costs were paid." ^^ Taxes assessed against the shareholders, paid by a bank or other cor- poration in pursuance of a State statute, are not deductible by 3Tr. D. ]989. 9 See t'oster v. Goddard, 1 Black, 4 See § 63, infra. 506, 514, 17 L. ed. 228, 230 (an ac- 5 The cost of the instruments and counting). books, etc., of a surveyor. Re Smith, l" Instruction 18 endorsed upon 16 Hawaii, 796. Form 1040. Selectman of Balhitt 6 Mutual Benefit Life Ins. Co. v. v. Selectmen of Savoy, 3 Cush. 530, Herold, 198 Fed. 199, 216. 533: "The expenses of protecting 'Ruling 2 Int. Rev. Rec. 61. their interest, involved in a suit at 8 See Foster v. Goddard, 1 Black law, are surely a necessary expense." 506, 514, 17 L. ed. 228, 230 (an ac- counting ) . 222 INCOME SUBJECT TO TAX. [§ 60 the corporation, but should be included in the individuals'' retiirns.^^ The rental value of business property occupied hj the owner may be deducted in England.'^ Individuals may deduct the cost of daily transportation from their dwellings tO' their places of business.*' A corporation cannot charge the traveling expenses of directors from their residences to the company's office.** Subscriptions to an association to indem- nify its members for loss by strikes were disallowed.** It has been held, in Great Britain, that the expense of collecting rents cannot be deducted,*® unless they were necessarily incurred " but in the United States they have been allowed.*' Where a premium was paid for a lease, it was held that it could not be considered as rent paid in advance, nor could any part there- of be deducted as an annual expense, but that the lessee might deduct the fair rental value of the premises if greater than the rent actually paid.*^ A brewing company was allowed to deduct the amount spent upon houses which it let to its ten- ants ; ^^ but not the cost of applications for additional licenses for its own houses and those of its customers, these being con- sidered capital.''* A mortgage company for the same reason was not allowed to deduct the commission paid brokers and other expenses of raising money loaned by it. ^^ Deductions were allowed for the expenses of weeding and watching a nur- sery, the trees on which could not bear for several years, when it was part of a plantation.*' H T. D. 1763. So held under Cor- W Ruling, 3 Int. Rev. Rec. 102. poration Tax Law. Eliot Nat. Bank 19 Gillat v. Colquhon, 33 Week. V. GUI, 210 Fed. 933; Northern Trust Rep. 258 (1885). Co. V. M'Goach, 215 Fed. 991. io Smith v. Lion Brewery Co. 80 ^^ Russell V. Town, &c.. Bank, L. L. J. K. B. N. S. 566 [1911] A. C. R. 13 App. Cas. 418. But see In- 150, 104 L. T. N. S. 321, 75 J. P. struction 10 endorsed on Form 1040, 273, 55 Sol. Jo. 269, 27 Times L. quoted, infra, § 62. R. 261, 5 Tax Cas. 568, H. L. (E). 13 Ruling, 1 Int. Rev. Rec. 172; »i Southwell ^f. Savill Bros. iWOl'i 7 Int. Rev. Rec. 60; infra, § 62. 2 K. B. 349, 70 L. J. K. B. N. S. iiRevell V. Directors of Elworthy 815, 85 L. T. N. S. 167, 49 Week. Brothers & Co. (1890) 3 Tax Cas. Rep. 682, 4 Tax Cas. 430. 12. 22 Texas Land and Mortgage Co. l-i Rhymney Iron Co. v. Fowler v. Holtham (1894) 63 L. J. Q. B. [1896], 2 Q. B. 79, 65 L. J. Q. B. N. S. 496, 10 Times L. R. 337, 3 N. S. 524, 44 Week. Rep. 651, 3 Tax Tax Cas. 255. Cas. 476. 23 Vallambrosa Rulber Co. v. Far- leOtike of Norfolk v. Larnarque, mer [1910] S. C. 519, 47 Scot. L. L. R. 24 Q. B. Div. 485 (1890). R. 488, 5 Tax Cas. 529. 11 Stevens v. Bishop, L. R. 20 Q. B. Div. 442 (1888). § 61] EXPENSES OF COKPOEATIONS. 223 § 61. Necessary expenses of corporations. The Treasury Kegulations, as to corporations, provide: "Art. 114. Expenses of operation and maintenance shall in- clude 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, and all other expenses incurred in the operation of the business except such as are required by the act to be segre- gated in the return. "Art. 115. The cost of erecting permanent buildings on ground leased by a company is a proper deduction as a rental charge, provided such buildings are left on the ground at the expiration of the lease as a part of the rental payment. In such case the cost will be prorated according to the number of years constituting the term of the lease and the annual deduction will be made accordingly. "Art. 116. General expenses, such as coal, ship stores, etc., of foreign steamship companies, shall be prorated as provided in the act for interest deductions in the case of foreign corpo- rations. "Art. 117. Commissions allowed salesmen, paid in stock, may be deducted as expense if so charged on books at the actual value of such stock. "Art. 118. Amounts expended in additions and betterments which constitute an increase in capital investment are not a proper deductita. "Art. 119. Amounts paid as compensation or additional com- pensation to officers or employees, which amounts are based upon the stockholdings of such officers or employees, are held to be dividends, and although paid in lieu of salaries or wages, are not allowable deductions from gross income, for the reason that dividends are not deductible. "Art. 120. Amounts paid for pensions to retired employees, or to their families, or others dependent upon them, or on ac- count of injuries received by employees, are proper deductions as 'ordinary and necessary expenses ; ' gifts or gratuities to employees in the service of a corporation are not properly de- ductible in ascertaining net income. "Art. 121. Donations made for purposes connected with the operation of the property when limited to charitable institu- 224 INCOME SUBJECT TO TAX. [§ 61 tions, hospitals, or educational institutions, conducted for the benefit of its employees, or their dependents, shall be a proper deduction for ordinary and necessary expenses." Under the Corporation Tax Law it was held that money paid out for charities cannot be deducted as a part of the "ex- penses actually paid within the year out of income." ^ It has been ruled: that "This office has consistently held and still holds that in cases where these increased compensa- tions, denominated as bonuses or profit sharings, are paid to the employees pursuant to a contract as between the employees and the corporation, the amounts so paid will be considered an ordinary and necessary expense of operation of business, and as such will constitute an allowable deduction from gross income of the corporation making such payments. If, how- ever, there is no contractual relation between the employee and the employer by reason of which the employee could enforce his claim for the additional compensation, it is held that these payments are gratuities on the part of the corporation and as siich are not allowable deductions from gross income." ^ "Art. 122. Funds set aside by a corporation for insuring its own property are not a proper deduction, but any loss actually sustained and charged to such fund may be deducted. "Art. 123. In ascertaining expenses proper to be inchided in the deductions to be made under the item of 'Expenses,' cor- porations carrying materials and supplies on hand for use should include in such expenses the charges for materials and supplies only to the amount that the same are actually dis- bursed and used in operation and maintenance during the year for which the return is made." "Art. 126. Reserves to take care of anticipated or probable losses are not a proper deduction from gross income." "Art. 131. Incidental repairs which neither add to the value of the property nor appreciably prolong its life, but keep it in an operating condition, may be deducted as expenses." The Department permits co-operative dairies to include in their deductions the amount actually paid members and patrons § 61. 1 BaldvAn Locomotive Works liams to Secretary Alexander Hamil- V. MoCoach, 215 Fed. 967. ton Institute June 25, 1914. 8 Letter of Acting Comm'r Wil- § 62j PEESOITAL AND FAMILY EXPENSES. 225 for milk.' It has been held that where the ordinary business of a corporation is the purchase, sale, lease and management of land, interest upon bonds secured by a mortgage upon its land is deductible as ordinary and necessary expenses in the main- tenance and operation of its business and as charges required to be paid as a "condition of the continued use or possession" of its property.* § 62. No deduction of personal living and family ex- penses. Personal living and family expenses are not deduct- ed.^ The Department has ruled: "Expense for medical attendance, store accounts, family supplies, wages of domestic servants, cost of board, room, or house rent for family or personal use, are not expenses that can be deducted from gross income." In case an individual owns his own residence he can not deduct the estimated value of his rent, neither shall he be required to include such estimated rental of his home as income,^ that traveling expenses of those who transact business in the city and live in the suburbs ' but •usually not hotel bills,* nor it was held in England the railroad fares of a public officer who did not live where the office was situated ^ may be deducted. In Great Britain the wages of a domestic servant, whose employment was necessary to supply the place of the taxpayer's wife who taught school, were not deducted.* 3T. D. 1996, June 15, 1914. land, Wylie v. Eccott, Ct. Sess. S. ^Anderson v. Forty-Second Broad- C. 16 (1913) ; but that he could not loay Co. (C. C. A. 2d Ct.) 213 Fed. charge for rent of the house which 777 ; affirming Forty-Second Broad- he and his family occupied unless he way Co. V. Anderson, 209 Fed. 991. returned as income the rental value Certiorari granted by S. C. U. S. of any homestead that he owned, 5 Oct. 26, 1914. Int. Rev. Eec. 154; that when he § 62. 1 Act of October 3, 1913, rented a furnished house, rent for the subsection B. furniture should not be deducted, 7 2 Instruction 10 endorsed on Form Int. Eev. Eec. 59. 1040. Under earlier statutes, which 3 Ruling, 1 Int. Eev. Eec. 172; allowed the deduction of the rental Ruling, 7 Int. Eev. Eec. 60. value of a homestead owned by the *Euling, 7 Int. Eev. Eec. 59. taxpayer, it was ruled that, where ^ Cook v. Knott, 4 Times L. E. he rented his homestead and paid 164, 2 Tax Cas. 246 (1887). rent elsewhere, he must return the ^ Bowers v. Harding [1891] 1 Q. rent received, but would be allowed B. 560, 60 L. J. Q. B. N. S. 474, to deduct the amount of rent paid; 64 L. T. N. S. 201, 39 Week. Eep. 4 Int. Eev. Eec. 46. Contra, in Scot- 558, 3 Tax Cas. 22. Foster Income Tax. — 15. 226 IM^COME SUBJECT TO TAX. [§ 62 In Great Britain, a minister was allowed to deduct from his salary the expense of visiting members of his congregation,' including the cost of keeping a horse and carriage for that pur- pose,* the expense of attending church meetings,^ for station- ery ^^ and for communion expenses ; ^^ but not the rental value of part of his dwelling-house used as an office for the perform- ance of his professional duties,^* nor for the expenses of books, ^* nor expenses incurred in obtaining an increase of salary,^* nor for outlays for pulpit supplies during his holidays.^' Contribu- tions by employees of a municipality to a thrift fund for their own benefit were held not to be deductible. ^^ § 63. Contributions to capital. Although it may be that losses or capital can be deducted,^ contributions to new capital cannot. Such have been held to be sums paid for the purchase of new business : as payments for good will ^ or for the transfer of a concession ; ^ payment upon the transfer to the manager of the business purchased of a commutation for salary promised,* guaranteed interest paid, during the construction of new works, to shareholders of companies thus purchased,^ the cost of moving a business and the machinery therewith con- nected,^ at least when not necessitated by a fire, contributions 7 Charlton y. Commissioners of In- C. 77, 44 Scot. L. E. 13G, 5 Tax Cas. land lieoenue (1890) 17 R. 785, 27 263. Scot. L. R. 647. 16 ibid. iJarding v. Gillespie [1907] S. ^^ Hudson v. Gribhle [1903] 1 K. C. 77, 44 Scot. L. R. 136, 5 Tax B. 517, 72 L. J. K. B. N. S. 242, 88 Cas. 263. L. T. N. S. 186, 51 Week. Rep. 457, 9 Charlton v. Commissioners of 4 Tax Caa. 522. Contra, Beaumont Inland Revenue (1890) 17 R. 785, v. Bowers [1900] 2 Q. B. 204. 27 Scot. L. R. 647. § 63. l See infra, § 47. 10 Charlton v. Commissioners of 25 int. Rev. Rec. 188. Inland Revenue (1890) 17 R. 785, ^London Bank of Mexico and 27 Scot. L. R. 647. South America v. Apthorpe [1891], 11 Charlton v. Commissioners of 2 Q. B. 378, 60 L. J. Q. B. N. S. Inland Revenue (1890) 17 R. 785, 653, 65 L. T. N. S. 60], 39 Week. 27 Scot. L. R. 647; Jarding v. Oil- Rep. 564, 3 Tax Cas. 143. les}ne [1907] S. C. 77, 44 Scot. L. * Royal Insurance Co. v. Watson E. 136, 5 Tax Cas. 263. [1S97], A. C. 1, 66 L. J. Q. B. N. S. 12 Charlton v. Commissioners of 1, 75 L. T. N. S. 334, 3 Tax Cas. Inlwnd Revenue (1890) 17 R. 785, 500. 27 Scot. L. R. 647. 5 City of London Contract Corpo- '^ Charlton v. Commissioners of ration v. Styles (1887), 4 Times L. Inland Revenue (1890) 17 E. 785, E. 51, 2 Tax Cas. 239. 27 Soot. L. R. 647. ^Granite Supply Association v. I* Jarding v. Gillespie [1907] S. Kitton (1905), 8 F. 55, 43 Scot. L. § 64] DEPEECIATION. 227 to a sinking fund/ and to a repair fund,' the expense of im- proving the roadbed of a railroad or replacing its line with steel in place of iron rails and chairs of additional weight,' the cost of brewers' printing and advertising in connection with applications for additional licenses for houses owned and leased by them and also for houses of their customers; " a bonus paid or agreed to be paid when capital was borrowed; '^ and the price of a seat in an exchange. ^^ According to the Treasury Regulations : "Art. 115. The cost of erecting permanent buildings on ground leased by a company is a proper deduction as a rental charge, provided such buildings are left on the ground at the expiration of the lease as a part of the rental payment. In such case the cost will be prorated according to the number of years constituting the term of the lease and the annual deduc- tion will be made accordingly." "Art. 118. Amounts expended in additions and betterments which constitute an increase in capital investment are not a proper deduction." § 64. Deductions for depreciation. In computing the net income of individuals for the purpose of the normal tax, there are allowed as deductions: "sixth, a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business, not to exceed, in the case of mines, 5 per centum of the gross value at the mine of the out- put for the year for which the computation is made, but no de- duction shall be made for any amount of expense of restoring E. 65, 5 Tax Cas. 168; Smith v. a new wooden bridge. Hawaiian C. Westinghouse Brake Co. 2 Tax Cas. <£ 8. Go. v. Assessors, 14 Haw. 601,. 357; Dowell on Income Tax, 7th ed., 687. p. 117, note. 1" Southwell v. Savill Brothers t City of Dublin Steam Packet Go. [1901], 2 K. B. 349, 70 L. J. K. V. O'Brien (1912), 6 Tax Cas. 101; B. N. S. 815, 85 L. T. N. S. 167, 49- Re Taxes Honolulu Rapid Transit Week. Eep. 682, 4 Tax Cas. 430. & L. Co., 18 Haw. 15, GG6. ll Arizona Copper Go. v. Smiles 8 Ruling, 2 Int. Rev. Rec. 100. (1891), 29 Scot. L. E. 134, 3 Ta.x 9 Highland Ry. Co. v. Balderston Cas. 149. See Texas Land and Mort- (1889), 26 Scot. L. R. 657, 2 Tax gage Go. v. Holtham (1894), 63 L. Cas. 485; In Re Income Tax Ap- J. Q. B. N. S. 496, 10 Times L. R. peal Gases, 18 Haw. 596, held that 337, 3 Tax Cas. 255. no deduction can be made for the 12 In Re The Income Tax Acts, Ex replacement of a steel by a wooden parte C. B., 20 A. T. L. Vict. 50, 4 bridge beyond the estimated cost of A. L. R. Vict. 231. 228 INCOME SUBJECT TO TAX. [§ 64 property or making good the exhaustion thereof for which an allowance is or has been made : Provided, That no deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate." * The Act further provides : That in ascertaining the net in- come of corporations, joint-stock companies or associations, or insurance companies, there shall be deducted "a reasonable al- lowance for depreciation by use, wear and tear of property, if any; and in the case of mines a reasonable allowance for de- pletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made."^ The concluding clauses of the provision concerning the deductions for individ- uals are omitted. According to the Treasury Regulations : "Art. 127. Loss due to voluntary removal of buildings, etc., incident to improvements is either a proper charge to the cost of new additions or to depreciation already provided, as the facts may indicate, but in no case is it a proper deduction in determining net income, except as it may be reflected in the reasonable amount allowable as a deduction for depreciation of the new building. Any loss claimed because of the voluntary reanoval of a building is presumed to have been covered by previous depreciation charges ; otherwise the amount of such loss will constitute a part of the cost of the new building. "Art. 128. All losses claimed arising from sale of capital assets should be arrived at in the manner prescribed in article 109, defining gains arising from sale of capital assets. "Art. 129. The deduction for depreciation should be the esti- mated amount of the loss, accrued during the year to which the return relates, in the value of the property in respect of which such deduction is claimed, that arises from exhaustion, wear and tear, or obsolescence out of the uses to which the property is put, and which loss has not been made good by payments for ordinary maintenance and repairs deducted under the heading of expenses of maintenance and operation. This estimate should be formed upon the assumed life of the property, its § 64. 1 Statute Subsection B. 8/6id. G. (b.) § 64] DEPEECIATION. 229 cost, and its use. Expenses paid in any one year in making good exhaustion, wear and tear, or obsolescence in respect of which any deduction for depreciation is claimed must not be included in the deduction for expense of maintenance and operation of the property, but must be made out of accumulated allowances, deducted for depreciation in current and previous, years.* "Art. 130. The depreciation allowance, to be deductible^ must be, as nearly as possible, the measure of the loss due to wear and tear, exhaustion, and obsolescence, and should be so entered on the books as to constitute a liability against the assets of the company, and must be reflected in the annual balance sheet of the company. The annual allowance deductible on this account should be such an amount as that the aggregate of the annual allowances deducted during the life of the property, with respect to which it is claimed, will not, when the property is worn oiit, exhausted, or obsolete, exceed its original cost." The following instructions have been given by the Depart- ment: "It has come to the notice of this oiSce that, in the examina- tion of the books of corporations for the purpose of verifying their returns of annual net income, revenue agents and examin- ing officers have, in many cases, declined to allow deductions on account of depreciation, simply and only because the amounts claimed in the returns on this account were not written off on the books of the companies. This conforms technically with the rules of this office, requiring all deductible items to be evi- denced by book entries. "However, the special excise tax law (Section 38, Act of Au- gust 5, 1909) and the Federal income tax law (Section 2, Act of October 3, 1913) authorize corporations to deduct from 8 "Deduction on account of depre- in the value of real estate acquire(i ciation of property must be baaed in previous years, sold or held for on lifetime of property, its cost, sale, is taken up on the books and value, and use, and must be evi- the rate cannot be accurately deter- denced by a ledger entry and a like mined with respect to individual reduction in the plant and property years, such increase or decrease may account with respect to which the be prorated as provided by regula- depreciation is claimed." "Where tions in cases of sale of capital as- increase or decrease during the year sets." Synopsis T. D. 1742. 230 INCOME SUBJECT TO TAX, [§ 64 gross income 'a reasonable allowance for depreciation, if any.' JSTeither of these laws speciiically require that, in order to se- cure deduction on this account, the amount claimed must be written off. . "It has nevertheless been consistently held by this office that a depreciation deduction, in order to be allowable, must be a fair measure of the loss sustained by reason of the wear and tear, exhaustion, or obsolescence of the property, and must be so entered upon the books of the company as to constitute a liability against its assets. "Such 'reasonable allowance' is to be determined upon the basis of the cost and probable number of years constituting the life of the property with respect to which it is claimed. "Because of the fact that the law does not specifically require amounts, otherwise deductible, to be written off, many corpora- tions included in their deductions from gross income reasonable allowances for depreciation, of which there was no evidence on their books. "It is not the desire of this office to deny, upon purely techni- cal grounds, a deduction which the law authorizes and which conforms, or may be made to conform, to the regulations. Revenue agents and examining officers, in the examination of the books of a corporation, will, therefore, determine whether or not the deduction claimed in its return is a fair and reason- able measure of the loss sustained during the year, and, if they find that the amount claimed in a return is such fair and rea- sonable measure of the loss and that it was not written off on the books of the company, they will permit the corporation to reopen its books, if it so desires, and make such entries as will constitute the amount, sought to be deducted, a liability against the assets of the company and a charge against the income of the year for which the return is made. Sufficient time to make such correcting entries should be given the corporation before the report of the examination is made to this office, and any recommendations as to additional taxes should be made accord- ingly- "If a corporation refuses or neglects to reopen its books and write off the depreciation claimed in the return, or a reasonable amount measuring the loss sustained on this account, the ■§" 64] DEPEECIATION. 231 amount claimed in the return -will be disallowed. The correct- ing entries for each year, if made, must be such as would have been made had they been made at the time the books were closed. "The foregoing instructions do not contemplate that a de- preciation deduction is to be allowed in every case simply be- cause it is written off. If, upon examination, taking into account the character of the property and the uses to which it is put, it appears that the amount written off and deducted in the return is in excess of a reasonable allowance within the law, the excess should be disallowed. "When the amount claimed for depreciation has been written off on the books of the company, either prior or subsequent to the making of the return, it remains for the revenue agent and the examining ofEcer to determine whether or not this amount is such as, within the meaning of the law and regulations, con- stitutes an allowance deduction, and, if it does, it should be allowed and report made accordingly." * "Art. 131. Incidental repairs which neither add to the value of the property nor appreciably prolong its life, but keep it in an operating condition, may be deducted as expenses. "Art. 132. Depreciation set up on the books and deducted from gross income can not be used for any purpose other than making good the loss sustained by reason of the wear and tear, exhaustion, or obsolescence of the property with respect to which it was claimed. If it develops that an amount has been reserved or deducted in excess of the loss by depreciation, the excess shall be restored to income and so accounted for. "Art. 133. If any portion of the depreciation set up is di- verted to any purpose other than making good the loss sustained by reason of depreciation, the income account for the year in which such diversion takes place must be correspondingly in- creased. "Art. 134. Depreciation in book values of capital assets shall be treated in the return in the manner prescribed in the •case of loss from the sale of capital assets (art. 109), but 4C. T. Mim. 1077, Aug. 27, 1914, Corp. Tr. Co. Eec. 307. 232 INCOME SUBJECT TO TAX. [§ 64 amounts arbitrarily charged off will not be allowed as deduc- tions except so far as they represent an actual shrinkage in values which may be determined to have taken place during the year for which the return is made." ° It has been subsequently ruled that losses due to fluctuations during a taxable year in the value of capital assets, although evidenced by book entries^ cannot be deducted from gross income. The Treasury Eegu- lations further provide: "Art. 135. Where a corporation holds bonds which were pur- chased at a rate above par and said corporation shall propor- tionately reduce the value of those bonds on its books each year so that the book value shall be the redemption value of the bonds when such bonds become due and payable, the return of annual net income of the corporation holding such bonds may show the depreciation on account of amortization of such bonds. The requirement is, however, that the amount carried to the amortization account each year shall be equitably proportioned with respect to the difference between the purchase price and the maturing value and the number of years to elapse until the bonds become due and payable. With respect to bond issues where such bonds are disposed of for a price less than par and are redeemable at par, it is also held that because of the fact that such bonds must be redeemed at their face value, the loss sustained by reason of their sale for less than their face value may be prorated by the issuing corporation in accordance with the life of the bond.* s Under the Corporation Tax Law time, seems to me without force, of 1909 it was ruled: "Premiums The books may be very badly kept, on stocks and bonds arbitrarily kept in such a way as will in the charged upon the books of a corpo- end bring them into trouble and ration do not constitute a proper difficulty; but this act does not pro- deduction on account of deprecia- vide any penalty for bad bookkeep- tion, unless there shall have been an ing. It simply provides that 1 per actual shrinkage in value of such cent, of the net profit of the various stocks and bonds to the extent of corporations shall be turned over to the deduction claimed during the the government, and provides that year for which the return is made." in finding out that net profit there Synopsis T. D. 1742. Under the shall be a reasonable allowance for same Act of 1909 it was said depreciation." U. S. v. Nippissing by Lacombe, J.. "The sua;gestion Mines Co. 202 Fed. 803, 804. See that there can be no allowance Stratton's Independence v. Howbert, for depreciation unless such depre- 231 U. S. 399, 407, 422, 58 L. ed. ciation is entered in the books of 285, 289, 295, 34 Sup. Ct. Rep. 136. the company, recorded from time to 6 Under the Corporation Tax Law § 64] DEPEECIATIOIT. 233 "Art. 136. 'Good will' represents the value attached to a business over and above the value of the physical property, and is such an entirely intangible asset that no claim for deprecia- tion in connection therewith can be allowed. "Art. 137. An allowance for depreciation of patents will be made on the following basis : "The deduction claimed for exhaustion of the capital assets as represented by patents to be made in the return of annual net income of a corporation for any given year shall be one- seventeenth of the actual cost of such patents reduced to a cash basis. Where the patent has been secured from the Govern- ment by a corporation itself, its cost would be represented by the various Government fees, cost of drawings, experimental models, attorneys' fees, etc. Where the patent has been pur- chased by the corporation for a cash consideration, the amount would represent the cost. Where the corporation has purchased a patent and made payment therefor in stocks or other securi- ties, the actual cash value of such stocks or other securities, at the time of the purchase will represent the cost of the patent to the corporation. "Art. 138. With respect to the depreciation of patents, one- seventeenth of the cost is allowable as a proper deduction each year until the cost of the patent has been returned to the cor- poration. Where the value of a patent has disappeared through obsolescence or any other cause and the fact has been established that the patent is valueless, the unreturned cash investment re- maining in the patent may be claimed as a total loss and be de- ducted from gross income in the return of annual net income for the year during which the facts as to obsolescence or loss of 1909 it was ruled: "In the case ment, there will be neither gain nor of corporations owning stocks and loss, as to the principal of such se- bonds or other securities, if an an- eurities, until the same shall have- nual adjustment of the value of such been disposed of, when the gain or securities is made and the adjusted loss as compared with the original values made a matter of ledger en- cost shall be prorated, and the try, the appreciation of such securi- amount of such gain or loss appor- ties as so entered must be accounted tioned to the years since the inci- for as income, and the depreciation dence of the tax, to wit, January 1,. may be deducted from gross income. 1909, shall be added to or deducted If no annual adjustment is made, from the gross income of the year and the securities are carried from in which the securities were so dis- year to year as a permanent invest- posed of." Synopsis T. D. 1742. 234 INCOME SUBJECT TO TAX. [§ 64 shall be established, such unreturned cash value to be fixed in accordance with the proportion that the number of years which the patent still has to run bears to the full patent period of 17 years. "Art. 139. Corporations owning tracts of timber lands and removing therefrom and selling, or otherwise disposing of the timber will be permitted to deduct from their gross income on account of depreciation or depletion an amount representing the original cost of such timber, plus any carrying charges that may have been capitalized or not deducted from income. The pur- pose of the depreciation or depletion deduction is to secure to the corporation, when the timber has been exhausted, an aggre- gate amount which, plus the salvage value of the land, will equal the capital actually invested in such timber and land. "Art. 140. When an amount sufficient to return this capital has been secured through annual depreciation deductions no further deduction on this account shall be allowed. For the purpose of increasing the deduction on this account no arbitrary increase in values shall be made, unless such increase in value shall be returned as income for the years in which the increase in value was taken up on the books. "Art. 141. The depreciation of coal, iron, oil, gas, and all other natural deposits must be based upon the actual cost of the properties containing such deposits. In no case shall the an- nual deduction on this account exceed 5 per cent of the gross value at the mine (well, etc.) of the output for the year for which the computation is made. "Art. 142. The term 'gross value at the mine,' as used in paragraphs B and G of section 2 of the act of October 3, 1913, prescribing a limit to the amount which may be deducted in the return of individuals and corporations as depreciation in the case of mines, is held to mean the market value of ore, coal, crude oil, and gas at the mine or well, where such value is es- tablished by actual sales at the mine or well; and in case the market value of the product of the mine or well is established at some place other than at the mine or well, or on the basis of the bullion or metallic value of the ore, then the gross value at the mine is held to be the value of the ore, coal, oil, or gas :§ 64] DEPKECIATION'. , 235 sold, or of the metal produced, less transportation, reduction, and smelting charges. "If the rate of 5 per cent per annum shall return to the cor- poration its capital investment prior to the exhaustion of the deposits, the rate on which the annual deduction for depletion of deposits is based must be lowered in accordance with the es- timated number of years it will take to exhaust the estimated reserves. "In case the reserves shall be in excess of the estimates, no further deduction on account of depletion shall be made where "the capital investment has been returned to the corporation. "Art. 143. In addition to the deduction to measure the loss ■due to depletion, the corporation will be allowed the usual de- preciation of its machinery, equipment, etc., such depreciation to be determined on the basis of the cost and estimated life of the property with respect to which the depreciation is claimed. "Art. 144. Corporations leasing oil or gas territory shall base their depletion deduction upon the cost of the lease, and not upon the estimated value, in place, of the oil or gas. "Art. 145. Corporations operating mines (including oil or gas wells) upon a royalty basis only can not claim depreciation because of the exhaustion of the deposits. "Art. 146. Unearned increment will not be considered in fixing the value on which depreciation shall be based." '' The following instructions to the collectors have been given by the Treasury Department : "Depreciation as an allowable deduction in ascertaining an- nual net income for the 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 as- 7 It is a queation whether the greater percentage was allowed in limitation, "in the case of mines," such cases, and the Treasury De- of the "allowance for depletion of partment promulgated an elaborate ores and all other natural deposits" scheme for determining the deple- te five per cent, of the gross value tion by the exhaustion of wells of at the mine of its yearly output natural gas. T. R. Dec, Nos. 1754, applies to oil and gas wells. The 1755. See, also, T. R. Dec, No. word "mine" in common parlance is 1742, par. 97 ; V. 8. v. Nippissing not applied to them. Under the Mines Co., 202 Fed. 803. Corporation Tax Act of 1909 a 236 INCOME SUBJECT TO TAX. [f ©4 sets, such as are susceptible 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 right or interest in property, and hence, any shrinkage in the value of bonds, stocks and like securities, due to fluctua- tions in their market value, is not deductible in a return of income as depreciation or loss." * Under the Corporation Tax Law of 1909, it was ruled: "Depreciation to be an allowable deduction in the return of annual net income of a corporation must be charged off on the ledger of the corporation, so as to show a reduction in the capital assets of the corporation to the extent of the depreciation claimed." ^ "Depreciation of company's stock a loss to the- stockholders, but not a loss to the company issuing the same,, and therefore not a proper deduction." ^^ It has been held in Great Britain : That a depreciation in the value of machinery due to a removal of the works is a loss of capital and is not deductible as a loss of income; and the de- duction for wear and tear is a deduction for diminished value as a means of earning income and not as a salable subject ; ^"^ that a railway company, consequently, can make no deduction for the purchase of new rolling stock; *^ that a dimunition in market value, apart from that caused by wear and tear, cannot be allowed ; ■'* that a loss of earning power, caused by the fact that a ship had become more or less obsolete, cannot be allowed.^* When the operation of a street railway company had been changed from horse to electric power in England, no deduction was allowed for horse cars which, although not worn out, had been discarded, nor for so much of the track as had been re- constructed, although its life was below the average life of 8 T. D. 2005 ; Letter of Acting 14 Burnley Steamship Co. v. Aikin Commissioner Williams to collect- (1894) 21 R. 965, 31 Scot. L. R. ors, Aug. 4, 1914. 803, 3 Tax Cas. 275. The loss of a 9 Synopsis T. D. 1742. steamer, which became unserviceable ^'' md. by reason of the requirements of the 11 Smith V. Westinghouse Brake Federal inspectors, was held not to Co. 2 Tax Cas. 357. be deductible, the court reserving 12 Calendonian Ry. Co. v. Banks its opinion as to the propriety of (1888) R. 59, 18 Scot. L. R. 85; 1 the deduction of the cost of a new- Tax Cas. 487. steamer bought to replace the same. ^^Ibid. Be Wilder's S. 8. Co. 16 Haw. 567. § 64] DEPEECIATION. 237 rails.** So, in Hawaii, that a deduction cannot be made for the loss by reason of the abandonment of an old mill, which is in good condition, although a new one has been made.** It is not the custom in Great Britain to allow the amount spent by the owner of a mine in making bores and sinking pits which are exhausted in the year.*' A charge on the books of the cor- poration of a depreciation fund, to be expended in future years in the restoration of the plant, does not entitle the taxpayer to a deduction, unless the depreciation has actually occurred.*' Where a premium was paid upon the purchase of a lease, the buyer was not allowed to deduct from the remainder of the term any portion thereof.*® In Great Britain, the practice of the Inland Revenue De- partment has been to make allowances for wear and tear: to railway companies upon cars and engines; to gas companies upon gas meters and pipes; to water and oil companies upon reservoirs, tanks and pipes; to engineering and electrical com- panies on dynamos, motors, batteries, engines and their ac- •cessories ; to telegraph companies upon wires and cables ; to street railroad and stage companies upon horses and vehicles; to shipping companies upon ships; to carriers on horses, carts, boats and automobiles ; to metal refiners upon engines, furnaces ^nd boilers ; to telephone and typewriting companies upon ma- chines ; to hotel companies upon billiard tables ; to airmen upon balloons and aeroplanes ; to lawyers and clergymen upon books ; to physicians and dentists on surgical implements and appli- ances, operating chairs, and to physicians also in some cases 15 London County Council v. Ed- land Revenue ( 1875 ) 2 E. 431, 12 wards (1909) 100 L. T. N. S. 444, Scot. L. R. 274, 1 Tax Cas. 1. See 73 L J Prob N S. 213, 25 Times Morant v. Wheal Grenville Mining L. R.'319, 5 Tax Cas. 383. Co. (1894) 71 L. T. N. S. 758, 3 IS Hawaiian G. & 8. Co. v. Asses- Tax Cas. 298. sors, 14 Haw. 601, 687, Ann. Cas. 18 Clayton v. Newcastle-^nder- 19] 3C, 980. See Re Income Tax Lyme Corporation (1888) 2 Tax Appeal Cases, 18 Haw. 596. Cas. 416. It Coltness Iron Co. v. Black l^Watney v. Musgrave (1880) L. (1881) L. R. 6 App. Cas. 315, 51 R. 5 Exch. Div. 24], 49 L. J. Exch. L. J. Q. B. N. S. 626, 45 L. T. N. S. N. S. 493, 42 L. T. N. S. 690, 28 145, 29 Week. Rep. 717, 1 Tax Cas. Week. Rep. 491, 1 Tax Cas. 272; 287; Bonner v. Bassett Mines, Lim- Gillatt & Watts v. Colquhoun ited. Law Times, Dec. 21st, 1912, p. (1884) 33 Week. Rep. 258, 2 Tax 179; Addic & Sons v. Solicitor of In- Cas. 76. 238 INCOME SUBJECT TO TAX. [§ 64r upon horses, carriages and automobiles used in professional visits.*" § 65. Deductions by individuals for interest. Deduc- tions for interest when paid by individuals and by corporations, joint-stock companies or associations, or insurance companies, are regulated by different rules. An individual can deduct all interest paid by him within the year upon indebtedness.^ Ac- cording to the Deputy Commissioner of Internal Revenue, "This, of course, would be confined to the interest paid within the year on the indebtedness of the taxable person and naturally, in the ascertainment of the income for any one year, should not include any interest which had accumulated and had been payable in previous years." * This statement is criticized by Mr. Albert H. Walker as follows : "In order to make the stat- ute convey Mr. Speer's idea, it would have to be amended by inserting after the word 'year,' the words 'and not payable in any previous year.' Neither Mr. Speer nor anybody else has any authority to amend the statute by any such limitation." * § 66. Deductions for interest by corporations, joint- stock companies or associations, and insurance companies. Different rules regulate deductions for interest by corporations, joint-stock companies or associations. One of these may deduct only "the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not ex- ceeding one-half of the sum of its interest bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of its indebtedness not exceeding the amount of capital employed in the business at the close of the year." ^ According to the Treasury Regulations, "the maximum principal, upon which interest for the purpose of this deduc- tion, can be computed must not exceed, in the one case, one-half of the sum of the interest-bearing indebtedness and the capital stock outstanding at the close of the year, or, in the other case, must not exceed the amount of capital employed in the business 20 Jarvis, Income Tax, 47, 48. * Speer's Pamphlet, p. 15. § 65. 1 Act of October 3, 1913, 8 Walker's Pamphlet, p. 67. Subsection B. §66. 1 Statute, Subsection G ( b ) . § 66] INTEREST. 239- at the close of the year." * The language of the statute does not clearly indicate whether the phrase "one-half of the sum.' of" qualifies the phrase "its paid-up capital stock outstanding at the close of the year ; " or, in other words, whether, in ascer- taining the amount of indebtedness interest whereupon can h& deducted, the whole, or one-half of, the amount of the outstand- ing paid-up capital stock should be added to one-half of the sum of the interest-bearing indebtedness. It has been ruled by the Treasury Department as follows: "It is held that in the case of a corporation having capital stock, this deductible interest is interest actually accrued and paid within the year, on an amount of indebtedness not exceeding the paid-up capital stock outstanding at the close of the year, increased by the addition thereto of one-half the interest-bearing indebtedness outstand- ing at the close of the year. The qualifying phrase 'out- standing at the close of the year' appearing in the foregoing quotation, is held to apply to both paid-up capital stock and indebtedness, and 'one-half the sum of qualifies only the in- debtedness, which indebtedness, like the paid-up capital stock,, is required by the law to be reported, in making return of annual net income, as outstanding at the close of the year. If no indebtedness is outstanding at the close of the year, the maximum deduction allowable on account of interest paid,, will be the amount of interest actually accrued and paid on an amount of indebtedness not exceeding at any time within the year, the entire paid-up capital stock outstanding at the close of the taxable year, that is, in such case, the paid-up capital stock outstanding at the close of the year, measures the high- est amount of indebtedness upon which deductible interest can be computed. For the purpose of an allowable deduction, in- terest on the maximum amount of indebtedness, determined in the manner above indicated, can be computed upon such amount only for the time during which such amount of indebtedness is- not in excess of the paid-up capital stock increased by one-half the sum of the interest-bearing indebtedness outstanding at the close of the year. "In any event, the amount of interest, in order to constitute 2Tr. Reg. 148. 240 INCOME SUBJECT TO TAX. .[§ 66 an allowable deduction, must not only be within the limit of the law as herein defined, but must have actually accrued and been paid within the year for which the return is made. "In cases where no capital stock exists, the limitation as to ■deduction is confined to interest actually paid on an amount of indebtedness not exceeding at any time during the year, the ■capital employed in the business at the close of the year. "Any provision in the Regulations heretofore issued incon- sistent with the foregoing, is hereby revoked." * The Treasury Eegulations provide: "Full amount of stock, as represented by the par value of the shares issued, is to be regarded as the paid-up capital stock, ■except when such stock is assessable on account of deferred payments, or payable in instalments, in which case the amount actually paid on such shares will constitute the actual paid-up •capital stock of the corporation." "The interest to be deductible must have been computed on the proper principal at the con- tract rate and must have been actually paid within the year." ■"Interest paid pursuant to contract on an indebtedness 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 in- come 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, however, 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 in- debtedness of the corporation within the meaning of the law and the interest paid on such mortgage will be deductible only to the extent that it, with interest on other obligations of the corporation, is within the limit fixed by the act." * "Art. 151. Interest on bonded or other indebtedness bearing different rates of interest may be deducted from gross income during the year, provided the aggregate amount of such indebt- edness on which the interest is paid does not exceed the limit prescribed by law, and in ease the indebtedness is in excess of the amount on which interest may be legally deducted the in- 3 T. D. I960. 4 Tr. Reg. 150. § 66] INTEREST. 241 debtedness bearing the higbest rate may be first considered in computing the interest deduction and the balance, if any, will be computed upon the indebtedness bearing the next lower rate actually paid, and so on until interest on the maximum prin- cipal allowed has been computed." The statute next directs: "Provided, That in case of indebtedness wholly secured by collateral the subject of sale in ordinary business of such corporation, joint-stock company, or association, the total interest secured and paid by such company, corporation, or association within the year on any such indebtedness may be deducted as a part of its expenses of doing business."^ According to the B statute, Subsection G (b). This exemption was added in the Senate at the following suggestion of the Investment Bankers' Association of America, made by Mr. Eobert Reed, Counsel for the Association: "We do not oppose the general policy of prohibiting the deduction from gross income of interest on in- debtedness created in excess of the capital stock. Such a provi- sion has a tendency to discourage the creation of indebtedness above the capital stock, but it also has a tendency to encourage the watering of capital stock so as to permit a large indebtedness. But there are certain businesses, of which the banking business is one, which from their very nature necessitate the carrying of a debt very much in ex- cess of the capital of the corpora- tion. This is true of all corpora- tions the business of which involves the purchase and sale of property of relatively large value. It in- cludes the banking house, the dealer in precious gems, or any other dealer whose stock in trade must necessa- rily be large. It is the practice in all such businesses to carry the stock in trade under loans with banks secured by collateral of vari- ous kinds, including warehouse re- ceipts. Such a business having a capital, say, of $100,000 would ordi- narily carry stock of a value of five to ten times that amount. We Foster Income Tax. — 16. are quite sure that it was never the intention of the corporation-tax law to prohibit the deduction from the gross income of the interest neces- sarily paid in carrying a stock in trade. Referring exclusively to the investment banking business, we would say that it is not unusual for a banking house with a capital of, say, $1,000,000 and a surplus of an equal amount to be carrying at the banks high-class securities of a value, say, of $10,000,000, against which the banks would advance $8,000,000. The interest received on the collateral carried would be a part of the gross income of the banking house, and amount to ap- proximately $500,000. The interest paid to the bank on the loan of $8,000,000 would be a necessary ex- pense to the business of the bank- ing house, and would amount to ap- proximately $400,000. From the gross income of $500,000 the bank would only be permitted to deduct its interest on an indebtedness of $1,000,000, that is $50,000, and it would have to pay a tax on $450,- 000, amounting to $4,500 a year, al- though its net income from the situ- ation stated would be only $100,000 a year. On this income it would pay a tax of 4J per cent instead of 1 per cent. The same situation ap- plies to all companies similarly sit- uated, large and small. The injus- tice of this provision in the pending 242 INCOME SUBJECT TO TAX. [§ 66 Treasury Regulations this contemplates that the entire interest received on the collateral securing such indebtedness shall be included in the gross income returned.® "Provided further, That in the case of bonds or other indebt- edness, vehich have been issued with a guaranty that the in- terest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed: and in the case of a bank, banking association, loan, or trust company, interest paid within the year on deposits or on moneys- received for investment and security by interest-bearing cer- tificates of indebtedness issued by such bank, banking associ- ations, loan or trust company." ' A foreign corporation, joint-stock company or association,, can deduct only "(third) the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding the proportion of one-half of the sum of its interest-bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the capital employed in the business at the close of the year tax as applied to such corporations Either or both of these proviaions- is, we believe, too manifest to re- would seem to be proper as amend- quire further argument. This injus- ments to the pending bill. The law tice could be cured by the insertion as it now stands is in this respect of an amendment on page 147, fol- a tax upon income that is not in- lowing line 7, of the pending bill, come; that is, a tax upon gross in- reading substantially as follows: come, without permitting the de- Proinded, That in the case of in- duction of an expense which is 80' debtedness wholly secured by col- per cent to 90 per cent of the total, lateral the subject of sale in the The banking house is competing in ordinary business of any such cor- this business with ordinary banks^ poration, joint-stock company, or and trust companies which are able association the total interest secured to finance their investment securi- and paid within the years on any ties out of their deposits, interest- such indebtedness may be deducted on which, of course, is deductible as an expense of said business. The under the act. The reason of one same result could be partially is the reason of the other, and we- reached, so far as banking houses believe the omission has been and go, in a somewhat different way by is an oversight which should be a provision substantially as follows: remedied at this time.'' (Senate- Provided, In the case of indebted- Doc, Sixty-third Congress, First Ses- ness secured by interest-bearing col- sion. Briefs and Statements filed lateral that the interest received with Committee on Finance on H- from any such collateral shall be R. 3321, pp. 2017, 2018). deemed income under this section 6 Tr. Reg. -ISO. only after deducting therefrom the T Statute, Subsection G (b). interest paid on such indebtedness. § 66] INTBEEST. 243 which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources with- in and without the United States : Provided, That in the case of bonds or other indebtedness which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein im- posed shall be allowed." ' Several diiHeulties in the construction of these clauses may arise. Among others: the meaning of the phrase "collateral the subject of sale in ordinary business of such corporation, joint-stock company or association." Does the omission of the term "insurance company" imply that a deduction of the in- terest upon indebtedness wholly secured by collateral may not be deducted by an insurance company? Does the term "collateral" include mortgages of real estate ? Can a corporation whose ordinary business is borrowing money secured by mortgages upon real estate made by such com- pany or by a stranger to the loan to the company, or a part of whose ordinary business is the sale of mortgages made by oth- ers, the interest upon which it guarantees, deduct the whole amount of such interest ? The Treasury Department has ruled : "Collateral," as used in the proviso, comprehends and includes real estate or any form of physical or tangible property bound for the perform- ance of certain covenants, the payment of certain obligations, and if such real estate or other physical or tangible property is the 'subject of sale in the ordinary business of the corpora- tion' owning the same, that is, if such corporation is, as a matter of its ordinary business, engaged in buying and selling, or dealing in such property, the interest actually paid within the year on indebtedness wholly secured by such collateral (a mortgage on such property) may be allowably deducted from gross income under Item 4 (a) of the return form as an ex- pense of doing business, without regard to the limit of deduc- tible interest as set out in Sub-Division "Third," Paragraph 8 Ihid. ,-- 344 INCOME SUBJECT TO TAX. [§ 66 (b), Sub-Section G of the Federal income tax law hereinbefore cited. "This construction of the proviso quoted is not intended to and does not authorize the deduction as an 'expense of doing business' of any interest paid or indebtedness secured by prop- erty, real or personal, which is not the 'subject of sale in the ordinary business of the corporation,' but which is held by it for the purpose of, or as an instrument in carrying on, its or- dinary business — such as the rights of way and other property of public utility companies, permanent office buildings and prop- erty of like character held or occupied for their own particular use or purpose in the furtherance of the objects of the corpora- tion, but which property is not the subject of sale in their ordinary business, and which is simply occupied or used as an instrument or means of, or essential to, the carrying on of the ordinary business for the transaction of which they are organ- ized. The fact that such property may be subject to sale under extraordinary or peculiar conditions does not qualify, but rath- er disqualifies it as 'collateral' such as is contemplated by this provision of the act cited. The only corporations, joint-stock companies, or associations which will be allowed under this pro- viso, as herein interpreted, to deduct as an 'expense of doing business' interest paid on indebtedness wholly secured by mort- gage on real estate, or other physical or tangible property, are those corporations, joint-stock companies, or associations which are organized and operated for the exclusive purpose of buying, selling, and dealing in the particular kind of property upon which the mortgage is given, and the particular property pledged for the debt upon which the interest is paid must be the 'sub- ject of sale in the ordinary business of the corporation.' "Any corporation whose indebtedness is secured by a trust mortgage, or by any form of indenture which covers and in- cludes in the lien any property which is not the subject of sale in the ordinary business of such corporation, will be and is excluded from the benefit of this proviso, as hereinbefore con- strued, and its interest deduction will be limited to the amount authorized in subdivision 'third' above referred to — that is, •the interest actually paid within the year, at the contract rate, § 66] INTBEEST. 245 on an amount of bonded or other indebtedness at no time with- in the year in excess of a sum ascertained by adding to the paid- up capital stock outstanding at the close of the year one-half of the total amount of the interest-bearing indebtedness also then outstanding. "Corporations which, under this ruling, are entitled to deduct as 'an expense of doing business' the total amount of interest paid within the year on 'indebtedness wholly secured by col- lateral the subject of sale in the ordinary business of such cor- porations,' are required to state separately in their returns the amount of indebtedness upon which such interest is paid, segre- gating it from the indebtedness not so secured, and upon whiehi the interest paid is taken credit for or deducted under itema 6 (a) of the return form. The interest-bearing indebtedness; stated under item 2 of the return form as one of the bases for determining the amount of interest which may be allowably deducted under item 6 (a) must not include any 'indebtedness, wholly secured by collateral the subject of sale in the ordinary? business of the corporation.' Failure to segregate the two forms of indebtedness will render the interest deduction under item 6 (a) subject to suspension and disallowance." ^ Under the Corporation Tax Act, Attorney General Wicker- sham expressed the opinion that all interest upon a mortgage^ not assumed by the company, but encumbering land that was bought, might be deducted ; . but that when the company had assumed the mortgage, only so much of the interest thereupon might be deducted as did not exceed the interest upon its paid- up stock. ^'' Under the same statute it has been held that where the ordinary business of a corporation is the purchase, sale,, lease and management of land, interest upon bonds secured by a mortgage upon its land are deductible as ordinary and neces- sary expenses in the maintenance and operation of its business and as charges required to be paid as a "condition of the con- tinued use or possession" of its property.^* It has been held 9 Letter to collectors, June 9, 10 2S Ops. Atty. Gen. 198. 1914. See letter by Commissioner n Anderson v. Forty-Second- Osborn to Edward F. Clark, May Broadway Co. (C. C. A. 2d Ct.) 213 21, 1914, Corp. Trust Co. Records, Fed. 777, affirming Forty-second p. 263. Broadway Go. v. Anderson, 209 Fed- 246 inrcoME subject to tax. [§ 66 that a deduction cannot be allowed for interest paid from wMch the company failed to deduct the tax at the time of payment as required by the statute.'^ A subsequent subdivision of the same subsection of the Act of 1913 when regulating returns provides: that they shall in- clude "in case of a corporation, joint-stock company or associa- tion, or insurance company, organized under the laws of a for- eign country, interest so paid on its bonded or other indebted- ness to an amount of such bonded or other indebtedness not exceeding the proportion of its paid-up capital stock outstand- ing at the close of the year, or if no capital stock, the amount of capital employed in the business at the close of the year, which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States." *' This language is included in an instruction attached to several forms of returns.''* Mr. Walk- er thus comments upon the same: "That portion of that in- struction which follows that semi-colon, and continues to the period which follows the words 'United States' eight lines below, is a copy of a fragment of subdivision c, subsection G, of the statute. That fragment refers only to income tax returns, to be made by foreign corporations, and refers only to one point in such a return. These are all the facts that are known about that fragment, for its significance on the subject to which it refers is unknown, and past finding out. Probably its ambig- uous language arose from some error of some typewriter girl, made when trying to copy some other paper, and whose work was never reviewed by any statesman, but was simply inserted in the statute as it came from her, without being considered by any other intellect." '° § 67. Deductions for taxes paid during the year. An individual is entitled to deduct "all national, state, county, 991. Certiorari granted by S. C. 13 Statute II, Subsection G- (c). U. S. Oct. 26, 3914, 235 U. S. — , 59 1*3 Forms 1030, 1031, 1032, 1033, h. ed. — , 35 Sup. Ct. Rep. — . 1034, 1035, Instr. 15. 18 City of London Contract Co. v. IB The Unconstitutional Character Styles, 4 Times L. R. 51 (1887), Ct. and the Illegal Administration of App. affirming s. u. 3 Times L. K. the Income Tax Law, demonstrated 512 (1887). by Albert H. Walker, 83, 84. § 68] LOSSES DEDUCTIBLE. 247 school and municipal taxes paid within the year, not including those assessed against local benefits." ^ A corporation, joint- stock company, association or insurance company, may deduct : ^'AU sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory "thereof, or imposed by the Government of any foreign coun- try.'"' In the case of foreign insurance companies, the statute reads : ■"AH sums paid by "it within the year for taxes imposed under the authority of the United States, or of any state or territory thereof or the District of Columbia." * A bank, trust company or other corporation is not entitled to deduct taxes assessed against its stockholders which it has paid in pursuance of a State statute.* The stockholders, con- sequently, have the right to deduct such taxes when making their returns. "Import duties or taxes are not deductible under the item of taxes paid during the year, but should be included in arriving at the cost of goods under item ISTo. 4 (expenses).* "Taxes paid by a corporation pursuant to a contract guaran- teeing that the interest payable on its bonds or other indebted- ness shall be free from taxation are not deductible." ^ "Reserves for taxes cannot be allowed, as the law specifically provides that only such sums as are paid within the year for taxes shall be deducted." ' § 68. Losses deductible by individuals from income. The statute provides that, in case of individuals, there is to be a deduction of "fourth, losses actually sustained during the year, incurred in trade or arising from fires, storms, or ship- wreck, and not compensated for by insurance or otherwise; fifth, debts due to the taxpayer actually ascertained to be worth- less and charged off within the year ; sixth, a reasonable allow- ance for the exhaustion, wear and tear of property arising out of its use or employment in the business, not to exceed, in the case §67. 1 Act of Oct. 3, 1913, 11, B. 210 Fed. 933, Bingham, C. J.; 2 Hid II G (b) Northern Trust Co. v. McGoach (E. s/6irf' ' D. Pa.) 215 Fed. 991, Dickinson, J. iTr. Reg. 152; T. D. 1763. So » Tr. Reg. 155. held under Corporation Tax Law. 6Tr. Reg. 153. Eliot Nat. Bank v. Gill, (D. Mass.) ^Tr. Reg. 156. 248 INCOME SUBJECT TO TAX. [§ 68 of mines, 5 per centum of the gross value at the mine of the output for the year for which the computation is made, but no deduction shall be made for any amount of expense of restor- ing property or making good the exhaustion thereof for which an allowance is or has been made: Provided, That no deduc- tion shall be allowed for any amount paid out for new build- ings, permanent improvements, or betterments, made to increase the value of any property or estate." ^ The language might justify the construction that losses of capital may be deducted, but the draughtsman of the bill expressed in Congress the con- trary opinion.^ "Loss due to voluntary removal of buildings, etc., inci- dent to improvements is either a proper charge to the cost of new additions or to depreciation already provided, as the facts may indicate, but in no case is it a proper deduction in determining net income, except as it may be reflected in the reasonable amount allowable as a deduction for depreciation of the new building. Any loss claimed because of the voluntary removal of a building is presumed to have been covered by pre- vious depreciation charges; otherwise the amount of such loss will constitute a part of the cost of the new building." ^ It will be observed that the act does not provide for a deduction of losses, not incurred in trade, sustained by a railroad wreck,* or by personal injuries. The rule in Great Britain is, that to authorize a deduction the loss must be connected with a trade, so as to be incidental thereto, or arise out of the same, and that they cannot be if they are mainly incidental to some other voca- tion or fall on the trader in some other character.^ "The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers § 68. lAct of October 3, 1913, or losses incurred entirely apart Subsection B. from business transactions from 2 In the Hoxise of Representatives which income is derived. A similar April 26th, 1913, Mr. Cordell Hull rule governs deductions for ex- said: "As to losses, these provisions penscs." primarily contemplate allowance for 3 Tr. Reg. 127. losses growing out of the trade or * See Walker's First Pamphlet, business from -which the taxable in- ^ Strong & Co. Limited v. Woodi- come is derived, and generally field [1906] A. C. 448, 75 L. J. K. B. termed trade losses, as distinguished N. S. 864, 95 L. T. N. S. 241, 22 from losses of capital or principal Times L. R. 754, 5 Tax. Cas. 215. § 68] LOSSES DEDUCTIBLE. 249' for accidents in traveling might be deducted. On the other hand, if a man kept a grocer's shop, for keeping which a house is necessary, and one of the window shutters fell upon and in- jured a man walking in the street, the loss arising thereby to the- grocer ought not to be deducted." ® Under the former statute, it was ruled that losses could not be deducted which were not incurred in trade, although suffered by an individual taxpayer, such as loss by robbery,'' or losa through the default of a principal, to whom the taxpayer had been a surety.' But inasmuch as the payment by a surety makes the principal his debtor, it was ruled that such a debt might be deducted if "ascertained to be worthless." ' It was. also ruled that a debt might be deducted when it became worth- less, although it had existed and been payable during a previous, year, when no deduction on account thereof was made.^" Under the present statute it has been ruled, that the phrase- "in trade" is synonymous with "business" ^^ and that losses resulting from the sale of real estate by an individual cannot be deducted unless real estate operations are a part of a busi- ness in which he is engaged.^^ The doing of a single act inci- dentally or of necessity not pertaining to the particular business, of the person doing the same will not be consid- ered engaging in or carrying on the business.'^* It has been ruled that losses due to fluctuations during a taxable year in the value of capital assets, although evidenced by book entries, do not constitute such losses "actually sustained" as may be deducted from gross income. "J^osses are not actually sus- tained until, as a result of a completed, a closed transaction,, such losses have been definitely ascertained and the amount they represent has irredeemably disappeared from the assets of the individual or corporation." ^* The instructions of the Treasury Department, endorsed upon 8 Ibid p 452, per Lord Chancellor " See the definition supra, Sec. 60. Loreburn. 12 T. D. 1989. 7 See 5 Int. Eev. Rec. 123. l^a lUd. 8 5 Int. Rev. Rec. 123. 13 T. D. 2008c; T. D. 2005; Letter 9 5 Int. Rev. Rec. 188. by Acting Commisaioner Williams to- 10 Regulation III, under Act of collectors, Aug. 14, 1914. 1894. 250 INCOME SUBJECT TO TAX. [§ 68 the forms for returns by individuals, provide: "Debts wMch were contracted during the year for which return is made, but found in said year to be worthless, may be deducted from gross income for said year, but such debts cannot be regarded as worth- less until after legal proceedings to recover the same have proved fruitless, or it clearly appears that the debtor is insolvent. If debts contracted prior to the year for which return is made were included as income in return for year in which said debts were ■contracted, and such debts shall subsequently prove to be worth- less, they may be deducted under the head of losses in the re- turn for the year in which such debts were charged off as worth- less." " Mr. Walker disputes this position as follows : "This would be an absurd provision to put into the statute, for legal proceedings to recover a debt could not be 'proved fruitless' without the ex- penditure of more money than the creditor could afford, and without the passage of months or even years during the liti- gation. And nothing but litigation would make it 'clearly evi- dent' that a debtor is insolvent, and that proceedings to collect the debt would avail nothing. Fortunately, this idea of Mr. Speer has no foundation in the statute, for the statute clearly authorizes debts due to the taxpayer, to be deducted from his gross income, in ascertaining his net income, whenever such a debt is ascertained, to the satisfaction of the taxpayer, to be worthless, and is thereupon 'charged off' by him from his ac- count books." '^ The regulations provide- concerning corporations, joint-stock companies or associations, including limited partnerships and insurance companies : "Bad debts, if so charged off the com- pany's books, during the year, are proper deductions. But such debts, if subsequently collected, must be treated as income." ^* It was held in a prosecution for perjury that the taxpayer has a discretion in estimating the value of debts which are due him, which he may exercise within the limits of good faith, and that he will not be criminally responsible for an untrue return 14 Form 1040, Instr. 14. W Tr. Eeg. 125. 16 Walker's First Pamphlet, p. 66. § 68] LOSSES DEDUCTIBLE, 251 ■thus made." It was also intimated that a taxpayer will not be allowed to leave his debts uncollected in order to evade the tax." The losses and gains of a firm, of which a taxpayer is a member, are considered as incidental to the business. ^^ Under s. former statute it was ruled : that losses incurred in the prose- cution of one branch of a business could not be deducted from the gains in another, since an absolute loss incurred in the prosecution of a single business was a loss of capital.^" Under the language of the present statute, this ruling might not be followed. Under a former statute it was further ruled: that losses in speculation incident to the business, such as specu- lation by a broker in stocks, by a dry-goods merchant in cotton, by a hardware man in iron, might be set off against the gain in that part of his business which was conducted without specu- lation ; ^' but that loss in speculation could not be deducted from gains in merchandise of an entirely different character from the subject of the speculation, nor from salaries ; ^^ but that losses and gains of speculations of a different character might be deducted from each other ; ^^ that losses in one branch of merchandise might be deducted from gains in any other branch ; ^* and that where stocks were bought as a permanent investment and sold for a change of investment, a loss in such sale might be deducted from the dividends thereupon, but that where the purchase and sale were made in speculation, such loss could not be so deducted.^* Where brewers as an adjunct of their brewing trade acted as bankers and money lenders by mak- ing loans to ciistomers on the security of public houses, it was held that they might deduct from the profits of brewing losses on such loans.^^ When shippers, who, by their articles, •could not own more than one ship at a time, lost a boat at sea, and with the insurance money bought another, with which they 17 United States v. Frost, 9 Int. 22 Ruling, 1 Int. Eev. Rec. 155. Rev. Rec. 41, Fed. Cas. No. 15,172; 83 1 Int. Rev. Rec. 155. See 3 Int. United States v. Mayer, Deady, 127, Rev. Rec. 109. Fed. Cas. No. 15,753. 2* Ruling, 1 Int. Rev. Rec. 155. 18 United States v. Frost, 9 Int. 26 Ruling, 1 Int. Rev. Rec. 196. Eev. Rec. 41, Fed. Cas. No. 15,172. i^Reid's Brewery Co. v. Male 19 Ruling, 4 Int. Rev. Rec. 46. [1891] 2 Q. B. 1, 60 L. J. Q. B. N. S. 20 Ruling, 1 Int. Rev. Rec. 154. 340, 64 L. T. N. S. 294, 39 Week. ii-lUd. Rep. 459. 252 INCOME SUBJECT TO TAX. [§ 68 -traded during the balance of the year, the losses and gains on both ships were set off against each other.^^ In Scotland, it was held that the losses of a farmer could not be deducted from the profits of his business as a seed-merchant.^* These cases were decided under the British statutes, which contain different lan- guage upon this subject from that in the Act of October 3, 1913. Consequently, they may not be followed here. "If the new Treasury ruling on the income tax means that citizens will not be allowed to deduct from their assessed totals actual losses accruing on bona fide sales of securities or real estate, it is outrageous ; no court in the world would uphold it, If it means that holders of stock will not be allowed to deduct theoretical or contingent losses, losses which might or would result from a sale that was not made, the ruling is fair enough, provided it be made sufficiently broad to cover theoretic or con- tingent gains some time in the future, gains which might or would result from a sale that is not made. "The proposal to tax a citizen upon his losses on the pretence that a sale of property is not trading clearly belongs to the realm of comic opera. The notion that a man may end a business year tens of thousands of dollars poorer than he began it, that, in fact, he may become a bankrupt, and still be expected to pay income tax on net income — for net income is contemplated in every sentence of the law — is the sort of idea that the late W. S. GiLBEET would have reveled in. It is only one step further to inflicting a penalty on every one who fails to earn an income high enough to bear the tax. "As for the plea that the Government needs the money, it sim- ply has nothing to do with the case. The Government's necessi- ties are no excuse for contorting a statute to make it cover robbery. The war tax measure is being passed precisely to meet this condition of the Government's finances. If it does not cover ail deficiency reasonably to be expected there is stiii time to amend it. However oppressive it may become, the burden is preierabie to placing the entire community at tUe mercy o± a 27 Merchiston Steamship Co. v. 28 Brovm v. Watt, 23 Scot. L. E. Turner []90n 2 K. B. 923, 102 L. 403, 50 J. P. 583, 2 Tax. Caa. 143. T, N. S. 363— Bbay, J. § 69] LOSSES DEDUCTIBLE. 253 taxgatherer's whim with the alternative of prolonged and ex- pensive litigation. This ruling verifies one more of the many fears which have been expressed all along that the income tax was certain to bring with it endless injustices and vexations which would make it one of the most galling and unpopular assaults upon personal rights ever endured by Americans." ^' § 69. Losses deductible by corporations, joint-stock companies and associations. In the case of corporations, joint-stock companies or associations, or insurance companies, there must be a deduction of "all losses actually sustained with- in 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 rea- sonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made." ^ All losses not compensated by insurance or otherwise must consequently be deducted, whether they were incurred in trade or not.* Thus, a loss by embezzlement may be deducted,^ provided that an allowance is made by a credit of any net amount recovered from the defaulter that has absconded.* The act makes no provision for debts actually ascertained to be worthless and charged off within the year. Under a former statute, which made no such exception, it was ruled that a debt might be deducted as soon as it became worthless, although it had existed and been payable during a previous year, when no deduction on account thereof was made.* The Privy Council held when construing the ISTew Bruns- wick Act imposing a tax upon income that "in the natural and 29 Editorial N. Y. Sun, Oct. 18, of the property owned or business 1914. carried on shall make full and com- § 69. 1 Act of October 3, 1913, plete return of said income and Subsection G (b). shall pay the tax as provided here- 2 United States v. Central Nation- in." T. D. 2013. al Bank, 10 Fed. 612; s. >;., 15 Fed. * Solicitor General Phillips, 13 223. Ops. Atty. Gen. 643. 3 Ibid. "The responsible heads, 6 Regulation III, under Act of agents or representatives of said 1894. nonresident aliens who are in charge 254 INCOME SUBJECT TO TAX. [§ SD' ordinary meaning of language, the income of a bank or trade for any given year would be understood to be the gain, if any, resulting from the balance of the profits and losses of the busi- ness in that year ; " and that the bad debts of the year must be deducted and could not be excluded from consideration as "a loss pro tanto of capital." * "The deduction for losses must be losses actually sustained during the year and not compensated by insurance or otherwise. It must be based upon the difference between the cost value and salvage value of property or assets, including in the latter value such amount, if any, as has, in the current or previous years, been set aside and deducted from gross income by way of de- preciation, as elsewhere defined, and has not been paid out in making good such depreciation." '' "Bad debts, if so charged off the company's books, during the year, are proper deductions. But such debts, if subsequently collected, must be treated as income." ' "Reserves to take care of anticipated or probable losses are not a proper deduction from gross income." ^ "Loss due to voluntary removal of buildings, etc., incident to improvements is either a proper charge to the cost of new additions or to depreciation already provided, as the facts may indicate, but in no case is it a proper deduction in determining net income, except as it may be reflected in the reasonable amount allowable as a deduction for depreciation of the new building. Any loss claimed because of the voluntary removal of a building is presumed to have been covered by previous de- preciation charges ; otherwise the amount of such loss will con- stitute a part of the cost of the new building." " It has been ruled that losses due to fluctuations during a taxable year in the value of capital assets, although evidenced by book entries, do not constitute such losses "actually sus- tained" as may be deducted from gross income. "Losses are not actually sustained until, as a result of a completed, a closed 6 Lawless v. Sullivan, L. E. 6 App. 8 Tr. Reg. 125. Cas. 373, 378, 379, 382, per Sir MoN- 9 Tr. Reg. 126. TAGUE E. Smith, A. D. 1881. w Tr. Reg. 127. 7Tr. Reg. 124. § 69] LOSSES DEDUCTIBLE. 255 transaction, such losses have been definitely ascertained and the amount they represent has irredeemably disappeared from the assets of the individual or corporation." " A book charge because of the sale of an issue of bonds at less than par cannot be deducted. ^^ "Losses may be sustained by individuals or corporations on personal or real property. Only those losses are deductible which are sustained during the tax year 'in trade' — that is,, the business which engages the time, attention and labor of any one for the purpose of livelihood, profit or improvement. Loss to be deductible, must be an absolute loss, not a speculative or fluctuating valuation of continued 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. "Losses sustained by individuals or corporations from the sale of or dealings in personal or real property growing out of own- ership or use of or interest in such property, will not be deduct- ible at all unless they are an incident of, connected with and grow out of the business of the individual or corporation sus- taining the loss, and 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 head- ing 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, in the case of individuals, and prior to Jan. 1, 1909, in the case of corporations, and then, and in such event, the loss ascertained will be prorated over the whole time the property was held, and that part of the whole loss apportioned to the tax- able period will be taken into account in annual returns if in- come, in prorating, fractional parts of years will not be con- sidered. 11 T. i). 2008c; T. D. 2005; Letter ^^ Baldwin Locomotive Works v. by Acting Commissioner Williams to McCocbch, 215 Fed. 967, under Act of collectors, Aug. 14, 1914. Aug. 5, 1909. 256 INCOME SUBJECT TO TAX. [§ 69 "Loss is the difference between selling price and cost, where "the selling price is less than cost." ^* § 70. Deductions by domestic insurance companies. In determining the net income of a domestic insurance com- pany, there should be deducted: "(First) All the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, including rentals or other payments required to be made as a condition' to the continued use or possession of property.^ In this are included the expenditures for uniforms of attendants and office furniture and equipment, including rugs, awnings, small hardware, door- mats, window-shades, lamps, meters, electric wires and fixtures, and other articles of a similar character, which are no greater than the previous yearly average of similar expenses.^ (Second) All losses actually sustained within the year and not compensat- ed by insurance or otherwise, including a reasonable allowance for depreciation by use, wear and tear of property, if any." ^ (Third) "The net addition, if any, required by law to be made within the year to reserve funds." In the case of assessment in- surance companies, whether domestic or foreign, the actual deposit of sums with State or Territorial officers, pursuant to law, as additions to guarantee or reserve funds are treated as payments required by law to reserve funds.* Under the Corpo- ration Tax Law of 1909, it was held that a deduction might be made of additions to the reserve fund to secure payment upon supplemental policy contracts. These consisted of policies un- der which the insured had exercised their option to have the proceeds paid in anntial instalments for life or a given term of years, instead of in a lump sum.^ (Fourth) "Sums other than dividends paid within the year on policy and annuity con- tracts." ^ Under the Corporation Tax Act of 1909, it was 13 T. D. July 17, 1914. e Subsection G (b). This repeats § 70. 1 Statute, Subsection G (b) . the language in the Corporation Tax ^Mutual Benefit Life Insurance Act of August 5th, 1909, but omits •Co. V. Herold, 198 Fed. 199, 216. the comma which Is there inserted 3 Subsection G (b). See § 64, after the word "dividends." Mr. supra. Kossuth Kent Kennan comments * Subsection G (b). upon this language as follows: "But B Mutual Benefit Life Insurance the law does not spealc of 'dividends Co. V. Herold, 198 Fed. 199, 212. paid.' It speaks of 'sums,' 'paid § 70] DEDUCTIONS BY DOMESTIC INSUBAKCE COMPANIES. 25Y held: that all life insiirance companies might deduct or omit from their return any part of the actual premium which was paid back or credited to an individual stockholder or treated as an abatement of his premium within the year, although the same was termed "a dividend ; " but that there could be no deduction of dividends declared in the case of a full paid par- ticipating policy, wherein the policyholder had no further pre- mium payments to make.' The dividends paid by mutual life insurance companies to their policyholders have been analyzed into four parts: salvage on loading, salvage on mortality, surplus interest on reserve and interest on loading of both classes of salvage. Of these, the first two parts, namely, salvage on loading and salvage on mor- tality, are returns to the policyholder out of his premium and within the year on policy and an- nuity contracts' and dividends are expressly excepted from these suras. The phrase would perhaps have been clearer had it read: 'the sums paid within the year, other than divi- dends, on policy and annuity con- tracts.' We are aware of the gen- eral rule in legal construction that the punctuation of an act or its title is not controlling for the purpose of ascertaining its real meaning. But it is equally well established that courts may give effect to punctua- tion in determining the true mean- ing of doubtful passages. A strong reason for giving the comma its full significance in this case is that only in this way can the sentence be made coherent and intelligible. If all the words following 'dividends' are construed to relate to dividends then the word 'sums' is left hanging in the air, unexplained and unrelated to anything which follows or pre- cedes. If however the words, 'other than dividends' is treated as a par- enthetical clause relating wholly to 'sums paid within the year on policy and annuity contracts' we have a complete and intelligible statement, and one which may be fairly sup- posed to express the true intent of Congress that, in computing net in- come, dividends, as such, should not Foster Income Tax. — 17. be deducted." The Federal Income Tax in its Relation to Life Insur- ance Companies, Milwaukee, 1913, pp. 19, 20. 7 Mutual Benefit Life Ins. Go. v. Herold, 198 Fed. 199, s. c. as Herald V. Mutual Benefit Life Ins. Go. 120 C. C. A. 256, 201 Fed. 918. The Cir- cuit Court of Appeals reserved its judgment upon the latter point. Mr. Kossuth Kent Kennan criticized so much of the reasoning of the Dis- trict Court as states that the pur- pose of the Act "was to subject to taxation cash dividends." He says that the object of the Act Was not the taxation of cash dividends, but the taxation of net earnings; and further that the question, whether or not dividends are deductible from gross income, hinges more upon the elements that make up the dividend than upon the form of payment. The Federal Income Tax in its Re- lation to Life Insurance Companies, Milwaukee, 1913, p. 12. See also 'N. y. Life Insurance Co. v. Styles (1889) L. R. 14 App. Cas. 381, 59 L. J. Q. B. N. S. 291, 61 L. T. N. S. 201, 2 Tax Cas. 460; Contra, Last v. London Assurance Corporation (1885) L. R. 10 App. Cas. 438, 55 L. J. Q. B. N. S. 92, 53 L. T. N. S. 634, 34 Week. Rep. 233, 2 Tax Cas. 100. 258 INCOME SUBJECT TO TAX. [§70 are deductible from the taxable income. The last two, however, which consist of surplus interest on the reserve and interest up- on loading salvage, are in the nature of profits and seem, con- sequently, to be income. It has consequently been suggested that they must be taxable as income, either in the hands of the corporation or of the policyholder, and that the better method is to collect the tax on the aggregate sum in the hands of the Insurance Company.* By the Treasury Regulations, "Art. 100. Life insurance companies are authorized to omit from gross income such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to the policyholder or treated as an abate- ment of his premium. In so far as 'deferred dividends' pay- able at a stated period represent 'a portion of any actual pre- mium received,' such deferred dividends may be included in the amounts to be omitted from gross income for the year in which they were actually paid back, credited to the policyhold- er, or applied as an abatement of premium. In the case of dividends credited or apportioned annually to the policyholder, only the aggregate amount so actually credited or apportioned during the premium-paying period, and not any accretions thereto, can be excluded from gross income. In the case of whole-life or five-year distribution policies, deferred dividends may be excluded from gross income to the extent that they are paid back, or credited to the insured, or used as an abatement of his annual premiums." Mutual fire insurance companies may deduct or omit from their return any part of the premium deposits returned to policyholders.' By the Treasury Regulations, "Art. 98. Mutual fire insurance companies, which require their members to make premium deposits to provide for losses and expenses, shall not return as gross income any portion of 8 The Federal Income Tax in its 198 Fed. 199, 212, affirmed as Berold Relation to Life Insurance Corapa- v. Mutual Benefit Life Ins. Co. 120 nies, by Kossuth Kent Kennan, Mil- C. C. A. 256, 201 Fed. 918, which i8 waukee, 1913, pp. 3-8. But see Mu- criticized by Mi". Kennan. tual Benefit Life Ins. Co. v. Berold, 9 Subsection G (b). § 70] DEDUCTIOBTS BY DOMESTIC INSTJKANOE COMPANIES. 259 the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves." Mutual marine insurance companies may deduct all amounts repaid to policyholders on account of premiums previously paid by such, with payments for interest upon the same. "Art 99. Mutual marine insurance companies may include in their deductions from gross income amounts repaid to policy- holders on account of premiums previously paid by them and interest paid upon such amounts betvyeen the ascertainment thereof and the payment thereof, such amounts and interest having been included in gross income." Insurance Companies are by the statute further authorized to deduct: (Fifth) The amount of interest accrued and paid within the year upon so much of its indebtedness, whether bond- ed or otherwise, as does not exceed one-half of the s\im of its interest-bearing debts and its paid-up capital stock; or if, as a mutual insurance company, it has no capital stock, the amount of interest paid within the year on an amount of its indebted- ness not exceeding the amount of capital employed in the busi- ness at the year's close; but where the indebtedness is wholly secured by collateral, the subject of sale in ordinary business of the company, which may possibly apply to loans upon life insurance policies, the total interest secured and paid upon such indebtedness may be thus deducted." (Sixth) The amount actually paid within the year for taxes imposed under the authorities of the United States, or of any State or Territory thereof, or imposed by the Government of any foreign eounty.**^ Whether the tax as imposed under the authority of the District of Columbia can be deducted by insurance companies not or- ganized in foreign countries is not specifically stated. The Treasury Regulations provide: "Art. 97. Gross income of insurance companies consists of the total revenue derived from the operation of the business, in- M Tr. Eeg. 113. " See supra, § 67. 260 INCOME SUBJECT TO TAX. [§ 70 eluding income, gains, or profits from all other sources, as shown by the entries on the books of account within the calendar or fiscal year for which the return is made, except as modified by the express exemptions of the articles which apply to mutual fire, mutual marine and life insurance companies." "Art. 101. Gross income of insurance companies, as defined above, will include net premium income as reported to the State insurance departments, except the foregoing items specifically exempted in the act, and, in the case of life insurance com- panies, surrender values applied in any manner, consideration for supplementary contracts involving and not involving life contingencies, and all other income, gains, or profit as shown by the books of account. "Art. 102. Applied surrender values and consideration for supplementary contracts not involving life contingencies in- cluded 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. 103. All insurance companies should include and at- tach to their returns a supplementary statement showing, for life companies, the aggregate of items 'of such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policy- holder, or treated as an abatement of premium of such individu- al policyholder within such year ;' in the case of mutual fire in- surance companies a statement showing 'any portion of the premium deposits returned to their policyholders;' and in the case of mutual marine companies 'amounts repaid to policy- holders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment thereof and the payment thereof,' which are, or may be, omit- ted from gross income." The statute authorizes a deduction, by "insurance companies, the net addition, if any, required by law to be made with- in the year to reserve funds, and the sums other than divi- dends paid within the year on policy and annuity contracts," ex- § 70] DEDUCTIONS BY DOMESTIC INSUEANCE COMPANIES. 261 cept as provided in the cases of mutual fire, mutual marine, and life insurance companies." *^ "Art. 147. (a) Under item 5 (a) of the return form, the insurance company may take credit for all losses actually sus- tained during the year and not compensated by insurance or otherwise, including losses resulting from the sale or maturity of securities or other assets, as well as decreases by adjustment of book values of securities, in so far as such decreases repre- sent actual declines in values which have taken place during the year for which the return is made ; also losses from agency bal- ances, or other accounts, charged off as worthless; losses by de- falcation ; premium notes voided by lapse, when such notes shall have been included in gross income. This item will not, how- ever, include payments on policy contracts. (h) In this item may be deducted actual losses sustained within the year by reason of the depreciation of property, which shall have been so entered on the books of the company as to constitute a liability against its assets. An arbitrary deprecia- tion deduction claimed in the return, but not evidenced by book entry, cannot be allowed. (c) In this item credit will be taken for all death, disability, or other policy claims, including fire, accident, and liability losses, matured endowments, annuities, payments on instal- ment policies, surrender values, and all claims actually paid under the terms of policy contracts.. Salvage need not be in- cluded in gross income if deducted in ascertaining the net amount paid for losses under policy contracts. Eeserves cover- ing liabilities for losses incurred, reported, resisted, adjusted or unadjusted but not paid, cannot be deducted from gross in- come under this or any other item of the return. (d) The reserve funds of insurance companies to be con- sidered in computing the deductible net addition to reserve funds are held to include only the reinsurance reserve and the reserve for supplementary contracts required by law in the case of life insurance companies, the unearned premium reserves required by law in the case of fire, marine, accident, liability, and other insurance companies, and only such other reserves as are specifically required by the statutes of a State within 18 II. G. (c). 262 INCOME SUBJECT TO TAX. [§ 70 which the company making the return is doing business. The reserves used in computing the net addition must not include the reserve on any policies the premiums on which have not been accounted for in gross income. For the purpose of this deduction, the net addition is the excess of the reserve at the end of the year over that at the beginning of the year and may be based upon the highest authorized reserve required by any State in which the company making the return does business. In the case of assessment insurance companies, the actual deposits of sums with the State or Territorial officers pursuant to law, as additions to guaranty or reserve funds, shall be treated as payments required by law to reserve funds. Mutual marine insurance companies will deduct under item 5 (e) amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof." § 71. Deductions by alien insurance companies. The taxable net income of an insurance company organized, author- ized or existing under the laws of any foreign country, is as- certained by making from the gross amount of its income ac- crued within the year from business transacted and capital in- vested within the United States the following deductions: "(First) All the ordinary and necessary expenses actually paid within the year out of earnings in the maintenance and oper- ation of its business and property within the United States, in- cluding rentals or other payments required to be made as a con- dition to the continued use or possession of property." * In this are included the expenditures for uniforms of attendants and office furniture and equipment, including rugs, avraings, small hardware, door-mats, window-shades, lamps, meters, elec- tric wires arid fixtures, and other articles of a similar character, which are no greater than the previous yearly average of simi- lar expenses.* "(Second) All losses actually sustained within the year in business conducted by it within the United States and not compensated by insurance or otherwise, including a § 71. 1 Statute, Subsection G (b.) as Herold v. Mutual Benefit Life Ins. B Mutual Benefit Life Ins. Go. v. Co. 120 C. C. A. 256, 201 Fed. 918. Berold, 198 Fed. 199, 216, affirmed § 71] DEDUCTIONS BY ALIEN INSUEANCE COMPANIES. 263 reasonable allowance for depreciation by use, wear and tear of property if any." ' (Third) "The net addition, if any, re- quired by law to be made within the year to reserve funds." * In the case of a foreign assessment insurance company, the actual deposit of sums with State or Territorial oiScers, pursuant to law, as addition to guarantee or reserve funds, is considered as a payment required by law to a reserve fund.* Under the Cor- poration Tax Law of 1909, it was held that a deduction might be made of additions to the reserve fund to secure payment upon supplemental policy contracts, consisting of policies, un- der which the insured had exercised their option to have the proceeds paid in annual instalments for life or a given term of years, instead of in a lump sum.* (Fourth) "Sums other than dividends paid within the year on policy and annuity con- tracts." ' All life insurance companies may deduct or omit from their return any part of the actual premium which is paid back or credited to an individual policyholder or treated as an abate- ment of his premium within the year although the same is termed "a dividend." * Mutual fire insurance companies may deduct or omit from their return any part of the premium deposits returned to policyholders.' Mutual marine insurance companies may deduct all amounts repaid to policyholders on account of premiums previously paid by such, with payments for interest upon the same.^" (Fifth) "The amount of inter- est accrued and paid within the year on its indebtedness, to an amount of indebtedness not exceeding the proportion of one- half of the sum of its interest-bearing indebtedness and its paid- up capital stock outstanding at the close of the year, or if no capital stock, the capital employed in the business at the close 8 Subsection G (b). Go. 120 C. C. A. 256, 201 Fed. 918; ijbid ^^. y. Life Insurance Co. v. Styles bliid. (1889) L. R. 14 App. Cas. 381, 59 « Mutual Benefit Life Ins. Co. v. L. J. Q. B. N. S. 291, 61 L. T. N. S. Eerold, 198 Fed. 199, 212, aiBrmed 201, 2 Tax Cas. 460. Contra, Last as Eerold v. Mutual Benefit Life Ins. v. London Assurance Corporation Go. 120 C. C. A. 256, 201 Fed. 918. (1885) L. R. 10 App. Cas. 438, 55 See Tr. Eeg. 102; supra, § 70. L. J. Q. B. N. S. 92, 53 L. T. N. S. T Subsection G (b). See Tr. Reg. 634, 34 Week. Rep. 233, 2 Tax Cas. 100 and supra, § 70. 100. 9 Ibid. Mutual Benefit Life Ins. 9 Subsection G (b). Go. V. Eerold, 198 Fed. 199, affirmed lo /6td. See Tr. Reg. 98; supra, as Eerold v. Mutual Benefit Life Ins. § 70. 264: i]srcoME subject to tax. [§. %1 of the year, which the gross amount of its income for the year from business transacted and capital invested within the Unit- ed States bears to the gross amount of its income derived from all sources within and without the United States." " (Sixth) The amount actually paid within the year for taxes imposed under the authority of the United States, or by any State or Territory thereof, or the District of Columbia.^^ "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, as shown by the entries on the books of account within the calendar or fiscal year for which the return is made, except as modified by the express exemp- tions of the articles which apply to mutual fire, mutual marine and life insurance companies." ^ For other applicable regula- tions upon subject, see those quoted in preceding section upon "Deductions by Domestic Insurance Company." ^* § 72. General and uniform deductions. There shall be deducted from the amount of the net income of each of said persons, ascertained as provided herein, the sum of $3,000, plus $1,000 additional if the person making the return be a married man with a wife living with him, or plus the sum of $1,000 additional if the person making the return be a married woman with a husband living with her, but in no event shall this additional exemption of $1,000 be deducted by both a husband and a wife. Provided, That only one deduction of $4,000 shall be made from the aggregate income of both hus- band and wife when living together.^ It has been ruled that this does not apply to income of nonalien residents.^ Under the earlier statutes it was ruled : that where the mem- bers of a family disagreed upon the apportionment of the amount of an exemption, the case might be referred to the Internal Rev- enue Office; ^ and that any joint exemption or deductions should be shared in proportion to the respective incomes.* ll/6id. See Tr. Reg. 99; supra, § 72. l Act of October 3, 1913, § 70. Subsection C. 12 md. See supra, § 70. 2 Tr. Reg. 8, T. D. 2013. 13 Tr. Reg. 97. 8 1 Int. Rev. Rec. 149. 14 Supra, § 70. 4 1 Int. Rev. Rec. 188. § T2] GENBEAL AND UNIFORM DEDUCTIONS. 265 The Treasury Regulations consider tliis subsection as au- thorizing a husband and wife, who live apart, each to deduct $3,000 ; but when they live together, to permit a deduction of $4,000 only from the aggregate income of both. "Art. 9. Under paragraph C, every single person and every married person not living with husband or wife in the sense below defined, who has a net income exceeding $3,000 per an- num, is liable to pay the normal tax under this law, but in mak- ing return for such tax such person may claim an exemption of $3,000 from his or her total net income. "Art. 10. Husband and wife living together are entitled to an exemption of $4,000 only from the aggregate net income of both, which may be deducted in making the return of such in- come for taxation. However, when the husband and wife are separated and living permanently apart from each other each shall be entitled to an exemption of $3,000. "If the husband and wife not living apart have separate es- tates, 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 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 and receives an income of $3,000 or over, she may make return of her own income, and if the hus- band has other net income, making the aggregate of both in- comes more than $4,000, 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 may be made from the aggregate of both incomes. The tax in such case, how- ever, will be imposed only upon so much of the aggregate in- come of both as shall exceed $4,000. "If either husband or wife separately has an income equal to or in excess of $3,000, a return of annual net income is re- quired under the law, and such return must include the income 266 INCOME SUBJECT TO TAX. [§ 72 of both, and in such case the return must be made even though the combined income of both be less than $4,000. "If the aggregate net income of both exceeds $4,000, an an- nual return of their combined incomes must be made in the manner stated, although neither one separately may have an income of $3,000 per annum. They are jointly and separately liable for such return and for the payment of the tax. "The single or married status of the person claiming the specific exemption if such claim be made within the year for vyhich return is made, otherwise the status at the close of the year,° and this is the construction given by draftsman of the act.' § 73. Deductions by guardians. Guardians pay no tax upon the income of their wards, unless the latter's net annual « Tr. Reg. 9, 10. * In his address before the N. Y. Bar Ass'n Congressman Cordell Hull said: "Par. C, relating to exemptions, has given rise to much discussion and difference of construction. This par- agraph as finally written was agreed upon in the Conference Committee of the House and Senate after pro- tracted discussion and earnest con- troversy. As not infrequently oc- curs under such circumstances, the language of the paragraph is not clear, nor is it quite in harmony with the assessment provisions of the law. It is obvious that with Par. C eliminated from the law the net income of every man, woman and child from $1.00 and over would be subject to the normal tax of 1%. The laws of all governments, after providing the method of computing the net income of a taxable person, also contain a provision allowing an exemption of a fixed amount of the same. Our former income tax laws liave allowed different amounts as exemptions. Most all of the fifty- two income tax laws in operation throughout the world prescribe the family as the basis of income and unit of taxation, and provide a stat- utory exemption that may be de- ducted from the aggregate net in- come of the family, consisting of husband and wife, or husband and wife and minor children. Our for- mer income tax laws contained a like provision. In but rare In- stances has this rule which long ex- perience has approved been departed from by any government. For this tax law to go inside the family and allow each individual member — hus- band, wife, and each minor child — an exemption of $3,000, throws wide open the door to evasion and fraud. Any member of the family receiving income from investments might dur- ing the period of assessment easily malve such distribution among mem- bers of the family as would satisfy his or her conscience, and enable each to secure exemption, and there- by evade taxes. The exemption is intended for the member or members of the family furnishing the income — whether husband, wife, or child, or all jointly and ratably. "Par. C of the present law allows each taxable person an exemption of $3,000. In case of a husband and wife living together, only one of whom has taxable income, he or she making return of same is allowed $1,000 additional exemption. Fur- thermore, the proviso at the end of Par. C imposes a restriction or limi- tation upon tlie main provision with respect to the amount of exemption to be allowed a husband and wife living together, in all cases where each baa taxable income. But this does not interfere with the right of husband and wife to be taxed as individuals under the additional tax provisions. The language of the pro- § 73] DEDUCTIONS BY GUAEDIANS. 267 income is $3,000 or over.* The ward is entitled to this deduc- tion by his guardian, whether he lives with his parents or not, and if there are several wards it seems that the deduction, will be allowed to each, even if they live together.* The guardian mudt deduct and pay to the Government the tax upon so much of the income of his ward as exceeds $3,000 for any taxable year "other than dividends on capital stock, or from the net earning: of corporations and joint-stock companies or associ- ations subject to like tax, who are required to make and render a return in behalf of another, as provided herein." ' viso 'tliat only one deduction of $4,000 shall be made from the aggre- gate Income of both husband and wife when living together' can have but one meaning, and that is that the normal tax fastens itself upon the amount of the aggregate income of such husband and wife in excess of $4,000. The law is plain in its provisions that every dollar of the net income of both husband and wife when living together is subject to the normal tax except to the ex- tent of the exemption to be had under authority of Par. C. As just stated, the benefit of the exemption can only be had upon condition that their net income shall be aggregated, and only one deduction of $4,000 is then allowed to be made therefrom. If no return of this income should be made as directed by Par. D, and if no assessment of taxes should be made upon the same as provided by Par. E, an action of debt would lie each year under section 3213, Re- vised Statutes, in favor of the gov- ernment against such husband and wife for the amount of the taxes ac- cruing upon that portion of their aggregate net income in excess of $4,000, with costs of the proceeding. This is true regardless of the ques- tion as to whether a lien would at- tach or penalties accrue. An assess- ment is not a prerequisite to the collection of taxes legally imposed. "It is seen from the foregoing that one view makes the family the basis of income and the unit of taxation and the other the individual. 'I he new law is a compromise of both views. "The income tax laws of all coun- tries allow the taxpayer certain ex- emptions and deductions in comput- ing his net taxable incxme. To frame a law providing for such de- ductions as are usually allowable, and which can be administered with ease and convenience at the outset is not free from difficulty, by reason of the complex business conditions existing in this country. There is naturally much difference of O|jinion with respect to the amount of ex- emption that should be allowed a taxpayer. Most foreign laws allow a statutory exemption ranging from $50 to $250. England and a few minor states allow a larger exemp- tion. "A model or scientific income tax law would embrace a graduated tax imposing the lowest rate at a point just above the amount of net income reasonably necessary to support an average family, and likewise impos- ing the higher rates upon each suc- cessive category of income. This view is based upon the experience and the teaching that a family is entitled to subsist before being com- pelled to pay taxes to the govern- ment, otherwise it would have to ask government charity in return."' Report of N. Y. State Bar Ass'n 1914, pp. 128-130. S 73. lAct of October 3, 1913, Subsection D. a Ruling, 11 Int. Rev. Eec. 153. See 1 Int. Rev. Rec. 171. 8 Act of Oct. 3, 1913, II. Subsec- tion D, CHAPTER V. RETURNS. § 74. Persons who must make return. Eetums must be made by individuals and by corporations, joint-stock companies and associations. Each of these classes must make return on be- half of themselves and also for others, on whose behalf they col- lect income in certain cases. Returns must be made by all indi- viduals over lawful age, subject to the tax, and having a net income of $3,000 for a taxable year, provided that such an amount of their respective incomes was not derived from a source at which the tax has been already paid.^ Guardians, trustees, executors, administrators, agents, receivers, conserv- ators, and all persons, corporations, or associations acting in any fiduciary capacity, must make return of the net in- come of the beneficiaries of their respective trusts, in each case, when such net income equals at least $3,000, provided that no essential part of such minimum is income upon which the tax has bean already paid at its source; but a return made by one of two or more of such persons jointly acting in a fidu- ciary capacity, is sufficient.* All persons, firms, companies, co- partnerships, corporations, joint-stock companies or associ- ations, and insurance companies, except as hereinafter pro- vided, in whatever capacity acting, having the control, receipt^ disposal or payment of fixed or determinable annual or pe- riodical gains, profits and income of another person subject to the tax, amounting to at least $3,000, must make a separate and distinct return of such portion of that person's income.* In § 74. 1 12 Stat, at L. p. 309, 2 Act of Oct. 3, 1913, II, printed in full, infra, part IV. 3 Ihid. 268 § 74] PEESONS WHO MUST MAKE EETUEN. 2G9 this class are apparently included lessees, mortgagees of prop- erty, real and personal, trustees acting in any trust capacity, executors, administrators, agents, receivers, conservators, em- ployers, officers and employees of the United States. The trus- tees under deeds of trust or similar obligations of corporations, joint-stock companies or associations, and insurance compan- ies, and such corporations, joint-stock companies, associations and insurance companies, when mortgagors or obligors upon bonds or similar obligations, deduct and pay the tax upon all fixed and determinable annual gains, profits and income, derived from interest upon such bonds, mortgages and deeds of trust, although such interest does not amount to $3,000.* And the Treasury Regulations direct that each shall file with the col- lector of internal revenue for his, her or its district, a certifi- cate of such deduction, which is in the nature of a return. The disbursers within the United States, or the collectors and vend- ors of coupons, checks or bills of exchange, for or in payment of dividends upon the stock or interest upon the obligations of for- eign corporations, associations and insurance companies, en- gaged in business in foreign countries, and all dealers in the same who buy them otherwise than from a bank or other dealer in such coupons, are required to deduct and pay the tax there- upon; although such interest, dividends or other compensation does not exceed $3,000.® The Treasury Eegulations provide that: "Such licensee shall obtain the names and addresses of the persons from whom such items are received, and shall pre- pare a list of same and file it with the collector of internal rev- enue for his district not later than the 20th of the month next succeeding the receipt of such items. The list shall be dated, and shall contain the names and addresses of the taxable per- sons and the amount of tax deducted, and from what source col- lected." When an individual wishes to enforce a statutory deduction from the tax upon income paid at its source, that is, by one of the persons above specified, he must file with the person who is required to withhold and pay the tax for him, a true and correct return of his annual gains, profits, and income from all other sources and also the deductions asked for, and the showing thus made must then become a part of the return made in his ♦ Subsection E. Ubid. 270 EETUliNS. [§ 74 behalf by the person required to withhold and pay the tax ; or he must make a similar application for deductions to the collector of the district in which return is made or to be made for him; unless he is a minor, or insane, or absent from the United States, or unable owing to serious illness to make such re- turn and application, in which case such return and application may be made for him or her by the person required to withhold and pay the tax, if the latter swears that he has sufficient knowl- edge of the affairs and of the property of his beneficiary to en- able liim to make a full and, complete return for him or her, and that the return and application made by him are full and complete.' The statute fails to state expressly whether such supplemental return when made by or in behalf of the recipient of the income or whether the application to the collector must be supported by an affidavit as to the truth of the matters there- in stated. It was ruled under the Act of July 14, 1870, which in sec- tion 11 required returns from all persons "whose gross income during the preceding year exceeded $3,000," that persons whose income did not exceed that figure need not make returns, nor even make affidavit that their incomes did not exceed that sum.' This practice would seem to be correct under the present law. There is no provision requiring or compelling any affidavit, ex- cept that providing a return, and if no return is made there would seem to be no reason for any affidavit. The statute prescribes that returns shall be made by all per- sons of lawful age,* a provision that is repeated from former acts. It was ruled formerly that a minor, if he had no guar- dian, should make return himself; but that if he refused, an independent assessment should be made, as in other cases, with- out, however, imposing any penalty.' A subsequent ruling under a former statute was that when a minor had no guar- dian, the father, if living, was responsible for the return as being the child's natural guardian, and if he had legal con- trol of the minor's income he should return it with his own." If he has such legal control, that would seem to be the present law. If the taxpayer is unwilling or for any reason unable to make the return himself, it is provided : "That if any person 8 Subsection D. » 7 Int. Rev. Reo. 59. 7 13 Int. Rev. Rec. 97. «• 1 Int. Rev. Rec. 68. • Subsection D. § 74] PERSONS WHO MUST MAKE EETUKN. 271 liable to pay any duty or tax, or owning, possessing, or having the care or management of property, goods, wares, and merchan- dise, 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 occupation liable to pay any tax as aforesaid, then, and in that case, it shall be the duty of the collector or deputy collector to make such list or return, which, being distinctly read, consented to, and signed and verified by oath or affirmation by the person so owning, possessing, or having the care and management as aforesaid, may be received as the list of such person." ** The Eevised Statutes, as amended by this Act, provide: "When any person, corporation, company or association re- fuses or neglects to render any return or list required by law, or renders a false or fraudulent return .or list, the collector or any deputy collector shall make, according to the best informa- tion which he can obtain, including that derived from the evi- dence elicited by the examination of the collector and on his own view or information, such list or return, according to the form prescribed, of the income * * * liable to tax, owned, or possessed, or under the care or management of such person, or corporation, or company, or association." '* In case of a refusal or neglect to make a return in due time, and in case of a false or fraudulent return, the Commissioner of Internal Revenue "shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information obtained as provided for in this section or by existing law." " 11 U. S. Rev. Stat. § 3173. U. S. 12 15 U. S. Eev. Stat. § 3176. Comp. Stat. 1901, p. 2065, as amend- 1* Subsection E. ed by subsection 1, b, this Act. 272 EETDENS. [§ 75 § 75. Returns by copartnerships. All firms having the control, receipt, disposal or payment of fixed or determinable annual or periodical gains, profits and income of any person subject to the tax, must make such return whenever such per- son's annual income is equal to at least $3,000.^ "Any such firm, when requested by the Commissioner of Internal Revenue, or any district collector, shall forward to him a correct state- ment of such profits and the names of the individuals who would be entitled to the same, if distributed." * The Treasury Regulations provide: "His or her pro rata share of the net profits derived from a partnership business, whether or not divided and paid out shall be included in the personal return of each partner." ^ "Partnerships, as such, are not subject to the income tax, and are only required to make return when requested to do so by the Commissioner of Internal Revenue or the collector of internal revenue for the district in which said partnership has its principal place of business; and when a return is required it shall give a complete and correct statement of the gross in- come of the said partnership and also a complete statement of the actual expenses of conducting the business of said partner- ship, and the net profits and the name and address of each member of said partnership, and their respective interest in the net profit thus reported.* "The net annual profits of a partnership when divided and paid to the members thereof shall he included by each individual partner receiving same in his annual return of net income, and the tax shall be paid thereon as required by law. When the annual profits of a partnership are not distributed and paid to the members thereof the respective interest of each member in said profits shall be ascertained, and the individuals entitled thereto shall include the said amount in their annual return as a part of their gross income, the same as if said profits had been distributed and paid to them." * "Undivided annual net profits of partnerships thus returned § 75. lAct of October 3, 1913, 3 Tr. Reg. 11. Subsection D. * Tr. Reg. 12. aiUd. 6Tr. Reg. 13. § .75] EETUENS BY COPAETNEESHIPS. 273 by the individual members thereof, and tax paid thereon, shall not, when said profits are actually distributed and paid to such members, be again included in their annual return as a part of their gross income." ' The Treasury Department has ruled in accordance with the opinion of the Attorney-General : ' that since partnerships are not taxable as such, the tax cannot be deducted at the source from income due them ; * and that upon filing a certificate of ownership in forms 1001 or 1003,* or, in the case of foreign firms, in revised form 1004,^° a copartnership can collect the whole amount of any coupon or other obligation due the same.*^ The Department has further ruled that the individual members of a firm cannot, when making a return of income or paying the tax, deduct from their respective shares of its income their proportionate amounts of income received by the firm which belongs to a class that the statute exempts from the tax ; '* but the soundness of this latter ruling is questionable.^' "Foreign partnerships or firms, all the members of which are both citizens, or subjects, and residents of a foreign country, which are the owners of bonds and mortgages or deeds of trust or other similar obligations, including equipment trust agree- ments, receivers' certificates, and stocks of corporations, joint- stock companies or associations and insurance companies, or- ganized or doing business in the United States, may file with the debtor or withholding agent, with their coupons or orders for registered interest, or orders for other income derived from property or investments in the United States, a certificate and notice of ownership (Form 1016) setting forth the above facts; and the debtor or withholding agent shall not withhold any part of said income." ^* 6Tr. Reg. 14, as amended by T. D. " Tr. Keg. 49. 2957_ 12 T. D. 1957, Acting Commission- ' Opinion of Attorney-General Mc- er Fletcher to Corporation Trust Co. Reynolds, February 12, 1914. March 27, 3914. * T. D. 1957. This repeals Tr. 13 See the opinion of Messrs. Cald- Eeg. 47 and last sentence of Tr. well, Masslich & Reed to the Invest- Eeg. 14. ment Bankers' Ass'n of America 9 Printed in full infra, § 103. June, 1914. I B. A. of A. Bulletin, 10 Tr. Reg. 49. Printed in full II, No. 12. infra, § 103. " Tr. Reg. 48. Foster Income Tax. — 18. 274 EETUENS. [§ 7& "Where a foreign partnership or firm is composed of both nonresident foreigners and citizens of the United States, or foreigners residing in the United States or its possessions, the certificate of ownership shall show this fact, and the name and legal address of each member of said partnership who is a citizen of the United States, or who is a foreigner residing in the United States or its possessions, shall be given on the back of said certificate, and no part of said income shall be withheld. The said certificate and notice of ownership in either case above provided shall be on Form 1014." " The certificate should be upon white paper in the following form: (FORM 1065.) District of United States Internal Revenue. RETURN OF ANNUAL NET INCOME. (Paragraph D, Section 2, Act of Congress approved October 3, 1913, and Article 12, Regulations Ko. 33.) Pabtnershifs. Return of net income of vrhoae ( Name of partnership. ) principal place of business ik located at ( Street and number. ) city or town of , in the State of for the calendar (fiscal) year ended , 191 . . 1. Gross Income (see Note A, page 4) $. 2. Deductions: (o) Total amount of all ordinary and necessary expenses paid within the year for the main- tenance and operation of the business and properties of the partnership, exclusive of interest payments (see Note B, page 4) .... $ (6) Total amount of losses sustained during the year not compensated by insurance or other- wise (see Note 1, page 2) $ "Tr. Reg. 49. § 75] EETUENS BY COPAETNEESHIPS. 275 (c) Total amount of depreciation for the year (see Note 2, page 2) $. (d) Total amount of interest paid on indebted- ness $. (e) Total amount of interest received upon obliga- tions of a State or political subdivisions thereof, and upon the obligations of the United States or its possessions $ . (f ) Total taxes paid during the year $. Total Deductions $. 3. Net income on which the individual members are subject to tax on their distributive interest, whether distributed or not $. Note. — The above blank spaces for figures should show the amount of each respective item. If there is nothing to return under any item, the word "none" must be written in such blank space. PAGE 2 OF FORM 1065. If deductions are claimed on page 1, state here, in detail: Note 1. If loss, of what the loss consisted, when it was actually sus- tained, and how it was determined to be a loss; and if bad debts, of what they consisted, when they were created, when and how they were ascer- tained to be worthless. Note 2. If depreciation, the character of the property on which depre- ciation is claimed; if buildings, the character of the buildings, the materia] of which constructed, when erected, the cost, and the basis on which deduc- tion claimed was made; if property other than iuildings, the character of the property, its cost, when purchased, and the basis on which depreciation was claimed. 4. Members of partnership: Name. Post-Office Address. Amount of distributive interest in net income. 5. Persons who are citizens or residents of the United States employed by your firm, either as members of the partnership or in any capacity whatever, to each of whom a salary or compLnsation in any form what- ever was paid to the amount of $3,000 or over for services rendered during the calendar year. For the year 1913 the report should show amounts received of $2,500 or over for services rendered fom March X to December 31, 1913, inclusive. Name. Post-Office Address. Amount of salary or compensation. State of , County of , to wit : , Member of the firm of , a partnership, whose return of annual net income is set forth herein, being duly sworn, deposes and says that the foregoing report and the several items therein set forth are, to his best knowledge and belief and from such information as he has been able to obtain, true and correct in each and every particular; that the amount of gross income therein set forth is the full amount of gross income, without any deduction what- soever, received from all sources by the said partnership during the year stated; that the expenses claimed as deductions were actually incurred and paid during the year; that the amount claimed for losses and depre- ciation are believed to be proper and allowable deductions under the law. 276 RETUENS. [§75 and that the net income therein set forth is the full amount of the dis- tributive interest on which the individual members are subject to income ta2C. For , Partnership. Sworn and subscribed to before me this day of , 191 . Notarial seal. (OCBcial capacity.) Note A. — Gross income shall consist of the total of the gross revenues derived from the operation and management of its business and properties, together with all amounts of income from other sources, including dividends received on stock of organizations, and interest received upon obligations of a State or political subdivision thereof, and upon the obligations of the United States or its possessions. Note B. — Amounts expended in making permanent improvements or bet- terments, etc., or in any way transferred from earnings to capital account, are not proper deductions in ascertaining annual net income. Note C. — This return of net income is desired for immediate use and should be given prompt attention and, when properly filled in and executed, should be forwarded, not later than 30 days from the date of receipt of notice, direct to the Commissioner of Internal Revenue, Washington, D. 0. Note D. — The word "year" as herein used means the calendar or fiscal year, as the case may be, and this return is to show the net earnings for the year as of the date on which the books were closed or the net earnings were ascertained. "Limited partnerships are held to be corporations within the meaning of this act and these regulations, and in their organized capacity are subject to the income tax as corporations." ^® § 76. Corporations, companies and associations which must make return. All corporations, joint-stock companies or associations, and insurance companies, subject to the tax, must make an annual return, under oath or affirmation, by their respective presidents, vice-presidents or other principal officers, and treasurers or assistant-treasurers.* Under similar language in the Corporation Tax Law of August 5, 1909,* it was ruled : that all corporations, subject to the statute, must make the re- turn whether their income was less than the taxable amount or not.' That corporations organized during the year or going into liquidation during the year must, nevertheless, render a sworn return on the prescribed form.* That where a company 16 Tr. Eeg. 86. 3 Opinion of Attorney-General, § 76. 1 Subsection G. January 24, 1910. z 36 Stat, at L. 112, § 38, chap. 6. * Treasury Department, Synopsis (U. S. Comp. Stat. Supp. 1911, p. of Decisions, December 15, 1911; T. 946). D. 1742. § 76] COEPOEATIONS WHICH MUST MAKE EETUBN. 277 had dissolved and the required return was not made by its officers, such return would be prepared by the Commissioner.* That where a corporation had gone into bankruptcy, returns in such a case must be made by its trustees in bankruptcy.* That foreign companies, having several branch offices in the United States, should each designate one of such branches as its prin- cipal office and should also designate the proper officers to make the proper returns.'' That where a consolidation of two or more corporations had been effected during the year, and each or any such corporation subsequent to the consolidation collected prior existing debts, each such corporation should make sepa- rate return and include therein all such collected debts, as also all income received during the year therefrom to the date of consolidation.' It seems that all corporations, joint-stock companies or asso- ciations, and insurance companies, which are mortgagors, obli- gors under bonds or trustees under deeds of trust, under which fixed and determinable annual gains, profits and income are derived from interest thereupon, must make a return of the same, although such interest does not amount to $3,000.* The Treasury Regulations provide: "A corporation organized during the year should render a sworn return on the prescribed form, covering that portion of the year (calendar or fiscal) during which it was engaged in business or had an income accruing to it." '" "Corporations going into liquidation during any tax period may, at the time of such liquidation, prepare a 'final return'^ covering the income received or accrued to them during the fractional part of the year during which they were engaged in business, and immediately file the same with the collector of the district in which the corporations have their principal places of business." ^* All firms, companies, copartnerships, corporations, joint- 6 T. D. 1736. 9 Subsection B. 8T. D. 1742. 10 Tr. Reg. 84, llbid. 11 Tr. Keg. 85. 278 EETUENS. [§ Y6 stock companies or associations, and insurance companies, hav- ing the control, receipt, disposal or payment of fixed or deter- minable annual or periodical gains, profits and income of another person subject to the tax, must make such return when- ever such persons annual income is equal to at least $3,000.^ "All persons, firms, or corporations 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 shall obtain a license from the Commissioner of In- ternal Eevenue, and shall be subject to such regulations enab- ling the Government to ascertain and verify the due withhold- ing and payment of the income tax required to be withheld and paid as the Commissioner of Internal Revenue, with the ap- proval of the Secretary of the Treasury, shall prescribe ; and any person who shall undertake to collect such payments as aforesaid without having obtained a license therefor, or with- out complying with such regulations, shall be deemed guilty of a misdemeanor and for each offense be fined in a sum not ex- ceeding $5,000, or imprisoned for a term not exceeding one year or both, in the discretion of the court." ^' "When any person, corporation, company, or association re- fuses or neglects to render any return or list required by law, or renders a false or fraudulent return or list, the collector or any deputy collector shall make, according to the best infor- mation which he can obtain, including that derived from the evidence elicited by the examination of the collector and on his own view or information, such list or return, according to the form prescribed, of the income * * * liable to tax, owned, or possessed or under the care or management of such person, or corporation, or company, or association." ** A previous section of the present law provides: "In cases of refusal or neglect to make such return, and in cases of false or fraudulent returns, * * * the Commissioner of Inter- nal Eevenue shall, upon the discovery thereof, at any time with- in three years after said return is due, make a return upon in- 18 Subsection D. " U. S. Eev. Stat. § 3176 (U. S. 13 Subsection E. See § 104 infra. Comp. Stat. 1901, p. 2068). f 77] TIME OF EETCEN. 279 formation obtained as provided for in this section or by existing law." « § 77. Time of the return. The return must be made by individuals on or before March 1, 1914, and the first day of March in each year thereafter.* When an individual seeks to be allowed the benefit of any deduction authorized by the statute, he must not less than thirty days prior to March first file with the person who is required to withhold and pay tax for him, a true and correct return of his annual gains, profits and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return made in his behalf by the person required to withhold and pay the tax, or else he must make to the collector of the district in which return is made or to be made for him, an application in a similar form for deductions.* The return must be made by a corporation, joint-stock company or association, and insurance company, subject to the tax, on its own behalf, on or before the first day of March, 1914, and the first day of March in each year thereafter, unless it has designated the last day of any month in the year as the day of the closing of its fiscal year. In such case, it must give notice of the day thus designated to the collector of the district in which its principal business office is located, "at any time not less than thirty days prior to the date upon which its annual return shall be filed." It must then render its return within sixty days after the close of its fiscal year and within sixty days after the close of its fiscal year in each year thereafter.* 16 Subsection G ( c ) . law in existence at the close of a § 77. 1 Subsection D. See infra, calendar year is required to file a §§ 81, 97. return to cover all or any part of 2 Subsection D. the preceding calendar year during 8 Subsection G (o). On Oct. 26, which it may have been in existence 1914, the following regulation was on or before March 1, provided such adopted and sent to the collectors of corporation has not established or Internal Revenue: "Reference is does not establish a fiscal year. made to Treasury Decision No. 2,001, "In order to establish a fiscal year relative to the designation by corpo- it is necessary for the corporation rations of a fiscal year other than a to give notice to you in writing des- calendar year as a basis for making ignating the last day of some month returns of annual net income. as the close of its fiscal year. This "You are informed that every cor- notice must be filed not less than poration amenable to the income tax thirty days prior to March 1 of the 280 EETUENS. [§ It The Treasury Eegulations proviide: "The Federal income- tax law authorizes corporations, joint-stock companies, etc., un- der certain conditions to make their returns on the basis of an established 'fiscal year' or consecutive l2-months period, which may be other than the calendar year. Pursuant to this provi- sion the following instructions are issued for the guidance of collectors and other interested parties: "Any corporation, joint-stock company, or association, or any insurance company subject to the tax imposed by this act may, at its option, have the tax payable by it computed upon the basis of the net income arising or accruing from all sources during its fiscal year, provided that it shall designate the last day of the month selected as the month in which its fiscal year shall close as the day of the closing of its fiscal year, and shall, not less than 30 days prior to the date upon which its annual return is to be filed give notice, in writing, to the collector of internal revenue of the district in which its principal place of business is located, of the day it has thus designated as the closing of such fiscal year.* "In pursuance of this provision, a corporation or like or- ganization subject to this tax may, for example, designate the year in which the fiscal year period 1915,) must be filed on or before of twelve months closes. A return Aug. 29, 1915. for that portion of the calendar year '•'Ihat portion of the year preced- preceding the commencement of the ing the beginning of an established fiscal period of twelve months is re- fiscal year is held to be a fractional quired to be filed on or before March part of tlie calendar year, and as the 1 of the year next following the return of a calendar year is not re- calendar year of which it is a part, quired to he filed until on or before and the return for the first full fis- the first day of March next follow- cal year is required to be filed on or ing, there is no provision of law before the last day of the sixty-day whereby the return covering a frac- Eeriod following the close of the tion of a calendar year is required seal year. to be filed earlier than "on or before" "Example: A corporation desiring the next March first, though it ia to establish its fiscal year as ending preferred that the return for this on June 30, 1915, must file notice fraction shall be filed as early as not less than thirty days prior to possible after the close of the period. March 1, 1915, or on or before Jan. "Tlie above instructions are supple- 29, 1915. A return for the period mental to Treasury Decision 2,001, Jan. 1 to June 30, 1914, must then and rulings or decisions heretofore be filed on or before March 1, 1915, issued in conflict with the foregoing and a return for the first fiscal year are hereby revoked." period (July 1, 1914, to June 30, W. H. Osbobn, Commisaioner. 4Tr. Reg. 105. § 77] TIME OF EETUEN. 281 30th day of September as the day for the closing of its fiscal year, whereupon its return of annual net income shall be filed with the collector of internal revenue of the district in which its principal place of business is located not later than 60 days after the close of its said proposed fiscal year; that is to say, on or before the 29th day of November next succeeding. "The date of the closing of the fiscal year having been desig- nated, notice thereof must be given to the collector not less than 30 days prior to the last day of such 60-day period. In the case just instanced the notice must be given not later than Oc- tober 29. "If such designation (September 30, 1913) had been made and notice given, as hereinbefore indicated, as to the closing of the fiscal year 1913, the corporation would be authorized to make its return and have the tax payable by it computed upon the basis of the net income arising or accruing to it during the period from January 1 to September 30, 1913, both dates in- clusive." * "Collectors of internal revenue receiving notices of the selec- tion and designation of the 'fiscal years,' as above indicated, will make record of the same, recording (a) the name of the corporation or like organization, (6) the date when notice was given, (c) the day designated for the closing of the fiscal year, and (d) the date when the return under such designation must be filed, which must be, as above stated, not later than the last day of the 60-day period next following the day designated as the close of the fiscal year." ® "If it shall appear that for the year 1913 the notice was given within the prescribed time — that is, within 30 days of the last day of the 60-day period — the 1913 return may be made as of the fiscal year so established; otherwise it will be made on the basis of the calendar year until such time as the desig- nation shall be duly made and notice thereof properly given." ^ "The designation and notice can not be retroactive; that is to say, if a corporation now designates April 30, 1914, as the date of the closing of its fiscal year and gives notice of such 6Tr. Reg. 166. 7Tr. Reg. 168. 6 Tr. Reg. 167. 282 BETURNS. [§ 7T designation, it would not he authorized to make a return for the four months ended April 30, 1913, and then for the fiscal year ended April 30, 1914, nor would it be authorized to make one return covering the entire 16 months ended April 30, 1914. In the case of such corporation the return for the year must be made for the calendar year ended December 31, 1913, and then, assuming that designation and notice had been properly made and given, it may make a return for the four months ended April 30, 1914, and thereafter the return will be made on the basis of the fiscal year so established." ' "In all cases where a fiscal year is not established as above prescribed returns must be made on the basis of the calendar year, in which case such returns must be filed on or before the 1st day of March next succeeding such calendar year. Such returns in either case provided must be verified under oath or affirmation of its president or other principal officer, and its treasurer or assistant treasurer ; that is to say, by two different persons acting in the official capacity indicated." ' "If it shall appear in any case that returns have been made to the collector on the basis of a fiscal year not designated as above indicated, the corporations making such returns will be advised that such returns can not be accepted, but must be made to cover the business of the calendar year." ^^ Whether such a corporation, joint-stock company, associa- tion or insurance company must make its return of income belonging to a beneficiary of a trust or other person, which it pays at the source thereof, on the first day of March or at sixty days after the time which it has designated for the return of its own net income, is not stated in the Act. Ey the Treasury Regulations: "Returns of withholding agents (including those of licensed collecting agents) as to in- terest payments shall be made monthly and returns containing summaries of said monthly returns shall be made annually. (See Part 2, A., B., and C.) Returns of individuals (see Part 1), corporations (see Part 3), and withholding agents, with- holding tax on wages, salaries, rents, etc. (see Part 2, D), and 8Tr. Reg. 169. 10 Tr. Reg. 171. 9Tr. Reg. 170. § 77] TIME OF EETUEN. 283 fiduciaries acting as withholding agents (see Part 2, E) shall be made annually. All monthly returns are required to be made on or before the 20th day of each month for the preceding month. All annual returns are required to be made on or before the 1st day of March in each year, except in the case of cor- porations which have given due notice of the termination of their fiscal year, in which cases the prescribed return is to be filed within 60 days after the termination of such fiscal year." ^^ "In case of neglect occasioned by sickness or absence, the collector may allow such further time for making or delivering such list or return as he may deem necessary not exceeding thirty days." ^^ "When the return is not filed within the required time by reason of sickness or absence of the individual, an extension of time, not exceeding 30 days from March 1, within which to file such return may be granted by the collector, provided a written application therefor is made by the individual within the period for which such extension is desired." ^^ "An extension of time within which a return may be filed can in no ease exceed 30 days from the date on which the return is due and can be granted only upon written application to the collector, and in case of sickness or absence of an officer whose signature to the return is required, such application to be made prior to the expiration of the period for which the ex- tension is desired." ^* "If a return is made and placed in the United States mails, properly addressed, and postage paid, in ample time, in due course of mails, to reach the office of the collector or deputy collector on or before the last due date, no penalty will be held to attach should the return not be actually received by such officer until subsequent to that date." ^* " 'Last due date,' as hereinbefore used, is construed to mean the last day upon which a return is required to be filed in ac- cordance with the provisions of the law, or the last day of the 11 Tr. Reg. 190. 13 Tr. Keg. 23. 12 U. S. Rev. Stat. § 3176, (U. S. "Tr. Reg. 173. Comp. Stat. 1901, p. 2038,) as 15 Tr. Reg. 174. amended by Aet of October 3, 1913, subsection I. 284 EETUENS. [§ 7T period not exceeding 30 days covered by an extension of time granted ty the collector." " "When the due date as above defined falls on' Sunday or on a legal holiday, the last due date -will be held to be the day next following such Sunday or legal holiday and the return should be made to the collector not later than such following day, or, if placed in the mails, it should be posted in ample time to reach the collector's office, under ordinary handling of the mails, on or before the date on which the return is thus made due in the office of the collector." " The Revised Statutes as amended provide : "That in case na annual list or return has been rendered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or busi- ness, with some one of suitable age and discretion, if such be present, otherwise to deposit in the nearest postoffice, a note or memorandum addressed to such person, requiring him or her to render to such collector or deputy collector the list or return required by law, within ten days from the date of such note or memorandum, verified by oath or affirmation." " By the Treasury Regulations : "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. (For authorized extension of time, see articles 23 and 173.)" " 16 Tr. Eew. 175. by Act of October 3, 191 3, II, sub- 17 Tr! Eeg.' 176. section I. See infra, § 87. 18U. S. Rev. Stat. § 3173, (U. S. 19 Quoted p. 283, supra. Comp. Stat. 1901, 2065,) as amended i 77] TIME OF EETUBN. 285 FORM 1045. UNITED STATES INTERNAL REVENUE. NOTICE OF FAILURE TO RENDER A SWORN RETURN OF INCOME TAXABLE UNDER INTERNAL REVENUE LAWS. (Note. — Notice on Form 644 will be used in case of corporations, etc., failing to file returns under the provisions of section 38 of the act of August 5, 1909.) United States Internal Revenue, Office of Colleotok, To District of At At 191 Your attention is called to the provisions of scetion 2 of the act of October 3, 1913 (Income Tax Law), relative to filing a sworn return, and to the penalties imposed by said section for failure to file said return. As you have failed to file the required return in my office within the prescribed time, you are hereby notified that the above-mentioned penalties have been incurred. You are also notified that if the required return is not filed with me within ten days from the date hereof it will be my duty to examine your books and papers and to prepare a return therefrom as provided in sec- tions 3173 and 3176 of the Revised Statutes of the United States. , Collector. 286 EETUENS. [§ 7T Endorsement of Form 1045. PENALTIES FOR FAILURE TO FILE INCOME RETURNS WITHIN aHE TIME PRESCRIBED BY LAW. (In addition to tlie 50 per cent and 100 per cent penalties assessable under section 3176.) IndividualSj Withholding Agents, and Fiduciaeies. "That if any person, corporation, joint-stock company, association, or insurance company liable to make the return or pay the tax aforesaid shall reluae or neglect to make a return at the time or times hereinbefore speciilcd in each year, such person shall be liable to a penalty of not less than 520 nor more than $1,000. Any person or any officer of any corpora- tion required by law to make, render, sign, or verify any return who makes any lai^e or fraudulent return or statement with intent to defeat or evade the assessment required by this section to be made shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000 or be imprisoned not excLeuizig one year or both, at the discretion of the court, with the costs of prosecution." (Paragraph F, sec. 2, act of October 3, 1913.) Corporations. "If any of the corporations, joint-stock companies or associations, or insurance companies aforesaid, shall refuse or neglect to make a return at the lime or times hereinbefore specified in each year, or shall render a. false or fraudulent return, such corporation, joint-stock company, or asso- ciation, or insurance company shall be liable to a penalty of not exceeding $10,000." (Subparagraph d of paragraph G, sec. 2, act of October 3, 1913.) Under the early statutes it was ruled that a want of notice did not relieve the taxpayer from the statutory penalty.^ Withholding adults who deduct and pay the tax at the source make returns monthly and annually as well.*^ § 78. Place of return. The return must be made, in the case of an individual, on his own behalf, to the collector of in- ternal revenue for the district in which such person resides or has his principal place of business, or, in the case of a person residing in a foreign country, in the place where his principal business is carried on within the United States.^ so 3 Int. Rev. Rec. 151 ; see 1 Int. 2i See infra, § 97. Rev. Rec. 113. § 78. i II, Subsection D. § 78] PLACE OF EETUEBT. 287 By the Treasury Kegulations: "If the person making the return of income has his place of business in the collection dis- trict in which he resides, the return shall be filed with the collector of that district. If his principal place of business is elsewhere, the return shall be filed in the district in which that business is located. In the case of an individual residing in a foreign country return shall be made to the collector of internal revenue for the district where his principal business is carried on within the United States." * The statute and regulations fail to state the place of return . by a citizen of the United States who resides in a foreign coun- try and has no place of business here. The statute provides that returns of the net incomes of the persons for whom they act, made by guardians, trustees, executors, administrators, agents, receivers, conservators, or any persons, corporations or associations acting in a fiduciary capacity, shall "be subject to all the provisions of this section which apply to individuals : Provided, That a return made by one of two or more joint guardians, trustees, executors, administrators, agents, receivers, and conservators, or other persons acting in a fiduciary capacity, filed in the district where such person resides, or in the dis- trict where the will or other instrument under which the acts is recorded," shall be sufficient.' There is room for a differ- ence of construction upon the question, whether by "in the dis- trict where such person resides," in this clause, is intended the district of the residence of the person acting in a fiduciary ca- pacity or of that of the beneficiary. The statute further pro- vides that a return made by persons, firms, companies, copart- nerships, corporations, joint-stock company or associations, and insurance companies, having the control, receipt, disposal or payment of fixed or determinable annual or periodical gains, profits and income of another person subject to the tax, shall "make and render a return as aforesaid, but separate and dis- tinct, of the portion of the income of each person from which the normal tax has been thus withheld, and containing also the name and address of such person, or stating that the name and 2Tr. Reg. 15. » lUd. 288 EETUENS, [§78 address or the addresses, as the case may he, are unknown." * Apparently the intent is that this return be filed at the resi- dence or principal place of business of the returner. And the Eegulations of the Treasury Department so direct.* The withholding agents or corporations as well as those of individuals file their returns with the collectors of their respec- tive districts.® What constitutes residence within the act may be a matter of some difiiculty. The place where a taxpayer exercises his ■ franchise is ordinarily presumed to be that of his residence.' Every corporation, joint-stock company, association or in- surance company, subject to the tax, must file the return with the collector of the district in which its principal place of busi- ness is located.* According to the instructions endorsed on the forms for returns. "2. The principal place of business as used in the act and in these regulations is held to mean the place in which the books of account and other data to be used in preparing the return of annual net income are ordinarily kept." "A foreign corporation, association or insurance company must file its return in the place where its principal business is located within the United States." ® By the Treasury Eegula- tions : "A foreign corporation having several branch offices in the United States should designate one of such branches as its prin- cipal office and should also designate the proper officers to make the required return.^" COLLECTION DISTRICTS; HOW NXMBERED. For the purpose of assessing, levying and collecting internal revenue taxes the law provides that the President may establish convenient col- lection districts, the number of which, however, is limited by law, which at the present time is sixty-three districts. At one time there were as many collection districts as there were rep- resentatives in Congress, and they were numbered consecutively for each state. The number of districts was afterwards reduced, but each newly formed district retained the original number assigned to the district in which the collector's office is located. For example, the collection district with headquarters at Buffalo, N. Y., *Ibid. 8 Subsection G (c). 6Tr. Reg. 35. 9 Ibid. «Tr. Reg. 35, 36. lOTr. Reg. 83, ' See Foster, Fed. Pr. 5th ed. § 46. § 78] PLACE OB" EETtTEN. 289 i3 the 28th District of New York, although the State of New York now has but six collection districts. In Pennsylvania the district including Philadelphia is number 1, the original number for that district, and the Pittsburgh district is number 23, the original number for that district, although there are now but four collection districts in the State of Pennsylvania. Changes in the territory of districts are made from time to time but the name and address of the collector for any district is easily ascertained upon inquiry at any cigar store, bank, etc. LOCATION OF COLLECTOES' OFFICES. Birmingham, Ala. Little Rock, Ark. San Francisco, CaL Alabama, (including the State of Mississippi). Arkansas, 1st California, (including the counties of Alameda, Alpine, Amador, Butte, Colusa, Calaveras, Contra Costa, Del Norte, Eldorado, Fresno, Glenn, Hum- bolt, Inyo, Kings, Lake, Lassen, Marin, Mendo- cino, Modoc, Madera, Maripose, Merced, Mono, Monterey, Napa, Nevada, Placer, Plumas, Sac- ramento, Shasta, Sierra, Siskiyou, Solano, Sonoma, Sutter, San Francisco, San Joaquin, San Mateo, Santa Clara, Santa Cruz, Stanislaus, Tulare, Tuolumna, Tehama, Trinity, Yolo, and Yuba, and the State of Nevada). *th California, (including counties of Imperial, Kern, Los Angeles, Cal. Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Luis Obispo, Santa Barbara, and Ventura). Colorado, (including the State of Wyoming). Connecticut, (including the State of Rhode Island). Florida, Georgia, Hawaii, 1st Illinois, (including the counties of Boone, Carroll, Cook, DeKalb, Dupage, Grundy, Jo Daviess, Kane, Kankakee, Kendall, Lake, Lasalle, Lee, McHenry, Ogle, Stephenson, Whiteside, Will, and Winne- bago). Foster Income Tax. — 19. Denver, Colo. Hartford, Conn. Jacksonville, Fla. Atlanta, Ga. Honolulu. Chicago, HI. 290 EETURNS. [§ Y8 5th Illinois, (including the counties of Bureau, Peoria, IIL Henderson, Henry, Knox, Marshall, Mercer, Peoria, Putnam, Rock Island, Stark, and Warren). 8th Illinois, (including the counties of Adams, Springfield, 111. Bond, Brown, Calhoun, Cass, Champaign, Chris- tian, Coles, Cumberland, Dewitt, Douglas, Edgar, Ford, Fulton, Greene, Hancock, Iroquois, Jersey, Livingston, Logan, McDonough, McLean, Macon, Macoupin, Mason, Menard, Montgomery, Morgan, Moultrie, Piatt, Pike, Sangamon, Schuyler, Scott, Shelby, Tazewell, Vermilion, and Woodford). 13th Illinois, (including the counties of Alexander, E. St. Louis, IIL Clarke, Clay, Clinton, Crawford, Edwards, Effingham, Fayette, Franklin, Gallatin, Hamilton, Hardin, Jackson, Jasper, Jefferson, Johnson, Lawrence, Madison, Marion, Massac, Monroe, Perry, Pope, Pulaski, Randolph, Richland, St. Clair, Saline, Union, Wabash, Washington, Wayne, White and Williamson). 6th Indiana, (including the counties of Adams, Indianapolis, Ind. Allen, Bartholomew, Benton, Blackford, Brown, Cass, Dearborn, Decatur, DeKalb, Delaware, Elk- hart, Fayette, Franklin, Fulton, Grant, Hamil- ton, Hancock, Hendricks, Henry, Howard, Hunt- ington, Jackson, Jasper, Jay, Jefferson, Jennings, Johnson, Kosciusko, Lagrange, Lake, Laporte, Lawrence, Madison, Marion, Marshall, Miami, Mon- roe, Morgan, Newton, Noble, Ohio, Porter, Pulaski, Randolph, Ripley, Rush, St. Joseph, Shelby, Starka, Steuben, Switzerland, Tipton, Union, Wabash, Wayne, Wells, White, and Whitley). 7th Indiana, (including the counties of Boone, Car- Terre Haute, Ind. roll, Clark, Clay, Clinton, Crawford, Daviess, Dubois, Floyd, Fountain, Gibson, Greene, Harrison, Knox, Martin, Montgomery, Orange, Owen, Parke, Perry, Pike, Posey, Putnam, Scott, Spencer, Sulli- van, Tippecanoe, Vanderburg, Vermilion, Vigo, Wai ren, Warrick, and Washington ) . 3rd Iowa, (including the State of Iowa). Dubuque, la. Kansas, Leavenworth, Kansas. § 78] PLACE OF EETUEN. 291 2nd Kentucky, (including the counties of Allen, Owensboro, Ky. Ballard, Barren, Breckenridge, Butler, Caldwell, Calloway, Carlisle, Christian, Clinton, Critten- den, Cumberland, Daviess, Edmonson, Fulton, Graves, Grayson, Hancock, Hart, Henderson, Hick- man, Hopkins, Livingston, Logan, Lyon, Mo- Cracken, McLean, Marshall, Metcalfe, Monroe, Muhlenberg, Ohio, Russell, Simpson, Todd, Trigg, Union, Warren, and Webster). 5th Kentucky, (including the city of Louisville and Louisville, Ky. the counties of Adair, Bullitt, Casey, Green, Har- den, Henry, Jefferson, Larue, Marion, Meade, Nelson, Oldham, Owen, Shelby, Spencer, Taylor, and Washington ) . 6th Kentucky, (including the counties of Boone, Covington, Ky. Bracken, Campbell, Carroll, Gallatin, Grant, Harrison, Kenton, Pendleton, Robertson and Trible). 7th Kentucky, (including the counties of Bath, Lexington, Ky. Bourbon, Boyd, Carter, Clark, Elliott, Fayette, Fleming, Franklin, Greenup, Johnson, Lawrence, Lewis, Martin, Mason, Menifee, Montgomery, Mor- gan, Nicholas, Powell, Rowan, Scott, and Wood- ford). 8th Kentucky, (including the counties of Anderson, Danville, Ky. Bell, Boyle, Breathitt, Clay, Estill, Floyd, Gar- rard, Harlan, Jackson, Jessamine, Knott, Knox, Laurel, Ijee, Leslie, Letcher, Lincoln, Madison, Magoffin, Mercer, Owsley, Perry, Pike, Pulaski, Rockcastle, Wayne, Whitley, and Wolfe). Louisiana, New Orleans, La. Maryland, (including the State of Delaware, and Baltimore, Md. the District of Columbia). Massachusetts, Boston, Mass, 1st Michigan, (including the counties of Alcona, Detroit, Mich. Alpena, Arenac, Bay, Branch, Calhoun, Cheboygan, Clare, Clinton, Crawford, Genesee, Gladwin, Gratiot, Hillsdale, Huron, Ingham, Iosco, Isabella, Jackson, Lapeer, Lenawee, Livingston, Macomb, Midland, Monroe, Montmorency, Oakland, Ogemaw, Oscoda, Otsego, Presque Isle, Roscommon, Saginaw, Sanilac, Shiawassee, St. Clair, Tuscola, Wash- tenaw, and Wayne). 292 EETtTENS. [§ ^8 Ith Michigan, (including the counties of Alger, Grand Hapids, Mich. Allegan, Antrim, Baraga, Barry, Benzie, Berrien, Cass, Charlevoix, Chippewa, Delta, Dickinson, Eaton, Emmet, Gogebic, Grand Traverse, Hough- ton, Ionia, Iron, Kalamazoo, Kalkaska, Kent, Keweenaw, Lake, Leelanau, Luce, Mackinac, Manistee, Marquette, Mason, Mecosta, Menominee, Missaukee, Montcalm, Muskegon, Newaygo, Oceana, Ontonagon, Osceola, Ottawa, St. Joseph, School- craft, Van Buren, and Wexford) . Minnesota, St. Paul, Minn. 1st Missouri, (including the counties of Adair, St. Louis, M Supra, §§ 35, 41. ^o Supra, §§ 37-39. 308 EETUENS. [§79 subsequently prove to be worthless, they may be deducted under the head of losses in the return for the year in which such debts were charged off as worthless.il 15. Amounts due or accrued to the individual members of a partnership from the net earnings of the partnership, whether apportioned and dis- tributed or not, shall be included in the annual return of the individual.l2 16. United States pensions shall be included as income. 17. Estimated advance in value of real estate is not required to be reported as income, unless the increased value is taken up on the books of the individual as an increase of assets.is 18. Costs of suits and other legal proceedings arising from ordinary business may be treated as an expense of such business, and may be de- ducted from gross income for the year in which such costs were paid. 19. An unmarried individual or a married individual not living with wife or husband shall be allowed an exemption of $3,000. When husband and wife live together they shall be allowed jointly a total exemption of only $4,000 on their aggregate income. They may make a joint return, both subscribing thereto, or if they have separate incomes, they may make separate returns; but in no case shall they jointly claim more than $4,000 exemption on their aggregate income.l* 20. In computing net income there shall be excluded the compensation of all officers and employees of a State or any political subdivision there- of, except when such compensation is paid by the United States Gov- ernment.15 "Income paid by 'debtors' from March 1 to November 1, 1913, shall be included in the return of the individual (under column B, page 2, of Form 1040) as income upon which the normal tax of one per cent, has not been withheld and paid at the source. Income received by individuals between November 1 and December 31, 1913, upon wliich the normal tax has been withheld at the source shall be included in their annual return (under column A, page 2, of Form 1040) as income upon which the tax has been paid." 18 § 80. Contents of returns by fiduciary agents. The Treasury Regulations provide: "Fiduciaries shall, on or be- fore March 1 of each year, make and render a return of the income coming into their custody or control and management from each trust or estate when the annual interest of any bene- ficiary in said trust or estate is in excess of $3,000. This return (Form 1041) must be filed with the collector for the district in which the fiduciary resides or has his principal place of business, and shall contain an itemized statement of the gross income and deductions claimed. "IN'otice of failure to file return as required shall be served upon the fiduciary, (See art. 18.) ^ 11 But see supra, § 68. 15 Supra, §§ 28, 56. iZ Supra, § 75. leT. D. ]967. 13 Supra, §§ 58, 64. § 80. I See infra, § 87. U Supra, § 72. § 80] EETUBNS BY FIDUCIAEY AGENTS. 309 "The entries on the first page of Form 1041 in column headed 'Amount of income paid or accrued to beneficiaries' should not include their respective shares of income derived from divi- dends on the stock or from the net earnings of corporations, joint-stock companies, etc., subject to like tax or the income on which the normal tax of 1 per cent has been deducted and with- held at the source by the debtor or the prior withholding agent, as these two items of income are treated as deductions in deter- mining the amount of income subject to tax for which the fidu- ciary as withholding agent has to account. "When the share of any beneficiary, therefore, in the amount stated on line 3 of the first page of said return is in excess of $3,000, return must be made." " "As each such fiduciary acts solely in behalf of the bene- ficiaries of the trust, the annual return required in such cases has reference only to the income accruing and payable through said fiduciary, and not to the income of the beneficiary de- rived from other sources. If, however, such fiduciary is legal- ly authorized to act for such beneficiary as agent or attorney in fact, he may in such case also make for the beneficiary the per- sonal annual return (Form 1040) ' required by law." * "The annual return of the fiduciary shall contain a list of the name and full address of each beneficiary and the share of said income to which each may be entitled. There must also be entered opposite the name of each beneficiary the amount of exemption, if any, claimed by him, the amount of income on which the fiduciary is liable for tax, and the amount of tax withheld, and the said return shall be signed and sworn to by the fiduciary, if an individual, making same, and his full ad~ dress miist be stated. If the fiduciary is an organization, the return shall be signed and sworn to by the president, secretary,. or treasurer of said organization." ^ "Fiduciaries having control of any portion of an annual income accruing during the year, but not distributed or paid to the beneficiaries during the year, shall, in rendering their annual return (Form 1041), give the name and address of each «Tr. -Reg. 71. 4Tr. Reg. 72. » Supra, § 70, STr. Reg. 73. 310 BETUKiirs. [§80 of said beneficiaries having a distributive interest in said in- come, and shall furnish all information called for in such re- turns. The fiduciary shall in all such cases withhold and pay to the collector, as provided by lav?, the normal tax of 1 per cent upon the distributive interest of each of said beneficiaries when in excess of $3,000, the same as if said income was actual- ly distributed and paid. Exemption under paragraph C, how- ever, may be claimed by the beneficiary or his legal representa- tive by filing his claim for exemption with the fiduciary agent." ® "When the normal tax on undivided annual net income has been so withheld, such tax shall not be again withheld when such portion of the income is actually distributed and paid to said beneficiary." '' Prior to the consolidation of the Regulations, the Treasury Department ordered: "Fiduciary agents, in addition to the annual return of income required by these regulations, shall make an annual list return, as provided by regulations for with- holding agents, whenever payment of income to any beneficiary is in excess of $3,000. Said list return shall be made on or before March 1 of each year to the collector of internal revenue for the district in which said fiduciary resides or has his prin- cipal place of business, giving name and address of each bene- ficiary of said trust, to whom annual income in excess of $3,000 is paid, the amount of income paid to each beneficiary, giving source of income, the amount of exemption claimed by each beneficiary, if any, and the amount of income withheld for tax, and the said list return shall be signed by the fiduciary making same, stating in what capacity acting, and give his name and full address. Fiduciaries having an annual income that is not distributed or paid to the beneficiaries of the trust under which said fiduciary acts shall make an annual list return, as provided herein, and said list return shall show the name and address of each beneficiary having a distributive interest in said income in excess of $3,000, stating the distributive amount of each beneficiary, and shall give all information as required in said list returns, and shall withhold and pay to the collector, 6 Tr. Reg. 74. See Form 1007, in- 7 Tr. Reg. 75. See infra, % 102. fra, § 81. § 80] EETUENS BY. FlDUCtAEY AGENTS. 311 as provided by law, the normal tax of 1 per cent, upon the dis- tributive interest of each of said beneficiaries in excess of $3,000, the same as if said income vyas actually distributed and paid; exemption under paragraph C, however, may be claimed by the beneficiary or his legal representative by filing his claim for ex- emption with the fiduciary agent. When the fiduciary agents deduct, withhold and pay the normal tax on undivided annual net income as provided herein they shall not be required to withhold and pay again the normal tax on said income when actually distributed and paid to said beneficiaries, nor shall the beneficiaries be required again to pay the normal tax upon the amounts on which the tax has been paid when such amounts are distributed. "Where the normal tax is withheld and paid by fiduciary agents on undivi- ded annual income beneficiaries (or their legal representatives) in whose behalf said tax is paid may file notice with said fidu- ciary and claim the benefit of any annual exemption they may be entitled to under paragraph C of the act of October 3, 1913, as provided by regulations, the same as if their distributive in- terest in same income was actually paid." * "Where a decedent died after March 1 in the year 1913, and from March 1 up to the date of his death had a net income of $2,500 or more, the fiduciary (i. e., the executor or administra- tor) should make a return for the decedent on Form 1040 and the income tax, both normal and additional, shown to be due thereon will be a debt against the estate of the decedent. The same principle will apply to subsequent years if the net income of the decedent from January 1 to the date of his death amounts to $3,000 or more. No other return is required to be made by the fiduciary until the settlement of the estate has reached the stage when the beneficiaries thereof and their respective in- terests in the income derived from the estate are determinable, and then the fiduciary is required to file a return on or before March first of each year as prescribed by the regulations. "The fiduciary will enter on page 2 of Form 1041, under the appropriate heads, all income accruing to the beneficiaries of » T. D. 1906. Nov. 28, 1913. See infra, §§ 81, 102. 312 EETUENS. [§80 the trust or estate from March 1 to December 31, 1913, inclu- sive; but the interest derived from the obligations of a State or any political subdivision thereof and the obligations of the United States or its possessions, is not to be included. "The fiduciary will enter on page 3 of Form 1041, for the year 1913, five-sixths of the deductions allowable under para- graph B of the law, and on line 1 it will be proper for the fidu- ciary to enter all legitimate expenses incurred in administering the estate or trust. If the fiduciary holds and rents business or residental property and pays insurance, water rents, commis- sions for the collection of rents, or any other necessary expenses in managing the estate or trust, it will be proper to enter same on line 1 as an allowable deduction. "The amount to be shown on page 1, line 3, will represent the total amount of income accruing through the fiduciary to the beneficiaries of the estate or trust which is subject to the normal tax, and when the interest of any one beneficiary in this amount from November 1 to December 31, 1913, inclusive, was in ex- cess of $3,000, whether distributed or not, the fiduciary was required to withold and pay the normal tax on the whole $3,000 and excess thereof, unless the beneficiary filed with the fiduciary- Form 1007, as prescribed by the regulations, claiming exemp- tion under paragraph C, and in that event the fiduciary was only required to withhold and pay the normal tax on the amount in excess of the exemption claimed. "Treasury Decision 1906 prescribes that when fiduciaries make their annual return, they shall give the name and full ad- dress of each beneficiary and the share of income to which each may be entitled, which information shall be given on page 1 of Form 1041. In the column 'Amount of income paid or accrued to beneficiaries,' should be entered the respective interest of the beneficiary in the amount of income as shown on page 1, line 3. "When the interest of any beneficiary in the amount of income subject to the normal tax, as shown on Form 1041, page 1, line 3, is in excess of $3,000, and the same was paid to the benefici- ary within the period from November 1 to December 31, 1913, both dates inclusive, the fiduciary was required to withhold and pay the normal tax, as prescribed by the regulations, and the in- § 80] EETUENS BY FIDUCIAEY AGENTS. 313 formation required should be given on Form 1041, page 1, giv- ing the name and full address of each beneficiary, the amoimt of income paid or payable to each beneficiary, (this amount would be the beneficiary's interest in the amount of income sub- ject to the normal tax as shovpn on line 3), the amount of ex- emption claimed under paragraph C (if any), the amount of income on which normal tax should be withheld, and the amount of tax withheld, all to be given in the respective columns in the order named. "A fiduciary acting for a minor or insane person who had a net income of $2,500 or more for the year 1913, will make the return for his ward on Form 1040 and will not be required to file a return on Form 1041, unless he has more than one ward by reason of the same estate or trust, then in that event a return will be required on Form 1041, and a separate return on Form 1040 for each ward having a net income of $2,500 or more for the year 1913. "The income accruing or paid to a beneficiary through a fidu- ciary may be composed in part of dividends, or income upon which the normal tax has been withheld and paid or to he paid at the source, or income derived from the obligations of a State or any political subdivision thereof or from the obligations of the United States or its possessions (income from obligations of a State or any political subdivision thereof and from the ob- ligations of the United States or its possessions is not subject to the tax and should not be included). If a beneficiary has other income which, added to the income accruing to him through his fiduciary, gives him a net income of $2,500 or more for the period from March 1 to December 31, 1913, inclusive, he should make a-return-of-his gross income on Form 1040, as required by the regulations. "To illustrate : If a fiduciary's gross income was $10,000, de- rived from the following sources : 1. Interest upon the obligations of the United States. . $1,000 2. Dividends on stock or net earnings of corporations. 2,000 314 EETUENS. [§80 3. Interest from bonds containing "Tax free covenant clause," upon which the fiduciary did not claim any exemption at source and which he entered on Form 1041, on page 2, column A, as income on which normal tax was withheld 2,000 4. Income from rents, etc 5,000 $10,000 "The fiduciary's return on Form 1041 would show as follows: Page 2. Line 3, column B, amount of rents $5,000 Line 5, interest from bonds, "tax-free clause," column A 2,000 Line 10, dividends 2,000 Aggregate total of gross income $9,000 (ISTo entry of interest on U. S. bonds, . $1,000) Page 3. Line 1, necessary expenses actually paid in carrying on business, including compensa- tion of fiduciary, water rents, insurance, etc $450 Line 3, taxes paid 400 Line 6, actual repairs made on building, or amount allowed for wear and tear 150 Line 7, dividends not subject to normal tax. . 2,000 Line 8, amount of income on which normal tax has been deducted and withheld at source, bonds with "tax-free clause" 2,000 Total deductions $5,000 Page 1. Line 1, gross income $9,000 Line 2, total deductions 5,000 Line 3, amount of income due beneficiary, which is subject to normal tax 4,000 "The beneficiary has filed with the fiduciary as a withholding agent a claim for exemption under paragraph C for $2,500 (ex- ■§ 80] EETUENS BT FIDTJCIAET AGENTS. 315 «inption of a single person for 1913), and the return on Eorm 1041 would show on page 1, in addition to the foregoing entries, the following : " 'John Doe, 76 B Street, New York City,' In third column, amount of income paid or accrued to beneficiary $4,000 In foiirth column, amount of exemption claimed. . . . 2,500 In fifth column, amount of income on which fiduciary liable to tax 1,500 In sixth column, amount of normal tax withheld .... 15' "In the foregoing illustration, the beneficiary in his return on I'orm 1040, would make no return of item 1, interest on United States bonds. Item 2, dividends, would be entered on page 2, line 11, and for the purpose of calculating the normal tax would be an allowable deduction on page 1, line 4. Item 3, interest on bonds, would be entered on page 2, line 7, column A, and for "the purpose of calculating the normal tax would be an allowable deduction on page 1, line 5. Item 4, rents, would be entered on page 2, line 7 ; $1,500 in column A and $2,500 in column B (exemption of $2,500 claimed and no tax withheld on this amount). This would show — Income received from fiduciary subject to be returned on Form 1040 $8,000 Deductions and exemption allowable in calculating normal tax 8,000 0,000 "No normal tax due, it having been paid at the source by the fiduciary as shown by his return on Form 1041. "In making the foregoing entry on Form 1040 on line 11, there should be written just above the printed heading, "Amount received from fiduciary," and the amount should be entered in the appropriate column. "No illustration is given of income accruing to the beneficiary from other sources, an illustration of this not being deemed necessary as such income is entered in the usual way." ' 9 T. D. 1943. 316 EETUENS. [§80 To be Filled in by Collector. Form 1041 (Revised.) To be Filled in by Internal Bevenue Bureau. Assessment List 23-B (Month.) Folio Line INCOMi: TAX. File No. Bxamined by AbOTe space to be stamped by Collector, showing district and date re- ceived. The Penalty For failure to have this Eeturn in the hands of the Collector of Inter- nal Revenue on or be- fore March 1 is S20 to ?1,000. (See instructions on page 4.) Audited by IMPOKTANT. Read this form through carefully. Fill in page 2 before making entries on first page. United States Internal Revenue. RETURN OF ANNUAL NET INCOME BT FIDUCIARIES. (As provided by Act of Congress, approved October 3, 1913.) Income received or accrued daring the year ended December 31, 191.. Filed by of (Name of fiduciary.) (Street & number.) (Post-office address.) (State.) Acting in capacity of , for the beneficiaries of the (State whether trustee, executor, etc.) estate or trust of . (State name by which estate or trust is known.) Answer must be given to the following: question; Are any of the beneficiaries minors, incompetents, persons under an.v legal Incapacity, or nonresident aliens? _._' Note. — If there are any such beneficiaries they should be designated on the list below. £1 S T 2. General Deductions (brought from line 23) 3. Net Income - - - - - - - - - 4. Income on which normal tax has been paid or is to he paid at original source (brought from line 14) - - - 5. Amount of income accrued to beneficiaries to the estate or trust as listed in column 3 below, whethpr dis- tributed or not, and upon which the fiduciary is liable for tbe normal tax when the amount is in excess of $3,000 ?- ■§ 80] EETUBNS BY FIDUCIAEY AGENTS. 317 (1) . (2) (3) (4) (5) (6) Name of beneficiaries. Addresses. beneficiaries' In- terest in amount reported on line 5, whether dis- tributed or not. gga Amount of income on which fiduciary Is liable for tax. 5 $ $ $ Totals IS $ $ — s NOTES. 1. The total of column 3 shall equal the amount entered on line 5 above. 2. Entries made in column 4 representing claims for exemption will not be allowed unless properly executed certificate for each claim accompanies this return. 3. Enter in column 5 the difference between the entries in columns 3 and 4. 4. Enter in column 6 one per cent of the entries in column 5, 5. If sufficient space is not provided on this page to list all beneficiaries an additional sheet, similarly ruled, should be appended. 6. Fiduciaries shall withhold the normal tax of one per cent from each beneficiary whose income in column 3 above Is in excess of $3,000, subject, however, to the claim for specific exemption. 318 EETUENS. [§ 80 GROSS INCOME. This statement must show In the proper spaces the entire amount of gains., profits, and Income received or accrued from all sources whatever coming into the custody or control and management of the fiduciary for the benefit of the beneficiaries of the trust or estate during the year specified on page 1, except- ing dividends on stock of domestic corporations which are listed on page S, and excepting income derived from the oiUgations of the United States or any of its possessions or of any State or political au'bdi'Vision thereof^ includ- ing district drainage l)onds. Description of Income. A. Income on which the tax has been paid or is to be paid at the source. B. Income on which tax has NOT been paid or is not to be paid at the source. M a o s » •a a Hi in a o a H u ■a a a iU a o s OS m m O Si B ►a a M a' Total Amount Derived from— 6. Business, trade, commerce, or sales or dealings in property whether real or personal 7. Rents — $- - -- $-_ - -- - - - -- -- -- 8. Interest on notes, mortgages, bank deposits, and securities other than reported on lines 9 and 11 9. Interest on bonds, mortgages, or deeds of trust or other similar obligations of domes- tic corporations, joint stock companies, or associations and insurance companies 10. Partnership gains and profits, whether distributed or not. {Net gains or profits must be reported here) 11. Interest upon bonds issued in foreign countries, and upon foreign mortgages or like obligations (not paya- ble in the United States), and also dividends upon the stock or interest upon the obligations of foreign corporations, associations, and insurance companies, engaged in business in for- eign countries - .. '" -- § 80] KETUKNS BY FIDUCIAKY AGENTS. 319 12. Royalties from mines, oil wells, patents, franchises, or other legalized privileges 13. Other sources not enumerated — - -- - - -- - -- - $- %- ~ Note.— State sources from which received and amount received from each: 14. Totals (enter total of col- umn A on line 4) 15. Gross Income (total of columns A and B to be entered on line 1) GENBRAI, DEDUCTIONS. Note.— Claims for deductions can not be allowed unless the Information re- quired below is clearly set forth. o 3 m o .=1 Vi Td 0) u a l-i-l m a 16. The amount of necessary expenses actually paid within the calendar year for which this return is made in the administration of the estate or trust. There must not be included under this bead per- sonal, living, or family expenses, business ex- penses of partnerships, or cost of merchandise. Amounts paid for permanent improvement or bet- terment of property are not proper expense de- % 17. All interest paid witliin the year on indebtedness of 18. All national, State, county, school, and municipal taxes paid within the year (not including those 19. Losses actually sustained during the year incurred in trade or arising from fires, storm, or shipwreck, and not compensated by insurance or otherwise — Note.— State (a) of what the loss consisted, (6) when it was actually sustained, and (o) how it was determined to be a loss : — - - - - - -- 320 EETUENS. [§ 80 20. Debts past dne which have been actually ascertained to be worthless and which have been charged off within the year Note.— State (a) of what the debts consisted, (6) when they were created, (c) when they became due, and (d) how they were actually determined to be worthless: 21. Amount representing a reasonable allowance for the exhaustion, wear and tear Of property arising out of its use or employment in business. No deduction shall be made for any amount of expense of re- storing property or making good the exhaustion thereof for which a deduction is claimed elsewhere in this return Note.— State (a) what tbe property was on which depreciation is taken (if buildings, state when erected, of what material constructed and Talue of same, as of January 1, of the calendar year for which this return is rendered) and (ii) what per- centage of depreciation is claimed: $.. - - - - - - 22. Amount allowed to cover depletion in case of mines and oil wells, not to exceed 5 per cent of the gross value at the mine or well of the output for the calendar year for which this return is rendered Note.— State (a) cost of mine or well, (6) gross value at the mine or well of the output for the calender year for which this return is rendered, and (c) what percentage for depletion is claimed : - 23. Total General Deductions (to be entered on line 2) Note.— If space is insufScient for answering any anestions, attach a supple- mental sheet to this return. The following statement shall be made by the fiduciary, giving the names of all beneficiaries and showing each beneficiary's interest in (o) the income of the estate as shown in line 5, (6) the income of the estate on which the normal tax has been or is to be paid at source other than this fiduciary as shown on line 4, (c) any dividends of domestic corporations accrued to the fiduciary in the year for which this return is rendered, whether said Interest is distributed to beneficiaries or not, and (d) the total net Income of the estate, Including dividends. § 80] BETUENS BY FIDUCIAEY AGENTS. 321 Note.— This statement will show the amount each beneficiary who is required to render a return should include In his personal return under the head of income received from fiduciaries. A B C D Names of Beneficiaries. Beneficiaries' Interest in amount reported on line 5, whether dis- tributed or not. Beneficiaries' interest in amount entered on Hue 4, whether dis- tributed or not. Beneficiaries' interest In dividends of domestic corporations accrued to the estate, whether distributed or not. Beneficiaries' interest In total net Income (including dividends) of the estate. $ ?- $ s Totals s__ _ .. I _ $ $ NOTES. 1. Total of column A shall equal the total of column 3. page 1. 2. Total of column B shall equal amount entered on line 4. 3. Total of column C shall represent the amount of dividends of domestic -corporations accrued to fiduciary in which beneficiaries have an interest, whether said interest is distributed or not. 4. Total of column D shall represent the total amount of Income accrued to the estate in the year for which this return is rendered, in which the bene- ficiaries have an interest, whether said interest is distributed or not. AFFIDAVIT TO BE EXECUTED WHERE FIDCCIARY IS AN INDIVIDUAI,. I swear (or affirm) that I am the , (State whether trustee, executor, etc.) for the beneficiaries of the estate or trust of , that the foregoing return, to the best of my knowledge and belief, contains a true and complete statement of all gains, profits, and income received by -or accrued to me or coming into my custody or control and management as such, during the year for which this return is made; that said beneficiaries are entitled, under the Federal Income Tax Law of October 3, 1913, to all the de- ductions entered or claimed therein: that all certificates claiming personal •exemption, presented by the beneficiaries, are herewith inclosed; and that there is contained therein a true and complete list of the names and addresses of all the beneficiaries to whom any part of this income accrued and a true and complete statement of the Interest of each beneficiary in the income of the ■estate or trust, whether said Income Is distributed or not. Sworn to and subscribed before me this day of . 191 [Seal] (Slgnatureof fiduciary.) (Official capacity.) Foster Income Tax. — 21. 322 EETUENS. [§80 AFFIDAVIT TO BE EXECUTED WHERE FIDUCIABT IS AN OBGANIZATION. I swear (or affirm) tliat I am the of tlie (State official position.) 1_ of wbicb (State name of fiduciary organization.) (Address In full.) organization is the duly authorized or appointed (State whether trustee, executor, etc.) for the beneficiaries of the estate or trust of — - ; that I am duly authorized to act for said fiduciary; that the foregoing return to the best of my knowledge and belief, contains a true and complete state- ment of all taxable gains, profits, and income received by or accrued to, or coming into the custody or control and management of said organization in its fiduciary capacity as stated during the year for which the return is made; that said beneficiaries are entitled under the Federal Income Tax Law of Octo- ber 3, 1913, to all the deductions entered or claimed therein ; that all certificates claiming personal exemption presented by the beneficiaries are herewith in- closed, and that there is contained therein a true and complete list of the names and addresses of all the beneficiaries to whom any part of this income accrued and a true and complete statement of the interest of each ben'jficiary in the income of the estate or trust, whether said Income is distributed or not. Sworn to and subscribed before me this day of , 191 (Signature of officer representing fiduciary.) [Seal] "(OfflciaYcapacityV) INSTRUCTIONS. 1. Fiduciaries, when the annual interest In any income accruing and payable to any beneficiary through said fiduciary is in excess of $3,000, shall make and render a return on this form of such income of the person or person for whom they act, to the Collector of Internal Revenue for the district in which the fiduciary resides on or before the 1st day of March succeeding the close of the calendar year for which this return is rendered. 2. This return shall be made by the trustee, etc., of every nonresident alien deriving any net income from any property or business located in the United States. No specific exemption is allowed nonresident aliens. 3. Where two or more individuals act jointly in a fiduciary capacity, this return, when required, may be made and executed by any one of the individuals so acting. When the fiduciary is an organization the return shall be executed by a duly authorized officer of the organization. 4. When the return is not filed within the required time by reason of sick- ness or absence of the fiduciary, an extension of time, not exceeding 30 days from March 1, within which to file such return may be granted by the Col- lector, provided a written application therefor is made by the fiduciary within the period for which such extension is desired. 5. This return properly filled out must be made under oath or affirmation. Affidavits may be made before any officer authorized by law to administer oaths. If before a justice of the peace or magistrate not using a seal, a certificate of the clerk of the court as to the authority of such officer to administer oaths should be attached to the return. 6. A fiduciary acting in the capacity of guardian when there is but one ward shall render his return on Form 1040 as agent of the beneficiary and not on this form, but where there are two or more wards he shall render a return on Form 1041, and a personal return on Form 1040 for each ward. A fiduciary act- ing in the capacity of trustee, executor, or administrator, when there is only one beneficiary and that beneficiary a nonresident alien shall render a return on Form 1040, but when there are two or more beneficiaries and those bene- ficiaries are nonresident .aliens, he shall render a return on Form 1041, and a personal return on Form 1040 for each such nonresident alien beneficiary. 7. Amounts charged on line 16 for restoring property, or making good the exhaustion thereof from its use in business, together with the amount claimed for depreciation (line 22), must not exceed the deterioration of the property during tlie year. § 80] EETUENS BY FIDUCIAET AGEXTS. 323 Page 4 of Form 1041. INSTRUCTIONS ANNEXED TO ORIGINAL FORM 1041. 1. Fiduciaries shall, when the annual interest of any beneficiary in income accruing and payable through said fiduciary is in excess of $3,000, make and render a return on this form of such income of the person or persons for whom they act, to the Collector of Internal Revenue of the dis- trict in which the fi^duciary resides. The return shall be made as provided herein, whether the income is distributed or not. See Treasury Decision 1906. 2. The list return required from fiduciaries by regulations provided in Treasury Decision 1906, issued November 28, 1913, shall be made on page 1 of this return, giving thereon the name of each beneficiary of the trust or estate, the amount of income paid or accrued to each beneficiary, the amount of exemption claimed by each beneficiary, if any, the amount of income on which fiduciary is liable for tax, and the amount of income withheld for tax. 3. Where several individuals act jointly in a fiduciary capacity, when this return is required it may be made and executed by one of two or more. When the fiduciary is an organization it shall be signed and exe- cuted by the President, Secretary, or Treasurer of said organization. 4. This return shall be filed with the Collector of Internal Revenue for the district in which the fiduciary resides if he has no other place of business, otherwise in the district in which he has his principle place of business. 5. This return must be filed on or before the first day of March suc- ceeding the close of the calendar year for which return is made. 6. The penalty for failure to file the return within the time specified by law is $20 to $1,000. In case of refusal or neglect to render the re- turn within the required time (except in case of sickness or absence) 50 per cent shall be added to amount of tax assessed. In case of false or fraudulent return 100 per cent shall be added to such tax and a flue not exceeding $2,000 or Imprisonment not exceeding one year or both may he imposed. 7. When the return is not filed within the required time by reason of sickness or absence of the fiduciary, an extension of time not exceeding 30 days from March 1, within which to file such return may be granted by the Collector, provided an application therefor is made by the fiduciary within the period for which such extension is desired. 8. This return properly filled out must be made under oath or affirma- tion. Afiidavits may be made before any officer authorized by law to ad- minister oaths. If before a justice of the peace or magistrate, not using 324 EETUENS. [§80 a seal, a certificate of the clerk of the court as to the authority of such officer to administer oaths should be attached to the return. The following instructions, so far as applicable, are to l>e con- sidered by the fiduciary in determining the amount of Income coming Into his custody or control and management which should be reported in this return on page 2, and the deductions which should be reported on page S. 9. Expense for medical attendance, store accounts, family supplies, wages of domestic servants, cost of board, room, or house rent for family or personal use, are not expenses that can be deducted from gross income. In case an individual owns his own residence he can not deduct the es- timated value of his rent, neither shall he be required to include such es- timated rental of his home as income. 10. The farmer, in computing the net income from his farm for his an- nual return, shall include all moneys received for produce and animals sold, and for the wool and hides of animals slaughtered, provided such wool and hides are sold, and he shall deduct therefrom the sums actually paid as purchase money for the animals sold or slaughtered during the year. When animals are raised by the owner and are sold or slaughtered, he shall not deduct their value as expenses or loss. He may deduct the amount of money actually paid as expense for producing any farm pro- ducts, live stock, etc. In deducting expenses for repairs on farm property the amount deducted must not exceed the amount actually expended for such repairs during the year for which the return is made. (See page 3, item 6.) The cost of replacing tools or machinery is a deductible ex- pense to the extent that the cost of the new articles does not exceed the value of the old. 11. In calculating losses, only such losses as shall have been actually sustained and the amount of which has been definitely ascertained during the year covered by the return, can be deducted. 12. Persona receiving fees or emoluments for professional or other services, as in the case of physicians or lawyers, should include all actual receipts for services rendered in the year for which the return is made, together with all unpaid accounts, charges for services, or contingent income due for that year, if good and collectible. 13. Debts which were contracted during the year for which return is made, but found in said year to be worthless, mtiy be deducted from gross income for said year, but such debts cannot be regarded as worthless until after legal proceedings to recover the same have proved fruitless, or it clearly appears that the debtor is insolvent. If debts due to the taxpayer and contracted prior to the year for which return is made were included as income in return for year in which said debts were contracted, and such debts shall subsequently prove to be worthless, they may be deducted un- § 80] EETUENS BY riDtlCIARY AGENTS. 325 der the head of losses in the return for the year in which such debts were charged off as worthless. 14. Amounts due or accrued to the individual members of a partnership from the net e.'vrnings of the partnership, whether apportioned and dis- tributed or not, shall be included in the annual return of the individual. 15. United States pensions shall be included as income. 16. Estimated advance in value of real estate is not required to be re- ported as income, unless the increased value is taken up on the books of the individual as an increase of assets. 17. Costs of suits and other legal proceedings arising from ordinary business may be treated as an expense of such business, and may be de- ducted from gross income for the year in which such costs were paid. 18. An unmarried individual or a married individual not living with wife or husband shall be allowed an exemption of $3,000. When husband and wife live together they shall be allowed jointly a. total exemption of only $4,000 on their aggregate income. 19. In computing net income there should be excluded the 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. Foster Income Tax — 13. 326 EETUENS. [§ 81- § 81. Contents of returns of income payable at the source. The act provides: that "all persons, firms, companies, copartnerships, corporations, joint-stock companies or associa- tions, and insurance companies, except as hereinafter provided, in whatever capacity acting, having the control, receipt, dis- posal, or payment of fixed or determinable annual or periodical gains, profits, and income of another person subject to tax, shall in behalf of such person deduct and withhold from the payment an amount equivalent to the normal income tax upon the same and make and render a return, as aforesaid, but sep- arate and distinct, of the portion of the income of each person from which the normal tax has been thus withheld, and con- taining also the name and address of such person or stating that the name and address or the address, as the case may be, are unknown." * The act further provides: "In all cases where the income tax of a person is withheld and deducted and paid or to be paid at the source, as aforesaid, such person shall not receive the benefit of the deduction and exemption allowed in paragraph C of this section except by an application for refund of the tax unless he shall, not less than thirty days prior to the day on which the return of his income is due, file with the person who is required to withhold and pay tax for him, a signed notice in writing claiming the benefit of such exemption and thereupon no tax shall be withheld upon the amount of such exemption: Provided, That if any person for the purpose of obtaining any allowance or reduction by virtue of a claim for such exemption, either for himself or for any other person, knowingly makes any false statement or false or fraudulent representation, he shall be liable to a penalty of $300 ; nor shall any person under the foregoing conditions be allowed the benefit of any deduction provided for in subsection B of this section unless he shall, not less than thirty days prior to the day on which the return of his income is due, either file with the person who is required to withhold and pay tax for him a true and correct return of his annual gains, profits, and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf § 81. lAct of Oct. 3, 1913, D. § 81] COITTENTS OF BETUEJSTS PAYABLE AT SOURCE, 327 by the person required to withhold and pay the tax, or like- wise make application for deductions to the collector of the dis- trict in which return is made or to be made for him : Provided further. That if such person is a minor or an insane person, or is absent from the United States, or is unable owing to serious illness to make the return and application above provided for, the return and application may be made for him or her by the person required to withhold and pay the tax, he making oath under the penalties of this Act that he has sufficient knowledge of the affairs and property of his beneficiary to enable him to make a full and complete return for him or her, and that the return and application made by him are full and complete." * According to the Treasury Regulations: "~Nov shall any person under the foregoing conditions be allowed the benefit of any deduction provided for in sub- section B (see art. 6, 1 to 6) unless he shall, not less than 30 days prior to the day on which the return of his income is due, either file with the person who is required to withhold and pay tax for him a true and correct return (on Form 1008) of his annual gains, profits, and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf by the person required to withhold and pay the tax and the debtor or withholding agent will only withhold the tax on the payments made in excess of the deductions claimed on said form. Or such person may likewise make application for de- ductions to the collector of the district in which return is made or to be made for him. "If such person is a minor or an insane person, or is absent from the United States, or is unable owing to serious illness to make the return and application above provided for, the return and application may be made for him or her by the person required to withhold and pay the tax, he making oath on certificate (Form 1009) under the penalties of this act that he has sufficient knowledge of the affairs and property of his beneficiary to enable him to make a full and complete return for him or her, and that the return and application made by him are full and complete." * iliid. E. STr. Eeg. 33 (6). 328 EETUENS. [§ 81 FORM 1008. UNITED STATES INTERNAL REVENUE. FORM OF RETURN FOR MAKING APPLICATION FOR DEDUCTIONS, As provided by Paragraphs B and E, Section 2 of the Federal Income-Tax Law of October 3, 1913. To (Name of withholding agent) ( Street and number ) ( Town or city ) (State) I hereby solemnly declare that the following is a true and correct return of my gains, profits, and income from all other sources for the calendar year ended December 31, 191 (for the year 1913 the period to be covered is only for ten months, from March 1 to December 31), and a true and correct return of deductions asked for under paragraph B of section 2 of the act of October 3, 1913, and I hereby claim deductions as shown below. Amount of gains, profits, interest, rents, royalties, profits from copartnerships, and income from all other sources whatsoever DEDUCTIONS The amount of necessary ex- penses actually paid in carry- ing on business, except business expenses of partner- ships, and not including per- sonal, living, or family expenses 2. All interest paid within the year on personal indebted- ness of taxpayer 3. All national. State, county, school, and municipal taxes paid within the year (not including those assessed against local benefits) 4. Losses actually sustained dur- ing the year incurred in trade or arising from fires, storms, or shipwreck and not com- pensated for by insurance or otherwise § 81] CONTENTS OF EETUENS PAYABLE AT SOUECE. 329 6. Debts due which have been actually ascertained to be worthless and charged off within the year 6. Amount representing a reason- able allowance for the ex- haustion, 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 cent of the gross value of the output for the year for which the computation is made, but not including the expense of re- storing property or making good the exhaustion thereof, for which an allowance is or has been made The amount received as divi- dends upon the stock of from the net earnings of any cor- poration, joint-stock com- pany, association, or insur- ance company which is tax- able upon its net income . . . 8. The amount of income, the tax upon which has been paid or withheld for payment at the source of income Total deductions (Signed) Date: 191 Address Note. — Money or other things of value, disposed of by gift, donation, or endowment, shall not be deducted or be made the basis for a deduction from the income of persons or corporations in their tax returns under the income-tax law. "Any such person, firm, or organization other than the dehtor who has withheld said tax, shall file with the collector of inter- 830 EETUENS. [§ 81 nal revenue for his, her, or its district, a certificate (Form 1006) showing from whom and in what amount the tax has been so withheld. FORM 1006. Form of Certificate to he filed by persons, firms, or organisations required to withhold and pay said taa other tham the Dehtor at the source. To : , Collector of Internal Revenue, (Name of collector of internal revenue.) ( Give address and designate district. ) I, (Name.) (Official title, if any. ) of the , ( Person, firm, or organization. ) ( Capacity in which acting. ) of , do solemnly declare that I (we) ( Post-office address. ) received of $ , same being ( Name from whom received. ) income derived from ( State source, whether rents, salary, or other sources. ) belonging to , ( Give name of person to whom income is due. ) ( Address. ) and that the tax thereon amounting to $ , to which said person is subject, has been withheld at the source of said income by (Name of person withholding.) (Post-office address.) (Signed) Address ( Street and number. ) ( City and State. ) Date: , 191... FORM 1009. Form of oath required of a withholding agent when acting for another in filing return and making application for deductions allowable under paragraph B, as provided in paragraph E, section 2, of the Federal income-taai law of Octoier 3, 1913. I hereby swear (or affirm) that I have sufficient knowledge of the affairs and property of to enable me to (Naming person and address for whom acting.) make a full and complete return for , and that the return (Naming person.) of income and application for deductions made by me are true and accurate. (Signed) Address ( Street and number. ) ( City and State. ) Date: , 191—. Signed and sworn to before , 191 — . :§ 81] CONTENTS OP EETUENS PAYABLE AT SOTJECE. 331 "When, however, claims for exemption and deductions as above described 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, Re- vised Statutes, said claims to be made either by the withhold- ing agent against whom the assessment was made, or by the person on account of whom such taxes were withheld. "Claims for abatement of taxes erroneously assessed, or which are excessive in amount, may, prior to collection thereof, be filed under the provisions of said section 3220, Revised Stat- utes, (U. S. Comp. Stat. 1901, 2086,) either by the withholding agent against whom the assessment was made, or by the persons on account of whom such taxes were withheld. "In the monthly list returns as now prescribed a space is provided to show the amount of taxes which the withholding agent may remit to the collector when such returns are filed. The withholding agents will not, however, forward to the col- lector amounts withheld by him until notices of assessment are received from the collector. "Claims for exemption and deductions may be filed with the withholding agent and claims for deductions may be filed with the collector, not later than 30 days prior to March 1. "In cases where claims for deductions are filed with the col- lector within the time prescribed, the collector will immediately furnish the withholding agent (whose name and address must be shown on Form 1008) with a statement of the amount of deductions claimed, and said withholding agent shall not with- hold and pay the normal tax to the extent of the deductions ■claimed as per said list. "Withholding agents should not file their annual returns until after the expiration of the time allowed persons to file claims for exemptions and deductions and if claims for deduc- tions are filed with the collector in the required time, yet not in sufficient time to have the adjustment made by the with- holding agent, the collector will make the adjustment on the withholding agent's return and in reporting such withholding agent for assessment will make allowance for the amount of such deductions claimed. ISTotice of such adjustment, however, must be furnished the withholding agent.* 332 EETTJENS. [§81 "The normal tax of 1 per cent shall be deducted and with- held at the source^ and payment made to the collector of inter- nal revenue as provided in the law, by the debtor, or his, her, or its duly appointed agent authorized to make such deduction and payment. "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 with- hold the normal tax of 1 per cent thereon, provided that any such person, firm, or organization other than the debtor who has withheld said tax, shall file with the collector of internal revenue for his, her, or its district, a certificate (Form 100) showing from whom and in what amount the tax has been with- held." * The Treasury Regulations further provide: "Withholding agents are required to file in duplicate a month- ly list return (Form 1012) giving a list of all coupon or interest payments made on which the normal tax of 1 per cent was de- ducted and withheld from interest payments made upon bonds or other similar obligations, and shall show the name and ad- dress in full of the owners of the bonds, amount of the income, amount of exemption claimed, amount of income on which with- holding agent is liable for tax, and the amount of tax withheld. "Forms 1012a, 1012b, and 1012c, are to be used where Form 1012 does not afford sufiicient space in which to enter all items. "Form 1012d, when necessary to be used, shall be made in duplicate and shall be a summary of the monthly list return, Form 1012, as made in detail by the withholding agent, and the said summary and lists thereto attached when properly filled in and the summary signed and sworn to shall constitute the complete monthly list return of the withholding agent mak- ing same as fully as if each list attached to the summary was signed and sworn to separately. "An annual list return (Form 1013) in duplicate is also required to be made by debtors or withholding agents of the normal tax of 1 per cent withheld from interest payments made upon bonds or other similar obligations, and it shall be filed on or before March 1 of each calendar year." * 6Tr. E«g. 34. «Tr. Reg. 50. § 81] COBTTENTS OF EETUENS PAYABLE AT SOTJKCE. 333 FORM 1012. UNITED STATES INTERNAL REVENUE. MONTHLY LIST RETURN OF AMOUNT OF NORMAL INCOME TAX WITHHELD AT THE SOURCE. Fibd by (Name of debtor organization.) To be made in duplicate to the Collector of Internal Revenue for the District in which the withholding agent is located, on or before the 20th day of each month, showing the names and addresses of persons who have received payments of interest upon bonds and mortgages, or deeds of trust, or other similar obligations of corporations, joint-stock companies or associations, and insurance companies, on which the normal tax of 1 per cent has been deducted and withheld during the preceding month. I (we) , of , the (Name.) ( State address in full. ) duly authorized withholding agent of , (State name of debtor organization.) located at , do solemnly swear ( or affirm ) (Address in full.) that the following is a true and complete return of all coupon and interest payments as above described, made by said organization and from which the normal tax of 1 per cent was deducted and withheld, at the time of payment, or for which it is liable as withholding agent, during the month of ,191 , on the (Describe the particular issue of bonds.) Bonds (or other similar obligations) of the , ( Name of debtor organization. ) and there are herewith inclosed all certificates of ownership which were presented with said coupons or orders for registered interest covering the interest maturing on $ , of the bonds described. Name. Address in full. o 1 •s -»^ a s i Amount of Exemption Claimed. Amount of Income on Which With- holding Agent Is Liable for Tax. 1^ $ $ $ $ 334 EETUENS. [§ 81 Name. Address in full. 1 "S O s < Amount ot Exemption Claimed. Amount of Income on Which With- holding Agent Is Liable for Tax. 1^ $ $ $• $ 1 1 1 1 1 1 1 1 Totals for month $ $ $ $ Amount of ta IX remitted herewit h (if any ) to Colle ctor .... $ To Collector. District of Sworn to and subscribed before me this day of ,191 (Address.) Signed : ( Capacity in which acting.) Note A. — Withholding agents may, if they so desire, pay at the time this list is filed, to the Collector of Internal Revenue with whom the list is filed, the amount of tax withheld during the month for which the list is made. Note B. 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 ■'vill enter the name, address, and the number of the substitute certificate of the col- lecting agent in lieu of the name and address of the owner of the bonds. § 81] CONTENTS OF EETUENS PAYABLE AT SOUECE. 335 FORM 1012A. UNITED STATES INTERNAL REVENUE. MONTHLY LIST RETURN OF AMOUNT OF NORMAL INCOME TAX WITHHELD AT THE SOURCE. Filed by (Name of debtor organization.) To be made in duplicate to tbe Collector of Internal Revenue for the District in which the withholding agent is located, on or before the 20th day of each month, showing the names and addresses of persons who have received payments of interest upon bonds and mortgages, or deeds of trust, or other similar obligations of corporations, joint-stock companies or associations, and insurance companies, on which the normal tax of 1 per cent has been deducted and withheld during the preceding month. I (we) , of , the ( Name. ) ( State address in full. ) duly authorized withholding agent of , ( State name of debtor organization. ) located at , do solemnly swear ( or affirm ) (Address in full.) that the following is a true and complete return of all coupon and interest payments as above described, made by said organization and from which the normal tax of 1 per cent was deducted and withheld, at the time of payment, or for which it is liable as withholding agent, during the month of ,191 , on the (Describe the particular issue of bonds.) Bonds (or other similar obligations) of the , (Name of debtor organization.) and there are herewith inclosed all certificates of ownership which were presented with said coupons or orders for registered interest covering the interest maturing on $ , of the bonds described. Name. Address in full. c pi o a .fJ '4j T3 g S 6 I i " <1 o.a 1-5 aS 336 EETUENS. [§ 81 Name. Address in full. O ■*^ 1 < Amount of Exemption Claimed. Amount of Income on Which With- holding Agent Is Liable for Tax. 1-3 i $ $ $ $ . . . Totals carried forward § 81] CONTENTS OF EETTJENS PAYABLE AT SOUECE. 337 FORM 1012B. UNITED STATES INTERNAL REVENUE. V come ith- t Is g ■ s ^^i^ H Name. Address in full. 1 "S »g . ■°-§'^o °^ :l ount mpt: imed ; o > ;S ^ 11 25 ^ l§l;3 ^^ Totals brought forward $ $ a $ Foster Income Tax. — 22. ?• $ $ $ 338 EETUENS. [§ 81 FORM 1012C. tJNITED STATES INTERNAL REVENUE. t a.. 8 Inco With ent I Tax. 1 Name. Address in full. "S °§ . •s^^s -s^ .«J ■** '^T3 -►»•" .„■" ■*^ "^ a C O.S = •« ^OJ §5 § §^11 a < a S.2 lgll . 4-i Totals brought forward $ a $ $ Totals carried forward $ $ $ $ Amount of ta X remitted herewit 1 (if any) to Collec tor $ To Sworn to and subscribed " Collector. before me this District of day of ,191 (Address.) Signed: (Capacity in which acting. ) Note A. — Withholding agents may, if they so desire, pay at the time this list is filed, to the Collector of Internal Revenue with whom the list is filed, the amount of tax withheld during the inonth for which the list is made. Note B. — All substitute certificates of collecting agents, authorized by regulations, that are received by debtors or withholding agents will hie considered the same as certificates of owners, and in entering same in making Monthly List Returns, debtors or withholding agents will enter the name, address, and the number of the substitute certificate of the collecting agent in lieu of the name and address of the owner of the bonds. § 81] CONTENTS OF EETUENS PAYABLE AT SOUEOE. 339 FORM 1012D. UNITED STATES INTERNAL REVENUE. SUMMARY OF MONTHLY LIST RETURN OF AMOUNT OF NORMAL INCOME TAX WITHHELD AT THE SOURCE. Filed by ' (Name of debtor organization.) To, be made in duplicate to the Collector of Internal Revenue for the District in which the withholding agent ia located, on or before the 20th day of each month, showing the name and addresses of persons who have received payments of interest upon bonds and mortgages, or deeds of trust, or other similar obligations of corporations, joint-stock companies or associations, and insurance companies, on which the normal tax of 1 per cent has been deducted and withheld during the preceding month. I (we) , of , the ( Name. ) ( State address in full. ) duly authorized withholding agent of , ( State name of debtor organization. ) located at , do solemnly swear (or affirm) (Address in full.) that the following is a true and complete return of all coupon and interest payments as above described, made by said organization and ,from which the normal tax of 1 per cent was deducted and withheld, at the time of payment, or for which it is liable as withholding agent, during the month of , 191 . . on bonds ( or other similar obligations j of the , as fully set forth in detail, on (Name of debtor organization.) lists attached hereto, said lists. Form 1012, and this Summary, consti- tuting the Monthly List Retubn of Noemal Income Tax Withheld at THE SoUBCE as required by the regulations; and that there are herewith in- closed all certificates of ownership which were presented with said coupons or orders for registered interest covering the interest maturing on $ of the bonds described, and that said withholding agent has paid no coupons or orders for registered interest not accompanied by the certificates of ownership as required by Treasury Regulations. Description of Obligation. a o 8 s ^ ^ suo o o g H §1 si 340 EETUENS, [§ 81 Description of Obligation. 1 u 1 a ,.2 s Ineo With ent Tax. "S a So." 13^ SPm 1 ll-§ o!>S J5 1 as.2 lg|2 o -^ $ $ $ $ . Totals for month $ $ $ $ To Collector. District of Sworn to and subscribed " before me this day of 191. (Address.) Signed : (Capacity in which acting.) Note A. — Withholding agents may, if they so desire, pay at the time this list is filed, to the Collector of Internal Revenue with whom the list is filed, the amount of tax withheld during the month for which the list is made. Note B. — All substitute certificates of collecting agents, authorized by regulations, that are received by debtors or withholding agents, will be considered the same as certilicates of owners, and in entering same in making Monthly List Returns, debtors or withholding agents will enter the name, address, and the number of the substitute certificate of the collecting agent in lieu of the name and address of the owner of the bonds. § 81] CONTENTS OF EETUENS PAYABLE AT SOXJECE. 341 "The monthly list return in the form as required herein shall constitute a part of the annual list return to be made by debtors or withholding agents, and the debtor or withholding agent will not be required, in making an annual list return of the tax withheld from income derived from interest upon bonds and mortgages or deeds of trust, or other similar obliga- tions of corporations, joint-stock companies or associations and insurance companies, to again make an itemized list of the amount of tax withheld from each person, but will give in the annual list return the totals of the monthly list return for each month of the year for which annual list return is made. "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 with- holding 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. Until the further ruling on this subject by this department, no list return is required to be made of certificates of ownership accompanying coupons or registered interest orders filed with a debtor or withholding agent when the oivners of the bonds are not subject to having the normal tax withheld at the source, but all such certificates of ownership shall be forwarded by the debtor or withholding agent to the collector of internal revenue for the district, on or before the 20th day of the month succeeding that in which said certificates of ownership were received." " TTr. Reg. 51. 342 KETTJENS. (Form 1013.) [§ 81 United States Internal Revenue. — Annual list return of amount of normal income taw withheld at the source. From interest upon bonds and mortgages or deeds of trust or other similar obligations of corporations, joint-stock companies, or associations, and insurance companies. Filed by (Kame of debtor organization.) To be made in duplicate to the collector of internal revenue for the dis- trict in which the withholding agent is located on or before March 1, show- ing the totals of each monthly return on Form 1012 and their aggregate totals for the preceding calendar year. I (we) of (Name.) (State address in full.) the duly authorized withholding agent of (State name of debtor organization.) located at (State address in full.) do solemnly swear (or affirm) that the following is a true and complete return of the monthly totals of all coupon and interest payments made and normal taxes withheld therefrom by said organization or for which it is liable as withholding agent as reported on Form 1012 and their aggre- gate totals for the year ended December 31, 191 . . . . i Month Amount of income Amount of ex- emption claimed Amount of income on which with- holding agent is liable for tax Amount of tax withheld Amount of tax remitted to collector Balance of tax due $ $ ;. $ $ $ $ April May Julv December Aggregate total for year To (Collector.) district of , Sworn to and subscribed before me this day of 191 — . . . Signed: (Address.) icity in which acting.) § 81] CONTENTS OF EETUENS PAYABLE AT SOUKCE. 343 "Withholding agents who are required to make monthly re- turns will, on or before the 20th day of each month, file with the collector for their respective districts such returns for the preceding month, accompanied by all certificates relating there- to, and there shall also accompany said returns all certificates claiming exemptions and deductions which are not required to be listed thereon ; and on or before the 1st day of March in each year said withholding agents shall likewise file their anniuil returns for the preceding calendar year. Annual returns (Forms 1041 and 1042) must be accompanied by all certificates claiming exemptions and deductions relating thereto." ' Although the forms for the monthly list returns contain jurats, the Treasury Department has waived the requirement of an oath, since they are parts of the annual list return which must be verified and the jurat thereto covers them also.' "Withholding agents shall make an annual list return (Form 1042), in duplicate, to the collector of internal revenue for the district in which the withholding agent resides or has his prin- cipal place of business on or before the 1st day of March in each year, showing the names and addresses of persons who have received incomes in excess of $3,000, on which the normal tax of 1 per cent has been deducted and withheld during the preced- ing year. This return must be accompanied by all forms pre- sented claiming exemptions and deductions." *' 8Tr. Reg. 35. MTr. Reg. 69. 9 T. D. 1997. 344 EETUENS. [§ 81 FORM 1042. UNITED STATES INTERNAL REVENUE. ANNUAL LIST RETURN OF AMOUNT OF NORMAL INCOME TAX WITHHELD AT THE SOURCE on salaries, wages, rent, interest, or other fixed and determinable annual gains, profits, and income Exceeding $3,000 for the taxable year. The income to be made the subject of this return does not include divi- dends on capital stock or net earnings of corporations. Joint-stock com- panies, etc., subject to like tax or income derived from interest upon bonds or mortgages, or deeds of trust, or other similar obligations of corpora- tions, joint-stock companies, etc., or from interest upon bonds, mortgages, or dividends of foreign corporations. Filed by , for the year 191 (Name of debtor or withholding agent.) To be made in duplicate to the Collector of Internal Revenue for the District in which the debtor or his duly appointed withholding agent, as the case may be, is located, on or before the first day of March, showing the names and addresses of persons who have received salaries, wages, rent, etc., as above described, in excess of $3,000, on which the normal tax of 1 per cent has been deducted and withheld during the preceding calen- dai: year. I (we) , of ( Name. ) ( Address in full. ) the of ( State official title. ) ( Debtor or withholding agent. ) located at do solemnly swear ( or affirm) (Address in full.) that the following is a true and complete return of all salaries, wages, rent, and other fixed and determinable annual gains, profits, and income in excess of $3,000 as above described, which were paid (or were payable) to each of the persons listed herein, and on which the normal tax of 1 per cent was deducted and withheld during the year stated, and there are herewith inclosed all certificates claiming exemptions and deductions with respect to said income. Name. Address in full. Character of Income. ( State whether Rent, Wages, etc.) 6 i M O O 1 Amount of Exemption Claimed. Amount of Income on Which With- holding Agent Is Liable for Tax. •a 11 $ $ $ 81] COISTTENTS OF EETUENS PAYABLE AT SOUECE. 345 Name. Address in full. S a 5^ .a bo PI o s <1 ■g'^S-d 1J "3 i ■ " O rj li Totals for calendar year Amount of tax remitted herewith (if any) to Collector . . To Sworn to and subscribed Collector. before me this District of day of ,191 ( Address. ) Signed: (Capacity in which acting. ) Note A. — ^Withholding agents may, if they so desire, pay at the time this list is filed, to the Collector of Internal Revenue with whom the list is filed, the amount of tax withheld during the year for which the list is made. 346 EETUENS. [§ 81 "Withholding agents receiving coupons or interest orders not accompanied by certificates of owners are required to file monthly and annual list returns in duplicate. "The required monthly list return (Form 1044) shall give a list of all coupon or interest payments made on which the normal tax of 1 per cent, was deducted and withheld and shall show the name and address in full of the owner of, or the per- son presenting such coupons or interest orders, if the owner is not known, amount of the income subject to tax and the amount of tax withheld. "An annual list return (Form 1044a) is also required to be made by such withholding agents, showing the amount of tax withheld during the preceding year on income of this charac- ter. This return must be filed on or before the 1st day of March of each calendar year. "The monthly list returns in the form as required herein shall constitute a part of the annual list return to be made, and the withholding agent will not be required, in making an annual list return of the tax thus withheld, to again make an itemized list of the amount of tax withheld from each person, but will give in the annual list return the totals of the monthly list returns for the year for which annual list return is made." ** "Tr. Reg. 53. 81] CONTENTS or EETUENS PAYABLE AT SOUEOE. 347 (REVISED FORM 1044.) UNITED STATES INTERNAL REVENUE. MONTHLY LIST RETURN OF AMOUNT OF NORMAL INCOME TAX WITHHELD BY FIRST BANK OR COLLECTING AGENCY Receiving Coupons and Interest Orders Not Accompanied by Certificates of Owners. Filed by ( Name of bank or collecting agency. ) To be made in duplicate to the Collector of Internal Revenue for the District in which the collecting agency is located, on or before the 20th day of each month showing the names and addresses of persons who have received payments of interest upon bonds and mortgages, or deeds of trust, or other similar obligations of corporations, joint-stock companies or asso- ciations, and insurance companies, on which the normal tax of 1 per cent has been deducted and withheld during the preceding month, the coupons for said payments having been presented without certificates of owners. I (we) , of the ( Name. ) ( State address in full. ) of , located at ( Official position. ) ( Name of bank or collecting agency. ) do solemnly swear (or affirm) (Address in full.) that the following is a true and complete return of all coupon and interest orders purchased or accepted for collection as above described during the month of , 191 .. , and the said bank or collecting agency, having acknowledged its responsibility of withholding therefrom the normal tax of 1 per cent, has deducted and withheld the tax as listed below, in accordance with the regulations of the Treasury Department. Party presenting coupons. Name. Address. -a § ■Si S &i so a » 3 " S-2 3.S Totals for month $ $ To Collector. District of . . . . , Sworn to and subscribed " before me this day of , 191.., (Address.) Signed : (Capacity in which acting. ) 348 EETUEWS, [§ 81 FORM 1044A. UNITED STATES INTERNAL REVENUE. ANNUAL LIST RETURN of amount of normal income tax withheld by first bank or collecting agency from payments of interest upon bonds and mortgages, or deeds of trust, or other similar obligations of corporations, joint-stock companies or associations, and insurance companies where coupon and interest orders loere not accompanied by certificates of owners. Filed by ( Name of bank or collecting agency. ) (This return is to be made in duplicate to the Collector of Internal Revenue for the district in which the bank or collecting agency is located on or before March 1, showing the totals of each monthly return on Form 1044 and their aggregate totals, for the preceding calendar year.) I (we) , of , the ( Name. ) ( State address in f ull. ) of the above-named bank or collecting agency, ( Official position. ) located at do solemnly swear (or affirm) (Address in full.) that the following is a true and complete return of the monthly totals of all coupon and interest payments made and normal taxes withheld there- from by said organizations, or for which it is liable as withholding agent, as reported on Form 1044, and their aggregate totals for the year 191 ; and the Monthly List Returns, Form 1044, the totals of which are listed below, constitute a part of this return. January February March April May June July August $.. ... ,.. $.. ... ... $.. § 81] CONTENTS OF EETUKJSTS PAYABLE AT SOURCE. 349 To Collector. District of .... Sworn to and subscribed " before me this day of ,191 ( Address. ) Signed : (Capacity in which acting. ) Conceming returns by licensees who collect foreign income, the regulations provide: "Such licensee shall obtain the names and addresses of the persons from whom such items are received and shall prepare a list of same in duplicate (on Form 1043) and file it with the collectoi* of internal revenue for his district not later than the 20th day of the month next succeeding the month in which such items were paid. The list shall be dated, and shall contain the names and addresses of the taxable persons, the character and amount of income, amount of exemption claimed, amount of income on which withholding agent is liable for tax, and the amount of tax withheld. In addition to the monthly lists the licensee will, on or before the 1st day of March in each year, file with the collector in duplicate a return (Form 1043a), show- ing the amount of income paid and the amount of tax withheld 350 eetue:sis. [§ 81 by him during the preceding year and such other information as the form prescribes. "The monthly list return in the form as required herein shall constitute a part of the annual list return to be made by the licensee as withholding agent, and he will not be required, in making an annual list return of the tax withheld from income described in article 54, to again make an itemized list of the amount of tax withheld from each person, but will give in the annual list return the totals of the monthly list return for each month of the year for which annual list return is made." " (FORM 1043.) UNITED STATES INTERNAL REVENUE. MONTHLY LIST RETURN OF AMOUNT OF NORMAL INCOME TAX WITHHELD ON FOREIGN INCOME By Licensed Banks or Collecting Agencies. Filed by License No (Name of bank or collecting agency.) To be made in duplicate to the Collector of Internal Revenue for the District in which the licensee is located, on or before the 20th day of each month, showing the names and addresses of persons who have re- ceived payments from coupons, checks, or bills of exchange representing interest upon bonds Issued in foreign countries and upon foreign mort- gages or like obligations ( not payable in the United States ) , or dividends upon the stock or interest upon the obligations of foreign corporations, associations, or insurance companies engaged in business in foreign coun- tries, on which the normal tax of 1 per cent, has been deducted and with- held during the preceding month. I (we) , of , the ( Name. ) ( State address in full. ) of the above-named bank or collectlns (Official position.) agency located at do solemnly swear ( or (Address in full.) affirm) that the following is a true and complete return of all payments as above described, made by said bank or collecting agency, and from which the normal tax of 1 per cent, was deducted and withheld at the time of 12 Tr. Reg. 59. § 81] CONTENTS OF KETUE.NS PAYABLE AT SOUECE. 351 payment, or for which it is liable as withholding agent, during the month of , 191. ., and there are herewith inclosed all certificates claiming exemption which were presented with said coupons, checks, etc. Name. Address in full. O U U ^ .g .o to" » u V != CW O h-( ^^ 3 o a °g. of Income 3h With- Agent Is or Tax. 1 M-l ■♦^ '^ G cua> C^ M-. c S 3 pS Amou on W holdin Liable §3 a S.3 B.'S a Address in ^ d 8 a Incc With ent I Tax. 1^ Name. full. cter Note ?i i< § Si § gas 3>.S " a I§l3 1^ Totals for month Amount of tax remitted herewith (if any) to Collector 352 EETUENS. [§ 81 To Sworn to and subscribed {Collector.) before me this District of day of , 191.., (Address.) Signed : (Capacity in which acting. ) Note A. — Withholding agents may, if they so desire, pay at the time this list is filed, to the Collector of Internal Revenue with whom the list ia filed, the amount of tax withheld during the month for which the list is made. Note B. — 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, address, and the number of the substitute certificate of the collecting agent in lieu of the name and address of the owner of the bonds. Note C. — Enter "Int. on Bonds," "Int. on Mortg.," "Dividends," etc., as the case may be. FORM 1043A. UNITED STATES INTERNAL REVENUE, License No ANNUAL LIST RETURN OP AMOUNT OF NORMAL INCOME TAX WITHHELD ON FOREIGN INCOME BY LICENSED BANKS OK COLLECTING AGENCIES. Filed by , for the year 191 ( Name of bank or collecting agency. ) (To be made in duplicate to the Collector of Internal Revenue for the district in which the withholding agent is located, on or before March 1, showing the totals of each monthly return on Form 1043, and their aggre- gate totals for the preceding calendar year.) I (we) , of the ( Name. ) ( State address in full. ) of the above-named bank or collecting (Official position.) agency, located at , do solemnly swear (or afiirm) ( Address in full. ) that the following is a true and complete return of the monthly totals of all payments made representing interest upon bonds issued in foreign coun- tries and upon foreign mortgages or like obligations (not payable in the United States ) , or dividends upon the stock or interest upon the obliga- tions of foreign corporations, associations, or insurance companies engaged in business in foreign countries, and normal taxes withheld therefrom by said organization, or for which it is liable as withholding agent, as reported on Form 1043, and their aggregate totals for the year stated above ; and the Monthly List Returns, Form 1043, the totals of which are listed below, constitute a part of this return. § 81] CONTBl^TS OF EETTJRNS PAYABLE AT SOUKCE. 353 Month. o e G CI, OJ ° j3 J 5£^ O r1 r^ an >— « ED O MQ January « $ $ « $ $ March April Mav June Month. ° o . -*J '^ T3 g a.a a5^^ CL- Fi to o ,a a 1— 1 -t-> H bt o ^< o a ^ ^ a I- O < o F-l H ^^ a s 'o ''^'^ 3. 1913.) date filed. COBPOBATIONS. (Other than Insurance Companies.) RETURN OP NET INCOME for the ^^I^Ffg^li \ year ended , 191 by - (Name of corporation, joint-stock company, or association.) (Kind of business.) and located at , , (Street and number.) (City or town.) (State.) (The address given must be that of the principal place of business of the corporation.) If no figures are to be extended opposite any item in the return the word "None" should be inserted. 1. Total amount of paid-up capital stock outstanding at the close of the year or the capital employed in the business 2. Total amount of bonded and other indebtedness outstanding at the close of the year exclusive of Indebtedness wholly secured by collateral, the subject of sale In the ordinary business of the corporation 3. Gross Income: (a) From operations (b) From rentals (c) From Interest — (d) From dividends re ceived (e) From other sources Total gross income Total deductions — 8. Net Income Dollars. | ^ Deductions. 4. (a) Expenses, general (b) Rentals (a) Losses (b) Depreciation and de- pletion 6. (a) Interest actually paid (b) Interest paid on de- posits (banks) 7. (a) Taxes, Federal State and Dollars. | ( (b) Taxes, foreign Total Deductions ]$- 82] CONTEJSTTS OF EETUEKS BY OOEPOEATION. 362ni We, officers o£ the above-named corporation whose return of net income is herein set forth, being severally duly sworn, each for himself, deposes and says that the items entered in the foregoing report and In the supplementary statement and in any additional list or lists attached to or accompanying this return, are, to his best knowledge and belief and from such information as he has been able to obtain, true and correct In each and every particular. Sworn to and subscribed before me SeTil of officer taking affidavit. this day of , 191 President. (Official capacity. Treasurer. GENERAL INSTRUCTIONS. Time of filing returns. — Returns made on the basis of a calendar year must be filed with the Collector of Internal Revenue of the district In which is lo- cated the principal place of business of the corporation, ou or before March 1; if made ou the basis of a FISCAL Year • they must be filed within 60 daj s after the close of such year. Principal place of business.— As used in the income tax law the priucipiil place of business is the place or office in which are kept the books of account, papers, and other data from whicli the return is prepared. * Fiscal year.— Corporations desiring to make returns of annual net income on the basis of a fiscal year other than the calendar year, must, not less than 30 days prior to March 1, file with the collector a notice in writing designating the last day of some month as the close of such fiscal year. The notice must be filed not later than January 29 of the year in which the fiscal period of 12' mouths closes. A return for that portion of the calendar year preceding the first full fiscal year must be filed on or before March 1 of the next calendar year, and the return for the fiscal year (12 months) must be filed on or before the last day of the 60-day period next following the close of the fiscal year. Example: A corporation desiring to designate .June 30, 1915, as the close of its fiscal year, must file notice with the collector not later than .January 29. 1915, and its return for its first fiscal year (July 1, 1914, to June 30, 1915) must be filed on or before August 29, 1915, and its return for the period January 1 1o Juue 30, 1914, on or before March 1, 1915. Extension of time. — In the case of neglect to file the return within the prp- scribed time, the collector is authorized to grant an extension for the fllin'5 period not exceeding 30 days, provided such neglect was due to abspnce or sickness of an officer reciuired to sign the return, and provided an application in writing is made prior to the expiration of the period for which extension may be granted. Signatures and veriiicatioii. — Returns must be signed and verified by two officers of the corporation, that is, by the president, vice president, or other principal officer, and the treasurer or other financial officer, and must be sworn to before an officer authorized to administer oaths and the seal of the attestlns' officer, if he is required to have a seal, must be impressed on the return in the space provided for that purpose. Subsidiary companies. — The corporation making this return should attach hereto a list of all its subsidiary companies, if any, with the location of the principal place of business of each. Foreign corporations. — Foreign corporations subject to the law are rerinired to make returns to the collector of the district in which the principal place of business in the United States is located. The gross income to be returned is- tbat received from business transacted and capital invested in the United Stales. The losses deductible are those relating to the business done in this country and not compensated by insurance or otherwise. The amount of interest de- ductible is the amount actually paid within the year on its bonded or othei indebtedness to an amount of such bonded or other indebtedness not excopd- ing the proportion of one-half of the sum of the interest-bearing indebtedne.ss outstanding at the close of the year plus the paid-up capital stock then out- standing (or if no capital stock the proportion of the capital employed in business) which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States. Such corporations are not permitted to deduct foreign taxes paid, but may deduct from gross income all domestic taxes paid within the year. Penalties. — Corporations refusing or neglecting to file returns within the time prescribed by law or rendering false or fraudulent returns shall be liable to a penalty of not exceeding $10,000, and an additional tax of 50 per cent in case of neglect to file the return within the time prescribed by law. and 100 per cent in the case of a false or fraudulent return shall be added to the assess- ment. 362ll EETUENS. [§ 82 Any officer of any corporation required by law to make, render, sign, or verify any return, wlio makes any false or fraudulent return or statement with intent to defeat or evade the assessment required to be made shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000 or be im- prisoned not exceeding one year, or both, at the discretion of the court, witli the costs of proseeutioo. SUPPIiEMBNTABY STATEMENT. The following Information must be furnished by every corporation, joint- stock company, or association, without which the return will not be accepted as complete. The items herein relate to the items listed above and bear cor- responding numbers. 1. Paid-up Capital Stock : Unissued or treasury stock should not be included in this item, but only such stock as has been actually issued and is outstanding at the close of the year and tor which payment has been received. Where the stock issued is payable in installments or assessments, only so much of it as has been actually paid in upon such installments or assessments should be reported. In case no stock is issued there should be reported the amount of capital actually employed in the business and property of the corporation at the close of the year. (a) Paid-op "comimon stock" (b) Paid-up "preferred stock" Total paid-np stock — or (c) Capital enstployed in business $ Indebtedness : All interest-bearing indebtedness, for the payment of which the corpora- tion or its property is bound, should be reported below. In the case of banking corporations and like financial institutions deposits should not be reported as indebtedness. Indebtedness wholly secured by collateral, the subject of sale in the ordinary business of the corporation should be reported here, but such indebtedness should not be considered in determin- ing the amount of interest deductible under item 6 (a) as interest on such indebtedness is allowable as a deduction under item i (a) as an expense. 1 Rate of 1 Character of obligation. | interest.! Principal. $ Total indebtednea.s $ 3. Gross Income: All manufacturiug, mercantile, and other corporations which determine their annual gain or loss by inventory are required to state the same In the form indicated below. If the annual Income or loss is determined other- wise, the methods employed must be stated In the space provided. Any appreciation in the value of assets due to appraisal or ad.iustment and taken up on the books should not be reported as income until such appreciation as a result of a complete or closed transaction has been con- verted into cash or its equivalent. The profit or income to be returned in the event of the sale of capital ■assets should be determined upon the basis of the difference between the cost and selling price of such assets. If the assets were acquired prior to January 1, 1909, the profit resulting from their sale may be proratec', in which case the amount apportioned to the years subsequent to January 1, 1909, will be included as income, (a) From Operations: Per inventory — § 82] CONTENTS OF EETUENS BY COEPOEATION. 362o Sales (luring year Stock on hand at close of year Total Overhead charges should not be in- cluded in inventory (see item 4). Putchases during year 1$ Stock on hand at beginning of| year Total — Total gain or loss (II inventory shows loss make entry in red ink or strike out gain.) If inventory is not used, state below method of determining gain or loss. (b) From Rentals: Rentals to be reported as Income will include all payments received in cash or its equivalent as rent on buildings or other property owned by the corporation making the return. (c) From Interest: Interest to be reported as income includes all Interest received on bonds or securities owned by the corporation with the exception of interest on obligations of a State or political subdivision thereof or interest upon the obligations of the United States or its possessions, which latter interest for the purpose of information should be extended I I I I on this line 1$ 1 1 1 (d) From Dividends Received: Dividends received upon the stock of other corporations must be included in the gross income of the corporation receiving the same and are not deduc- tible from gross Income in ascertaining the net income upon which the tax is computed. 362p BETUENS. [§ 82 (e) From Other Sources; All other sources from which Income has been received should be Indi- cated below and the amount received from each such source should be extended in the space provided. $ „ Total — $ DEDUCTIONS. 4. Expenses, General: The items below should only include the ordinary and necessary expenses paid within the year in the maintenance and operation of the business and properties of the corporation, not including Interest payments, which are to be reported under Item 6 (a), except Interest paid on Indebtedness wholly secured by collateral the subject of sale in the ordinary business of the cor- poration, as such Interest may be reported under this item as an expense. All expenses for material, labor, fuel, and other items entering into the cost of the goods produced, sold or inventoried are deductible under this head as expense, provided such items have not been considered in deter- mining the income derived from operations under Item 3 (a). Expenditures for incidental repairs which do not add to the value of the property are deductible as expenses, but expenditures for additions and betterments which add to the value of the property are not deductible under this or any other item of the return. Expenditures for renewals and replace- ments are not, as such, deductible as expenses, but should be charged to depreciation reserve account. Salaries of officers in order to constitute an allowable deduction must be reasonable compensation for the services rendered and must not comprehend any compensation for capital invested in the business. Eentals should be reported separately uuder Item 4 (b). (a) 1. Labor, -wages, commissions, etc- 3. Fuel, light, power etc 3. Repairs ^ 4. Interest on indebtedness wholly secured by collateral the subject of sale, etc— 5. Salaries of officers 6. Other expenditures Total expenses- 4. (a) 7. Names of officers and employees to whom salaries of $3,IID0 or more were paid during the year and amount paid to each. (If the space below is not adequate, a list marlsed "Item 4 (a)" containing this informa- tion should be attached to this form.) § 82] CONTENTS OF EETUENS BY OORPOEATION. 362q Name. Amount $ Total $ (b) Rentals: This item should include all rentals or other payments required to be made as a condition to the continued use or possession of the property. In cases where interest on a mortgage on property occupied or used by the corporation is paid as a condition to its possession and use, such interest may be included under this Item. 5. (a) Losses: Losses deductible under this item must be distinguished from depre- ciation or allowances for wear and tear, exhaustion, or obsolescence of prop- erty. The losses must be absolute, complete, actually sustained and charged off on the books of the corporation, and if the loss results from the sale of assets acquired prior to January 1, 1909, such loss may be prorated and the- amount apportioned to the years subsequent to January 1, 1909, may be- deducted under this item. Book entries representing a shrinkage in the value of securities are not a loss within the meaning of the law and can not be deducted from gross income either as a loss or as depreciation. Losses compensated by insurance or otherwise are not deductible. Describe character of losses. 1 Date charged off. | Amount charged off. l' k Total — $ How were the deducted losses ascertained aud determined? When were they ascertained to be losses? (b) Depreciation and Depletion: The amount deductible on account of depreciation is an amount whlchi fairly measures the deterioration during the year in the value of the physi- cal property with respect to which it is claimed, and such amount should be- determined upon the basis of the cost of the property and the probable- number of years constituting Its life. Stocks, bonds, and like securities are- not subject to wear and tear, exhaustion, or obsolescence within the meaning of the law, and any shrinkage in their value due to fluctuations in the mar- ket Is not deductible either as depreciation or loss. On what class of property is depreciation claimed? What was its cost? $ At what rate was depreciation com- puted? Depletion. — In computing deplption In the case of natural deposits the rate- should not exceed 5 per cent of the gross value at the mine of the output for the year. 362r EETUENS. [§ 82 state cost of property exclusive of equipment, I Improvement, etc- |J- Amount previously charged off on account of | depletion |$.. Date of purchase of property- (a) Interest Actually Paid : The amount of Interest which may properly be deducted under this Item Is the amount actually accrued and paid within the year on an amount of bonded or other indebtedness not in excess of the paid-up capital stock outstanding at the close of the year plus one-half of the Interest-bearing Indebtedness also then outstanding. Where there is no capital stock the amount of interest deductible is the amount actually paid on an amount of indebtedness not in excess at any time during the year of the capital em- ployed in the business at the close of the year. Interest paid on mortgage indebtedness, assumed or unassumed, on prop- erty to which the corporation has taken or is taking title, or in which it has an equity, or In the acquirement of which the mortgage was consid- ered a part of the purchase price, should be reported under this Item. Interest paid In lieu of rent on a mortgage secured by property which the corporation occupies should be reported under item 4 (b). Interest paid on Indebtedness wholly secured by collateral the subject of sale in the ordinary business of the corporation should be reported under Item i (a) and Item 2. INTEREST PAYMENTS ACTUALLY MADE DURING YEAR. Name of obligation. { Amount of principal. Rate of interest. Amount of interest paid. It $ Total S.— . $ (b) Interest Paid on Deposits (Banks): Interest paid on deposits is a proper deduction from gross income under this item in ease of banks and banking institutions only. 7. (a) Taxes— Federal and State: (b) Taxes— Foreign : Taxes deductible under these items are such taxes actually paid within the year as are Imposed by either the United States or any State or Territory thereof, or by the Government of any foreign country, not including taxes for local benefits, nor taxes paid by corporations pursuant to their covenants on their bonds. A reserve for taxes, as such, is not deductible. Banks paying taxes assessed against their stockholders because of their ownership of the shares of stock Issued by such banks can not deduct the amount so paid in making their return unless specially authorized to do so by the laws of the State in which they do business. Where suflBclent space is not provided for the entry of the information re- quired In the "Supplementary statement," lists containing full Information in the form indicated should be marked in accordance with the particular item and attached to this form. Totals entered m the "Supplementary statement" must agree with entries of corresponding items at the beginning of this form. § 82] CONTENTS OF EETUENS BY OOEPOEATION. 362s The Treasury Department has promulgated the following instructions, which were endorsed upon the forms for the return of corporations except in the case of insurance companies for which special instructions were issued before the revision. New instructions are annexed to the revised forms, ORIGINAL INSTRUCTIONS. Special Notice. —This form, properly filled out and executed, must be in the hands of the collector of internal revenue for the district in which is located the principal business office of the corporation making the return, on or before March 1, in case the return is based on the calendar year, or within 60 days after the expiration of the fiscal year in case the return is made on that basis. For failure to comply with this provision of the law, the amount of the assessment is increased 50 per cent and liability to a specific penalty not exceeding $10,000 is incurred. 1. This return of annual net income should be filed with the Collector of Internal Revenue of the district in which the corporation has its prin- cipal place of business. 2. The principal place of business as used in the act and in these regu- lations is held to mean the place in which the books of account and other data to be used in preparing the return of annual net income are ordina- rily kept. 3. Beturns must be verified by two officers of the corporation; that is, by two individuals, namely, the president, vice president, or other principal officer, aaid treasurer or assistant treasurer, or chief financial officer. 4. The affidavit of verification must be made before a notary public or some other officer qualified to administer oaths, and the seal of the at- testing officer, if such officer is required by law to have a seal, must be impressed on the return in the space reserved for that purpose. 5. The return must be true and accurate in every respect and must disclose all the income arising, accruing, or received from all sources during the year for which the return is made. 6. If the return is based upon the calendar yea/r it should be filed 362t EETUBNS. [§82 with the collector on or before the first day of March next succeedl.ig such calendar year. If it is made on the basis of business transacted during a fiscal year, duly designated in accordance with the law and the regulations, the return must be filed with the collector on or before the last day of the 60-day period next following the date designated as the close of the fiscal yearXt 7. In case of sickness or absence of an officer required to verify the return, the collector of the district is authorized to extend the time for filing such return not exceeding 30 days from the date when such return is otherwise due. Application for such extension should be made prior to the date when the return is due, or within the thirty-day period for which such extension is desired and can be granted. 8. Item No. 1 of the schedule on the obverse of this form should not include unissued or treasury stock, but only such stock as has actually been issued and for which payment has been received; or, in case no stock is issued, there should be reported under this item the amount of capital actually employed in the business and property of the corporation. In cases wherein the capital stock is issued payable in instalments or upon assessment, only so much of the capital as has been actually paid in iipon such instalments or assessments should be reported under this item. 9. Item No. 2 should include all interest-bearing indebtedness for the payment of which the corporation or its property is bound. In case of banking corporations and like financial institutions, deposits should not ibe reported as indebtedness under this head. 10. Item No. 3 of the return form (gross income) should include all income derived from the operations and management of the business and properties, together with all actual increases in value by appraisement, ■adjustment, or otherwise in the value of the assets which have been taken up on the books as income or credited to profit and loss during the year.18 In the case of a corporation organized, authorized, or existing under the laws of any foreign country, the gross income to be returned is the gross amount of its income for the year resulting from business transacted and capital invested within the United States.l9 11. Item No. 4 (a) should include the total amount of all ordinary and necessary expenses paid out of earnings in the maintenance and op- eration of the business and properties of the corporation,80 etc., exclusive IT Supra, % 42. " Supra, §§ 37, 38, 40. 18 But see supra, % 58. 20 Supra, § 60. § 82J CONTENTS OF EETUBNS BY OOEPOEATION. 362u of interest and other payments to be listed under their respective heads on the return forms. 12. Item No. 4 (&) should include all rentals or other payments re- quired to be made as a condition to the continued use or possession of the property. In cases where interest on a mortgage on property occupied or used by the corporation is paid as a condition to its possession and use, thus becoming in the nature of a rental charge, such interest charge may be included in the deduction under this item. Mortgage indebtedness, assumed or unassumed, on property to which the corporation has taken or is taking title, or in which it has an equity, or in the acquirement of which the mortgage was considered a part of the purchase price, is held to be a debt of the corporation and interest paid on such indebted- ness will be deductible only under Item 6 of the return. 13. The amount claimed under Item No. 5 (b) for depreciation should be such an amount as measures the loss which the corporation actually sustains during the year in the value of buildings, machinery, and such other property as is subject to depreciation on account of wear and tear, exhaustion, or obsolescence. The amount taken credit for on this account in order to be allowable should be so entered on the books as to constitute a liability against the assets of the corporation. The amount claimed under this item should not cover losses in the value of stocks and bonds. Decrease in the book value of securities owned, so far as such decrease represents a decline in the actual value of such securities, should be de- ducted under item 5 (a) of the return.2l 14. Where depreciation of physical property is made good by renewals, replacements, repairs, etc., and the expense of such renewals, replace- ments, repairs, etc., is charged to the general expense account, no deduction for depreciation can be made in the return of annual net income. Where a depreciation reserve is set up, all renewals and replacements must be charged to such reserve and the addition to this reserve each year must be a fair measure of the loss which the corporation sustains by reason of the depreciation of its property. 15. The amount of interest deductible is the amount of interest accrued and paid within the year on bonded or other indebtedness not exceeding one-half of the sum of inter-bearing [Sic] indebtedness and the paid-up ■capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of indebtedness not exceeding the amount of capital employed in the business at the close 21 Supra, §§ 64, 69. 362v EETUEA-S. [§ 82 of the year; or in case of a corporation, joint stock company or associa- tion, or insurance company orgwnized under the laws of a foreign country, so paid on its bonded or other indebtedness to an amount of such bonded or other indebtedness not exceeding the proportion of its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of capital employed in the business at the close of the year, which the gross amount of its income for the year from business transacted and capital invested vnthin the United States hears to the gross amount of its income derived from all sources vnthAn and without the United States. All interest deductions must be claimed under Item 6 on the return form. 16. Dividends declared or paid are not deductible from gross income. _^ 17. Dividends received upon the stock of other corporations must be included in gross income and are not deductible therefrom in the ascer- tainment of the net income on which the tax is computed. 18. Interest received upon the obligations of u State or any political subdivision thereof, and upon the obligations of the United States or its possessions, should be included in gross income, as well as all other interest due and accrued during the period for which return is made. 19. Accrued interest is considered to be interest due and payable, ex- cept in the eases of banking or other similar institutions which close their accounts on the basis of the interest earned. In all cases the accrued interest shall be reported on the basis on which the books are closed. 20. Taxes deductible in the return are such taxes, actually paid within the year, as are imposed by authority of the United States or of any State or Territory thereof, or by the government of any foreign country, not including taxes paid by a corporation, pursuant to guaranty, on its bonds or the income therefrom and not including those taxes assessed against local benefits. A reserve for taxes, as such, is not deductible. 21. The gross income of mercantile corporations should be ascertained in the following manner: From the sum of the total sales during the year plus the sum of the inventory at the end of the year, deduct the sum of the inventory at the beginning of the year plus the cost of the goods and materials purchased during the year; to this difference add the income received from any other source and the result will be the gross income to be reported under Item No. 3 of the return.88 t^i Supra, § 51. § 82] CONTENTS OP BETUENS BY COEPOKATION. 8G2w 22. Gross income in the ease of a manufacturing corporation shall in- clude the total receipts from the sale of all manufactured goods sold during the year plus any increase in the inventoried value ascertained through an accounting of the finished and unfinished product, raw material, etc., on hand at the close of the year.83 23. To the income thus ascertained there should be added the income arising, accruing, or received from any and all other sources, the ag- gregate thus ascertained to be the gross income to be returned under Item No. 3 of the return form. Since the gross income thus ascertained rep- resents the total receipts as well as the inventoried value of finished and unfinished products, raw material, etc., the corporation will include in its deduction under Item No. 4 all expenditures for material, labor, fuel, and other items going to make up the cost of the goods sold or inven- toried at the end of the year." 28 But see supra, § 58. '^ 84] SECEECY OF KETUKNS. 363 § 83. Oath to return. The statute directs that the return be made "under oath or affirmation." ^ The Treasury Eegula- tions : "The annual return must be verified by oath or affirmation of the person making the same. Collectors are directed by law to require every return to be so verified by the person rendering it. The affidavit may be made before the collector for the dis- trict or before any officer authorized by law to administer oaths." * By the instruction as to returns by individuals: "9. This return, properly filled out, must be made under oath ■01 affirmation. Affidavits may be made before any officer au- thorized by law to administer oaths. If before a Justice of the Peace or Magistrate not using a seal a certificate of the clerk of the court as to the authority of such officer to administer oaths should be attached to the return." * By the instruction as to returns by corporations : "3. Returns must be verified by two officers of the corpora- tion; that is, by two individuals, namely, the president, vice president, or other principa] officer, and treasurer or assistant treasurer, or chief financial officer. "4. The affidavit of verification must be made before a notary public or some other officer qualified to administer oaths, and the seal of the attesting officer, if such officer is required by law to have a seal, must be impressed on the return in the space re- served for that purpose." * The oath, if administered without the United States, may be taken before any secretary of legation or consular officer at the post, port, place, or within the limits of his legation, consulate or commercial agency.* § 84. Secrecy of returns. The secrecy of returns by in- dividuals is secured by penal provisions. The Revised Stat- § 83. 1 II, Subsection D. * Forms 1030-1036. 2Tr. Reg. 22. 5 U. S. Rev. Stat. § 1750, (U. S. 3 Form 1040. In the Form 1041 Comp. Stat. 1901, p. 1196). See for Fiduciaries this is Instruction 8. Foster, Fed. Pr. 5th ed. § 192. 364 EETUENS. [§84- utes as amended by the Act of October 3, 1913, provide: "It shall be unlawful for any collector, deputy collector, agent, clerk or other officer or employee of the United States to di- vulge 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 dis- charge of his official duties, or the amount or source of in- come, profits,, losses, expenditures, or any particular thereof, set forth or disclosed in any income return by any person or corporation, or to permit any income return or copy there- of 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 pub- lish in any manner whatever not provided by law, any income return or any part thereof or the amount or source of income, profits, losses, or expenditures appearing in any income re- turn; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding one thousand dollars or by imprisonment not exceeding one year, or both, or at the discretion of the court ; and if the offender be an officer or employee of the United States he shall be dismissed from office and be incapable thereafter of holding any office under the Government." * The Act of 1913 provides: "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 commis- sioner, shall be filed in the office of the Commissioner of Inter- nal Revenue and shall constitute public records and be open to inspection as such: Provided, That any and all such returns shall be open to inspection only upon the order of the President, under rules and regulations to be prescribed by the Secretary of the Treasury and approved by the President: Provided fur- ther, That the proper officers of any State imposing a general income tax may, upon the request of the governor thereof, have § 84. lU. S. K. S. § 3167 as amended by Act of October 3, 1913, TI, Subsection I. § 84] SECBECY OF EETUBNS. 365 access to said returns or to. an 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." ^ A similar provision in the Corporation Tax Law was held to be constitutional.^ The Treasury Regulations provide: "When the assessments shall have been made, the returns shall be iiled in the office of the commissioner and shall con- stitute public records, subject to inspection upon the order of the President, under rules and regulations prescribed by the Secretary of the Treastiry 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 to the corporation itself or to its duly authorized attorney." * "Upon request of the governor of a State which imposes a general income tax, the proper officers of such State may have access to the returns filed by corporations doing business in such States, or to an abstract thereof showing the name and in- come of such corporations, etc., at such times and in such man- ner as the Secretary may prescribe. In no case are the original returns to be removed from the office of the commissioner, ex- cept upon order and by direction of the Secretary of the Treas- ury or the President." * "At the request of the Attorney General, or by direction of the Secretary of the Treasury, certified copies of returns may be made 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 tax assessed on the basis of such returns is involved, or in any suit to which the United States Government and the corporation, etc., making the return are parties and in which suit such certified copies would constitute material evidence, of the Secretary of the 8 Subsection II, G, (d). printed in full infra, part VII. 3 Flint V. Stone Tracy Co. 220 U. * Tr. Keg. 178. S. 107, 55 L. ed. 389, 31 Sup. Ct. 5 Tr. Eeg. 179. Eep. 342, Ann. Caa. 1912B, 1312, 3G6 EETUEHS. [§84 Treasury which was by a subsequent order approved by the- President." ® "For the purpose of making effective the legislative intent thus expressed, the President has ordered that such returns shall be open to inspection under the following riiles and regu- lations. The word 'corporation' when used alone herein, shall be construed to refer to corporations, joint-stock companies or associations and insurance companies. "1. The return of every individual and of every corporation,, joint-stock company or association, and every insurance com- pany, whether foreign or domestic, shall be open to the inspec- tion of the proper officers and employees of the Treasury De- partment. Eeturns of individuals shall not be subject to in- spection 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 employee of any other department of the Gov- ernment, an application for permission to inspect such return, setting out the reasons therefor, shall be made in writing, signed by the head of the executive department or other government establishment in which such officer or employee is employed, and transmitted to the Secretary of the Treasury. If the re- turn of a corporation is desired to be used in any legal proceed- ings other than those to which the United States is a party, or to be used in any manner by which any information contained in the return could be made public, the application for permis- sion 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 associations, or insurance companies, may be furnished, upon approval of the Secretary of the Treasury, for use, either in the original or by certified copies thereof, in any legal proceedings before any United States grand jury or 6Tr. Reg. 180. § 84] SECEECY OF EETUKNS. 367 in the trial of any cause to which both the United States and the person or corporation or association rendering the re- turn 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 constitute material evi- dence, but in any case arising in the collection of the income tax, the Commissioner 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 Kevenue or by some officer of the Bureau of Internal Revenue designated by him for that purpose, and after such original re- turn has been placed in evidence it shall be returned to the files in the office of the Commissioner of Internal Revenue at Wash- ington, D. C. "4. The Secretary of the Treasury, at his discretion, upon application to him made, setting forth what constitutes a prop- er showing of cause, may permit inspection of the return, of any corporation, by any bona fide stockholder in such corpora- tion. 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 in- spection, 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 legiti- mate reason exists for refusing permission to inspect its returns 368 EETUENS. [§ 84 of annual net income by the stockholder applying for permis- sion 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. The returns of the following corporations shall be open to the inspection of any person upon written application to the Secretary of the Treasury, which application shall set forth briefly and succinctly all facts necessary to enable the Secretary to act upon the request : "(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 classi- fication above, the person desiring to see such return should make application, 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. "Returns can be inspected only in the office of the Commis- sioner of Internal Revenue, 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 in- spected any return or furnish any information whatsoever rel- ative to any return or any information 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 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. § 84] SECEECY OP EETUENS. 369 "7. Upon request of the governor of a State imposing a gen- eral income tax, the proper officer of such State, to be designa- ted 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 associa- tion, 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 corporations, etc., named in the request is desired, and (fourth) what officer or officers are designated to make the de- sired inspection, 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 Sec- retary of the Treasury for his consideration and action thereon. "No provision is made in the law for furnishing a copy of any return to any person 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 hereinbefore authorized. "The provisions herein contained shall be effective on and after the 1st day of September, 1914." '' ^T. D. 2016, approved by the shears, then thrown into large bags. President, July 28, 1913. Similar and conveyed with equal care to a regulations were made under the paper manufactory, where, under the Corporation Tax Law of 1909. The inspection of a commissioner, they lack of secrecy concerning the were committed to the mash tub: amount and sources of a man's in- and he did not leave them till they come has been one of the chief were reduced to a pulp." — The Prin- eriticisms upon income taxation. ciples of Taxation: or Contribution Upon the repeals in 1802 and in according to Means; in which it is 1813, of the British statutes impos- shevm that if every Man pays in ing income taxes, all the records of Proportion to the Stake he has in each tax were destroyed. In 1802, the the Country, the present Ruinous papers ''were carefully collected and and Oppressive System of Taxation, cut into pieces with large stationers' the Custom House, and the Excise Foster Income Tax. — 24. 370 EETTJEIirS. [§ S4t Office may he abolished, and the no- atonal Debt Gradually and Easily paid off. By William Frend. Lon- don, 1804, p. 3. Seligman, Income Tam, 88, 113. There are not wanting authorities to contend that such secrecy is of no advantage. Francis Newbery said of the oath of secrecy imposed upon the tax collectors: "Is it not a prudish delicacy, and a solecism in finance?" And, again, "Notorie- ty is the antidote to subterfuge and evasion." — Observations on the In- come Act; particularly as it relates to the Occupiers of Land: with some Proposals of Amendment. To which is added a Short Scheme for Melio- rating the Condition of the Labour- ing Man. By Francis Newbery, Lon- don, 1801, pp. 13, 35. Thomas Clio Eickman said: "I do not see why the exact state of a man's pecuniary affairs should not be known, as well as the colour of his coat, or the com- plexion of his countenance." "It would be well if every iota of every man's income, whether in or out of business, could be known. If it could be ascertained, what property every man hath, and how he gets and applies it; it vould be, like' a correct chart to a mariner, a guide over the rocks, and through the mazes of society." — Mr. Pitt's De- mocracy manifested; in a Letter to him, containing Praises of, and Strictures on, the Income Tax. By Thomas Clio Kickman, London, 1800, pp. 9-10, 28. Benjamin Sayer said: "that persons who do not carry on trade speculatively, but prudently, do not dread an exposure of the state of them." — An Attempt to shew the Jus- tice and Expediency of substituting an Income or Property Tax for the present Taxes, or a part of them; as affording the most Equitable, the least Injurious, and ( under the modi- fied Procedure suggested therein) the least Obnoxious Mode of Taxation; also, the most Fair, Advantageous, and Effectual Plans of reducing the National Debt. By Benjamin Sayer. London, 1833, p. 32. Seligman, In- come Tax, pp. 86, 125. The United States during 1863, through the Commissioner of Internal Revenue, issued instructions that the returns should be open for inspection to the revenue officers alone. Later, Sec- retary Fessendei- in order that "the amplest opportunity may be given for the detection of any fraudulent return that may have been made" gave the public free ac- cess to the return. (Boutwell, 4th ed. p. 259. The newspapers then freely published lists of incomes that had been returned. Publicity was defended by the New York Tribune,, which said: "So long as an In- come Tax shall be required and levied, we are satisfied that it is- best for all who are honestly con- cerned therein that there should be no restriction on giving publicity to the items." (Jan. 21, 1865, p. 4, col. 3.) The New York Times said that in this year only could full re- turns be secured and that during two years the consequences had been that it gained millions of dollars for the Government. (July 9, 1866,. p. 4, col. 4-5.) And, later, argued that this prevented collusion be- tween taxpayers and unfaithful col- lectors. (N. Y. Times Aug. 7, 1869, p. 4, col. 2.) Later, however, the Times reversed its decision, saying that a properly organized revenue service would be able to guard against evasion and that then pub- licity would be needless and a nui- sance, which Congress might be- asked to abate. (July 26, 1869, p. 4, col. 3.) And later: "The pub- licity given to the returns is offen- sive and objectionable." (Aug. 7, 1869, p. 4, col. 2.) The Commercial and Financial Chronicle had before this said that publicity led to fal- sification of returns for ostentation and to secure credit, since young business men might be unable to re- tain their standing and credit if they gave truthful returns. (Feb. 10, 1866, vol. 2, p. 162.) But on April 5th, 1870, shortly after the appointment of Delano, Commis- § 85] DISCOVEEY. 371 It was ruled under a former commissioner that Income re- turns "were not privileged communications and the collector had no right to withhold them in evidence.' The former rules for the collection of internal revenue forbid the collectors to produce the records, or the copies thereof, in the State court. They are also directed to decline to testify as to facts contained in the records or coming to their knowledge in their official capacity.' Such a rule was authorized by the general authority conferred on the Secretary of the Treasury by the Eevised Statutes of the United States.^" In England a defendant agreed to sell his business to the plaintiff, stating his income from it to be £2,000 per annum. The plaintiff brought a bill of discovery as to the defendant's income, on the ground that the defendant had stated to the tax commissioners, that his income was only £500 ; and it was held that discovery would not be allowed, since it would render the defendant liable to the penalty; and the master of the rolls went even further in saying that discovery would not be allowed if there were any question of a penalty, "Considering the provisions contained in the act for preventing or avoiding disclosure of the returns." ** How far such a decision is applicable under the present statute remains to be seen. § 85. Discovery. The Eevised Statutes further provide that "When any person, corporation, company, or association refuses or neglects to render any return or list required by law, or renders a false or fraudulent return or list, the collector or any deputy collector shall make according to the best informa- sioner of Internal Revenue, he for- ter. Fed. Pr. 5th ed. § 339, p. 1092, bade the assessors to furnish lists where the rule is set forth at length, for publication. (11 Int. Rev. Ree. lOJSos/ce v. Gomingore, 177 U. S. 113.) The practice was forbidden 459, 460, 461, 44 L. ed. 846, 847, 20 by Congress. (July 14, 1870; 16 Sup. Ct. Rep. 701, s. c. Re Comin- iStat. at L. p. 259, Sec. 11 ; published gore, 96 Fed. 552 ; Stegall v. Thur- in full infra, Part IV.) Smith's U. man, 175 Fed. 813. See Re Lamher- S. Federal Internal Tax History, ton, 124 Fed. 446. from 1861 to 1871, p. 68. il Mitchell v. Koecker, 11 Beav. 8 Ruling 10 Int. Rev. Rec. 5. 380, 382. See, also, authorities cited 9U. S. Rev. Stat. § 161 (U.* S. im/ro under Part III. Comp. Stat. 1901, p. 80). See Fos- 372 EETUENS. [§ 85 tion which he can obtain, including that derived from the evi- dence elicited by the examination of the collector, and on his own view and information, such list or return, according to the form prescribed, of the income, property and objects liable to tax owned or possessed or under the care or management of such person, or corporation, company, or association." ^ In order to make it possible that the collector may make the return in case of the default of the taxpayer, various pro- ceedings have been devised to assist him. Of these, the first are proceedings for discovery. It is provided : "That in case no annual list or return has been rendered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the an- nual list or return, it shall be the duty of such collector or depu- ty collector to leave at such place of residence or business, with some one of suitable age and discretion, if such be present, other- wise to deposit in the nearest postoffice, a note or memorandum addressed to such person, requiring him or her to render to such collector or deputy collector the list or return required by law within ten days from the date of such note or memorandum, verified by oath or affirmation. And if any person, on being notified or required as aforesaid, shall refuse or neglect to ren- der such list or return within the time required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax fails to do so at the time required, or delivers any return which, in the opinion of the collector, is false or fraudulent, or contains any under- valuation or understatement, it shall be lawful for the collector to summon such person, or any other person having possession, custody, or care of books of account containing entries relating to the business of such person, or any other person he may deem proper, to appear before him and produce Such books, at a time and place named in the summons, and to give testimony or an- swer interrogatories, under oath, respecting any objects liable to tax or the returns thereof. The* collector may summon any person residing or found within the state in which his district lies; and when the person intended to be summoned does not § 85. I U. S. Rev. Stat. § 3176, U. amended by Act of October 3. 1913, e. Comp. Stat. 1901, p. 2068, as L § 85] DISCOVERY. 373 reside and cannot be found within such state, he may enter any collection district where such person may be found, and there make the examination herein authorized. And to this end be may there exercise all the authority which he might law- fully exercise in the district for which he was commissioned." ^ It is to be observed that it is only the collector and not the deputy collector who is authorized to issue such process. His right to this examination is to be distingTiished from that con- ferred by section 3163 of the Revised Statutes upon the former supervisors of internal revenue. The latter were entitled to inspection of "books, papers, accounts, and premises," without notice to the taxpayers ; but the collector under section 3174 is entitled to the examination by the express words of the statute only after notice by means of this summons.* Accordingly the summons which he issues should state the object of the ex- amination with sufficient fairness: "My impression is that the summons should state with reasonable certainty the cause of its being issued; as that the assessor is dissatisfied with the re- turns or the like, and the subject-matter of the inquiry. It is uot like the mere subpoena." * The summons should state the place where the examination is t© be held. It must allow a reasonable time in which to comply with its command and must be limited to the realm of examination into which the collector is entitled to enter.* Thus it was held that the summons cannot require the production of books kept anterior to the passage of the income tax laws.' The right to examination is confined to the books of the taxpayer, and the examination cannot be made to include books of persons with whom the taxpayer has had dealings.' The summons "shall in all cases be served by a deputy col- lector of the district where the person to whom it is directed may be found, by an attested copy delivered to such person in hand or left at his last and usual place of abode, allowing such 2 U. S. Rev. Stat. § 3173, as amend- 2,570; In re Phillips, 10 Int. Rev. ed by Act of October 3, 1913, I. Rec. 107, Fed. Gas. No. 11,097. i Stwmvood V. Green, 2 Abb. (U. ^U. 8. v. Fordyce, 13 Int. Rev. S.) 184, 3 Am. L. T. 133, Fed. Cas. Rec. 77. Fed. Gas. No. 15,130. No. 13,301. eiud. *LoWEXL, J., In re ChadnHck, 1 T Re Strouse, 1 Sawy. 605, Fed. Low. Dec. 439, 443, Fed. Cas. No. Cas. No. 13,548. 374 EETUEJSfS. [§ 85 person one day for each twenty-five miles he may be required to travel computed from the place of service to the place of ex- amination ; and the certificate of service signed by such deputy shall be evidence of the facts it states on the hearing of an application for an attachment. When the summons requires the production of books, it shall be sufiicient if such books are described with reasonable certainty." ' In a proceeding of this character, where the taxpayer claimed the privilege of refusing to produce his books, on the ground that a criminal proceeding had been commenced against him for making false and fraudulent returns, and that to produce the books or give testimony would incriminate him, Mr. Jus- tice Blatchfoed said: "The use of any entries in the books and of any testimony given is solely to furnish evidence for making a true return. If there were no entries in any books of account in the posses- sion, custody, or care of the relator relating to the trade or busi- ness of the relator during the period named in the summons, the relator is not bound to produce them, but if there are such entries, he is bound to bring the books. He refuses now to bring the books at all, while he does not deny that they contain such entries. He must therefore bring the books. But he is not at once obliged to submit the books, or any of them, to the inspection of the assessor or of any other person.' The entries in question and not the books are the things sought for by the section. When the books are brought, the relator must appear with them under the summons to give testimony. He must then be asked whether there are any such entries as the summons specified. If he says there are, he must then be asked to exhibit any entry or entries relating to the par- ticular point or matter to be named in the inquiry within the scope of the summons as to subject-matter and time. If he says that he cannot do so without incriminating himself, or fur- nishing thereby a link in the chain of evidence which might criminate him, he is protected from exhibiting such entry or entries. And he is protected in like manner from giving tes- timony in reply to any particular question put to him. If «U. S. Eev. Stat. § 3174. »But see contra, In re Strouse, 1 Sawy. 605, Fed. Cas. No. 13,548. :§ 85] DISCO VEET. 375 there be any entry as to which he does not claim protection, he is entitled in disclosing such entry, to withhold and conceal all entries as to which he does claim protection. The power of the assessor under the fourteenth section ^'' to make out a proper return on which to assess the tax, and then to add one hundred per cent, to such tax, in case a false return has been made, is ample, even in the absence of the books and testimony of the relator; and the withholding of such books and testimony when an opportunity is offered to the relator to have the benefit of them, will warrant the assessor in making out a return on the best information he can obtain and in assessing the tax thereon, and will deprive the relator of all ground of complaint as to the amount of the tax." '* In accordance with this opinion, the examination was di- rected to proceed in the manner indicated. "Whenever any person summoned under the two preceding sections neglects or refuses to obey such summons, or to give testimony, or to answer interrogatories as required, the col- lector may apply to the judge of the district court oV to a com- missioner of the circuit court of the United States for the dis- trict within which the person so summoned resides for an at- tachment against him as for a contempt. It shall be the duty of the judge or commissioner to hear the application, and if satis- factory proof is made, to issue an attachment directed to some proper officer for the arrest of such person, and upon his being brought before him, to proceed to the hearing of the case; and upon such hearing the judge or commissioner shall have power to make such order as he shall deem proper, not inconsistent with existing laws for the punishment of contempts, to enforce obedience to the requirements of the summons, and to punish such person for his default or disobedience." ^ Judge Shipman suggested a query as to the constitutionality of the foregoing section. ^^ It was held constitutional, however, in at least two cases ; " but the Supreme Court of the United States has never passed upon the question.** 10 U. S. E. S. § 3176. 14 /» re Meador, 10 Int. Rev. Ree. lliSe Lippman, 3 Ben. 95, Fed. 74, Fed. Cas. No. 9,375; Perry v. Cas. No. 8,382. Newsome, 10 Int. Rev. Rec. 20, Fed. 12 U. S. Rev. Stat. § 3175. Cas. No. 11,009. IS Ece parte Ives, 1 Int. Rev. Rec. 1' It is discussed at length supra, 145, Fed. Cas. No. 7,114. § 34. 376 EETUENS. [§ 85 It has been held that an order to show cause may issu« be- fore the attachment; ^® that the proceedings not being criminal in their character may be amended by the court ; ^^ and that an examination of the taxpayer will not be refused on the ground that the examination would expose him to a penalty, such pen- alty being said not to be within the constitutional provision against self-incrimination/' It was held in one case that in a proceeding for contempt, no supersedeas could be obtained, "no provision of law existing whereby a writ of error would lie to the decision made by the judge in a proceeding of this nature out of court and while sit- ting simply as judge under the revenue acts of 1866 and 1868." '* This decision, however, was rendered before the Act of March 3, 1891, which has since been incorporated in the Judicial Code.^" 18 In re Chadwick, 1 Low. Dec. 439, Fed. Gas. No. 2,570. Cf. Matter of Meador, 1 Am. U. S. 317, 2 Am. Law Times, 140, 10 Int. Eev. Eec. 74, Fed. Gas. No. 9,375. " Ihid. 18 In re Strouse, 1 Sawy. 605, Fed. Gas. No. 13,548; In re Phillips, 10 Int. Eev. Eec. 107, Fed. Gas. No. 11,097. But see Boyd v. United States, 116 U. S. 616, 29 L. ed. 746, 6 Sup. Gt. Eep. 524, and supra, §§ 30, 31. In the investigation before the Grand Jury of the District of Massachusetts of a charge of smug- gling against Mary A. Dolan, the American managing partner of the banking firm of Munroe & Gompany, which transacted business in Paris and New York, refused to obey a subposna duces tecum directing him to produce checks drawn by her upon his Paris house, which were in France. It was held that he could not be committed for contempt be- cause of such refusal, although it appeared that he did not inform his partners in Paris of the service of the subpoena and did not request that the checks be forwarded to this coun- try in obedience to the same. Mun- roe V. United States (G. C. A.) 216 Fed. 107, reversing 210 Fed. 326. Before the reversal of his commit- ment in the court below. Miss Dolan notified the Paris house of Munroe & Gompany not to send the checks. The bankers instituted proceedings to set aside such prohibition. The First Chamber of the tribunal in Paris, over which Monier presided, dismissed the bankers' application, holding that a banking house, with- out being obligated to professional secrecy in the strict legal sense of the word under the penalties pre- scribed by article 378 of the Penal Gode, is none the less pledged to absolute discretion as regards the business of its customers, who are the sole judges to determine whether the banker should or should not give information concerning their mutual transactions, except for the purpose of the service of public justice or the public interest, and that the pub- lic policy of France would not be subserved by aiding in the enforce- ment of the protective tariff of a foreign country which discriminated against French manufactures. Le Matin, July 16, 1914. 19 Re Meador, 10 Int. Eev. Eec. 74, Fed. Gas. No. 9,375. 20 Act of March 3, 1911, §§ 128, 238; Foster's Fed. Pr. 5th ed. §§ 688, 693, 695. § 86] ENTKY OF taxpayek's peemises. 377 The Treasury Eegulations provide: "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." ^^ "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 de- ductions 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 taxa- tion." "" "For the purpose of verifying any return, made pursuant to this act, the Commissioner of Internal Kevenue may, by any duly authorized revenue agent or deputy collector, cause the books of such corporation to be examined, and if such ex- amination 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 prop- erly authorized officer." *' "All persons licensed shall keep their records in such manner as to show from whom every such item has been received, and such records shall be open at all times to the inspection of in- ternal-revenue officers." § 86. Entry of taxpayer's premises. The Revised Stat- utes provide: "Any collector, deputy collector, or inspector may enter in the daytime any building or place where any articles or objects subject to tax are made, produced, or kept within his district, so far as it may be necessary for the purpose 21 Tr. Keg. 182. "^ Tr. Reg. 186. 88 Tr. Ke|. 183. " Tr. Keg. 62, 378 KETUKNS. [§ 86 of examining said articles or objects. And any owner of such building or place, or person having the agency or superintend- ence of the same who refuses to admit such oflBcer, or to sufEer him to examine such article or articles, shall for every such refusal for- feit five hundred dollars. And when such premises are open at night, such officers may enter them while so open in the performance of their official duties. And if any person shall forcibly obstruct or hinder any collector, deputy collector, or inspector in the execu- tion of any power or authority vested in him by law, or shall forcibly rescue or cause to be rescued any property, articles, or objects after the same shall have been seized by him, or shall attempt or endeavor 80 to do, the person so ofEending, except in cases otherwise pro- vided for, shall for every such offense forfeit and pay the sum of five hundred dollars, or double the value of the property so rescued, or be imprisoned for a term not exceeding two years, at the discretion of the court."^ This provision has been held to be not unconstitutional.* The officers mentioned in the section may enter without process, but the right of entry exists only when the circumstances prescribed in the section arise, that is, where the articles or objects subject to tax are made, produced, kept, or actually exist.' Even national banks are not exempt from such entry.* The only officers authorized to make the entry are those specifically named in the section. A collector's clerk, therefore, has no such right.* An indictment under this section must state the cause of action exactly. It is fatally defective, for example, unless it says that at the time of the entry the premises contained articles subject to tax.® The statutory words "forcible attempt to rescue" without specifications do not sufficiently describe the act to sustain an indictment, even after verdict. § 87. Penalties. The penalties enforced by the act are for three different defaults : for failure to make a return, for making a false or fraudulent return, and for failure to pay the tax. Penalties for default in the payment of the tax are subsequently con- sidered.* The act provides: "That if any person, corporation, joint- stock company, association, or insurance company liable to make the return or pay the tax aforesaid shall refuse or neglect to make a return at the time or times hereinbefore specified § 86. » U. S. Rev. Stat. § 3177, 6 17. -8. v. Marni, 95 U. S. 580, 24 U. S. Comp. Stat. 190], 2069. L. ed. 531. 2 In re Meador, 10 Int. Rev. Rec. 6 JJ. S. v. Ford, 34 Fed. 26. But 74, Fed. Gas. No. 9,375. But see see U. 8. v. Fears, 3 Woods, 510, supra, § 31. Fed. Gas. No. 15,080, when those 3 U. 8. V. Fears, 3 Woods, 610, words were used without objection. Fed. Gas. No. 15,080; V. 8. v. Mann, § 87. ^ Infra, § 106. 55 U. S. 580, 24 L. ed. 531. 4 U. 8. V. Rhawn, 11 Phila. 521, Fed. Gas. No. 16,150. § 8T] TENALTIES. , 379 in each year, such person shall be liable to a penalty of not less than $20 nor more than $1,000. Any person or any officer of any corporation required by law to make, render, sign, or verify any return who makes any false or fraudulent return or statement with intent to defeat or evade the assessment required by this section to be made shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000 or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution." " "If any corporations, joint-stock companies or associations, or insurance companies aforesaid, shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, or shall render a false or fraudulent return, such corporation, joint-stock company or association or insurance company shall be liable to a penalty of not exceeding $10,- 000." » The Revised Statutes provide that: "In case of aiiy return of a false or fraudulent list or valuation intentionally," the Com- missioner of Internal Revenue "shall add 100 per centum to such tax ; in ease of refusal or neglect, except in case of sickness or absence, to make a list or return or to verify the same as aforesaid, he shall add fifty per centum to said tax." * Upon the courts is imposed the task of reconciling the in- ■consistency of some of these provisions. The penalty imposed by the Revised Statutes has been held •constitutional,* although Mr. Justice Field questioned whether it could be imposed in the absence of fraud on the part of the 'taxpayers.® That case reversed on another ground a decision by Judge Shipman at circuit," in which he held that the penalty •could be imposed under such circumstances. On the other hand. Attorney General Sneed ruled that it could not.' By the procedure under the former acts there were two of- :ficials whose co-operation was necessary to collect the tax, — 11 Ops. Atty. Gen. 183. 5 Doll V. Evans, 9 Phila. 364, Fed. Cas. No. 3,969. 380 EETUENS. [§ 87 return and fix the amount of the tax, and the other was the collector whose sole duty it was to collect. It was ruled hy one attorney general that the power to add the penalty to the return ceased when the assessor had transmitted the list to the collector for collection.'" Under the present law, which requires the tax to be assessed by the commissioner, it may be a question whether the same condition would now obtain. It has been held that when suit is brought to recover a tax with penalties, only one penalty can be recovered for all de- faults prior to its commencement.® The Revised Statutes as amended provide : "That in case no annual list or return has been rendered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suitable age and discretion, if such be present, otherwise to deposit in the nearest postoffice, a note or memo- randum addressed to such person, requiring him or her to ren- der to such collector or deputy collector the list or return required by law, within ten days from the date of such note or memorandum, verified by oath or affirmation." ^^ The Act further provides : That, as regards individuals, cor- porations, joint-stock companies, associations and insurance companies, "to any sum or sums due and unpaid after the thirtieth day of June in any year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of 5 per centum on the amount of tax unpaid, and inter- est at the rate of 1 per centum per month upon said tax from the time the same became due, except from the estates of in- 8» 11 Op. Atty. Gen. 280. see also the motion for a rehearing, 9 U. 8. V. New York Guarantee, which was denied, s. c. 107 U. S. etc. Co. 8 Ben. 269, Fed. Cas. No. 1, 27 L. ed. 385, 2 Sup. Ct. Rep. 83. 15,872; V. 8. v. Brooklyn, etc. Rail- l" U. S. Rev. Stat. § 3173 (U. S. imy, 14 Fed. 284; V. 8. v. Erie Rail- Comp. Stat. 1901, p. 2065) as amend- way Co. 24 Int. Rev. Reo. 76, Fed. ed by Act of October 3, 1913, II, Cas. No. 15,056, reversed on an- subsection I. The notice should be other point, s. c. 106 U. S. 327, 27 in Form 1045 printed in full supra, L. ed. 151, 1 Sup. Ct. Rep. 293. And § 77, Tr. Reg. 196. § 88] INCREASE OF EETDEN. 381 sane, deceased, or insolvent persons ;" ^* and, as regards cor- porations, joint-stock companies, associations and insurance companies, omits the clause excepting "estates of insane, de- ceased, or insolvent persons." By virtue of section 5292 of the Eevised Statutes (U. S. Comp. Stat. 1901, p. 3604), the Secretary of the Treasury is authorized to remit penalties. This power is discretionary with him and is one of mercy. It cannot therefore be reviewed either in the Court of Claims or any other court. ^^ § 88. Increase of return. "If the collector or deputy col- lector have reason to believe that the amount of any income returned is understated, he shall give due notice to the person making the return to show cause why the amount of the return should not be increased, and upon proof of the amount under- stated may increase the same accordingly. If dissatisfied with the decision of the collector, such person may submit the case, with all the papers, to the Commissioner of Internal Reve- nue for his decision, and may furnish sworn testimony of wit- nesses to prove any relevant facts." ^ In a subsequent sub- section, after providing for the reform of the returns made by corporations, joint-stock companies or associations, and insur- ance companies, it further provides: "All such returns shall as received be transmitted forthwith by the collector to the Commissioner of Internal Revenue." * It might be argued that this seems to deprive the collector of power to increase the returns made by corporations, stock companies or associations, before their transmission to the commissioner. The same sub- division of this subsection provides: That "in cases of false or fraudulent returns, * * * the Commissioner of In- ternal Revenue shall, upon the discovery thereof, at any time within three years after such return is due, make a return upon 11 Subsection E ; Subsection G ten dollars from corporations which (c). are organized for profit. In the 12 Dorsheimer v. U. S. 7 Wall. 166, cases of all corporations not or- 175, 19 L. ed. 187, 190. The practice ganized for profit tlie specific pen- of the Treasury Department is to alty was not asserted in the year accept offers in compromise of the 1914, provided the required return specific penalty for failure to file was filed before December 31, 1914. returns within the period prescribed Records Corp. Tr. Co., p. 293. by law in a minimum sum as fol- § 88. l Statute II, Subsection D. lows: five dollars from individuals; 8 Subsection G. (o). 382 ujsTmiA's. [§ 88 information obtained as provided for in this section." Under similar language in the Corporation Tax Law of 1909 it was held: that such a return might be made by the Commissioner after the tax under the original return had been paid; that in determining the time, the first day should be excluded and the last included, so that a discovery made on March 2 in the third year after the return is due justified a new return by the com- missioner, and that the new return might be made when the original return was made in good faith but was false through a mistake of law.* It was said that where the discovery was made within three years, the assessment might be subsequently corrected.* The same subsection further provides: that "the returns together with any corrections thereof which may have been made by the commissioner, shall be filed in the office of the Commis- sioner of Internal Revenue." * This grants such commissioner the power to make additions to the return.* The Act of 1894 provided that the decision of the collector in the matters intrusted to his jurisdiction, "unless reversed by the Commissioner of Internal Revenue, shall be final." ' The omission of this clause from the present act may be deemed to show the intent of Congress — ^that his decision, even when not set aside by the commissioner, may be reviewed by the courts. 3 JUd. « lUd. * Subsection G (d). 'Act of August 28, 1894, Sec. 29. PBUot Nat. Bank v. Gill (D. Mass.) 210 Fed. 933, Bingham, C. J. CHAPTEK VI. ASSESSMENT. § 89. Assessment list. The Treasury Eegulations direct the transmission by the collectors of the assessment lists as follows: "The annual returns will be forwarded by colleetors by registered mail to the Commissioner of Internal Reve- nue with the list for the month in which the returns are filed. Collectors must provide that said returns and all forms relat- ing thereto are securely sealed in envelops or packages before forwarding the same." ^ "All income taxes found to be due will be reported by col- lectors on their assessment lists, Eorm 23-A in the case of cor- porations, and on Form 23-B in the case of individuals and withholding agents." * "The names of corporations subject to tax will be listed on Form 23-A,* according to their designated class, and in alpha- § 89. ITr. Eeg. 24. «Tr. Reg. 187. 8 Form 23A (Front Sheet). — Prescribed November 13, 1913. UNITED STATES INTERNAL REVENUE. (Original or Duplicate.) SPECIAL EXCISE AND INCOME TAX ASSESSMENT LIST Of Corporations, Joint Stock Companies, Associations, etc., taxable under Section 38, Act of August 5, 1909, and Section 2, Act of October 3, 1913, in the Collection District of , for the month of , 191 Collector. Receipted for by the Collector , 191 This form must never be folded. When transmitted by mail it should be rolled about a stick so that the form will not be mutilated. Special care should be taken to avoid tearing or injuring the binding edge. Instructions fob the Preparation, etc., of Forms 23A and 58A. These instructions supersede all previous instructions in conflict there- with and must be closely followed to insure uniform reports from the various Collection Districts. General Instructions. On or before the 10th of each month collectors will prepare and forward to the Commissioner of Internal Revenue, for the preceding month, on this combined Form 23A and 58A, a list of corporations, joint-stock companies, etc., taxable under Section 38 of the act of August 5, 1909, and section 2, act of October 3, 1913. This list must be in duplicate, and should be prepared on the typewriter when possible (a triplicate copy may also be prepared if the collector so desires). 383 384 ASSESSME3N-T. [§ 89 Only such corporations whose retuins show a taxable income will be reported on this form. Special Instbuctions — Foem 23A. On Form 23A will be entered in alphabetical order, by classes, the name, location, etc., of each corporation whose return {showing a taxable income) has been received during the previous month. Where, owing to the large number of returns received during any month, a portion only of such returns can be examined prior to the date on which the list for that month should be rendered, the returns not so examined should be listed the following month. But all returns received should be listed and for- warded to the Commissioner as soon as possible, so as to insure their early re-examination, as the acts above named require that all such assessments shall be made and -the corporation, etc., notified of the amount assessed, when its return is filed in time, not less than 30 days before the tax is due. In preparing their lists collectors will carefully enter in columns 1, 2, 3, 4, 5, 6, and 7 the information therein called for. In column 4 the col- lector will use care in stating the close of the fiscal year for which the return is rendered, to enable this office to determine from the list which of the corporations have taken advantage of the provisions of subpara- graph 6 of paragraph G, section 2, act of October 3, 1913. This informa- tion is necessary in determining whether 50 per cent additional tax has been incurred, and fixes the date when the tax assessed is due. Under the head of "Basis of Assessment" (column 6) reference will be made to "Original" or "Amended" returns, or to additional tax reported by revenue agents, etc., as the case may be. No entries will be made by collector in columns 8, 9, 10, and 16 of the list. Before sending the list to the Com- missioner the collector will enter in column 11 of the duplicate list (and original list if so desired) the amount of taxes paid during the month (advance collections) for which the list is rendered, and in columns 12, 13, and 15 the necessary data to complete the list. All advance collections reported on each page of the list should be added, and the amounts carried forward to the last page, where the total, including the amount reported on Form 58, will be entered on the "Totals" line in column 11. The words "Amount of Form 58" should also be entered in columns 5 and 6, line 35. In listing the names of corporations several blank lines should be left after each initial letter, in each class, so that the names of other corpora- tions found subject to tax may be added, in regular alphabetical order, before the list is returned to the collector. Where the proposed assessment against any corporation includes the tax for two or more calendar years a separate line should be used in re- porting the tax for each year. In rendering lists on which no tax is reported for assessment collectors will enter on line 1, column 2, of inside page of such lists, the words "No returns received during the month." Receipts. A separate receipt on Form 476 for advance collections of corporation taxes, reported on the lists for March, June, September, and December, should be furnished. Such receipt will include all collections made dur- ing the month on Forms 23A and 58A for that month, and will be dated and signed by the collector and attached to the original list before said list is forwarded to the Commissioner. If any list is not received by the collector in time to be receipted for by him before the close of the quarter lie will immediately, at the end of the quarter, forward to the Commis- sioner a receipt. Form 476, covering the amount collected on such list during the quarter, as under the circumstances he is chargeable in his quarterly account with so much of said list as has been collected and deposited by him. The collector will not combine the collections on two lists in the same Form 476, but will make a separate receipt on that form '§ 89] ASSESSMENT LIST. 385 for each list. If the collector promptly forwards his lists as instructed there will seldom be any necessity for a receipt on Form 476, except for the months closing the quarter and when a new bond is given. When assessments are made by the Commissioner receipts on Form 23J in duplicate for the full amount of the lists, less amount receipted for on Form 476, if any, will be prepared and inclosed with the original list. These receipts sliould be dated and signed by the collector, one of said receipts to be attached to his list and the other to be promptly returned to the Commissioner. Notice of Assessment. Upon receipt of the original list from the Commissioner a preliminary notice of assessment, Form 647, will at once be sent to each corporation, etc., assessed thereon, provided the same can be done within the 120 days from the date when its return was due. All corporations that have not paid the tax assessed for the current tax year on or before the end of 180 days from the close of their fiscal year will be at once served with notice on Form 17, which will be followed (should the taxes remain un- paid) by Forms 21 and 69, as in the case of other assessed and unpaid taxes. For all taxes assessed on any list for a prior tax year, and for the current tax year when the proper return is not filed within the 60 days after the close of the chosen fiscal year, Form 17 will immediately be issued and the taxes will be collected in the manner prescribed for other assessed taxes. In case the corporation assessed makes its tax return within 60 days after the close of its fiscal year, then the pre- liminary notice will give the date of payment 120 days from the date when said return was due, or, in other words, 180 days after the close of its fiscal year. The dates on which notices, Forms 647 and 17, are issued will be entered in columns 10 J and 11, respectively. All payments or abatements made subsequent to the rendition of lists by collectors will be at once noted in the appropriate columns of the original list. Form 58A. The names entered in column 1 of Form 58A will be arranged alpha- betically irrespective of class. In columns 1 and 2 the entries will be similar to entries in same columns on Form 23A. In column 3, item 1, will be entered "Offer in compromise, failure to file return in time for tax year ending — — ." Items 2, 3, and 4, after showing on what account paid, should refer to list, folio, and line where assessed. Under item 5, in column 1, will be entered the name of the owner of the property sold, and in column 3 should be given the reason of the sale, referring to the assessment, if any, by list, folio, and line, the gross proceeds, the expenses of sale, the amount applied to the payment of the tax if assessed, the amount of 5 per cent penalty and interest, and the surplus proceeds re- turnable to the owner. All of these amounts, except that applied to tax, should be carried to column 6 in separate items. In such sales deduct and apply the amounts in the order named. Costs must always be charged on Forms 58A and must not be paid out of the proceeds of the sale. Under item 6, in column 1, enter the name of the corporation on whose account the money is paid; in column 3 give a concise description of the specified violation, as "failure to file return," or "recovery of tax assessed," giving list, folio and line where assessed, and finally give the name of the court oificer who paid the money and to whom receipt, Form 540, was issued. Costs should be entered on a separate line and itemized as on Form 540. If more than one page of Form 58A is required the collector will use the continuation sheet. If the above instructions are not plain, or are not understood, please ask for further instructions. Collectors will be expected to follow these instructions implicitly, and the lists will be examined with them in view; therefore, failure to comply may cause improper action to be take;). Foster Income Tax. — 25. 386 assessme::«t. ;[§ 89 Folio 1. Total No. folios in list, Form 23A (First Page).. — Prescribed November 13, 1913. ALPHABETICAL LIST of Corporations, Joint Stock Companies, August 5, 1909, and Sec. 2, Act of October 3, 1913, in the District for Assessment, and the amount assessed against each by said District, for Collection, for the Month of , 191 Line No. Line No. Line No. Line No. Line No. Line No. 1 2 3 4 5 6 7 1 a Name. Oj CO 3 s i-t PMto If si rH ■5.1 S U ll ^ CI. No. Dols. Cts.l 1 9 3 4 5 fi 7 8 q in n T> n » 14 15 Ifi 17 1R ■■ IP - ' T) 91 99 9S 94 9t 9fi 97 '>8 90 ' ^n ^1 iij9 ?9 ■^4 35 * ' 1 Totals, 1 ADDITIONAL REMARKS BY COLLECTOR. § 89] ASSESSME^fT LIST. ^87 Folio Total No. folios in list, Form 23A (Inside Sheet). — Prescribed Novembei' 13, 1913. Associations, etc., liable to Special Excise Tax under Sec. 38, Act of Collection District of , reported by the Collector of said the Commissioner of Internal Revenue, and certified to the Collector of 8 9 10 1 lOi 1 11 1 12 13 14 15 1 16 6 a o d i 2 3 4 5 e 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 V CO OS < 50 & 100 % Add. Tax Assessed. 1% EC =^ ai C» en , Service of SpecialNotice, Form 647. 6>^ ■a '^ ■ ^ y< CI. No. Dols. Cts.l 1 o ;i 4 (; 7 S 9 in ■ 11 1? 13 14 IS .... Ifi 17 18 11 90 ?1 99 ^3 94 ^5 96 97 ^S 9q 30 31 39 33 34 35 1 Totals, 1 ADDITIONAL KBMABKS EY COLLECTOR. Line No. Line No. Line No. Line No. Line No. Line No. §■ 89] ASSESSMENT LIST. 389 Folio Total No. folios in list, Form 23A (Last Page). — Prescribed November 13, 1913. Associations, etc., liable to Special Excise Tax under Sec. 38, Act of Collection District of , reported by the Collector of said the Commissioner of Internal Revenue, and certified to the Collector of 1 8 9 10 lOJ 1 11 12 13 14 15 16 a O o tc at CO 50 & 100% Additional Tax Assessed. OQ CO ;^ a 1—1 s 0(x, .2'S B a $ ^ $ ^ 1 $ 1^ $ 1^ MO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 . . . .) I hereby certify that each of the corporations, joint stocit companies, asso- ciations, etc., above reported by me is liable to a tax of 1 per cent of the net income set opposite its name. Dated at Collector of Internal Revenue. Dist. of 191 I hereby certify that, as authorized and required by law, I have made in- quiries, determinations, and assessments of the taxes specified in the foregoing list, and find to be due the amounts specified in columns 8 and 9 of said list from the corporations, .joint stock companies, associations, etc., taxable under Section 38 of the act of August 5, 1909, and Section 2. act of October 3, 1913, ."rninst whose nam°s said amounts are respectively placed. I-itoriial Revenue Office, Washington. 191 Commi.ssliiner. 390 ASSESSMKNT. [§ 89 Form 58A. — Prescribed November 13, 1913. United States Internal Revenue. LIST OF UNASSESSABLE COLLECTIONS. Alphabetical List of Corporations, Joint Stock Companies, Associations, etc., in the District of from which the following- described Moneys have been Collected, and the Amounts so Collected in each case, during the Month of , 191 1. Amounts received as offers in compromise. 2. Five per cent penalties and interest collected. 3. All excess collections, including unassessable taxes. 4. All taxes paid after abatement. 5. Surplus proceeds and costs incident to sales under warrants of distraint. 6. All fines, penalties, judgments, and costs paid to the Collector by order of Court. I, , Collector of the District of , do hereby certify that the following Detailed List is complete, in every particu- lar, and embraces all collections , made in said District, from the sources enumerated above, during the above-specified period. Dated this day of ,191 Collector. 1 1 12 1 3 14 15 6 0) s '3 "3 d IZi Name. P4 <1 1 n o CS« ° a 1 ■s a a § a < 1 ■A 3 4 Q 7 H 9 (1 1 « 3 4 lii Mi 17 1H 19 '•!() ?A m '-',3 '>A ?.n m \>,1 m '■19 3U Total Carried Forward to EEMABKS BY COMMISSIONER. Line No Line No Line No Line No Line No Line No ■ (For instructions relative to the preparation of Form 58A see first page of cover.) i 89] ASSESSMENT LIST. 391 betical order as to each class. Names of individuals sub- ject to tax will be listed on Form 23-B,* alphabetically, 4 Form 23B (Front Sheet). — Prescribed December 5, 1913. UNITED STATES INTERNAL REVENUE. ( Original or Duplicate. ) Income Tax Assessment List of INDIVIDUALS AND WITHHOLDING AGENTS, Liable to Income Tax under Section 2, act of October 3, 1913, in the Collection District of , for the Month of , 191. . Collector. Receipted for by the Collector, , 191 This form must never be folded. When transmitted by mail it should be rolled about a stick so that "the form will not be mutilated. Special care should be taken to avoid tearing or injuring the binding edge. Instbuctions fob the Pbepabation, etc., op Fobms 23B and 58B. These instructions supersede all previous instructions in conflict there- Tvith and must be closely followed to insure uniform reports from the ■various Collection Districts. Genebai, Instbuctions. Beginning with the January, 1914, list, this Form 23B will be used ■exclusively for listing individuals and withholding agents subject to tax under Section 2 of the act of October 3, 1913 ; in the case of individuals, for personal income tax, and in case of withholding agents, for the normal income tax withheld by them at the source. Care will be taken to report such items only on this list, as corporation income tax will be reported on Form 23A. This list will be prepared in duplicate (and triplicate, if the collector so desires) on the typewriter, when possible, both original and duplicate to be forwarded, with all returns listed, on or before the 10th of the month following the month for which the list is rendered. It is very necessary that these lists be forwarded to the Commissioner not later than above specified, in order that the accompanying returns may be examined, assessments made, and the original list returned in time to be receipted for by the collector before the close of the month. It may not be possible "to list all returns on hand on the February and March lists, before such lists are to be forwarded to the Commissioner, and in such case the ■omitted names will be entered on the next subsequent list. All returns received on or before March 1 must, however, be listed not later than the April list, in order that a preliminary notice of assess- ment (Form 647) may issue on or before June 1. To avoid perplexing errors, duplication of receipts and delays in making assessments, the «bove should be strictly observed. 392 ASSESSMENT. [§ 89 Special Instructions, Fokm 23B. The blanks at the top of each folio must be filled in. The lines of this form have been especially ruled for typewriter spacing, and the single sheets furnished admit of a number of clerks listing at the same time and afterward assembling these sheets. Care should be taken to avoid muti- lating the binding edge. In typewriting, should there be a tendency to tear the tips, the binding edge of the sheet may be protected by inserting the same in a narrow slip of paper folded lengthwise before passing the same under the platen of the machine. In column 1 the collector will enter the names, alphabetically, of individ- uals subject to tax, leaving several lines after each letter on which other names may be entered by the Commissioner. The names of withholding agents will not be reported on Form 23B until the lists for the months of March and April are made up, or when such withholding agents dis- continue business, or when the amount withheld is paid, in which case the amount paid must be immediately accounted for by the collector. The April list must be promptly forwarded in order that the original may be returned to the collector in time to give notice of assessment on or before Jime 1. In preparing their lists collectors will carefully enter in columns 2, 3, 4, 5, 6, and 7 the information therein called for. Under the head of "Basis of Assessment" (column 6) reference will be made to "Original" or "Amended" returns, or to additional tax reported by revenue agents, etc., as the case may be. No entries will be piade by collector in columns 8, 9, 10, and 16 of the list. Before sending the list to the Commissioner the collector will enter in column 11 the amount of taxes paid during the month (advance collections) for which the list is rendered, and in columns 12, 13, and 15 the necessary data to complete the list. All advance col- lections reported on each page of the list should be added, and the amounts carried forward to the last page, where the total, including the amount reported on Form 58, will be entered on the total line in column 11. The words "Amount of Form 58" should also be written on the left half of the folio, line 35, and the amount in column 11. In listing the names of individuals and withholding agents several blank lines should be left after each initial letter, so that the names of other individuals and withholding agents found subject to tax may be added, in regular alphabetical order, before the list is returned to the collector. Where the proposed assessment against any individuals and withholding agents includes the tax for two or more calendar years a separate line should be used in reporting the tax for each year. In rendering lists on which no tax is reported for assessment, collectors will enter on line 1, column 2, of inside page of such lists the words "No returns received dur- ing the month." Receipts. A separate receipt on Form 476 for advance collections (collections made during the month for which the list is rendered) of income tax, reported on Forms 23B for March, June, September, and December, should be fur- nished. Such receipt will include all collections made during the month and reported on Forms 23B and 58B for that month, and will be dated and signed by the collector and attached to the original list before said list is forwarded to the Commissioner. If any list is not returned by the Commissioner in time to be receipted for by the collector before the close of the quarter, he will immediately, at the end of the quarter, for- ward to the Commissioner a receipt. Form 476, covering the amount col- lected on such list during the quarter, as under the circumstances he is § 89] ASSESSMENT LIST. 393 chargeable in his quarterly account with so much of said list as has been collected and deposited by him. The collector will not combine the col- lections on two lists in the same Form 476, but will make a separate re- ceipt on that form for each list. If the collector promptly forwards his lists as instructed, there will seldom be any necessity for a receipt on Form 476, except for the months closing the quarter and when a new bond is given. When assessments are made by the Commissioner, receipts on Form 23J in duplicate for the full amount of the lists, less amount receipted for on Form 476, if any, will be prepared and inclosed with the original list. These receipts should be dated and signed by the collector, one of said receipts to be attached to his list and the other to be promptly returned to the Commissioner. Notice of Assessment. Upon receipt of the Form 23B from the Commissioner a preliminary notice of assessment, Form 647, will at once be sent to each individual and withholding agent assessed thereon, provided the same can be done prior to June 30. All individuals and withholding agents that have not paid the tax assessed for the current tax year on or before June 30 will be at once served with notice on Form 17, which will be followed (should the taxes remain unpaid) by Forms 21 and 69, as in the case of other assessed and unpaid taxes. For all taxes assessed on any list for a prior tax year, and for the current tax year when the list is received too late to issue Form 647 before June 30, or when the return for any reason is not received on or before March 1 of each year. Form 17 will immediately be issued and the taxes will be collected in the manner prescribed for other assessed taxes. The dates on which notices. Forms 647 and 17, are issued, will be entered in columns lOJ and 11, respectively. All payments or abatements made subsequent to the rendition of lists by collectors will be at once noted in the appropriate columns of the original list. FoEM 58B. The names entered in column 1 of Form 58B will be arranged alpha- betically. In columns 1 and 2 the entries will be similar to entries in same columns on Form 23B. In columns 3, item 1, will be entered "Offer in compromise, failure to file return in time for tax year ." Items 2, 3, and 4, after showing on what account paid, should refer to list, folio, and line where assessed. Under item 5 enter costs and surplus proceeds on separate lines, referring in column 3 to list, folio, and line where assessed. In distraint sales the costs are first deducted from the gross proceeds, then the tax due, then the 5 per cent penalty and interest, and the amount left is surplus proceeds and must be entered on Form 58B. Under item 6, in column 1, enter the name of the person on whose account the money is paid; in column 3 give a, concise description of the specific violation, as "failure to file return," or "recovery of tax assessed," giving list, folio, and line where assessed, and finally give the name of the court officer who paid the money and to whom receipt. Form 540, was issued. Costs should be entered on a separate line and itemized as on Form 540. If more than one page of Form 58 is necessary, the collector will use the continuation sheet. Form 58, which form has been so arranged that it may be used with all of the lists, Forms 23, 23A, and 23B. If the above instructions are not plain or are not understood, please ask for further instructions. Collectors will be expected to follow these instructions implicitly, and the lists will be examined with them in view; therefore, failure to comply may cause improper action to be taken. 394 ASSESSMENT. [§.89 Folio 1. Total No. folios in list, Form 23B (First Page ) .—Prescribed December 5, 1913. ALPHABETICAL LIST of Individuals and Withholding Agents, liable to Collection District of , reported by the Collector of Commissioner of Internal Revenue, and certified to the -Collector of 1 1 2 1 3 4 5 6 1 7 1 B Name. i g s s ■s.sm ^ -*^ <:S Mod 1 1 is CO 03 = i 09 C -1— s a; > ^ $ ^ 1 1 9. 3 4 5 fi 7 8 9 in 11 ^9. 13 14 1.T Ifi 17 18 IP '^n 9.A '^? "3 •M f,fx '^(i "^7 ?8 ?9 30 31 3^ 33 34 35 1 Totals, 1- Line No. Line No. Line No. Line No. Line No. Line No. ADDITIONAL EEMAKKS BY OOLLECTOK. § 89] ASSESSMENT LIST, 395 Folio Total No. folios in list, Form 23B (Inside Sheet). — Prescribed December 5, 1913. Income Tax under Sec. 2, Act of October 3, 1913, in the said District for Assessment, and the amount assessed against each by the said District for Collection, for the Month of , 191 1 8 9 10 lOJ 11 12 13 14 15 16 B 3 O 6 03 S 09 09 50 & 100 % Add. Tax Assessed. 38 t3.s Service of Special Notice. Form 647. Is 11 li || a ^ 6 ^ $ (f 1 9 3 4 5 fi 7 8 f) in 11 ^9 13 u 1.1 Ifi 17 18 It ?n ''1 99 ''3 94 9t 9fi 97 98 9n 30 31 39 ?3 3'l 35 Tot als, 1 ADDITIONAL REMARKS BY COLLECTOR. Line No. Line No. Line No. Line No. Line No. .Line No. § 89] ASSESSMENT LIST. 397 Folio Total No. folios in list, Form 23B (Last Page). — Prescribed December 5, 1913. Income Tax under Sec. 2, Act of October 3, 1913 in the, of said District for Assessment, and the amount assessed against each of said District for Collection, for the Month of , 191 8 s 10 \ m 1 11 12 13 14 15 16 6 o d I? -a 02 m V m SO & 100 % Add. Tax Assessed. a) =° goo — o .2.9 Service of Special Notice. Form 647. 1- = 1.1 -a a =8 Ibid. and it omits the provision excepting 8 Delaware R. Co. v. Prettyman, "estates of insane, deceased, or in- 17 Int. Eev. Kec. 99, Fed. Cas. No. solvent persons." 3,767; Doll v. Evans, 9 Phila. 364, Fed. Cas. No. 3,969. 410 PAYMENT. [§ 93 The former statutes describe this imposition of interest as a penalty, but the present act contains no such denomination. The object of the omission was to obviate objections to the discovery. Interest does not begin to run until two contingen- cies have happened : 1. The arrival of the first day of July; and 2. The lapse of ten days after notice and demand. § 94. Manner of payment. Payment may be made in cash or by a certified check upon a national bank, a State bank or a trust company, located in the same city as the depositary, where the collector is obligated to deposit the same.^ The col- lectors are also authorized to accept certified checks drawn on such corporations elsewhere, which can be cashed by the col- . lectors without cost to the Government, provided that the de- positary will accept the same for deposit.* The Act of March 2nd, 1911, as amended by the Act of March 3rd, 1913, provides : "That it shall be lawful for col- lecting officers to receive certified checks drawn on national and State banks and trust companies, during such time and under such regulations as the Secretary of the Treasury may pre- scribe, in payment for duties on imports, internal taxes, and all public dues, including special customs deposits." "No per- son, however, who may be indebted to the United States on account of duties on imports or internal taxes who shall have tendered a certified check or checks as provisional payment for such duties or taxes, in accordance with the terms of this Act, shall be released from the obligation to make ultimate payment thereof until such certified check so received has been duly paid ; and if any such check so received is not duly paid by the bank on which it is drawn and so certifying, the United States shall, in addition to its right to exact payment from the party original- ly indebted therefor, have a lien for the amount of such cheek upon all the assets of such bank ; and such amount shall be paid out of its assets in preference to any or all other claims what- §94. IDept. Circular No. 11, 1911, p. 932) ; as amended by Act of March 27, 1913; T. D. 1990, Act of March 3, 1913, 37 Stat, at L. 733, March 2, 1911, 36 Stat, at L. 965, chap. 119. chap. 191 (U. S. Comp. Stat. Supp. «Dept. Circular No. 11, T. D. 1990. § 95] PAYMENT XJNDEK PHOTEST. 411 soever against said bank, except the necessary costs and expenses of administration and the reimbursement of the United States for the amount expended in the redemption of the circulating notes of such bank." ' The Department has made the following orders upon the subject: "Eeceivers and collectors of public moneys will, therefore, until further advised, accept in payment for all public dues of whatever description, certified checks when drawn in favor of the receiver, or collector, on national and State banks and trust companies located in the same city as the depositary with which the deposits are to be made, and such 'out of tovsm' certified checks as can be cashed by them without cost to the Government." * And in a subsequent rul- ing: "In the event that the depositary will not accept for deposit "out of town' certified checks, you are not required by law or regulations to accept such checks in payment of internal- revenue taxes. The law does not specifically authorize the ac- ceptance of any form of exchange in payment of internal- revenue taxes other than currency and such certified checks as are specifically described in Department Circular 'So. 11, ref- erence to which is made above. If, however, the collector elects to accept drafts or other mediums of exchange not specifically authorized by law, he does so at his own risk, but it may be said that, if the depositary bank will accept such forms of ex- change indorsed by the collector without recourse and issue therefor regular certificates of deposit, the monetary responsi- bility would appear to be shifted from the collector to the de- positary, inasmuch as the collector would be entitled to credit in his accounts by reason of the issuance of such certificates of deposit." * § 95. Payment under protest. The taxpayer may wish to preserve his rights to recover back his taxes after they are paid. This cannot be done if the payment is voluntary without any contemporary protest or notice of objection.^ Since the » Act of March 2, 1911, 36 Stat, at « T. D. 1990, June 1, 1914, citing L. 965, cliap. 191 (U. S. Comp. Stat. U. S. Rev. Stat. § 3211 (U. S. Comp. Supp. 1911, p. 932); Act of March Stat. 1901, p. 2083). 3, 1913, 37 Stat, at L. 733, chap. 119. § 95. 1 Ghesebrough v. V. S. 192 * Dept. Circular, A. D. 1913, No. U. S. 253, 48 L. ed. 432, 24 Sup. Ct. 11. Rep. 262; U. 8. v. N. Y. <£ Cuba 412 PAYMENT. [§ 95 internal revenue laws contain no requirement that the protest shall be in writing, it has been said that an oral protest is suf- ficient.^ Where, however, the taxes were paid by a check marked on its face "Paid under protest," it was held that it did not appear that the fact of the protest came sufficiently to the knowledge of the commissioner, and that consequently it was insufficient.' A payment not under duress would seem to be past recovery, although made under protest. The payment of an inheritance tax under protest, after a threat by the col- lector that unless promptly paid it would be collected with a penalty and interest of one per cent a month, was held to be involuntary and to justify a suit against the internal revenue collector to recover the amount of the same.* § 96. Receipts. Whether the tax is paid under protest or not, the taxpayer is entitled to a receipt in accordance with the provisions of subsection J of the present act. "That it shall be the duty of every collector of internal Mail 8. 8. Co. 200 U. S. 488, 50 L. ed. 569, 26 Sup. Ct. Rep. 327; Fos- ter, Fed. Pr. 5th ed. § 96, p. 369. a Wright v. Blakeslee, 101 U. S. 174, 179, 25 L. ed. 1048, 1049. See Stewart v. Barnes, 153 U. S. 456, 459, 38 L. ed. 781, 783, 14 Sup. Ct. Rep. 849. Ahrast Realty Go. v. Max- well, (E. D. N. Y.) 206 Fed. 333, 334-336; per Chatfield, J.: "In January, 1912, a corporation tax was assessed, under the provisions of sec- tion 38, Act of August 5, 1909, and, not being paid, a writ of distraint was issued by the collector. Notifi- cation having been given the cor- poration that the tax would be col- lected by levy, sufficient funds were in the hands of a representative of the corporation, so that the deputy collector was able to count out and take the amount necessary to cover the tax, viz., $2,166.76. Thus the writ did not have to be exhibited by the deputy. Verbal protest had been made to the collector prior to this time, and a written notice of pro- test was given him at the time of levy, in which notice the corporation stated that the tax was paid under protest and that the corporation claimed that it was not liable to the tax. * * * xhe only remaining question is whether the collector made a levy under sections 3107 and 3205, Rev. Stat. (U. S. Comp. Stat. 1901, pp. 2029, 2080), in such a way that it was equivalent to a payment without protest. In the eases of City of Philadelphia v. Collector (Phila- delphia v. Diehl) 5 Wall. 720, 18 L. ed. 614, Erskine v. Van Arsdale, 15 Wall. 75, 21 L. ed. 63, and John- son & Johnson v. Herald, Collector (C. C.) 161 Fed. 593, it is shown that where the tax is paid under such circumstances that the terms of protest are understood and suffi- ciently expressed to be brought to the notice of the government, and where the levy is used merely to pro- tect the government officer in acting under the statute, an action may be maintained to recover the tax." 3 Kings County Savings Institu- tion v. Blair, 116 U. S. 200, 29 L. ed. 657, 6 Sup. Ct. Rep. 353. i Simons v. U. 8. 19 Ct. CI. 601. See Huibard v. Kelley, 8 W. Va. 46. § 96] EECEIPTS. 413 revenue, to whom any payment of any taxes other than the tax represented by an adhesive stamp or other engraved stamp is made under the provisions of this section, to give to the person making such payment a full written or printed receipt, express- ing the amount paid and the particular account for which such payment was made ; and whenever such payment is made, such collector shall, if required, give a separate receipt for each tax paid by any debtor, on account, of payments made to or to be made by him to separate creditors in such form that such debtor can conveniently produce the same separately to his several creditors in satisfaction of their respective demands to the amounts specified in such receipts; and such receipts shall be sufficient evidence in favor of such debtor to justify him in withholding the amount therein expressed from his next payment to his creditor; but such creditor may, upon giving to his debtor a full written receipt, acknowledging the payment to him of whatever sum may be actually paid, and accepting the amount of tax paid as aforesaid (specifying the same) as a further satisfaction of the debt to that amount, require the surrender to him of such collector's receipt." ^ § 96. lAct of October 3, 1913, subsection J. CHAPTEE VIII. DEDUCTION AT THE SOURCE. § 97. Deduction at the source in general. All per- sons, firms, companies, copartnerships, corporations, joint-stock companies, associations and insurance companies, having the control, receipt, disposal or payment of fixed or determinable annual or periodical gains, profits and income of another person subject to tax, when such annual income is 6qual to at least $3,000, must deduct and withhold from the debtor and pay to the Government the normal income tax upon the same, except in the case of dividends on capital stock, or from the net earn- ings of corporations or joint-stock companies and associations subject to a like tax.* The collector must, if required, give a separate receipt for each tax so paid by any debtor on account of payment made out of sums due separate creditors, in such form that the debtor can conveniently produce the same separate- ly to his several creditors in satisfaction of their respective de- mands, and such receipt is sufiicient evidence in favor of the debtor to justify him in withholding the amount therein ex- pressed from his next payment to his creditor.* The creditor upon giving the debtor a full written receipt acknowledging the payment of whatever sum is actually paid and accepting the amount of the tax paid as aforesaid, specifying the same as a further satisfaction of the debt, may require the surrender to him of such collector's receipt.* "The provisions of this section relating to the deduction and payment of the tax at the source of income shall only apply to the normal tax herein- before imposed upon individuals." * The additional tax ° and § 97. »Act of October 3, 1913, » Ibid. II, subsection D. * Ibid. Subsection E. ilbid. Subsection J.; supra, § 96. S/6iaf. Subsection A, subd. 2. 414 § 97] DEDUCTION AT THE SOUBCIS IN GENERAL. 415 the tax upon the net income of corporations, joint-stock compa- nies or associations, and insurance companies,' must be paid by the recipient upon the net income "from all sources." ' Stoppage at the source was first adopted in England in 1803 and has been there continued throughout the British legisla- tion upon the subject. It has been copied in Italy and it has been said to be the chief cause of the success of the English system.* That was the reason for its insertion in the Act of Congress now under consideration,* although it was adopted ^ Ibid. Subsection G (a). 7 43 George III., 122. • See the two reports of the select committee on the Income and Prop- erty Tax, together with the minutes of evidence, both published in Lon- don in 1852 Seligman's Income Tax, 146, 216. Cf. §§ 3, 6, Supra. 9 "The question has been asked. Why does the new law contain the method of collecting a substantial portion of the tax at the source of the income? The law would be complete in its administrative provi- sions with this provision eliminated. One answer is: To avoid the un- satisfactory conditions existing in virtually all the States under the operation of their general property- tax systems, the result of which has been that only 20 per cent of the value of all personalty, including but a nominal portion of intangible personalty, and less than one-half of the value of all realty has been given in by the taxpayer for assess- ment. The State and local tax bur- dens are thus harsh and inequitable and measurably limited to those either honest and willing enough to disclose their full property values for taxation or those whose property is not concealable. A taxpayer is practically penalized for being hon- est. Most European countries re- quire a personal return for the pur- pose of income-tax assessment. The fact should not be overlooked, how- ever, that the successful administra- tion of this method is necessarily so drastic, and in some respects so in- quisitorial, as likely to render the tax law unpopular in a country like ours. Human nature is such that it is more disposed in the beginning to antago- nize a tangible than an intangible tax, however just the former and however unjust the latter. Foreign laws requiring a personal return would derive but a comparatively small amount of taxes unless the law should be enforced in a most rigid and drastic manner. When the English Government adopted the system of collection at the source the tax rates were reduced one-half, and yet the amount of revenue de- rived was the same as under the for- mer higher rates. This method greatly reduced inquisitorialness. The inexpediency of depending upon a personal return of the taxpayer has been thoroughly demonstrated in the administration of our State property-tax systems. More than $60,000,000,000 of our national wealth consists of personalty. By far the larger portion of this huge amount is intangible personalty, most of which has always been con- cealed from the tax gatherer. Ac- cording to a late report of the Ken- tucky Tax Commission, the amount of deposits in the banks of the State on January 1, 1912, was given in, under oath, for assessment at $12,- 847,868, whereas the true amount of deposits, according to the report of the banks, was $133,339,871. A Kentucky law imposing a tax on dogs yields a larger revenue to the State treasury than that derived from the entire bank deposits. The report of the New York State 416 DEDUCTIOJSr AT THE SOUKCE. [§ 9V Board of Tax Commissioners in 1910 showed that the ratio which the as- sessment of personal property bore to the total assessment had fallen to 5.65 per cent in 1909. The assessed value of real estate in 13 States for the year 1910 was $9,708,731,821, while its estimated true value was $28,285,821,708. This but illustrates the ill-balanced and unsatisfactory tax conditions in most of the States. Their general property tax systems have almost broken down. Moreover, there are 30,000 Ameri- cans residing in France alone — most of them wealthy — who draw their incomes from this country. Many nonresident Americans annually re- ceive as much as $500,000 income from interest on our corporate bonds alone. No tax method has hereto- fore been devised that would reach this class of persons or that would successfully reach the resident own- ers of our more than $40,000,000,000 of intangible personalty. In the light of the facts I have enumer- ated, it was deemed both wise and necessary to insert in the new law a method by which the Government might intercept the tax on certain large classes of income before it reached the owner and taxpayer. England, Italy, and other countries have long employed this method with splendid results. A number of States now successfully operate it to a limited extent. The English meth- od of retention at the source was adopted in a modified form under the new law. It is completely ap- plied to income derived from Corpo- rate interest due to individuals and only partially applied to other fixed annual income accruing to individ- uals. To require the tax to be with- held on all fixed annual income de- rived from rent, salaries, and other sources, as in England, regardless of amount, would necessitate the return of a large amount, either by refund or abatement of the assess- ment, in view of the high exemption of $3,000. England annually refunds many millions on account of exemp- tions, abatements, and reductions. The new law will secure the sub- stantial benefits of collection at the source and at the same time avoid any refund of taxes on account of exemptions, and also satisfy almost all claims for deductions at the source of the incorrie by abating the assessment. Every individual tax- payer has a number of remedies for securing the benefit of both exemp- tions and deductions. There will be only a limited number of in- stances in which the tax will be withheld upon the entire taxable in- come of an individual; in most eases he will have other income of which he will be required to make a per- sonal return, and in all such cases he would naturally claim and secure the benefit of his exemptions and de- ductions in connection with income embraced in his personal return." Representative Cordell Hull, of Ten- nessee, before the New York State Bar Association. N. Y. Bar Ass'n Report, 1914, pp. 132-135. "There remains, then, only the stoppage-at- source or schedule income tax. The advantages of this method have been fully stated in our account of the English conditions. It also affords the reason why the Italian income tax is more successful than the Aus- trian or the Swiss. Even in Italy, it will be remembered, only about four-tenths of the revenue is derived through the stoppage-at-source meth- od; but since, in these schedules, al- most the entire amount of taxable income is collected, while in the oth- er schediiles the tax is very much of a farce, it is no exaggeration to say that in all probability not more than a quarter of the real income of the country is secured by the stoppage-at-source method. Even this small percentage, however, serves to make the Italian tax more successful than the Swiss or Austri- an tax. On the other hand, accord- ing to the careful calculations that have been made by the French gov- ernment, the accuracy of which in this respect has not been seriously disputed, at least three-fourths of the large revenues that are to be expected from the French Income tax would be raised according t» the stoppage-at-aource idea. "In the United States tke »tg*- § 97] DEDDCTIOS AT THE SOURCE IN GENEEAL. 417 to a slight degree in a former statute.^" ISTo part of the present Act has been the subject of so much complaint.^^ menta in favor of the stoppage-at-; ditions?" Seligman Income Tax, source income tax are far stronger 660-662. than in Europe, because of the pe- l" Act of July 14, 1864. culiar conditions of American life. n See § 25 supra. "In connection In the first place, nowhere is cor- with this general problem of stop- porate activity so developed, and in page at source, two chief points de- no country of the world does the serve consideration: first, is the ordinary business of the community principle itself sound; and second, assume to so overwhelming an extent what administrative regulations the corporate form. Not only is a have been issued to facilitate the large part of the intangible wealth execution of the law? of individuals composed of corporate "Among the criticisms directed securities, but a very appreciable against the principle of stoppage at part of business profits consists of the source, the first to be noted is corporate profits. In the second the contention that there is no war- place, in no other important country rant for imposing upon the so-called are investments to so great an ex- 'withholding agents' the expense tent domestic in character. The one connected with the withholding of great difficulty in England; as we the tax and the rendering of the have learned, is that connected with accounts to the government. In this foreign securities. And in France, contention there seems to be some where the same difficulty exists, we merit. It must be remembered, have learned that the perfected con- however, that in so far as the with- trol of these foreign investments holding agents are corporations, they through the French bankers and all enjoy a privilege which is not agents forms the one difficult and granted to corporations in Europe, complicated point in the scheme. In namely, that of deducting interest the United States, on the other on debt from their gross income, hand, the situation is the reverse. Apart from this consideration, how- Instead of our capitalists seeking ever, it would seem proper for the investments abroad, it is the foreign government to allow some compen- capitalist who purchases American sation to witholding agents for the securities. We are, therefore, for- expense involved. This might be tunately exempt from the chief em- done by amending the law, or per- barrassment which confronts Eu- haps by a mere administrative pro- rope; and there is every likelihood vision. In any event, the matter that this situation will not be seems not sufficiently important se- changed for some time to come. The riously to compromise the principle arguments that speak in favor of a of the law. stoppage-at-source income tax abroad "The next criticism is more hence apply with redoubled force weighty. It is well known that since here. The stoppage-at-source scheme the beginning of the income-tax agi- lessens, to an enormous extent, the tation in the nineties, almost all of strain on the administration; it the American railroads, and many works, so far as it is applicable, of the larger industrial corporations, almost automatically; and, where have issued their bonds with the enforced, it secures to the last penny so-called 'tax-free' clause; that is, the the income that is rightfully due. corp orations have ob ligate d^ tfiem- Can there really be any doubt as to selves to pay any taxes that might the preference to be given to the be impos^ed upon the bonds or cou- stoppage-at-source income tax over pons. The consequeiicrtr^hat as the either the lump-sum or the presump- present law compels these corpora- tive income tax under American con- tions to withhold the income tax on Foster Income Tax. — 27. 418 deductiojv at the sotjece. [§ 97 the coupons, the corporations under source method ought to be kept in the tax-free clause have no option view, namely, the prevention of tax but to pay the tax themselves. As a evasion. They contended, however, result, t he g overnm ent is hitting "EEe that the needs of government in this vfr rong m an. It seeks to impose the respect would be met by the receipt tax upon^ the bondholder ; in effect, of information as to details of pay- it mulcts the corporation. Under ment, ownership, addresses, etc., and the present situation, the tax du e they declared themselves quite ready by^such. corporate bondholders is to present such reports. This sug- pald fy the stockholders. gestion was not entirely novel. Such "The framers of the bill were well reports form a part of a system aware of this complication. They originally introduced by Italy when accordingly introduced a section it imposed upon the corporations the rendering void any tax-free provi- duty of supplying the government sion in corporate bonds to be issued with certain facts. For this scheme in the future. They did not, how- the present writer suggested tlie ever, deal with existing bonds, as name of 'information at source,' a they feared thereby to expose the name that was at once adopted as law to a charge of unconstitution- a convenient appellation. The fram- ality. It may be stated, indeed, that ers of the bill acknowledged its so far as bonds to be issued in the legitimacy and were willing to sub- future are concerned, it makes little stitute in part at least, information difference, from the economic and at source for payment at source, fiscal points of view, whether the The doubts of the majority of the tax-free provision is contained there- Conference Committee, however, as in or not. The only result of a to the efficacy of the proposed substi- tax-free provision in future bonds tute in completely accomplishing the would be that the bonds would sell desired results were not entirely dis- at a higher price than would other- pelled, and the principle of stoppage wise be the case, the tax being cap- at source was therefore retained, italized into a difference in the mar- "The validity of these doubts must ket price. So far as the corporation indeed be acknowledged, in part at is concerned, it makes no essential least. To the extent that they are difference because the corporation justifiable, it must be conceded that will sell its tax-free bonds at a price the Conference Committee was cor- sufficiently high to compensate it reet in refusing to permit any gen- for the payment of the annual tax; eral acceptance of the information- and so far as inequality of taxation at-source principle. Yet in so far among individuals is concerned, it as tax-free bonds are concerned, there also makes no difference, because is little doubt that the information- the purchasers of tax-free bonds, in- at-source method would have been stead of paying the income tax on an acceptable compromise between the coupons, will capitalize this an- the impracticable lump-sum personal nual tax into the additional price tax and the stoppage-at-source they pay for the bonds. This con- scheme, which virtually results, for sideration, however, does not aflfect the present at least, in some inequal- the thousands of millions of existing ity. It must be remembered, how- corporate bonds where the result of ever, that with the passage of every the present system is to impose an year and the gradual disappearance additional burden on the corporation of tax-free bonds, the objections will and to exempt the security holders, diminish. Our conclusion must "It was a consideration of this therefore be that, with this one ex- nature which led the representatives ception, the stoppage-at-source prin- of the withholding corporations to ciple is defensible, but that the in- suggest during the pendency of the formation-at-source method deserves discussion an alternative scheme, serious consideration as a possibil- They conceded that the chief object ity of the future. At all events, the to be attained by the payment-at- elimination of the old lump-sum per- § 97] DEDUCTION AT THE SOUECE IN GENERAL. 419 The provision for the payment of tax at the source applies to lessees,^^ mortgagors of real or personal property/^ trustees act- ing in any trust capacity, executors, administrators,^* agents,*^ sonal income tax constitutes an un- deniable advance. "The other phase of the stoppage- at-source question is that of the ad- ministrative regulations issued to en- force the law. The Treasury Depart- ment, which was given great lati- tude, has struggled with the difficult task of interpreting some obscure passages in the law and making them workable. In the first place, the Bureau of Internal Revenue has pro- vided for the attachment of certifi- cates by all withholding agents. In case of bonds and similar obliga- tions, it has been settled that if the debtor corporation or its fiscal agent does not deduct the tax, the first bank, trust company, banking firm, individual or collecting agency re- ceiving the coupons for collection or otherwise shall withhold the tax and attach a certificate stating for whom the tax is deducted, the per- son from whom the coupons were received, the bonds from which the coupons were cut, and the amount of interest. All such certificates, which may be signed by a bank or other responsible collecting agency, as well as those prepared by persons li- censed to collect foreign incomes, must be filed with the district col- lector by the 20th of the following month. So far as income from sour- ces other than corporate interest is concerned, the situation has been rendered much simpler by a regula- tion that the tax shall not be with- held until the aggregate of the pay- ment during the year amounts to more than $3000. The tax is then to be paid upon this aggregate un- less the person to whom the income is payable files with the withholding agent a claim for the three or four thousand dollar exemption, respect- ively, in which case the tax is to be withheld only on the excess above the exemption claimed. The tax payer may present his claim for exemption to the revenue ofiicers, rather than to the withholding agent. In a great majority of the cases, of course, this will be done, because in order to take advantage of the deductions, the tax payer must file a statement of his annvial income from all other sources. After the tax has once been withheld, any one may subsequently pass on the money involved without incurring any liability for further withholding or payment. It must also be re- membered that the obligation on the part of the withholding agent to de- duct the tax does not apply where the payment is made to corporations. Owing to this provision, as well as to the regulation governing the $3000 exemption, most of the com- plications which had been antici- pated so far as concerned rentals of real estate or the interest on real- estate mortgages, will be effectively removed. There are still left, how- ever, not a few minor administrative difficulties to be overcome." Selig- man in Political Science Quarterly, Mar. 1914, vol. XXIX, 18-22. 12 Tr. Reg. 64, infra, § 98. 13 Tr. Reg. 64, infra, § 103. li Infra, § 77. 15 Mr. Walter Lindner, of the New York bar, has expressed the opinion that the tax must be paid at the source by a rent collector who col- lects more than $3,000 gross rent during the year from the tenants of different buildings or different apart- ments in the same building, although he has paid out of the same disburse- ments connected with the buildings, which reduce the net amount of in- come collected by him to $3,000 or less. N. Y. Sun, Nov. 23, 1913. In view, however, of the probabilities of vacancies, a more reasonable con- struction of the statute would seem to be that the annual gains are not fixed or determinaole, and that in any event the act only applies to the net income payable to the principal, not to the gross amount collected. 420 DEDUCTION AT TilE SOUECE. [§ 97 receivers," conservators, employers," and all officers and em- ployees of the United States having the control, receipt, custody, disposal, or payment of interest, rent, royalties, salaries, wages, premiums, annuities, compensation, remuneration, emolu- ments, or other fixed or determinable annual gains, profits and income of another person,^' but not from such as are neither fixed nor determinable^' nor from dividends by corpo- rations to stockholders,^" at least when not preferred or^' guar- anteed.^^ 1^0 such deduction or payment is required accord- ing to a ruling of the Treasury Department, from a corporation, association, or organization which is itself exempt from the tax.'^^ According to the Treasury Eegulations : "Banks, bankers, trust companies, and other banking insti- tutions receiving deposits of money, are not required to with- hold at the source the normal income tax of 1 per cent on in- terest paid, or accrued, or accruing to depositors, whether on open accounts or on certificates of deposit; but all such in- terest, whether paid or accrued and unpaid, must be included in the annual income return of the person entitled to receive such interest, whether on open account or on the certificate of deposit." ^* When a note is given in payment of interest, rent or other income, accruing after March 1st, 1913, the maker of the note is considered by the Treasury Department to be the source where the income originates and is required by the Department to withhold the normal tax of one per cent, on the entire amount of the note, if the note is in excess of $3,000, unless a claim is made for exemption in accordance with the statute.^* The same rule applies when the note is presented by one who has bought or discounted the same. In cases of such purchase or discount, the amount of the tax should be taken from the purchase price. ^* Illustrations of income the tax whereupon should be paid by the individual and not deducted le Infra, « 101. 22 See § 103, infra, l-rinfra, § 99. "» Tr. D. 1967. 18 Tr. Reg. 63, infra, § 100. 24 Regulation 67. 19 Eegulation 32. ^6 Tr. Reg. 65. 20 Ibid. ** '**<*• 21 See § 103, infra. § 87] DEDUCTIOIT AT THE SOL'ECE IN GENERAL. 421 at the source are the incomes of farmers, merchants, agents compensated by commissions, lawyers, doctors, authors, invent- ors and other members of the professions, unless they are paid fixed salaries. The courts have not decided whether, in the case of alimony exceeding $3,000, the husband is entitled or re- quired to deduct the tax. In Great Britain, it has been held that the rule applies to a husband who, by a deed of separation, is bound to pay his wife a yearly allowance,^^ but not to interest paid a municipal corporation by a land-owner in respect of his share of the expense of paving.^' It was held in Great Britain: that when a loan not secured by a mortgage is paid within less than a year, interest upon the same should not be thus deducted and paid by the debtor.^' That where the interest is for an uncertain period, but is calcu- lated by the year and accrues for more than a year, it may be deducted.'" That the tax cannot be deducted from a payment into court.'* That when a payment is made to a creditor, who has proved his debt in an administration suit, the income tax may be deducted ; '^ and that a demand is not invalidated by its claim of interest in full without allowing for a deduction of the tax.'' The Treasury Kegulations provide : "The normal tax of 1 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 ^ Dalrymple v. Dalrymple, i F. ulated at a certain rate per year, 545, 39 Scotch L. R. 348. although It accrued for a less time. ^^ Corporation V. Lumsden (1913) ^^ Holroyd v. Wyatt, 1 De G. & 77 J. P. 124. S. 125 (1847); Dawson v. Dawson, 89 Mosse V. SaZt, 32 Beav. 269, 273, 11 Jur. 984 (1847); Bumile v. 276, 32 L. J. Ch. N. S. 756. Humble, 12 Beav. 43 (1849); Bebb 30 Goslings & Sharpe v. Blake, L. v. Bunny, 1 Kay & J. 216, 219 R. 23 Q. B. Div. .324, 58 L. J. Q. B. (1854). N. S. 446, 37 Week. Rep. 774, 2 Tax 32 Dinning v. Henderson, 3 De G. Cas. 450 ( 1889 ) ; De Peyer v. The & S. 702, 19 L. J. Oh. N. S. 273, 14 King, 100 L. T. N. S. 256 (1909); Jur. N. S. 1038 (1850); Criticized J?e Craven's Mortgage, Davies v. Cra- in Goslings & Sharpe v. Blake, L. reft [1907], 2 Ch. 448, 76 L. J. Ch. R. 23 Q. B. Div. 324, 58 L. J. Q. B. N. S. 651, 97 L. T. N. S. 475. Con- N. S. 446, 37 Week. Rep. 774; 2 tra. Lord Advocate V. Corporation of Tax Cas. 450 (1889). Edinburgh, 6 F. 1, 41 Scot. L. R. 33 Sg Cooper [1911], 2 K. B. 550, .1, 4 Tax Cas. 627 (1903) ; Bebb v. 80 L. J. K. B. N. S. 590, 105 L. T. Bunny, 1 Kay & J. 216, 1 Jur. N. N. S. 273, 55 Sol. Jo. 5.54 (1911). S. 20.3; where the interest was stip- 423 DEDUCTION AT THE SOUECE. [§ 97 its duly appointed agent authorized to make such deduction and payment. "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 -with- hold the normal tax of 1 per cent thereon, provided that any such person, firm, or organization other than the debtor who has withheld said tax, shall file with the collector of internal revenue for his, her, or its district, a certificate (Form 1006) ** showing from whom and in what amount the tax has been so withheld." '= "Copartnerships, companies, corporations, joint-stock com- panies or associations, insurance companies, in whatever capac- ity acting, including lessees, mortgagors of real or personal property, trustees acting in any trust capacity, executors, ad- ministrators, agents, receivers, conservators, employers and all officers and employees of the United States, hereinafter referred to as 'debtors' or withholding agents, having the con- trol, receipt, custody, disposal, or payment of income as de- scribed in article 63, shall deduct and withhold from such an- nual gains, profit, and income, when the same shall have reached an aggregate amount in excess of $3,000, such sum as will be sufficient to pay the normal tax of 1 per cent imposed by law, 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." '* "A withholding agent who pays monthly, or periodically during the year, interest, rents, salaries, wages, etc., shall not withhold the said tax until such time as the interest, rents, salaries, wages, etc., shall have reached an aggregate amount in excess of $3,000. When such amount has been reached, such agent shall withhold the tax on the whole $3,000 and any ex- cess thereof, unless the person to whom the income is due files a notice claiming exemption under paragraph C (as provided in art. 33 (a)), in which case the withholding agent shall with- hold only the tax on the income in excess of said exemption of 84 Form 1006 is printed supra, § 85 Tr. Reg. 34. gl. S6Tr. Reg. 64. § 97] DEDUCTIOIT AT THE SOUECE IN GENEllAL. 423 $3,000 or $4,000 (as the case may be), and the tax so withheld shall be paid as required by law." *'' Withholding agents must file monthly and yearly returns in the forms previously set forth.^* By the statute "in all cases where the income tax of a person is withheld and deducted and paid or to be paid at the source as aforesaid, such person shall not receive the benefit of the deduction and exemption allowed in paragraph C of this section unless he shall not less than thirty days," namely, on or before January 29th, "prior to the day on which the return of his income is due, file with the person who is required to withhold and pay tax for him, a signed notice in writing claiming the benefit of such exemption and thereupon no tax shall be withheld upon the amount of such exemption." ^* This, in the case of an individual acting in his own right, should be in Form 1007 as revised, printed upon yellow paper, as follows: ITellow paper.'] FORM 1007 REVISED. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. EXEMPTION CERTIFICATE (For claiming exemption at the source as provided in paragraph C of the Federal Income Tax Law of October 3, 1913.) To (Give name of withholding agent.) ( Full post-ofBce address. ) I hereby serve you with notice that I am single — married, with my (wife — husband) living with me, and that I now claim the benefit of the exemption of $ as allowed in paragraph C of the Federal Income Tax Law of October 3, 1913 (my total exemption under said para- graph being $ ) . Date, , 191.. Signed Address : ( Full post-office address. ) Note. — Claim for exemption on Form 1007 can be filed with the debtor or withholding agent at any time, not less than 30 days prior to March first next succeeding the year for which exemption is claimed.) (Signatures must be clearly and legibly written.) 8T Tr. Reg. 65. 89 Subsection E. 88 Supra, § 81. 424 DEDUCTION AT THE SOUECE. [§ 97 [Yellow Paper.] FORM 1063. EXEMPTION CERTIFICATE FIRMS, ORGANIZATIONS, OR FIDUCIARIES. (For use of firms, organizations, or fiduciaries entitled to receive income other than from interest on bonds, to establish their identity and non- liability to withholding at the source. ( Give name of debtor. ) (Character of income — other than interest on bonds — as rent, dividends from foreign corporations, &c.) I do solemnly declare that the firm, organization, or person named below is entitled to receive the above described income, and that under the provisions of the income tax law and regulations said income is exempt from having the tax withheld at the source, and that all the information given herein is true and correct. Date , 191.. ( Name of firm, organization, or fiduciary. ) By : (Signature of person duly authorized to sign for firm, organization, and his oiEcial posi- tion or name of trust.) Address (Give full Post Office address of firm, organization or fiduciary.) The exemption certificate provided for the use of individuals is Form 1,007, which will be used by individuals in all cases, except for interest on bonds, for which Forms 1,000 and 1,000B are provided.*" The Act continues: "Provided, That if any person for the purpose of obtaining any allowance or reduction by virtue of a claim for such exemption, either for himself or for any other person, knowingly makes any false statement or false or fraud- ulent representation, he shall be liable to a penalty of $300; nor shall any person under the foregoing conditions be allowed the beneiit of any deduction provided for in subsection B of this section unless he shall, not less than thirty days prior to the day on which the return of his income is due, either file with the person who is required to withhold and pay tax for him a true and correct return of his annual gains, profits, and 40 T. D. 1998. No revenue stamp is required T. D. 2049. § 97] DEDUCTION AT THE SOUECE IN GENEEAL. 425 income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf by the person required to with- hold and pay the tax, or likewise make application for deduc- tions to the collector of the district in which return is made or to be made for him : Provided further. That if such person is a minor or an insane person, or is absent from the United States, or is unable owing to serious illness to make the return and application above provided for, the return and application may be made for him or her by the person required to withhold and pay the tax, he making oath under the penalties of this Act that he has sufficient knowledge of the affairs and property of his beneficiary to enable him to make a full and complete return for him or her, and that the return and application made by him are full and complete." *^ The Regulations provide : "When, however, claims for exemption and deductions as above described 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, Eevised Statutes, said claims to be made either by the with- holding agent against whom the assessment was made, or by the person on account of whom such taxes were withheld. "Claims for abatement of taxes erroneously assessed, or which are excessive in amount, may, prior to collection thereof, be filed under the provisions of said section 3220, Revised Stat- utes, either by the withholding agent against whom the assess- ment was made, or by the persons on account of whom such taxes were withheld." ** "In all cases where the income tax of a person is withheld and deducted and paid or to be paid at the source, as aforesaid, such person shall not receive the benefit of the deduction and exemption allowed in paragraph C of this section except by an application for refund of the tax unless he shall, not less than thirty days prior to the day on which the return of his income is due, file with the person who is required to withhold and pay tax for him, a signed notice in writing claiming the benefit of *l/6t(J. 42 Tr. Reg. 33 (c). 426 DEDUCTION" AT THE SOURCE. [§ 97 such exemption and thereupon no tax shall be withheld upon the amount of such exemption." *^ The Treasury Department has promulgated the following rule: "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, certificates claiming the benefit of deductions and exemptions provided for in paragraph B and allowed in paragraph C of 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 claims for deductions and exemptions has expired." ** Subsection E, which contains the provisions concerning the deduction of the tax at the source, contains in one of its conclud- ing paragraphs the following provision : "Nothing in this sec- tion shall be construed to release a taxable person from liability for income tax." It has been argued that in case the Government should be unable to collect the tax from the person who deducts the same at the source, the individual from whose income the tax had been deducted at the source might be compelled to pay the same.*° The writer has been informed at the ofiice of the Col- lector of Internal Revenue for the Second District of New York that, in such a case, the loss will fall upon the United States and not upon the person to whom the income was due. It has been said by Mr. Albert H. Walker : "This vicarious scheme is perhaps violative of the Fifth Amendment to the Con- stitution of the United States." *^ § 98. Deduction at the source by lessees. Lessees, who are bound to pay to individuals rent in excess of $3,000 for any taxable year, under the same lease, are authorized and re- quired to deduct, withhold and pay to the proper internal rev- enue collector, so much thereof as will be sufficient to pay the « Act of Oct. 3, 1913, II, E. ate by the Massachusetts Real Es- 44 T. D. 1965, March 23, 1914. See tate Exchange, Sen. Dec, Sixty- Tr. Eeg. 33. third Cong., First Sess. (Briefs and 45 Complaint signed by Messrs. Da- Statements on H. E. 3321, filed with vies, Auerbach & Cornell, in Brush- Finance Committee, p. 1959). aber v. Union Pacific R. R. Co., U. 46 Walker's Pamphlet 21. See S S. C, D. N. Y., March 1914; see 26, supra. Memorandum submitted to the Sen- § 98] DEDUCTION AT THE SOURCE BY LESSEES. 427 normal income tax imposed upon the same and are made per- sonally liable for such tax.^ The lessee is entitled to receive a receipt from the collector of internal revenue for the amount of the tax so paid, and the receipt is sufficient evidence in the former's favor to justify him in withholding the amount there- in expressed from his next payment to his creditor.* The Treas- ury Department has ruled that the payment shall not be made until after the time for filing claims for deductions and exemp- tions has expired, namely, after January 29th. Deduction at the source is not required of the lessees of cor- porations, nor authorized by them. Many large landowners have consequently incorporated their holdings in order to escape the inconvenience of such deductions.* A vendee of mines or other real estate, who covenants to pay the same in annual instalment of a specified amount, irrespective of his receipts therefrom, has no right to make such a deduction,* although such payments cover a period of thirty years.* The owner of a coal mine sold the same to another for a term of fifty years, under a covenant: that the latter should pay the former a specified sum down and the same amount yearly thereafter, irrespective of the amount of coal there- from mined; and that whenever he mined therefrom enough •coal to exceed that year's payment, he would pay for each ad- ditional Lancashire acre of coal a specified sum until the whole consideration named in the deed had been paid. It was held, in Great Britain, that the annual instalment was not rent and that the vendor, and not the vendee, should pay the same.® At least where the rent is payable in monthly, quarterly or other periodical instalments, it would seem equitable that the lessee should not be entitled to make any deduction, except from the last instalment, provided that such instalment is sufficient to meet the tax. § 98. lAct of October 3, 1913, Week. Rep. 141, 5 Jur. N. S. 342 subsection D. (1858). 8 Ibid. Subsection J. 6 Taylor v. Evans, 1 Hurlst. & N. 3 T. D. 1965. See T. Eeg. 33, and 101, 25 L. J. Exch. N. S. 269. •supra, § 97. 6 Tinclcler v. Prentice, 4 Taunt. i Foley V. Fletcher, 3 Hurlst. & 549; Baher v. Davis, 3 Campb. 474; N. 769, 28 L. J. Exch. N. S. 100, 7 Phillips v. Beer, 4 Campb. 266. 428 DEDUCT10?< AT THE SOUItCE. [§ 98 It has been held in England: that the production of the re- ceipt for the tax will be pro tanto a defense in an action for rent/ although the suit is against an assignee and payment was made by his assignor ; * that he need not prove the assessment upon the trial.® Whether the actiial payment is essential to such a defense has not under the present law been decided.'* When the lessor files with the lessee the requisite notice in writ- ing claiming the benefit of an exemption/' "no tax shall be with- held upon the amount of such exemption." '* It has been held in England that the tenant has the right to such deduction, al- though the landlord before the payment claimed exemption and the exemption has subsequently been allowed.'' No contract entered into after the act took effect is valid in regard to any Federal income tax imposed upon a person liable to such payment.'* In Great Britain covenants in leases were enforced, which bound the lessee, so long as a tax upon income was imposed to pay further rent to an amount depending up- on the amount of such tax,'° and which bound the landlord to repay the tax to the tenant, if the latter would pay the former the full rental without any deduction for the tax the tenant had paid. § 99. Deduction at the source by employers. Em- ployers who have agreed to pay to anyone a fixed or determin- able salary or compensation exceeding $3,000 for any taxable year are authorized and required to deduct, and pay to the proper internal revenue collector, so much thereof as will be sufiicient to pay the normal income tax imposed upon the same and are made personally liable for such tax.' The deduction should not be made until the annual salary or compensation al- "> Clennel v. Read, 7 Taunt. 50. 18 Act of October 3, 1913, subsec- i Phillips V. Beer, 4 Campb. 266. tion E. 9 That it would not be seems to ^iBeadel v. Pitt (1865), 11 L. T. be suggested by Be Cooper [1911], N. S. 592, 593, 13 Week. Eep. 287. 2 K. B. 550, 80 L. J. K. B. N. S. l^ Lamb v. Brewster (1879), L. 590, 105 L. T. N. S. 273, 55 Sol. Jo. R. 4 Q. B. Div. 609. 554. § 99. lAct of Oct. 3, 1913, 11, 10 See supra, § 97. subsection E. It has been ruled that 11 Subsection E. this does not apply to salaries of 18 Sioatmam v. Anibler, 8 Exch. actors contingent upon the run of 72 24 L. J. Exch. N. S. 185. a play or the lengtli of the dramatic season. T. D. Dec. 5, 1913. § 100] DEDUCTION BY OFFICEKS AND EMPLOYEES OF V. S. 429 ready paid or due exceeds $3,000.* The tax should not be paid before January twenty-ninth of the following year.^ When such compensation is neither fixed nor determinable nor in ex- cess of $3,000 a year, or it is indefinite or irregular as to amount or time of accrual, there can be no such deduction and the nor- mal tax, if any is due, must be paid by the employee.* The benefit of any exemption or deduction to which he may be en- titled can be claimed by the employee in the manner previously explained.* § 100. Deduction at the source by officers and em- ployees of the United States. Officers and employees of the United States having the control of the payment of a fixed and determinable salary or compensation in excess of $3,000 a year to a Government employee or ofiicer are authorized and required to deduct and pay to the proper internal revenue collector, so much thereof as will be sufficient to pay the normal income tax imposed upon the same and are made personally liable for such tax.' The deduction should not be made until the aggregate salary or compensation already paid or due exceeds $3,000.* The tax should not be paid before January twenty-ninth of the following year.' When such compensation is neither fixed nor determinable nor in excess of $3,000 a yeai', or it is indef- inite or irregular as to amount or time of accrual, there can be no such deduction, and the normal tax, if any is due, must be paid by the employee.* !N"o such deduction is made from the salary of the present President of the United States during his present term, nor from the salaries of the judges of the supreme and inferior courts of the United States now in office.* This exemption does not apply to the judges or other officers of the Governments of the District of Columbia, Porto Rico and the Philippine Islands, or the political subdivisions thereof.* Whether it applies to the judges of the District Court of Alaska and the United States Court for China is a doubtful question. 2Tr. Reg. 65. 2 Tr. Reg. 65. 8 T. D. 1965. See Tr. Reg. 33. 3 T. D. 1965. See Tr. Reg. 33. 4 Statute II. Subsections B, E. * Statute II. Subsections B, E. 5 Supra, § 97. 5 Ihid. Subsection B. § 100. lAct of October 3, 1913, e md. Subsection M. II, subsection E. 430 DEDUCTION AT THE SOTJECE. [§ 100 These are not usually considered to be courts of the United States." The same doubt exists concerning the salaries of mem- bers of the Board of General Appraisers and the fees of United States commissioners. Where the officer or employee is mar- ried and lives with his wife, or is entitled to an additional deduction or exemption whenever the same exceeds the statu- tory amount, or for other reasons ; he may obtain the same by filing with the disbursing officer the proper notice claiming the benefit thereof within thirty days before the pay-day.' § 101. Deduction at the source by masters, receivers, trustees and referees in bankruptcy, executors and admin- istrators. In the payments by a master, receiver, trustee or referee in bankruptcy, executor or administrator, to individual creditors of the estate, which is in his hands for administration, the normal income tax must be deducted from so much as is paid for interest, whenever the same exceeds the statutory amount.^ The said deduction should be made by them from periodical payments until the aggregate due or previously paid exceeds $3,000.^ They should not pay the tax before Jan- uary 29th of the succeeding year.' When the person entitled to such interest is entitled to an additional exemption or deduc- tion, he may obtain the same by filing with such payer the proper notice on or before that date.* The former practice of masters in chancery, in the adminis- tration of an insolvent's estate, in Great Britain, was to allow creditors to prove the amount of the principal of the debts due them with interest, less the income tax upon debts carrying in- terest by law, calculated to the date of the judgment or order 7 American Insurance Co. v. Can- of Columbia is a court of the United ter, 1 Pet. 511, 7 L. ed. 243; Benner States within the meaning of U. S. V. ' Porter, 9 How. 235, 13 L. ed. Rev. Stat. § 714, U. S. Comp. Stat. 119; Clinton v. Englebrecht, 13 1901, p. 578. See Foster's Fed. Pr. Wall. 434, 20 L. ed. 659; McAllister 5th ed. § 2. V. XJ. 8. 141 U. S. 174, 35 L. ed. 8 Act of Oct. 3, 1913, subsection B, 693, 11 Sup. Ct. Eep. 949; James v. Rev. Form. 1007, printed in full s«- V. 8. 202 U. S. 401, 50 L. ed. 1079, pra, § 97. 26 Sup. Ct. Rep. 685; Romeu v. § 101. l Act of October 3, 1913, Todd, 206 U. S. 358, 368, 51 L. ed. subsection F. 1093, 1097, 27 Sup. Ct. Rep. 724 z Tr. Reg. 65, siipro, § 97. (United States Court for Porto 3 T. D. 1,965, Tr. Reg. 33. Rico). But it has been held that * Rev. Form 1,007 printed in full the Supreme Court of the District su^ra, § 97. § 102] DEDUCTIO]Sr BY GTTAEDIANS. 431 for administration. The interest less the tax and any costs al- lowed were added to the principal and dividends calculated on the whole amount. The income tax so deducted was not ac- counted for to the revenue, because until the principal sums were paid it was considered that no income tax was in fact pay- able. It was held : that a creditor was authorized to prove for the balance of principal outstanding, with interest to the date of the judgment, without any deduction vidth respect to income tax; that from each payment on account of interest the tax should be deducted and paid to the Commissioner of Internal Revenue.^ Where a trust deed provided for the payment of arrears of interest upon debentures before the principal, certain payments were made pending a foreclosure suit, and after a sale of the mortgaged property a final distribution decreed; it was held that the debenture-holders had no right to them so as to treat the payments made prior to the sale as capital, but that the entire amount which they received should first be applied to the satisfaction of their claim for interest and the tax deducted from the same.® § 102. Deduction at the source by guardians, trustees, executors, administrators, agents and all persons acting in fiduciary capacity. Guardians, trustees, executors, adminis- trators, agents, receivers, conservators, and all persons, corpora- tions, or associations acting in any fiduciary capacity, before paying any income to their respective individual beneficiaries, must deduct and pay to the collector the normal income tax at its source, unless the amount collected for the respective benefit of the last is not fixed and determinable or does not ex- ceed $3,000 for any taxable year.* As to these the Treasury Regulations provide : "Guardians, trustees, executors, administrators, agents, receivers, conserva- tors, and all persons, corporations, or associations acting in any 5 Re Green, Ball & Ellis (1904), But see Smith v. Law Guarantee and W. N. 78, 105. Trust Society [1904], 2 Ch. 569, 73 6 Re Queensland Lamd £ Coal Co., L. J. Ch. N. S. 733, 91 L. T. N. S. TAmited {Davis v. Martin) (1903), 545, which tends to support a con- unreported; Dowling on Income Tax, trary conclusion. 7th ed., p. 463 ; explained in Anno- § 102. 1 Act of Oct. 3, 1913, 11, E. tated Statute and Digest, infra. 432 DEDUCTION AT THE SOUECE. [§ 102 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, and by filing notice with other debtors or with- holding agents said fiduciary shall be exempt from having any income, due to them as such, withheld for any income tax by any other debtor or withholding agent. Other debtors or with- holding agents upon receipt of such notice shall not withhold any part of such income from said fiduciary and will not in such case be held liable for normal tax of 1 per cent due there- on. The form of notice to be filed with the debtor or withhold- ing agent by fiduciary will be on Form 1015. Where such exemption is not claimed, notice thereof on Form 1019 should be filed with the withholding agent." ^ [Yellow paper.'] FORM 1015 REVISED. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Ownership Certificate — Fiduciary, the Source. (To be filed with debtor or withholding agents by fiduciaries claiming exemption from withholding at the source.) (Give name of debtor.) (Full description of bonds, giving name of issue and interest rate.) 191—. ( Date of maturity of interest. ) Amount of coupon or registered interest, $ I (we) do solemnly declare that the estate or trust named below is the owner of the above-described bonds from which were detached the accom- panying coupons, or upon which there is due the above-described registered interest, and acting for the estate or trust in the capacity herein stated, I (we) hereby declare that I (we) do now claim exemption from having the normal tax of 1 per cent withheld from said income by the debtor at the source. I (we) hereby assume the duty and responsibility, imposed upon withholding agents under the law, of withholding and paying the in- come tax due, for which I (we) may be liable. • " J (Name of fiduciary. ) ( Capacity in which acting. ) lor (Name of estate or trust.) Date, , 191— -. ( Full post-ofEce address. ) Note. — When numbers of bonds are required to be given, same are to be entered on the back hereof. (Signatures must be clearly and legibly written.) «Tr. Reg. 70. § 102] DEDUCTION BY GUAKDIANS. 433 FORM 1019 REVISED. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Ownership Certificate — Fiduciary, not Source. (To be filed with debtor or withholding agents by Fiduciaries when not claiming any exemption, as an alternative to the filing of Form No. 1015 in which exemption is claimed.) (Give name of debtor.) ( Full description of bonds, giving name of issue and interest rate. ) 191—. ( Date of maturity of interest. ) Amount of coupon or registered interest, $ I (we) do solemnly declare that the estate or trust named below is the owner of the above-described bonds from which were detached the accom- panying coupons, or upon which there is due the above-described registered interest, and acting for the estate or trust in the capacity herein stated, I (we) hereby declare that I (we) do not now claim exemption from having the normal tax of 1 per cent withheld from said income by the debtor at the source. » (Name of fiduciary.) (Capacity in which acting.) for ( Name of estate or trust. ) Date, , 191— ( Full post-office address.) Note. — When numbers of bonds are required to be given, same are to be entered on the back hereof. Signatures must be clearly and legibly written. "Only one certificate is required for all coupons from the same issue of bonds, the property of different estates or trusts where fiduciaries have the custody and control of more than one estate or trust, and said estates or trusts have as assets, bonds of corporations, etc., of the same issue, said fiduciaries may adapt certificates Form 1015 or Form 1019 by changing the words 'estate or trust' in lines 1, 2 and 3 of said forms to the plural, and inserting in the blank space provided in line 3 of said forms for the description of the estate or trust, the words: 'As noted on the back hereof.' In such cases the notation on the back of the certificate should show for each estate or trust: (a) The name of the estate or trust, (b) The amount of the bonds, (c) The amount of the interest. In all other respects the certificates should be filled out as indicated thereon." * Foreign fiduciaries, when any or all » T. D. 1961, 1987. Foster Income Tax. — 28. 434 DEDUCTION AT THE SOURCE. [§ 102 of the beneficiaries are citizens of the United States or resident aliens, should use Form 1015, whenever an exemption is claimed ; but when all of the beneficiaries are nonresident aliens, foreign fiduciaries may use Eorm 1004.* When the fiduciary uses Form 1019, the debtor organization is the source for the deduction and withholding of the normal tax, and fiduciaries receiving the income therein described from which the normal tax has been withheld are not required again to deduct and withhold the normal tax upon the same.* "When the normal tax on undivided annual net income has been so withheld, such tax shall not be again withheld when such portion of the income is actually distributed and paid to said beneficiary." * Trustees to secure the payment of bonds issued by corporations or of other indebtedness of corporations are subject to the same regulations as are corporations them- selves and must, unless an exemption or deduction is duly claimed or the creditor is a corporation, joint-stock company, association, or an insurance company, deduct the normal tax from all payments of interest, although such payments aggre- gate less than $3,000.' The disbursers, collectors, vendors, and dealers purchasing otherwise than from a banker or other dealer therein, coupons, checks or bills of exchange, for or in payment of dividends upon the stock or interest upon the obligations of foreign cor- porations, associations and insurance companies engaged in business in foreign countries, must deduct, withhold and pay the normal income tax therefrom, although the same is less than $3,000, unless the owner is a corporation, joint-stock company or association, or an insurance company.' § 103. Deduction at the source by corporations who are mortgagors or obligors. Trustees under trust deeds, made by corporations, joint-stock companies or associations, and in- surance companies, and corporations, joint-stock companies and associations and insurance companies when mortgagors, must * Deputy Comra'r. Speer to Leiden- * T. D. 1911. Dec. 8, 1913. burg Thalmann & Co., May 13, 1914. 8 Tr. Reg. 75. Form 1004 is printed in full, infra, ''="-'*^ute II, E, infra, § 103. § 103. tibid. § 103] DEDUCTION BY COEPOEATIONS. 435 deduct and pay to the collector the amount of the normal income tax from the income due to individuals which is derived from interest upon bonds and mortgages, or deeds of trust, or other similar obligations of corporations, although such interest does not amount to $3,000.* "Whether this applies to preferred stock- holders or not may be an arguable question. According to an eminent authority, Mr. Victor Morawetz, in the bill as pending in May, 1913, preferred stockholders were exempt.^ It is not clear whether guarantors of interest secured by the mortgages of corporations must make such deduction and payment. It has been ruled that the tax should not be withheld at the source from interest paid or credited upon certificates of deposit or interest upon accounts of depositors with banks and trust companies.* Deduction and payment at the source may be made by the debtors themselves or by their fiscal agent, or else by the first bank or collecting agency that receives the coupon for collection. When the bondholder does not wish to disclose to the debtor his ownership of the bonds from which the coupons are cut, he should make provision for payment by the latter. The in- come may be derived from the United States or from a foreign country.* The debtors may be domestic or foreign corpora- tions.* The creditors may be individuals, copartnerships, or corporations, joint-stock companies or associations. In the case of debtors who are corporations, joint-stock companies or associations, they may be such as are liable to the tax or such as are exempt from the same. Different rules are prescribed for these different cases. The practice when the debtors are individuals has been previously described.* An individual mortgagor must make such deduction where the interest exceeds $3,000, a year, but not otherwise." Such deduction is not made from the interest upon the ob- ligations of a State or any political subdivision thereof, or upon the obligations of the United States or its possessions ; ' nor from the income derived from the operation of a public utility § 103. lAct of October 3, 1913, ^ Ihid. II, Subsection D. 6 Supra § 97. 8 N. Y. Sun, May 8, 1913. ' Supra § 97. 8 Tr. Reg. 67. » Tr. Reg. 37. i Infra § 104. 436 DEDUCTION AT THE SOUECE. [§ 103 under a contract entered into before the passage of the Act, in so far as such payment will impose a loss or burden upon a State, Territory or the District of Columbia, or a political subdivision of a State or Territory ; ' nor, according to a ruling of the Treasury Department, from interest upon the obligations of corporations, associations or organizations, the income of which is exempt from the tax.^" According to the construction placed upon the statute by the Attorney General and the Treas- ury Department, interest and coupons due to, or owned by, a nonresident alien are also exempt.^* Such deduction is not made from any interest or coupon due to or owned by a corporation, joint-stock company or associa- tion, or insurance company ; ^ nor, according to the ruling of the Treasury Department, from any interest or coupon due to, or owned by, a copartnership.^* The payer is entitled to require a receipt from the collector and it is the safer practice for him to take the same.^* A covenant in a mortgage binding the mortgagor to pay the tax will be enforced when made prior to the passage of the statute, namely, October 3, 1913." Under a former statute it was held, that the mortgagor was entitled to deduct the tax from the payment of coupons, although the defeasance clause of the mortgage was as follows: "Provided, always, that if the said railway company or their successors do well and truly pay to the said Haight, the said $100,000 on the days and times hereinbefore mentioned, together with the interest payable thereon, without any deduction, defalcation or abatement to be made of anything for or in respect of any taxes, charges or assessments whatsoever, then," &c.'® No contract entered into 9 Act of Oct. 3, 1913, II, B. McEeynolds Oct. 23, 1913. Tr. Reg. 10 T. D. 1967. In such eases at 46. See § 37 supra. least, the Treasury Department re- 12 Act of Oct. 3, 1913, II, E. quires that upon payment of interest 13 T. D. 1957. See Opinion of At- they exact certificates of ownership torney General McReyonlds Feb'y 12, and forward the same to the collect- 1914. Cf. Supra § 75. or of the district where the organi- 14 Act of Oct. 3, 1913, II, J. Su- zation is located. Commissioner Os- pra % 96. born to Lee Higginson & Co. May 4, i^ Ibid. G (c). Supra, § 97. 1914_ 16 Baight v. Railroad Company, 6 11 Opinion of Attorney General Wall. 15, 16; published in full Part VII. ■§ 103] DEDUCTION BY COEPOEATIONS. 4o7 after the act takes effect is valid in regard to any Federal in- come tax imposed xipon a person liable to such payment.*^ Whether a mortgagor, which made such a covenant before the enactment, can compel a mortgagee to relieve it by claiming his statutory exemption of $3,000, is a question that has not been raised nor decided ; since the principal corporations in this country after deliberation and conference became satisfied that to dispute the point with their bondholders might injuriously affect their credit. The regulations of the Treasury Department provide as fol- lows: Income derived from interest upon bonds and mort- gages or deeds of trust or other similar obligations of corpora- tions, etc. "Under the law a tax of 1 per cent, designated as the normal tax, shall be deducted at 'the source,' beginning Novem- ber 1, 1913, from all income accruing and payable to any person subject to such tax which may be derived from interest upon bonds and mortgages, or deeds of trust, or other similar- obligations, including equipment trust agreements and receivers' certificates of corporations, joint-stock companies or associationSy and insurance companies, although such interest does not amount to $3,000. Income derived from the interest upon the obligations of a State, county, city, or any other political sub- division, or 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 orders for registered interest will not be required.^* "The term 'debtor,' as hereinafter used, shall apply to all corporations, joint-stock companies or associations, and insur- ance companies; 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. Where such withholding agent is so authorized by the debtor corporation, he may file with the col- lector of his district the required returns and accompanying certificates (arts. 50 and 51), in which case the assessment of " Act of October 3, 1913, II. Sub- w Tr. Eeg. 37. section E. 438 DEDUCTION AT THE SOUECE. [§ 103 the tax withheld by him will be made in that district. Unless such aiithority is 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 oflSce is located), where, in such case, assessment will be made." ^* "For the purpose of collecting the tax on all coupons and registered interest originating or payable in the United States, the source shall be the debtor (or its withholding and paying agent in the United States), who shall deduct the tax when the same is to be withheld, and no other bank, trust company, bank- ing firm, or individual taking coupons or interest orders for collection, or otherwise, shall withhold the tax thereon, where such coupons or orders for registered interest are accompanied by certificates of ownership signed by the owners of the bonds upon which the interest matured. 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. (See Arts. 43 and 46.)'""' When the taxpayer does not wish to disclose to the debtor that he is the owner of bonds or coupons, he should file such certificate of ownership with his bank or collecting agency, which undertakes the collection, and instruct such bank or col- lecting agency to substitute therefor its own certificate in trans- mission to the debtor. In that case, the original certificates of ownership are sent to the Commissioner of Internal Revenue directly by the bank or collecting agency.*"* 19 Tr. Keg. 38. 20a Tr. Reg. 40. 20 Tr. Keg. 39. [White Paper.^ FOEM 1000 REVISED. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Ownership Certificate — Individual — Exemption not Claimed. (To be furnished with coupons or interest orders showing ownership of bonds. ) (Give name of debtor.) (Full description of bonds, giving name of issue and interest rate.) , 191—. (Date of maturity of interest.) Amount of coupon or registered interest, $ 1 do solemnly declare that I am a citizen or resident of the United 103] DEDUCTION BY OOEPORATIONS. 439 States and am the owner of the above-described bonds from which were detached the accompanying coupons, or from which I am entitled to the above-described registered interest, and that all of the information as given in this certificate is true and correct. I do not now claim exemption from having the normal tax of 1 per cent, withheld from said income by the debtor at the source. Date, , 191 — . (Usual business signature of owner of bonds) ( Full post-oflSce address of owner. ) * By Agent. (Usual business signature of agent authorized to sign for owner. ) ( Full post-office address of agent. ) * Note 1. — To be filled in only when duly authorized agent executes this certificate for owner, in whict- case the name and address of owner must be given, and collecting agent first receiving certificate must stamp across face "Satisfied as to identity and responsibility of agent" (giving name and address of collecting agent). Note 2. — If securities are owned jointly by several persons one may sign, and the names, addresses, and proportion of ownership of each, in- dorsed on the back hereof. Note 3. — When numbers of bonds are required to be given, same are to be entered on back hereof. (Signatures must be clearly and legibly written.) ^Endorsement .\ JOINT OWNERS. If securities described on other side are owned jointly, the names and addresses of owners and the proportion of ownership of each should be given. Names Full Post-Office Addresses Proportion Owned [Yellow Paper. '[ FORM lOOOB REVISED. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Ownership Certificate — Individual — Exemption Claimed. (To be furnished with coupons or interest orders showing ownership of '440 DEDUCTIOBT AT THE SOUECE. [§ loa bonds and amount of exemption claimed under paragraph C of the Federal Income Tax Law.) ( Give name of debtor. ( Full description of bonds, giving name of issue and interest rate. ) , 191—. (Date of maturity of interest. ) Amount of coupon or registered interest, $ Total exemption allowed under paragraph C, $ Amount of exemption now claimed, $ I do solemnly declare that I am a citizen or resident of the United States and am the owner of the above-described bonds from which were detached the accompanying coupons, or from which I am entitled to the above-described registered interest, and that all of the information as given in this certificate is true and correct. Date, , 191—. ( Usual business signature of owner of bonds. ) ( Full post-office address of owner. ) * By Agent, (Usual business signature of agent authorized to sign for owner. ) ( Full post-office address of agent. ) * Note 1. — To be filled in only when duly authorized agent executes this certificate for owner, in which case the name and address of owner must be given, and collecting agent first receiving certificate must stamp across face "Satisfied as to identity and responsibility of agent" (giving name and address of collecting agent). Note 2. — If securities are owned jointly by several persons one may sign, and the names, addresses, and proportion of ownership of each, in- dorsed on the back hereof. Note 3. — When numbers of bonds are required to be given, same are to be entered on back hereof. (Signatures must be clearly and legibly written.) [Endorsement. ] JOINT OWNERS. If securities described on other side are owned jointly, the names and addresses of owners and the proportion of ownership of each should be given. Names Full Post-Office Addresses Proportion Owned § 103] DEDUCTION BY COEPOKATIONS. 441 When securities are owned jointly by several persons, the certificates of ownership on these forms may be signed by either of them and the names, addresses and proportionate ownership of each must be shown on the back thereof.** When form lOOOB is filed in such a case, the signer may claim exemption thereon only in his own right. Such of the other joiners as desire to claim exemption against their pro rata share of the income should file with the signers of the certificates on form 1007,** and the latter should be attached to the joint certificate when presented with coupons or interest orders.** Partnerships must file certificates evidencing the fact of ownership in form 1001 when presenting for collection or payment coupon or interest orders, and the Treasury Department has ruled that thereupon the tax upon the interest payments to them shall not be with- held.** Form 1003 will be accepted.** Certificates of owner- ship claiming an exemption must also be attached to coupons from the bonds of corporations which are exempt from taxa- tion. *° When not accompanied by a certificate of ownership, the bank or collection agency must deduct the tax and attach to the coupon its own certificate, form 1002.*^ When the coupon or order is not accompanied by such a cer- tificate of ownership, the first bank, trust company, banking firm or individual, or collecting agency receiving the coupon for collection or otherwise, must deduct and withhold the tax and must attach to the coupon or order his or their own certificate giving the name and address of the owner, or, if the owner is unknown, of the person presenting the same, together with a description of the coupon, setting forth the fact that he or they, as the case may be, are withholding the tax upon the same. Such certificate must be in substantially the following form: 21 T. D. 1976. 2«Comm'r Osborn to Corporation 82 As amended T. D. 1974. Trust Co. July 30, 1914. Records 23 Deputy Commissioner Fletcher Corp. Tr. Co., 297. to Central Trust Co. May 14, 1914. f^T Ibid. Form 1002 is printed in 24 T. D. 1957. But see supra § 75. this section supra,. 25 Acting Comm'r Fletcher to Cor- poration i'r. to. March 27, 1914. Records Corp. Tr. Co., 232. 442 DEDUCTION AT THE SOTJECE. [§ 103 [Oreen Paper.] FORM 1002 REVISED. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Certificate of Bank or Collecting Agency. To be presented with coupons or interest orders when not accompanied by certificate of owners. (Give name of debtor.) ( Full description of bonds, giving name of issue and interest rate. ) , 191—. ( Date of maturity of interest. ) Amount of coupon or registered interest, $ I (we) do solemnly declare that the bank or collecting agency named below has purchased or accepted for collection the accompanying coupons or interest orders from , of (Name of party from whom received.) . ., and that no certificate of ownership (Full post-office address of said party.) accompanied said coupons or interest orders, and that I (we) have no knowledge as to who is the owner or owners of the bonds (except as noted on back hereof)* upon which the above-described interest is due, and the bank or collecting agency hereby acknowledges responsibility of withhold- ing therefrom the normal income tax of 1 per cent, in accordance with the regulations of the Treasury Department. Date, , 191—. (Bank or collecting agency.) By ( Signature of officer authorized to sign and oiiicial position. ) ( Full address of bank or withholding agency. ) * Note. — If the ownership of bonds is known to person signing this cer- tificate, he must give the name and address of the owner on the back hereof. (Signatures must be clearly and legibly written.) "Eesponsible banks, bankers, and collecting agents receiving coupons for collection with the aforesaid certificates of owner- ship attached, may present the coupons with the attached cer- tificates to the debtor or withholding agent for collection, or such certificates may be detached and forwarded direct to the Commissioner of Internal Eevenue, provided such bank, bank- er, or collecting agent shall substitute for such certificates its own certificate, and shall keep a complete record of each trans- action, showing — "1. Serial number of item received. "2. Date received. "3. Name and address of person from whom received. "4. Name of debtor corporation. § 103] DEDUCTION BY OQKPOEATIONS. 443 "5. Class of bonds from which coupons were cut. "6. Face amount of coupons. "Exemptions from tax claimed by owner under paragraph 0. "For the purpose of identification, such substitute certificates should be numbered consecutively, and corresponding numbers given the original certificates of ownership. "The permission here granted will extend to responsible banks, bankers, and collecting agents in foreign countries, through whom collection of such interest coupons is made. "The various substitute certificates hereby authorized will correspond with the form numbers of the ownership certificates detached by the collecting agent, except that the substitute certificates' form numbers will be followed by the letter 'a.' " *' [Yellow Paper.] FORM 1058. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Substitute Ceitificate — Exemption Claimed. (To be attached to interest coupons when the collecting agent's certificate is substituted for the certificate of owner in which exemption was claimed.) (Give name of debtor.) (Full description of bonds, giving name of issue and interest rate.) , 191— . (Date of maturity of interest.) Amount of coupon or registered interest, $ Total exemption allowed under paragraph C, $ Amount of exemption ■ claimed, $ I (we) do solemnly declare that the owner of the above-described bonds from which were detached the accompanying interest coupons has filed with me (us) a certificate of ownership. Form No , duly executed and filled in according to Treasury Regulations, which certificate has been indorsed by me (us) as required by Treasury Regulations, and that under the provisions of the income tax law and regulations, said interest is exempt from the withholding and payment of the income tax at the source, or that exemption was claimed as stated herein; and I (we) do hereby promise and pledge myself (ourselves) to forward the said certificate to the Commissioner of Internal Revenue at Washington, D. C, not later than the 20th day of next month, in accordance with Treasury Regulations. Date, , 191—. ( Name of bank or collecting agency. ) By ( Signature of person authorized to sign, and his official position. ) No 28 Tr. Reg. 40. (Full post-ofiice address of collecting agency.) 444 DEDUCTION AT THE SOCECE. [§ 103 [White Paper.^ FORM 1059. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Substitute Certificate — Exemption Not Claimed. (To be attached to interest coupons when collecting agent's certificate is substituted for certificate of owner in which exemption was not claimed.) ( Give name of debtor. ) ( Full description of bonds, giving name of issue and interest rate. ) , 191—. (Date of maturity of interest.) Amount of coupon or registered interest, $. I (we) do solemnly declare that the owner of the above-described bonds from which were detached the accompanying coupons has filed with me (us) a certificate of ownership. Form No. , duly executed and filled in according to Treasury Regulations, which certificate has been indorsed by me (us) as required by Treasury Regulations, and which certificate did not claim any exemption from having the normal tax of 1 per cent with- held by the debtor at the source; and I (we) do hereby promise and pledge myself (ourselves) to forward the said certificate to the Commissioner of Internal Revenue at Washington, D. C, not later than the 20th day of next month, in accordance with Treasury Regulations. Date, , 191 — . ( Name of bank or collecting agency. ) By ( Signature of person authorized to sign, and his official position. ) (Full post-office address of collecting agency.) No The name of the bank or collecting agent may be printed or stamped and a fac-simile of the signature of the person authorized to sign the sub- stitute 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 au- thorization in substantially the following form: (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 ia revoked by written notice to you. (Name of bank or collecting agent.) By (Signature of person authorized to sign.) (Fac-simile signature of (Official position.) person authorized to sign.) 29 T. D. 1986. § 103] DEDUCTION BY COEPOEATIOKS. 445 "A debtor -whose bonds may be registered, both as to prin- cipal and interest, shall deduct the normal tax of 1 per cent from the accruing interest on all bonds before sending out checks for said interest to registered owners or before paying such interest upon interest orders signed by the registered hold- ■ers of said bonds unless there shall be filed with said debtor or its fiscal agent [at least five days before the due date of said interest] through whom said interest is customarily paid, the proper certificates claiming exemption from liability for said tax as herein provided, executed — By a citizen or resident of the United States, the bona fide owner of the registered obligations, who may claim exemption under paragraph C, section 2, of the income tax law, or by corporations, joint-stock companies, as- sociations, or insurance companies organized in the United States, or organizations, associations, fraternities, etc., which are either taxable or exempt from taxation, as provided in para- graph G, subdivision (a), of the act, or by a bona fide resident and citizen of a foreign country, claiming exemption as such." ^^ "If the ovmers of the bonds are individuals who are citizens or residents of the United States, the aforesaid certificates shall accompany the coupons, or, with respect to the interest on registered bonds, shall be filed with payer of said interest, and such certificates shall describe the bonds and show the amount of coupons attached or the amount of interest due such owners on registered bonds and the name and address of the owners, and if registered in names other than the owners such names with addresses shall also be given. Such certificates shall also show whether the claimants do or do not then claim exemp- tion from taxation at the source, under paragraph C, articles 9 and 10 ($3,000, and under certain conditions $4,000), as to the income represented by such coupons or interest. The cer- tificates will be prepared on Form 1000 and must show the amount, if any, of exemption claimed, the total amount of ex- emption to which the claimant is entitled and must be signed by the claimants, who shall use their ordinary business signa- tures. The certificates shall also show the postoffice and street 30 Tr. Reg. 41. 4:46 DEDucTiojsr at the source. [§ 103 address of the claimants, the internal-revenue district, and the date when signed." '* "Duly authorized agents may sign such certificates for the persons for whom they act, and withholding agents, banks, or others, with whom such certificates are filed, if satisfied as to the identity and responsibility of the persons so signing, shall stamp or write on the face of each such certificate 'Satisfied as to identity and responsibility of agent,' giving name and address of person thus certifying. Certificates so verified may be accepted by all other persons, firms, or organizations to whom presented, without question as to authority of such agent. If the person, firm, or organization first receiving such cer- tificate is not satisfied as to the agent's identity and responsi- bility, then, in that event, the agent shall furnish evidence of his authority to so act, which will be retained by the person, firm, or organization receiving it, and the certificate of owner- ship shall be indorsed as above provided." '^ When signed by such a bank or such a collecting agency, no indorsement, "Satisfied as to identity and responsibility of agent," is required.'* "Whenever interest coupons, accompanied by an individual who is a citizen or resident of the United States, are presented to a debtor or its withholding agent for payment, or whenever interest is payable to such individual on a bond registered as to both principal and interest, the debtor or its withholding agents shall deduct and withhold the amount of the normal tax, except to the extent that exemption is claimed in the certificate of ownership (Form 1000). Where the interest to be paid is registered, the same form of certificate shall be used where exemptions are claimed, and it shall be filed with the debtor at least five days before the due date of such interest." ** "Where such certificates are so filed, the said debtors shall stamp or write on the interest orders or cheeks, as the case may be, 'Exemption claimed by certificate filed with debtor.' Where prescribed certificates are not so filed, said debtor shall 81 Tr. Eeg. 42. Speer to National Park Bank, April 88 Tr. Reg. 43. 16, 1914. 83 Letter of Deputy Commissioner »*Tr. Eeg. 44. § 103] DEDUCTION BY COEPOEATIONS. 447 deduct and withhold the normal tax of one per cent from the amount of such payment, and shall stamp or write on the in- terest order or check, as the case may be, 'Income tax withheld by debtor.' 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 own- ership be filed therewith. Certificates of ownership are not required to accompany interest orders or cheeks in payment of interest on fully registered bonds, as information as to owner- ship of bonds will be furnished by debtor organizations on monthly list returns, Form 1012 [p. 83] ; but claim for exemp- tion 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 pur- pose of claiming this exemption. 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 [p. 163], Income Tax Regulations, to the extent of exemption claimed, release and pay to the persons entitled thereto the amount of such income so withheld."^^ "If the owners of the bonds are corporations, joint-stock com- panies, associations, or insurance companies organized in the United States, no matter how created or organized, or organiza- tions, associations, fraternities, etc., which are either taxable or exempt from taxation as provided in paragraph G, subdivi- sion (a) of the act, the debtor is not required to withhold or deduct the tax upon income derived from interest on such bonds, provided coupons or orders for interest from such bonds shall be accompanied by a certificate of the owners thereof cer- tifying to such ownership, which certificates shall be filed with the debtor when such coupons or interest orders are presented for payment. "Such certificate will be made on Form 1001, and must be signed in the name of the organization (stating its place of 86 T. D. 1974. 448 DEDUCTION AT THE SOTJECE. [§ 103 business) by the president, secretary, or some other principal officer of the said corporation or organization duly authorized to sign same, and must be properly dated." '* [Yellow Paper. 1 FORM 1001 REVISED. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Ownership Certificate — Firms or Organizations. ( Siiowing ownersliip of bonds, which is to be furnished by firms or organi- zations not subject to withholding of tax on interest at source.) (Give name of debtor.) ( Full description of bonds, giving name of issue and interest rate. ) , 191—. ( Date of maturity of interest. ) Amount of coupon or registered interest, $ I do solemnly declare that the firm or organization named below, and of which I am a member or an ofiicer, is the owner of tlie above-described bonds from which were detached the accompanying coupons, or upon which there is due the above-deacribed registered interest, and that under the provisions of the Income Tax Law and Regulations said interest is exempt from having the tax withheld at the source, and that all the information given herein is true and correct. Date, , 191 (Name of firm or organization.) By (Signature of person duly authorized to sign, and his official position. ) Address : (Give full post-ofiice address of firm or corporation.) Note. — When numbers of bonds are required to be given, same are to be entered on back hereof. "Coupons, or orders for registered interest, payable in the United States, representing the interest on bonds owned by nonresident aliens, must be accompanied by the prescribed cer- tificate (Form 1004)," but this certificate may be signed either by the owner or, in behalf of the owner, by a reputable bank or bankers or other responsible collecting agency, certifying to the ownership of the bonds and giving the name and address of the bona fide nonresident and alien owners, and when such certificate is thus attached the normal tax of 1 per cent on such 36 Tr. Reg. 45. for foreign partnerships, Tr. Reg. 37 Formerly a separate form of 46. certificate. No. 1016 was prepared § 103] DEDUCTION BY COEPOKATIONS. 449 coupons or interest orders need not be withheld at the source by the debtor or collecting agency. Unless such proof of foreign ownership is furnished, the normal tax of 1 per cent should be deducted." *' [Tellow Paper.} FORM 1004 REVISED. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Ownership Certificate — Nonresident Aliens. (To be furnished with coupons detached from bonds or other obligations •owned by citizens or subjects, firms, corporations, or organizatiolis of for- eign countries and who are not residents of the United States. (Give name of debtor.) ( Full description of bonds, giving name of issue and interest rate. ) , 191—. ( Date of maturity of interest. ) Amount of coupon or registered interest, $ I do solemnly declare that the owner of the bonds from which were de- tached the accompanying coupons, or upon which there matured the afore- said registered interest, is a nonresident alien in respect to the United States, and is exempt from the income tax imposed on such income by the United States Government under the law enacted October 3, 1913; that no citizen of the United States wherever residing, or foreigner resid- ing in the United States or in any of its possessions, has any interest in said bonds; and that all of the information as given in this certificate is true and correct. Date, , 191—. (Signature of owner or, if organization, name.) (If organization, signature of ofiicial authorized to sign, and official position.) (Full post-office address of owner. ) Note. — When numbers of bonds are required to be given, same are to be entered on back hereof. (Signatures must be clearly and legibly written.) Foreign organizations engaged in business within the United States are subject to the normal tax of 1 per cent per annum upon the amount of net income accruing from business trans- acted and capital invested within the United States; but said organizations shall be exempt from having any paj-t.of their income withheld by a debtor or withholding agent, and claim for such exemption will be made on Revised Form 1001.''* 88 Tr. Reg. 46. SSa iMd. Foster Income Tax. — 29. 450 DEDUCTION AT THE SOUECE. [§ 103 "For the purpose of complying with income-tax regulations requiring the filing of certificates of ownership of bonds when presenting coupons or interest orders for collection of interest on bonds of domestic corporations of the United States owned by nonresident aliens as to the United States, a certificate in the form following is provided, which may be executed by re- sponsible banks or bankers in the United States and foreign countries for and in behalf of nonresident alien owners of bonds of United States corporations: [Yellow Paper.1 FORM 1060. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Ownership Certificate — Nonresident Alien — To Be Executed by- Banks, Bankers, Etc. (For use by foreign banks or bankers, to accompany coupons detached from bonds or other obligations owned by citizens or subjects, firms, cor- porations, or organizations of foreign countries and who are not residents of the United States.) (Give name of debtor. (Full description of bonds, giving name of issue and interest rate.) , 191—. (Date of maturity of interest. ) Amount of coupon or registered interest, $ I (we) do solemnly declare that the owners of the bonds from which were detached the accompanying coupons or upon which there matured the aforesaid registered interest are nonresident aliens as to the United States, and are exempt from the income tax imposed on such income by the United States Government under the law enacted October 3, 1913; that no citizen of the United States, wherever residing, or foreigner residing in the United States or in any of its possessions, has any interest in said bonds; and that all of the information as given in this certificate is true and correct. I (we) hereby agree that if at any time within three years from the date of this certificate it shall appear that the income or any part thereof represented or covered by this certificate was, or is, subject to the normal tax imposed by the United States, upon presentation of proof of that fact to me (us) by, from, or through the Commissioner of Internal Revenue, Washington, D. C, I (we) will pay and remit to the United States Gov- ernment the amount of tax claimed to be due; and I (we) hereby further agree liat whenever in the judgment of the Commissioner of Internal Revenue it shall be necessary in or to the administration of the income tax law, I (we) will, upon request of the said Commissioner of Internal ■§ 103] DEDUCTION BY COKPOEATIOAS. 451 Revenue, disclose and furnish to him the names and addresses of the owners and the amounts of the bonds aforesaid. Date, , 191—. (Name of bank or banker.) By ( Signature of official authorized to sign. ) (Official position.) (Full post-office address of bank or banker.) Note. — When numbers of bonds are required to be given, same are to be entered on back hereof. (Signatures must be clearly and legibly written.) "When banks or bankers use the foregoing certificate, they may include in one certificate all the coupons from bonds of the same class and same issue, and may include in one certificate all the interest orders or checks for interest on registered bonds of the same class and same issue." ^ "All certificates shall be, in size, 8 by 3J inches, and shall be printed to read from left to right along the 8-inch dimension. All certificates claiming exemption shall be printed on yellow paper; all certificates not claiming exem,ption shall be printed on white paper ; and certificate Form 1002, for use by the first bank or collecting agency, shall be printed on green paper. All paper upon which certificates shall be printed shall corres- pond in weight and texture to white writing paper 21 by 32, about 40 pounds to the ream of 500 sheets. Certificates hereto- fore authorized, when properly executed, will be accepted up to October 1, 1914. The revised certificates hereby provided will be printed by the Government and furnished without cost for the use of bond owners. All existing regulations which may be in conflict with the prescriptions of this regulation are hereby superseded. *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, shade, and weight of paper as used by the Govern- ment." " *NoTE. — Sample certificates showing size of type and color of paper can be secured from collectors of internal revenue in their several dis- tricts or from the Commissioner of Internal Revenue at Washington, D. C."*0 S9T. D. 1977. 1988. MT. D. 1976. 452 deductiojS- at the souece. [§ 103 None of these certificates need specify the number of the bonds or other corporate obligations for which coupons are de- tached or upon which registered interest is to be paid.** ]^o revenue stamp is required.** Banks should exercise care in procuring the full post-office address upon all certificates. When no street address is given, the Treasury Department will assume that the same is not nec- essary in addressing mail, and certificates will not be returned for that reason.*^ § 104. Deduction at the source of income derived from foreign countries. The statute provides that "likewise the amount of such tax shall be deducted and withheld from cou- pons, checks, or bills of exchange for or in payment of interest upon bonds of foreign countries and upon foreign mortgages or like obligations (not payable in the United States) ^ and also from coupons, checks, or bills of exchange for or in payment of any dividends upon the stock or interest upon the obliga- tions of foreign corporations, associations, and insurance com- panies engaged in business in foreign countries; and the tax in each case shall be withheld and deducted for and in behalf of any person subject to the tax hereinbefore imposed, although such interest, dividends, or other compensation does not exceed $3,000, by any banker or person who shall sell or otherwise realize coupons, checks, or bills of exchange drawn or made in payment of any such interest or dividends (not payable in the United States), and any person who shall obtain payment (not in the United States), in behalf of another of such dividends and interest by means of coupons, checks, or bills of exchange, and also any dealer in svich coupons who shall purchase the same for any such dividends or interest (not payable in the United States), otherwise than from a banker or another dealer in such coupons; but in each ease the benefit of the exemption and the deduction allowable under this section may be had by complying with the foregoing provisions of this paragraph." * The foregoing provisions, to which reference is made, are described in the preceding section of this work, which relates 41 T. D. 1022. National Park Bank April 23, 48 t! D. 2049. 1914. 43 Deputy Commissioner Speer to § 104. l Act of Oct. 3, 1913, II, E. § 104] DEDUCTION OF FOBEIGN INCOME. 453 to deduction at the source by corporate mortgagors and by trustees under trust deeds made by them as security for loans.* "All persons, firms, or corporations 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 shall obtain a license from the Commissioner of In- ternal Revenue, and shall be subject to such regulations ena- bling the Government to ascertain and verify the due withhold- ing and payment of the income tax required to be withheld and paid as the Commissioner of Internal Revenue, with the ap- proval of the Secretary of the Treasury, shall prescribe; and any person who shall undertake to collect such payments as aforesaid without having obtained a license therefor, or with- out complying with such regulations, shall be deemed guilty of a misdemeanor and for each offense be fined in a sum not ex- ceeding $5,000, or imprisoned for a term not exceeding one year, or both, in the discretion of the court." ^ "Where foreign corporations have an issue of bonds the in- terest upon which is payable wholly within the United States or within or without the United States at the option of the owner of the bonds, in all cases where said foreign corporations have fiscal agents within the United States and the said bonds are owned by citizens of the United States or aliens resident within the United States, the collection of interest on said bonds shall be considered to be and be treated as a domestic transaction upon the filing with said coupons certificates of ownership properly executed ; Provided, that whenever coupons from foreign bonds not accompanied by certificates of owner- ship, are presented for collection they shall be treated as foreign items, and the first bank or collecting agency receiving or ac- cepting the same for collection or otherwise shall deduct, with- hold and pay the tax as provided by income tax regulations for the collection of foreign income. "Where a foreign corporation has an issue of registered bonds the interest on which is payable through a fiscal agent in the United States, certificates of exemption may be filed with said fiscal agent in manner and form as prescribed by T. D. 1974 i Supra, % 103. i IliA 454 DEDocTioJsr at the souece. [§ 104 and payment by said fiscal agent shall be made in accordance with the provisions of T. D. 1974." * The words "foreign cor- porations" include municipal and private corporations holding charters under laws of countries foreign to the United States.* The phrase " 'fiscal agents' refers to financial agents in the ordinary sense, upon whom the law casts the same duties with reference to withholding and paying the tax as are imposed upon withholding and paying agents of domestic corporations by appointment. Where a foreign government has a fiscal agent in the United States for the purpose of paying the interest on its obligations, such fiscal agent will be charged with the duty of withholding and paying the tax on such interest payments, except to the extent of exemption claimed. Where such foreign countries or corporations have an issue of bonds payable wholly within the United States or within or without the United States, at the option of the owner of the bonds, and where the coupons from such bonds are presented for payment to the fiscal agent in the United States of such foreign countries or corporations, or for collection to a bank or collecting agency whether licensed or not, with ownership certificate attached, then and in all such cases said coupons shall be treated as domestic items and the aforesaid fiscal agents will be charged with the duties and re- sponsibilities of withholding and paying agents, and will make return on Form 1012 as provided by income tax regulations. Where, however, such coupons are not presented with such ownership certificates attached, they shall be received only by a licensed bank or collecting agency, and when so received shall be considered to be and be treated as foreign items, in accordance with the regulations for the collection of foreign )J 6 income. "The following certificate is hereby provided, which may be executed by responsible banks or bankers, either foreign or domestic, for and on behalf of nonresident owners of stock of corporations of foreig-n countries, for the purpose of claiming exemption from the income to such dividends from such stock : 4T. D. 1992. See T. D. 1974. 6 T. D. 2006. Supra, % 103. « Ibid. § 104] DEDUCTION OF irOEEIGN INCOME. 455 [Yellow Paper.} FORM 1071. TREASURY DEPARTMENT, INTERNAL REVENUE— INCOME TAX. Exemption Certificate — Banks or Bankers, Either Foreign or Domestic. (For the use of responsible banks or bankers, either foreign or domestic, for and on behalf of nonresident owners of stock of corporations of foreign eountries. ) ( Give name of foreign corporation. ) (Full description of stock, stating whether common or preferred, or both.) Amount of dividends, $ I (we) do solemnly declare that the owners of the stock of foreign cor- porations upon which the aforesaid dividends were declared are non- resident aliens as to the United States and are exempt from the Income tax imposed on such income by the United States Government under the law enacted October 3, 1913; that no citizen of the United States, wher- ever residing, or foreigner residing in the United States, or in any of its possessions, has any interest in said stock; and that all of the information as given in this certificate is true and correct. I (we) hereby agree that if at any time it shall appear that the income or any part thereof repre- sented or covered by this certificate was, or is, subject to the normal tax imposed by the United States, upon presentation of proof of that fact to me (us) by, from, or through the Commissioner of Internal Revenue, Wash- ington, D. C., I (we) will pay and remit to the United States Government the amount of tax claimed to be due; and I (we) hereby further agree that whenever in the judgment of the Commissioner of Internal Revenue it shall be necessary in or to the administration of the income-tax law, I (we) will, upon request of said Commissioner of Internal Revenue, dis- close and furnish to him the names and addresses of the owners anj the amount of the stock aforesaid. Date, 191—. (Name of bank or banker.) By ( Signature of official authorized to sign. ) ( Official position. ) ( Full post-office address of bank or banker. ) (Signatures must be clearly and legibly written.) The above certificate shall be in size 8 by 3^ inches, and shall be printed to read from left to right along the 8-inch dimension. The certificate shall be printed on yellow paper, and such paper shall correspond in weight and texture to white writing paper, 21 by 32, about 40 pounds to the ream of 500 sheets. The certificate hereby authorized will be printed by the Government and furnished without cost. Banks or bankers desiring to furnish their own certificates may do so, but the certificate so printed must conform in size to that prescribed above and be 4:50 DEDUCTION AT THE SO0EOE. [§ 104- printed in similar type upon the same color, shade, and weight of paper as used by the Government." '' The regulations of the Treasury Department provide as fol- lows: "All persons, firms, or corporations undertaking for accom- modation or profit (this includes handling either by way of purchase or collection) the collection of coupons, checks, bills of exchange, etc., for or in payment of interest upon bonds issued in foreign countries, and upon foreign mortgages or like obligations, and for any dividends upon stock or interest upon obligations of foreign corporations, associations, or insurance companies engaged in business in foreign countries, are re- quired by law to obtain a license from the Commissioner of Internal Revenue.* "Applications for such license (Form lOlT) ® will be made to the collector for the district in which such business is to be carried on. Upon the acceptance of such application the col- lector will issue to the applicant without cost a license (Form "> T. D. 2030. Said person, firm or corporation is 8 Tr. Reg. 54. now engaged in business as and 9 Form 1017. United States In- desires to conduct the business of ternal Revenue: collecting foreign income at the Application for license for collec- above address or addresses and here- tion of income from foreign, coun- by makes application for the license tries: required to be secured by persons. State of County of firms or corporations engaging in The undersigned (name) the business of collecting income (office) of (name of person from foreign countries under the pro- firm or corporation) being duly visions of paragraph E of section 11 sworn according to law, declares of the income tax law of October that on and after the day 3, 1913, and I (we) hereby promise of (191 ) he intends to engage and pledge myself (ourselves) to in the business of collecting foreign comply strictly with the provisions income payments of interest or divi- of said law and the rules and regu- dend by means of coupons, checks, lations of the Treasury Department or bills of exchange. The aggregate which have been or may hereafter amount of annual collections of such be issued in respect to the collection foreign income at the principal and and payment of such income. branch offices is estimated at . (Signed) The location of the principal and For (name of firm or cor- branch offices is as follows: poration). Principal office: Sworn to before me this day Branch offices: of 191 — . (If a firm, state names of mem- bers). § 104] DEDUCTION OF FOEEIGN INCOME. 457 1010) ^^ which will continue in force until revoked or canceled. Blank forms of such license, bearing the facsimile signature of the Commissioner of Internal Revenue, will be furnished collectors on requisition, who will in all cases countersign the same before issuing it to applicant. Failure to obtain a license or to comply with regulations is punishable by a fine not ex- ceeding $5,000 or imprisonment not exceeding one year, or both, in the discretion of the court." ^* "Where the collector is not sufficiently informed as to the entire responsibility of the applicant, or where in any case he deems it advisable, the Commissioner of Internal Revenue rtiay upon the recommendation of the collector require of the ap- plicant a bond, in duplicate, with satisfactory sureties, in a penal sum at least equal to the estimated amount of tax to be withheld by such applicant during any one year. A form of bond to be given in such cases will be furnished collectors on application for the same. Where licenses are issued without bond, the collector will each year inquire into and satisfy him- self of the financial responsibility of the licensee." ^^ "When any person, firm, or corporation shall have branch offices and desire to collect foreign interest or dividend income through said branch offices, the application for license or licenses shall be made by the person, firm, or corporation through its principal office for its branch office or offices.^' Application 10 Form 1010. foreign joint stock companies or as- Treasusy Department. sociations, or foreign insurance com- Offjce of the Commissioner of In- panies engaged in business in foreign ternal Revenue. countries, from , 191.., until License for collection of foreign revoked, income. "This license will not be valid un- , located and doing business til countersigned by the collector of at , and engaged in the busi- internal revenue for the district in ness of , having made applica- v^hioh issued. tion in accordance with the provi- Countersigned : sions of section 11 of the act of ( ) collector (dis- October 3, 1913, and the regulations trict). made in pursuance thereof, is hereby H Tr. Reg. 55. licensed to accept for collection cou- 12 Tr. Reg. 56. pons, checks and bills of exchange 18 By the preliminary regulations: for or in payment of interest upon "When any person, firm or cor- bonds issued in foreign countries and poration has branch offices and de- upon ' foreign mortgages or like ob- sires to collect said foreign interest ligations and for the dividends up- or dividend income through said on stock of foreign corporations branch offices the application for li- 458 DEDUCTION AT THE SOUECE. [§ 104 for licenses in such cases shall be made to the collector of in- ternal revenue for the district in which the home office is located. The names and addresses of the branch offices shall be furnished to the collector in the application of the said prin- cipal, and if the requirements of the foregoing regulations have been complied -with to the satisfaction of the collector, he shall certify this fact to the collector of internal revenue for the district in which the branch office is located, and the collector to whom this certification is made shall issue to such branch ofiiee a license, as in the case provided in article 55." ^* "The licensed person, firm or corporation first receiving such foreign items for collection, or otherwise, shall withhold there- from the normal tax of one per cent., and will be held respon- sible therefor. If the foreign item is in the form of a check or bill of exchange, the words 'Income Tax withheld by ' (giving name, address and date) shall be endorsed or stamped thereon by such licensee; but if the item is represented by a coupon or coupons from bonds, the licensee shall attach there- to a statement identifying the same, and the endorsement or stamp showing the tax withheld shall be placed on the state- ment instead of the coupon or coupons. "Said endorsement or stamp shall be a sufficient evidence of tax withheld to relieve subsequent holders or purchasers from the obligations of withholding." ^^ "Such licensee shall obtain the names and addresses of the persons from whom such items are received and shall prepare a list of same in duplicate (on Form 1043) ** and file it with the collector of internal revenue for his district not later than the 20th day of the month next succeeding the month in which such items were paid. The list shall be dated, and shall contain the names and addresses of the taxable persons, the character and amount of income, amount of exemption claimed, amount cense or licenses shall be made (and office and its branch office or offices." bond furnished when a bond is re- T. D. 1909, Nov. 28, 1913. quired) by the person, iirm or cor- l* Tr. Reg. 57. poration through its principal office 16 Tr. Reg. 58 as amended T. D. for its branch office or offices. The 2023. bond in such cases shall be based 16 Form 1043 is printed ia full on the total amount of such foreign supra, § 81. business transacted by both the home :§ 104] DEDUCTION OF FOEEIGN INCOME. 459 ■of income on which withholding agent is liable for tax, and the amount of tax withheld. In addition to the monthly lists the licensee will, on or before the 1st day of March in each year, file with the collector in duplicate a return (Form 1043a) " showing the amount of income paid and the amount of tax withheld by him during the preceding year and such other in- formation as the form prescribes. ''The monthly list return in the form as required herein shall ■constitute a part of the annual list return to be made by the licensee as withholding agent, and he will not be required, in making an annual list return of the tax withheld from income described in article 54, to again make an itemized list of the amount of tax withheld from each person, but will give in the annual list return the totals of the monthly list return for each month of the year for which annual list return is made.^' "In the event such coupons, checks, or bills of exchange above mentioned are presented for collection by an individual claiming the benefit of the exemptions allowable under para- graph C (arts. 9 and 10), such individual shall be permitted to avail himself of the exemption claimed, upon signing on the form heretofore prescribed for coupons payable in the United States,*' and no tax shall be deducted for the amount of the ■exemption so claimed; or if such items are presented by cor- porations, joint-stock companies, or associations and insurance ■companies, organized in the United States, the form of certifi- ■cate heretofore prescribed for such organizations shall be used, and in such instances no tax shall be deducted." ^'' "In both instances the licensee first receiving such items shall Tctain such certificates for delivery with the lists aforesaid, and with respect to said coupons, checks, or bills of exchange, said licensee shall attach thereto (identifying the items) or in- dorse or stamp thereon the words 'Income tax exemption claimed through' giving name and address of licensee), which shall be sufficient evidence to relieve subsequent holders or purchasers from the duty of also withholding the tax thereon. IT Form 1043a is printed in full 19 Form 1000 B printed in full su- supra, § 81. pra, § 103. 18 Tr. Reg. 59. so Tr. Reg. 60. 460 DEDUCTION AT TiiE SOUECE. [§ 104 "The provisions for collection of the tax on foreign obliga- tions herein set forth includes the interest upon all foreign bonds, even though the coupons may, at the option of the holder, be payable in the United States as well as in some foreign country." "^ "All persons licensed shall keep their records in such manner as to show from whom every such item has been received, and such records shall be open at all times to the inspection of in- ternal-revenue officers." ^* 21 Tr. Reg. 61. 22 Tr. Reg. 62. Treasury Department, Washington, D. C, April 4, 1914 JIessrs. Boissevain & Co., 24 Broad St., N. Y. City. Sirs: This office has your letter of April first ill which you state: We have received from the Canadi- an Pacific Railway Company, a for- eign corporation, one cheque cover- ing a dividend on 250 shares of stock; 200 of these shares belong to our clients, but as to the 50 shares, while registered in our name, we liave no linowledge of the owner thereof. You further state tliat you can secure ownersliip certificates to cover the 200 shares, but are unable to secure certificates to cover the 50 shares, and request information as to what course to pursue in order that you may cash such cheque and pay to each Icnown shareholder the amount derived from same to which he or she may be entitled. You are advised that ownership certificates to cover the 200 shares belonging to known shareholders should be obtained. In lieu of such certificates to cover the remaining 50 shares, you should execute a cer- tificate. Form 1002, to cover each individual share, and deduct the nor- mal tax of 1% from the amount of income derived from same, and make return of amount withheld to the Collector. If, at a later date, a certificate covering any such item and claiming exemption is received, it should be forwarded witli your next monthly list return to the said Collector. The Collector upon receipt of such a certificate, providing it is received not later than thirty days prior to March first of the next succeeding year, will make a proper notation on the monthly and annual list returns rendered by you, and acknowledge the receipt of the certificate, and, after receipt of such acknowledg- ment, the amount of tax withheld upon the item co-ered by the certifi- cate may be released by you to the individual entitled to receive the same. Respectfully, L. F. Speer, Deputy Commissioner CHAPTEE IX. COLLECTION OF THE TAX. § 105. Demand. The Eevised Statutes provide that "Every collector shall, from time to time, cause his deputies to proceed through every part of his district and inquire after and con- cerning 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." * "It shall be the duty of the collectors, or their deputies, in their respective districts, and they are authorized, to collect all the taxes imposed by law, however the same may be desig- nated. And every collector and deputy collector shall give re- ceipts for all collected by him." ^ "Where it is not otherwise provided, the collector shall in person or by deputy, within ten 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 pay- ment thereof. If such person does not pay the taxes, within ten 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 five per centum additional upon the amount of taxes, and interest at the rate of one per centum a month." * Similar provisions of the statute in question do not describe this liability of interest as a penalty. They provide that "to .any sum or sums due and unpaid after the thirtieth day of June in any year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of 5 per § 105. lU. S. R. S., § 3172, (U. «U. S. R. S„ § 3] 83 (U. S. Comp. S. Comp. Stat. 1901, p. 2065), as Stat. 1901, p. 2072). amended by Act of October 3, 1913, 3 U. S. R. S., § 3] 84 (U. S. Comp. II, subsection I. Stat. 190] r p. 2072). 4G1 4:62 COLLECTION OF THE TAX. [§ 105 centum on the amount of tax unpaid, and interest at the rate of 1 per centum per month upon said tax from the time the same became due, except from the estates of insane, deceased,, or insolvent persons." * This notice and demand is necessary in order to entitle the Government to a lien upon the property, and to enable it to distrain for the tax and to impose a penalty upon the tax- payer.' The Treasury Regulations direct: "When assessment has been made, collectors will, on receipt of their returned lists, at once issue preliminary notices of as- sessment (Form 647) ® and where in any case the tax assessed 4 Act of October 3, 1913, II, sub- B T7. 8. v. Bristol, 20 Fed. 378. section E. See infra, § 107. 6 FORM 647. UNITED STATES INTERNAL REVENUE. NOTICE OF ASSESSMENT OF SPECIAL EXCISE AND INCOME TAX. United States Internal Revenue,. OFFICE OF the COLLECTOR List for mouth of , 191 To District of At , 191 You are hereby notified that a special excise tax (income tax) under the provisions of section 38 of the Act of August 5, 1909, (2 of the Act of October 3, 1913,) amounting to $ , has been assessed against you by the Commissioner of Internal Revenue and transmitted by him to me for collection. This tax is due and payable on or before the , 191 .. , to the person designated below in the- manner set forth on the reverse side of this notice. Payment may be made to At (Post-office address.) Or to , Collector. Bring this notice with you. [ENDORSEMENT.] To avoid penalty and interest, taxes must be paid to the collector or person designated by him in such a manner as will enable him to place- the same with his depositary and receive a certificate of deposit therefor not later than the close of business of the date mentioned in the body of this notice. § 105] DEMAND. 4G3 is not paid on or before the 30th day of June, or in ease of corpo- rations designating their own fiscal year, within 120 days fol- lowing the date on which the return should have been filed, notice and demand (Form 17) ' should be at once issued, and Payment may be made in currency, post-office money order, or certified check on a national or state bank or trust company, providing such checks, can be collected without cost to the Government. It should be borne in mind by taxpayers that the date when such cheeks may be cashed and the money deposited is the date of payment, and allowance should be made accordingly. Collectors can not receive in payment of taxes uncertified checks, per- sonal checks, drafts, or vouchers, and all indorsements by collectors on certified checks are made without recourse. Money orders anj certified checks must be made payable to the Collector of Internal Revenue. 7 FORM 17. UNITED STATES INTERNAL REVENUE. NOTICE OF AND DEMAND FOR TAA ASSESSED. United States Internal Revenue, office of the collbctob. List for month of , 191 Division. To District of At 191 You are hereby notified that a tax, under the Internal Revenue Laws of the United States, amounting to $ , the same being a tax upon for the period ending , has been as- sessed against you by the Commissioner of Internal Revenue and trans- mitted by him to me for collection. Demand is here made for this tax, which is due and payable to the person designated below on or before , 191 , such pay- ment to be made in the manner set forth on the reverse side of this No- tice and Demand. If this tax is not in my hands for deposit before the close of business of the day above specified it will become my duty, under the law, to collect the same together with 5 per centum additional, and interest at 1 per centum per month until paid. Payment may be made to At (Post-office address.) Bring this notice with you. Or to , Collector. [ENDORSEMENT.] To avoid penalty and interest, taxes must be paid to the collector or person designated by him in such a manner as will enable him to place 464: COLLECTION 03? THE TAX. [§ 105 unless the tax in such case is paid within 10 days after the service of such notice, general demand for tax, penalty, and in- terest (Form 21) ' should at once be issued. Immediate notice the same with his depositary and receive a certificate of deposit therefor not later than the close of business of the date mentioned in the body of this notice. Payment may be made in currency, post-offiee money order, or certified check on a national or state bank or trust- company, providing such checks can be collected without cost to the Government. It should be borne in mind by taxpayers that the date when such checks may be cashed and the money deposited is the date of payment, and allowance should be made accordingly. Collectors can not receive in payment of taxes uncertified checks, per- sonal checks, drafts, or vouchers, and all indorsements by collectors on certi- fied checks are made without recourse. Money orders and certified checks must be made payable to the Collector of Internal Revenue. 8 FOEM 21. UNITED STATES INTERNAL REVENUE. SECOND NOTICE OF AND DEMAND FOR TAX ASSESSED. List for Month of , 191 , Division. United States Internal Revenue, office of the collectoe, To District of At At , 191 . Your attention is called to a notice of and demand for assessed tax (Form 17), dated , 191 , notifying you of and demanding the payment of the said tax amounting to $ assessed against you on account of for the period ending ,191 . The said tax not having been paid within the time required by law, as stated in the said notice and demand, you became liable to pay a pen- alty of 5 per centum additional upon the amount of this tax, and interest Skt the rate of 1 per centum per month from , 191 , and DEMAND is hereby made upon you for the said tax, with the penalty and such interest as may accrue before payment. If the said tax, penalty, and accrued interest are not paid within ten days from the date hereof, in the manner described on the reverse side of this form, it will become my duty to collect the same, with costs, by .seizure and sale of property under warrant of distraint. Payment may be made to Amount of tax .... $ At (Post-ofiice address.) 5 per cent penalty Or to Total $ Collector. [ENDORSEMENT.] Payment may be made in currency, post-ofEce money order, or certi- fied check on a National or State bank or trust company, providing such checks can be collected without cost to the Government. It should also be i)orne in mind by taxpayers that the date when such checks may be cashed § 105] DEMAND. 465 and demand (Form 17) will, however, he served in case of failure to file the required return within the statutory period.' "Pending assessment on returns forwarded to the commis- sioner, collectors will have prepared the necessary notices of assessment, with properly addressed envelops, to be used im- mediately on return of their assessment lists." ^^ "Statements of payment, abatement, and outstanding balan- ces of such assessed taxes will be rendered monthly by collect- ors on special Form 325.^^* Such statements will be prepared in the same manner as required in the case of assessments on the regular Form 23,*^ except that in Statement III the out- standing balances on the various lists will be reported in aggregate only. Items constituting such balances, however, will be carded by collectors, but only as to such as were assessed during the month for which the return is rendered, thus avoid- ing detailed statements each month of outstanding balances previously reported. A separate card (Form 1020) ^' will be used for each such item; and all cards so prepared each month should be arranged alphabetically, and so forwarded by the col- lector with his report on special Form 325." '* and the money deposited is the date of payment, and allowance should be made accordingly. Collectors can not receive in payment of taxes uncertified checks, per- sonal cheeks, drafts, or vouchers, and all indorsements by collectors on certified checks are made without recourse. Money orders and certified checks must be made payable to the Collector of Internal Revenue. 9 Tr. Keg. 197. i" Tr. Reg. 188. *For footnotes 11-14 see pp. 466-470. Foster Income Tax. — 30. 466 COLLECTIOlf OH" THE TAX. [§ 105 11 Special Form 325. — ^Prescribed December 11, 1913. UNITED STATES INTERNAL EEVENUE. Report of Payments, Abatements, and Balances Outstanding for the Month of , 191. ., of Taxes and Penalties assessed on Forms 23A and 23B, not paid at the close of the month for which said forms were prepared, in the District of Name. i 3 Period of Liability, Year Ending — 1" Is i ■So; II -•a s II ■Si d t 1 1 1 Uo.lb, If 1 T. •idYr.l -l-'-l^- $ ^ $ 1^ $ |# $ |# 1 1 2 1 1 1 3 Statement No. 1.- I..I..I 4 -Paymt 5 nts Di 6 ring 7 the 8 yiont 9 1. 10 ? S 4- I fi 7 S q in 11 ^'> .... IS 1/1 I") 1R 17 10 '>^ OQ "S OA or; "fi 07 OS oq ^n 11 ■^0 '!? ' '^I ■''1 ?fi 37 .... 88 __ § 105] DEMAND. 467 STATEMENT NO. IV.- -RECAPITULATION BY ASSESSMENT LIST. o Monthly List. Balance from Last Month and Charged during this Month.* .■H«. (S5 II ■§ m s 1 m i 1 ■s ^ Col. 8. Col. 9. Col. 8. Col. 9. Col. 8. Col. 9. Col. 8. Col. 9. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 IS 1!) 20 2] 22 22 1 19.. , 19-- , 19.- , 19.. , 19.. , 19.. , 19.. , 19.. , 19.. , 19.. , 19.. , 19.. 19.. , 19.. , 19.. , 19.. , 19.. , 19.. ,19.. , 19.. , 19.. , 19.. , 19.. Totals ... ... ... ... ... ... ... ... ... ... " " " " " " " " : :: ' . . ■■■. . - ... ... " " ... ' Including transfers t Including transfers Dated at this dav of . . . . from other districts, to other districts. 19 Collector of the .... Dist. of 468 COLLECTION OF THE TAX. [§ 105 [ENDORSEMENT.] Special Form 325. UNITED STATES INTERNAL REVENUE. Report of Payments, Abatements, and Balances Outstanding for the month of , 19 of taxes and penalties assessed on Forms 23A and 23B, in the District of INDORSEMENTS IN THE OFFICE OF THE COMMISSIONER OF INTERNAL REVENUE. Examined and compared with the accounts in this Division as to pay- ments, abatements, transfers, and balances outstanding, and found to be correct this day of , 19 Clerk in Division of Accounts. Approved : Head of Division. Examined and compared with record of abatements, and this day of , 19 found to be correct. Cleric in Division of Claims. Approved : Head of Division. Examined, compared with last previous report on this form, also with Forms 23A and 23B, and 58, proper entries made, and found this da,y of ,19 , to be correct. Clerk in Assessment Division. Approved : Head of Division. § 105] DEMAND. 469 assessment division. Instructions. 1. Each collector will forward to the Commissioner of Internal Revenue a monthly report on this form, such report to be rendered on the first day of the month or within five days thereafter. 2. Special Form 325 will be made up in four statements, viz : Statement I, Payments made during the month; Statement II, Abatements made dur- ing the month; Statement III, Balances outstanding at the end of the month; and Statement IV, Recapitulation by assessment lists. Headings for Statements II and III will be entered on the form by the collector to suit the entries necessary under each heading. No items will be taken up on this form except those appearing on "back" lists — ^that is, items on the January list will not be taken up until the February report and then only such items as were unaccounted for on February 1. In entering income taxes under the first three statements such taxes will be entered in column 4; the 50 per cent and 100 per cent penalties in column 5. This is very important, as taxes and penalties must be kept separate for statistical purposes. Entries must be made from assessment lists and so arranged that the folios and lines of each list noted will be in consecutive order. The serial number of each tax receipt, Form I, should be stated in full. Separate books, Form I, will be used for all payments relative to the income taxes — one for corporations. Form 23A, and one for individuals. Form 23B. 3. Credits may be taken in three ways, as follows: (o) by payments, (6) by abatements, and (c) by transfer to another district under Section 3209 R. S. [a) When credits are taken by payments, the entries will be made in detail under Statement I in the regular order of the lists by months, giv- ing the number of receipts. Form I. It sometimes occurs that a partial payment of an assessed tax is made. In such cases credit will be taken, under Statement I, on this form for the amount paid, and a receipt on Form I issued to tlie taxpayer, and the balance will be included in the aggregate reported under Statement III. When the unassessed 5 per cent penalty, or interest at 1 per cent per montli, or both, accrue and are collected during the same month the tax Is paid, the amount will be re- ported in columns 9 and 10 of this form and on Form 58. For the method of computing the 5 per cent penalty and interest at 1 per cent per month, see Regulations No. 1, pp. 109-11, and Reg. No. 14, p. 16. See also T. D. No. 870, February 27, 1905, and Sections 3184 and 3185 R. S., compilation of 1911, and the various citations thereunder. Proper entries must be made in each column as indicated by the headings thereof. (6) Credits by abatements will be entered under Statement II, and entries made in detail in the regular order of the lists by dates and proper entries made in each column as indicated by the headings thereof. In- structions as to the manner of making claims for abatements and the- proper forms to be used have been carefully prepared and embodied in Regulations No. 14. Taxes paid after abatement and abatements in excess- should not be taken up on this form. (c) When credit is taken because of the transfer of a tax to another collection district, under Section 3209 R. S., the entry should be made under Statement II in red ink. A transcript of the amount to be trans- ferred will be made on Form 514 and forwarded with Form 51B. The receiving collector will report on this form the amount transferred to him for collection as though the liability had been incurred in his own district. Charges or credits entered in the recapitulation because of such transfera 470 COLLECTIOIT OF THE TAX. [§ 105 should be entered in red ink with the necessary explanation to distinguish them from other charges or credits reported thereon, and should be so reported until the same are paid or abated. 4. All credits must be taken in the month in which payments, abate- ments, or transfers are made. 5. As soon as the Original assessment lists, Forms 23A and 23B, are received back from the Commissioner by the collector, a card. Form 1020, will be prepared in duplicate for each item of assessment, giving all the information required above the dividing line of said card. If the tax so -assessed has been paid, such payment will also be noted on the cards. One of these cards will be forwarded to the Commissioner on or before the date when the next report on Form 325 is due. These cards will be used in lieu of reporting these items in detail under Statement III of Form 325 from month to month until paid or abated, and will thereby materially lessen not only the clerical work in preparing these reports, but the danger of errors in retranscribing into such reports the balances still outstanding on the various assessment lists. If properly kept, such cardj will be a complete index of all persons, etc., paying income tax. The duplicate cards retained in the collectors' offices should be arranged in such a man- ner that the proper time of issuing the various collection forms can be carefully watched, thus avoiding delay in collecting the tax due and the loss of 5 per cent penalty and interest that would accrue if said forms •were promptly issued. As to the best manner of filing these cards the collector will no doubt readily solve, but should he desire, the method pur- sued in the Commissioner's office will be explained on request. The balances outstanding on Forms 23A and 23B may be reported in the aggregate under Statement III until the expiration of the 120 days from the date of filing the return, after which proper entries will be made in the first six columns, and i:i columns 6 to 10, inclusive, a note of explanation should be made as to the exact status of the balance, whether claim is pending, and if such is the case the number of form and date should be given. If no claim is pending, a statement should be furnished showing what efforts are being made to collect the tax, dates of Forms 17 and 21, date of filing of lien (T. D. 1841) and Form 69, or otherwise explain why the same has not been collected. 6. The totals of all lists should be made in Statements I, II, and III and entered in red ink. The grand total of each statement should be treated in the same manner. 7. The headings of columns of Statement IV are such that special in- structions are not deemed necessary. When taking up a list for the first time under Statement IV, the whole amount of the list will be entered on the margin in the same manner as on Form 51B. 8. The items on Form 23A will be taken up first under Statement I, followed by items on Form 23B. The same arrangements will be observed as to Statements II, III, and IV. 9. Failure to follow the above instructions will necessitate the return of the form for correction to the collector rendering the same. 18 Form 23. Supra, § 89. 18 Dist. Name, (Of corporation or individual.) (Post-office address.) l*Tr. Reg. 199. § lOG] PENALTIES JFOE DEEAOLT IN PAYMENT. 471 § 106. Penalties for default in payment. The Act pro- vides: "That if auy person, corporation, joint-stock company, association, or insurance company liable to make the return or pay the tax aforesaid shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, such person shall be liable to a penalty of not less than $20 nor more than $1,000." ^ The Act further provides : that, as regards both individuals^ and corporations, joint-stock companies or associations, and insurance companies,' "to any sum or sums due and unpaid after the thirtieth day of June in any year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of 5 per centum on the amount of tax unpaid, and interest at the rate of 1 per centum per month upon said tax from the time the same became," — in the case of corporations, joint-stock companies or associations, and in- surance companies, "becomes" * — "due, except from the estates List, Form , For , Folio Line ( 23 A or 23b. ) ( Month. ) ( Year. ) For Year Ending , 191 Tax Due 191 Amount of Tax, $ 50% Pen., $ 100% Pen., $ Paid , 191 Serial No. Receipt ,, , , ,„, (Erroneous. ■^^^^^^ ' l**! I Uncollectible. Serial No. Abt. ( over ) Eemabks, Refebence to Corbespondence, Etc. Assessment Division, Internal Revenue — Form 1020 — Ed. 600,000 — Dec. 11-13. § 106. lAet of October 3, 1913, 3 lUd. Subsection G (c). II, Subsection F. 4 Hid. Subsection G (c). ^ Ibid. Subsection E. 472 COLLECTION OF THE TAX. [§ 106 of insane, deceased, or insolvent persons," the last clause being contained only in that part of the statute which applies to in- dividuals. It will be observed that this addition of 5 per cen- tum, with interest at the rate of 1 per centum a month, is not described in the statute as a penalty. Interest does not run until ten days after service of notice and demand.*" In cases of residence or travel of the taxpayers in foreign countries, the interest is charged by the Treasury Department ten days sub- sequent to the time when the notice sent should have reached them in the ordinary course of the mails, unless satisfactory evidence of delay in the mails is presented.*'' "You are ad- vised that this office is of the opinion that the cases referred to in the law where the assessments should be made by the Commissioner of Internal Revenue and paid immediately up- on notification of the amount of such assessment relate to de- linquent corporations who have failed to file returns until after the final day on which taxes should be paid in the regular course, viz., June 30. Under this construction, therefore, it will be seen that in cases of individuals and corporations whose delinquency was disclosed prior to July 1 or prior to the termi- nation of the 120-day period following the day when the return was due to be filed, the demand and notice on Form 17 should not be served until July 1 or on the day following the termi- nation of the 120-day period after the return was due and the 5 per cent penalty should not be demanded until the expiration of the 10-day period following the serving of such demand and notice. Where, however, such demand and notice has been served and payment of the 5 per cent penalty made before the termination of the 10-day period following June 30, the corpo- rations by whom such payments have been made should be ad- vised of their privilege to file claim for refund." *° The Eevised Statutes provide, in regard to Internal Eevenue taxes : "When the said tax is not paid on or before the last day of the month, as aforesaid, the collector shall add a penalty of five per centum, together with interest at the rate of one per centum per month, upon such tax from the time the same be- became due ; but no interest for a fraction of a month shall be 4a T. D. 1991. 2nd District, June 26, 1914, T. D. « T. D. 2028. 2003. See U. 8. v. Bristol, 20 Fed. 4c Com'r. OsTiorn to Collector of 378. § 107] LIENS. 47S demanded: Provided, That notice of the time when such tax becomes due and payable is given in such manner as may be pre- scribed by the Commissioner of Internal Revenue. It shall then be the duty of the collector, in case of the non-payment of said tax on or before the last day of the month, as aforesaid,, to demand payment thereof, with five per centum added thereto, and interest at the rate of one per centum per month, as afore- said, in the manner prescribed by law ; and if said tax, penalty,, and interest are not paid within ten days after such demand, it shall be lawful for the collector or his deputy to make distraint therefor, as provided by law." ° A similar section has been held constitutional.® Where the refusal to pay taxes was induced by inconsistent Department rulings after suit for the statutory penalty was pending, the court refused to allow interest to the Government in a suit for the collection of the tax.' In a suit in equity to recover the amount of a tax imposed by a State statute, with interest at the rate of twelve per cent until paid, the defendant admitted part of the tax to be due, and paid the amount admitted into court, with twelve per cent inter- est. The sum so paid was greater than the interest then accrued apon the whole tax for which suit was brought. It was held that the amount paid into court should be applied, in accord- ance with the defendant's contention, to the principal and inter- est admitted to be due, and further, that on the remainder of the tax decreed to be due, the interest should be computed at, the rate of twelve per cent, until the date of the decree and there- after only at six per cent.* § 107. Liens. The Eevised Statutes provide that "If any person liable to pay any tax neglects or refuses to pay the same- after demand, the amount shall be a lien in favor of the United States from the time when the assessment list was received by the collector, except when otherwise provided, until paid, with the interest, penalties, and costs that may accrue in addition thereto, upon all property and rights to property belonging to 5U. S. Eev. Stat. § 3185, U. S. Int. Rev. Eec. 193, Fed. Caa. No, Comp. Stat. 1901, p. 2072. 979. 6 Doll V. Evans, 9 Phila. 364. „ ' Massachusetts y Western Vnior^ 7 rr o n 77 c • d 7 1= ^«^- ^°- ^^^ U. S. 40, 35 L. ed. 628, ' (/. &. V. Dollar Samngs Bank, 15 j^j Sup. Ct Eep 889 474 COLLECTION OF THE TAX. [§ 107 said person." ^ No lien arises until after assessment, notice, demand,^ and refusal to pay.' The demand must specify the amount of the tax.* It should be in writing.^ The validity of such lien is not affected by the failure to comply with a state law which requires all liens to be recorded.^ This lien is not displaced by a judicial sale of the property under a pre-existing judgment or for the foreclosure of a pre-existing mortgage or other lien,'' except possibly one for State or Federal taxes pre- viously imposed. The United States are not estopped by any statements of the collector or other Federal officer that the prop- erty is not subject to their lien.* The proceedings to enforce the lien are described hereafter.* § 108. Distraint. The Kevised Statutes provide that "If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes, with five per centum additional thereto, and interest as afore- said, by distraint and sale, in the manner hereafter provided, of the goods, chattels, or effects, including stocks, securities, and evidences of debt, of the person delinquent as aforesaid: Provided, That there shall be exempt from distraint and sale, if belonging to the head of a family, the school-books and wearing apparel necessary for such family; also arms for personal use, one cow, two hogs, five sheep and the wool thereof, provided the aggregate market-value of said sheep shall not exceed fifty dol- lars, the necessary food for such cow, hogs, and sheep, for a peri- od not exceeding thirty days; fuel to an amount not greater in value than twenty-five dollars; provisions to an amount not § 107. 1 U. S. Rev. Stat. § 3186, « U. 8. v. Pacific R. R. 4 Dill. 66, as amended by Act of March 1, 71, Fed. Cas. Nos. 15,983, 15,984. 1879, chapter 125, § 3, 20 Stat 6 U. S. v. Allen, 14 Fed. 263, 267. at L. 327 ; 1 U. S. Eev. Stat. Supp. 6 u. S. v. Snyder, 149 U. S. 210, 2d ed. p. 226, U. S. Comp. Stat. 37 L. ed. 705, 13 Sup. Ct. Rep. 846; 1901, p. 2073. On general question Arnson v. Murphy, 109 U. S. 238, of priority of claims for taxes 27 L. ed. 920, 3 Sup. Ct. Rep. 167. against the assets of a debtor, see 1 Osterberg v. Union Trust Co. 93 note in 29 L.R.A. 278. U. S. 424, 23 L. ed. 964. See, how- 2 V. 8. V. Pacific R. R. 1 McCrary, ever. Department Ruling of January 1, 1 Fed. 97. See s. c. 4 Dill. 66, 25, 1866, I. R. R. 37. Fed. Cas. No. 15, 983; s. c. 4 Dill. 9 Alkan v. Bean, 8 Biss. 83, 23 71, Fed. Cas. No. 15, 984; U. 8. v. [nt. Rev. Reo. 351, Fed. Cas. No. Allen, 14 Fed. 263; Brovm v. Ooo^ 202. mn, 75 N. Y. 409. * ^»^'"«' § ^^■ 3 Breton v. Goodwin, 75 N. Y. 409. § 108] DISTBAINT. 475 greater than fifty dollars; household furniture kept for use to an amount not greater than three hundred dollars; and the books, tools, or implements of a trade or profession, to an amount not greater than one hundred dollars shall also be ex- empt; and the officer making the distraint shall summon three disinterested householders of the vicinity, who shall appraise and set apart to the owner the amount of property herein de- clared to be exempt." ^ This mode of collection is constitu- tional.^ State exemption laws do not apply to proceedings to ■collect debts due to the United States.* "In such cases of neglect or refusal, the collector may levy, ■or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the said lien exists, for the payment of the sum due as aforesaid, with interest and penalty for non-payment, and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy.* "All persons, and officers of companies or corporations, are required, on demand of a collector or deputy collector about to distrain or having distrained on any property, or rights of prop- erty, to exhibit all books containing evidence or statements re- lating to the subject of distraint, or the property or rights of property liable to distraint, for the tax due as aforesaid.^ "When distraint is made, as aforesaid, the officer charged with the collection shall make or cause to be made an account of the goods or effects distrained, a copy of which, signed by the officer making such distraint, shall be left with the owner or possessor of such goods or effects, or at his dwelling or usual place of business, with some person of suitable age and dis- cretion, if any such can be found, with a note of the sum de- manded, and the time and place of sale; and the said officer shall forthwith cause a notification to be published in some news- paper within the county wherein said distraint is made, if a newspaper is published in said county, or to be publicly posted § 108. lU. S. Kev. Stat, section 3 P. 8. v. Howell, 9 Fed. 674. 31S7, V. S. Comp. Stat. 1901, p. « U. S. Rev. Stat. § 3188. See 2073. Bartman v. Bean, 99 U. S. 393, S Springer v. V. 8. 102 U. S. 586, 25 L. ed. 455. 26 L. ed. 253; quoted supra, § 20. 6 U. S. Kev. Stat. § 3189. 476 COLLECTION OY THE TAX. [§ 108- at the post office, if there be one within five miles nearest to the residence of the person whose property shall be distrained, and in not less than two other public places. Such notice shall specify the articles distrained, and the time and place for the sale thereof. Such time shall not be less than ten nor more- than twenty days from the date of such notification to the owner or possessor of the property and the publication or post- ing of such notice as herein provided, and the place proposed for the sale shall not be more than five miles distant from the place of making such distraint. Said sale may be adjourned from time to time by said officer, if he deems it advisable, but not for a time to exceed in all thirty days." ® "When property subject to tax, but upon which the tax has not been paid, is seized upon distraint and sold, the amount of such tax shall, after deducting the expense of such sale, be first appropriated out of the proceeds thereof to the payment of the tax. And if no assessment of such tax has been made upon such property, the collector shall make a return thereof in the form required by law, and the Commissioner of Internal Revenue shall assess the tax thereon." '' "When any property advertised for sale under distraint,^ as aforesaid, is of a kind subject to tax, and the tax has not been paid, and the amount bid for such property is not equal to the amount of the tax, the collector may purchase the same in behalf of the United States for an amount not exceeding the said tax. All property so purchased may be sold by the col- lector, under such regulations as may be prescribed by the Commissioner of Internal Revenue. The collector shall render to the commissioner a distinct account of all charges incurred in such sales, and, in case of sale, shall pay into the Treasury the surplus, if any there be, after defraying all lawful charges and fees." ' The debt originally due by virtue of the assess- ment of the tax is merged in the tax sale and the purchase thereof, to the extent at least of the purchase price.® "In any case of distraint for the payment of the taxes afore- said, the goods, chattels, or effects so distrained shall be re- stored to the owner or possessor, if prior to the sale payment 6U. S. Eev. Stat. § 3190. 9 U. 8. v. Wilson. 118 U. S. 86, 7U. S. Rev. Stat. § 3192. 88, 89. 8U. S. Eev. Stat. § 3191. I 108] DISTEAINT. 4:7T of the amount due is made to the proper officer charged with the collection, together -with the fees and other charges ; but in the case of non-payment as aforesaid, the said officers shall pro- ceed to sell the said goods, chattels, or effects at public auction, and shall retain from the proceeds of such sale the amount de- mandable for the use of the United States, and a commission •of five per centum thereon for his own use, with the fees and •charges for distraint and sale, rendering the overplus, if any there be, to the person who may be entitled to receive the ^ame." " "In all cases of sale, as aforesaid, the certificate of such sale shall be prima facie evidence of the right of the officer to make such sale, and conclusive evidence of the regularity of his proceedings in making the sale, and shall transfer to the pur- chaser all the right, title, and interest of such delinquent in and to the property sold; and where such property consists of stocks, said certificate shall be notice, when received, to any -corporation, company, or association of said transfer, and shall be authority to such corporation, company or association to record the same on their books and records in the same manner as if transferred or assigned by the party holding the same, in lieu of any original or prior certificates, which shall be void, whether canceled or not. And said certificates, where the sub- ject of sale is securities or other evidences of debt, shall be good and valid receipts to the person holding the same, as against any person holding, or claiming to hold, possession of such securi- ties or other evidences of debt." ^^ "When any property liable to distraint for taxes is not di- visible, so as to enable the collector by a sale of part thereof to raise the whole amount of the tax, with all costs, charges, and commissions, the whole of such property shall be sold, and the surplus of the proceeds of the sale, after satisfying the tax, costs, and charges, shall be paid to the person legally en- titled to receive the same; or, if he cannot be found, or re- fuses to receive the same, shall be deposited in the Treasury of the United States, to be there held for his use until he makes application therefor to the Secretary of the Treasury, who, upon such application and satisfactory proofs in support there- 10 U. S. Rev. Stat. § 3193. "U. S. Eev. Stat. § 3194. 4T8 COLLECTION OF THE TAX. [§ 108 of, shall, by warrant on the Treasury, cause the same to be paid to the applicant." ** "When goods, chattels, or effects, sufficient to satisfy the tax imposed upon any person, are not found by the collector or deputy collector, he is authorized to collect the same by seizure and sale of real estate." '* "The officer making the seizure mentioned in the preceding section shall give notice to the person whose estate it is pro- posed to sell by giving him in hand, or leaving at his last or usual place of abode, if he has any such within the collection, district where said estate is situated, a notice, in writing, stating what particular estate is to be sold, describing the same- with reasonable certainty, and the time when and place where- said officer proposes to sell the same; which time shall not be less than twenty nor more than forty days from the time of giving said notice. "The said officer shall also cause a notification to the same effect to be published in some newspaper within the county where such seizure is made, if any such there be, and shall also cause a like notice to be posted at the post-office nearest to the estate to be seized, and in two other public places within the county; and the place of said sale shall not be more than five miles distant from the estate seized, except by special order of the Commissioner of Internal Revenue. "At the time and place appointed, the officer making such seizures shall proceed to sell the said estate at public auction, offering the same at a minimum price including the expense of making such levy, and all charges for advertising and an officer's fee of ten dollars. "When the real estate so seized consists of several distinct tracts or parcels, the officer making sale thereof shall offer each tract or parcel for sale separately, and shall, if he deem it ad- visable, apportion the expenses, charges, and fees aforesaid to such several tracts or parcels, or to any of them, in estimating the minimum price aforesaid. "If no person offers for said estate the amount of said mini- mum price, the officer shall declare the same to be purchased 12 U. S. Rev. Stat. § 3195. See also Brown v. Oooiwm, 75 N- 13 U. S. Rev. Stat. § 3196. Y. 409. § 108] DISTEAINT. 4:79 by him for the United States ; otherwise the same shall be de- clared to be sold to the highest bidder. "And in case the same shall be declared to be purchased for the United States, the officer shall immediately transmit a cer- tificate of the purchase to the Commissioner of Internal Reve- nue, and, at the proper time, as hereafter provided, shall exe- cute a deed therefor, after its preparation and the indorsement of approval as to its form by the United States district attorney for the district in which the property is situated, and shall without delay cause the same to be duly recorded in the proper registry of deeds, and immediately thereafter shall transmit such deeds to the Commissioner of Internal Revenue. "And said sale may be adjourned from time to time by said officer for not exceeding thirty days in all, if he shall think it advisable so to do. If the amount bid shall not be then and there paid, the officer shall forthwith proceed to again sell said estate in the same manner. "And it is hereby provided, that all certificates of purchase, and deeds of property purchased by the United States under the Internal Revenue laws, on sales for taxes, or under exe- cutions issued from United States courts, which now are, or hereafter may be, found in the office of any collector. United States marshal, or United States district attorney, shall be immediately transmitted by such officers respectively to the Commissioner of Internal Revenue. "And it is hereby further provided, that for the preparation and approval by the United States district attorney of each deed as above required, a fee of five dollars shall be allowed to that officer, to be paid by the United States, and which he shall account for in his emolument returns." " "Upon any sale of real estate, as provided in the preceding section, and the payment of the purchase money, the officer making the seizure and sale shall give to the purchaser a cer- tificate of purchase, which shall set forth the real estate pur- chased, for whose taxes the same was sold, the name of the purchaser, and the price paid therefor; and if the said real estate be not redeemed in the manner and within the time here- 14 U. S. Rev. Stat. § 3197, as 1 U. S. Rev. Stat. Supp. 2d Ed. 227, amended by Act of March 1, 1879, U. S. Comp. Stat. 1901, p. 2077. 20 Stat, at L. 227, § 3, chap. 125: 480 COLLECTION OF THE ta:s:. [§108 after provided, the said collector or deputy collector shall exe- cute to the said purchaser, upou his surrender of said certificate, a deed of the real estate purchased by him as aforesaid, reciting the facts set forth in said certificate, and in accordance with the laws of the state in which such real estate is situated upon the subject of sales of real estate under execution." ** "The deed of sale given in pursuance of the preceding section shall be prima facie evidence of the facts therein stated; and if the proceedings of the officer as set forth have been substan- tially in accordance with the provisions of law, shall be con- sidered and operate as a conveyance of all the right, title, and interest the party delinquent had in and to the real estate thus sold at the time the lien of the United States attached there- to." " The deed is not prima facie evidence of the facts which the statute does not require to be included in its recitals, but which are necessary to the validity of the sale : " such as the notice and the assessment of the tax, the demand of payment, the failure to find personal estate to satisfy the distress warrant and the notice of seizure of the real estate.^' Where two lots of real estate were occupied as a homestead with a house upon one lot and a bam on the other, although they had been assessed separately for state taxation, it was held that their sale in one parcel for income taxes was not void, but was properly made within the discretion of the collector, al- though the state statute directed that such lots should be sold separately.^' "Any collector or deputy collector may, for the collection of taxes imposed upon any person, and committed to him for collection, seize and sell the lands of such person situated in any other collection-district within the state in which such officer resides; and his proceedings in relation thereto shall have the same effect as if the same were had in his proper collection district." ''"> "Any person whose estate may be proceeded against as afore- is U. S. Rev. Stat. § 3198. " Bpringer v. U. 8. 102 U. S. 686, 16 U. S. Eev. Stat. § 3199. 26 L. ed. 253. w Fox V. Stafford, 90 N. C. 296 ; 20 U. S. Kev. Stat. § 3200. Brown v. Goodwin, 75 N. Y. 409. 18 Brown v. Goodwin, 75 N. Y. 409, 415. § 108] DISTEAINT. 481 said shall have the right to pay the amount due, together with the costs and charges thereon, to the collector or deputy collector at any time prior to the sale thereof, and all further proceed- ings shall cease from the time of such payment." ^^ "The owners of any real estate sold as aforesaid, their heirs, ■executors, or administrators, or any person having any inter- est therein, or a lien thereon, or any person in their behalf, shall be permitted to redeem the land sold, or any particular tract thereof, at any time within one year after the sale thereof, upon payment to the purchaser, or, in case he cannot be found in the county in which the land to be redeemed is situate, then to the collector of the district in which the land is situate, for the use of the purchaser, his heirs or assigns, the amount paid by the said purchaser and interest thereon at the rate of twenty per centum per annum." ^^ "It shall be the duty of every collector to keep a record of all ■sales of land made in his collection-district, whether by himself •or his deputies, or by another collector, in which shall be set forth the tax for which any such sale was made, the dates of ■seizure and sa:le, the name of the party assessed, and all pro- •ceedings in making said sale, the amount of fees and expenses, i;he name of the purchaser and the date of the deed ; and said record shall be certified by the officer making the sale. And it shall be the duty of every deputy making sale, as aforesaid, to xeturn a statement of all his proceedings to the collector, and to •certify the record thereof. In case of the death or removal of the collector, or the expiration of his term of office from any ■other cause, said record shall be delivered to his successor in ■office; and a copy of every such record, certified by the col- lector, shall be evidence in any court of the truth of the facts therein stated." "^ "When any lands sold, as aforesaid, are redeemed as here- tofore provided, the collector shall make entry of the fact upon the record mentioned in the preceding section, and the said •entry shall be evidence of such redemption." ^* "Whenever any property, personal or real, which is seized and sold by virtue of the foregoing provisions, is not sufficient 21 U. S. Rev. Stat. § 3201. 83 u. S. Rev. Stat. § 3203. M U. S. Rev. Stat. § 3202. 84 U. S. Rev. Stat. § 3204. Foster Income Tox. — 31. 482 COLLECTION OF THE TAX. [§ 108- to satisfy the claim of the United States for which distraint or- seizure is made, the collector may, thereafter, and as often as the same may be necessary, proceed to seize and sell, in like manner, any other property liable to seizure of the person against whom such claim exists, until the amount due from him,, together with all expenses, is fully paid." ** "The Commissioner of Internal Revenue shall by regulation determine the fees and charges to be allowed in all cases of distraint and other seizures ; and shall have power to determine- whether any expense incurred in making any distraint or seiz- ure was necessary." ^* "The gross amount of all taxes and revenues received or col- lected by virtue of this Title, or of any law hereafter enacted providing internal revenue, shall be paid, by the officers re- ceiving or collecting the same, daily into the Treasury of the- United States, under the instructions of the Secretary of the Treasury, without any abatement or deduction on account of salary, compensation, fees, costs, charges, expenses, or claims- of any description; and a certificate of such payment, stating the name of the depositor and the specific account on which the- deposit was made, signed by the Treasurer, assistant treasurer, designated depositary, or proper officer of a deposit bank, shall be transmitted to the Commissioner of Internal Revenue r Provided, That in districts, where, from the distance of the- officer, collector, or agent receiving or collecting such taxes and revenues from a proper Government depositary, the Secretary of the Treasury may deem it proper, he may extend the time for- making such payment, not exceeding, however, in any case a period of one month." ^^ "When a second assessment is made in case of any list, state- ment, or return, which in the opinion of the collector or deputy collector was false or fraudulent, or contained any understate- ment or undervaluation, no taxes collected under such assess- ment shall be recovered by any suit, unless it is proved that, the said list, statement, or return was not false or fraudulent, and did not contain any understatement or undervaluation." ^^ "Whenever a collector has on any list duly returned to him 26 U. S. Rev. Stat. § .3205. 28 u. S. Eev. Stat. § 3225 (U. S. 26 U. S. Rev. Stat. § 3206. Comp. Stat. 1901, p. 2088). 27 U. S. Rev. Stat. § 3210. § 109] SUITS BY V. S. TO COLl-ECT INCOME TAX. 483 the name of any person not within his collection-district who is liable to tax, or of any person so liable who has, in the collection- district in which he resides, no sufficient property subject to seizure or distraint, from which the money due for tax can be collected, such collector shall transmit a statement containing the name of the person liable to such tax, with the amount and nature thereof, duly certified under his hand, to the collector of any district to which said person shall have removed, or in which he shall have property, real or personal, liable to be seized and sold for tax. And the collector to whom the said certified statement is transmitted shall proceed to collect the said tax in the same way as if the name of the person and objects of tax contained in the said certified statement were on any list of his own collection-district ; and he shall, upon receiving said certified statement as aforesaid, transmit his receipt for it to the collector sending the same to him." ^ § 109. Suits by the United States to collect the in- come tax. The United States is not confined to the summary remedies granted by the Eevised Statutes, but may also collect the income tax and the penalties therein imposed by an action at law or a suit in equity.^ This may be by either a suit to fore- close the lien ; * or an action to collect the tax, interest, and pen- alties.' The collection of the tax with interest and the collec- tion of the penalties may be by separate suits.* "No suit for the recovery of taxes, or of any fine, penalty, or forfeiture, shall be commenced unless the Commissioner of Internal Revenue authorizes or sanctions the proceedings: Provided, That in case of any suit for penalties or forfeitures brought upon information received from any person, other than a collector or deputy collector, the United States shall not be subject to any costs of suit.* "It shall be the duty of the Commissioner of Internal Reve- nue, with the approval of the Secretary of the Treasury, to establish such regulations, not inconsistent with law, for the observance of revenue officers, district attorneys, and marshals, 29 TJ. S. Eev. Stat. § 3209. iU. S. v. Dolla/r Samngs Bwnk, § 109. lU. S. Eev. Stat. § 3213. 15 R. I. R. 193. 2 U. S. Rev. Stat. § 3207, infra, § B u. S. Eev. Stat. § 3214. 8 U. S. Rev. Stat. § 3213, infra, § 484 COLLECTION OS THE TAX. [§ 109 respecting suits arising under the Internal revenue laws in which the United States is a party, as may be deemed necessary for the just responsibility of those officers and the prompt col- lection of all revenues and debts due and accruing to the United States under such laws." ^ "All judgments and moneys recovered or received for taxes, costs, forfeitures, and penalties shall be paid to the collectors as internal taxes are required to be paid." ' "It shall be lawful for any court in which any suit or crim- inal proceeding arising under any internal revenue laws may be pending, to continue the same at any stage thereof, for good cause shown on motion by the district attorney." * § 110, Suits by the United States to foreclose liens for taxes. A suit by the United States to foreclose their lien for taxes, although less expeditious than a statutory sale, may be more prudent when the amount of the tax is large, since a judicial sale under the decree of a court will produce higher bids on account of the greater security on his title which the purchaser thus obtains. The Revised Statutes provide that "In any case where there has been a refusal or neglect to pay any tax, and it has become necessary to seize and sell real estate to satisfy the same, the Commissioner of Internal Revenue may direct a bill in chan- cery to be filed, in a District or Circuit Court of the United States, to enforce the lien of the United States for tax upon any real estate, or to subject any real estate owned by the de- linquent, or in which he has any right, title, or interest, to the payment of such tax. All persons having liens upon or claiming any interest in the real estate sought to be subjected as afore- said, shall be made parties to such proceedings, and be brought into court as provided in other suits in chancery therein. And the said court shall, at the term next after the parties have been duly notified of the proceedings, unless otherwise ordered by the court, proceed to adjudicate all matters involved therein, and finally determine the merits of all claims to and liens upon the real estate in question, and, in all cases where a claim or interest of the United States therein is established, shall decree «U. S. Rev. Stat. § 3215. 'U. S. Rev. Stat. § 3231. 7U. S. Rev. Stat. § 3216. § 111] SUITS IN PEKSONAM. 4:85 a sale of such real estate, by the proper oflBcer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States." * Other suits to enforce liens by the United States can ordinarily be brought only in the District Courts.* § 111. Suits in personam by the United States to collect internal revenue taxes. The United States may sue in mdebir tatus assumpsit to collect an income tax or any other internal revenue tax.* Such a suit may be brought even where no assess- ment has been made.* Such a suit may be brought in case an assessment has been made and paid when the collector subsequently discovers that the first assessment was inadequate.* Such an action may be brought after the statutory time for the assessment has elapsed.* Laches will not bar such an action by the United States,* at least unless it is shown that the delay has prejudiced the defend- ant through the loss of evidence material to the defense.^ Where the United States sues without any assessment, the burden of proof rests upon the plaintiif ; but where an action was brought to collect income taxes for a period of ten years, the court denied the defendant a bill of particulars on the ground that he knew the details of his own income although he swore that he was "ignorant of the particulars of the claim against him." ' The Supreme Court said : "An assessment is not required by the act, or, if made, conclusive upon either party, and that in § 110. lU. S. Rev. Stat. 3107, Ct. Rep. 627; V. 8. v. Thompson, 98- U. S. Comp. Stat. 1901, p. 2081. U. S. 486, 25 L. ed. 194; V. S. v. 2 36 Stat, at L. 1087, § 24. Gf. Becle, 127 U. S. 338, 32 L. ed. 121,. Cofley V. V. S. 116 U. S. 427, 29 8 Sup. Ct. Rep. 1083; V. 8. v. Eax- L. ed. 681, 6 Sup. Ct. Rep. 432. ley, 130 U. S. 263, 32 L. ed. 968, » § 111. lU. S. Rev. Stat. § 3213. Sup. Ct. Rep. 485; U. 8. v. Dalles Hiing V. D. S. 99 U. S. 229, 25 L. Military Road Co. 140 U. S. 599, 35. ed. 373; Dollar Savings Bank v. U. L. ed. 560, 11 Sup. Ct. Rep. 988. 8. 19 Wall. 227, 22 L. ed. 80: U. 8. s King v. V. 8. 99 U. S. 229, 25 L.. V. Tilden. 24 Int. Rev. Rec. 99, Fed. ed. 373. Cas. No. 16,519. e Little Miami, etc. R. R. Co. y; 3 King v. TJ. 8. 99 U. S. 229, 25 L. V. 8. 108 U. S. 277, 280, 27 L. ed. ed. 373. 724, 725, 2 Sup. Ct. Rep. 627 ; V. 8. * U. 8. V. Tilden, 24 Int. Rev. Rec. v. Little Miami, etc. R. R. Co. 1 Fed. 99, Fed. Cas. No. 16,519; Little Mia- 700. mi, etc. R. R. Co. v. V. 8. 108 U. S. 7 XJ. 8. v. Tilden, 10 Ben. 547, Fed. 277, 280, 27 L. ed. 724, 725, 2 Sup. Cas. No. 16,521. 486 COLLECTION OF THE TAX. [§ 111 an action to recover the tax the controlling question is not what has been assessed but what is by law due." * The result of a suit for the taxes of one year is not res ad- judicatd in suits for the taxes of subsequent years except in so far as the decision is binding as a precedent' The Revised Statutes provide 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 the 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 said action." ■"' No State statute can cut ojSE or limit this remedy.^' All judgments recovered in such suits must be paid to the collector of the district. ^^ § 112. Smtsto collect penalties. The Eevised Statutes concerning internal revenue provide that "It shall be the duty of the collectors, in their respective districts, subject to the pro- visions of this title, to prosecute for the recovery of any sums that may be forfeited by law. All suits for fines, penalties, and forfeitures, where not otherwise provided for, shall be brought in the name of the United States, in any proper form of action, or by any appropriate form of proceeding, qui tarn or other- wise, before any Circuit or District Court of the United States, for the district within which said fine, penalty, or forfeiture may have been incurred, or before any other court of competent jurisdiction." ^ The penalty may also be levied with the tax by distress without suit.^ Separate suits for the tax with inter- est, and for the penalty may be maintained concurrently ; ' but only one penalty, can be recovered for all failures to make a return prior to the commencement of the action.* The United States are not subject to costs when the suit is brought on information received from a person other than a 8 V. S. V. Philadelphia & Reading § 112. 1 U. S. Rev. Stat. § 3213. R. R. Co. 123 U. S. 113, 114, 38 L. ^U. S. Rev. Stat. § 3185; supra, ed. 138, 139, 8 Sup. Ct. Rep. 77, per § 96. Mr. Justice Gray. 8 XJ. 8. v. Dollar Savings Bank, 15 Shake Shore, etc. R. R. Go. v. Int. Rev. Rec. 193, Fed. Cas. No. People, 46 Mich. 193, 9 N. W. 249. 14,979. 10 U. S. Rev. Stat. § 3213. * V. S. v. Brooklyn, etc. Ry. Co. "i^i^ Dollar Savings Bank v. V. 8. 14 Fed. 284; U. S. v. ]V. T. Guaran- 19 Wall. 227, 239, 22 L. ed. 80, 82. tee, etc. Go. 8 Ben. 269, Fed. Cas. 12 U. S. Rev. btat. § 3216. No. 15,872. § 113] COMPROMISES. 487 collector or deputy collector." All judgments for penalties re- covered by the United States must be paid to the collector in the same manner as internal taxes.* § 113. Compromises. The Eevised Statutes provide that "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 addi- tional tax or penalty imposed by law in consequence of the ne- glect or delinquency of the person against whom the tax is assessed, and the amount actually paid in accordance with the terms of the compromise." ^ An agreement to dismiss a case on the payment of costs and entry of a certificate of probable cause is in effect a compromise and should receive the consent of the three officers named in the statute,^ but the unconditional dismissal of a suit under the directions of the Commissioner is not such a compromise.* A compromise implies some mutuality of concession, and the power to compromise does not authorize a voluntary re- linquishment of a tax lawfully assessed upon a solvent person.* The power, consequently, should not be exercised except when there is some doubt of the legality of the claim or of the ability to collect." The power to compromise a suit under this statute ceases up- on the entry of judgment.® S U. S. Rev. Stat. § 3214. 3 ibid. p. 552. 8 U. S. Rev. Stat. § 3215. * Attorney General Devens, 16 Op. § 113. lU. S.Eev. Stat. § 3229. Att. Gen. 247. For an explanation of the relation 6 Attorney General Devens, 16 Op. of these three officers to compromise, Att. Gen. 247, 248. see Opinion of Attorney General Ash- 8 Attorney General Akerman, 13 ton, 12 Op. Att. Gen. 472. Op. Att. Gen. 479. 8 Attorney General Evarts, 12 Op. Att Gen. 536. CHAPTER X. EEMEDIES OF TAXPAYER. § 114. Enumeration of remedies of the taxpayer. The remedies of a taxpayer against an illegal incoine tax may be taken before or after the collection of the tax. The remedies before the assessment of the tax are a hearing before the col- lector or deputy collector as to the contents of the return ; ^ on appeal to the collector from the deputy's decision ; * and an ap- peal to the Commissioner of Internal Revenue from the decision of the collector.* These remedies have been previously discussed. If the internal revenue district in which the tax is assessed in- cludes one of the territories or the District of Columbia, it is possible that the proceedings of some or all of these officers may be reviewed by the writ of certiorari, mandamus, or prohibi- tion.* It is probable also that the proceedings of the Commis- sioner of Internal Revenue may be reviewed by one or more such writs.* He may perhaps also be personally liable in dam- ages for an assessment upon income which is exempt from the tax.* The collection of the tax, if it or the warrant for its levy is void, may be resisted by force.' The remedies after the col- lection of the tax are appeals to the Commissioner of Internal Revenue,* suits against the United States,' suits against the Collector of Internal Revenue,^" and perhaps against the Com- missioner of Internal Revenue.*^ § 115. Injunctions. When the income tax was first im- posed during the civil war, a number of applications were made for injunctions against its assessment or collection. To prevent this practice. Congress inserted a section in the Act of March 2d, 1867,' which has been incorporated in the Revised § m. ISuyra, % 88. f Infra, % ]21. zihid. S Infra, % 122. 8 Jbid. 9 In^ra, § 328. * Infra, § 116. l^ Infra, § 124. i Infra, §§ 117-119. i^ Infra, § 120. 6 Gutting v. Oilhert, 5 Blatchf. §115. 1 1 4 Stat, at L. chap. 169, 259, 2 Tnt. Rev. Rec. 94, Fed. Cas. § 10. p. 475, U. S. Comp. Stat. 1901, Ko. 3,519; infra, % 120. p. 2088. 488 § 115] INJUNCTIONS. 48& Statutes as follows: "!N"o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." * Under this provision, it has been held that wher- ever a tax is imposed by a person in ofEce having authority in the assessment of taxes for the United States, who acts under color of the statute, no injunction will be issued to restrain its collection, no matter how erroneous the assessment may be, and although the person against whom the assessment is made does not own the property taxed.' "It is sufficient that a stat- ute has authorized the assessor to entertain the general subject of taxation; that it was in fact entertained, and a judgment^ lawful or unlawful, was rendered concerning it." * It has been held that the unconstitutionality of the statute imposing the tax will not authorize the issue of an injunction.^ The Supreme Court of the District of Columbia has denied an application for an injunction against the enforcement of the Act of October 3, 1913.** It has been held that a mandatory injunction requir- ing a collector of internal revenue to accept an export bond for spirits in a bonded warehouse and to allow their withdrawal for export without payment of taxes, is in effect a bill to restrain the collection of internal revenue taxes and cannot be granted.* "The inhibition of section 3224 applies to all assessments of taxes made under color of their offices by internal revenue officers." "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 forbidden. The remedy so given is exclusive, and no other remedy can be substituted for it. Such has been the current of decisions in the Circuit Courts of the United States, and we are satisfied it is a correct view of the law." '' This prohibition is constitutional, since the remedy by injunction is not a remedy at common lav?, and 2U. S. Rev. Stat. § 3224, IT. S. collection of illegal tax, see note in Comp. Stat. 1901, p. 2088. 22 L.R.A. 699. 3 Kensett v. Stivers, i S Blatchf . * Emmons, J., in Pullan v. Kin- SSI, 10 Fed. 517; Pullan v. Ein- simjrer-, 2 Abb. U. S. 94, 99, Fed. Cas. singer, 2 Abb. U. S. 94, Fed. Cas. No. 11,463. No. 11,463; Rowland v. Soule, ^ Robhins v. Freeland, 14 Int. Rev. Deady, 413, Fed. Cas. No. 6,800; Rec. 28. Fed. Cas. No. 11,883; Shel- Delaware B. Co. v. Prettyman, 17 ton v. Piatt, 139 U. S. 591, 598, 35 L. Int. Rev. Rec. 99, Fed. Cas. No. ed. 273, 277, 11 Sup. Ct. Rep. 646. 3,767 ; Kissinger v. Bean, 7 Eiss. 60, 6a Dodge v. Osborn, S. C. D. 0. Fed. Cas. No. 7,853; Alk-an v. Bean, May 14, 1914. 23 Int. Rev. Rec. 351, Fed. Cas. No. 6 Miles v. Johnson, 59 Fed. 38. 202; United States v. Black, 11 7 Mr. Justice Blatohfoed. in Sny- Blatehf. 538, Fed. Cas. No. 14,600. der v. Marks, 109 U. S. 189, 193, But see Frayserv. Russell,3 Hughes, 27 L. ed. 901, 903, 3 Sujj. Ct. Rep. 227, Fed. Cas. No. 5,067. On general 159; citing Hotcland v. Soule, Deady, question of injunction to restrain 413, Fed. Cas. No. 6,800; Pullan v. 490 REMEDIES OF TAXPAYEE. [§ 115 therefore the statute does not deny the citizen a right to legal process.' "The system prescribed by the United States in re- gard 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 com- plete, and enacted under the right belonging to the Govern- ment to prescribe the conditions on which it would subject itself to the judgment of the courts in the collection of its reve- nues. In the exercise of that right, it declares, by section 3224, that its officers shall not be enjoined from collecting a tax claimed to have been unjustly assessed, when those officers in the course of general jurisdiction over the subject-matter in ques- tion, have made the assignment and claim that it is valid." ' The prohibition was held to apply so as to forbid an injunction against assessments made and warrants for collection issued prior to the enactment of the original statute." It has been sug- gested that an injunction might be granted to restrain an un- lawful increase of an assessment when sufficient ground for equitable relief was shown.^^ An injunction by a state court against the assessment or collection of a Federal tax will be vacated after a removal of the case into a Federal court. *^ This statute does not apply so as to forbid an injunction by a Fed- eral court against the collection or assessment of taxes by state or municipal authorities in a proper case for relief.** Judge Hughes in the Circuit Court of the United States for the east- ern district of "Virginia granted an injunction against the as- Kinsinger, 2 Abb. U. S. 94, Fed. Cas. der v. Marks, 109 U. S. 189, 194, 27 No. 11,463; RobUns v. Freeland, 14 L. ed. 901, 903, 3 Sup. Ct. Rep. 159. Int. Rev. Rec. 28, Fed. Cas. No. 11,- 10 Kensett v. Stivers, 18 Blatchf. 883; Delaware B. B. Go. v. Pretty- 397, 10 Fed. 517. num, 17 Id. 99, Fed. Cas. No. 3,767 ; " Magee v. Denton, 5 Blatchf. 130, United States v. Black, 11 Blatchf. Fed. Cas. No. 8,943, A. D. 1863. 538, 543, Fed. Cas. No. 14,600; Eis- ^^ Kissinger v. Bean, 7 Biss. 60, singer v. Bean, 7 Biss. 60, Fed. Cas. Fed. Cas. No. 7,853. No. 7,853; VrUted States v. Pacific " iJe Tyler, 149 U. S. 164, 37 L. Railroad, 4 Dill. 66, 69, Fed. Cas. ed. 689, 13 Sup. Ct. Rep. 785; State No. 15,983; Alkan v. Bean, 23 Int. Railroad Tax Cases, 92 U. S. 575, Rev. Rec. 351, Fed. Cas. No. 202; 613, 23 L. ed. 669; Schulenberg- Kensett v. Stivers, 18 Blatchf. 397, Boeckeler Lumber Co. v. Town of 10 Fed. 517. Eayxcard, 20 Fed. 422, 424. But see 8 Pullan V. Kinsinger, 2 Abb. U. S. Wells v. Central Vermont R. Co. 14 94, Fed. Cas. No. 11,463. Blatchf. 426, Fed. Cas. No. 17,390. 8 Mr. Justice Bt.atchfobd, in Sny- § 116] APPLICATIONS FOR WRITS. iOl sessment of the tax against a citizen who had already paid all that was due. That judge said: "His threatened levy was for what was not a tax, and it was threatened to be made in a manner which set at nought the provisions of section 3371. It was a clear case for the exercise of the restraining power of the court; and was not a case falling within either the letter or spirit or intention of section 3224." " The case which held that the Income Tax of 1894 was un- constitutional was brought by a stockholder to prevent his corpo- ration from paying the tax. The government did not raise the objection of an adequate remedy at law and an injunction was consequently granted.^* But where it appeared that the suit was collusive, the Supreme Court dismissed a similar bill ; *' and in a later case, where that did not appear but the district attorney took the objection, the injunction was denied in a Dis- trict Court." § 116. Applications for the writs of mandamus, certiorari and prohibition against collectors and deputy collectors of internal revenue. The District Courts of the United States have the power to grant writs of mandamus,^ certiorari,* or prohibition,' except as incidental to another case pending be- fore them, and in certain special cases enumerated in different statutes, none of which relate to the review of or interference with the assessment or collection of taxes. ISTo State Court has the power to grant any of these writs against an ofEcer of the 14 Frayser v. Russell, 3 Hughes, L. ed. 99 ; Davenport v. County of 227, 330, Fed. Cas. No. 5,067. Dodge, 105 U. S. 237, 26 L. ed. 1018; isPoHocfc V. Farmers' Loam & Louisiana v. Jumel, 107 U. S. 711, Trust Co. 157 U. S. 429, 554 (Har- 727, 27 L. ed. 448, 453, 2 Sup. Ct. Ian and White, JJ. dissenting at p. Rep. 128. See Foster's Fed. Prac- ■653), 39 L. ed. 759, 809, 844, 15 Sup. tiee, 5th ed. § 457. Ct. Eep. 673. 2U. S. E. S. § 716; V. S. v. 16 Corhus V. Alaska Treadwell Young, 94 U. S. 258, 260, 24 L. ed. Cold Min. Co. 187 U. S. 455, 47 L. 153; Ex parte Van Orden, 3 Blatchf. cd.. 256, 23 Sup. Ct. Eep. 157. 166, Fed. Cas. No. 16.870; In re IT Straus V. Airast Realty Co. {E. Martin, 5 Blatchf. 303, Fed. Cas. No. D. N. Y.) 200 Fed. 327. See Foster's 9,151; Fowler v. Lindsey, 3 Dall. 411, Fed. Pr., Fifth ed., § 145. 1 L. ed. 658. See Foster's Federal § 116. iMcIntire v. Wood, 7 Practice, 5th ed. § 460. ■Cranch 504, 3 L. ed. 420 ; M'Clung v. 3 Ee Bininger, 7 Blatchf. 159, Fed. Silliman, 6 Wheat. 598, 5 L. ed. 340 ; Cas. No. 1,417 ; U. S. Rev. Stat. § ■Grotem V. ffortoji, 15 Wall. 427, 21 716, U. S. Comp. Stat. 1901, p. L. ed. 177: Bath County v. Amy, 13 580. See Foster's Federal Practice, Wall. 244, 20 L. ed. 539; County of 5th ed. § 456. ■Greene v. Daniel, 102 U. S. 187, 26 492 EEMEDIES OF TAXPAYEB. [§ 116 United States.* The Supreme Court of the District of Col- umbia has the power to issue these writs to officers of the United States in cases within its territorial jurisdiction.^ Il may be that the Supreme Courts of the Territories have the power to issue such writs to officers of the United States within their respective Territories.^ The Supreme Court of the District of Columbia has no jurisdiction to grant such a writ to any officer of the United States beyond its territorial jurisdiction, which is limited to the District of Columbia. Consequently, no court can issue any of them to review the proceedings of a collector or- deputy collector of internal revenue except a Territorial Court and the Supreme Court of the District of Columbia against officers residing within their respective territorial jurisdictions. Inasmuch as the proceedings of the collector and deputy col- lector in increasing returns can be reviewed upon appeal by the Commissioner of Internal Revenue, it is doubtful whether any court would interfere with their decisions. Consequently, the court in which the application for the review of proceedings to assess a tax or penalty is likely to be made is the Supreme Court of the District of Columbia, upon the application for one of those writs against the Commissioner of Internal Revenue. § 117. Mandamus against the Commissioner of Internal Revenue. The Supreme Court of the District of Columbia has- the same jurisdiction in law and equity that was possessed by the preceding courts of the State of Maryland, in 1801, prior to the cession of the district to the United States, so far as not modified by statute.* "The Supreme Court of the District of Columbia has the power to issue the writ of mandamus, in cases in which the relator is by common law entitled to seek relief, to an officer of the United States or other person within its territorial jurisdiction.* The writ will not issue in a case- where its effect would be to direct or control the head of an ex- 4 M'Glung v. Sillimom, 6 Wheat. S. v. Schurz, 102 U. S. 378, SOS, 26 698, 5 L. cd. 340. L. ed. 167, 170; Foster's Fed. Pr. 5th !> Infra, § 117. ed. § 68. 8 Clough V. Curtis, 134 U. S. 361, 2 9 St. at L. 253 ; United States v. 33 L. ed. 945, 10 Sup. Ct. Rep. 573. Schurz, 102 U. S. 378, 394, 26 L. See Foster's Federal Practice, 5tli ed. 167, 171 ; Kendall v. U. S. 12 Pet.^ ed. S 457. 524, 9 L. ed. 1181; Decatur v. Pauld- § 117. lAct of February 27, 1877, ina. 14 Pet. 497, 10 L. ed. 559; Ken- chap. 69, § 2118: 19 Stat, at L. 253; dall v. Stokes, 3 How. 87, 11 L. ed. Price V. State, 8 Gill, 295, 310; U. 500; Commissioners of Patents v.. :§ llY] MANDAMUS AGAINST COMMISSIONEE. 493 ■ecutive department in the exercise of judgment or discretion, even when in the exercise of his discretion the officer has been called upon to interpret a statute of doubtful meaning, and has made an erroneous interpretation of the same ; * but when the officer refuses to act at all in a ease where he is bound to act,* •or when by special statute or otherwise a purely ministerial duty, which he is bound to perform without question, is im- posed upon a public officer, even the head of an executive de- partment, a mandamus may be issued to compel him to do such ■duty, if there is no other adequate remedy." ^ A peculiar rule, not usual in other jurisdictions, may be here observed : namely, that the court will not interfere to correct an erroneous inter- pretation, by the aid of the executive department, of a stat- ute of doubtful meaning.^ This limitation is not usual. Or- ^iinarily, courts will grant a mandamus in case of such mistakes by executive officers upon the ground that they are bound to know the law, and that the courts will, consequently, interfere to compel them to observe it, even though they have acted in good faith.'' Whether or not this doctrine would be extended to prevent the issue of the mandamus against the Commissioner Whiteley, 4 Wall. 522, 18 L. ed. 335; 6 Foster's Fed. Pr. {2d ed.) § 458; U. 8. ex rel. Miller v. Black, 128 U. citing U. 8. ex rel. Dunlap v. Black, S. 40, 50, 32 L. ed. 354, 358, 9 Sup. 128 U. S. 40, 48, 50, 32 L. ed. 354, Ct. Rep. 12 ; U. 8. ex rel. Redfield v. 357, 358, 9 Sup. Ct. Rep. 12 ; Vmted Windom, 137 U. S. 636, 34 L. ed. 8tates v. Schurz, 102 U. S. 378, 394, 811; U. 8. ex rel. Boynton v. Blaine, 26 L. ed. 167, 171; Butterioorth v. 139 U. S. 306, 35 L. ed. 183, 11 Sup. Hoe, 112 U. S. 50, 28 L. ed. 656, 5 Ct. Rep. 607; Foster's Fed. Pr. 5th Sup. Ct. Rep. 25; Kendall v. V. S. «d. § 458. 12 Pet. 524, 9 L. ed. 1181; 17. 8. ex 3 U. 8. ex rel. Dunlap v. Black, 128 rel. Redfield v. Windom, 137 U. S. U. S. 40, 48, 32 L. ed. 354, 357, 9 636, 644, 34 L. ed. 811, 814, 11 Sup. Sup. Ct. Rep. 12; Decatur v. Pauld- Ct. Rep. 197; U. 8. ex rel. Boynton ing, 14 Pet. 497, 10 L. ed. 559;- V. v. Blaine, 139 U. S. 306, 319, 35 L. 8. ex rel. Redfield v. Windom, 137 ed. 183, 187, 11 Sup. Ct. Rep. 607. U. S. 636, 644, 34 L. ed. 811, 814, 11 6 u. 8. ex rel. Dunlap v. Black, 128 Sup. Ct. Rep. 197. U. S. 40, 48, 32 L. ed. 354, 357, * U. 8. ex rel. Dunlap v. Black, 9 Sup. Ct. Rep. 12 ; Decatur v. 128 U. S. 40, 48, 32 L. ed. 354, 357, 9 Paulding, 14 Pet. 497, 10 L. ed. 559 ; Sup. Ct. Rep. 12 ; Decatur v. Pa/uld- U. 8. ex rel. Redfield v. Windom., 137 ing, 14 Pet. 497, 10 L. ed. 559; U. U. S. 636, 644, 34 L. ed. 811, 814, 8. ex rel. Redfield v. Windom, 137 11 Sup. Ct. Rep. 197; Foster's Fed. U. S. 636, 644, 34 L. ed. 811, 814, 11 Prae. (5th ed.) § 457. Sup. Ct. Rep. 197 ; V. 8. ex rel. 1 8tate ex rel. Carpenter v. Hast- . Boynton v. Blaine, 139 U. S. 306, ings, 10 Wis. 518; 8tate ex rel. Poe 319, 35 L. ed. 183, 187, 11 Sup. Ct. v. Raine, 47 Ohio St. 447, 25 N. E. Rep. 607; U. 8. v. Lamar, 116 U. S. 54; People ex rel. Otsego County 423, 29 L. ed. 677, 6 Sup. Ct. Rep. Bank v. Board of 8upervisors, 51 424. N. Y. 401, 408. 494 EEMEDIES or TAXPAYER. [§ 117 of Internal Revenue to compel him to allow a deduction from the assessment of income exempt from the tax, or which the taxpayer is entitled to have deducted, is unsettled. It has been held by the courts of different States that where there is no stat- utory review of the correction of errors in the assessment of a tax, a mandamus will be granted for that purpose, provided that the evidence is undisputed, so that the duty of the assessor to allow the correction is clear." Under the Act of 1863, a District Judge said that the assess- or might be compelled by mandamus to allow a statutory de- duction.® In England, the writ has been issued to allow an exemption,^" and to compel the return of an overpayment.*' § 118. Certiorari against Commissioner of Internal Rev- enue. "The writ of certiorari is a writ issued from a supe- rior to an inferior court, ordering the latter to certify to the former certain proceedings before it.' At common law, the writ was issued for two purposes : as an appellate proceeding for the re-examination of some action of an inferior tribunal; and as 8 People ex rel. Genesee County 9 Magee v. Denton, 5 Blatehf 130, Bank v. Olmsted, 45 Barb. 644, per Fed. Cas. No. 8,943, (N. D. N. Y., Daxiels, J. ; GoRVBB and Martin, 1863 ) ; Hall, J. : "As the assessor J J., concurring; People ex rel. Lin- had no discretion, and would have coin V. Barton, 44 Barb. 148, 29 been bound on the presentation of How. Pr. 371 ; People ex rel. Nos- the oath, to strike out the addition trand v. Wilson, 7 N. Y. Supp. 727; f^^m t},g assessment. It is probable State ex rel. Poe v. Raine, 47 Ohio 4,^^^ ^he plaintiff might have had a St. 447, 25 NE 54; State V. Gov- ^^^^^^ ^^ j^^^ ^^ mandamus." ington, 35 S. C. 245 14 S. K 499; lo Commission's v. Pensel (A. D. 8imth y. K^ng,U Or 10, 12 Pac affirming 2 Q. 8; Spelling on Extraordinary Relief, ' ve > = S 1534. See, however, as to the view ,,' „ . . j: „ c.„„ that certiorari and not mandamus is . " Q"'^^" v. Comm^ss^onersfor Spe^ the proper remedy to review the de- oml Purposes of the Income T,^ cision if the assessor or board of {Copper iUmng Company s Case) 21 assessors. People ex rel. Oslorn v. Q- B. D. 313, 317; Robinsons In- Gilon, 9 N. Y. Supp. 212; Spelling come Tax, 2d ed. 342. on Extraordinary Relief, § 1967. § 118. 1 Foster's Fed. Pr. 5th ed. § 118] CEETIOEAKI AGAINST COMMISSION KK. 4-95 an auxiliary process to enable tlie court to obtain further in- formation in respect to some matter already before it for adjudi- cation." * Tbe Supreme Court of the District of Columbia has the power to grant a writ of certiorari in order to re-examine the decision of an inferior tribunal within that district and de- termine whether its proceedings have been irregular or without jurisdiction.' "A writ of certiorari, when its object is not to remove a case before trial, or to supply defects in a record, but to bring up, after judgment, the proceedings of an inferior court or tribunal whose procedure is not according to the course of the common law, is in the nature of a writ of error. Although the granting of the writ of certiorari rests in the discretion of the court, yet after the writ has been granted and the record certified in obedience to it, the questions arising upon that rec- ord must be determined according to fixed rules of law, and their determination is reviewable on error." * Of late years there has been a strong tendency on the part of the courts to extend this remedy in order to review proceedings of adminis- trative ofiicers which are of a quasi-judicial nature, when there is no other adequate remedy.* The Supreme Court of the Dis- trict of Columbia even after a sale for taxes may review by cer- tiorari and quash the proceedings of the District Board of Equalization in assessing a tax upon exempt property.® The § 460; citing United States v. 32 L. ed. 697, 9 Sup. Ct. Eep. Young, 94 U. S. 258, 259, 24 L. ed. 314. ]o3. See Harris v. Barber, 129 U. * Mr. Justice Gray, in Harris v. S. 366, 369, 32 L. ed. 697, 699, 9 Barber, 129 U. S. 366, 369, 32 L. ed. Sup. Ct. Kep. 314. 697, 699, 9 Sup. Ct. Eep. 314. 2 Foster's Federal Practice, 5th ed. 8 Alexandria C. R. & 8. Li. Co. v. § 460; citing United States v. District of Columbia, 5 Maclcey, 376. Young, 94 V. S. 258, 259, 24 L. ed. 6 State v. City of Elisabeth, 50 N. 153. J. L. 347, 13 Atl. 5; Remey v. As- 3 Harris v. Barber, 129 U. S. 36.6, sessors of Sunset, 80 Iowa, 470, 45 496 EEMEDIES OF TAXPAYEE, [§ 118 same court has issued the writ against the Treasurer of the United States and the commissioners of the district to set aside an invalid assessment of district taxes.' Where the district tax was assessed on different kinds of property as a unit and part of the property was not subject to taxation; the whole as- sessment was set aside when the court could not from the record separate the illegal tax on the exempt, from that on the tax- able, property.* If these rulings are followed, there seems to be no reason in principle why the same relief should not be ex- tended to review the proceedings of the Commissioner of In- ternal Eevenue on the correction of the collector's list or the assessment of the income tax. That the act of assessment is judicial in its nature cannot well be questioned.® Where an assessor of taxes acts beyond his jurisdiction by assessing taxes upon persons or property who are exempt, it is a frequent practice for the courts to review his proceedings and quash the assessment by the writ of certiorari.®* The rule is thus laid down by Mr. Spelling in his excellent book on Extraor- dinary Eelief : "To authorize certiorari to review and quash the proceedings of tribunals charged with duties pertaining to taxation, there must be some irregularity fatally affecting their legality. It does not lie on accoimt of mistake or N. W. 899; Spelling on Extraordi- 376, 384; citing Santa Clara Co. v. nary Relief, § 1967. Southern Pac. R. R. Co. 118 U. S. 7 Wood V. District of Columbia, 6 394, 30 L. ed. 118, 6 Sup. Ct. Eep. Mackey, 142; citing Ewing v. St. 1133. Louis, 5 Wall. 413, 18 L ed. 657 ; 9 Delaware R. Co. v. Prettyman, 17 Aff'tflZ-Q r-p^z .;5n interest over and above the amount of interest paid upon all notes, bonds and mortgages, or other forms of indebtedness, bearing interest, whether due and unpaid or not, if good and collectible, shall be included and as- sessed as part of the income of such person for each year. — Act of June 30, 1864, § 117. Cf. Ibid. § 116. Provided that incomes derived from interest upon notes, bonds and other securities of the United States, and also all premiums on gold and coupons, shall be included in estimating Incomes under this section. — ^Act of March 3, 1865, § 1, amending this section. In estimating the gains, profits and income of any person, there shall be included all income derived from ♦ ♦ * interest received or accrued upon all notes, bonds and mortgages, or other forms of indebtedness, bearing interest, whether paid or not, if good and collectible, interest upon notes, bonds or other securities of the United States; and the amount of all premium on gold and coupons. — Act of July 14, 1870, § 7. And be it further enacted, That any railroad, canal, turnpike, canal navigation, or slack-water company indebted for any money for which bonds or other evidences of indebtedness have been issued, payable in one or more years after date, upon which interest is stipulated to be paid, or coupons representing the interest, or any such company that may have declared any dividend in scrip, or money due or payable to its stockholders, as part of the earnings, profits, income, or gains of such company, and all profits of such company carried to the account of any fund, or used for construction, shall be subject to and pay a duty of five per centum on the amount of all such interest, or coupons, dividends, or profits, whenever the same shall be payable; and said companies are hereby authorized to deduct ANNOTATED STATUTE AND DIGEST. 575 and withhold from all payments, on account of any interest, or coupons and dividends due and payable as aforesaid, the duty of five per centum; and the payment of the amount of said duty so deducted from the inter- est, or coupons, or dividends, and certified by the president or treasurer of said company, shall discharge said company from that amount of the dividend, or interest, or coupon, on the bonds or other evidences of their indebtedness so held by any person or party whatever, except where said companies may have contracted otherwise." — Act of June 30, 1864, § 122. In estimating the accounts, profits and income of any person, there shall be included all income derived from interest received upon notes, bonds and other securities except such bonds of the United States, the principal and interest of which are by the law of their issuance exempt from all Federal taxation. — ^Act of August 28, 1894, § 28. On IN'ovember 2, 1895, the S. A. E. granted H. J. S. a conces- sion for tlie construction of a railway, and the S. A. R. guar- anteed to a company which was formed to take over the railway interest at 4 per cent, on its share capital. On October 11, 1899, war having broken out, the line was seized and worked by the British military authorities until the end of the war. On Feb. 18, 1902, the British Government gave notice to expropriate the railway under the terms of the concession. They recognized the validity of the concession and admitted liability to pay all ar- rears of interest. They paid 97,5061. 16s. lid. as "guaranteed interest on share capital, at 4 per cent, per annum from January 1, 1899, to November 14, 1903," in addition to the other pay- ments on the exportation. Held, that the 97,5061. 16s. lid. was not a part of a sum paid by the British Government as the price of the company's undertaking; that it must be treated as the gross revenue of the company earned as a trading company from January 1, 1901, to JSTovember 14, 1903, and that after deduct- ing certain expenses incurred by the company during the same period of benefit, the three years' average must be applied, and the income tax was payable on one-third of the balance only. Pretoria-Pietersburg Eailroad v. Elgood, 98 L. T. N. S. 741 — C. A. When interest is in fact paid by a railroad, an assessment of a tax thereon is justified, even though the interest was paid out of a fund not included in the act, and therefore not taxable. Improvement Company v. Slack, 100 U. S. 648, 25 L. ed. 609 (1879), Cliefobd, J. The Act of July 14, 1870, taxed only interest paid, not in- terest merely accrued or payable. 5Y6 ANNOTATED STATUTE AND DIGEST. U. S. V. Louisville, etc., E. E. 33 Fed. 829 (1888), TJ. S. Cir. Ct. Dist. Ky., Baer, J. Under the Act of June 30, 1864, a railroad deducted the in- come tax from interest due a municipal corporation. Held, that the city could not recover the tax, so deducted, from the cor- poration. Having neglected to resist the collection of the tax by the United States from the railroad, it was precluded from raising the question of the legality of the tax as against the railroad. Baltimore v. Baltimore Eailroad, 10 Wall. 543, 19 L. ed. 1043 (1870), U. S. Supreme, Davis, J. And see U. S. v. Kail- road Company, 17 Wall. 322, 21 L. ed. 597 (1872), U. S. Su- preme, in which the United States was not allowed to collect the tax from the city. A sum paid by a loan society as interest to its depositors is taxable. Mersey Loan, etc., Co. v. Wootton, 4 Times L. R 164 (1887), Q. B. Div. The funding of past-due coupons in second-mortgage bonds, held, not a payment of interest out of earnings so as to be taxable. Memphis, etc., E. E. v. U. S., 108 U. S. 228, 27 L. ed. 711, 2 Sup. Ct. Eep. 482 (1882), Waite, C. J. The acts of Congress distinguished interest to depositors from dividends to them. Held, on the facts, that certain pay- ments were made as dividends and not as interest. Cary v. San Francisco Savings Union, 22 Wall. 38, 22 L. ed. 779 (1875), U. S. Supreme, Waite, C. J., better reported in 21 Int. Eev. Eec. 84. Cary v. Savings and Loan Society, 154 U. S. 615, and 22 L. ed. 780, 14 Sup. Ct. Eep. 1208 (1875), Waite, C. J., resers- ing San Francisco Savings and Loan Society v. Cary, 17 Int. Eev. Eec. 109, Fed. Cas. ISTo. 12,317 (1873), U. S. Cir. Ct. Dist. Cal. Sawyee, J. A life insurance company, receiving untaxed interest on a portion of its investments, was held liable to assessment in re- spect thereof, although the amount of the interest on its other investments on which tax had been deducted, exceeded the prof- its earned by the company. Per Lord Esher, M. E. L. E. 22 Q. B. Div. p. 450 : "Interest of money ought not first to be taxed ANNOTATED STATUTE AND DIGEST. 577 as a separate subject-matter of taxation, and then brought again into account in arriving at the profits and gains of a business and so taxed again." Clerical, Medical and General Life Assurance Society v. Car- ter (1889), L. E. 22 Q. B. Div. 444, 58 L. J. Q. B. N. S. 224, 37 Week. Eep. 346 ; 2 Tax Cas. 437. A life insurance company derived the bulk of its gross in- come from taxed sources. The amount of this taxed income exceeded the company's net profits. The company received in addition certain interest from which tax was not deducted: — Held, that this interest was properly assessable under Cases III. and IV. of Sched. (D.) in § 100. Per the Lord President, 5 Tax Cas., p. 226 : "I thought it had been settled beyond all possibility of doubt, that inasmuch as the Income Acts do not only deal with profit in the true sense of the word as a commer- cial profit, but also deal with and impose taxes upon the interest of investments, the Crown has always been allowed, when in- vestments are held by a trading company, if it suits them, to say, 'We will charge you a tax upon the produce of your in- vestments, and we won't charge the tax upon your profits.' The Crown cannot charge the tax on both — that is to say, it cannot take a trading account which has money, its assets and invest- ments — and first of all charge income tax upon the produce of investments, and then over and above charge on the profits. It must elect between the two." Revell V. Edinburgh Life Insurance Co. (1906), 5 Tax Cas. 221. Interest is taxable although it accrue de die in diem,, as where a purchaser failed to pay the purchase price on the day ap- pointed and interest was due until the price was paid. It is not necessary that the interest should be paid only annually. Bebb V. Bunny, 1 Kay & J. 216 (1854), Chancery Cham- bers, Wood, V. Ch. On November 2, 1895, the South African Eepublic granted a concession for the construction of a railway, and guaranteed to a company which was formed to take over the railway interest at 4 per cent, on its share capital. On October 11, 1899, war having broken out, the line was seized and worked by the British military authorities until the end of the war. On February ] 8, the British Government gave notice to expropriate the rail- Foster Income Tax. — 37. 578 AITNOTATED STATUTE AND DIGEST. way under the terms of the concession. They recognized the validity of the concession, and admitted the liability to pay all arrears of interest. They paid 97,5061. 16s. 14d. as "guaranteed interest on share capital at 4 per cent, per annum from the 1st Jan. 1899 to 14th Nov. 1903, "in addition to the other payments on the appropriation. Held, that the Crown was entitled to in- come tax on the sum of 97,5061. 16s. lid. Pretoria-Pietersburg Eailway v. Elgood, 95 L. T. N. S. 468 Walton, J. The Secretary of State for India was empowered under certain contracts to purchase the plaintiff company's railways at the expiration of a specified number of years, either for a gross sum or for an annuity for a term of years. Before the period arrived at which the option to purchase was exercisable, negotiations were entered into between the parties for the pur- chase of the railways, and an agreement was arrived at, subse- quently sanctioned by Parliament, by which the secretary of State purchased the railways for an annuity terminable at the end of seventy-three years, and payable half yearly to the plain- tiffs, the annuity being 51. 12s. 6d. for each 1001. of capital stock committed at a price of Z125. This annuity was calculated on the basis of 51. 7s. 6d., part thereof, being interest at the rate of 41. 6s. per cent, on the 1251., and of a sum of 5s. other part thereof, being the amount required to be set aside and invested half yearly at a rate of interest in order to produce, by means of a sinking fund, the capital sum of 1251. at the end of the seventy-three years: — Held, first, that the annuity was partly a payment of capital by instalments and partly a payment of interest on the unpaid capital, and that income tax was payable only upon so much of it as represented interest on unpaid capi- tal; and second by that in estimating in each half-yearly pay- ment the amount on which income tax was payable, the propor- tion representing capital must be taken as continually increas- ing, and the proportion representing interest on unpaid capital as continually decreasing. Secretary of State of India v. Scoble (72 L. J. K. B. K S. 617; [1903] A. C. 299) applied East Indian Eailway v. Secre- tary of State for India, 74 L. J. K. B. N. S. 779 ; [1905] 2 K. B. 413, 93 L. T. K S. 220, 54 Week. Eep. 4, 21 Times L. E. 606— C. A. ANNOTATED STATUTE AND DIGEST. 5Y9 rent, dividends, In computing net income for the purpose of the normal tax there shall be allowed as deduction * * • (seventh) the amount received as divi- dends upon the stock or from the net earnings of any corporation, joint- stock company, association, or insurance company which is taxable upon its net income as hereinafter provided: — See section B infra. Provided, further, that persons liable for a normal income tax only, on their own account or in behalf of another, shall not be required to make return of the income derived from dividends on the capital stock or from the net earnings of corporations, joint stock companies or asso- ciations, and insurance companies, taxable upon their net income as here- inafter provided. — D. infra. Derived from any kind of property, rents, interests — Act of June 30, 1864, Act of March 2, 1867; dividends — Act of July 1, 1862, Sec. 90; Act of June 30, 1864, Sec. 116; Act of March 3, 1865, Sec. 1; Act of March 2, 1867, Sec. 13; Act of August 28, 1894, Sec. 27. That there shall be levied and collected a duty of iive per centum on all dividends in scrip or money thereafter declared due, and whenever the same shall be payable, to stockholders, policy-holders, or depositors, a.s part of the earnings, income, or gains, of any bank, trust company, sav- ings institution, and of any fire, marine, life, inland insurance company, either stock or mutual, under whatever name or style known or called, in the United States or territories, whether specifically incorporated or ex- isting under general laws, and on all undistributed sums, or sums made or added during the year to their surplus or contingent funds; and said banks, trust companies, savings institutions, and insurance companies shall pay the said duty, and are hereby authorized to deduct and withhold from all payments made on account of any dividends or sums of money that may be due and payable as aforesaid, the said duty of five per centum. And a list or return shall be made and rendered to the assessor. —Act of June 30, 1864, § 120. And the share of any person of the gains and profits of all companies, whether incorporated or partnership, who would be entitled to the same if divided, whether divided or otherwise. — Act of March 2, 1867, § 13. Except the amount of income received from institutions or corporations whose ofiBcers as required by law, withhold a per centum of the dividends made by such institutions, and pay the same to the officer authorized to receive the same. — Act of March 2, 1867, § 13. A share in profits can, by bargain, by given by a company to a person who is not a shareholder ; and, where "participating policy holders" in a life insurance company have purchased a 580 AITNOTATED STATUTE AND DIGEST. share in the profits, they are persons having a right to a share in the profits, under this section. Lastv. London Assurance Corporation (1885), L. K, 10 App. Cas. 438, 55 L. J. Q. B. K S. 92, 53 L. T. N. S. 634, 34 Week. Eep. 233, 2 Tax Cas. 122. "Without re-opening that subject for an inquiry into those differences, it may be said that the question whether the tax ^was, in those cases (Barnes v. Eailroads and U. S. v. Eail- roads), a tax on the shareholder or on the corporation, was, and is, one of form rather than substance." "[The shareholder] in any and all these cases, in point of fact ultimately suffers to that extent, or loses the amount of the tax." MiLLEE, J., in Stockdale v. Insurance Cos. 20 Wall. 323, at pp. 329, 330, 22 L. ed. 348, 350, 351 (1873), U. S. Supreme. The amount of taxes illegally collected from the Illinois Cen- tral Eailroad as income tax on dividends to non-resident alien stockholders, should be repaid to the company, instead of to the stockholders, after deducting so much as the Government may have already paid to such stockholders. Attorney General Pierpont, 15 Ops. Atty. Gen. 67 (1875). Dividends declared and paid during the current year become income of shareholders. It is double taxation to tax them as income of the shareholder, and again as income of the corpora- tion. Board of Revenue v. Montgomery Gas Light Co. 64 Ala. 269 (1874). Semble, that under the act of July 1, 1862, a dividend de- clared -by a corporation but not paid was taxable against the company. Magee v. Denton, 5 Blatchf. 130, Fed. Cas. No. 8,943 (1863), U. S. C. Ct. S. Dist. N. Y. Hall, J. Under § 117 of the Act of June 30, 1864, a stockholder is not so "entitled" to undistributed profits of the corporation that he must return them as part of his income. Ex parte Ives, 1 Int. Rev. Eec. 145, Fed. Cas. No. 7,114 (1865), U. S. Dist. Ct. D. Conn. Shipmam-, J. The editor of the Internal Revenue Eecord comments edi- torially in the same issue on the foregoing decision as follows: "If we read the opinion of Judge Shipman correctly, any number of mercantile men may organize themselves into a ANNOTATED STATUTE AND DIGEST. 581 coi-porate body for the transaction of business, and term their profits dividends; and instead of distributing their earnings, may hold them for years as a corporate fund, undistributed, or pass them to the credit of stock amount. In this way stock- holders might, in the course of time, become immensely wealthy, and entirely avoid the payment of income tax on this portion of their annual gains and profits; thus defeating, it seems to us, the very object and purpose of the law." The Commissioner of Internal Revenue refused to acquiesce in Judge Shipman^s ruling on the ground that the law taxed undistributed earnings as income, that the corporation was not liable to the income tax, and therefore that they must be taxed as income of the stockholder. Euling, April 28, 1865, 1 Int. Eev. Eec. 157. "A stock dividend is unlike a cash dividend, in that the assets of the corporation are not divided, or the property there- in changed, but the stock is increased and divided, and the separate holdings of the stockholders increased to the extent of the dividend declared." Commissioners of Sinking Fund v. Buckner, 48 Fed. 533 (1891) U. S. C. C. Ky. Baee, J. A railroad company foreclosed a mortgage given to secure loans. Having taken title to the mortgaged premises, it issued certificates to its stockholders representing their pro rata, in- terest in the mortgaged property. Held, that such certificates were not dividends. Chicago, etc., E. E. v. Page, 1 Biss. 461, Fed. Cas. JSTo. 2,668 (1864), U. S. Cir. Ct. N. Dist. 111. Davis and Deum- MOND, JJ. When a corporation has actually made dividends from its profits or property without formally declaring them, by adding them to the stock of the shareholder, or where it has declared dividends and returned them, whether earned or not, the sum thus added to the stock of the shareholders, or the sum thus declared and set apart to him, becomes the measure of the tax, the legislative intent being to make the profit transferred by the corporation to its shareholders from its treasury or prop- erty the measure of taxation of its capital. Hence, it is clear that a mere nominal or arithmetical increase of the shares, without a transfer to the shareholders of anything out of the 582 ANNOTATED STATUTE AND DIGEST. treasury or property of the corporation, is not a dividend or profit either made or declared. So held of watered stock. Commonwealth v. Pittsburgh, etc. K. E. 71 Pa. 84 (1873). A corporation issued certificates to its stockholders that each holder was "entitled to dollars payable ratably with the other certificates * * at the pleasure of the company out of its future earnings, with dividends thereon at the same rates and times as dividends shall be paid' upon the shares of the eapitnl stock of said company." They were transferrable on the books of the company. They were intended to be a dis- tribution of prior earnings and to "approximate as near as pos- sible to stock without exposing the company to the hazard of an actual addition to the same in violation of law." Held, taxable as scrip dividends. Bailey v. Eailroad Co. 22 Wall. 604, 22 L. ed. 840 (1874), U. S. Supreme, Cliffoed, J. It is competent for the company to show by collateral evi- dence what portion of earnings distributed by means of the certificates was earned during the period covered by the income, and what portion was earned prior thereto. A declaration of dividends is not conclusive proof that they were earned within the period covered by the tax. Bailey v. Eailroad Co. (second appeal), 106 U. S. 109, 27 L. ed. 81, 1 Sup. Ct. Eep. 62 (1882), Matthews, J. "The law conclusively assumes * * that a dividend declared is a dividend earned." Semble. Ibid. As between life-tenant and remainderman, stock dividends constitute increase of capital, not income. Gibbons v. Mahon, 136 U. S. 549, 34 L. ed. 525, 10 Sup. Ct. Eep. 1057 (1889), Geay, J. "[In Bailey v. Eailroad Co. 22 Wall. 604, 22 L. ed. 840,] the question at issue was not between the owners of successive interests in particular shares, but between the corporation and the government, and depended upon the terms of a statute care- fully framed to prevent corporations from evading payment of the tax upon their earnings." Ibid, at p. 560. A corporation began with a capital of $100,000, which was increased to $1,000,000 out of its profits, the increase being invested in improvements and enlargement of its business. Held, that $900,000 increase was taxable as dividends. Lehigh, etc. v. Commonwealth, 55 Pa. 448 (1867). ANNOTATED STATUTE AND DIGEST. 583 When a contract is made with certain trustees to build a railroad and divide the profits among the stockholders of a certain corporation, which guarantees the trustees against loss, and agrees to advance funds and receive a commission, held that the profits received by the trustees and distributed among the stockholders are not taxable as dividends of the corporation. Credit Mobilier v. Commonwealth, 67 Pa. 233 (1870). The relator invested surplus profits in real estate and gas mains, and issued certificates to the shareholders to the effect that they had a ratable interest therein. Held, that such in- vested profits were property of the corporation, and taxable as such. People ex rel. Gas Co. v. Assessors, 76 IST. Y. 202 (1879). Proof that capital stock has been increased is not even prima facie evidence that such increase is a stock dividend or a division of actual profits. Commonwealth v. Erie, etc. E. K. 74 Pa. 94 (1873). The whole assets of a bridge company having been taken by the state in condemnation proceedings, and the compensation having been divided among the stockholders ratably, held, that the surplus over the capital stock was taxable as dividends. Matson Bridge Co. v. Commonwealth, 117 Pa. 265, 11 Atl. 813 (1888). The acts of Congress distinguished interests to depositors from dividends to thcM. Held, on the facts, that certain pay- ments were made as dividends and not as interest. Cary v. San Francisco Savings Union, 22 Wall. 38, 22 L. ed. 779 (1874), TJ. S. Supreme, Waite, C. J. better reported in 21 Int. Eev. Eec. 84. Cary v. Savings and Loan Society, 154 U. S. 615, and 22 L. ed. 780, 14 Sup. Ct. Eep. 1207 (1875), Waite, C. J., re- versing San Francisco Savings and Loan Society v. Cary, 17 Int. Eev. Eec. 109, Fed. Cas. ^Ro. 12,317 (1873), U. S. Cir. Ct. Dist Cal. Sawtee, J. When the profits of a bank are applied in payment of its stock, such payments are dividends, and taxable as such. State V. Farmers' Bank, 11 Ohio, 94 (1841). In construing a State statute, a tax on capital stock measured by dividends was heldj not a tax on dividends. Phoenix Iron Co. v. Commonwealth, 59 Pa. 104 (1868). 584 ANNOTATED STATUTE AND DIGEST. Under the Act of Jung 30, 1864, the tax was collectible on the interest of a stockholder in the profits of a corporation not included in dividends but invested partly in real estate, partly m machinery and raw materials, and partly in the payment of debts incurred in previous years. Collector v. Hubbard, 12 Wall. 1, 20 L. ed. 272 (1870), TJ. S. Supreme, Clifeoed, J. When a corporation declares a dividend payable in gold, the tax upon such dividends must be paid in gold or its equivalent in currency. Euling, 2 Int. Kev. Eec. 100. There is no tax on the mere doubling of the shares of a cor- poration when no more property is represented by the addi- tional number of shares than before the addition was made. On an increase, where the new shares represent the gains of the company made during the year and added to the capital, a tax should be assessed. Kulingjl Int. Eev. Kec. 188. Where a stock dividend is in reality a division of the accumu- lated earnings of several years, so much of the amount as is clearly shown to the assessor to be due to the profits of pre- vious years may be omitted from the return. Such stock should be returned at its par value if it remain unsold; other- wise at its actual value. Euling, 1 Int. Eev. Eec. 155. The profits acquired by the winding up of a corporation, and the division of its assets, are taxable as income. Euling, 2 Int. Eev. Eec. 138. Although §§ 120 and 122 of the Act of June 30, 1864, clearly contemplate that the Government shall receive five per cent, of the whole amount paid out by any of the companies enumerated on account of dividends or interest upon bonds, it has been contended by some companies that as they were merely authorized and not required to withhold the tax from such dividends or interest, it was competent for them to pay the tax, and charge the same to their expense account, and make the payment to the stockholder or bondholder free of tax. The result of this construction is to give the Government five dollars for every one hundred dollars paid to the stockholder, instead of five dollars for every ninety-five dollars thus paid. ANNOTATED STATUTE AND DIGEST. 585 When the company adopts that construction, the deduction provided for in the 116th and ll7th sections, should not be allowed. Euling, 1 Int. Eev. Eec. 116. Whenever a stockholder makes his income return under § 116, he should return as his income from dividends, not only the $95 from $100 paid to him by the company, but also the $5 paid for him to the Government. For example: A's dividend or share of the profits in a railroad company is $4,000. Of that sum the company withholds and pays into the Government five per cent., that is $200, the remaining $3,800 is paid to A. In addition to income from dividends, he has an income of $800 from other sources. From this he is entitled to deduct $600, leaving $200 as taxable income from other sources. To this add the $3,800 received directly from the company, and he has a taxable income of $4,000. Five per cent, upon that sum is $200. From this deduct the $200 withheld by the company and nothing remains. The Govern- ment has received no tax whatever from the $200 taxable in- come from other sources. Euling, 2 Int. Eev. Eec. 100. securities. There shall be included all income derived from interest upon notes, bonds, and other securities. — Act of August 28, 1894, § 28. Interest received or accrued upon all notes, bonds, mortgages, or other forms of indebtedness bearing interest. — § 28, post, p. 287. There shall be included all income derived from interest upon notes, bonds and other securities of the United States. — Act of March 2, 1867. § 13. There shall be included all income derived from any kind of propertj-, rents, interest received or accrued upon all notes, bonds, and mortgages. —Act of July 14, 1870, § 7. or the transaction of any lawful business carried on for gain or profit. Gains derived from, and losses incurred by, the sale of stocks, are regarded as gains and losses in business without reference to the time during which the stocks are held. Interest in dividends derived from stocks is regarded as income derived from fixed investments, without reference to the time during which such stocks are held ; but when gains derived from sales 586 AlfNOTATED STATUTE AND DIGEST. of stocks Involve interest received or accrued, such gains may be regarded as derived from business alone. Salaries, except when specially provided for by statute, are regarded as income from business. The value of property used in business, less the amount of insurance, may be deducted when lost from the gains and profits in business. Euling, 3 Int. Eev. Eec. 188. or gains or profits and income derived from any source whatever, All other gains, profits, and income derived from any source whatever. — Act of August 28, 1894, § 28. All other gains, profits, and income derived from any source whatever. — Act of March 2, 1867, § 13. All other gains, profits, and income drawn from any source whatever. — Act of July 14, 1870, § 7. Eent saved by reason of the fact that a person occupies a house rent-free is not taxable. Tennant v. Smith [1892], A. C. 150, H. L. Profits realized during the year are to be returned and as- sessed without regard to the fact that they had been produced by the labors of previous years. Euling, 2 Int. Eev. Eec. 44. Wages of a minor son, if the parent has power to control the same, must be included with the income of the parent, and taxed as such. Euling, 1 Int. Eev. Eec. 156. S. was a partner in business with E. His share of the profits was about $5,000. The firm dissolved, and S. gave F. the amount of his profits in payment for F.'s share in the good will of the firm. Held, that S. should pay an income tax on $5,000, although that was reinvested in the business, and that F. should also pay an income tax on $5,000. Euling, 4 Int. Eev. Eec. 46. When a vendor consents to receive the purchase price in annual installments, such installments are not taxable as "an- nual payments." They are principal and not income. Foley V. Fletcher, 3 Hurlst. & N. 769 (1858), Exch. including the income from but not the value of property acquired by gift, bequest, devise, or descent: Money and the value of all personal property acquired by gift or in- *ieritance. — ^Act of August 24, 1894, § 28. ANNOTATED STATUTE AND DIGEST. 587 Gifts of personal property made ante mortem as advances since the passage of the revenue laws, should be treated as income. Euling, 3 Int. Eev. Eec. 133. The value of an annuity to arise from a fixed principal should be estimated by assuming the rate of interest upon money at 6 per cent without reference to the legalized rate of any particular state. Euling, 4 Int. Eev. Eec. 47. A gift is not taxable as an "annual profit or gain arising from any kind of property" or "from any profession, trade, employ- ment, or vocation." So held of an allowance to a curate "in recognition of faithful service," renewable at the discretion of a committee and conditional upon his collecting half the amount as donations to the fund. Turner v. Ouxon, L. E. 22 Q. B. Div. 150 (1888), Cole- EIDGE, C. J. An annual gift by parishioners to their clergyman Jieldj a payment in respect of his office, and so taxable as income. Inland Eevenue v. Strang, 15 Scot. L. E. 704 (1878) ; Sc. Ct. Sess. Outer House, Ld. Cueeiehill. Amounts paid to clerks of banks, etc., as gifts, are clearly paid with reference to services rendered, and should be taxed as income. Ruling, 7 Int. Eev. Eec. 35. All gifts which are in the nature of compensation for services rendered, whether made in accordance with a previous under- standing or with an annual custom, are taxable as income. Euling, 1 Int. Eev. Eec. 150. Provided, That 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 surrender of contract, shall not be included as income. That in computing net income for the purpose of the normal tax there shall be allowed as deductions: First, the necessary expenses actually paid in carrying on any business. When any person rents buildings, lands, or other property, or hires labor to carry on [cultivate — Act of March 3, 1865] lands, or to conduct 588 AiriTOTATED STATUTE AND DIGEST. any other business from which such income is actually derived, or pays, interest upon any actual incumbrance thereon, the amount actually paid for such rent, labor, or interest shall be deducted. — Act of June 30, 1864,. § 117; Act of March 3, 1865, § 1. Also the amount paid out for usual or ordinary repairs, not exceeding tlie average paid out for such purposes for the preceding five years, shall be deducted.— Act of June 30, 1864, § 117 ; Act of March 3, 1865, § 1. The amount actually paid for labor or interest by any person who rents- land or hires labor to cultivate land, or who conducts any other busi- ness from which income is actually derived. — Act of March 2, 1867, § 13. The amount paid out for usual or [and — ^Act of July 14, 1870] ordinary repairs.— Acts of March 2, 1867, § 13; Act of July 14, 1870, § 9. The amount paid for rent or labor to cultivate land, or to conduct any other business from which income is derived. — Act of July 14, 1870, § 9, In computing incomes the necessary expenses actually incurred in car- rying on any business, occupation, or prtjfession shall be deducted. — ^Act of August 28, 1894, § 28. Strong & Co. v. Woodifield, [1906] A. C. 448, 5 Tax Gas. 215, [1906] Per Lord Davey, p. 453 : "It is not enough that the disbursement is made in the course of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits." A rubber company, of whose estate only a portion was as yet producing rubber, claimed to deduct the expenses incurred annually in weeding, watching, etc., those portions of the estate where the trees had not yet reached the rubber-bearing age:~ Held, that the expenses were deductible, and that the fact that they were incurred to earn profit in future years, and were not referable to profits earned in the year in which they were in- curred, did not prevent them from being proper deductions; and that, as they were annually recurring expenses, they were- prima facie not capital expenditure, but income expenditure :. Vallambrosa Rubber Co. v. Farmer [1910] S. C. 519, 4T Scotch L. E. 488, 5 Tax. Cas. 529. Subscriptions to Coal Owners Association. — A colliery com- pany were members of a coal owners association, to which they paid a subscription. The object of the association was tO' indemnify its members in the event of deficiency or stoppage of output caused by strikes, etc. : — Held, that the subscription was not money laid out for the purposes of the trade, and could not be deducted: ANNOTATED STATUTE AND DIGEST. 589 Ehymney Iron Co. v. Fowler, [1896] 2 Q. B. 79, 65 L. J. Q. B. ]Sr. S. 524, 44 Week, Kep. 651, 3 Tax Cas. 476. A brewery company, upon being assessed under Schedule D of the Income Tax Act, 1853, in respect of the profits of their trade, claimed to deduct from the amount of those profits the sum expended by them as landlords of certain "tied" houses in respect of the proportion of the compensation levy imposed upon them by Section 3 of the Licensing Act 1904. The tied houses were owned by the company and were let to tenants upon the terms that the tenants should only deal with the company in the way of their business, and should buy all the beer con- sumed on the premises from the company, the tenants paying a lower rent in consideration therefor. It was found as a fact that the profits of the company were greatly increased by the employment of the houses, and that they were necessary in order to enable the company to carry on their business profit- ably: Held (the House of Lords being equally divided in opinion on the question), that the respondents were entitled to the deduction claimed. Smith V. Lion Brewery Co., 80 L. J. K. B. JST. S. 566, [1911] A. C. 150, 104 L. T. ]Sr. S. 321, 75 J. P. 273, 55 S. J. 269; 27 L. J. E. 261, 5 Tax Cas. 568, H. L. (E). S. & L. a firm of tube manufacturers, entered into an agree- ment with W., another firm of tube manufacturers whereby in return for the right to nominate a majority of the directors of W., S. & L. undertook to pay to W. each half year such sum as might be necessary to make up any deficit in the dividend on W.'s preference shares. In pursuance of this agreement, in the year 1904 S. & L. made payments to W. of sums amounting to £841. In estimating their profits for that year for income tax purposes, S. & L. claimed to deduct from the profits this sum of £841. The Income Tax Commissioners held that S. & L. had expended this sum for the purposes of their trade and that they might sell their goods at a better price, and allowed the deduc- tion : Held, that the deduction had been rightly allowed. Moore v. Stewarts and Lloyds, 8 F. 1129, Ct. of Sess. A corporation required by law first to supply a town with gas was permitted thereafter to supply private consumers with gas. It received [so far as the report shows] no compensation 590 ANNOTATED STATUTE AND DIGEST. from the town, but the receipts from private consumers pro- duced a profit on the whole enterprise. Held, that the expense of lighting the town could not be deducted. Such expense is not for the purpose of the business; it is merely to enable the corporation to enter upon the business. Dillon V. Corporation of Haverfordwest, [1891] 1 Q. B. 575. When a lessee pays a large premium at the beginning of his term for the lease, such payment is not to be regarded as rent paid in advance. He is not, therefore, entitled to deduct an aliquot part of such premium as an annual expense. He may, however, deduct the fair rental value, if it is greater than the rent actually paid. Gillatt v. Colquhoun, 33 Week. Eep. 258 (1885), Q. B. D. Under the terms of section 117 of the Act of June 30, 1864, the salary of a person employed to take care of real estate would be deductible from such income of the persons paying the salary as is derived from the estate in question. The per- son receiving the salary should return the same as part of his income subject to tax. Euling, 3 Int. Eev. Eec. 102. Expenses of collection, necessarily incurred, may be deduct- ed from rents. Stevens v. Bishop, L. E. 20 Q. B. Div. 442 [1888]. [Distinguished in the Duke of Norfolk v. Lamarque, on account of the words in itaJics.] Expenses of collection are not to be deducted from rents. Duke of Norfolk v. Lamarque, L. K. 24 Q. B. Div. 485 [1890]. "No analogy whatever can be drawn from the profits of manufactures or mercantile business, because there the word 'profits' necessarily means that which is earned after a certain outlay made for the purpose of earning it, and it cannot be said that expenditure in the collection of rent is money spent for the purpose of earning the rent — it is simply money spent for getting in that which belongs to the owner." Ibid., Pol- lock, B., at p. 490. Legal expenses arising from ordinary business may be de- ducted as expenses of the business. Euling, 7 Int. Eev. Eec. 59. ANNOTATED STATUTE AND DIGEST. 591 Wages paic^ for productive labor, i. e. labor in the manufac- ture of article.^ for sale, may be deducted, but not wages paid for unproductiv e labor. Kuling, 7 Ini, Rev. Kec. 58. Where a party owns unimproved property from which no income is derived, expenses, repairs, insurance, interest, etc., are deducted from whatever income has accrued to him; but the expense of hired labor can be deducted from profits of only such business as employed in the labor. Ruling, 1 Int. Rev. Rec. 154. Wages of his minor children are not deductible from the in- come of a farmer; but the wages of adult children are. Euling, 7 Int. Eev. Rec. 58. A bank is entitled to deduct as an expense of its business the rental value of premises occupied by it, although a part of such premises are occupied by its officials rent free. Russell V. Town, etc.. Bank, L. E. 13 App. Cas. 418 [1888], H. L. Voluntary contributions by a minister towards the stipend of his assistant minister, were held not to be allowable deduc- tions under § 52 of the Income Tax Act, 1853, not being ex- penses necessarily incurred in the personal performance of his duty. Lothian v. Macrae [1884], 12 E. 336, 22 Scot. L. E. 219, 2 Tax Cas. 65. Eoyalties for use of Patent — The Finance Act, 1907, § 25 (1), provides that: "In estimating, under any Schedule of the Income Tax Acts, the amount of the profits and gains aris- ing from any trade, manufacture, adventure, concern, profes- sion, or vocation, no deduction shall be made on account of any royalty, or other sum, paid in respect of the user of a patent, but the person paying the royalty or sum shall be authorized, on making the payment, to deduct and retain thereout the amount of the rate of income tax chargeable during the period through which the royalty or sum was accruing due." The appellant company were assessed for the year 1907-8 on the average of their profits for the three years ended September 30th, 1906. During each of the three years they had paid royalties for the user of patents, but these payments ceased on January 1st, 592 ANNOTATED STATUTE AND DIGEST. 1907, a date prior to the operation of the Finance Act, 1907. In arriving at the assessment for the year 1907-8, the royalties paid in the years of average were disallowed as a deduction, the disallowance being based on § 25 (1) of the Finance Act, 1907 : — Held, by the Court of Appeal, that § 25 of the Finance Act, 1907, must be read as a whole, and that as it was not a charging section, but a section for improving the machinery of collection, it did not operate to prohibit the deduction of royal- ties when the person assessed was debarred from reimbursing himself in the manner contemplated by the section. The pro- hibition to deduct was dependent on the existence of facilities for recoupment. Lanston Monotype Corporation v. Anderson, [1911] 2 K. B. 1019, 80 L. J. K B. N. S. 1351, 105 L. T. IT. S. 398, 5 Tax Gas. 675. A payment of capital invested in a business cannot be de- ducted. City of London Contract Co. v. Styles, 4 Times L. K. 51 [1887], Ct. App., affirming s. c. 3 Times L. E. 512 [1887]. A railway company claimed as deductions, (1) a sum ex- pended upon the improvement of the permanent way of one section in order to bring it up to the standard of the main line ; and (2) a sum representing the cost of the extra weight in re- laying another portion of the line with steel in place of iron rails, and with chairs of additional weight. In the books of the company these sums were charged against capital: — Held, that the sums in question were properly charged against capital, and were not allowable deductions. Highland Kail. Co. v. Balderston [1889], 26 Scot. L. R. 657, 2 Tax Cas. 485. The appellant company carried on the business of zinc smelt- ing, for which purpose large quantities of blende were required. To supplement their own supply, a new company was formed for acquiring and working, in the interests of the appellant company, certain mines containing blende. Practically all the shares of the new company were owned by the appellant com- pany. From time to time the appellant company made ad- vances to the new company by way of loan at interest, for the purpose of working these mines, the more recent advances being ANNOTATED STATUTE AND DIGEST, 593 alleged to be made as against blende to be delivered. A certain quantity of blende was delivered, but, after giving credit in respect thereof, there remained a balance due to the appellant company. The new company subsequently went into liquida- tion, and the appellant company lost the whole of this balance. In estimating the amount of the profits from their business for assessment, the appellant company claimed to deduct this balance as being a bad debt: Held, that the advances were an investment in a separate concern and a capital expenditure, and not money laid out exclusively for the purpose of the trade, or advanced against specific parcels of goods to be delivered, and accordingly, that the deduction claimed was not allowable. English Crown Spelter Co. v. Baker [1908], 99 L. T. K S. 353, 5 Tax Cas. 327. Expenses of Applications for Wew Licenses. — A company of brewers expended certain sums for law costs, printing, and advertising, etc., in connection with applications made by them to the licensing justices for the grant of new and additional licenses to houses owned and leased by them, and also to houses not owned by them, but for which they conducted the applica- tions for the purpose of maintaining and increasing their trade. Payments were also made to owners of public houses for the right to call for a surrender of the licenses attached to such houses, if required by the licensing justices to be surrendered before the grant of new licenses for new houses. Where the applications were successful, the expenses were added to the cost of the new houses. The company claimed, in computing their profits, to deduct the sums paid as above in cases where the applications for new licenses were unsuccessful, as a necessary annual trade expense: Held, that the sums in question were expended on account of capital, and were not an allowable de- duction. Southwell V. Savill Brothers, [1901] 2 K. B. 349, 70 L. J K. B. E". S. 815, 85 L. T. N. S. 167, 49 Week. Eep. 682, 4 Tax Cas. 430. Expenses of Eemoval.— A company, which carried on the business of buying and selling granite, moved their business premises, and defrayed the whole cost out of income. In calculating their profits for assessment under Sehed. Poster Income Tax. — 38. 594 ANNOTATED STATUTE AND DIGEST. (D.), the company claimed to deduct the cost of carting their granite from the old premises to the new, and of taking down and re-erecting two cranes : Held, that they were not entitled to do so. Per Lord President, 8 F. p. 56 : "Supposing these parties had not had a crane, and in fitting up their new yard had found it necessary to buy one, its cost is not a deduction which would have been allowed." Per Lord McLaren (p. 57) : "The cost of transferring plant from one set of premises to other and more commodious premises is ijot an expense incurred for the year in which the thing is done, but for the general interests of the business. * * * Suppose a person is so imprudent as not to insure his business premises, . . . and that they are destroyed by fire, and he has to replace them, he would not be allowed to charge the reinstatement against the income of the year." Granite Supply Association v. Kitton [1905], 8 F. 55, 43 Scotch L. K. 65, 5 Tax Cas. 168. Consideration for Transfer of Business, etc. — Part of tlie business taken over by a company consisted of unexecuted con- tracts, and guaranteed interest was paid to the shareholders of other companies, without deducting income tax, during the construction of works contracted for : Held, that the price paid for such contracts was not a deduction from the profits, and per Lord EsHER, M. E., that the interest was also not a deduction. City of London Contract Corporation v. Styles [1887], 4 Times L. E. 51, 2 Tax Cas. 239. Held, that no deduction was allowable on account of the consideration paid to another Mexican bank for the transfer of certain concessions involving the right of issuing bank notes. London Bank of Mexico and South America v. Apthorpe [1891] 2 Q. B. 378, 60 L. J. Q. B. K S. 653, 65 L. T. K S. 601, 39 Week. Eep. 564, 3 Tax Cas. 143. The Eoyal Insurance Company acquired the business of the Queen Insurance Company, it being agreed that the manager of the latter should be taken into the service of the former, with liberty for the Eoyal Insurance Company to commute his sal- ary by payment to the management of a gross sum. Shortly after the transfer, the Eoyal Insurance Company paid the man- ager a sum in commutation of his salary: Held, that the pay- ment formed part of the consideration for the transfer of the ABrWOTATBa) BTATUTB AND DIGEST. 595 business, and being capital expenditure, could not be deducted in ascertaining the profits. Per Lord Halsbuey, L. C. [1897], A. C. p. 7 : "Under these circumstances, it appears to me that this comes within the express language of the statute; it is capital expenditure — it is part of the purchase-money for the concern. It is perfectly immaterial whether it was entirely so or partly -so, because if it was partly so it is enough to establish the proposition which I am maintaining." Eoyal Insurance Co. v. Watson [1897] A. C. 1, 66 L. J. Q. B. N. S. 1, 75 L. T. K S. 334, 3 Tax Cas. 500. Sinking Fund. — The appellant company were empowered un- der their private Act to raise money upon mortgage of the undei^ taking, for the purpose of carrying out a Government contract, and were required to establish a sinking fund for the extinction of the mortgage debt. A sum was to be set aside into the sinking fund out of each quarterly payment received under the contract or out of other moneys belonging to the company : — Held, follow- ing Mersey Docks v. Lucas [1883], L. E. 8 App. Cas. 891, that the sums thus set aside were not allowable as a deduction in ar- riving at the company's assessable profits. City of Dublin Steam Packet Co. v. O'Brien [1912], 6 Tax Cas. 101. A steamship owned by a steamship company, and valued at £37,000, was insured with underwriters at £34,500, the com- pany taking the risk of loss to the amount of £2,500. The com- pany transferred from revenue account to their insurance fund, out of annual profits, a sum equivalent to the amount of premium that would have been payable to an underwriter on a risk of £2,500. The steamship was wrecked and became a total loss, and the company recovered the sum of £34,500 from the under- writers. The company claimed, in ascertaining their profits, to deduct the said sum of £2,500 (less the amount received as salvage) as being the amount of the risk undertaken by them, and transferred from their insurance fund to capital account : — Held, that the company were not entitled to make the deduction in question, the loss being a loss of capital. Per Lord McLaben, 44 Sc. L. E., p. 717 : "This is not marine insurance in the legal sense of the term, because there is no contract of insurance, but only a reservation of a sum out of the profits of the business to provide for future losses :" 596 AiyNOTATED STATUTE , AlfJ). DIGEST, Inland Eevenue v. Western Steamship Oo. [1907], S. C. 1005 ; 44 Scot. L. K. 715. Where under a policy of life insurance and an agreement he- tween the parties thereto, the. insured has paid only one-half of the premium in cash and the other half by means of a loan from the insurer repayable on demand and bearing interest (the principal and interest being charged upon the policy), he is only entitled under section 54 of the British Income Tax Act, 1853, to deduct the amount paid by him in cash in respect of premium from his assessable income (Lord James of Hee.eb'okd dissent- ing). Hunter v. Atty.-Gen., 73 L. J. K. B. K S. 381 ; [1904] A. C. 161 ; 90 L. T. IST. S. 325, 52 Week. Eep. 593, 20 Times L. E. 570— H. L. (E.) By a policy of assurance, known as a double endowment assur- ance policy, the insurance company, in consideration of the pay- ment of annual premiums by the assured, agreed to pay 1001. to his legal personal representatives if he died before a specified date, and to pay 2001. to the assured himself if he were alive on that date : — Held, that this was an "insurance on his life" with- in the meaning of Section 54 of the Income Tax Act, 1853, and that, consequently, the assured was entitled to deduct the whole amount of the premiums from his profits and gains in respect of which he was liable to be assessed to the income tax under Schedule D. Gould V. Curtis, 81 L. J. K. B. N. S. 634 [1912] 1 K B. 635, 106 L. T. ISr. S. 680, 28 Times L. E. 274— Hamilton, J. not including personal, living, or family expenses; That in estimating the annual gains, profit, or income, of any person, under the act to which this act is an amendment [Act of July 1, 1862], the amount actually paid by such person for the rent of the dwelling- house or estate on which he resides shall be first deducted from the gains, profit, or income of such person. — Act of March 3, 1863, § 11. Also the amount paid by any person for the rent of the homestead used or occupied by himself or his family, and the rental value of any home- stead used or occupied by any person, or by his family, in his own right or in the right of his wife, shall not be included and assessed as part of the income of such person. — Act of June 30, 1864, § 117; Act of March 3, 1865, § 1. Except the rental value of any homestead used or occupied by any per- son or by his family in his own right, or in the right of his wife. — ^Act of March 2, 1867, § 13. ANNOTATED STATUTE AND DIGEST. 597 The amount actually paid by any person for the rent of the house or premises occupied as a residence for himself or his family. — ^Act of March 2, 1857, § 13. Not including the rental value of the homestead used or occupied by any person, or by his family. — Act of July 14, 1870, § 7. The amount paid for rent of the house or premises occupied as a res- idence for himself or his family. — ^Act of July 14, 1870, § 9. If a taxpayer rents his own house and is subjected to pay rent elsewhere on account thereof, he must return the rent received, _ and will be allowed to deduct the amount of rent paid. Euling, 4 Int. Eev. Eec. 46. When a taxpayer owns a homestead the rental value of which is not returned as income, he should not be allowed to- deduct the amount paid by him for the rent of the house or premises occupied as a residence for himself and his family elsewhere. Euling, 5 Int. Eev. Eec. 154. When a tax-payer rents a furnished house, rent for the fur- niture should not be deducted. Euling, 7 Int. Eev. Eec. 59. A lady made a profit by letting her furnished house for two months, and when assessed for income tax thereon, claimed to deduct the rent of another house which she had taken to reside in during that period: — Held, that this rent was not an expense- necessarily incurred in earning the profit, and accordingly that the deduction should be disallowed. Wylie V. Eccott, Ct. Sess. S. C. 16 (1913). A schoolmaster and his wife, the schoolmistress, were paid a joint salary, in respect of which the husband was assessed under Sched. (E.), and he claimed, under § 51 of the Income Tax Act, 1853, to deduct the wages and cost of maintenance of a domestic servant, whose employment was necessary in order that the duties of his household might be carried on while his wife' was engaged in the school: — Held, that the deduction could not be claimed : Bowers v. Harding, 1 Q. B. 560, 60 L. J. Q. B. K S. 474,, 64 L. T. ISr. S. 201, 39 Week. Eep. 558, 3 Tax Cas. 22 [1891]. It was held that under section 52 of the Income Tax Act, 1853, a minister was entitled to deduct from his stipend (1), has 598 AKNOTATED STATUTE AND DIGEST. expenses of visiting members of his congregation; (2) expenses of attending church meetings where part of his duty was en- joined on him by his superiors; (3) stationery; (4) communion expenses. He was not entitled, however, to make any deduction in respect of that part of his dwelling-house which was used as an office for the business of his profession, or for the expense of books. Charlton v. Commissioners of Inland Revenue [1890], 17 E. 785, 27 Scotch L. E. 647. Minister's Expenses. — Keeping Horse and Carriage, etc. — A parish minister claimed repayment of income tax under § 52 of the Income Tax Act, 1853, in respect of (1) the cost of keep- ing a horse and carriage ; (2) expenses incurred in obtaining an augmentation of stipend; (3) outlays for pulpit supply during holidays; and (4) an allowance granted by the Court of Teinds for communion elements. The commissioners allowed the first and last, but disallowed the others. On appeal, the court upheld the decision of the commissioners, holding that (1) and (4) were questions of fact which the statute laid on the commission- ers to decide, and that the others were not expenses necessarily incurred solely in the personal performance of his duty. Jarding v. Gillespie [1907], S. C. 77, 44 Scotch L. E. 136, 5 Tax Cas. 263. The expense of season tickets on railways held by persons living out of town, who do business there, going by the morn- ing and returning by the evening train, can be deducted from income, so far as the assessor shall consider such expenses as properly chargeable to expenses of business. Ruling, 1 Int. Eev. Rec. 172. Expenses of conveyance in the prosecution of business, but not hotel bills or other expenses of living, are to be deducted as the expenses of the business. Ruling, 7 Int. Rev. Rec. 60. Traveling expenses of directors from their residences to the office of their company were held to be inadmissible deduction. Revell V. Directors of Elworthy Brothers & Co. (1890) 3 Tax Oas. 12. Traveling Expenses. — A solicitor resided and carried on his profession at Worcester; he was also clerk to the justices at JBromyard. and consequently had to travel frequently between ANNOTATED STATUTE AND DIGEST. 599 those two places : — Held, that he was not entitled to deduct from the emoluments of his office such traveling expenses : Cook V. Knott [1887], 4 Times L. K. 164, 2 Tax Cas. 246. Contribution to Thrift Fund. — Under powers conferred by Act of Parliament, a municipal corporation established a scheme for a thrift fund for the benefit of their officers. Under the scheme, persons entering the service of the corporation after a certain date were to contribute, and the corporation might deduct a certain part of their salaries. The moneys so contrib- uted were held upon certain trusts in the contributers' favour. Persons in the service on the date in question, might on their own application, be admitted to the benefit of the fund upon the same terms, but no persons so admitted were to cease to contribute while in such service. A person in the service on the date in question, applied to be admitted to the benefits of the fund, and another person who had entered the service after the date in question subsequently made payments to the fund under the scheme : — Held, that the payments were not "sums payable or chargeable by virtue of any Act of Parlia- ment," or sums "really and bona fide paid and borne by the party to be charged," within § 146, Sched. (E), r. 1, and ac- cordingly could not be deducted from the amounts of the salaries for the purpose of assessment under Sched. (E) : Beaumont v. Bowers, [1900] 2 Q. B. 204, disapproved; Hud- son V. Gribble, Bell v. Gribble, [1903] 1 K. B. 517, 72 L. J. K. B. ]Sr. S. 242, 88 L. T. N. S. 186, 51 Week. Eep. 457, 4 Tax Cas. 522. The amount deducted from the salary of a clerk to the guar- dians of a union, etc., as a contribution for superannuation allowance under the Poor Law Officers' Superannuation Act, 1896 (59 & 60 Vict. c. 50), was held to be deductible from his Sched. (E) assessment, as falling within the words "sums pay- able or chargeable by virtue of any Act of Parliament" in § 146, r. 1: Beaumont v. Bowers, [1900] 2 Q. B. 204, 69 L. J. Q. B. N. S. 600, 48 Week. Eep. 557, 4 Tax Cas. 189. This case was dis- approved in Hudson v. Gribble and Bell v. Gribble, supra. second, all interest paid within the year by a taxable person on in- debtedness ; And also all interest due or paid within the year by such person on existing indebtedness. — Act of August 28, 1894, Sec. 28. 600 ANNOTATED STATUTE AND DIGEST. A financial and investment company obtained from bankers in New York sums on loans for periods not exceeding six months in order to pay for its securities purchased by it. In stating its profits for the purpose of income tax, the com- pany claimed to deduct the interest paid on these loans, but the commissioners, being of opinion that these sums were utilized as additional capital, disallowed the deduction: Held, that the sums borrowed could not be regarded as capital, and that the interest fell to be deducted in arriving at the assessable profits. Alexandria Water Co. v. Musgrave (52 L. J. Q. B. 'S. S. 349, 11 L. E. Q. B. Div. 174), distinguished. Anglo-Continental Guano Works v. Bell (70 L. T. K S. 670), doubted. Scottish North American Trust v. Inland Revenue [1910} S. C. 966, Ct. of Sess. A company carrying on a financial and banking business at home and abroad borrowed money from its foreign bankers, by whom it was allowed a large overdraft, and paid interest on. the amount so borrowed, and also from time to time on the amount of the overdraft : Held, that in assessing for income tax the profits and gains of its business, the company was entitled to deduct the amount of interest paid to the bankers on the loan and the periodical amount of the overdraft. Farmer v. Scottish North American Trust, Lim. 81 L. J.. P. C. N. S. 81 [1912] A. C. 118, 105 L. T. N. S. 833, 28 Times L. R. 142, 5 Tax Cas. 693, H. L. (Sc). Where a burial board make profits, they are entitled to de- duct from the total receipts the expense of earning them, or what may be called the working expenses, but not the interest upon money borroAved. Portobello Town Council v. Sulley (1890), 27 Scot. L. R. 863, 2 Tax Gas. 647. An English company carrying on business at Alexandria, where their works and property were, paid debenture interest to their debenture holders residing in Egypt: — Held, not an allowable deduction in ascertaining the amount of the com- pany's profits for assessment. Alexandria Water Co. v. Musgrave (1883), L. R. 11 Q. B. Div. 174, 52 L. J. Q. B. N. S. 349, 49 L. T. N. S. 287, 32; Week. Rep. 146, 1 Tax Gas. 521. ANNOTATED STATUTE AND DIGEST. 601 Per Lord Halsbuey, L. C. [1892] A. C. p. 315 : "With the decision in that case I am not disposed to disagree, though I am not quite certain I am able to adopt the reasoning . . . but upon the facts, I think I should have come to the same con- clusion, since, to put it very plainly, in that case it was a claim to deduct the company's debts for borrowed capital and diminish the amount of the profits of the trading.'' Per Lord Heesohell (p. 325) : "It is by no means clear that the case was not within the prohibition of the third rule." See also Lord Watson (p. 320). Gresham Life Assurance Society v. Styles [1892] A. C. 309 ; 62 L. J. Q. B. ]ST. S. 41, 67 L. T. IST. S. 479, 41 Week. Kep. 270, 3 Tax Cas. 185. See also Clerical, Medical and General Life Assurance So- ciety V. Carter (1889), L. E. 22 Q. B. Div. 444, 58 L. J. Q. B. ]Sr. S. 224, 2 Tax Cas. 437. Per Lord Eshee, L. K. 22 Q. B. Div. p. 449 : "I think that the 52nd section ought to be so construed as to prevent the suggested hardship, and that in- terest of money ought not first to be taxed as a separate sub- ject-matter of taxation and then brought again into account in arriving at the profits and gains." The case of Mersey Loan and Discount Co. v. Wootton (1887), 4 Times L. E. 164, 2 Tax Cas. 316, where it was de- cided that a company paying compound interest at 5 per cent. to its depositors on the varying amounts standing to their credit at one or more week's notice of withdrawal, was not entitled to deduct such interest in ascertaining the amount of its profits for assessment, because it was "payable out of profits and gains," is now overruled. Gresham Life Assurance Society v. Styles [1892] A. C. 309, supra. A banking company, which had its head office in Australia, and carried on a banking business at a branch office in Lon- don, paid interest on its interminable stock to certain holders of such stock in the United Kingdom. In ascertaining the amount of the profits of the branch in the United Kingdom, assessable under Sched. (D.), the bank claimed a deduction in respect of the interest so paid : — Held, per Channels, J., in the King's Bench Division, that the deduction was not allowable. Queensland National Bank v. Thrift (1909), unreported. 602 ANNOTATED STATUTE AND DIGEST. A foreign company had a central office at Hamburg and a branch house in London, the latter being carried on as a sep- arate business, with a separate capital. To enable the Lon- don house to buy goods more advantageously for cash, instead of on credit at a higher price, the London house obtained short loans from the central office and from bankers abroad, and paid interest thereon. It was admitted that the interest on the ad- vances from the central office was not a deduction in ascertain- ing the profits of the London branch: — Held, that the interest on the short loans from the bankers was also not an admissible deduction. Anglo-Continental Guano Works v. Bell (1894), 70 L. T. K S. 670, 58 J. P. 383, 3 Tax Cas. 239. This case was distinguished in Farmer v. Scottish North American Trust, Limited [1912] A. 0. 118, 81 L. J. P. C. K S. 81, 105 L. T. W. S. 833, 5 Tax Cas. 693, set out infra. See also City of London -Contract Corporation v. Styles (1887), 4 Times L. R. 51, 2 Tax Cas. 239, referred to ante. A financial and investment company carrying on an invest- ment business, was empowered by its memorandum of asso- ciation to borrow and raise money by way of loan, overdraft, etc. The company purchased, in the course of its business, bonds, stocks, and other securities in New York. As the value of these purchases exceeded the amount of the company's avail- able cash, the company pledged to their bankers in New York, certain of their securities lying there, and thereupon the bank- ers allowed the company to overdraw their banking account. The overdraft fluctuated from time to time as securities vverc bought and sold by the company, and the bankers charged f.iie company periodic interest thereon at current rates from day to day. In 1906, the company opened a loan account with their bankers, in addition to the ordinary overdraft, on which the bankers granted a loan not exceeding $200,000, for a period of six months at 6 per cent. When this loan fell due, it was re- newed for a further six months, after which the loan account was terminated and the balance transferred to current account. The bankers collected all the dividends and coupons upon the se- curities in their hands, paying the interest due to themselves out of the sums so collected, the difference or net amount being credited to the company. In the event of the dividends and ANNOTATED STATUTE AND DIGEST. t)03 coupons collected not equalling the amount of the interest pay- able in any month, the interest was debited to the overdraft on the current account. The company, in ascertaining the amount of their profits for assessment, claimed to deduct the amount of interest paid to their bankers, but on appeal to the general commissioners the deduction was disallowed, on the ground that the interest was interest on capital: — Held, by the House of Lords, that the deduction in question was admissible, as the money borrowed could not be regarded as "capital" within the meaning of the Income Tax Acts ; and the interest paid was expenditure by means of which the company procured the use of the thing by which they made a profit, and, like any similar outgoing, should be deducted from the receipts to ascertain the 1;axable profits and gains earned by the company (Anglo-Con- tinental Guano Works v. Bell (1884), 70 L. T. N. S. 670, 3 Tax Cas. 239, distinguished). Per Lord Atkinsotst [1912], A. C. p. 125 : "The second proposition established in the last- mentioned case (Gresham Life Assurance Society v. Styles, [1892] A. C. 309) is that in these Acts the words 'profits and gains' are, where the context does not otherwise require, to be •construed in their ordinary signification. I can see no reason for suggesting that this last-mentioned principle should not ap- ply to the word 'capital' when used in these statutes, and that it too, where the context does not otherwise require, should be construed in its ordinary sense and meaning." (P. 127) : "There is nothing to show that that word capital should bear a different meaning in the Income Tax Acts when applied to the proceedings of joint stock companies. The interest is, in truth, money paid for the use or hire of an instrument of their trade, as much as is the rent paid for their office or the hire paid for a typewriting machi.ie." Farmer v. Scottish North American Trust, Limited, [1912] A. C. 118, [1912] S. C. (H. L.) 26, 81 L. J. P. C. N". S. 81, 105 L. T. IST. S. 833, 49 Scot. L. R 114, 5 Tax. Cas. 693. third, all national, state, county, school, and municipal taxes paid within the year, not including those assessed against local benefits; Provided, that in estimating said income, all national, state, or local taxes assessed upon the property from which the income is derived shall ibe first deducted. — Act of Aug. 5, 1861, § 49. All other national, state, and local taxes, lawfully assessed upon the 604 ANNOTATED STATUTE AND DIGEST. property or other sources of income of any person as aforesaid, from which said annual gains, profits, or income of such person is or should be derived. — Act of July 1, 1862, § 9. All national, state, and municipal taxes, other than the national income- tax, lawfully assessed within the year upon the property or sources of income of any person, as aforesaid, from which said annual gains, profits,. or income is or should be derived. — Act of June 30, 1864, § 117. All national, state, county, and municipal taxes paid within the year. Act of March 3, 1865, § 1; Act of March 2, 1867, § 13. All national, state, county, and municipal taxes paid by him within the- year.— Act of July 14, 1870, § 9. And all national. State, county, school, and municipal taxes, not including those assessed against local benefits, paid within the year. — ^Act of August 28, 1894, § 28. Under a former act ruled that assessments made by munici- pal corporations for the laying out or the grading of streets, or the construction of walks, sewers, etc., may be deducted from^ income where they are laid upon all taxpayers within the cor- porations, but if they are laid only upon the owners of the property supposed to be increased in value by the improvement,, no deduction can be allowed. Ruling, 1 Int. Eev. Eec. 150. fourth, losses actually sustained during the year, incurred in trade or arising from fires, storms, or shipwreck, Losses actually sustained during the year arising from fires, shipwreck,, or incurred in trade. — Act of March 2, 1867, § 13. All his losses actually sustained during the year arising from fires, floods,, shipwreck, or incurred in trade. — Act of July 14, 1870, § 9. Also losses actually sustained during the year, incurred in trade or aris- ing from fires, storms, or shipwreck. — Act of August 28, 1894, § 28. A brewery company owned an inn, which was carried on by a manager as part of their business. In estimating the balance of profits for income tax purposes, they claimed to be entitled to deduct the amount of damages and costs recovered against them by a customer, who had been injured by the fall of a chimney while he was sleeping in the inn : — Held, that they were not entitled to do so. The loss was not connected with or aris- ing out of the trade, and was not money wholly and exclusively laid out for the purposes of the trade. Per Lord Lorebuen, L. C. [1906] A. 0. p. 452: "I think only such losses can be de- ducted as are connected with, in the sense that they are really incidental to, the trade itself. They cannot be deducted if they ANNOTATED STATUTE AND DIGEST. 605 are mainly incidental to some other vocation, or fall on the "trader in some character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accidents in travelling might be deducted. On the other hand, if ,a man kept a grocer's shop, for keeping which a house is nec- essary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer •ought not to be deducted. Per Lord Davey (p. 453) ; "The word 'loss' in r. 3 means what is usually known as a loss in trad- ing or in speculation. It contemplates a case in which the result of the trading or adventure is a loss, wholly or partially, of the •capital employed in it." Strong & Co. Limited v. Woodifield, [1906] A. 0. 448, 75 L. J. K. B. N. S. 864, 95 L. T. K S. 241, 22 Times L. K. t54, 5 Tax Cas. 215. Serrible, by the Lord Chancellor, losses sustained by a railroad •company in compensating passengers for accidents in traveling .might be deducted. Ibid. A fire insurance company is not allowed to deduct a sum •estimated to be the probable future loss on policies outstanding .at the time of assessment upon which the premiums are fully paid. Such losses are deductible when they occur. Imperial Fire Ins. Co. v. Wilson, 35 L. T. IST. S. 271 [1876], Exch. D. If a person is engaged in a partnership business either as a silent partner or otherwise, his gains and losses must be con- sidered as incident to the business. Euling, 4 Int. Eev. Eec. 46. The general rule is that losses incurred in the prosecution of one branch of business cannot be deducted from gain in another, since an absolute loss incurred in the prosecution of a single business is indisputably a loss of capital; but a broker may speculate in stocks, a dry-goods merchant in cotton, a hardware man in iron, etc., etc., and offset the gain and loss of the legitimate business and speculation. Euling, 1 Int. Eev. Eec. 154. Losses in speculation cannot be deducted from salaries nor from gains in mechandise. Where losses are sustained in 606 ANNOTATED STATUTE AND DIGEST. one speculation and gains made in another speculation, sucb losses may be deducted from such gains; and losses in one branch of merchandise may be deducted from gains in any other branch of merchandise. Ruling, 1 Int. Kev. Eec. 155. A brewery company, which carried on the business of bankers and money lenders as an adjunct to their business as brewers, made loans to the customers of the brewery on the security of publichouses, and if the security did not realize the amount of the loan, the company wrote off the loss as a bad debt : — Heldj. that the company were entitled to deduct the amount of such losses or bad debts, that they must be taken to have carried on one business only, and that the money advanced to the customers was used in the business and not capital invested (Watney v. Musgrave, distinguished). Eeid's Brewery Co. v. Male, [1891] 2 Q. B. 1, 60 L. J. Q: B. K S. 340, 64 L. T. K S. 294, 39 Week. Eep. 459. The appellants were a limited company, formed to purchase: and trade with a steamship, and, in the event of her loss or sale, to acquire some other steamship "but so that the company shall not at any one time own more than one ship." The company purchased the M. and traded with her from October 14, 1901 to April 1, 1906, when she was lost at sea. With the insurance moneys the company purchased the V. and she commenced her voyages on October 17, 1906, and so continued over the period of assessment to income tax : Held, that the company was carry- ing on one business throughout, and that a new business was not started when the M. was lost and the V. was acquired. Merchiston Steamship Co. v. Turner, [1910] 2 K. B. 923, 102 L. T. ]Sr. S. 363— Bray, J. It was held that the loss on a farm assessed under Sched. (B.), and worked in connection with the business of a seed merchant assessed under Sched. (D.), could not be deducted from the profits of the seed business. Brown v. Watt, 23 Scot. L. E. 403, 50 J. P. 583, 2 Tax Cas. 143 [1886]. A company, to extend its business, opened a manufactory and fitted machinery. That part of the business did not answer, and the company closed the manufactory, and removed a portion of the machinery elsewhere. ANNOTATED STATUTE AND DIGEST. 607 Subsequently the company reopened the manufactory on a smaller scale. The company considered that a portion of the original cost of constructing the factory and fitting the ma- chinery, was lost to them, and claimed a deduction in respect thereof: — Held, that the deduction "was inadmissible, the loss being a loss of capital. Smith v. Westinghouse Brake Co. [1888], 2 Tax Cas. 357. The loss of an old mill by its abandonment upon the con- struction of a new one, is not deductible when the old mill was in good condition. Hawaiian C. & S. Co. v. Assessors, 14 Haw. 601, 687. A steamship company owned the whole of one ship, and fifty-nine sixty-fourths of another: — Held, by Ridley^ J., fol- lowing Atty.-Gen. v. Borrodaile, that the latter ship was an adventure carried on by the company jointly with other persons, and that therefore the company must be assessed by two assess- ments, one in respect of each ship. Tarrell v. Sunderland Steamship Co. [1903], 88 L. T. N. S. 741, 4 Tax Cas. 605. Ruled, that an actual loss realized by the sale of stock will be allowed as an offset to gains derived from the sale of similar stocks, or interest received on such stocks, but unless the sale of stock has been made, there is no ascertained, but merely a speculative, loss which cannot be deducted from any income, 3 Int. Rev. Eec. 109 ; When stocks are sold at less than their cost, the difference between their actual cost and the price at which they are sold should be allowed as a deduction in estimat- ing the taxable income of the year in which the sale is made, 5 Int. Rev. Rec. 115 ; If a taxpayer can show the stock of an insolvent manufacturing company to be utterly worthless, he should be allowed to deduct the purchase-money originally given by him therefor from the gains accruing in respect of the other manufacturing operations in which he may be engaged, or in respect of the dividends of other manufacturing companies, for the year when such insolvency appeared, 2 Int. Rev. Rec. 4; Where stocks, &c., are bought as a permanent investment and sold again merely to change the investment, a loss sus- tained in the sale may be deducted from the dividends from such stock; but where the purchase i'^^jgade for the purpose of selling again on speculation, the loss sustained by the sale cannot be deducted from dividends, but may be deducted from 608 ANNOTATED STATUTE AND DIGEST. gains derived from the purchase and sale of stock in the same year, 1 Int. Eev. Eec. 196. • A loss by a bad investment previously incurred, but not dis- covered within the year, cannot be deducted when the sole de- terioration within the year was caused by the exhaustion of the property. Ee Assessment Pacific Guano & Fertilizer Co. IS Haw. 552. No deduction from income can be allowed for a voluntary conveyance without valuable or adequate consideration. Eul- ing, 3 Int. Eev. Eec. 172. Losses of capital such as loss by robbery, losses as surety &e., &c., cannot be deducted from income. Euling, 5 Int. Eev. Eec. 123. The amount paid for the good-will of a business is capital invested and not a loss to be deducted from income. Euling, 5 Int. Eev. Eec. 188. No account is to be made in the estimation of income of a merely nominal appreciation or depreciation in the value of property. Therefore the mere depreciation in the value of a lease cannot be deducted from income. Euling, 2 Int. Eev. Eec. 92. If a manufacturer has invariably estimated his stock on hand at the cost value each year since the act has been in force, he should continue so to do, and should not make return by one method after having adopted the other. Euling, 3 Int. Eev. Eec. 109. When the income of a former year is lost, it cannot be de- ducted from the income of the year of tax unless used and lost in the year of tax. This rule of deduction is not extended to capital not used in business. Euling, 4 Int. Eev. Eec. 46. Capital invested in any stockholding company is not recog- nized as capital used in business, and there is no deduction for the loss of such capital. Euling, 4 Int. Eev. Eec. 46. Where repairs made on rented property by a tenant are al- lowed in lieu of rent, the amount actually expended for such repairs should be treated as rent paid and may be deducted from any income of the tenant. Euling, 2 Int. Eev, Eec. 61. Penalties imposed for violation of the excise law are legiti- mate offsets to the profits of the business in connection with ANNOTATED STATUTE AND DIGEST. 609 which they were incurred, but they cannot be allowed as de- ductions from income actually realized from other pursuits. Ruling, 4 Int. Eev. Eec. 46. By section 23 of the Customs and Inland Revenue Act, 1890. "Where any person shall sustain a loss in any trade, manu- facture, or concern, or profession, employment, or vocation — it shall be lawful for him * * * to apply to the commis- sioners * * * for an adjustment of his liability by ref- erence to the loss and to the aggregate amount of his in- come * * * — : Held, that this does not apply to a particular loss in ascertaining the profits of a particular business which has occurred in the course of the business, but to a general loss resulting from the business — that is a loss as the total result of the business operations. The commissioners under section 23 ought to consider the aggregate income of the person; then whether he has sustained a loss in any trade, manufacture, etc. ; and if so, what is a proper adjustment of his liability to pay income tax by reference to that loss. Eex V. Income Tax Commissioners, 91 L. T. N. S. 94 — D. and not compensated for by insurance or otherwise; And not compensated for by insurance or otherwise. — Act of Aug. 28, 1894. The property which is used in business, and furnishing the profits, when destroyed by fire, may be restored at the expense of those profits to the condition when destroyed. If insured the difference between the insurance received and the amount expended in restoration will be allowed. Unless the property be restored, no deduction on account of the loss of such prop- erty can be made. Ruling, 2 Int. Rev. Rec. 36. fifth, debts due to the taxpayer actually ascertained to be worthless and charged off within the year; And debts ascertained to be worthless. — Act of March 2, 1867, § 13; Act of July 14, 1870, § 9; Act of August 28, 1894, § 28. Under the Act of July 14, 1870, the amount of a promissory note taken in 1871 on the sale in that year of a patent right but not due until 1872, and paid then, is not taxable as income Foster Income Tax. — 39. 610 ANK^OTATED STATUTE AND DIGEST. Bed quaere, if it had been due in 1871 and the defendant had allowed it to remain unpaid ? U. S. v. Schillinger, 14 Blatchf. 71, Fed. Cas. No. 16,228 (1876), U. S. Cir. Ct. S. Dist. K Y. Johnson, J. Senible, that the taxpayer should not be allowed to leave his debts uncollected for the purpose of evading the tax. U. S. v. Frost, 9 Int. Rev. Rec. 41, Fed. Cas. '^o. 15,172 (1869), U. S. Dist. Ct. l^r. Dist. 111. DEtrMMOND, J. In Hawaii the loss of a bad debt advanced to a corporation by the owner of all its stock, when written off during the year, is not deductible if it was previously incurred. He Assessment Hackfield Co. L'd. 16 Hawaii, 559. sixth, a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business. See Corporation Income Tax, infra, G. A corporation purchased gasworks in a defective structural condition: — Held, not to be entitled to deduct a sum appro- priated yearly out of the profits to a depreciation fund to be expended in future years in the restoration of the plant and apparatus. Clayton v. Newcastle-under-Lyme Corporation [1888], 2 Tax Cas. 416. Income tax commissioners, in estimating the deduction to be allowed from the profits of a shipowner's business under section 12 of the Customs and Inland Revenue Act, 1878, in respect of the diminished value of the ships by reason of wear and tear, must consider what is a just and reasonable allowance to make for the depreciation in their value during the particular years of assessment, and are not entitled to take into account allow- ances in respect of depreciation which have been made in previ- ous years. Hall & Co. v. Rickman, 75 L. J. K B. N. S. 178, 1 K B. 311, 94 L. T. JST. S. 224, 54 Week. Rep. 380, 22 Times L. R. 131— Walton, J. [1906]. A new company having purchased as a going concern the busi- ness of an old company was assessed for income tax on the average profits of the old company for the three years preceding the purchase. The amount of deductions for wear and tear to which the old company was entitled during these three years had not been given effect to in full, owing to the fact that they ex- ceeded the amount of the taxable income of the old company during that time: Held, that the new company was entitled ANNOTATED STATUTE AND DIGEST. 611 to deduct from its taxable income the balance of the deductions allowable to the old company. Scottish Shire Line v. Inland Eevenue [1912] S. C. 1108— Ct. of Sess. In ascertaining the profits from the business of coal and iron masters, it was held that a deduction of a percentage claimed for (1) sinking pits, and (2) depreciation of buildings and machinery, was not allowable. Addie & Sons v. Solicitor of Inland Eevenue [1875] 2 K 431, 12 Scot. L. E. 274, 1 Tax Gas. 1. The appellants, a firm of brewers, purchased the leases of pub- lic houses which they let to tenants, who convenanted to pur- chase from the brewers all the beer sold therein. In some cases the appellants paid premiums for such leases. In ascei^ taining their profits, they claimed to deduct for each year a portion of the amount paid as premiums, as representing a part of their capital exhausted during the year in earning profits: — Held, that the deduction was not allowable. Watney v. Musgrave [1880] L. E. 5 Exch. Div. 241, 49 L. J. Exch. N. S. 493, 42 L. T. N. S. 690, 28 Week. Eep. 491, 1 Tax Gas. 272. In ascertaining the profits of the business of licensed victual- lers, who had purchased the lease, which had 20^ years to run, of their business premises, for £34,000, a deduction of £1,725, viz., 1-20^ part of £34,000, was claimed for depreciation in value of the lease for the year : — Held, that this deduction could not be made, and that the deduction must be limited to the exist- ing annual value of the premises, whatever the premium orig- inally paid may have been. Gillatt and Watts v. Colquhoun [1884] 33 Week. Eep. 258, 2 Tax Gas. 76. 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. See Corporation Income Tax, infra, G, and cases there cited. Where land is acquired for commercial purposes of which one stratum only is of any value, and that stratum is in the process of exhaustion, such land is "capital" within the meaning of the Eirst case of Schedule D of the Income Tax Act 1842 and no 612 ANBTOTATED STATUTE AND DIGEST. deduction, can be allowed in respect of such exhaustion, which is a diminution of capital for which deduction is prohibited by section 159. Alianza Co. v. Bell, 75 L. J. K B. N. S. 44, [1906] A. C. 18, 93 L. T. N. S. T05, 54 Week. Rep. 413, 5 Tax Cas. 172, 22 Times L. R. 94—11. L. (E.) But no deduction shall be made for any amount of expense of restor- ing property or making good the exhaustion thereof for which an allowance is or has been made: Provided, That no deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate; No deduction shall be made for any amount paid out for new build- ings, permanent improvements, or betterments, made to increase the value of any property or estate. — ^Act of June 30, 1864, § 117; Act of March 3, 1865, § 1; Act of March 2, 1867, § 13; Act of July 14, 1870, § 9. Provided, that no deduction shall be made for any amount paid out for new buildings, permanent improvements, or betterments, made to in- crease the value of any property or estate. — ^Act of August 28, 1894, § 28. Expenses incurred for usual and ordinary repairs on farms may be deducted from income, but the amount deducted must not exceed the average paid out for such purposes for the pre- ceding five years. Amounts expended for permanent improve- ments or betterments, made to increase the value of any prop- erty or estate, cannot be deducted. Ruling, 1 Int. Rev. Rec. 140. Repairs must be distinguished from permanent improve- ments. The replacing of worn-out tools or machinery should be considered as repairs in so far as the new articles equal the es- timated value of the old, and as permanent improvements in the amount by which the value of the new articles exceed that of the old. Ruling, 2 Int. Rev. Rec. 61. Amounts expended by the purchaser of a building in repair- ing injuries which occurred thereto prior to his purchase, are, so far as he is concerned, betterments made to increase the value of the property, and should not be allowed as deductions from income. Ruling, 6 Int Rev. Rec. 18. Permanent improvements and betterments as used in Sec- ANNOTATED STATUTE AND DIGEST. 613 tion 117 are very nearly synonymous, and refer to that class of improvements which permanently increase the value of the property upon which they are made, while repairs are under- stood to be those improvements made or work done upon the property which serve merely to prevent its becoming useless or depreciating in value. Amounts expended in improvements or betterments are not deducible from income, but repairs are. Euling, 5 Int. Eev. Eec. 130. Under the Hawaiian statute, no deduction can be made for the cost of a new building ; nor for that of the replacement of a steel by a wooden bridge, beyond the estimated cost of a new wooden bridge. Ee, Income Tax Appeal Cases, 18 Haw. 596. seventh, the amount received as dividends upon the stock or from the net earnings of any corporation, joint-stock company, associa- tion, or insurance company which is taxable upon its net income as hereinafter provided; See subsection G, infra. All gains, profits, or income * * • derived from interest or dividends on stock, capital, or deposits in any bank, trust company, or savings insti- tution, insurance, gas, bridge, express, telegraph, steamboat, ferry-boat, or railroad company, or corporation, or on any bonds or other evidences of indebtedness of any railroad company or other corporation, which shall have been assessed and paid by said banks, trust companies, savings in- stitutions, insurance, gas, bridge, telegraph, steamboat, ferry-boat, express, or railroad companies, as aforesaid, or derived from advertisements, or any articles manufactured, upon which specific, stamp, or ad valorem duties shall have been directly assessed or paid, shall also be deducted. — Act of July 1, 1862, § 9. And he it further enacted, That any railroad, canal, turnpike, canal navigation, or slack-water company indebted for any money for which bonds or other evidences of indebtedness have been issued, payable in one or more years after date, upon which interest is stipulated to be paid, or coupons representing the interest, or any such company that may have declared any dividend in scrip, or money due or payable to its stockholders, as part of the earnings, profits, income, or gains of such company, and all profits of such company carried to the account of any fund, or used for construction, shall be subject to and pay a duty of five per centum on the amount of all such interest, or coupons, dividends, or profits, when- ever the same shall be payable; and said companies are hereby authorized to deduct and withhold from all payments, on account of any interest, or coupons and dividends due and payable as aforesaid, the duty of five per centum; and the payment of the amount of said duty so deducted from the interest, or coupons, or dividends, and certified by the president or treasurer of said company, shall discharge said company from that amount of the dividend, or interest, or coupon, on the bonds or other evidences of their indebtedness so held by any person or party whatever, except where said companies may have contracted otherwise." — Act of June 30, 1864, 614 ANNOTATED STATUTE AND DIGEST. And there shall also be deducted the income derived from dividends on shares In the capital stock of any bank, trust company, savings in- stitution, insurance, railroad, canal, turnpike, canal navigation, or slack- water company, and the interest on any bonds or other evidences of in- debtedness of any such corporation or company, which shall have been assessed and the tax paid, as hereinafter provided. — Act of June 30, 1864, §U7. No deduction shall be made for dividends or interest received from any association, corporation, or company. — Joint Resolution of July 4, 18(J4. In ascertaining the income of any person liable to an income tax, the amount of income received from institutions whose officers, as required by law, withhold a per centum of the dividends made by such institutions and pay the same to the Commissioner of Internal Revenue, or other officer authorized to receive the same, shall be included; and the amount so withheld shall be deducted from the tax virhich otherwise would be as- sessed upon such person. — Act of March 3, 1865, § 1. Except the amount of income received from institutions or corporations whose officers as required by law, withhold a per centum of the dividends made by such institutions and pay the same to the officer authorized to re- ceive the same.— Act of March 2, 1867, § 13. [The return shall not include] the amount received from any corporation whose officers, as authorized by law, withhold and pay as taxes a per centum of the dividends made and of the interest or coupons paid by such corpora- tion.— Act of July 14, 1870, § 11. Provided also, that in computing the income of any person, corporation, company, or association there shall not be included the amount received from any corporation, company, or association as dividends upon the stock of such corporation, company, or association if the tax of two per centum has been paid upon its net profits by said corporation, company, or as- sociation as required by this act. — ^Act of August 28, 1894, § 28. Under the Act of June 30, 1864, an insurance company hold- ing shares in a bank was not liable to a tax upon a dividend declared by the bank upon which the bank has already paid the tax. Merchants Ins. Co. v. McCartney, 12 Int. Eev. Eec. 122, Fed. Cas. No. 9,443 (1870), U. S. Cir. Ct. Dist. Mass. Low- ell, J. Although sections 120 and 122 of the Act of March 3d, 1865, clearly contemplate that the Government shall receive five per cent of the whole amount paid out by any of the companies enumerated on account of dividends or interest upon bonds, it has been contended by some companies that as they were merely authorized and not required to withhold the tax from ANNOTATED STATUTE AND DIGEST. 615 sucli dividends or interest, it was competent for them to pay the tax, and charge the same to their expense account, and make the payment to the stockholder or bondholder free of tax. The result of this construction is to give the Government five dollars for every one hundred dollars paid to the stockholder, instead of five dollars for every ninety-five dollars thus paid. When the company adopts that construction, the deduction provided for in the 116th and 117th sections should not be allowed. Euling, 1 Int. Eev. Eec. 116. Whenever a stockholder makes his income return under sec- tion 116, he should return as his income from dividends, not only the $95 from $100 paid to him by the company, but also the $5 paid for him to the Government. For example : A's dividend or share of the profits in a railroad company is $4,000. Of that sum the company withholds and pays into the Government five per cent, that is $200 ; the remaining $3,800 is paid to A. In addition to income from dividends, he has an income of $800 from other sources. From this he is entitled to deduct $600, leaving $200 as taxable income from other sources. To this add the $3,800 received directly from the company, and he has a taxable income of $4,000. Five per cent upon that sum is $200. From this deduct the $200 withheld by the com- pany and nothing remains. The Government has received no tax whatever from the $200 taxable income from other sources. Euling, 2 Int. Eev. Eec. 100. eighth, the amount of income, the tax upon which has been paid or withheld for payment at the source of the income, under the pro- visions of this section, provided that whenever the tax upon the income of a person is required to be withheld and paid at the source as hereinafter required, if such annual income does not exceed the sum of $3,000 or is not fixed or certain, or is indefinite, or irregular as to amount or time of accrual, the same shall not be deducted in the personal return of such person. "All persons, firms, copartnerships, companies, corporations, joint-stock, companies, or associations, and insurance companies, in whatever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, agents, receivers, conservators, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or payment 616 ANNOTATED STATUTE AND DIGEST. of interest, rent, salaries, wages, premiums, annuities, compensations, re- muneration, emoluments, or other fixed or terminable annual gains, prof- its, and income of another person, exceeding three thousand dollars for any taxable year, other than dividends on capital stock, or from the net earnings of corporations and joint-stock companies or associations sub- ject to like tax who are required to make and render a return in behalf of another, as provided herein, to the collector of his, her, or its district, are hereby authorized and required to deduct and withhold from such annual gains, profits, and income such sum as will be sufificient to pay the normal tax imposed thereon by this section, and shall pay to the officer of the United States Government authorized to receive the same; and they are each hereby made personally liable for such tax. » ♦ » Provided further, That the amount of the normal tax hereinbefore im- posed shall be deducted and withheld from fixed and determinable annual gains, profits, and income derived from interest upon bonds and mortgages, or deeds of trusts or other similar obligations of corporations, joint-stock companies or associations, and insurance companies, whether payable an- nually or at shorter or longer periods, although such interest does not amount to three thousand dollars, subject to the provisions of this sec- tion requiring the tax to be withheld at the source and deducted from annual income and paid to the Government; and likewise the amount of such tax shall be deducted and withheld from coupons, checks, or bills of exchange for or in payment of interest upon bonds of foreign countries and upon foreign mortgages or like obligations (not payable in the United States ) , and also from coupons, checks, or bills of exchange for or in pay- ment of any dividends upon the stock or interest upon the obligations of foreign corporations, associations, and insurance companies engaged in business in foreign countries; and the tax in each case shall be withheld and deducted for and in behalf of any person subject to the tax herein- before imposed, although such interest, dividends, or other compensation does not exceed three thousand dollars, by any banker or person who shall sell or otherwise realize coupons, checks, or bills of exchange drawn or made in payment of any such interest or dividends (not payable in the United States ) , and any person who shall obtain payment ( not in the United States), in behalf of another of such dividends and interest by means of coupons, checks, or bills of exchange, and also any dealer in such coupons who shall purchase the same for any such dividends or in- terest (not payable in the United States), otherwise than from a banker or another dealer in such coupons.'' Subsection C, infra. In cases where the salary or other compensation paid to any person in the employment or service of the United States, shall not exceed the rate of six hundred dollars per annum, or shall be by fees, or uncertain or irregular in the amount or in the time during which the same shall harve accrued or been earned, such salary or other compensation shall be included in estimating the annual gains, profits, or income of the person to whom the same shall have been paid in such manner as the Commissioner of Internal Revenue, under the direction of the Secretary ANNOTATED STATUTE AND DIGEST. 617 of the Treasury, may prescribe. — ^Aot of June 30, 1864, § 117; Act of March 3, 1865, § 1. In cases where the salary or other compensation paid to any person in the employment or service of the United States shall not exceed the rate of one thousand dollars per annum, or shall be by fees, or uncertain or irregular in the amount or in the time during which the same shall have accrued or been earned, such salary or other compensation shall be in- cluded in estimating the annual gains, profits, or income of tne person to whom the same shall have been paid. And provided further, that in cases where the salary or other compen- sation paid to any person in the employment or service of the United States shall not exceed the rate of four thousand dollars per annum, or shall be by fees, or uncertain or irregular in the amount or in the time during which the same shall have accrued or been earned, such salary or other compensation shall be included in estimating the annual gains, profits, or income of the person to whom the same shall have been paid. — Act of August 28, 1894, § 28. The net income from property ovirned and business carried on in the United States by persons residing elsewhere shall be com- puted upon the basis prescribed in this paragraph and that part of paragraph G of this section relating to the computation of the net income of corporations, joint-stock and insurance com- panies, organized, created, or existing under the laws of foreign countries, in so far as applicable. In the case of a corporation, joint stock company or association, or insurance company, organized, authorized or existing under the laws of any foreign country, such net income shall be ascertained by deducting from the gross amount of its income accrued within the year from busi- ness transacted and capital invested within the United States, (first) all the ordinary and necessary expenses actually paid within the year out of earnings in the maintenance and operation of its business and property within the United States, including rentals or other payments required to be made as a condition to the continued use or possession of property (second) all losses actually sustained within the year in business con- ducted by it within the United States 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 reasonable allowance for depletion of ores and all other natural deposits, not to exceed five per centum of the gross value at the mine of the output for the year for which the computation is made; * * * (third) the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding the proportion of one-half of the sum of its interest-bearing indebtedness and its paid-up capital stock outstand- ing at the close of the year, or if no capital stock, the capital employed in the business at the close of the year which the gross amount of its in- come for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from 618 ANNOTATED STATUTE AND DIGEST. all sources within and without the United States: Provided, that in the case of bonds or other indebtedness which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed; (fourth) all sums paid by it within the year for taxes imposed under the authority oE the United States or of any state or territory thereof or the District of •Columbia. Infra. G. That in computing net income under this section there shall be excluded the interest upon the obligations of a state or any politi- cal subdivision thereof, Provided further, That there shall not be taxed under this section any income derived from any public utility or from the exercise of any essential governmental function accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State, Territory, or the District of Columbia, nor any income accruing to the government of the Philippine Islands or Porto Rico, or of any political subdivision of the Philippine Islands or Porto Rico: Provided, That whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, has, prior to the passage of this Act, entered in good faith into a contract with any person or corporation, the object and pur- pose of which is to acquire, construct, operate or maintain a public utility, no tax shall be levied under the provisions of this Act upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, or the District of Columbia, or a political subdivision of a State or Territory; but this provision is not intended to confer upon such person or corporation any financial gain or exemption or to relieve such person or corporation from the payment of a tax as provided for in this section upon the part or portion of the said income to which such person or corporation shall be entitled under such contract. — Subsection G infra. "Another question is directly presented by the record as to the' validity of the tax levied by the act upon the income derived from municipal bonds. The averment in the bill is that the de- fendant company owns two millions of the municipal bonds of the city of New York, from which it derives an annual income of $60,000, and that the directors of the company intend to return and pay the taxes on the income so derived. The Consti- tution contemplates the independent exercise by the !N"ation and the State, severally, of their constitutional powers. As the States cannot tax the powers, the operations, or the property of the United States, nor the means which they employ to carry their powers into execution, so it has been held that the United ANNOTATED STATUTE AND DIGEST. 619 States have no power under the Constitution to tax either the instrumentalities, or the property of a State. A municipal corporation is the representative of the State and one of the in- strumentalities of the state government. It was long ago de- termined that the property and revenues of municipal corpo- rations are not subjects of Federal taxation. Collector v. Day, 11 Wall. 113, 124, 20 L. ed. 122, 125 ; United States v. Kail- road Company, 17 Wall. 322, 332, 21 L. ed. 597, 601. In Col- lector V. Day, it was adjudged that Congress had no power, even by an act taxing all incomes, to levy a tax upon the salaries of judicial officers of a State, for reasons similar to those on which it had been held in Dobbins v. Commissioners, 16 Pet. 435, 10 L. ed. 1022, that a State could not tax the salaries of officers of the United States. Mr. Justice Nelson, in delivering judg- ment, said : 'The general government, and the States, although both exist within the same territorial limits, are separate and distinct sovereignties, acting separately and independently of each other, within their respective spheres. The former in its appropriate sphere is supreme ; but the States within the limits of their powers not granted, or, in the language of the tenth amendment, 'reserved,' are as independent of the general govern- ment as that government within its sphere is independent of the States.' This is quoted in Van Brocklin v. Tennessee, 117 U. S. 151, 178, 29 L. ed. 845, 854, 6 Sup. Ct. Eep. 670, and the opinion continues: 'Applying the same principles, this court, in United States v. Eailroad Company, 17 Wall. 322, 21 L. ed. 597, held that a municipal corporation within a State could not be taxed by the United States on the dividends or interest of stock or bonds held by it in a railroad or canal company, be- cause the municipal corporation was a representative of the State, created by the State to exercise a limited portion of its powers of government, and therefore its revenue, like those of the State itself, were not taxable by the United States. The revenues thus adjudged to be exempt from Federal taxation were not themselves appropriated to any specific public use, nor derived from property held by the State or by the munici- pal corporation for any specific public use, but were part of the general income of that corporation, held for the public use in no other sense than all property and income, belonging to it in its mtmicipal character, must be so held. The reasons for 620 ANNOTATED STATUTE AND DIGEST. exempting all the property and income of a State, or of a mu- nicipal corporation, which is a political division of the State, from Federal taxation, equally require the exemption of all the property and income of the national government from State taxation.' In Mercantile Bank v. New York, 121 U. S. 138, 162, 30 L. ed. 895, 904, 7 Sup. Ct. Eep. 826, this court said: 'Bonds issued by the State of New York, or under its authority by its public municipal bodies, are means for carrying on the work of the government, and are not taxable even by the United States, and it is not a part of the policy of the government which issues them to subject them to taxation for its own pur- poses.' The question in Bonaparte v. Appeal Tax Court, 104 U. S. 592, 26 L. ed. 845, was whether the registered public debt of one State, exempt from taxation by that State or actually taxed there, was taxable by another State when owned by a citizen of the latter, and it was held that there was no provision of the Constitution of the United States which prohibited such tax- ation. The States had not covenanted that this could not be done, whereas, under the fundamental law, as to the power to borrow money, neither the United States on the one hand, nor the States on the other, can interfere with that power as pos- sessed by each and an essential element of the sovereignty of each. The law under consideration provides 'that nothing here- in contained shall apply to States, counties or municipalities.' It is contended that although the property or revenues of the States or their instrumentalities cannot be taxed, nevertheless the income derived from state, county, and municipal securities can be taxed. But we think the same want of power to tax the property or revenues of the States or their instrumentalities exists in relation to a tax on the income from their securities, and for the same reason, and that reason is given by Chief Justice Marshall in Weston v. Charleston, 2 Pet. 449, 468, 7 L. ed. 481, 488, where he said: 'The right to tax the contract to any extent, when made, must operate upon the power to borrow before it is exercised, and have a sensible influence on the con- tract. The extent of this influence, depends on the will of a dis- tinct government. To any extent, however inconsiderable, it is a burden on the operations of government. It may be carried to an extent which shall arrest them entirely. * * * The tax on government stock is thought by this court to be a tax on the ANNOTATED STATUTE AND DIGEST. 621 contract, a tax on the power to borrow money on the credit of the United States, and consequently to be repugnant to the Constitu- tion." Applying this language to these municipal securities, it is obvious that taxation on the interest therefrom would operate on the power to borrow before it is exercised, and would have a sensible in- fluence on the contract, and that the tax in question is a tax on the power of the State and their instrumentalities to borrow money, and consequently repugnant to the Constitution." Pollock y. Farmers' Loan & Trust Co. 157 U. S. 429, 583-586, 39 (L. ed.) 759, 820, 821, 15 Sup. Ct. Eep. 673, per Puller, C. J. See also the opinions of Governor Hughes, Governor Fort, and Senator Eoot, quoted supra, § 27. This exempts interest upon the obligations of counties, town- ships, wards, precincts and special assessment districts, created un- der the laws of the States for the purpose of the improvement of streets and public highways, the provision of sewerage, gas and light, and the reclamation, drainage, or irrigation of considerable bodies of land within the same so long as they are not created for a pri- vate purpose. Opinion of Attorney General McEeynolds January 30th, 1914, cited T. D. 1946, overruling as to irrigation and reclamation dis- tricts, T. D. 1910. and upon the obligations of the United States or its possessions; The House bill here contained the phrase "the principal and in- terest of which are now exempt by law from Federal taxation." This was stricken out in the Senate. Provided, That upon such portion of said income as shall be de- rived from interest upon treasury notes or other securities of the TJnited States, there shall be levied, collected, and paid a tax of one and one half per centum. * * * Excepting that portion of said income derived from interest on treasury notes and other se- curities of the Government of the United States, which shall pay one and one half per centum. — Act of Aug. 5, 1861, § 49. That upon such portion of said gains, profits, or income, whether subject to a duty as provided in this act of three per centum or of five per centum, which shall be derived from interest upon notes, bonds, or other securities of the United States, there shall be levied, collected, and paid a duty not exceeding one and one half of one per centum, anything in this act to the contrary notwithstanding. —Act of July 1, 1862, § 91. Provided, that income derived from interest upon notes, bonds, and other securities of the United States, shall be included in esti- mating incomes under this section. — Act of June 30, 1864, § 116. Provided, that incomes derived from interest upon notes, bonds and other securities of the United States. * * * shall be in- cluded in estimating incomes under this section. — Act of March 3, 1865, § 1. There shall be included all income derived from interest upon notes, bonds, or other securities of the United States. — Act of March 2, 1867, § 13. There shall be included * * * interest upon notes, bonds, or 622 AlfJS^OTATED STATUTE AND DIGEST. Except such bonds ot the United States the principal and interest of which are by the law of their issuance exempt from all Federal taxation. — Act of August 28, 1894, § 28. "District of Columbia 3.65 bonds" are not bonds of the United States or exempt from taxation under § 5214, Rev. Stat. (U. S. Comp. Stat. 1901, p. 3,500). Attorney General Devens, 16 Ops. Atty. Gen. 173 (1878). "It would seem to be clear that the fact that they are obli- gations of the United States does not dispose of the question whether they are to be included within the amount exempted under this statute. It would not be contended, for instance, that the 'gold and silver certificates,' as they are familiarly called, of the United States, which are certificates of indebted- ness, to the payment of which the United States is solemnly pledged, would be exempt under this statute." Ibid. Manhattan Co. v. Blake, 148 U. S. 412, 37 L. ed. 504, 13 Sup. Ct. Eep. 640 (1893), Blatchfoed, J. A statute providing for taxes on incomes is constitutional un- der the Constitution of New Hampshire, except so far as it au- thorizes a tax on securities given to secure a loan to the United States. Opinion of the Justices, 53 IST. H. 634 (1865). 'No deduction should be allowed for the proportionate inter- est of shareholders in the stock or bonds of the United States held by a corporation. Euling, 4 Int. Eev. Rec. 13. The fact that United States bonds are above par does not ren- der the owner liable to State taxation by the State on the excess. People ex rel. Leonard v. Commissioners, 90 N. Y. 63 (1882). also the compensation of the present President of the United States during the term for which he has been elected, and of the judges of the Supreme and inferior Courts of the United States now in office. That on, and after the first day of August, eighteen hundred and sixty- two, there shall be levied, collected, and paid, on all salaries of officers, or payments, to persons in the civil, military, naval, or other employ- ment or service of the United States, including senators, representa- tives, and delegates in Congress, when exceeding the rate of six hundred dollars per annum, a duty of three per centum on the excess above the said six hundred dollars.— Acts of July 1, 1862, § 86. AITNOTATED STATUTE AND DIGEST. 623 That there shall be levied, collected, and paid, on all salaries of ofiBcers, or payments for services to persons in the civil, military, naval, or other employment or service of the United States, including senators, representatives, and delegates in Congress, when exceeding the rate of six hundred dollars per annum, a duty of five per centum on the excess above the said six hundred dollars. — Act of June 30, 1864, § 123; Act of July 13, 1868, § 1. There shall be levied, collected, and paid, on all salaries of ofiScers, or payments for services to persons in the civil, military, naval, or other service of the United States, including senators, representatives, and delegates in Congress, when exceeding the rate of one thousand dollars per annum, a tax of five per centum on the excess above the said one thousand dollars. — ^Act of March 2, 1867, § 13. That there shall be levied, collected, and paid on all salaries of officers, or payments for services to persons in the civil, military, naval, or other employment or service of the United States, including senators, representa- tives, and delegates in Congress, when exceeding the rate of four thousand dollars per annum, a tax of two per centum on the excess above the said four thousand dollars. — Act of August 28, 1894, § 33. And all gains, profits, or income derived from salaries of officers, or payments to persons in the civil, military, naval, or other service of the United States, including senators, representatives, and delegates in Con- gress, above six hundred dollars, * * » shall also be deducted. — ^Act of July 1, 1862, § 91. Also [is to be deducted] the salary or pay received for services in the civil, military, naval, or other service of the United States, including senators, representatives and delegates in Congress, above the rate of six hundred dollars per annum. — Act of June 30, 1864, § 117. Also [is to be deducted] the salary or pay received for services in the civil, military, naval, or other service of the United States, including senators, representatives and delegates in Congress, above the rate of six hundred dollars per anum. — ^Act of March 3, 1865, § 1. Except that portion of the salary or pay received for services in the civil, military, naval, or other service of the United States, including senators, representatives, and delegates in Congress, from which the tax has been deducted.— Act of March 2, 1867, § 13. Including any amount received as salary or pay for services in the civil, military, naval, or other service of the United States, or as senator, representative or delegate in Congress; except that portion thereof from which, under authority of acts of Congress previous hereto, a tax of five per centum shall have been withheld. — Act of July 14, 1870, § 7. Military or naval pensions allowed to any person under the laws of the United States » * • ghall be exempt. — Act of July 14, 1870, § 8. [The return shall not include] that portion of the salary, or pay re- ceived for services in the civil, military, naval, or other service of the United States, or as senator, representative or delegate in Congress from which the tax has been deducted. — Act of July 4, 1870, § 11. Except that portion of the salary, compensation, or pay received for services in the civil, military, naval, or other service of the United States, 624 ANNOTATED STATUTE AND DIGEST. including senators, representatives, and delegates in Congress, from which the tax has befen deducted. And except that portion of any salary upon which the employer is re- quired by law to withhold, and does withhold, the tax, and pays the same to the oflBcer authorized to receive it. — Act of August 28, 1894, § 28. A law taxing the salaries of a president of the United States, or judges of the United States courts, who were in office at the time of its passage, would be unconstitutional. Attorney General Hoar, 13 Ops. Atty. Gen. 161 (1869). A law taxing the salaries of the civil officers of the United States, but not specifically naming either the president or the judges, is not to be construed as imposing a tax upon the salaries of such officers whose term of office began after the imposition of the tax. Ibid. "It would not be competent for Congress during his [the president's] term of office, by any repeal or diminution of the tax, to increase the amount paid to him. So that if the law imposing an income tax were repealed, the president alone, of the citizens of the country, would continue liable for its pay- ment during the term for which it had been originally im- posed, if his official term continued so long." Ibid. A tax upon the salary of a judge imposed subsequently to his appointment is not a diminution of his salary so as to con- flict with a constitutional prohibition against diminishing sal- aries of judges during their terms of office. Commissioners of ITorthumberland County v. Chapman, 2 Eawle (Pa.) 73 (1829). Euling, 4 Int. Eev. Eec. 132. "M. That the provisions of this section shall extend to Por- to Eico and the Philippine Islands: * * * And Pro- vided further. That nothing in this section shall be held to ex- clude from the computation of the net income the compensa- tion paid any official by the government of the District of Col- umbia, Porto Eico and the Philippine Islands, or the political subdivisions thereof." and the compensation of all ofHcers and employees of a State or any political subdivision thereof Consuls of foreign governments who are not citizens of the United States shall be exempt from any income tax imposed by this act which ANNOTATKD STATUTE AWD DIGEST. 625 may be derived from their oiEoial emoluments, or from property in foreign countries: Provided, that the governments which such consuls may represent shall extend similar exemption to consuls of the United States. —Act of June 30, 1864, § 178; Act of July 14, 1870, § 14. Provided that salaries due to state, county or municipal officers shall be exempt from the income tax herein levied. — ^Act of August 28, 1894, § 33. The salary of a state ofScer is not taxable by the United States. So held, at common law, of a probate judge in Massa- chusetts. The Collector v. Day, 11 Wall. 113, 20 L. ed. 122 (1870), U. S. Supreme, Nelson, J. affirming Day v. Buffington, 8 Cliff. 376, Fed. Cas. No. 3,675 (1869), U. S. Ct. Dist. Mass. Cmf- FOBD, J. 8o held, also, of the salary of a judge of a court of a State, whose salary was paid by a city and fixed by a county board. Freedman v. Sigel, 5 Chicago Leg. News, 196, Fed. Cas. No. 5,080 (1872), U. S. Cir. Ct. S. Dist. N. Y. Shipmaw, J. 8o held, also of the salary of a State's attorney. U. S. V. Eitchie, 4 Chicago Leg. News, 139, Fed. Cas. No. 16,168 (1872), U. S. Dist. Md. Giles, J. except when such compensation is paid by the United States Gov- ernment. C. That there shall be deducted from the amount of the net income of each of said persons, ascertained as provided herein, the sum of $3,000, If such annual income exceeds the sum of eight hundred dollars, a tax of three per centum on the amount of excess of such income above eight hundred dollars. — Act of Aug. 5, 1861, § 49. Upon the income, rents, or dividends accruing upon any property, se- curities, or stocks owned in the United States by any citizen of the United States residing abroad, there shall be levied, collected, and paid a tax of five per centum. — ^Act of Aug. 5, 1861, § 49. If such annual gains, profits, or income exceed the sum of six hundred dollars, and do not exceed the sum of ten thousand dollars, a duty of three per centum on the amount of such annual gains, profits, or income over and above the said sum of six hundred dollars; if said income exceeds the sum of ten thousand dollars, a duty of five per centum upon the amount thereof exceeding six hundred dollars. — Act of July 1, 1862, § 90. If such annual gains, profits, or income, exceed the sum of six hundred dollars, a duty of five per centum on the excess over six hundred dollars and not exceeding five thousand dollars; and a duty of seven and one half of one per centum per annum on the excess over five thousand dollars and not exceeding ten thousand dollars; and a duty of ten per centum on the excess over ten thousand dollars. — Act of June 30, 1864, § 116. Foster Income Tax. — 40. (626 ANNOTATED STATUTE AND DIGEST. A special income duty • ' • at the rate of five per centum on alt sums exceeding six hundred dollars. — Joint Resolution of July 4, 1864. A duty of five per centum on the excess over six hundred and not ex- ceeding five thousand dollars, and a duty of ten per centum on the excess over five thousand dollars. — Act of March 3, 1865, § 1. A tax of five per centum on the amount so derived over one thousand dollars.— Act of March 2, 1867, § 13. A tax of two and one half per centum upon the gains, profits, and in- come. — ^Act of July 14, 1867, § 6. The tax herein provided shall be assessed upon the annual income of any person shall be exempt from said income tax, in the manner herein- after provided. — ^Act of July 14, 1870, § 8. A tax of two per centum on the amount so denied over and above four thousand dollars. — ^Act of August 28, 1894, § 27. There shall be deducted from the amount of the net income of each of such corporations, joint stock companies or associations, or insurance com- panies, ascertained as provided in the foregoing paragraphs of this section, the sum of five thousand dollars, and said tax shall be computed upon the remainder of said net income of such corporation, joint stock company, association, or insurance company. — Corporation Tax Act of August 5^ 1909. "The income tax law under consideration is marked by dis- criminating features which affect the whole law. It discrim- inates between those who receive an income of four thousand dollars and those who do not. It thus vitiates, in my judgment, by this arbitrary discrimination, the whole legislation. Hamil- ton says in his papers (the Continentalist), "the genius of liber- ty reprobates everything arbitrary or discretionary in taxation. It exacts that every man, by a definite and general rule, should know what proportion of his property the State demands ; what- ever liberty we may boast of in theory it cannot exist in fact while (arbitrary) assessments continue." I Hamilton's Works, ed. 1885, 270. The legislation, in the discrimination it makes, is class legislation. Whenever a distinction is made in the burdens a law imposes or in the benefits it confers on any citizens by rea- son of their birth, or wealth, or religion, it is class legislation, and leads inevitably to oppression and abuses, and to general unrest and disturbance in society. It was hoped and believed that the great amendments to the Constitution which followed the late civil war had rendered such legislation impossible for all future time. But the objectionable legislation reappears in the act under consideration. It is the same in essential char- ANNOTATED STATUTE AND DIGEST. 627 aeter as that of the English income statute of 1691, which taxed Protestants at a certain rate, Catholics, as a class, at double rate of Protestants and Jews at another and separate rate. Under wise and constitutional legislation every citizen should con- tribute his proportion, however small the sum, to the support of the government, and it is no kindness to urge any of our citizens to escape from that obligation. If he contributes the smallest mite of his earnings to that purpose he will have a greater regard for the government and more self-respect for himself feeling that though he is poor in fact, he is not a pauper of his government. And it is to be hoped that, whatever woes and embarrassments may betide our people, they may never lose their manliness and self-respect. Those qualities preserved they will ultimately triumph over all reverses of fortune." Pollock V. Farmers' Loan and Trust Co. 157 U. S. 429, 596, 39 L. ed. 759, 824, 15 Sup. Ct. Kep. 912, Per Field, J. An exemption of $500 is not a constitutional provision that "taxation shall be equal and uniform throughout the state." City of Ifew Orleans v. Fourchy, 30 La. Ann. 910 (1878). "One of the questions most elaborately discussed in this case is dehors the record, to wit: that the tax on defendant's income is unconstitutional, for the reason that the city has exempted $1,000 of income in violation of article 118 of the Constitution [quoted ante]. We do not find in defendant's answer any alle- gation, nor in the record any proof of the fact that such exemp- tion was in reality made. True, thei-e was a law of the state authorizing and directing such exemption, but non constat that the city did so, especially if the doing so would have been uncon- stitutional, as argued by defendant." Ibid, per Spencer, J". An exemption of five thousand dollars in a tax on corpora- tions was held to be constitutional. Flint V. Stone Tracy Co. 220 U. S. 107, 173, 55 L. ed. 389, 422, 31 Sup. Ct. Kep. 342, Ann. Cas. 1912 B, 1312. "It is again objected that incomes under $5,000 are exempted from the tax. It is only necessary, in this connection, to refer to Knowlton v. Moore, 178 U. S. 41, 44 L. ed. 969, 20 Sup. Ct. Eep. 747, supra, in which a tax upon inheritances in excess of $10,000 was sustained. 628 ABriTOTATEl> STATUTE AND DIGEST. In Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 293, 42 L. ed. 1037, 1042, 18 Sup. Ct Kep. 594, a graded in- heritance tax was sustained. Ibid. plus $1,000 additional if the person making the return be a mar- ried man with a wife living with him, or plus the sum of $1,000 additional if the person making the return be a married woman with a husband living with her; but in no event shall this additional exemption of $1,000 be deducted by both a husband and a wife: Provided, That only one deduction of $4,000 shall be made from the aggregate income of both husband and wife when living together. Provided,, That only one deduction of six hundred dollars shall be made from the aggregate incomes of all the members of any family, composed of parents and minor children, or husband and wife, except in cases where such separate incomes shall be derived from the separate and individual estates, gains, or labor of the wife or child: * * * — ^Act of June 30, 1864, § 116. Promded further, That only one deduction of six hundred dollars shall be made from the aggregate incomes of all the members of any family, composed of parents and minor children, or husband and wife. — ^Act of March 3, 1865, § 1. And Provided, further, That only one deduction of one thousand dollars shall be made from the aggregate income of all the members of any family, composed of one or both parents and one or more minor children, or hus band and wife; that guardians shall be allowed to make such deduction in favor of each and every ward, except that in case where two or more wards are comprised in one family and have joint property interests only one deduction shall be made in their favor. — Act of March 2, 1867, § 13. Only one deduction of two thousand dollars shall be made from the aggregate income of all the members of any family composed of one or both parents and one or more minor children, or of husband and wife; but when a wife has by law a separate income, beyond the control of her husband, and is living separate and apart from him, such deduction shall then be made from her income, gains, and profits. — ^Act of July 14, 1870. § 8. For the purpose of allowing said deduction from the income of any religious or social community holding all their property and the income therefrom jointly and in common, each five of the persons composing such society, and any remaining fractional number of such persons, less then five over such groups of five, shall be held to constitute a family, and a deduction of two thousand dollars shall be allowed for each of said families.— Act of July 14, 1870, § 8. [The return shall not include] the wages of minor children not received. —Act of July 14, 1870, § 11. Provided further, that only one deduction of four thousand dollars shall be made from the aggregate income of all the members of any family, ANNOTATED STATUTE AND BiaEST. 620 composed of one or both parents, and one or more minor children, or hus- band and wife. — ^Aet of August 28, 1894, § 28. Where it is difficult to apportion or agree upon the appor- tionment of the amounts exempted among the members of any family, the case may be referred to the Internal Revenue Office. Ruling, 1 Int. Rev. Rec. 149. When the wife has legal control of her own incoiiie, she should make separate returns of the same, and the exemption of $600 should be shared in proportion to the separate amount of income, but the rate of ten per cent should be assessed only on the excess of each income over $5,000. Ruling 2 Int. Rev. Rec. 61. The deduction shall be rated by proportion according to the respective incomes of the members of the family. Thus, A., the husband, has an income of $9,000, B., the wife, an income of $1,000, A. is entitled to deduct from his income nine-tenths of $600, and B. from hers one-tenth of $600. A.'s tax would be five per cent of $4,460 and ten per cent of $4,000, while B.'s tax would be five per cent on $940. Ruling, 1 Int. Rev. Rec. 188. The word "family" is construed to include not only parents and minor children living under the same roof, but also hus- band and wife, though living separately, unless separated by divorce or other operation of law such as to break up the family relation; and also minor children, although living separately from parents and supported by property in their own right, unless the parent or parents are legally absolved from all rela- tions toward said children, or legally restrained from all per- sonal control over them. Ruling, 1 Int. Rev. Rec. 171. In the definition of the family, no distinction is made be- tween natural parents and parents at law, nor between a nat- ural and step-child ; although only one deduction can be allowed' if the parties are generally possessed with incomes free from the control of another. The rate of tax will be determined by the amount of each separate income. If neither party has an in- come in his own right in excess of $5,000, the tax will be as- sessed at the rate of five per cent. Ruling, 1 Int. Rev. Rec. 156. 630 ANNOTATED STATUTE AND DIGEST. D. The said tax shall be computed upon the remainder of said net income of each person subject thereto, accruing during each pre- ceding calendar year ending December thirty-first: The tax herein provided shall be assessed upon the annual income of the persons hereinafter [before] named for the year next preceding the time for assessing said tax, to wit, the year next preceding the first day of January, eighteen hundred and sixty-two. — Act of August 5, 1861, § 49. That the tax herein imposed by the forty-ninth section of this act shall be due and payable on or before the thirtieth day of June, in the year eighteen hundred and sixty-two. — ^Act of August 5, 1861, § 51. And the duty herein provided for shall be assessed and collected upon the income for the year ending the thirty-first day of December next pre- ceding the time for levying and collecting said duty, that is to say, on the first day of May, eighteen hundred and sixty-three, and in each year thereafter. — Act of July 1, 1862, § 91. Provided, that the return [required from certain corporations] for the first of January, eighteen hundred and sixty-three, shall be made within thirty days after the passage of this act. — Act of March 3, 1863, § 14. And the duty herein provided for shall be assessed, collected, and paid upon the gains, profits, or income for the year ending the thirty-first day of December next, preceding the time for levying, collecting, and paying said duty.— Act of June 30, 1864, § 116; Act of March 3, 1865, § 1. The duties or incomes herein imposed shall be levied on the first day of May, and be due and payable on or before the thirtieth day of June in each year. — Act of June 30, 1864, § 119. And the tax herein provided for shall be assessed, collected and paid upon the gains, profits, and income for the year ending the thirty-first day of December next preceding the time for levying, collecting, and pay- ing said tax.— Act of March 2, 1867, § 13. The tax hereinbefore provided shall be assessed upon the gains, profits, and income for the year ending on the thirty-first day of December next preceding the time for levying and collecting said tax. — Act of July 14, 1870, § 10. Received in the preceding calendar year. * * • And the tax herein provided for shall be assessed by the Commissioner of Internal Revenue and collected and paid upon the gains, profits, and income for the year ending the thirty-first day of December next preced- ing the time for levying, collecting, and paying said tax. — Act of August 28, 1894, § 27. When a decedent dies within the year, the tax must be paid upon so much of his income as accrued within the year and prior to his decease. Mandell v. Pierce, 3 Cliff. 134, Fed. Cas. ISTo. 1,008 (1868), TJ. S. C. Ct. Dist. Mass., Clifford, J. In the case of a decedent, the same deductions are to be made ANNOTATED STATUTE AND DIGEST. 631 from the income accruing before his death as would be made if he had lived but had ceased to receive any further income. Ibid. A person living on the first Monday in May in any year is liable by himself or his executors or administrators to be taxed for his income the preceding year. Euling, 2 Int. Eev. Eec. 54. A person having made all returns of income for which he was liable while living, will, on dying, leave his estate free from liability for income tax. Ruling, 2 Int. Eev. Eec. 54. If a person prior to the first Monday in May in any year make a return of income for the preceding year and then dies before the first Monday in May of the year in which he makes the return, neither he nor his representatives are liable for tax. Euling, 2 Int. Eev. Eec. 54. All income of an estate after the owner dies, is income to the persons entitled to receive the same, and should be taxed to them or their legal representatives. Euling, 2 Int. Eev. Eec. 54. ISTeither deceased persons nor their executors or administra- tors are to be taxed for income or gains made on or after January in one year and prior to the first Monday in May of the succeeding year, the person dying at any time before those two dates including the first. Euling, 2 Int. Eev. Eec. 54. Only property passing from the testator or the testatrix can be considered liable to legacy taxes, but income accruing to the estate subsequently to the testator's death is taxable as income of the persons benefited thereby. Euling, 1 Int. Eev. Eec. 172. Provided, however, That for the year ending December thirty-first, nineteen hundred and thirteen, said tax shall be computed on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive, after deduct- ing five-sixths only of the specific exemptions and deductions herein provided for. "The joint resolution of July 4th, 1864, imposed a tax upon 632 ANNOTATED STATUTE AND DIGEST. all income 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." Millee, J., Stockdale v. Insurance Cos. 20 Wall. 323, at p. 331, 22 L. ed. 348, 351 (1873), U. S. Supreme. The act of July 14, 1870, imposed a tax upon all earnings for the year 1870, and was not thereby unconstitutional as being retroactive. Stockdale v. Insurance Cos. 20 Wall. 323, 22 L. ed. 348 (1873), U. S. Supreme, Millee, J., overruling Home Mutual Ins. Co. V. Stockdale, 16 Int. Eev. Eec. 30, Fed. Cas. Ho. 6,662 (1872), U. S. Cir. Ct. Dist. La. Dueell, J. Schuylkill ISTav. Co. v. Elliott, 21 Int. Eev. Eec. 342, Fed. Cas. No. 12,497 (1875), U. S. Cir. Ct. W. Dist. Pa., Mc- Kknnan, J. "It is clearly * * * perfectly constitutional as well as expedient, in levying a tax upon profits or income, to take as the measure of taxation the profits or income of a preceding year. To tax is legal, and to assume as a standard the trans- actions immediately prior is certainly not unreasonable." Eead, J., in Drexel & Co. v. Commonwealth, 46 Pa. 31, at p. 40 (1863). For the general purposes of assessment the tax year in Ala- bama begins January 1st, and ends December 31st. Property owned on the first of January is returned for assessment that year. The tax on income, however, is given in, assessed, and paid the year after it accrues. Before that it cannot be known. It is not, therefore, double taxation to tax income of one year invested the succeeding year ; once as income, and a second time as investment. Board of Eevenue v. Montgomery Gas Light Co. 64 Ala. 269 (1.879). Surplus earnings, made and laid aside before the passage of the first income tax law and profits on the sales of real estate bought before that time were not taxable thereunder. Merchants' Ins. Co. v. McCartney, 12 Int. Eev. Eec. 122, Fed. Cas. No. 9,443 (1870), U. S. Cir. Ct. Dist. Mass. Lowell, J. The Act of July 14, 1870, declared that "there shall be levied ANNOTATED STATUTE AND DIOEST. 633- and collected for and during the year 1871, a tax of 2^ per cent on the amount of all interest paid by corporations and on the amount of dividends of earnings hereafter declared" by them. Held, to include interest paid and dividends declared during the last five months of 1870. To interpret the act the Court had recourse to the journals of Congress. Blake v. National Banks, 23 Wall. 307, 23 L. ed. 119 (1874),. U. S. Supreme, Hunt, J. Missouri Eiver etc. E. E. v. TJ. S. 19 Ted. 66 (1884), U. S. Cir. Ct., W. Dist. Mo., McCeaey, J., ace. Interest and dividends accruing and earned in the last year of the tax, but payable the year following, held taxable. Barnes v. The Eailroads, 17 Wall. 294, 21 L. ed. 544 (1872), TJ. S. Supreme, Clifford, J. (Waite, C. J., Steong, Davis,. and Field, J J., dissenting.) Stockdale v. Insurance Cos. 20 Wall. 323, 22 L. ed. 34& (1873), U. S. Supreme, Millee, J. Eailroad Co. v. U. S. 101 U. S. 543, 25 L. ed. 1068 (1879), Waite, 0. J. contra. [The court distinguishes this case from Barnes v. Eailroads- on the ground that it appeared there expressly that the divi- dends (nothing being said of the interest in that case) were earned in the last year of the tax, while in the principal case there was no finding as to when the interest was earned, the only finding being that the interest was paid after the tax lapsed.] Ibid. U. S. V. Indianapolis, etc. E. E. 113 U. S. 711, 28 L. ed. 1140, 5 Sup. Ct. Eep. 724 (1884), Haelan, J., contra. [In this case it appeared expressly that the interest was paid out of earnings made in the last year of the tax, and thus the case falls within the distinction taken as to Barnes v. Eail- roads in Eailroad Co. v. U. S. 101 U. S. 543, 25 L. ed. 1068, which is relied on as a controlling authority. The Court say,. at p. 713, "We do not perceive that the liability of the corpora- tion for tax on this interest, as such, is affected by the circum- stance that the interest was paid out of the earnings of the pre- vious year." The distinction should probably be regarded as overruled, though the case taking it is followed.] Ibid. 634 ANNOTATED STATUTE AND DIGEST. On or before the first day of March, nineteen hundred and fourteen, and the first day of March in each year thereafter, In case of an income tax on or before the first day of March in each year.— U. S. Rev. Stat. § 3173 (U. S. Comp. Stat. 1901, p. 2065) as amended by this act. In case of neglect occasioned by sickness or absence as aforesaid, the collector may allow such further time for making and delivering such list or return as he may deem necessary, not exceeding thirty days. — § 3176 of Rev. Stat, as amended by this act, infra. On or before the day designated by law. — Act of July 14, 1870, § 11. On or before the day provided by law. — ^Act of August 28, 1894, § 29. a true and accurate return. To make and render a return on or before the day designated by law, to the assistant assessor of the district in which he resides of the gross amount of his income, gains, and profits as aforesaid. — ^Act of July 14, 1870, § 11. It shall be the duty of any person, partnership, firm, association, or cor- poration made liable to any duty, special tax, or other tax imposed by law, when not otherwise provided for, in case of a special tax, on or before the thirty-first day of July in each year, in case of income tax on or before the first Monday of March in each year, and in other cases before the day on which the taxes accrue, to make a list or return verified by oath or affirmation. — U. S. Rev. Stat. § 3173, as amended by this act, infra. The act of' August 5, 1861, contained no provision for a return by the taxpayer before the assessment of the tax, though by § 51 it was the duty of the several collectors, in case of failure to collect the tax, to "Examine under oath the person assessed under this act or any other person." To make return in the list or schedule, as provided in this act, to the proper officer of internal revenue, of the amount of his or her income, * * * according to the requirements hereinbefore stated. — ^Act of July 1, 1862, § 93. To make a list or return under oath or affirmation, in such form and manner as may be prescribed by the Commissioner of Internal Revenue, to the assistant assessor of the district in which he resides, of the amount of his or her income, * • • according to the requirements hereinbe- fore mentioned, stating the sources from which said income is derived, whether from any kind of property, or the purchase and sale of property, rents, interest, dividends, salaries, or from any profession, employment, or vocation, or otherwise. — Act of June 30, 1864, § 118. To make and render a list or return, in such form and manner as may be prescribed by the Commissioner of Internal Revenue, to the assistant assessor of the district in which they reside, of the amount of their in- come, gains, and profits, as aforesaid. — Act of March 3, 1865, § 1; Act; of March 2, 1867, § 13. To make and render a list or return, on or before the day provided by law, in such form and manner as may be directed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, to ANNOTATED STATUTE AND DIGEST. 635 the collector or a deputy collector of the district in which they reside, of the amount of their income, gains, and profits, as aforesaid. — Act of August 28, 1894, § 29. The Act of June 30, 1864, as amended by the Act of July 13, 1866, required returns to state whether they were made ac- cording to their values in legal tender or according to their values in coined money. Held, that the plaintiff having made its return in terms of coin (then at a premium) could not pay the tax in legal tender (then at a discount) of the same face value. Pacific Ins. Co. v. Soule, 7 Wall. 433, 19 L. ed. 95 (1868), U. S. Supreme, Swatne, J. under oath or affirmation, And the assistant assessor shall require every list or return to be verified by the oath or affirmation of the party rendering it. — Act of March 3, 1865, § 1; Act of March 2, 1867, § 13. The assistant assessor shall require every such return to be verified by the oath of the party rendering it. — Act of July 14, 1870, § 11. And the collector or deputy collector, shall require every list or return to be verified by the oath or affirmation of the party rendering it. — Act cf August 28, 1894, § 29. QucerBj whether the oath presented with the first return under the Act of July 1, 1862, was required by that act so that perjury could be assigned upon it ? Magee v. Denton, 5 Blatchf. 130, Fed. Cas. No. 8,943 (1863), TJ. S. Cir. Ct, S. Dist. IST. Y., Hall, J. shall be made by each person of lawful age, P. That if any person, corporation, joint-stock company, association, or insurance company liable to make the return or pay the tax aforesaid shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, such person shall be liable to a penalty of not less than $20 nor more than $1,000. Any person or any officer of any corpo- ration required by law to make, render, sign, or verify any return who makes any false or fraudulent return or statement with intent to defeat or evade the assessment required by this section to be made shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000, or be im- prisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. For general provisions as to the making of returns of income, see §§ 3173, 3176, of Rev. Stat. (U. S. Comp. Stat. 1901, pp. 206f, 2068) as amended by this act, post, App. p. 433. 636 ANNOTATED STATUTE AND DIGEST. That It shall be the duty of all persons of lawful age. — ^Aet of July 1, 1862, § 93; Act of June 30, 1864, § 118; Act of March 3, 1865, § 1; Act of March 2, 1867, § 13. That it shall be the duty of all persons. — Act of July 14, 1870, § 11. That it shall be the duty of all persons of lawful age. — ^Act of August 28, 1894, § 29. A minor, if he have no guardian, should make return him- self. If he refuses, an independent assessment should be made as in other cases, without penalty. Euling, 7 Int. Rev. Eec. 59. except as hereinafter provided. That a return made by one of two or more joint guardians, trustees, executors, administrators, agents, receivers, and conservators, or other persons acting in a fiduciary capacity, filed in the district where such person resides, or the district where the will or other instrument under which he acts is recorded, under such regulations as the Secretary of the Treasury may prescribe, shall be a sufficient compliance with the require- ments of this paragraph;— infra. Provided, further, that persons liable for the normal. Income Tax only, on their own account or in behalf of another, shall not be required to make return of the income derived from dividends on the capital stoclc or from the net earnings of corporations, joint-stock companies or asso- ciations, and insurance companies taxable upon their net income as here- inafter provided. Any person for whom return has been made and the tax paid, or to be paid as aforesaid, shall not be required to make a return unless such person has other net income, but only one deduction of $3,000 shall be made in the case of any such person. — infra, subject to the tax imposed by this section, and having a net income of $3,000 or over for the taxable year, Provided further, that in either case above mentioned no return of in- come not exceeding $3,000 Arabic shall be required, infra. Whose gross income during the preceding year exceeded two thousand dollars.— Act of July 14, 1870, § 11. Having an income of more than three thousand five hundred dollars for the taxable year, computed on the basis herein prescribed. * * ♦ But persons having less than three thousand five hundred dollars income are not required to make such report. — Act of August 28, 1894, § 29. Persons whose income did not exceed $2,000 did not need to make returns, nor even to make affidavit that their income did not exceed that sum. Euling, 13 Int. Eev. Eec. 97. to the collector of internal revenue for the district in which such per- son resides or has his principal place of business. To the proper oflicer of internal revenue. — ^Act of July 1, 1863, § 93. ABTNOTATED STATUTE AND DIGEST. 637 To the assistant assessor of tlie district in which he resides. — ^Act of June 30, 1864, § 118; Act of July 14, 1870, § 11. To the assistant assessor of the district in which they reside. — ^Act of March 3, 1865, § 1; Act of March 2, 1867, § 13. To the collector or a deputy collector of the district in which they re- side.— Act of August 28, 1894, § 29. As all income tax is required to be assessed and paid in the district in which the party resides, the legal residence of such party often becomes an essential subject of inquiry. It seems that where a party exercises his right of franchise, or where he is entitled so to exercise it, it is the best criterion of his resi- dence. Where, however, a party has no vote, the tax is properly assessable where a personal property tax is paid. Editorial in 1 Int. Eev. Eec. 153. In case of removal out of a district after the first of May, the correct practice would seem to be to forward the return for collection to the district to which the party has removed. Ibid. or, in the case of a person residing in a foreign country, in the place where his principal business is carried on within the United States, See supra. in such form as the Commissioner of Internal Revenue, with the ap- proval of the Secretary of the Treasury, shall prescribe. In such form and manner as may be prescribed by the Commissioner of Internal Revenue. — ^Act of June 30, 1864, § 118; Act of March 3, 1865, § 1 ; Act of March 2, 1867, § 13. In such form and manner as may be prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury. — Act of August 28, 1894, § 29. setting forth specifically the gross amount of income from all sepa- rate sources and from the total thereof, deducting the aggregate items or expenses and allowance herein authorized; ^ardians, trustees, executors, administrators, agents, receivers, conservators, and all persons, corporations or associations acting in any fiduciary capacity, shall make and render a return of the net income of the person for whom they act, subject to this tax, coming into their custody or control and management, and be sub- ject to all the provisions of this section which apply to individuals: And all guardians and trustees, whether such trustees are so by virtue of their office as executors, administrators, or other fiduciary capacity, to make return in the list or schedule, as provided in this act, to the proper officer of internal revenue, of the amount of * * * the income of such 638 ANNOTATED STATUTE AND DIGEST. minors or persons as may be held in trust, as aforesaid. — Act of July 1, 1862, § 93. And all guardians and trustees, whether such trustees are so by virtue of their office as executors, administrators, or in other fiduciary capacity, to make a list or return under oath or aflBrmation, in such form and man- ner as may be prescribed by the Commissioner of Internal Revenue, to the assistant assessor in the district in which he resides, of the amount of * * * the income of minors or persons as may be held in trust as afore- said. — ^Act of June 30, 1864, § 118. And all guardians and trustees, whether as executors, administrators, or in any other fiduciary capacity, shall make and render a list or return, as aforesaid, to the assistant assessor of the district in which such guard- ian or trustee resides, of the amount of income, gains, and profits of any minor or person for whom they act as guardian or trustee. — ^Act of March 3, 1865, § 1. And all guardians and trustees, executors and administrators, or any person acting in any other fiduciary capacity, shall make and render a list or return, as aforesaid, to the assistant assessor of the district in which such person acting in a fiduciary capacity resides, of the amount of in- come, gains, and profits of any minor or person for whom they act. — Act of March 2, 1867, § 13. And every guardian and trustee, executor and administrator, and any person acting in any other fiduciary capacity, or as resident agent for, or copartner of any non-resident alien, deriving income, gains, and profits from any business, trade, or profession carried on in the United States, or from rents of real estate situated therein, shall make and render a return as aforesaid to the assistant assessor of the district in which he resides of the amount of income, gains, and profits of any minor or person for whom he acts.— Act of July 14, 1870, § 11. And all guardians and trustees, executors, administrators, agents, re- ceivers, and all persons or corporations acting in any fiduciary capacity, shall make and render a list or return, as aforesaid, to the collector or a deputy collector of the district in which such person or corporation acting in a fiduciary capacity resides or does business, of the amount of income, gains and profits of any minor or persons for whom they act. — ^Act of August 28, 1894, § 29. When a decedent dies, his legal representatives must make the return of income accruing before his death and within the year. Mandell v. Pierce, 3 Cliff. 134, Fed. Cas. No. 9,008 (1868), U. S. Cir. Ct., Dist. Mass., Clifford, J. A guardian residing abroad should return the income of his ward in the district where the ward resides, but a guardian not residing abroad should return the income of his ward in the district where such guardian resides. ANITOTATED STATUTE AND DIGEST. 639 Euling, 3 Int. Eev. Eec. 172, If a minor is under guardianship, the guardian must return the income. If there is no guardian the father is responsible for such return, and if he has the legal control of such income, he must return it with his own. "Ruling, 2 Int. Eev. Eec. 68. A minor, if he have no guardian, should make return him- self. If he refuses, an independent assessment should be made as in other eases, without penalty. Euling, 7 Int. Eev. Eec. 59. If the partners or agents of aliens residing abroad can take the oath prescribed, that they have made the proper returns and paid tax in the district where they reside, the collector will not require any further return. Euling, 7 Int. Eev. Eec. 10. Provided, That a return made by one of two or more joint guardians, trustees, executors, administrators, agents, receivers, and conserv- ators, or other persons acting in a fiduciary capacity, filed in the district where such person resides, or in the district where the will or other instrument under which he acts is recorded, under such regulations as the Secretary of the Treasury may prescribe, shall be a sufficient compliance with the requirements of this paragraph; and also all persons, firms, companies, copartnerships, corporations, joint-stock companies or associations, and insurance companies, except as hereinafter provided, in whatever capacity acting, having the control, receipt, disposal, or payment of fixed or determinable annual or periodical gains, profits, and income of another person subject to tax, shall in behalf of such person deduct and withhold from the payment an amount equivalent to the normal income tax upon the same and make and render a return, as aforesaid, but separate and distinct, of the portion of the income of each person from which the normal tax has been thus withheld, and containing also the name and address of such person or stating that the name and address or the address, as the case may. be, are unknown: Pro- vided, That the provision requiring the normal tax of individuals to be withheld at the source of the income shall not be construed to require any of such tax to be withheld prior to the first day of November, nineteen hundred and thirteen: Provided, that any party in his or her own behalf, or as guardian or trustee, as aforesaid, shall be permitted, to declare, under oath or afSrma- tion, the form and manner of which shall be prescribed by the Commis- sioner of Internal Revenue, that he or she was not possessed of an income of six hundred dollars, liable to be assessed according to the provisions of 640 ANNOTATED STATUTE AND DIGEST. this act, or that he or she has been assessed elsewhere and the same year for [and has paid — ^Act of June 30, 1864] an income duty, under authority -of the United States.— Act of July 1, 1862, § 93; Act of June 30, 1864, ^ 118. Provided, that any party, in his or her own behalf, or as guardian or trustee, shall be permitted to declare, under oath or affirmation, the form and manner of which shall be prescribed by the Commissioner of Internal Revenue, that he or she, or his or her ward or beneficiary, was not pos- sessed of an income of six hundred [one thousand — ^Act of March 2, 1867] dollars, liable to be assessed according to the provisions of this act; or may declare that he or she has been assessed and paid an income duty [tax — ^Act of March 2, 1867] elsewhere in the same year, under authority of the United States, upon his or her gains and profits, as prescribed by law.— Act of March 3, 1865, § 1; Act of March 2, 1867, § 13. Any person, in his own behalf, or as such fiduciary or agent, shall be permitted to declare, under oath, that he, or his ward, beneficiary or principal, was not possessed of an income of two thousand dollars, liable to be assessed according to the provisions of this act; or may declare that an income tax has been assessed and paid elsewhere in the same year, under authority of the United States, upon his income, gains, and profits, or upon those of his ward, beneficiary, or principal, as required by law. — Act of July 14, 1870, § 13. Provided, that any person or corporation in his, her, or its own behalf, or as such fiduciary, shall be permitted to declare, under oath or affirma- tion, the form and manner of which shall be prescribed by the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury, that he, she, or his or her, or its ward or beneficiary, was not possessed of an income of four thousand dollars, liable to be assessed ac- cording to the provisions of this Act; or may declare that he, she, or it, or his, her, or its ward or beneficiary has been assessed and has paid an income tax elsewhere in the same year, under authority of the United States, upon all his, her, or its income, gains, or profits, and upon all the income, gains, or profits, for which he, she, or it is liable as such fiduciary, as prescribed by law. — ^Act of August 28, 1894, § 29. And shall thereupon be exempt from an income duty. — Act of July 1, 1862, § 93. And shall thereupon be exempt from an income duty in said district. — Act of June 30, 1864, § 118. And if the assistant assessor shall be satisfied of the truth of the dec- laration, shall thereupon be exempt from income duty [tax — ^Act of March 2, 1867] in said district. — Act of March 3, 1865, § 1; Act of March 2, 1867, § 13. And if the assistant assessor shall be satisfied of the truth of the de- claration, such person shall thereupon be exempt from income tax in the said district.— Act of July 14, 1870, § 13. And if the collector or deputy collector shall be satisfied of the truth of the declaration, such person or corporation shall thereupon be exempt ANNOTATED STATUTE AND DIGEST. 641 from income tax in the said district for that year. — Act of August 28, ]894, § 29. All persons, firms, copartnerships, companies, corporations, joint-stock companies or associations, and insurance companies, in whatever capacity acting including lessees or mortgagors of real or personal property, trus- tees acting in any trust capacity, executors, administrators, agents, re- ceivers, conservators, employers, and all officers and employees of the United States having the control, receipt, custody, disposal or payment of interest, rent, salaries, wages, premiums, annuities, compensation, re- muneration, emoluments, or other fixed or determinable annual gains, profits, and income of another person, exceeding $3,000 for any taxable year, other than dividends on capital stock, or from the net earnings of corporations and joint-stock companies, or from the net earnings of cor- porations and joint-stock companies or associations subject to like tax, who are required to make and render a return in behalf of another, as provided herein, to the collector of his, her, or its district, are hereby authorized and required to deduct and withhold from such annual gains, profits, and income such sum as will be sufficient to pay the normal tax thereon imposed by this section, and shall pay to the officer of the United States government authorized to receive the same; and they are each hereby made personally liable for such tax. — infra. That there shall be levied and collected a duty of five per centum on all dividends in scrip or money thereafter declared due, and whenever the same shall be payable, to stockholders, policy holders, or depositors, as part of the earnings, income, or gains, of any bank, trust company, savings insti- tution, and of any fire, marine, life, inland insurance company, either stock or mutual, under whatever name or style known or called, in the United States or territories, whether specifically incorporated or existing under general laws, and on all undistributed sums, or sums made or added dur- ing the year to their surplus or contingent funds; and said banks, trust companies, savings institutions, and insurance companies shall pay the said duty, and are hereby authorized to deduc and withhold from all pay- ments made on account of any dividends or sums of money that may be due and payable as aforesaid, the said duty of five per centum. And a list or return shall be made and rendered to the assessor. — Act of June 30, 1864, § 120. Income due partnerships is not subject to deduction at the source. Opinion of Attorney-General McEeynolds February 12, 1914. Euled that individual members of a firm are obliged to pay a tax upon their respective shares of such parts of the net profits of the partnership as are derived from securities exempted by the statute. T. D. 1957. But see Tr. Eeg. 14, 4Y. Provided further, that in either case above mentioned no return of income not exceeding $3,000 shall be required: Provided further, that any persons carrying on business in partnership shall be liable for income tax only in their individual capacity, Not including partnerships. — Act of August 28, 1894, § 32. and the share of the profits of a partnership to which any taxable partner would be entitled if the same were divided, whether di- vided or otherwise, shall be returned for taxation and the tax paid, under the provisions of this section, and any such firm, when requested by the Commissioner of Internal Revenue, or any district Foster Income Tax. — 41. 642 ANNOTATED STATTJTE AHD DIGEST. collector, shall forward to him a correct statement of such profits and the names of the individuals who would be entitled to the same, if distributed; Provided further. That persons liable for the normal income tax only, on their own account or in behalf of another, shall not be required to make return of the income derived from divi- dends on the capital stock or from the net earnings of corporations, joint-stock companies or associations, and insurance companies tax- able upon their net income as hereinafter provided. Any person for whom return has been made and the tax paid, or to be paid as aforesaid, shall not be required to make a return unless such person has other net income, but only one deduction of $3,000 shall be made in the case of any such person. Nor shall any person under the foregoing conditions be allowed the benefit of any deduction provided for in subsection B of this section un- less he shall, not less than thirty days prior to the day on which the return of his income is due, either file with the person who is required to withhold and pay tax for him a true and correct return of his annual gains, profits, and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf by the person required to withhold and pay the tax, or likewise make application for deductions to the collector of the district in which return is made or to be made for him: Provided further. That if such person is a minor or an insane person, or is absent from the United States, or is unable owing to serious illness to make the return and application above provided for, the return and application may be made for him or her by the person required to withhold and pay the tax, he making oath under the penalties of this Act that he has suflScient knowledge of the affairs and property of his beneficiary to enable him to make a full and complete return for him or her, and that the return and application made by him are full and complete: — infra. In computing net income for the purpose of the income tax there shall be allowed as deductions: * * * seventh, the amount received as divi- dends upon the stock or from the net earnings of any corporation, joint stock company, association or insurance company which is taxable upon its net income as hereinafter provided. — B supra. Every person liable for the additional tax shall, for the purpose of its assessment and col- lection, make a return of his total net income from all sources, corproate and otherwise. — A subd. 2, supra. In computing net income for the purpose of the annual tax there shall be allowed as deduction: • * * eigth, the amount of income, the tax upon which has been paid or withheld for payment at the source of the income, under the provisions of this section, provided that whenever the tax, upon the income of a person is required to be withheld and paid at the source as hereinafter required, if such annual income does not exceed the sum of $3,000 or is not fixed or certain, or is indefinite, or irregular as to amount or time of accrual, the same shall not be deducted in the personal return of such person. — B supra. Every person subject to this additional tax shall, for the purpose of ANNOTATED STATUTE AND DIGEST. 643 its assessment and collection, make a personal return of his total net income from all sources, corporate or otherwise. — ^A supra. The collector or deputy collector shall require every list to be veri- fied by the oath or aiHrmation of the party rendering it. A true and accurate return, under oath or afSrmation shall be made, — supra. If the collector or deputy collector have reason to believe that the amount of any income returned is understated, he shall give due notice to the person making the return to show cause why the amount of the return should not be increased, and upon proof of the amount understated may increase the same accordingly. And the assistant assessor may increase the amount of the list or re- turn of any party making such return, if he shall he satisfied that the same is understated. — ^Act of July 1, 1862, § 93; Act of June 30, 1804, § 118. And may increase the amount of any list or return, if he has reason to believe that the same is understated. — Act of March 3, 1865, § 1; Act of March 2, 1867, § 13. And may increase the amount of any return, after notice to such party, if he has reason to believe that the same is understated. — Act of July 14, 1870, § 11. And may increase the amount of any list or return, if he has reason to believe that the same is understated. — Act of August 28, 1894, § 29. Or, if the list or return of any party shall have been increased by the assistant assessor in manner as aforesaid, he or she may be permitted to declare, as aforesaid, the amount of his or her annual income or the amount held in trust, as aforesaid, liable to be assessed as aforesaid. — Act of July 1, 1862, § 93. Or, if the list or return of any party shall have been increased by the assistant assessor, in manner as aforesaid, such party may be permitted to declare, under oath or affirmation, the amount of annual income, or the amount held in trust, as aforesaid, liable to be assessed. — Act of June 30, 1864, § 118. Or, if the list or return of any party shall have been increased by the assistant assessor, such party may exliibit his books and accounts and be permitted to prove and declare, under oath or affirmation, the amount of income liable to be assessed. — Act of March 3, 1865, § 1; Act of March 2, 1807, § 13. When the return of any person is increased by the assistant assessor, such person may exhibit his books and accounts and be permitted to prove and declare, under oath, the amount of income liable to be assessed;. — Act of July 14, 1870, § 12. And the same so declared shall be received as the sums upon which duties are to be assessed and collected. — Act of July 1, 1862, § 93. And the same, so declared, shall be received by such assistant assessor as true and as the sum upon which duties are to be assessed and col- 644 AITITOTATED STATUTE AND DIGEST. lected, except that the deductions claimed in such cases shall not be made or allowed until approved by the assistant assessor. — ^Act of June 30, 1864, § 118. But such oaths and evidence shall not be considered as conclusive of the facta, and no deductions claimed in such cases shall be made or allowed until approved by the assistant assessor. — Act of March 3, 1865, § 1 ; Act of March 2, 1867, § 13. But such oath and evidence shall not be conclusive of the facts, and no deductions claimed in such cases shall be allowed until approved by the assistant assessor. — Act of July 14, 1870, § 12. Or if the list or return of any person or corporation, company, or asso- ciation shall have been increased by the collector, or deputy collector, such person or corporation, company, or association may be permitted to prove the amount of income liable to be assessed. But such proof shall not be considered as conclusive of the facts, and no deductions claimed in such cases shall be made or allowed until approved by the collector or deputy collector. — ^Act of August 28, 1894, § 29. A preliminary injunction will not be granted to restrain the collector from increasing the assessment under the Act of July 1, 1862, when the oath required by § 93 of that a"ct had not been made and the plaintiff did not excuse his neglect by showing fraud, accident, or mistake. Magee v. Denton, 5 Blatchf. 130, Fed. Cas. No. 8,943 (1863), U. S. Cir. Ot, S. Dist. N. Y., Hall, J. If dissatisfied with the decision of the collector, such person may submit the case, with all the papers, to the Commissioner of Inter- nal Revenue for his decision, and may furnish sworn testimony of witnesses to prove any relevant facts. But any person feeling aggrieved by the decision of the assistant as- sessor in such cases, may appeal to the assessor of the district, and his decision thereon shall be final; and the form, time, and manner of pro- ceedings shall be subject to rules and regulations to be prescribed by the Commissioner of Internal Revenue. — Act of June 30, 1864, § 118. Any person feeling aggrieved by the decision of the district assessor in such cases may appeal to the assessor of the district, and his decision thereon, unless reversed by the Commissioner of Internal Revenue, shall he final, and the form, time, and manner of proceedings shall be subject to rules and regulations to be prescribed by the Commissioner of Internal Revenue.— Act of March 3, 1865, § 1 ; Act of March 2, 1867, § 13. Any person may appeal from the decision of the assistant assessor, in such cases, to the assessor of the district, and his decision thereon, unless reversed by the Commissioner of Internal Revenue, shall be final. The form, time, and manner of proceedings shall be subject to regulations to be prescribed by the Commissioner of Internal Revenue. — Act of July 14, 1870, § 12. ANNOTATED STATUTE AND DIGKST. 645 Any person or company, corporation, or association feeling aggrieved liy the decision of the deputy collector, in such cases may appeal to the collector of the district, and his decision thereon, unless reversed by the Commissioner of Internal Revenue, shall be final. If dissatisfied with the decision of the collector such person or corpora- tion, company, or association may submit the case with all the papers, to the Commissioner of Internal Revenue for his decision, and may furnish the testimony of witnesses to prove any relevant facts, having served notice to that efi'ect upon the Commissioner of Internal Revenue, as herein pre- scribed. — Act of Aug. 28, 1894, § 29. Such notice shall state the time and place at which, and the oflScer before whom, the testimony will be taken; the name, age, residence, and business of the proposed witness, with the questions to be propounded to the witness, or a brief statement of the substance of the testimony he is expected to give: Provided, that the Government may at the same time and place take testimony upon like notice to rebut the testimony of the witnesses examined by the person taxed. The notice shall be delivered or mailed to the Commissioner of Internal Revenue a, sufiicient number of days previous to the day fixed for taking the testimony, to allow him, after its receipt, at least five days, exclusive of the period required for mail communication with the place at which the testimony is to be taken, in which to give, should he so desire, instrnc- 'tions as to the cross-examination of the proposed witness. Whenever practicable, the affidavit or deposition shall be taken before a collector or deputy collector of internal revenue, in which case reasonable notice shall be given to the collector or deputy collector of the timfe fixed for taking the deposition or affidavit. — Act of August 28, 1894, § 29. A State statute provided that the board of levee inspectors should hear and decide all questions as to the assessment of a tax and the additions or deductions from the same "whose de- cisions thereupon be final." Held, that this did not deprive the courts of jurisdiction to review a decision when its propri- ety was questioned in a suit at law. McGhee v. Mathis, 21 Ark. 40, 55 (1860). Congress has the power to provide that "the dutiable value" of imports shall be determined by a board of general appraisers or "legislative referees," and to provide that their decision thereupon shall be "final and conclusive as to the dutiable value of such merchandise against all parties interested therein," and in such case the courts will not review their decision in the ab- sence of fraud when they acted within their jurisdiction. Passavant v. TJ. S. 148 U. S. 214, 219, 37 L. ed. 426, 428, 12 Sup. Ct. Eep. 572 (1892), Jackson, J. 646 ANNOTATED STATUTE AND DIGEST. Earnshaw v. U. S. 146 TJ. S. 60, 36 L. ed. 887, 13 Sup. Ct. Eep. 14 (1892), Beown, J. Hilton V. Merritt, 110 U. S. 97, 28 L. ed. 83, 3 Sup. Ct. Rep. 548 (1884), Woods, J. " 'Final' is defined in Burrill's Law Dictionary (Part 1, page 627) to be that which terminates or ends a matter or proceeding, not absolutely, however, as the final judgment of an inferior court admits of an appeal." Eondeau v. Beaumette, 4 Minn. 224, 228, Gil. 163 (1860). Where a statute declares that the decision of an inferior tribunal shall be "final and conclusive," an appeal will lie. (See, however, Clarke v. Patterson, 6 Binn. (Pa.) 128.) But the proceeding may be attacked collaterally for want of jurisdic- tion (Ackerman v. Taylor, 9 N. J. L. (4 Halst.) 65), and for fraud, or, in some cases, for mistake or irregularity. Matter of Application of Mayor, etc. of New York, 49 IST. Y. 150 (1872). Congress has the power to provide that an action will lie against a collector to recover taxes collected by him under an erroneous assessment not absolutely void, which he has paid into the treasury. Cary v. Curtis, 3 How. 236, 242, 245, 11 L. ed. 576, 581 (1845). Where the statute (U. S. Eev. Stat. § 2931) provided that the decision of the collector and appraiser should be "final and conclusive." Held, this "meant a valid liquidation — not a void liquidation. If merely erroneous, the liquidation will be valid and binding here ; but, if void, that fact may be shown as a de- fense." U. S. V. Thurber, 28 Fed. 56 (1886), U. S. Dist. Ct., S. Dist. ]Sr. Y., Beown, J. The imposition of an import duty on domestic goods would be void. Ibid. p. 57. An appraisal without an examination would be void, "because ; an examination is a condition of the lawful exercise of his power." Ibid. An advancement of the valuation of the collector and a ANNOTATED STATUTE AND DIGEST. 647 liquidation of duties by him without any valuation by the appraiser would be void "although the collector had a general jurisdiction of the subject matter. It would be void because ^uch an appraisement by the collector without any act of the -appraiser would be iUegal." Ibid. An appeal to the Commissioner of Internal Revenue was .held to be a waiver of defects in the notice of assessment. Bailey v. Eailroad Co. 22 Wall. 604, 22 L. ed. 840 (1874), TJ. S. Supreme, Cliffokd, J. A defendant claiming a credit which was not presented to the accounting officers of the treasury and passed upon by them under Rev. Stat. §§ 951, 3220 (U. S. Comp. Stat. pp. 695, 2086) cannot set it up in an action by the United States to recover taxes. Railroad Co. v. TJ. S., 101 U. S. 543, 25 L. ed. 1068 (1879), Waite, C. J. ;E. That all assessments shall be made by the Commissioner of Inter- nal Revenue The Commissioner of Internal Revenue is hereby authorized and re- -quired to make the inquiries, the determinations, and assessments of all taxes and penalties imposed by this Title [XXXV. — Internal Reve- nue], or accruing under any former Internal-Revenue Act where such taxes have not been duly paid by stamp at the time and in the manner provided by \ayf.—V. S. Rev. Stat. § 3182 (U. S. Comp. Stat. 1901, p. 2071) . and all persons shall be notified of the amount for which they are respectively liable on or before the first day of June of each suc- cessive year, and said assessments shall be paid on or before the thirtieth day of June, The tax herein imposed by the forty-ninth section of this act shall be due and payable on or before the thirtieth day of July, eighteen hundred -and sixty-tvpo. — Act of Aug. 5, 1861, § 51. That the duties on incomes herein imposed shall be due and payable on or before the thirtieth day of June eighteen hundred and sixty-three and in each year thereafter until and including the year eighteen hundred -and sixty-six and no longer. — Act of July 1, 1862, § 92. The duties [taxes — ^Act of July 13, 1866,] on incomes herein imposed shall be levied on the first day of May, and be due and payable on or "before the thirtieth day of June, in each year until and including the year ■eighteen hundred and seventy and no longer. — ^Act of June 30, 1864, rS 119; Act of July 13, 1866, § 1. 648 ANNOTATED STATUTE AND DIGEST. The taxes on incomes herein imposed shall be levied on the first day of March and be due and payable on or before the thirtieth day of April in each year, until and including the year eighteen hundred and seventy and no longer. — ^Aet of March 2, 1867, § 13. The tax hereinbefore provided shall be * * * levied on the first dav of March, eighteen hundred and seventy-one, and eighteen hundred and seventy-two, and be due and payable on or before the thirtieth day of April in each of said years. — Act of July 14, 1870, § 10. The taxes on incomes herein imposed shall be due and payable on or before the first day of July in each year. — Act of August 28, 1894, § 30. except in cases of refusal or neglect to make such return and in cases, of false or fraudulent returns, in which cases the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon in- formation obtained as provided for in this section or by existing law, and the assessment made by the Commissioner of Interna] Revenue thereon shall be paid by such person or persons im- mediately upon notification of the amount of such assessment; And in case of neglect or refusal to make such return, the assessor or assistant assessors shall assess the amount of his or her income. — Act of July 1, 1862, § 93. And in case of neglect or refusal to make such return the assessor or assistant assessor shall assess the amount of his or her income, and the duty thereon, in the same manner as is provided for in other cases of neglect and refusal to furnish lists or returns in the provisions of this act, where not otherwise incompatible. — Act of June 30, 1864, § 118. And in case any person, guardian, or trustee shall neglect or refuse to make and render such lists or returns, or shall render a false or fraudulent list or return, it shall be the duty of the assessor or the assistant assessor to make such list, according to the best information he can obtain, by the examination of such person, and his books and accounts, or any other evi- dence.— Act of March 3, 1865, § 1. And in case any such person shall neglect or refuse to make and render such list or return, or shall render a false or fraudulent list or return, it shall be the duty of the assessor or the assistant assessor to make such list, according to the best information he can obtain, by the examination of such person, his books, accounts, or other evidence. — Act of March 2, 1867, § 13. In case any person having a. gross income as above, of two thousand dollars or more, shall neglect or refuse to make and render such return, or shall render a false or fraudulent return, the assessor or the assistant assessor shall make such return according to the best information he can obtain by the examination of said person, or of his books, or accounts, or by any other evidence. — Act of July 14, 1870, § 11 ANNOTATED STATUTE AND DIGEST. 649 And in case any such person having a taxable income shall neglect or refuse to make and render such list and return, or shall render a wilfully false or fraudulent list or return, it shall be the duty of the collector or deputy collector, to make such list, according to the best information he can obtain, by the examination of such person, or any other evidence. — Act of August 28, 1894. It was held in Alabama that there is no remedy to correct the mistake of a state assessor honestly made in determining the annual income, when the taxpayer refuses to make the re- turn required by law. To save his rights the taxpayer should make a proper return under protest. Lott V. Hubbard, 44 Ala. 593 (1870). In re Lippman, 3 Ben. 95, Fed. Cas. No. 8,382 (1868), U. S. Dist. Ct. S. Dist. E". Y. Blatchfobd, J., semble at p. 98, and to any sum or sums due and unpaid after the thirtieth day of June in any year, and for ten days after notice and demand there- of by the collector, there shall be added the sum of 5 per centum on the amount of tax unpaid, and interest at the rate of 1 per centum per month upon said tax from the time the same became due, ex- cept from the estates of insane, deceased, or insolvent persons. AH persons, firms, copartnerships, companies, corporations, joint- stock companies or associations, and insurance companies, in what- ever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, agents, receivers, conservators, employers, and all oSicers and employees of the United States having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, premiums, annuities, compensation, remuneration, emolu- ments, or other fixed or determinable annual gains, profits, and income of another person, exceeding $3,000 for any taxable year, other than dividends on capital stock, or from the net earnings of corporations and joint-stock companies or associations sub- ject to like tax, who are required to make and render a return in behalf of another, as provided herein, to the collector of his, her, or its district, are hereby authorized and required to deduct and withhold from such annual gains, profits, and income such sum as will be sufficient to pay the normal tax imposed thereon by this section, and shall pay to the officer of the United States Govern- ment authorized to receive the same; and they are each hereby made personally liable for such tax. In all cases where the in- 650 ASrWOTATED STATUTE AND DIGEST. come tax of a person is withheld and deducted and paid or to be paid at the source, as aforesaid, such person shall not receive the benefit of the deduction and exemption allowed in paragraph C of this section except by an application for refund of the tax unless he shall, not less than thirty days prior to the day on which the return of his income is due, file with the person who is re- quired to withhold and pay tax for him, a signed notice in writing claiming the benefit of such exemption and thereupon no tax shall be withheld upon the amount of such exemption: Provided, That if any person for the purpose of obtaining any allowance or re- duction by virtue of a claim for such exemption, either for him- self or for any other person, knowingly makes any false statement or false or fraudulent representation, he shall be liable to a penalty of $300; nor shall any person under the forgoing conditions be allowed the benefit of any deduction provided for in subsection B of this section unless he shall, not less than thirty days prior to the day on which the return of his income is due, either file with the person who is required to withhold and pay tax for him a true and correct return of his annual gains, profits, and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf by the person required to withhold and pay the tax, or likewise make application for deductions to the collector of the district in which return is made or to be made for him: Pro- vided further, That if such person is a minor or an insane person, or is absent from the United States, or is unable owing to serious illness to make the return and application above provided for, the return and application may be made for him or her by the person required to withhold cmd pay the tax, he making oath under the penalties of this Act that he has sufficient knowledge of the affairs and property of his beneficiary to enable him to make a full and complete return for him or her, and that the return and application made by him are full and complete: Provided further, That the amount of the normal tax hereinbefore imposed shall be deducted and withheld from fixed and determinable annual gains, profits, and income derived from interest upon bonds, and mort- gages, or deeds of trust or other similar obligations of corpo- rations, joint-stock companies or associations, and insurance com- panies, whether payable annually or at shorter or longer periods, although such interest does not amount to $3,000, subject to the provisions of this section requiring the tax to be withheld at the source and deducted from annual income and paid to the Govern- ment; And also all persons, firms, companies, copartnerships, corporations, joint stock companies or associations, and insurance companies, except as hereinafter provided, in whatever capacity acting, having the control, re- ceipt, disposal, or payment of fixed or determinable annual or periodical ANNOTATED STATUTE AND DIGEST. 651 gains, profits, and income of another person subject to tax, shall in behalf of such person deduct and withhold from the payment an amount equiv- alent to the normal income tax upon the same and make and render a re- turn, as aforesaid, but separate and distinct, of the portion of the income of each person from which the normal tax has been thus withheld, and con- taining also the name and address of such person or stating that the name and address or the address, as the case may be, are unknown. Provided, That the provision requiring the normal tax of individuals to be withheld a,t the source of the income shall not be construed to require any of such tax to be withheld prior to the first day of November, nineteen hundred ^nd thirteen: Provided further, That in either case above mentioned no return of income not exceeding $3,000 shall be required. D, supra. That it shall be the duty of every collector of internal revenue, to whom any payment of any taxes other than the tax represented by an adhesive stamp or other engraved stamp is made under the provisions of this sec- tion, to give to the person making such payment a full written or printed receipt, expressing the amount paid and the particular account for which such payment was made; and whenever such payment is made such col- lector shall, if required, give a separate receipt for each tax paid by any ■debtor, on account of payments, made to or to be made by him to separate creditors in such form that such debtor can conveniently produce the same separately to his several creditors in satisfaction of their respective de- mands to the amounts specified in such receipts; and such receipts shall be sufiicient evidence in favor of such debtor to justify him in withholding the amount therein expressed from his next payment to his creditor; but such creditor may, upon giving to his debtor a full written receipt, ac- knowledging the payment to him of whatever sum may be actually paid, and accepting the amount of tax paid as aforesaid (specifying the same) as a further satisfaction of the debt to that amount, require the surrender to him of such collector's receipt. — Subsection J, supra. That there shall be levied and collected a duty of five per centum on all dividends in scrip or money thereafter declared due, and whenever the same shall be payable, to stockholders, policy holders, or depositors, as part of the earnings, income, or gains, of any bank, trust company, savings insti- tution, and of any fire, marine, life, inland insurance company, either stock or mutual, under whatever name or style known or called, in the United States or territories, whether specifically incorporated or existing under general laws, and on all undistributed sums, or sums made or added dur- ing the year to their surplus or contingent funds; and said banks, trust companies, savings institutions, and insurance companies shall pay the said duty, and are hereby authorized to deduct and withhold from all pay- ments made on account of any dividends or sums of money that may be due and payable as aforesaid, the said duty of five per centum. And a list or return shall be made and rendered to the assessor. — ^Act of June 30, 1864, § 120. And be it further enacted, That any railroad, canal, turnpike, canal navigation, or slack-water company indebted for any money for which bonds or other evidences of indebtedness have been issued, payable in one or more 652 AWNOTATED STATUTE AND DIGEST. years after date, upon which interest is stipulated to be paid, or coupons representing the interest, or any such company that may have declared any dividend in scrip, or money due or payable to its stockholders, as part of the earnings, profits, income, or gains of such company, and all profit* of such company carried to the account of any fund, or used for construc- tion, shall be subject to and pay a duty of five per centum on the amount of all such interest, or coupons, dividends, or profits, whenever the sami- sliall be payable; and said companies are hereby authorized to deduct and withhold from all payments, on account of any interest, or coupons and dividends due and payable as aforesaid, the duty of five per centum; andi the payment of the amount of said duty so deducted from the interest, or coupons, or dividends, and certified by the president or treasurer of said company, shall discharge said company from that amount of the dividend, or interest, or coupon, on the bonds or other evidences of their indebted- ness so held by any person or party whatever, except where said companies may have contracted otherwise." — Act of June 30, 1864, § 122. And the payment to the United States, as provided by law, of the amount of tax so deducted from the interest, coupons, and dividends aforesaid, shall discharge the corporation from any liability for that amount of said interest, coupons, or dividends, claimed as due to any person, except in cases where said corporations have provided otherwise by an express contract. — Act of July 14, 1870, § 15. And it shall be the duty of all paymasters and all disbursing officer* under the government of the. United States, or in the employ thereof, when making any payments to officers and persons as aforesaid, or upon settling and adjusting the accounts of such oflScers and persons, to deduct and withhold the aforesaid duty of three per centum, and shall, at the same time, make a, certificate stating the name of the officer or person from whom such deduction was made, and the amount thereof, which shall be transmitted to the office of the Commissioner of Internal Revenue, and en- tered as part of the internal duties; and the pay-roll, receipts, or accounts of officers, or persons paying such duty, as aforesaid, shall be made t* exhibit the fact of such payment. — Act of July 1, 1862, § 86. And it shall be the duty of all paymasters, and [all — Act of July 13, 1866J disbursing officers, under the government of the United States, or [per- sons—Act of July 13, 1866] in the employ thereof, when making any pay- ments to officers and persons as aforesaid, or upon settling and adjust- ing the accounts of such officers, and [or — Act of July 13, 1866] persons, to deduct and withhold the aforesaid duty of five per centum, and shall at the same time make a certificate stating the name of the officer or person from whom such deduction was made, and the amount thereof, which shall be transmitted to the office of the Commissioner of Interna! Revenue, and entered as part of the internal duties; and the pay-roll, receipts, or account of officers or persons paying such duty, as aforesaid, shall be made to exhibit the fact of such payment.— Act of June 30, 1864, § 123; Act of July 13, 1866, § 1. And it shall be made the duty of the several auditors of the Treasury Department, when auditing the accounts of any paymaster or disbursing; ANNOTATED STATUTE AND DIGEST. 653 officer, or when settling or adjusting the accounts of any such officer, to require evidence that the duties or taxes mentioned in this section have been deducted or paid over to the Commissioner of Internal Revenue. — Act of June 30, 1864, § 123; Act of July 13, 1866, § 1. Provided, that payments of prize money shall be regarded as income from salaries, and the duty thereon shall be adjusted and collected in like manner.— Act of June 30, 1864, § 123; Act of July 13, 1866, § 1; Act of -March 2, 1867, § 13. And it shall be the duty of all paymasters and all disbursing officers, under the government of the United States, or persons in the employ thereof, when making any payment to any officers, or persons as afore- said, whose compensation is determined by a fixed salary, or upon settling or adjusting the accounts of such officers or persons, to deduct and witli- hold the aforesaid tax of five per centum, and the pay-roll, receipts, or account of such officers, or persons paying such tax as aforesaid shall be made to exhibit the fact of such payment. — Act of March 2, 1867, § 13. Provided further, that this section shall not apply to payments made to mechanics or laborers employed upon public works.— Act of July 13, 1866, § 1; Act of March 2, 1867, § 13. And it shall be the duty of the accounting officers of the Treasury De- partment, when auditing the accounts of any paymaster or disbursing officer, or any officer withholding his salary from moneys received by him, or when settling or adjusting the accounts of any such officer, to require ■evidence that the taxes mentioned in this section have been deducted and paid over to the treasurer of the United States, or other officer authorized to receive the same. — Act of March 2, 1867, § 13. And provided further, that in case it should become necessary for show- ing the true receipts of the government under the operation of this sec- tion, upon the books of the Treasury Department, the requisite amount may be carried from unappropriated moneys in the treasury to the credit of said account; and this section shall take effect upon salary and com- pensation for the month of March, eighteen hundred and sixty-seven. — Act of March 2, 1867, § 13. And it shall be the duty of all paymasters and all disbursing officers under the government of the United States, or persons in the employ thereof, when making any payment to any officers or persons as aforesaid, •whose compensation is determined by a fixed salary, or upon settling or adjusting the accounts of such officers or persons, to deduct and withhold the aforesaid tax of two per centum; and the pay-roll, receipts, or account of officers or persons paying such tax as aforesaid shall be made to exhibit the fact of such payment. And it shall be the duty of the accounting officers of the Treasury De- partment, when auditing the accounts of any paymaster or disbursing officer, or any officer withholding his salary from moneys received by him, or when settling or adjusting the accounts of any such officer, to require ■evidence that the taxes mentioned in this section have been deducted and paid over to the Treasury of the United States, or other officer authorized to receive the same. 654 ANNOTATED STATUTE AND DIGEST. Every corporation which pays an employee a salary or compenaatiora exceeding four thousand dollars per annum shall report the same to the' collector or deputy collector of his district, and said employee shall pay thereon, subject to the exemptions herein provided for, the tax of two- per centum on the excess of his salary over four thousand dollars. — ^Acfc of August 28, 1894, § 33. The practice of the Chancery Masters, with regard to claims- by creditors in the administration of insolvent estates, was to allow creditors to prove for the amount of the principal of their debts with interest (less income tax), on debts carrying interest by law, to the date of the judgment or order for administration. The interest (less tax) and any costs allowed, were added to the- principal, and dividends were calculated on the total amount. The income tax so deducted was not accounted for to the revenue, because, until the principal sums were paid, it was considered that no income tax was in fact payable. Under the form of order approved by Kekewich, J., a creditor was allowed to prove for the balance of principal outstanding with interest thereon to- the date of the judgment, without any deduction in respect of income tax. From each payment on account of interest, income tax was to be deducted thereon at the rate current at the time of the payment, and such income tax was to be transferred to- the account of the Commissioners of Inland Revenue at the- Bank of England. In re Green, Ball & Ellis [1904] W. N. 78, 105. In an action for rent the tenant may plead as to part, that he- has paid the landlord's property tax to that amount, in respect of the rent due to the plaintiff claimed by the declaration, after he- has in fact paid the tax. Tinckler v. Prentice (1812), 4 Taunt. 549. In an action for rent, the tenant, having paid the property tax before action brought, has an undoubted right to deduct it at the trial. Baker v. Davis [1813], 3 Campb. 474. In an action for rent, to entitle the tenant to deduct the prop- erty tax, it is sufficient to prove the payments to the collector,, without producing the assessment. Philips V. Beer (1815), 4 Campb. 266. The assignee of a term gave up at Michaelmas, to a second assignee, the occupation of a house, and aftei'wards paid three ANNOTATED STATUTE AND DIGEST. 655 quarters of a year's property tax, due at Michaelmas, and hand- ed over the receipt to the succeeding occupier : Held, that the succeeding occupier, paying two quarters of a year's rent ac- cruing at the following Christmas, might tender in part of his rent the receipt for property tax given to the former occupier, and might plead it as a payment made by himself. Clennel V. Eead, (1816), 7 Taunt. 50. An occupier of lands having, during a course of twelve years, paid to the collector of taxes the landlord's property tax, and the full rent as it became due to the landlord, without claiming any deduction on account of the tax so paid, it was held that the occupier could not recover back from the landlord any part of the property tax so paid. Denby v. Moore (1817), 1 Barn. & Aid. 123, 15 Eng. Eul. Cas. 322. Where a tenant pays property tax assessed on the premises, and omits to deduct it on his next payment of rent, he cannot afterwards recover the amount as money paid to the use of the landlord. Gumming v. Bedborough [1846], 15 Mees. & W. 438. A tenant has a right to deduct from his rent, the amount of the property tax assessed upon and paid by him in respect of his landlord, although the landlord is not, in fact, liable to be assessed, and has, before the payment, claimed exemption, and that exemption has been subsequently allowed. Swatman v. Ambler (1854), 8 Exch. 72, 24 L. J. Exch. IST. S. 185. By the Income Tax Act, 1842, 560, Schedule (a) No. IV. (ninth) the defendant, as tenant, at a rent of £100 per annum, of licensed premises, of which the plaintiffs were the landlords, was entitled to deduct from the "rent payable" to the landlord a sum in respect of landlord's property tax equal to Is. in the pound on such rent. Under section 3 sub-section 3 and Sched- ule II. of the Licensing Act 1904, he had previously deducted from the rent the sum of £14 part of a sum of £20 paid by him under sub-section 1, as contribution to the compensation fund created by that act. Held, that he was entitled in respect of his payment of landlord's property tax to deduct a sum based on the full rent of £100 and not on that rent less the sum of £14. 656 ANNOTATED STATUTE AND DIGEST. Hancock & Co. v. Gillard, 76 L. J. K. B. IST. S. 20 [1907] 1 K. B. 47, 95 L. T. N. S. 680, 71 J. P. 9, 23 Times L. E. 12. BiGHAM, J. A provision in a lease, that so long as any tax upon property or income should be imposed, the lessee should pay further rents depending on the amount of the tax, was held not to be illegal. Beadel v. Pitt (1865), 11 L. T. K S. 592, 13 Week. Eep. 287. An agreement that, if the tenant would continue to pay his rent in full, without any deduction in respect of the landlord's property tax paid by him, the landlord would repay to the ten- ant all sums which he had paid, or should pay, for landlord's property tax, was held not to be invalid as being contrary to the provisions of the British Act. Per Beett, L. J. (1879), L. E. 4 Q. B. Div. p. 609. A lessor demised to a colliery company, for the term of ninety-nine years, all the mines and minerals or seams of coal, the iron-stone, iron-ore and fireclay lying within and under certain lands, containing an area of 145 acres 3 roods 3 perches, or thereabouts, at the minimum yearly rent of £60 per annum for the first four years, and thereafter at £80 per annum, or, in the option of the lessor, at the rents or royalties therein men- tioned, based on the minerals worked or gotten by the lessees. The surface of the land was not comprised in the lease, but had been let by the lessor to another tenant for ordinary farming purposes, and such tenant was duly assessed to income tax un- der Sehed. (A.) as occupier thereof. No assessment to income tax had been made in respect of the said mineral seama, etc^ beneath the land. No mineral working or borings had taken place under or upon the land, but the mineral field of which the minerals formed part, had been bored by the lessees of the minerals. The mining operations of the company, however, had not reached the stage of the production of minerals. For each of the two years of assessment, being the first two years of the lease, the lessees had paid the lessor the minimum rate of £60, and upon payment thereof had deducted income tax, and the tax so deducted had not been paid over to the revenue. In the formation of the colliery, the company had also acquired and possessed certain freehold lands, the surface of which had been let by them to tenants for agricultural purposes. These ANNOTATED STATUTE AND DIGEST. 657 tenants had paid income tax under Sched. (A.) on these lands, and deducted the tax from the rent paid to the company. The taxed rents so received by the company constituted the sole in- come of the company chargeable under the Income Tax Acts. !N^o assessment had been made on the company in respect of the colliery or any mines : Held, by Hamilton, J., that the lessor was assessable in respect of the rents received by him from the company, imder Sched. (A.), No. II., r. 6, and that the com- pand was not assessable as occupier under Sched. (A.), No. I., and, further, that the rents received by the lessor were not "an- nuities," or annual payments ejiisdem generis with annuities and yearly interest of money, within § 102 of the British In- come Tax Act, 1842, or "annuities" within § 24 (3) of the Customs and Inland Eevenue Act 1888. Hill V. Gregory [1912], 2 K. B. 61, 81 L. J. K. B. IST. S. 730, 106 L. T. K S. 603, 6 Tax Gas. 39. The plaintiff, in consideration of £1,380 to be paid by in- stalments, granted and sold to the defendant a mine of coal for a term of fifty years; and the deiendant covenanted with the plaintiff to pay him £150 dovsm and £150 per year after that time, whether a quantity of coal equal to that amount should be got out of the mine or not ; and when, in any year, so many coals should be got out of the mine as would amount to more than £150 per year, then, that the defendant would pay for every Lancashire acre of coal the sum of £100, until the sum of £1,380 should be paid. The defendant, who had never worked the mine, claimed to deduct from a half-yearly instalment a sum paid by him for income tax. Held, that the instalment of £150 per year, was not "rent" within meaning of § 60 of the Income Tax Act, 1842 (5 & 6 Vict. chap. 35) ; and that assuming it to be an "annual payment" within the meaning of § 102, the plaintiff, and not defendant, was liable to be assessed to the in- come tax. Taylor v. Evans (1856), 25 L. J. Exch. K S. 269, 1 Hurlst. & IST. 101. By agreement between the plaintiffs and the defendants' predecessors, and by an assignment from the latter, the defend- ants acquired the exclusive right of selling and manufacturing articles by a secret process, and were to pay to the plaintiffs, Foster Income Tax. — 42. 658 ANIfOTATED STATUTE, AND DIGEST. for forty years, 8 per cent, on the gross receipts of such sales. The plaintiffs resided abroad and were foreigners. Before pay- ing the amount due under the contract to the plaintiffs, the de- fendants deducted the income tax payable thereon : Held, that they were entitled to do so, and that the payment was an annuity or annual payment payable out of profits or gains. Per Phillimobe, J. 92 L. T. E". S. p. 683. The defendants "were compelled by the Crown, and as it seems to me rightly compelled by the Crown, to pay on their net profits, without de- ducting the sum of money which they had to pay away as the 8 per cent. Rightly were they so compelled, because that sum of money was, at any rate as between the Crown and the tax- payers, to be viewed as no deduction from profits, but as part payment in the way of capital expenditure, for the article originally bought, out of which they made their profit." Delage v. Nugget Polish Co. (1905), 92 E". T. K S. 682, 21 Times L. E. 454. The total income of the appellant company of a quinquennial period was 2,515,1131. of this 1,710,3821. was derived from pre- miums and other sources brought into charge 804,7311. consisted of interest dividends, and rents from which income tax was de- ducted from the payments made. During the same period 218,- 4631. was paid to purchasers. From this same income tax was deducted by the company: — Held that the company were en- titled to retain the whole of the tax which had been so deducted from the annuities. London County Council v. Attorney General, 70 L. J. K. B. N. S. 77 (1901) A. 0. 26 ; applied in Edinburgh Life Assurance Co. v. Lord Advocate (1910), A. C. 143, 79 L. J. P. C. N. S. 41, 101 L. T. N. S. 826, 5 Tax Cases 472. A firm acting as underwriters, both in their own name and for other persons, under a mandate, by which they were author- ized, as agents for these persons, to underwrite in their names and for their account a sum not exceeding a certain amount on each risk, on such terms as the firm thought fit. The firm under their contract at the end of each year drew out a statement of the balance of profit and loss on the underwriting transactions on behalf of each of the persons for whom they underwrote. -iHNOTATED STATUTE AND DIGEST. 659 and if there was a balance of profit handed it over to him, under deduction of a commission and of a sum -which, it was stipu- lated, should remain in their hands as security : Held — on the construction of sections 42 and 51 of the Income Tax Act 1842 that the firm were bound to deliver to the assessor of income tax a list of the persons for whom they conducted the business of underwriting, with the names and addresses of such persons, and to include in such lists the amount of profit belonging to each person. By a mortgage which recited that the mortgagor was indebt- ed to the mortgagee, and it had been agreed that payment of the debt should be postponed, the mortgagor covenanted to pay on the death of himself or his son, whichever should first happen the amount of the debt with simple interest, and if the aggregate amount of such sum and interest should not then be paid, the mortgagor should pay to the mortgagee interest for such aggre- gate sum by equal half-yearly payments, the first of such pay- ments to become due six months after the death of the mortgagor or his son. The mortgagor died before his son, and the debt, with simple interest, became thereupon payable: — Held, that the mortgagor's legal personal representative, on payment of the debt and interest, might deduct income tax on the interest. Bebb V. Bunny (1 Kay & J. 216) applied. Goslings and Sharpe v. Blake (58 L. J. Q. B. IST. S. 446, L. E. 23 Q. B. Div. 324) distinguished. Craven's Mortgage In re: Davies v. Crava, 76 L. J. Ch. K S. 651 [1907] 2 Oh. 448, 97 L. T. N. S. 475, Wakeington, J. The annuities granted by an assurance company are payable out of the whole income of the company — ^both that portion thereof which is brought into charge for income tax and that from which income tax is deducted at the source. Edinbufg Life Assurance Co. v. Lord Advocate, 79 L. J. P. C. K S. 41 [1910] A. C. 143, 101 L. T. IST. S, 826, 54 Sol. Jo. 133, 26 Times L. E. 146, H. L. (Sc.) The plaintiff, who was the owner of a term of years in a cer- tain property, which was let for the whole term less twenty-one days at an annual gross rental of £1,925 entered into two contemporaneous deeds with the defendants, who were his sub- lessees. By the first deed he assigned to the defendants his re- 660 ANNOTATED STATUTE AITD DIGEST. version in the property in consideration of £1,000 and the deed of covenant of even date. By the latter deed the defendants covenanted to pay the plaintiff the annual sum of £1,000 which was the net rent the plaintiil had previously received from the property. 'No gross sum was fixed upon as the purchase price of the property. The defendants having in making these annual payments of £1,625 deducted income tax therefrom, the plaintiff sought to recover the sums so deducted : Held, that the defendants were right in deducting income tax from the annual payments as falling within section 40 of the Income Tax Act 1853. Chadwick v. Pearl Life Assurance Co. Y4 L. J. K. B. N". S. 671 [1905] 2 K. B. 507, 93 L. T. N. S. 25, 54 Week. Kep. 78, 21 Times L. E. 456. Walton, J. By marriage settlement, a husband contracted to pay his wife, should she survive him, "a free life-rent annuity of £1,200 sterling, exempted from all burdens and deductions whatso- ever:" Held, that the tax might be deducted; even if such a contract implied a covenant not to deduct the tax, it was void under § 103 of the British Income Tax Act, 1842. Blair v. Allen (1858), 21 Dunlop, 15, 31 Scot. Jur. 1. Under a deed of separation, a husband bound himself to pay to his wife a free yearly allowance of £1,000. His whole in- come consisted of an annuity of £3,000 paid to him free of tax, by his father, and of sums voluntarily paid by his father. The husband deducted income tax before paying the annuity to his vnfe : Held, that he was entitled to do so, as it was payable as a personal debt or obligation in virtue of a contract; the question whether he was bound to account for it to the Crown, was a question between him and the Crown, with which the wife had no concern. Dalrymple v. Dalrymple (1902), 4 E. 545, 39 Scot L. K. 348. A public body, which issues stock on which it pays dividends after deducting tax, and also owns and occupies premises for its own purposes on which it pays tax under Schedule A of the Income Tax Act 1842, is not entitled to recoup itself for this tax out of the tax deducted from the dividends on the stock. Attorney-General v. London County Council, 76 L. J. K. B. AITITOTATED STATUTE AND DIGEST. 661 N. S. 464, [1907] A. 0. 131, 96 L. T. K S. 481, 11 J. P. 217, 6 L. G. K. 465, 23 Times L. R. 390— H. L. (e). A gas company was prohibited by its special Act from paying dividends to its shareholders above a fixed rate per annum. The company claimed to deduct the amount of the income tax from its gross profits before paying any divi- dend, and then to pay the dividend in full to the shareholders : Held, that the company was not entitled to do so, and that in arriving at the rate of dividend, the profits ought to be calculated as inclusive, and not exclusive, of the amount payable in re- spect of income tax: Ashton Gas Co. v. Attorney-General [1906], A. C. 10, 75 L. J. Ch. IT. S. 1, 93 L. T. N. S. 676. The London County Council borrowed large sums of money by the issue of stock which, together with the dividends thereon, was specifically charged on the lands, rents, rates, and all other property of the Council, and in paying dividends on the stock deducted inconiie tax pursuant to section 24, sub-section 3 of the Customs and Inland Eevenue Act, 1888. The council also owned land, which they occupied for the purpose of their duties, and paid income tax under Schedule A. upon its annual value. The interest on the stock issued was greater than the amount received from rents and interests on loans together with the annual value of the lands which they owned and occupied, and the Council raised the amount by which their income was in- sufficient to pay the interest on the stocks by rates : Held, that the Council were entitled to retain out of the income tax deduct- ed from the dividends upon the stock a sum equivalent to the in- come tax paid under Schedule A. on the income they derived from rents and under Schedule D. on the income they derived from interest on loans. Attorney-General v. London County Council, 74 L. J. K. B. K S. 787 [1905], 2 K B. 375, 93 L. T. IST. S. 378, 53 Week. Eep. 677, 3 L. G. R. 951, 69 J. P. 333, 21 Times L. R. 604. C. A. Mortgage Interest, etc. Bankers had a mortgage for a fixed sum, and a banking account with their customer : Held, that al- though in dealings between merchants, in discounting bills and the like, and on loans made for short periods, the income tax ~was not deducted, yet, in a mortgage transaction, the mortgagor 662^ AKWOTATED STATUTE AND DIGEST. was entitled to deduct income tax. Per Sib Johit Eomilxy, M. K. 32^ 'Beav. p. 273 : "It is necessary, in all these cases, to distinguish between what is a banking account, as between banker and customer, and what is an account as between mort-' gagor and mortgagee. . . ." (P. 276) : "In all cases of mortgagor and mortgagee, when the court has once arrived at the conclusion that it is a case of mortgagor and mortgagee, the mortgagor is entitled to deduct the income tax from the interest paid to the mortgagee, which he necessarily has paid on the property mortgaged, either in the shape of deduction from his rents, or from his dividends prior to that period, and, accord- ingly, this is so provided by the Act." Mosse V. Salt (1863), 32 Beav. 269, 32 L. J. Ch. IST. S. 756. A railway company, whose undertaking yielded no profit, paid annually interest on its share capital and debenture stock, and made a return of the amount so paid in the year previous to the year of assessment, and was assessed thereon. The amount paid in the year of assessment having been greater than the amount of the previous year, the company was held liable in respect of the difference, which had been deducted by them on paying the interest, as a debt due to the Crown under the Cus- toms and Inland Eevenue Act, 1888 (51 & 52 Vict. chap. 8), § 24 (3). Lord Advocate v. Forth Bridge Rail. Co. [1890] 28 Scot. L. E. 576, 3 Tax Cas. 1. A debenture trust deed provided for payment of arrears of interest before principal. On the commencement of a debenture holder's action, an order of court directed that the trusts of the said deed should be carried into effect. The rate of interest under the debentures varied. Orders were from time to time made, directing distribution of the funds in court to the deben- ture holders, in proportion to the amounts certified to be due to them for interest. Those funds were made up of certain rents and royalties paid to the trustees ; from which income tax had been deducted. Subsequently the whole of the assets and prop- erty comprised in the trust deed were sold, and a final distribu- tion was proposed to be made to the debenture holders. The total of the distribution up to that time, amounted to a pay- ment of about 3s. 8 ^d in. the pound of the certified amount ANNOTATED STATUTE AND DIGBSTj 663 x)f interest due, and thei proposed final distribution, would in- crease that amount to about 6s. 2d. in the pound. On an appli- cation to the court for an order for a final distribution of the funds in court, and that the payments already made to the de- benture holders should be treated as payments on account of capital, it was held by Faewell, J., that as the debenture hold- ■ers did not possess the same interests, and the trust deed provid- ed for payment of interest before principal, the debenture holders could not waive their rights under that provision in the absence of agreement of all the debenture holders, although the provision was inserted in the deed for the benefit of the deben- ture holders, and any payments to them must be made in ac- cordance with the terms of the deed, and that income tax must be deducted from such payments as had not already borne the tax. Ee Queensland Land and Coal Co., Limited, Davis v. Martin (1903) (unreported). A debenture trust deed executed by a company, provided that the trustees should appropriate the proceeds of the realiza- tion of the securities, in the first place towards payment of all arrears of interest on the debentures, and secondly towards payment of the principal. After default, it was ordered, in an action by the debenture holders, that the trusts of the deed should be carried into execution. When practically all the securities had been realized, the trustees had in their hands, after payment of various sums from time to time and of the costs, a sum of money which it was proposed to pay to the debenture holders. It was claimed on behalf of the Commis- sioners of Inland Revenue, that these payments should be appro- priated to interest, and that income tax should be deducted: Held, on the facts, and on the construction of the orders direct- ing payment, that as it was clearly for the benefit of the deben- ture holders that the payments should be appropriated to prin- cipal, they ought to be so appropriated without putting the payees to their election, and consequently income tax ought not to be deducted. Smith V. Law Guarantee and Trust Society [1904] 2 Ch. 569, 73 L. J. Ch. K S. 733, 91 L. T. K S. 545. Interest paid to depositors by savings bank is considered a dividend, and the tax should be withheld therefrom, and paid to the Government. Ruling, 2 Int. Rev. Rec. 36. 664 ANNOTATED STATUTE AND DIGEST. Where a savings bank credits its depositors -with interest, the amount thus credited should be treated as a deposit and returned accordingly. Euling, 2 Int. Eev. Eec. 92. Under the Act of June 30, 1864, a railroad deducted the in- come tax from interest due a municipal corporation. Held, that the cixy could not recover the tax, so deducted, from the cor- poration. Having neglected to resist the collection of the tax by the United States from the railroad, it was precluded from raising the question of the legality of the tax as against the railroad. Baltimore v. Baltimore Railroad, 10 Wall. 543, 19 L. ed. 1043 (1870) U. S. Supreme Ct., Davis, J. And see U. S. v. Eailroad Company, 17 Wall. 322, 21 L. ed. 597 (1872) U. S. Supreme, in which the United States was not allowed to collect the tax from the city. Under the earlier statutes ruled that in a suit to recover taxes illegally collected, a tax on a fund for the payment of interest to nonresident alien bondholders is an excise tax on the business of the corporation and therefore valid. In a suit to recover payment of coupons brought by a non- resident alien bondholder, held that the Act of June 30, 1864, was not intended to apply to nonresident aliens, and that there- fore the defendant was not entitled to deduct the income tax from the coupons. "Congress has since, in express terms * * * imposed a tax on alien nonresident bondholders. The question hereafter will be, not whether the laws embrace the alien nonresident bondholder, but whether it is competent for Congress to impose it, upon which we express no opinion." Eailroad Co. v. Jackson, 7 Wall. 262, 19 L. ed. 88 (1868) U. S. Supreme, Nelson, J., affirming Jackson v. North. Cent. E. E. 2 Int. Eev. Eec. 174, I^ed. Cas. No. 7,142 (1865) U. S. C. 0. D. Md. Chase, C. J. "Whether Congress having the power to enforce the law, has authority to levy * * * a tax on the interest due by a citizen of the United States to one who is not domiciled within our limits, and who owes the Government no allegiance, is a question which we do not think necessary to the decision of this ANNOTATED STATUTE AND DIGEST. 665 Eailroad Co. v. Collector, 100 U. S. 595, 25 L. ed. 647 (\879) MiLLEE, J., affirming Michigan Central Eailroad v. Slack, 22 Int. Eev. Eec. 337, Fed. Cas. No. 9,527 (1876) U. S. Cir. Ct., Dist. Mass., Claek, J. U. S. V. Erie Eailway Co. 106 U. S. 327, 27 L. ed. 151, 1 Sup. Ct. Eep. 223 (1882) Waite, C. J., reversing U. S. v. Erie Eailway Co. 24 Int. Eev. Eec. 76, Eed. Cas. No. 15,056 (1878) U. S. D. C. S. D. N. Y., Blatcheokd, J. See concurring opinion by Beadley, J., at p. 703, quoted supra. Quaere, vyhether a declaration that except when the company had contracted otherwise it might deduct the tax from interest due nonresident alien bondholders would, as a matter of inter- national law, relieve the company from its obligation to such bondholders ? Eailroad Co. v. Collector, 100 U. S. 595, 25 L. ed. 647 (1879) MiLLEE, J. The tax was on the fund in the hands of, and belonging to, the corporation, and not on the bondholder. So heldj of interest and dividends accruing and earned in the last year of the tax, but payable the year following, the tax being therefore collectible thereon. Barnes v. The Eailroads, 17 Wall. 294, 21 L. ed. 544 (1872) U. S. Supreme, Clipeoed, J. (Waite, C. J., Steong, Davis, and EiBED, J J., dissenting.) Stockdale v. Insurance Cos. 20 Wall. 323, 22 L. ed. 348 (1873) U. S. Supreme, Millee, J. Semble that under the Act of July 13, 1866, when the corpo- ration has paid its interest in full instead of deducting the tax, the tax falls upon it and not upon the bondholders. Michigan Central E. E. v. Slack, 22 Int. Eev. Eec. 337, Eed. Cas. No. 9,527 (1876) U. S. C. C. D. Mass., Claek, J. Contra, of interest paid to a municipal corporation whose income was not taxable, the tax therefore being not collectible thereon. U. S. V. Eailroad Company, 17 Wall. 322, 21 L. ed. 597 (1872) U. S. Supreme, Hunt, J. But see reporters' note and footnote at p. 335. And see Baltimore v. Baliimore Eailroad, 10 Wall. 543, 19 L. ed. 1043 (1870) U. S. Supreme, in which the city was not allowed to recover from the corporation taxes already paid to the United States. 66# AWIfOTATED STATUTE AND DIGEST;. Ooritra, iilso, where the law of a state directed ithe corpora- tion to "retain" the tax out of interest, such law being uncon- stitutional as to nonresident bondholders, because it impaired the obligation of the contract. State Tax on Foreign Held Bonds, 15 Wall. 300, ,21, L. ed. 179 (1872) U. S. Supreme, Field, J., following the judgment in Railroad Co. v. Jackson, 7 Wall. 262, 19 L. ed. 88 (1868) U. S. Supreme, Nelson, J. But so held, of a fund in the hands of a foreign corporation payable without the state to citizens of the state, sijch fund not being taxable by the state because not within its jurisdiction. i K Y. etc. Eailroad v. Pennsylvania, 153 U. S. 628, 38 L., ed. 846, 14 Sup. Ct. Eep. 952 (1893) Haelan, J., reversing Commonwealth v. N. Y. etc. E. E. 150 Pa. 234, 24 Atl. 609; (1892). Contra, also, where the corporation contracted to pay interest without defalcation of taxes, it being permitted to deduct the income tax from the interest due. i Haight V. Eailroad Co. 6 Wall. 15, 18 L. ed. 818,(1867) IT. S. Supreme, Geiee, J., affirming s. c. sub nam. Haight v. Pitts- burgh, etc. Eailroad Co. 1 Abb. U. S. 81, Fed. Cas. No. 5,903 (1867) U. S. D. C. W. D. Pa., McCandless, J. Contra, also, of interest payable in the year following the last year of the tax, the tax not being collectible thereon. [The court distinguishes this case from Barnes v. Eailroads on the ground that it appeared there expressly that the , dividends (nothing being said of the interest in that case) were earned in the last year of the tax, while in the principal case there was no finding as to when the interest was earned, the only finding being that the interest was paid after the tax lapsed.] Railroad Co. v. U. S. 101 U. S. 543, 25 L. ed. 1068 (1879) Waite, C. J. 8o held J however, of dividends earned, declared, and paid during the war and within the Confederate lines by a corporal tion under the jurisdiction of the United States, such dividends being taxable. Memphis, etc. E. E. v. U. S. 108 U. S. 228, 27 L. ed. 711 (1882) Waite, C. J. Contra, also, of interest accruing and earned in the last year of the tax, but payable the year following. The tax being ANNOTATED STATUTE AND DIGEST. 667 therefore not collectible. [In this case it appeared expressly that the interest was paid out of earnings made in the last year •of the tax, and thus the case falls within the distinction taken -as to Barnes v. Eailroads in Eailroad Co. v. U. S. 101 U. S. 543, 25 L. ed. 1068, which is relied on as a controlling authority. The court say, at p. 713, "We do not perceive that the liability -of the corporation for tax on this interest, as such, is affected by the circumstance that the interest was paid out of the earnings •of the previous year." The distinction should probably be regarded as overruled, though the case taking it is followed.] U. S. V. Indianapolis, etc. E. E. 113 U. S. 711, 28 L. ed. 1140, 5 Sup. Ct. Eep. 724 (1884), Haelan, J. An English company claimed a deduction on account of in- terest paid to non-resident alien bondholders. Hfild, not al- lowable. Alexandria Water Co.>. Musgrave, L. E. 11 Q. B. Div. 174 [1883] Beett, M. E. "I am unwilling to give an opinion whether the foreign de- benture-holder can be made to repay the company, because such •debenture-holder is not now before us, but I confess I have a :strong suspicion that those who drew this act meant, as far as English legislation can do so, to make him liable; but whether the foreign debenture-holder can be made to pay or not, that is to say whether the company in paying him can or not deduct ■the tax, is immaterial. If they can, there is no hardship; if -they cannot, the hardship is imposed upon them by the plain terms of the act." Ibid., Beett, M. E., at p. 179. and likewise the amount of such tax shall be deducted and withheld from coupons, checks, or bills of exchange for or in payment of interest upon bonds of foreign countries and upon foreign mort- gages or like obligations (not payable in the United States), and also from coupons, checks, or bills of exchange for or in payment of any dividends upon the stock or interest upon the obligations of foreign corporations, associations, and insurance companies ^engaged in business in foreign countries; and the tax in each case shall be withheld and deducted for and in behalf of any person sub- ject to the tax hereinbefore imposed, although such interest, div- idends, or other compensation does not exceed $3,000, ^ew. See British statutes infra. Provided, That the provision requiring the normal tax of individuals ito be withheld at the source of the income shall not be construed to re- 668 ANNOTATED STATUTE AND DIGEST. quire any of such tax to be withheld prior to the first day of November^ 1913: Provided further, That in either case above mentioned no return, of income not exceeding $3,000 shall be required: — Supra in D. Provided further, That the amount of the normal tax hereinbefore im- posed shall be deducted and withheld from fixed and determinable annual gains, profits, and income derived from interest upon bonds and mortgages, or deeds of trust or other similar obligations of corporations, joint-stock companies or associations, and insurance companies, whether payable an- nually or at shorter or longer periods, although such interest does not amount to $3,000, subject to the provisions of this section requiring tha tax to be withheld at the source and deducted from annual income andt paid to the Government; — Supra in E. The dividends of a foreign company were payable either at its London; agency or abroad, at the option of the shareholder. The agincy received no remittance from abroad to pay the dividends demanded of them in Lon- don in a particular year, because the agency profits were sufficient for the purpose: Held, that the dividends paid in London were entrusted to the agency for payment, within the meaning of the Income Tax Act, 1853, § 10; but that in assessing the dividends, an allowance should be granted in re- spect of that portion which arose from the previously taxed profits of the English agency: Gilbertson v. Ferguson (1881), 7 Q. B. D. 562; 46 L. T. 10; 1 Tax Cas. 501. The banking company, which had its head offices in Australia, and carried on a banking business at a branch office in London, paid interest on its Interminable Stock. Such interest was payable out of its total profits, including the profits made in the United Kingdom. For the year ending April 5th, 1901, the profits of the London branch amounted to £9,419, on £1,000 of which income tax was paid. During the same period, the company paid, through the Loudon branch, the sum of £68,539,. in respect of interest on Interminable Stock, to certain holders of such stock in the United Kingdom, and upon this sum, income tax was de- ducted and paid over to the Revenue. The company, by petition of right,, claimed repayment of the income tax paid on the above sum of £1,000. It was held on February 17th, 1909, by Channell, J., in the King's Bench Division, that a proportionate part only of the tax on the sum of £1,000- was returnable to the company, as the interest was payable out of the whole profits of the company: Queensland National Bank v. The King (1909) (unreported). New. See British statutes infra, by any banker or person vyho shall sell or otherwise realize coupons, checks, or bills of exchange drawn or made in payment of any such interest or dividends (not payable in the United States), and any person who shall obtain payment (not in the United States),, in behalf of another of such dividends and interest by means of cou- pons, checks or bills of exchange, and also any dealer in such cou- pons who shall purchase the same for any such dividends or in- terest (not payable in the United States), otherwise than from a< banker or another dealer in such coupons; All persons, firms, or corporations undertaking as a matter of business. ANNOTATED STATUTE AND DIGEST. 669 or fo" profit the collection of foreign payments of such interest or divi- dends by means of coupons, checks, or bill of exchange shall obtain a li- cense from the Commissioner of Internal Revenue, and shall be subject to such regulations enabling the Government to ascertain and verify the due withholding and payment of the income tax required to be withheld and paid as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe; — Infra in E. New. See British statutes infra, hut in each case the benefit of the exemption and the deduction al- lowable under this section may be had by complying with the fore- going provisions of this paragraph. New. See British statutes infra. In all cases where the income tax of a person is withheld and deducted and paid or to be paid at the source, as aforesaid, such person shall not receive the benefit ofrthe deduction and exemption allowed in paragraph C of this section except by an application for refund of the tax unless he shall, not less than thirty days prior to the day on which the return of his income is due, file with the person who is required to withhold and pay tax for him, a signed notice in writing claiming the benefit of such ex- emption and thereupon no tax shall be withheld upon the amount of such •exemption: Provided, That if any person for the purpose of obtaining any allowance or reduction by virtue of a claim for such exemption, either for himself or for any other person, knowingly makes any false statement or false or fraudulent representation, he shall be liable to a penalty of $300; nor shall any person under the foregoing conditions be allowed the benefit of any deduction provided for in subsection B of this section unless he shall, not less than thirty days prior to the day on which the return of his income is due, either file with the person who is re- quired to withhold and pay tax for him a true and correct return of his annual gains, profits, and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a a part of the return to be made in his behalf by the person required to withhold and pay the tax, or likewise make application for deductions to the collector of the district in which return is made or to be made for him: Provided further. That if such person is a minor or an insane person, or is absent from the United States, or is unable owing to serious illness to make the return and application above provided for, the return and application may be made for him or her by the person required to withhold and pay the tax, he making oath under the penalties of this Act that he has sufiicient knowledge of the affairs and property of his beneficiary to enable him to make a full and complete return for him or her, and that the return and application made by him are full and com- plete. — supra. All persons, firms, or corporations 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 shall obtain a license from the Commissioner of Internal Revenue, and shall be subject to such regulations enabling the government to ascertain and verify the due withholding and payment of the income 670 ANNOTATED STATUTE AND DIGEST. tax required to be withheld and paid as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe; and any person who shall knowingly undertake to collect such payments as aforesaid without having obtained a license there- fore, or without complying with such regulations, shall be deemed guilty of a misdemeanor and for each offense be fined in a sum not exceeding $5,000, or imprisoned for a term not exceeding one year,, or both, in the discretion of the court. These regulations are printed infra. Nothing in this section shall be construed to release a taxable- person from liability for income tax, nor shall any contract entered into after this Act takes effect be valid in regard to any Federal!, income tax imposed upon a person liable to such payment. New. See British statutes infra. "The defeasance clause of the mortgage was thus : 'Provided, always, that if the said railway company or their successors do well and truly pay to the said Haight, the said $100,000 on the days and times hereinbefore mentioned, together with the interest payable thereon, without any deduction, defalcation or abatement to be made of anything for or in respect of any taxes, charges or assessments whatsoever, then,' &c. The railway com- pany having retained five per cent, on the amount of the cou- pons, as they paid them, Haight brought suit against it, con- tending that it could not deduct the taxes from the interest due him, because it had, in the language of the act of Congress, 'con- tracted otherwise.' " Held, that the mortgage could deduct from its coupons the five per centum thereof paid to the United States under § 122 of the Act of June 30, 1864. Haight V. Eailroad Co. 6 Wall. 15, 16, 18 L. ed. 818, quoted in full, infra. The tax herein imposed upon annual gains, profits, and income not falling under the foregoing and not returned and paid by virtue of the foregoing shall be assessed by personal return under rules and regulations to be prescribed by the commissioner of internal rev- enue and approved by the Secretary of the Treasury. The pro- visions of this section relating to the deduction and payment of the tax at the source of income shall only apply to the normal tax hereinbefore imposed upon individuals. In addition to the income ■ tax provided under this section ( herein re- ferred to as the normal income tax) there sliall be levied, assessed, and collected upon the net income of every individual an additional income tax (herein referred to as the additional tax) of one per centum per annum upon the amount by which the total net income exceeds twenty ANNOTATED STATUTE AND DIGEST. 611 thousand ddllars and does not exceed fifty thousand dollars, and two per •ceintum per annum upon the amount by which the total net income ex- ceeds' fifty thousand dollars and does not exceed seventy-five thousand dollars, three per centum per annum upon the amount by which the total net income exceeds seventy-five thousand dollars and does not exceed one hundred thousand dollars, four per centum per annum upon the amount by which the total net income exceeds one hundred thousand dollars and does not exceed two hundred and fifty thousand dollars, five per cen- tum per annum upon the amount by which the total net income exceeds two hundred and fifty thousand dollars and does not exceed five hundred thousand dollars, and six per centum per annum upon the amount by which the total net income exceeds five hundred thousand dollars. All the provisions of this section relating to individuals who are to be charge- able with the normal income tax, so far as they are applicable and are not inconsistent with this subdivision of paragraph A, shall apply to the levy, assessment, and collection of the additional tax imposed under this section. — Subsection A, supra. The rules and regulations are printed infra. F. That if any person, corporation, joint-stock company, associa- tion, or insurance company liable to make the return or pay the tax aforesaid shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, such persons shall be liable to a penalty of not less than $20 nor more than $1,000. Any person or any officer of any corporation required by law to make, render, sign, or verify any return who makes any false or fraudulent re- turn or statement with intent to defeat or evade the assessment re- quired by this section to be ir.ade shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000 or be imprisoned not ex- ceeding one year, or both, at the discretion of the court, with the costs of prosecution. If any of the corporations, joint-stock companies or associations, or in- surance companies aforesaid, shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, or shall render a false or fraudulent return, such corporation, joint-stock company or associa- tion, or insurance company shall be liable to a penalty of not exceeding $10,000. — Subsection G (d) infra. In case of any return of a false or fraudulent list or valuation inten- tionally he shall add 100 per centum to such tax; and in case of a refusal or neglect, except in cases of sickness or absence, to make a list or return, or to verify the same as aforesaid, he shall add fifty per centum to such tax. In case of neglect occasioned by sickness or absence as aforesaid the collector may allow such further time for making and delivering such list or return, as he may deem necessary, not exceeding thirty days. The amount so added to the tax shall be collected at the same time and in the same manner as the tax unless the neglect or falsity is discovered after the tax has been paid, in which case the amount so added shall be col- lected in the same manner as the tax; and the list or return so made and 672 AlTlirOTATED STATUTE ANB DIGEST. subscribed by such collector or deputy collector shall be held prima facie good and sufficient for all legal purposes. U. S. Rev. Stat. § 3176 (U. S. Comp. Stat. 1901, p. 2068) as an.ended by this act. Subsection I. Only one penalty can be required for all failures to make returns prior to the beginning of the action therefor. So held, also, of failures to pay the tax. U. S. V. Brooklyn, etc. Ey. 14 Fed. 284 (1882), U. S. C. Ct. E. Dist. IST. Y., Benedict, J. U. S. V. ]Sr. Y. Guarantee, etc. Co. 8 Ben. 269, Fed. Cas. ITo. 15,872 (1875), U. S. Dist. Ot., S. Dist. N. Y. Blatch- EOED, J. The power of the assessor upon finding the first return to be false to add the penalty is not a judicial power in such a sense as to render the statute conferring it unconstitutional. In re Brown, 3 Int. Eev. Eec. 134, Fed. Cas. Wo. 1,977 (1866) U. S. Dist. Ct., N. Dist. K Y., Smallet, J. Where the returns of a manufacturer are understated, even where no attempt to default the revenue appears, as a general rule the penalty of 50 per cent, should be assessed, and when fraud appears, the specific penalty of fine should be added. Euling, 3 Int. Eev. Eec. 60. The fine of 50 per cent, in case of fraudulent or understated returns is to be assessed on the deficiency of the tax withheld, and not on the whole amount of the tax. Euling, 3 Int. Eev. Eec. 60. G (a) That the normal tax hereinbefore imposed upon iiidividuals likewise shall be levied, assessed, and paid annually upon the en- tire net income arising or accruing from all sources during the pre- ceding calendar year to every corporation, joint-stock company or association, And be it further enacted, That any railroad, canal, turnpike, canal navigation, or slack-water company indebted for any money for which bonds or other evidences of indebtedness have been issued, payable in one or more years after date, upon which interest is stipulated to be paid, or coupons representing the interest, or any such company that may have declared any dividend in scrip, or money due or payable to its stockholders, as part of the earnings, profits, income, or gains of such company, and all profits of such company carried to the account of any fund, or used for construction, shall be subject to and pay a duty of five per centum on the amount of all such interest, or coupons, dividends, or profits, whenever the same shall be payable; and said companies are hereby authorized to ANNOTATED STATUTE AND DIGEST. 673 deduct and withhold from all payments, on account of any interest, or coupons and dividends due and payable as aforesaid, the duty of five per centum; and the payment of the amount of said duty so deducted from the interest, or coupons, or dividends, and certified by the president or treasurer of said company, shall discharge said company from that amount of the dividend, or interest, or coupon, on the bonds or other evidences of their indebtedness so held by any person or party whatever, except where said companies may have contracted otherwise. — ^Act of June 30, 1864, § 122. That there shall be assessed, levied, and collected, except as herein other- wise provided, a tax of two per centum annually on the net profits or income of all banks, banking institutions, trust companies, savings institu- tions, fire, marine, life, and other insurance companies, railroad, canal, turnpike, canal-navigation, slack-water, telephone, telegraph, express, elec- tric light, gas, water, street railway companies, and all other corporations, companies, or associations. The net profits or income of all corporations, companies, or associations shall include the amounts paid to shareholders, or carried to the account of any fund, or used for construction, enlarge- ment of plant, or any other expenditure or investment paid from the net annual profits made or acquired by said corporations, companies, or asso- ciations. — Act of August 28, 1894, § 32. That every corporation, joint stock company, or association, organized for profit and having a capital stock represented by shares, and every in- surance company, now or hereafter organized under the laws of the United States or of any state or territory of the United States or under the acts of Congress applicable to Alaska or the District of Columbia, or now or hereafter organized under the territory of the United States or in Alaska or in the District of Columbia, shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such cor- poration, joint stock company, or association, or insurance company, equiva- lent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed. — Corporation Tax Law, 1909, infra, 3. ISTet income of a corporation is liable to taxation whether declared in dividends or not. Commonwealth v. Ocean Oil Co., 59 Pa. 61, 14 Mor. Min. Eep. 126 (1868). Semble that dividends are not net earnings or income and a corporation is taxable on its net earnings, although it declares no dividends and had commuted all taxes on its dividends by the payment of a lump sum. Jones, etc., Co. v. Commonwealth, 69 Pa. 137 (1871). !N"et earnings, whether carried to construction account or Foster Income Tax. — 43. 674 ANNOTATED STATUTE AND DIGEST. devoted to payment of interest on subsidy bonds, issued to the corporation by the United States, are taxable under the Act of June 30, 1864, as amended by the Act of July 13, 1866. Sioux City, etc., E. E. v. U. S, 110 U. S. 205, 28 L. ed. 120, 3 Sup. Ct. Eep. 565 (1884), Beadlet, J. "Net earnings," as used in a stipulation of counsel, construed to mean "all profits * * * carried to the account of any fund or used for construction." Ibid. An oil company was incorporated with a capital of one mill- ion dollars. Held, that the statutory phrase "net earnings or income" meant net income after deducting expenses, but not net income after applying the proceeds of the sale of its oil to the repayment to the stocltholders of the capital stock until the capital was repaid. Commonwealth v. Ocean Oil Co. 59 Pa. 61, 14 Mor. Min. Eep. 126 (1868). Commonwealth v. Penn Gas Coal Co. 62 Pa. 241, 14 Mor. Min. Eep. 163 (1869). A tax on gross receipts is not a tax on dividends. So held, where a city sued under a special statute to recover taxes paid on dividends on shares which it owned and it appeared that the corporation had paid only the tax on its gross receipts under § 103 of the Act of June 30, 1864. Commissioners of Sinking Fund v. Buclmer, 48 Ped. 533 (1891), U. S. Cir. Ct., D. Ky., Bake, J. The profits of a corporation may include a sum distributable to customers instead of to the shareholders. So held, when an insurance company, in consideration of increased premiums paid, agreed to return to the insured two-thirds of whatever "gross-profits" the company should have received from such premiums at the end of every five years, which two-thirds are taxable. Last V. London Assurance Co., L. K. 10 App. Cas. 438 (1885), reversing s. c. L. E. 12 Q. B. Div. 389 (1884), Day, J., and L. E. 14 Q. B. Div. 245 (1884). "The question is very important. * * * jf ^he conten- tion of the Crown is right, income tax will be payable in all cases in which employers have agreed with employed that, AM-NOTATED STATUTE AND DIGEST. 675 besides fixed wages, the employed shall receive what is called a share of the profits. The income tax will apply to co-operative soideties strictly so-called, and be payable on a sum falsely called profits, with no deduction of the wages contingently payable to workmen, if gross profits enable them to be paid. * * * I think it would be most disastrous, and most unreasonable." Ibid. LoED Beamwell, dissenting, at p. 448. The surplus over expenses of premiums paid in by the mem- bers of a mutual insurance company was redistributed to the members. Held, not taxable. Distinguishing Last v. London Assurance Co., L. R 10 App. Cas. 438 (1885). N. Y. Life Ins. Co. v. Styles, L. E. 14 App. Cas. 381 (1889), H. L. "Several persons contribute sums towards a book club to continue for a year. At the end of the year the expenses are less than the fund. Are the amounts returned 'profits' ?" Ibid., Lord Beamwell, dissenting arguendo, at p. 387. Profits "used for construction" were distinguished from profits "carried to the account of any fund" in the Act of June 30, 1864; in the Act of July 14, 1870, the latter were included, but the former not. Held, therefore, that profits used for con- struction were not taxable under that act. Marquette, etc., E. E. Co. v. U. S., 123 U. S. 722, 31 L. ed. 302, 8 Sup. Ct. Eep. 319 (1887), Waite, C. J., reversing U. S. V. Marquette, etc.,,E. E., 17 Fed. 719 (1883), U. S. Cir. Ct., W. Dist. Mich. Withey, J. Profits "used for construction" do not include earnings expended in keeping the property up to its normal condition. So held, of earnings expended in building a stone bridge in place of an old wooden one deemed insecure. Grant v. Hartford, etc., E. E. 93 U. S. 225, 23 L. ed. 878 (1876), Beadley, J., afiirming Hartford, etc., E. E. v. Grant, 9 Blatchf. 542, Fed. Cas. No. 6,159 (1872), U. S. Cir. Ct., Dist. Conn., Shipman, J. 8ed quaere, of the increase in value of the new bridge over the old one ? Ibid. Semble, that where the new bridge is more costly that the old, the increase of value is profits used in construction. Ibid. Where the increase of value came from a fund devoted to 676 ANNOTATED STATUTE AND DIGEST. general repairs of a plant, so that it is merely "withholding proper expenditure from one portion of the line and devoting it to another," heldj that such expenditure is not part of the "profits used in construction." Ibid. The declaration of a dividend was conclusive, and the corpora- tion was not allowed to set up a loss, e. g. by embezzlement, which it failed to take into account in declaring the dividend as a defense to an action for taxes on the dividend under a former statute. Central National Bank v. U. S., 137 U. S. 355, 34 L. ed. 703, 11 Sup. Ct. Eep. 126 (1890), Harlan, J., afiirming U. S. v. Central National Bank, 24 Fed. 577 (1885), U. S. Cir. Ct., S. Dist. ISr. Y., Wallace, J., which reversed s. c, 15 Fed. 222 (1883), TJ. S. Dist. Ct., S. Dist. IST.. Y., Bkown, J., and see s. c, 10 Fed. 613 (1882), U. S. Dist. Ct., S. Dist. N. Y., Beown, J. When a tax is on capital stock measured by dividends, the corporation cannot deduct from a declared dividend the amount contributed by stockholders to meet losses. Columbia Conduit Co. v. Commonwealth, 90 Pa. 307, 14 Mor. Min. Eep. 197 (1879). "To constitute a cause of action under this section (§ 120 of the Act of June 30, 1864), the complaint is sufficient, if it aver either a dividend declared or the earning of profits, which, in- stead of being divided, have gone to increase the surplus fund of the corporation." Benedict, J., in U. S. v. Brooklyn, etc., E. E., 14 Fed. 284 (1884), U. S. Dist. Ct., E. Dist. K Y. When a debt is canceled by the consolidation of the debtor and creditor companies, it is paid, but presumably not paid out of earnings or profits, and no tax is collectible thereon. U. S. V. Louisville, etc., E. E., 33 Fed. 829 (1888), U. S. Cir. Ct., Dist. Ky., Baee, J. An insurance company granted an annuity in consideration of a lump sum paid at the time of granting the annuity. Held, that the annuities were not "payable out of profits" and there- fore not taxable. Gresham Life Assurance ,Soo. v. Styles [1892] A. C, 309, ANNOTATED STATUTE AND DIGEST. 677 House of Lords, reversing s. c. L. E. 25 Q. B. Div. 351 (1890), and s. c. L. E. 24 Q. B. D. 500 (1890). "An annuity to the widow of a deceased partner, interest on capital advanced by a partner, or upon money borrowed for the purposes of the business, are truly payable out of profits earned, and therefore ought not to be deducted in estimating the income yielded by the business." Ibid. Lord Watson, at p. 320. The insurance company, under its charter, reserved a per- centage of its earnings as a fund to meet losses, and issued certificates to its members to the effect that they had a pro rata interest therein. Held, under a law taxing capital, that such a fund was capital. Sun Mutual Ins. Co. v. The Mayor, 8 N. Y. 241 (1853). A statute exempting the "stock" of a corporation exempts also the "gross income." Such income undistributed is the property of the corporation. State ex rel. So. Car. E. Co. v. Hood, 15 Eich. L. 177 (1868), S. Car. Ct. App. In determining the amount of taxable gains of a corporation under Section 120 of the Act of June 30, 1864, only such losses as were ascertained and settled during the period covered by the return can be deducted. Euling, 3 Int. Eev. Eec. 100. In determining the net profits of a national bank under sec- tions 120 and 121, the amount of semi-annual tax on the capital circulation on deposits paid by the bank during the period covered by the returns of such profits, may be deducted the same as other expenses, but no deduction should be made on account of the tax of five per cent, withheld from dividends paid upon surplus funds. Euling, 5 Int. Eev. Eec. 74. In determining the amount of tax upon the net gains of the corporations mentioned in sections 120 and 122, no deduction should be made on account of that part of the earnings, being the interest upon railroad bonds owned by them, upon which a tax has been withheld; or on account of tax withheld by other corporations from dividends payable to them. The law does not authorize any other deduction from the tax on divi- 6Y8 AlifNOTATED STATUTE AND DIGEST. dends and surplus profits, net gains, than that for tax once paid by the same corporation on that part of its surplus funds ^vhich is taken to complete dividends. Ruling, 5 Int. Eev. Eec. 91. Insurance companies in ascertaining the amount of their taxable gross receipts for premiums and assessments, cannot deduct the amounts paid for re-insurance. Rilling, 3 Int. Eev. Eec. 13. Under the Corporation-Tax Lavf of August 5, 1909, held, that corporations of the following character are not organized for profit, and consequently not subject to the income tax therein imposed : A corporation, the sole purpose of which is to hold title to a single parcel of real estate, subject to a long lease, and to receive and distribute the rents and the proceeds of the dis- position of the rents. Zonne v. Minneapolis Syndicate, 220 U. S. 187, 55 L. ed. 428, 31 Sup. Ct. Eep. 361, reported in full infra. A railroad company which has leased its railroad to another corporation, which operates the same exclusively, when the for- mer maintains its corporate existence, collects and distributes to its stockholders the rentals and dividends from other invest- ments. McCoach V. Minehill & Schuylkill Haven E. E. Co., 228 TJ. S. 295, 57 L. ed. 2, 33 Sup. Ct. Rep. 419, quoted in full in- fra. A corporation organized to own the stock of another company, which has no assets except such stock, its office furniture and a small bank deposit, and transacts no business except to re- ceive the dividends from the operating company and distribute the same. U. S. V. Nipissing Mines Co. 206 Fed. 431. It was further held that an association was not organized for profit and was consequently not subject to the Corporation In- come Tax, when it consisted of trustees holding land under a trust for the purpose of buying, improving, holding and selling the same, although they had issued transferable certificates to shareholders. Eliot V. Freeman, 220 U. S. 178, 55 L. ed. 424, 31 Sup. Ct. Eep. 360. ANNOTATED STATUTE AND DIGEST. 679 Under the Corporation-Tax Law of August 5, 1909, it was held that the following corporations were organized for the purpose of profit and subject to the Corporation Income Tax therein imposed: A company which owns and leases taxicabs and collected rents from the same. Motor Taximeter Cab Company Case, No. 432 — Flint v. Stone Tracy Co. 220 U. S. 107, 171, 55 L. ed. 389, 421, 31 Sup. Ct. Rep. 342, Ann. Cas. 1912 B, 1312. Realty companies formed for the purpose of owning, holding and managing real estate, which leased buildings to different tenants, although one of them transacted no business except the managing and leasing of a hotel. Cedar Street Company v. Park Realty Company, No. 415 — Flint V. Stone Tracy Co., 220 U. S. 107, 169, 55 L. ed. 389, 420, 31 Sup. Ct. Rep. 342, Ann. Cas. 1912 B, 1312. A corporation owning and leasing ore lands, which received from tenants a royalty dependent upon the quantity of ore mined by them. Mitchell V. Clark Iron Company, No; 446 — Flint v. Stone Tracy Co. 220 U. S. 107, 108, 170, 55 L. ed. 389, 421, 31 Sup. Ct. Rep. 342, Ann. Cas. 1912 B, 1312. A wharf company, operating under a charter, authorizing it to acquire lands and flats, to lease, manage and improve the same, and to receive dockage and wharfage. Cook V. Boston Wharf Company, No. 457 — Flint v. Stone Tracy Co., 220 U. S. 107, 170, 55 L. ed. 389, 421, 31 Sup. Ct. Rep. 342, Ann. Cas. 1912 B, 1312. A mining company agreed to pay its landlord a royalty on its profits. To secure him, it was agreed that the payments should not fall below a fixed sum, but that if at any time there was a surplus of royalties over such sum, the company might apply that surplus to any previous deficiency of royalties below such sum. Held, that the surplus of a given year was taxable as profits although there was a deficiency upon which it was applicable. Broughton, etc. Coal Co. v. Kirkpatrick, L. R. 14 Q. B. Div. 491 (1884). "It is true that in one sense the tax will be paid twice ; but it will not be paid twice by the same person." Ibid., Geove, J., at p. 498. 680 ANNOTATED STATUTE AND DIGEST. On November 2, 1895, the S. A. E. granted H. J. S. a con- cession for the construction of a railway, and the S. A. E. guaranteed to a company which was formed to take over the railway interest at 4 per cent on its share capital. On October 11, 1899, war having broken out, the line was seized and worked by the British military authorities until the end of the war. On Feb. 18, 1902, the British Government gave notice to ex- propriate the railway under the terms of the concession. They recognized the validity of the concession and admitted liability to pay all arrears of interest. They paid 97,5061. 16s. lid. as "guaranteed interest on share capital at 4 per cent, per annum from ."^anuary 1, 1899 to Nov. 14, 1903" in addition to the other payments on the expropriation. Held, that the 97,5061. 16s. lid. was not a part of a sum paid by the British Govern- ment as the price of the company's undertaking that it must be treated as the gross revenue of the company earned as a trad- ing company from Jan. 1, 1901 to Nov. 14, 1903, and that after deducting certain expenses incurred by the company during the same period the benefit of the three years' average must be applied and income tax was payable on one third of the balance only. Pretoria-Pietersburg Railroad v. Elwood, 98 L. T. N. S. 741 — C. A. An Indian government for the sake of having a railway through its dominions agreed to pay an English company an annuity of 5 per cent, on its capital, of which the company was to distribute a part as interest on its capital and a part into a sinking fund. Held, the latter part is subject to the income tax. Nizam's State Ky. Co. v. Wyatt, L. E. 24 Q. B. Div. 548 (1890). The memorandum of association of a limited company, a rubber syndicate, set forth that the objects of the company were {inter alia) first, the acquisition and development of a rubber estate in the Malay Peninsula ; secondly, the acquisition and de- velopment of rubber estates there or elsewhere, and the carrying on of the business of manufacturing and trading in rubber ; and thirdly the sale of the whole or any part of the business under- taking and property of the company. The company acquired two estates and expended money on their development : but be- ANNOTATED STATUTE AND DIGEST. 681 fore the estates reached the stage of prodacing rubber, the com- pany, finding its capital inadequate fully to develop the estates, sold its whole undertaking to a new company at a price which exceeded by 9,0001. the whole sums spent by the selling com- pany in acquiring, and developing the estates: Held, that the business of the company not being the buying and selling of rubber estates but the production of and trading in rubber, this sum of 9,0001. could not be regarded as income assessable for income tax. California Copper Syndicate v. Inland Eevenue, (6 F. 894) distinguished. Assets Co. v. Inland Eevenue (24 E. 578) and Stevens v. Hudson's Bay Co. (25 Times L. E. 709) followed. Tebrau (Johore) Eubber Syndicate v. Farmer [1910] S. C. 906, 5 Tax. Cas. 658, Ct. of Sess. Annual income "is what passage money and freights this road makes each year; of that an account must be rendered, and on that the per cent, must be estimated." So held, in spite of the objection that the company had leased the whole road and received no income except the rent. Goldsmith v. Augusta, etc. E. E. 62 Ga. 468 (1879). The defendant's charter provided that it should pay three per cent, of its gross earnings annually to the state, and then read, "for the purpose of ascertaining said earnings, an accu- rate account shall be kept by the company of all receipts and expenditures on account of the operation of said railroads." Held, that rent for the right to run trains over its lines was not a part of its gross earnings, or receipts on account of the operation of its road^ and need not therefore be included in the account. Slate V. St. Paul, etc. E. E. 30 Minn. 311, 15 N. W. 307 (1883). To hold otherwise would be in the nature of double taxation, as the lesser road would have to pay the same tax on the same property. Ibid. and every insurance company. And every such net income shall be ascertained by deducting from the gross amount of income of such * * * insurance company received with- in the year from all sources, (first) all the ordinary and necessary expenses paid within the year in the maintenance and operation of Its business and properties, including rentals or other payments required to be made as a 682 ANNOTATED STATUTE AND DIGEST. condition to the continued use or possession of property; (second) all losses actually 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 * * * in case of insurance companies the net addition, if any, required by law to be made within the year to re- serve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided further, that mutual fire insur- ance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall re- turn as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and ex- penses and reinsurance reserves: Provided further, That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross in- come amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertain- ment thereof and the payment thereof and life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; (sixth) the amount of interest accrued and paid within the year on its third indebt- edness to an amount of such indebtedness not exceeding one-half of the sum of its interest bearing indebtedness and its capital stock out- standing at the close of the year or if no capital stock, the amount of interest paid within the year on an amount of indebtedness not exceeding the amount of capital employed in the business at the close of the year, and in the case of a * * * insurance company, organized under the laws of a foreign country, interest so paid on its bonded or other indebted- ness to an amount of such bonded or other indebtedness not exceeding the proportion of its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of capital employed in the busi- ness at the close of the year, which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States; from all sums paid by it within the year for taxes imposed under the authority of the United States, or of any State or Territory thereof, or imposed by the government of any foreign country. G (b) infra. F. That if any person, corporation, joint-stock company, association, or insurance company liable to make the return or pay the tax aforesaid shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, such person shall be liable to a penalty of not less than $20 nor more than $1,000. Any person or any ofQcer of any ANNOTATED STATUTE AND DIGEST. 683 corporation required by law to make, render, sign, or -rerify any return who makes any false or fraudulent return or statement with intent to defeat or evade' the assessment required by this section to be made shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000, or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. Under the Corporation Tax Law of 1909, held that so-called dividends of a mutual life insurance company working upon the level premium plan, which consisted merely of the portion of the loading of the premium charges in excess of the cost of insurance and were returned annually to policy-holders after the first year, so far as the same were used to reduce subsequent periods, were not "income * * * received," and were, consequently, not subject to the tax. Mutual Ben£fit Life Insurance Co. v. Herold, 198 Fed. 199. Held, further, that this rule did not apply to a "dividend" declared in the case of a full-paid participating policy, wherein the policy-holder had no further premiums to pay, the dividend constituting a participation in the profits and income of the invested funds of the company. "It seems proper to say that dividends of the kind under consideration should not be con- fused with dividends declared in the case of a full-paid par- ticipating policy, wherein the policy holder has no further pre- mium payments to make. Such payments having been duly met, the policy has become at once a contract of insurance and of investment. The holder participates in the profits and income of the invested funds of the company. His case is, therefore, radically different from that of a policy holder whose dividend represents merely the excess cost of his insurance, which excess at his request, and pursuant to the terms of his policy, has been applied in abatement or reduction of a future premium. But it may be urged that the fund for which the so-called dividends are declared on mutual policies is likewise largely derived from interest on the company's investments, and that this shows that in a real sense such dividends are, after all, declared from the earnings, profits, or income of the company. This proposition might be entitled to weight, were it not for the fact that, in so far as the fund from which such dividends are declared is pro- duced from interest on the company's invested funds, it has 684 ABTNOTATED STATUTE AND DIGEST. already been subjected to, and "has paid, taxes under the act in question. Furthermore, while perhaps not illegal, it is in a sense unfair, and therefore presumably contrary to the inten- tion of Congress, as between a mutual company and a stock company, to tax the dividends in question as income received. The poilcy holder in a stock company pays a uniform and fixed premium each year. The premium in his case is not 'loaded,' but is presumed to represent cost as nearly as may be for the reason that the stability of his policy is assured by the stoclj of the company, and not, as in the mutual plan, by premium payments avowedly in excess of the cost of the insurance. It would seem to be fair and equitable, therefore, between the two classes of companies, to tax them upon the premiums actual- ly paid them by their policy holders, and not to tax one class upon premium payments actually received and the other upon payments which at the utmost are only 'constructively re- ceived.' " Ibid. 198 Fed. 199, 212. Under the British Act, held: "That the surplus premium income of a mutual insurance company, derived from and an- nually returned to participating policy holders, is not assessable to income tax as profits or gains arising from any profession, trade, or vocation exercised in the United Kingdom." New York Life Insurance Co. v. Styles, 59 L. J. Q. B. N. S. 291, L. R. 14 App. Cas. 381 (1889). Per Lord Heeschel : "I am aware that the surplus income with which we are concerned is called 'profits' in the documents of the appellants. But both the learned Lords who formed the majority in Last's Case repudiated the idea that because moneys, which were not in fact profits, are erroneously so called, this would make them 'profits' within the meaning of the Income Tax Acts. I entirely concur. We must look to see whether they are really so or not. Persons who agree to contribute to a common fund for mutual insurance certainly would not in ordinary parlance be regarded as carrying on a trade or voca- tion for the purpose of earning profit. Let us see how the so- called profit arises. It is due to the premiums which the mem- bers are required to pay being in excess of what is necessary to provide for the requisite payments to be made upon the deaths ANNOTATED STATUTE AND DIGEST. 685 of members, and not being, as the case states they were intended to be, commensurate therewith. This may result either from the contributions having, owing to an erroneous estimate or overcaution, been originally fixed at a higher rate than was necessary, or from the death rate being lower than was an- ticipated. Can it be properly said that, under these circum- stances, the association of mutual insurers has earned a profit ? The members contribute for a common object to a fund which is their common property; it turns out that they have contribut- ed more than is needed, and therefore more than ought to have been contributed by them, for this object; and accordingly their next contribution is reduced by an amount equal to their propor- tion of this excess. I am at a loss to see how this can be con- sidered as a 'profit' arising or accruing to them from a trade or vocation which they carry on. It is true the alternative is allowed them of leaving the excess in the common fimd, and so increasing their representatives' claim upon it in case of death ; but I cannot think that this makes any difference. Mr. Brem- ner truly pointed out that, if these so-called bonuses were to be regarded as representing profits, it followed that, if the pre- miums were trebled, the profits would be increased in propor- tion." Ibid. Per Lord MaoISTaghten : "The rates fixed by the tables are taken as being sufficient to provide for expenses, to meet lia- bilities, and to leave a margin for contingencies. What is to become of the surplus, if everything goes right? The practice is to take an account every year of assets and liabilities, and to give the insured the benefit of the surplus, either by way of reduction of premium or by way of addition to the sum in- sured. It can make no difference in principle whether the surplus is so applied, or paid back in hard cash. In either case it is nothing but the return of so much of the amount con- tributed as may be in excess of the amount really required. I do not understand how persons contributing to a common fund in pursuance of a scheme for their mutual benefit, having no dealings or relations with any outside body, can be said to have made a profit when they find that they have overcharged themselves, and that some portion of their contributions may 686 ANNOTATED STATUTE AND DIGEST. be safely refunded. If a profit can be made in that way, there is a field for profitable enterprise, capable, I suppose, of in- definite expansion." Ibid. "We think the so-called 'dividends to policy holders' are not 'net earnings or income,' and do not represent such earnings, and that defendant is not liable to tax in respect to them. Not- withstanding the mass of testimony and exhibits on this point, including the ingenious questions of the able counsel on either side, followed by answers from the officers of the company, called as witnesses, not always as clear or intelligent as might have been expected, the facts are few and simple, as we have found them above. It is strenuously contended by the able special counsel for the commonwealth that, because these abate- ments are entered on the books of the company as 'dividends to policy holders' or 'surplus to policy holders,' they therefore represent net earnings or income, and furnish a measure of the liability of the company to taxation. Whatever these state- ments may be called, they are in reality what we have stated in the finding of facts. The amounts they represent are mere negative quantities, abstract statements, not of what is, or is to be, received or to 'come in,' but what is not to be received. The calculations are made for the express purpose of determin- ing how much of the amount which the company might receive shall not be received, and one of the items which make up the apparent amount upon the basis of which this calculation is made is the sum which was abated and not received during the preceding year. In short, the whole proceeding is merely a method by which the books of the company are made to show what would be the actual gross debtor and creditor accounts of the company, if the whole amount of the premiums was col- lected and a part was afterwards returned to the policy holders, while in fact it is neither collected nor returned. * * * It is a fallacy to suppose that the real nature of the transaction is that the policy holder pays his whole stipulated premium and receives his share of the dividend or distribution of surplus." Commonwealth v. Penn Mutual Life Insurance Co. 1 Dau- phin Co. Rep. (Appellate Branch Common Pleas Pa.) 233. "The appellant, every year before a premium falls due, de- ANNOTATED STATUTE AND DIGEST. 687 termines how much of the stipulated premium it will exact from the insured. The diminution, whether it be called a 'dividend' or 'surplus,' goes in the abatement of the renewal premium, and the insured pays only the difference. The in- surance company, therefore, received, not the full renewal premium, but the difference between the stipulated premium and this dividend or portion of surplus. All that the insur- ance company receives in cash or otherwise is this difference. * * * The commonwealth is claiming to tax the appellant upon money which it never received at all. The appellant says that it is only required to pay upon money which it receives in cash or otherwise, except that it admits that it is bound to pay the full tax on the original premium receipted for on the face of the policy, without regard to whether it in fact received such premium or not. The answer sets out the course of busi- ness of the appellant, and shows what money it has received and what money it has not received, and shows that the differ- ence between it and the commonwealth is that the common- wealth is attempting to charge it for the full amount of premi- ums stipulated for in the face of the policy, although it does not exact, and has not the right to exact, such full amount, being required to give to the policy holder the advantage of the divi- dend or surplus, or whatever it may be called, in the diminu- tion of the nominal premium. * * * Ifow, the truth is that this overpayment (called 'dividend') is not a dividend in any sense of the term ; nor is the failure of the company to col- lect the full amount of the premium in after years a credit in any sense of the term. A sum of money applied as a credit can never be used for the same purpose again. If I owe A. $50, and he owes me five notes of $150 each, when I credit him on the first note with the $50 I owe him, he cannot require me to credit the s&me sum on the remaining four notes as they fall due. But that is just what the state is insisting on being done in this case. The policy holder makes the overpayment of premium technically called 'loading,' and the company holds this sum and calls it a 'dividend,' and the state says that this is a crediting of the same sum on each of the after-accruing pre- miums, and should be considered as so much collected each year by the company, and as having been paid 'otherwise' than as 688 ANNOTATED STATUTE AND DIGEST. cash. In order to bring the matter before our minds dis- tinctly, let us assume that in 1900 A. takes out a policy in the appellant company in which the stipulated premium is $150 per annum, that of this sum $100 would be suiEcient to carry the risk in ordinary times, and that $50 is what is called 'load- ing,' collected in order to meet the contingencies of the future. Now, in 1900 the policy holder pays the full amount of the premium, $150. After that the company says to him, 'You need only pay $100 per annum; and, as long as the $50 of over-payment you made in 1900 remains unexhausted, your annual premiums will be really $100, instead of $150, as stated in the policy.' The account of five years would be stated as follows : 1900, beginning of the insurance period, premium paid $150 00 1901, premium paid 100 00 1902, premium paid 100 00 1903, premium paid 100 00 1904, premium paid 100 00 1905, premium paid 100 00 Total $650 00 "Obviously the total amount of money paid by the policy holder and received by the insurance company is $650, and it has received no more, either in cash or otherwise ; and on the sum so received it is conceded that appellant has paid the tax due. If we look only at the method of bookkeeping of the appellant and have regard only to the terms it uses, there is much in the appearance of the case thus presented to warrant the position of the commonwealth as to its right to tax the so-called 'dividends' said to be annually credited on the premi- ums due from policy holders ; but the law looks below the mere appearance of things, and has regard to the reality, and, thus looking, it sees that the appellant misuses the terms 'dividend' and 'credit,' and, as shown above, pays no dividend and allows ao credit, but that, in reality, all that it does is to collect on the first premium a sum sufiicient to meet the contingencies of any given year of the future, and then abstains from collect- ing any further overpayment while the first remains on hand." ANHOTATED STATUTE AND DIGEST. 689 Mutual Benefit Life Insurance Co. v. Commonwealth, 128 Ky. 174, 107 S. W. 802. "The dividend declared in any year is applied in reduction of the next maturing premium on the policy of the insured. It follows that, where a dividend has been apportioned and ap- plied to the reduction of the premium named in the contract, the policy holder pays to the company, and the latter receives in cash only the difference between the maximum premium and the amount of the dividend, and these dividends, as the facts disclose, represent a surplus arising out of premiums previously paid, upon which the defendant company has already paid the state its two per cent. tax. The word 'premium,' as used in this statute, is subject to the limitations expressed in the words which follow and in a measure control its use, to wit : 'Received in this state in cash or other obligations.' The statute apparently does not require the company to pay the 2 per cent, tax on the full amount of premium named in its policies in this state. If so, the law would have so stated. On the con- trary, the language "is 'two per cent, on all premiums received in cash and other obligations tin this state.' " Minnesota v. Mutual Benefit Life Insurance Co., District Court, Second Judicial District, Minnesota, Dee. 15, 1909, not reported, but quoted in 198 Fed. 208. Under the British Act, held that sums or bonuses payable to participating policy-holders in a life insurance company constituted "profits or gains" of the company assessable to the income tax. Last V. London Assurance Corporation, 10 App. Cas. 438, 55 L. J. Q. B. N. S. 92, 53 L. T. K S. 634, 34 Week. Rep. 233, 2 Tax Cas. 100 (1885). Under the Corporation Tax Law of 1909, which provides for the deduction of the net addition, if any, required by law to be made within the' year to reserve funds, held that a deduction might be made of the additions to the reserve fund to secure payment upon supplementary policy contracts. These consisted of policies under which the insured had exercised their option to have the proceeds paid in annual instalments for life or a given term of years, instead of a lump sum. Foster Income Tax. — 44. 690 ANNOTATED STATUTE AND DIGEST. Mutual Benefit Life Insurance Co. v. Herold, 198 Fed. 199, 212. "These obligations seem to come fairly within the definitions of reserve, as above given. Notwithstanding the policy holder has died, there still remain unpaid under the policy certain in- stallments not presently due, but which will mature from time to time in the future. These are as much policy obligations as they would have been if payable in one sum immediately upon the death of the insured. ' They have a value, and that value must be estimated, and, when estimated, adequate pro- vision made for their payment as they mature, which can only be done by the establishment of a suitable reserve. Further- more, such reserires are 'required by law' within the meaning of the act. As appears by the agreed statement of facts, the com- missioners of insurance of all the states require the establish- ment of a reserve to cover the obligations of the company on such supplementary policy contracts." Ibid. 198 Fed. 199, 213. Under the Corporation Tax Law of 1909, held that, for the purpose of taxation the corporation's statement should be made on a cash or revenue basis; that uncollected and deferred pre- miums and interest accrued and due, but not actually received,, should not be included. Mutual Benefit Life Insurance Co. v. Herold, 198 Fed. 199, 214. An insurance company having one body of shareholders,, carried on three branches of business, viz., marine, fire, and life insurance : Held, by the Queen's Bench Division, that the three branches must be treated as one business, and the profits calculated on the results of that business taken as a whole, and that additions made to the life fund, out of the annual receipts,, were not subject to income tax as profits. Last V. London Assurance Corporation (1884), L. E. 12 Q. B. Div. 389, 52 L. T. N. S. 604, 2 Tax Cas. 100. There was no appeal from the decision on these points. There was an appeal, however, to the House of Lords on another question. The Lords held that the sums or bonuses payable to "participat- ing policy holders" in a life insurance company, constituted "profits or gains" of the company assessable to income tax. Th& ANKOTATED STATUTE AND DIGEST. 691 profits should be calculated on the principle that whatever profit was made should be assessed, though the company may have bound themselves to pay it, or part of it, to the policy- holders whose policies were still in force at the quinquennial period. Last V. London Assurance Corporation (1885), L. E. 10 App. Cas. 438, 55 L. J. Q. B. N. S. 92, 53 L. T, N. S. 634, 34 Week. Kep. 233, 2 Tax Cas. 100. A company carried on the business of fire and life insurance : — Held, that the net profits and gains from the two branches of business were to be massed together as one undivided income, assessable according to the rules applicable to the 1st case under Sched. (D.). Fire — Seeing that fire insurance policies are con- tracts for one year only, the premiums received for the year of assessment, or on an average of three years, deducting losses by fire during the same period and ordinary expenses, may be fairly taken as the profits and gains of the company, without taking into account or making any allowance for the balance of annual risks unexpired at the end of the financial year of the company. Life — There is a radical diflierence between fire and life insurance. The profits and gains of a company on its business can only be ascertained by actuarial calculation, proceeding upon the result of the statutory quinquennial in- vestigation, or of the usual periodical investigation in companies established before the statute, or of the triennial investigation prescribed by Sched. (D.) of the Income Tax Acts. Scottish Union and National Assurance Co. v. Smiles (1889), 16 E. 461, 26 Scotch L. E. 330, 2 Tax Cas. 551. A mutual life insurance association in which there were no shareholders, the funds of which belonged to the members, the participating policy-holders having a surplus beyond the ex- penditure for the year, which was appropriated for the benefit of the members, was held not to be liable to be assessed to in- come tax in respect of their transactions relating to participat- ing policies as constituting a trade or vocation from which profits or gains arose or accrued within the meaning of the Income Tax Acts. New York Life Insurance Co. v. Styles (1889), L. E. 14 692 ANNOTATED STATUTE AND DIGEST. App. Cas. 381, 59 L. J. Q. B. N. S. 291, 61 L. T. N. S. 201, 2 Tax Cas. 460. In estimating the profits and gains of an insurance com- pany, interest on investments, which has not suffered deduction of income tax' at its source, must be taken into account. Scottish Union and National Assurance Co. v. Smiles (1889), 16 E. 461, 26 Scotch L. E. 330, 2 Tax Cas. 551. A life insurance company, receiving untaxed interest on a portion of its investments, was held liable to assessment in respect thereof, although the amount of the interest on its other investments, on which tax had been deducted, exceeded the profits earned by the company Per Lord Eshee, M. E. L. E. 22 Q. B. Div. p. 450 : "Interest of money ought not first to be taxed as a separate subject-matter of taxation, and then brought again into account in arriving at the profits and gains of a business and so taxed again." Clerical, Medical and General Life Assurance Society v. Carter (1889), L. E. 22 Q. B. Div. 444, 58 L. J. Q. B. K S. 224, 37 Week. Eep. 346, 2 Tax Cas. 437. A life insurance company derived the bulk of its gross in- comes from taxed sources. The amount of this taxed income exceeded the company's net profits. The company received in addition, certain interest from which tax was not deducted: — Held, that this interest was properly assessable under Cases III. and IV. of Sched. (D.) in § 100. Per the Lord President, 5 Tax Cas. p. 226: "I thought it had been settled beyond all possibility of doubt, that inasmuch as the Income Tax Acts do not only deal with profit in the true sense of the word as a commercial profit, but also deal with and impose taxes upon the interest of investments, the Crown has always been allowed, when investments are held by a trading company, if it suits them, to say, 'We will charge you a tax upon the produce of your investments, and we won't charge the tax upon your profits.' The Crown cannot charge the tax on both — that is to say, it cannot take a trading account which has money — its assets and investments — and first of all charge income tax upon the produce of investments, and then over and above charge on the profits. It must elect between the two." ANNOTATED STATUTE AND DIGEST. 693 Eevell V. Edinburgh Life Insurance Co. (1906), 5 Tax Cas. 221. A fire and life insurance company having its head office in the United Kingdom, carried on business in the United King- dom and in certain foreign countries and British colonies. By the laws of certain of the latter countries, the company was required, as a condition of transacting fire insurance business therein, to deposit certain minimum amounts with representa- tives of the governments there, which were required to be in- vested in accordance with the local laws. So long as the com- pany carried on business in those countries, or any liability remained in respect of any risks, it was unable to recover any of the said sums, but the deposits were held as a fund out of which the claims of policy-holders in those countries could be paid. The company also made certain voluntary investments in those countries of sums which consisted of accumulated prof- its of the business made in past years, which investments were made, not under any legal obligation, but for the purpose of deriving income or profit. All the above classes of investments produced interest which was received by the company's agents or branches abroad, and such interest was not in fact remitted to the United Kingdom: — Held, by the Court of Appeal, that the interest or dividends from the investments in question, formed part of the profits or gains of the trade, adventure, or concern carried on, and were assessable under the 1st Case of Sched. (D.), and that the Crown had an option to tax under Case I. or Case IV- The facts in the second and third cases were similar. Liverpool and London and Globe Insurance Co. v. Bennett; Brice v. Northern Assurance Co. ; Brice v. Ocean Accident and Guarantee Corporation, Limited, [1912] 2 K. B. 41, 8.1 L. J. K. B. N. S. 639, 106 L. T. N. S. 323, 27 Times L. E. 279. organized in the United States, no matter how created or organized not including partnerships; but if organized, authorized or existing under the laws of any foreign country, then upon the amount of net income accruing from business transacted and capital invested with- in the United States during such year; Now or hereafter organized under the laws of any foreign country and engaged in business in any State or Territory of the United States, or in, 694 AITNOTATED STATUTE AND DIGEST. Alaska, or in the District of Columbia. • • ♦ Such net income shall be ascertained by deducting from the gross amount of its income ac- crued within the year from business transacted and capital invested with- in the United States. — Corporation Tax Law of August 5, 1909. Where the American Bell Telephone Company, a Massa- chusetts corporation, leased telephones in Boston to be deliv- ered there for use in New York, the rental to be a certain percentage of the royalties or rentals received by the licensees by subletting these telephones, vsdth provisions in the leases that in case of default, the lessor might collect these rents and royalties in the name of the lessees, held, that the lessor, the American Bell Telephone Company, was not "doing business in" the state of New York, and was consequently not liable to the New York state tax on its dividends. People V. American Bell Telephone Co. IIY N. Y. 241, 22 N. E. 1057 (1889). Same point. Commonwealth v. American Bell Telephone Co. 129 Pa. 217, 18 Atl. 122 (1889). See, also, U. S. v. American Bell Telephone Co. 29 Fed. 17 (1886), per Mr. Justice Jackson. A New York statute (L. 1880 Ch. 542, § 2, as amended by L. 1881, Ch. 361), provided that every foreign and domestic corporation "doing business in the state," with certain excep- tions, "shall be subject to, and pay a tax, as a tax upon its corporate franchise or business, into the treasury of the state annually, to be computed as follows: If the dividends made or declared annually by such corporation" exceeded six per cent, "at the rate of one quarter mill upon the capital stock, for each one per centum of dividends so made or declared." If the dividends were less, the tax was at a less rate. It was held that the tax on a foreign corporation must be estimated upon the value of its whole capital stock, and that it was entitled to no deduction because part of its profits were made and part of its property situated without the state. People V. Equitable Trust Co. 96 N. Y. 387 (1884). People V. Horn Silver Mining Co. 105 N. Y. 76, 11 N. E. 155 (1887). A foreign corporation carrying on business abroad, and earn- ing profits there, had an agency carrying on business in Eng- ANNOTATED STATUTE AND DIGEST. 695 land and earning profits there. Held that the agency was tax- able in respect of all profits earned by it, and also upon so much of the dividends declared by the foreign corporation, and paid in England, as was derived from profits arising in England. Gilbertson v. Eergusson, L. E. 1 Q. B. Div. 562 (1881), affirming, s. c. L. E. 5 Exch. Div. 57 (1879). A corporation domiciled in England is taxable with respect to all profits earned by it, whether transmitted to England or not. Cesena Sulphur Co. v. Nicholson, and Calcutta Jute Mills Co. v. Same, L. E. 1 Exch. Div. 428 (1876). A corporation domiciled in England is liable to the tax on all profits earned by it, although a part of such profits are earned abroad and never transmitted to England. Imperial, etc., Assn. v. Mcholson, 37 L. T. IST. S. 717 (1877), Exch. Div. Kelly, C. B. A company may be a "person residing in the United King- dom" within the meaning of section 2, Schedule D, of the In- come Tax Act, 1853, notwithstanding that it is incorporated and registered abroad. Goerz v. Bell, 73 L. J. K. B. 448 ; [1904] 2 K. B. 136 ; 90 L. T. 675; 53 H. E. 64; 20 T. L. E. 348— Chanwell, J. A company was incorporated and registered abroad for the purpose of prospecting and developing mining properties abroad and of floating companies for working them and of making a market for shares in those companies. The general meetings of the company were held abroad. The head office was in Lon- don. The directors had power to appoint agencies for manag- ing the affairs of the company abroad. The meetings of the directors, some of whom resided abroad, and some in the United Kingdom, were held in London. The accounts were made up and audited, the dividends were declared, and the books of the company were kept in London. The greater part of its capital was invested abroad. The greater part of its business was done in London: Held, that the company was "a person residing in the United Kingdom" within the meaning of section 2, Schedule D. of the Act Ibid. 696 ANNOTATED STATUTE AND DIGEST. A foreign company, the Great Northern Telegraph Company of Copenhagen, had three marine cables in connection with Aberdeen and Newcastle, which communicated with the post office telegraph lines in the United Kingdom. The company had workrooms in London, Newcastle and Aberdeen. Messages from the United Kingdom were forwarded over the post office lines and the company's cables to Denmark, and from thence to Kussia, China, Japan and India, by the company's wires and those of foreign governments. The post office collected the total charges paid for the transmission of the messages, and, after deducting their dues, handed the balance to the company, who retained the amount due to them for the transmission of messages over their cables and lines, and paid the residue to the various governments, etc., respectively entitled to it. The com- pany made no profits from the transmission of messages over the land lines in the United Kingdom: Held, by the Court of Appeal, that the company carried on a trade in the United Kingdom, and were chargeable on the profits thereof accord- ingly. Erichsen v. Last, 8 Q. B. D. 414; 51 L. J. Q. B. 86; 45 L. T. TOS; 30 W. R. 301; 1 Tax Cas. 351, 357; 4 Tax Cas. 422 (1881). A company incorporated and registered in Christiania (Nor- way), where its registered office was, its share list and books were kept, and where the shareholders' meetings were held, owned a ship. The two managers were resident in Norway, one of whom acted as director of the management. The chartering and all voyage receipts and disbursements were dealt with by Messrs. Wingate & Co., a firm resident in Glasgow, who received and retained all funds until required for payment of expenses or dividends. The form of the assessment was as follows: "Messrs. Wingate & Company for barque 'Chanaral' " : Held, that the company was not resident in the United Kingdom, but that it exercised a trade within the United Kingdom, for the profits of which the Glasgow firm, as its agents, were assessable to income tax, and that the form of the assessment was not in- valid, although not expressly made upon Messrs. Wingate & Co. as agents for their principals. Wingate v. Webber, 34 Sc. L. E. 699; 3 Tax Cas. 569 (1897). ANNOTATED STATUTE AND DIGEST. 697 A foreign company had agents in England, who submitted all orders to their principals, the latter reserving the right to re- ject those not satisfactory. On receipt of the principals' au- thority, the agents accepted the offers. All goods for delivery in the United Kingdom were shipped free on board at Boston, U. S. A., and consigned to Liverpool in the name of the agents, who distributed them to the customers. Payment of the greater part of the amounts arising from the sales was made by cus- tomers' cheques to the agents, which were either forwarded to the principals at Boston, or paid into the agents' banking ac- count in the United Kingdom, the amounts being subsequently remitted by the agents' drafts. In certain cases, when larger credit was required, customers forwarded their acceptances di- rect to the principals: Held, that the contracts, and the de- livery of the goods, were made in the United Kingdom, and that the company exercised a trade in the United Kingdom. Per Wills, J., (p. 34) : "Even if the contract has been made in ISTew York, an executory contract for sale, when he does de- liver the goods in this country he exercises a trade and carries on a business." Thomas Turner (Leicester) Limited v. Eickman, 4 Tax Gas. 25 (1898). Under § 59 of the New Zealand Land and Income Assess- ment Act, 1900, income derived from business taxable, includes "the profits derived from or received in New Zealand." The respondent company had its head office in London, and carried on the business of telegraphy in New Zealand, Australia and elsewhere, and sent messages from New Zealand to Madras. The Government owned the telegraphs in New Zealand and received the entire charges for messages, deducting the cost of transmis- sion over its own lines, and of transmission to New South Wales, the balance being paid to the Government of New South Wales. The messages then travelled by stages to the place whence they were dispatched by the respondent company's cable. The com- pany received the balance after deduction of the various charges. No contracts were made between the New Zealand Government and the company respecting the company's operations: Held, that the company's profits for the transmission of messages over its own cables were not taxable, not being "derived from or re* ceived in New Zealand." 698 ANNOTATED STATUTE AND DIGEST. Commissioner of Taxes for New Zealand v. Eastern Exten- sion Telegraph Co. A. C. 526; 75 L. J. P. C. 84; 95 L. T. 308; 22 T. L. E. 730 (1906). A company's profits consisted of a commission deducted from moneys received in London, under agency contracts of sales effected in London, of goods brought from ISTew Zealand, as a result of transactions made by the company in Jfew Zealand — Held, that the profits were actually made in London, and that the earlier transactions in New Zealand were insuffi- cient to render those profits taxable under the New Zealand Land and Income Assessment Act, 1900, as profits derived from business carried on in New Zealand. Lovell and Christmas v. Commissioner of Taxes, A. 0. 46; 77 L. J. P. C. 31; 97 L. T. 651; 24 T. L. E. 32. A French company, with its head office at Paris, and owning phosphate mines in Algeria, employed the appellants, who car- ried on business as merchants in Glasgow, as its sole principal agents for the sale of phosphates in the United Kingdom. The contracts for sale were entered into by the agents in the United Kingdom, who had authority to sell at or over minimum prices fixed by the company, and without reference to the company. No stock was kept in the United Kingdom. The company had sub-agents in various parts of the United Kingdom, who were appointed by the agents, subject to the company's approval. The agents were paid by commission. Delivery of the phos- phates was made out of the United Kingdom. The contracts provided for payment of the price of the goods "by cash in London." In practice, however, the payment was made by means of crossed cheques, the cheques being made payable in some cases to the company and in other cases to the agents. The agents did not cash any cheques but invariably forwarded them to the company in Paris as received (indorsed where necessary), and did not pay them into a bank in the United Kingdom: — ' Held (1) {diss. Lord Dundas), that the company did not exer- cise a trade within the United Kingdom; and (2) that the ap- pellants were not agents "having the receipt of any profits" within the meaning of § 41. Per Lord Aedwall (p. 224) : "I am of opinion that the words 'having the receipt of any profits or gains' apply to the actual receipt of money, and do not apply ANNOTATED STATUTE AND DIGEST. 699 to a case such as there is here, where the agreement of paiiies was that the appellants had no power to make the price of goods pay- able to themselves, and where in point of fact very few cheques were made payable to them; and that the fact that contrary to the reg- ular course of business, customers occasionally made cheques pay- able to the appellants, really does not alter the question, as the ap- pellants invariably sent to the company in Paris the cheques as received, and did not in any case cash them themselves and put the money into their own bank account, which, indeed, would be a breach of the contract of agency between them and the company. I think it is clear that the contemplation of the statute was that receivers, factors, or agents, should only be liable to pay income tax for their principals, where they have in their own hands the means of recouping themselves by having the receipt in money of profits and gains belonging to their principals." Per Lord Dun- das (p. 239) : "But it does not follow, and is not in my opinion the case, that the agents in merely transmitting the cheques, etc., to Paris, were persons 'having the receipt of any profits or gains belonging to' the company. Per Lord Salvesen (p. 235). "The words 'in receipt of profits,' must, I apprehend, be construed as meaning lawfully in receipt of profits, and 1 apprehend that an agent is not lawfully in receipt of money due to his principal under a, contract of sale made in the principal's name, because the pur- chaser chooses, or is induced by the agent, to make the cheques pay- able to him. The intention of the statute is not to make the agent personally liable for the income tax due by the foreign firm, but only to make him so liable where he has the opportunity of recoup- ing himself out of moneys belonging to the foreign firm." Crooks- ton Brothers v. Purtado, S. C. 217; 43 Sc. L. E. 134; 5 Tax. Cas. 602 (1911). Where an English company owned all but three of the shares and all the personal property of an American brewing company and furnished the capital for carrying on the brewery in America, which the directors of the English company controlled, although they del- egated their powers to managers in America; it was held that the former company was taxable in England upon all its profits. Ap- thorpe V. Peter Schoenhofen Brewing Co. 80 L. T. N. S. 395, 4 Tax. Cas. 41. See Frank Jones Brewing Co. v. Althorpe, 4 Tax. Cas. 6. But see Eex (The King) v. General Commissioners of Taxes, (Court of App. 1901) 2 K. B. 879, 890, per A^aughan WalliamSj L. J., 4 Tax. Cas. 549. Certain mutual life assurance societies invested sums of money in Australia at interest. The interest accruing was not specially remitted to the United Kingdom, but was reinvested abroad. There was no share capital, and no dividend payable, and no profits were divisible among the policy-holders in the year of assessment. The interest was included in the revenue aceoimts : Held, that the in- terest was not received in the United Kingdom, and accordingly was not assessable under the 4th case. 700 ANNOTATED STATUTE AND DIGEST. Forbes v. Scottish Widows' Fund and Life Assurance So- ciety; Forbes v. Scottish Provident Institution (1895), 23 K. 322, 33 Scot. L. R. 228, 3 Tax Cas. 443. "They do not invest in those investments for the sake of in- vestment, or for the sake of making profit by those investments,, but for the sake of having a fund invested in America to answer the requirements of the American law. In effect, it seems to me that the £5,502 is received in this country, because owing to the exigencies of the American law this money would have to be sent out from here if it were not otherwise provided; and if it can be otherwise provided, and so relieve the funds of the company in this country from being despatched from this country, it is a mere matter of convenience, which does not appear to me in any way to alter the nature or character of the moneys for the purpose of investment." Norwich Union Fire Insurance Co. v. Magee (1896) Y3 L. T. N. S. 733, 44 Week. Eep. 384, 3 Tax. Cas. 457. Per Weight, J. (73 L. T. IST. S. p. 735). See however now, Gresham Life, etc. Society v. Bishop, infra. An English life assurance society transacted business through its branches in India. It held securities in India, and retained there the interest arising therefrom as a matter of commercial convenience to meet Indian claims and expenditure, and but for such retention, an equal sum would have been required to be remitted to India. The interest was treated as a part of the divisible profits upon which dividends were paid in England, although the interest was never actually received in the United Kingdom : — Held, that the interest was constructively received in the United Kingdom and assessable under the 4th case. Universal Life Assurance Society v. Bishop (1899), 68 L. J. Q. B. N. S. 962; 81 L. T. K S. 422; 4 Tax Cas. 139. See however now, Gresham Life, etc. Society v. Bishop, infra. Part of the revenue of a proprietary insurance company con- sisted of interest arising from foreign investments. This in- terest, although included in the company's accounts, and taken into consideration in estimating the profits divisible among the shareholdei-3, was not required to meet the company's liabilities in the United Kingdom, which were met out of funds at their disposal there, and accordingly did not require to be, and in AWUOTATED STATUTE AND DIGEST. YOl fact was not, remitted home, but was reinvested abroad : Held (diss. Lord Young), that this interest was not chargeable under the ith case as having been received in the United Kingdom. Standard Life Assurance Co. v. Allan (1901), 3 F. 805, 38 Scot. L. E. 628, 4 Tax Gas. 446. Ai English life assurance society had funds invested in foreign countries upon securities there, and invested the in- terest, dividends, and rents therefrom in those countries, or remitted them directly to other foreign countries for invest- ment. The society also carried on business in foreign countries, and applied the sums arising from foreign securities either in investment in those countries, in establishment or other expenses there, in remitting directly to other foreign countries for in- vestment, or for the general purposes of the society abroad. The society included the amounts above mentioned as money ■ re- ceived, in their accounts, and took them into account in arriv- ing at the amount of the funds set out in their balance-sheets upon which surpluses or profits were ascertained. The share- holders were also paid an annual dividend of 5 per cent, out of the profits: — Held, by the House of Lords, reversing the de- cision of the Court of Appeal, that taking the interest into account was not equivalent to a receipt in the United Kingdom, and that income tax was not chargeable upon that part of the interest which was not remitted to the United Kingdom. Per Lord MacISTaghten, [1902] A. C. p. 293: "The difficulty seems to have arisen from a misunderstanding or a misapplica- tion of the judgment in the New Mexico Case (14 E. 98). That was a very special case. Whether the decision was right or wrong, it can have no bearing upon the question now before your lordships. Speaking for myself, I think the decision was right. In that case it seems to me, in the transmission to this country of money which the company was free to distribute, and the transmission to America, by way of exchange, of an equivalent amount which the company was bound to reinvest, the company acted as their own bankers, and did for them- selves, by an entry in their books, what might have been done less conveniently and less economically by an ordinary bank or financial agent on their behalf." Per Lord Shand (p. 294) ; "In the case of the Scottish Mortgage Company of New Mexico 702 ANNOTATED STATUTE AND DIGEST. 14 E.. 98, the species facti were different, for there the company treated the money as received in this country, and merely saved themselves the expense of cross-remittances. It appeared there that the company viras not entitled to divide the money earned abroad, imless it was received as profits in this country. It was treated as so received merely to avoid the expense and in- convenience of cross-remittances — money sent home, and the same amount sent back by cross-cheques or drafts. That was a material point in the decision of the case, showing that the money had been really received in this country." Per Lord Brampton (p. 295) : "For the Crown the case of the Scottish Mortgage Company of ITew Mexico v. Commissioners of Inland Revenue, 14 E. 98, was much relied upon. I am not satisfied with the correctness of the judgment in that case, but, assuming it to be sound, it is distinguishable from the present case, for in paragraph 13 of the printed case before the Court of Session, there was an admission that the ai&ount charged with the in- come tax had been applied in payment of interest and dividends to debenture and share holders in Glasgow." Per Lord Lindley (p. 298) : "Authorities have been referred to, and especially the Scottish cases of the New Mexico Co. (14 E. 98), Forbes (23 E. 322), and the Standard Life Assurance Co. (3 F. 805). The first case was very peculiar. Money received by the com- pany's agents abroad was clearly and unmistakably treated by the company as remitted to and received by it here, and money here was treated by the company as remitted abroad in exchange for it. The exchange was effected by a book entry, but thaf entry was the business mode of carrying out cross-remittances which it would have been unbusinesslike and really childish to have effected in any other way. But thinking, as I do, that that case may be properly upheld, I am not prepared to adopt it as a new starting-point for further inferences. The language of the statute is the true starting-point in each case. Forbes' Case (23 E. 322), and the Standard Life Assurance Co.'s Case (3 F. 805) were both based on this principle, and were, in my opinion, both clearly rightly decided. The Court of Appeal, in my opinion, considered this case distinguishable from the New Mexico Case (14 E. 98), but I am unable to so regard it. Assuming them to be indistinguishable, it would, ANNOTATED STATUTE AND DIGEST. 703 in my opinion, be more correct to overrule the New Mexico Case (14 E. 98), than to decide the present appeal in favor of the Crown." Gresham Life Assurance Society v. Bishop, [1902] A. C. 287, 71 L. J. K. B. K S. 618, 86 L. T. N. S. 693, 50 Week. Kep. 593, 4 Tax Cas. 464. Where money has been sent abroad for investment and the sums are sent home out of a bank account in which there are no separate statements of capital and income, and the whole amount left abroad after the remittances have been sent home i» larger than the sums originally sent abroad, those remittances must be considered as representing interests or profits, and bo held liable for income tax, for the year in which they were sent home. Scottish Provident Institution v. Allan, 72 L. J. P. 0. IST. S. 70 [1903] A. C. 129 ; 88 L. T. E". S. 478, 67 J. P. 341, 4 Tax Cas. 591, 19 Times L. E. 432 H. L. (Sc.) A mutual insurance society in Scotland, assessed under the 4th case, upon sums remitted from Australia in 1898, disputed liability on the ground that such sums were not in payment of interest, but in repayment of capital. Between 1885 and 1890, the society had remitted various sums to Australia for invest- ment. The interest thereon was received by their representa- tives there, and paid into a bank account. there ; and, prior to 1893, it was not brought to this country but invested in Austra- lia. In and after 1893, certain sums were remitted to Scotland from Australia, and in 1898 the sum upon which income tax was now claimed was so remitted. After all these remittances had been made, there still remained in Australia a sum greater than the total of all the sums originally sent out for investment: — Held (1), that where the remittances had been made by the so- ciety's representatives from their account in Australia, in which repayments of capital had been intermixed with interest, and where the particular remittances had not been definitely identi- fied with any particular repayments of capital, they must, at least, so long as a sum equal to the amount of capital originally remitted for investment to Australia remained still invested there, be presumed to be remittances of inteT&iQ'^li&^^JSTdt the society were liable to be assessed upon such sums; but that (2)- 704 AlfWOTATED STATUTE AND DIGEST. they were not liable to be so assessed upon a sum wliich had been remitted in part repayment of a loan direct to the society in London by the borrower's solicitor in Australia. Scottish Provident Institution v. Allan, [1903] A. C. 129, 72 L. J. P. C. K S. 70, 88 L. T. N. S. 478, 5 F. 10, 40 Scot. L. E. 605, 4 Tax Gas. 591. Interest from foreign securities, derived by an insurance society from its American investments, was not remitted to the United Kingdom, but was reinvested in America in bonds pay- able to bearer, and on mortgages of real property. These bonds and mortgages, with coupons attached thereto, were sent to the United Kingdom and kept at the society's head office: — Held, that the interest had not been "received in Great Britain," and accordingly was not chargeable with income tax. Scottish Widows' Fund Life Assurance Society v. Farmer; Farmer v. Scottish Widows' Fund Life Assurance Society [1909], S. C. 1372, 46 Scot. L. R. 993, 5 Tax Gas. 502. An insurance company, out of funds accumulated in America, representing interest arising from foreign and colonial securi- ties there prior to July, 1907, purchased in July, 1907, bearer bonds in New York, which were sent to the United Kingdom, and received at the head office of the company in the same month. These bonds were kept there for safe custody until August and October, 1908, when they were sold, and their pro- ceeds received at the head office in Edinburg. The company having been assessed for the year ending April 5th, 1908, it was held that the interest was chargeable to income tax, as al- though it had been earned prior to the year of assessriient, it had been "received in Great Britain in the current year," within the meaning of the rule in the 4th case. Scottish Provident Institution v. Farmer [1912] S. C. 452 ; 49 Scot. L. R. 435, 6 Tax Gas. 34. Gonstructive Remittance. — A company was formed prin- cipally for borrowing money in this country, and investing it abroad on the security of land. The interest received abroad was brought into account in the company's books, by retaining out of the funds raised here a sum equivalent to tkc^^w^j-est after defraying the working expenses in America, and out of this sum were paid all the working ex- ANNOTATED STATUTE AND DIGEST. 705 penses in Great Britain, the interest to debenture-holders and depositors, and a dividend to the shareholders for the year of assessment. The money itself, therefore, did not require to be sent home : — Held, that the company was rightly charged under the 4th case of Sched. (D.), but that it might also have been charged under the 1st case. Per the Lord President, 2 Tax Cas., p. 174: "The interest received by the company's agents in America has not been in forma specifica sent to this country. The money received by the agents in America re- mains in their hands, and it remains in their hands for invest- ment there. But then an equivalent for the amount of that interest is retained by the managers in this country, out of money borrowed by them on debentures for the purpose of being sent out to America and invested upon foreign securities there, so that the one sum is just set against the other in the books of the company here. They have received it in this most proper sense of the term, that it enters their books in this country as such interest, and is paid away as such." Scottish Mortgage Co. of ISTew Mexico v. McKelvie (1886), 14 Eeports 98, 24 Scot. L. K. 87, 2 Tax Cas. 165. (See the comments on this case in Gresham Life Assurance Society v. Bishop, [1902] A. C. 287, supra.) Weight, J. [1893] 2 Q. B. Div. p. 516, said: "It re- mains to consider whether the dividends retained in America -are within that limitation. It appears to me, that if the fourth •case were applicable, those dividends ought in point of law to be regarded as received in England. For reasons of convenience the money is not sent over, but it forms part of the profit dealt with and divided by the company here ; and the effect of what is done is that a debt due and payable in England to the foreign .■shareholders is discharged by the money retained in America. That, I think, is equivalent to a receipt of the money here." Bartholomay Brewing Co. v. Wyatt, [1893] 2 Q. B. 499, 62 L. J. Q. B. N. S. 525, 69 L. T. K S. 561, 42 Week. Eep. ■173, 3 Tax Cas. 213. (See however now, Gresham Life, etc. Society v. Bishop, supra). Provided, however, that nothing in this section shall apply to labor, agricultural, or horticultural organizations, or to mutual savings banks not having a capital stock represented by shares, Nor to such savings banks, savings institiitions or societies as shall, Foster Income Tax. — 45. 706 ANirOTATED STATUTE AND DIGEST. first, have no stockholders or members except depositors and no capital ex- cept deposits; secondly, shall not receive deposits to an aggregate amount in any one year, of more than one thousand dollars from the same de- positor; thirdly, shall not allow an accumulation or total of deposits, by any one depositor, exceeding ten thousand dollars; fourthly, shall actually divide and distribute to its depositors, ratably to deposits, all the earnings over the necessary and proper expenses of such bank, insti- tution, or society, except such as shall be applied to surplus. — Act of Aug- ust 28, 1894, § 32. "Provided, however. That nothing in this section contained shall apply to labor, agricultural or horticultural organizations, or to fraternal ben- eficiary societies, orders, or associations operating under the lodge system, and providing for the payment of life, sick, accident, and other benefits to the members of such societies, orders, or associations, and dependents of such members, nor to domestic building and loan associations, organized and operated exclusively for the mutual benefit of their members, nor to any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual." — Corporation-Tax Law of August 5, 1909. "Co-operative dairies, no matter how organized, do not appear to fall within any of these exempted classes, and will, therefore, be required to make returns." Ruling T. D. 1996, June 15, 1914. This nullified Eegulation 92. "1st. As to Mutual Savings Banks. — Under income tax laws prior to 1870, these institutions were specifically taxed. Under the new law, certain institutions of this class are exempt, pro- vided the shareholders do not participate in the profits, and in- terest and dividends are only paid to the depositors. ITo limit is fixed to the property and income thus exempted — it may be $100,000 or $100,000,000. One of the counsel engaged in this case read to us during the argument from the report of the Comptroller of the Currency, sent by the President to Congress December 3, 1894, a statement to the effect that the total number of mutual savings banks exempted was 646, and the total num- ber of stock savings banks was 378, and showed that they did the same character of business and took in the money of depositors for the purpose of making it bear interest, with profit upon it in the same way ; and yet the 646 are exempt and the 378 are taxed. ANNOTATED STATUTE AND DIGEST. 707 He also showed that the total deposits in savings banks 'B^ere $1,748,000,000. * * * "If this statement of the exemptions of corporations under the law of Congress, taken from the carefully prepared briefs of counsel and from reports to Congress, will not satisfy parties interested in this case that the act in question disregards, in almost every line and provision, the rule of uniformity required by the Constitution, then 'neither will they be persuaded, though one rose from the dead.' That there should be any question or any doubt on the subject surpasses my comprehension. Take the case of mutual savings banks and stock savings banks. They do the same character of business, and in the same way use the money of depositors, loaning it at interest for profit, yet 646 of them, under the law before us, are exempt from taxation on their income and 378 are taxed upon it. How the tax on the income of one kind of these banks can be said to be laid upon any prin- ciple of uniformity, when the other is exempt from all taxation, I repeat, surpasses my comprehension." Pollock V. Farmers' Loan & Trust Co. 157 U. S. 429, 597- 599, 39 L. ed. 759, 825, 826, 15 Sup. Ct. Kep. 673, per Field, J. "Mutual telephone companies, mutual insurance companies, and like organizations, although local in character, and whose income consists largely from assessments, dues, and fees paid by members, do not come within the class of corporations specif- ically enumerated as exempt. Their status under the law is not dependent upon whether they are or are not organized for profit. Not coming within the statutory exemption, all organi- zations of this character will be required to make returns of an- nual net income, and pay any income tax thereby shown to be due. For this purpose the surplus of receipts of the year over expenses will constitute the net income upon which the tax will be assessed." Treasury Regulation 80. As to the validity of a statutory exemption of such com- panies, see Citizens' Telephone Co. v. Fuller, 229 U. S. 322, 57 L, ed. 1206, 33 Sup. Ct. Rep. 833. 708 ANNOTATED STATUTE AND DIGEST. or to 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 pro- viding for the payment of life, sick, accident, and other benefits to the members of such societies, orders, or associations and depend- ents of such members, nor to domestic building and loan associa- tions, Including fraternal beneficiary societies, orders, or associations operating upon the lodge system and providing for the payment of life, sick, ac- cident, and other benefits to members of such societies, orders, or asso- ciations and dependents of such members; nor to the stocks, shares, funds, or securities held by any fiduciary or trustee for charitable, religious, or educational purposes; nor to building and loan associations, or companies which make loans only to their shareholders. — Act of August 28, 1894, § 32. "A society or association 'operating under tlie lodge system' is considered to be one organized under a charter, with properly appointed or elected officers, with an adopted ritual or cere- monial, holding meetings at stated intervals, and supported by fees, dues, or assessments." Treasury Regulation 89. Clubs are not subject to the tax when they have been or- ganized and operated exclusively for pleasure, recreation and other nonprofitahle purpose, and they have no net income in- uring to the benefit of any private stockholder, individual or member. Acting Commissioner Williams to Crescent Athletic Club January lYth, 1914 ; Deputy Commissioner Speer to New York Athletic Club March 2nd, 1914; Commissioner Osborn to Lee, Higginson & Co. May 4th, 1914. A golf club, the members of which were entitled on pay- ment of their subscriptions to play on the links, admitted, under the terms of its lease, visitors, who were nonmembers, to play on the links and to use the club-house, on payment of certain green fees fixed by the lessors. The annual expendi- ture incurred in the maintenance of the golf course alone ex- ceeded the amounts of the green fees received from visitors. The commissioners for general purposes decided on appeal, ANiSrOTATED STATUTE AND DIGEST. 709 that the club was chargeable under Sched. (D.) in respect of the green fees received from visitors, less such portion of the annual outlay in maintaining and keeping up the links and club-house, as the green fees bore to the entire annual income of the club or fund available for the maintenance and upkeep : — Heldj that the club was carrying on an enterprise which was outside the scope of the ordinary functions of the club, and that any profits derived from the fees in question were chargeable under Sched. (D.) ; and, further, that the method adopted by the commissioners of ascertaining the amount of the profits, was erroneous, as being an arbitrary method having no neces- sary application to the facts, and therefore, in default of agree- ment, the case must be referred back to the commissioners to ascertain the amount of the true profits. Carlisle and Silloth Golf Club v. Smith, [1912] 2 K. B. 117, 81 L. J. K. B. ISr. S. 581, 106 L. T. K S. 573, 6 Tax. Cas. 48. "3d. As to Building and Loan Associations. — The property of these institutions is exempted from taxation to the extent of millions. They are in no sense benevolent or charitable insti- tutions, and are conducted solely for the pecuniary profit of their members. Their assets exceed the capital stock of the national banks of the country. One, in Dayton, Ohio, has a capital of $10,000,000, and Pennsylvania has $65,000,000 in- vested in these associations. The census report submitted to Congress by the President, May 1, 1894, shows that their prop- erty in the United States amounts to over $628,000,000. Why should these institutions and their immense accumulations of property be singled out for the special favor of Congress and be freed from their just, equal, and proportionate share of taxation when others engaged under different names, in similar business, are subjected to taxation by this law? The aggregate amount of the savings to these associations, by reason of their exemption, is over $600,000 a year." Pollock v. Farmers' Loan & Trust Co. 157 TJ. S. 429, 598, 39- L. ed. 759, 825, 15 Sup. Ct. Eep. 673, per Field, J. "As to the objections that certain organizations, labor, agri- cultural and horticultural, fraternal and benevolent societies,, land and building associations, and those for religious, chari- tlO. ANNOTATED STATUTE AND DIGEST. table or educational purposes, are excepted from tbe operation of the law, we find nothing in them to invalidate the tax." Flint V. Stone Tracy Co. 220 U. S. 107, 173, 55 L. ed. 389, 422, 31 Sup. Ct. Kep. 342, Ann. Cas. 1912B, 1312, per Day, J. "Domestic building and loan associations are among those enumerated as exempt from the requirements of the law. A do- mestic building and loan association is held to be one organized under and pursuant to the laws of the United States, or of a State or Territory thereof, or under the laws applicable to Alas- ka or the District of Columbia. Mutuality in operation and in the distribution of profits and benefits is essential to exemption. Therefore, in order to come within the exempted class such asso- ciations must not only be 'Domestic,' as defined, but they must be organized and operated exclusively for the mutual benefit of the members; that is, all the profits and benefits provided for in the articles of association and by-laws must be ratably dis- tributed among all members regardless of the kind of stock held, according to the amount of money they have on deposit. An association issuing different classes of stock upon which different rates of interest or dividends are guaranteed or paid, does not come within the exempted class." Treasury Regulation 87. Under the Corporation Tax Law of 1909 held that building and loan associations were exempt as organized and operated exclusively for the mutual benefit of their trust, although they issue both prepaid and instalment shares of stock, the prepaid stock being granted a fixed dividend payable only out of the earnings of the association. Herold v. Park View Bldg. & Loan Ass'n, — C. C. A. — , 210 Fed. 577, affirming Park View Bldg. & Loan Ass'n v. Herold, 203 Fed. 876. Under the Corporation Tax Law of 1909 held that a building and loan association was not exempt when the articles of incor- poration authorized "lending the shareholders of such associa- tion and others, the funds so accumulated," and the by-laws au- thorized the issue of preferred stock or stock the interest upon which was guaranteed, and authorized the directors upon finding ANI^OTATED STATUTE AND DIGEST. Yll that the income of the association could not be loaned profitably "to cancel any outstanding certificates of general stock not bor- rowed upon," paying the holder the book value of the stock so cancelled. Pacific Bldg. & Loan Ass'n v. Hartsen, 201 Fed. 1011, 1016. But see Central Bldg. L. & Sav. Ass'n v. Bowland, 216 Fed. 526. nor to cemetery companies, organized and operated exclusively for the mutual benefit of their members, nor to any corporation or association organized and operated exclusively for religious, char- itable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or indi- vidual. Nor to corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes. — Act of August 28, 1894, § 32. In Great Britain the application of profits to charitable or other purposes, or the motive with which a trade is carried on, does not affect the liability. See Atty. Gen. v. Black (1871), L. E. 6 Exch. 308, 40 L. J. Exch. ]Sr. S. 194, 25 L. T. IST. S. 20Y, 19 Week. Eep. 1114, 1 Tax. Gas. 52; Mersey Docks v. Lucas (1883), 8 App. Gas. 891, 53 L. J. Q. B. N. S. 4, 49 L. T. N. S. 781, 32 Week. Eep. 34, 2 Tax. Gas. 25 ; Paddington Burial Board v. Gommissioners of Inland Eevenue (1884), L. E. 13 Q. B. Div. 9, 53 L. J. Q. B. N. S. 224, 50 L. T. IT. S. 211, 32 Week. Eep. 551, 2 Tax. Gas. 46; Blake v. Imperial Brazilian Eail. Go. (1884), 1 Times L. E. 68, 2 Tax. Gas. 58 ; Nizam's State Eail. Go. v. Wyatt (1890), L. E. 24 Q. B. Div. 548, 59 L. J. Q. B. W. S. 430, 62 L. T. IN". S. 765, 2 Tax. Gas. 584; Harris v. Corporation of Irvine (1900), 2 F. 1080, 37 Scot. L. E. 799, 4 Tax. Gas. 221. "The provisions of the law clearly indicate that companies which operate cemeteries for profit are liable to the tax. The status of cemetery associations under the law will, therefore, de- pend upon the character and purpose of the organization and what disposition is made of the income." Treasury Eegulation 90. 712 ANNOTATED STATUTE AND DIGEST. "But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits, or the charge which has been made on those profits by previous agreement or otherwise, is perfectly immaterial:" per Lord Halsbuey, L. 0. Gresham Life Assurance Society v. Styles [1892] A. C. 309, 62 L. J. Q. B. K S. 41, 67 L. T. K S. 479, 41 Week. Eep. 270, 3 Tax. Gas. 185. A hospital founded by voluntary contributions for the treat- ment of insane persons, accepted as patients (a) persons who paid remunerative prices, and (b) poor persona who did not pay the full cost of their maintenance and treatment, which was paid for out of the profit derived from the former class of patients, and applied its surplus income to the extension and improve- ment of the hospital buildings: — Held, that the surplus was profit assessable to income tax (Sched. D.), and that § 105, post, did not apply. St. Andrew's Hospital (Northampton) v. Shearsmith [1887], L. E. 19 Q. B. Div. 624, 57 L. T. N. S. 413, 35 Week. Rep. 811. 2 Tax. Gas. 219. Assuming for the purpose of argument, (1) that the institu- tion was a "corporation for charitable purposes only," and (2) that profit made by carrying on the hospital was "yearly in- terest or other annual payment," it was held that such profits were not, by reason of the application of them to making the hospital more fit for the purposes for which the hospital was con- ducted, "payments applied to charitable purposes only," so as to exempt the institution from payment of income tax under Schedule (D.), Ibid. In delivering judgment in favor of the Crown, Lord Cole- ridge, C. J., referred to the assumption (2) that the profits to be taxed was "yearly interest or other annual payment," and said : "I do not think it is," an expression of opinion noted by Chaeles, J., in delivering judgment in Psalms and Hymns v. Whitwell, infra, as "in accordance with the decision which we pronounce in this case." Ibid. (This case was followed in oSTeedham v. Bowers (1888), L. ANNOTATED STATUTE AND DIGEST. 713 R. 21 Q. B. Div. 436, 59 L, T. K S. 404, 37 Week. Rep. 125, 2 Tax Cas. 360, supra.) A hospital, -wholly self-supporting, held^ not exempt as a charitable corporation, though founded upon Yolnntary contri- butions, and though the services of the managers were gratui- tous and the surplus over expenses had been devoted to charity or to improvement of its own resources. Ibid. The income of a burial board which was created under a statute, held, taxable although it was applied in reduction of the poor-rates of the parish. It was a joint enterprise of the parish which was not charitable in its nature, and was not merely a means to accomplish parish ends, because a profit was dis- tinctly contemplated. Paddington Burial Board v. Commissioners of Inland Reve- nue, L. R. 13 Q. B. Div. 9 (1884). "Charitable purposes" applies to the relief of poverty, and a religious trust is therefore not exempt as devoted to charitable purposes. Baird Trustees v. Inland Revenue, 25 Scot. L. R. 533 (1888), Sc. Ct. Sess. Free public libraries are not exempt as being "literary or scientific institutions." Andrews v. Mayor, etc., of Bristol, 61 L. J. Q. B. IST. S. 715 (1892). A society of engineers, the income of which is in fact appro- priated to the promotion of science, and not for the promotion of the professional interest or advantage of its members, al- though such interest or advantage is incidentally promoted, is exempt under a statute exempting income "legally appropria- ted and applied * * for the promotion of science." Commissioners of Inland Revenue v. Forrest, L. R. 15 App. Cas. 334 (1890), H. L., affirming Matter of Institution of Civil Engineers, L. R. 20 Q. B. Div. 621 (1888), which re- versed s. c, L. R. 19 Q. B. Div. 610 (1887). The income of a trust of which a half was to be devoted to the support of Moravian missionary establishments, one-fourth to the support of children of Moravian ministers, and one- fourth to the support of single persons of the Moravian faith^ heldj exempt as devoted to "charitable purposes." 714 ANNOTATED STATUTE AND DIGEST. Queen ex rel. Pemsel v. Commissioners, L. E. 22 Q. B. Div. 296 (1888). Lord EsHER, M. E., and Lopes, L. J., put their decision on the ground that the words "charitable purposes" were to be taken in their popular signification of aid to the poor, and that the trust in question was within that definition. Fey, L. J., however, decided on the ground that by those words was intended the technical meaning which included all the uses mentioned in statute 43 Eliz. 0. 4. Commissioners v. Pemsel [1891] A. C. 531, adopting Fey's view. Lord Hat-sbuey, L. C, and Lord Beamwell, dissenting. But see Commissioners v. Scott, (1892) L. E. 2 Q. B. Div. 152, affirming Matter of Bootham Ward Strays, 60 L. J. Q. B. K S. 612 (1891). Certain trustees published a hymn book, and, in accordance with the trust deed, distributed the profits among widows and orphans of Baptist ministers and missionaries : — Held, that the profits were chargeable under Sched. (D.), and were not an "annual payment" within § 105, so as to be exempt when ap- plied to charitable purposes. Trustees of Psalms and Hymns v. Whitwell (1890), 7 Times L. E. 164, 3 Tax Cas. 7. A society, founded for the diffusion of religious literature, sold Bibles, etc., at a depository or shop in Edinburgh, and sent out colporteurs, whose duties were to sell Bibles, etc., and to act as cottage missionaries. The sales at the Edinburgh shop resulted in a profit, but the colportage was carried on at a loss. The net result of the whole operations was an annual loss, which was met by subscriptions: — Held, that the colportage was not a trade, and that the loss on it could not be set against the profits from the bookseller's business carried on at the shop. Per the Lord President, 33 Scot. L. E. p. 291 : "The legitimacy of the importation into the account of the colportage must de- pend entirely on whether it, as well as the shop, is a business, trade, or adventure, carried on for commercial purposes, and on commercial principles." Eeligious Tract and Book Society of Scotland v. Forbes (1896), 33 Scot. L. E. 289, 3 Tax Cas. 415. A philanthropic association having classes, a gymnasium, etc., also conducted, on ordinary business lines, a restaurant, ANNOTATED STATUTE AND DIGEST. 715 -which was open to the general public. On its first branch, the association did not cover expenses, but made a profit on the restaurant: — Held, that the losses on the other branches could not be deducted from the profits on the restaurant. Grove v. Young Men's Christian Association (1903), 67 J. P. 279, 88 L. T. N. S. 696, 19 Times L. E. 491, 4 Tax €as. 613. The New York Historical Society, which maintains a library and collection of paintings, manuscripts and antiquities, and which gives illustrated lectures upon American history, is not an ■educational corporation. Matter of De Peyster, 210 IST. Y. 216, 104 K E. 714. The Metropolitan Art Museum, which maintains a museum and library of art and gives popular instruction, is organized for educational purposes. Matter of Mergentine, 129 App. Div. 367, 113 N. Y. Supp. 948, affirmed on opinion below in 195 IST. Y. 572, 88 IST. E. 1125. So is the Arnot Art Gallery, which has similar functions. Matter of Arnot, 71 Misc. 390, 130 E". Y. Supp. 197, af- firmed in 145 App. Div. 708, 130 N. Y. Supp. 499, affirmed in 203 W. Y. 627, 97 K E. 1102. The Women's Christian Temperance Union, organized to promote "throughout the State of ITew York" the cause of total abstinence from all intoxicating liquors as a beverage and the suppression of liquor traffic, which, amongst other means for carrying out the objects of its incorporation, carries on educa- tional work in the public schools of the State, is an educational cojporation. Matter of Field, 71 Misc. 396, 130 K Y. Supp. 195, affirmed in 147 App. Div. 927, 131 K Y. Supp. 1114. Under the Corporation Tax Law of 1909 it was held, that the qualifying clause "no part of the net income of which inures to the benefit of any private stockholder or individual" did not qualify the whole proviso that only the immediately preceding ■clauses, namely, "nor to any corporation or association organized and operated exclusively for religious, charitable, or educational purposes." Herold v. Park View Bldg. & Loan Ass'n, — C. C. A. — , 210 Eed. 577; affirming Park View Bldg. & Loan Ass'n v. Herold, 203 Fed. 876. Contra, Pacific Bldg. & Loan Ass'n v. Hartsen, 201 Fed. 1011. 716 ANJS^OTATED STATUTE AND DIGEST, nor to any civic league or organization not organized for profit, but operated exclusively for the promotion of social wrelfare: Provided further, That there shall not be taxed under this section any income derived from any public utility or from the exercise of any essential governmental function accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State, Territory, or the District of Columbia, nor any income accruing to the government of the Philippine Islands or Porto Rico, or of any political subdivision of the Philippine Islands or Porto Rico: That nothing herein contained shall apply to states, counties, or munic- ipalities. — Act of August 28, 1898, § 32. The revenue of a municipal corporation is not taxable. U. S. V. Eailroad Co. 17 M^all. 322, 21 L. ed. 597 (1872),. U. S. Supreme, Hunt, J. Interest on a loan payable by a railroad to the city of Balti- more was not taxable. Attorney General Hoar, 13 Ops. Atty. Gen. 67 (1869). A tax levied on the average amount of deposits is collectible,, although part of the deposits are state funds. The tax is on the bank and not on the state. ISTeither railroads owned by a state, or the gross income thereof, or the profits accumulated therefrom, or dividends paid upon its bonds are subject to taxation under the Act of June 30, 1864. Attorney General Stanbery, 12 Ops. Atty. Gen. 277 (1867). Articles manufactured by convict labor in the penitentiaries of a state for the use of a state or on account of a state are- not taxable. Ibid. 8o ruled, as regards the Detroit House of Correction, where all female prisoners other than those convicted of murder and all other convicts at the discretion of the proper ofiicers might ANNOTATED STATUTE AND DIGEST. Y17 be confined instead of in the state prison, and where Federal prisoners were confined. Attorney General Browning, 12 Ops. Atty. Gen. 376 (1868). Dividends accruing to the state of Massachusetts on stock owned by it in the Boston and Albany railroad were not taxable. Attorney General Ackerman, 13 Ops. Atty. Gen. 439 (1871). Acting Attorney General Browning, 12 Ops. Atty. Gen. 402, (1868), ace. "It is no part of the essential governmental functions of a state to provide means of transportation, supply artificial light, water, and the like. These objects are often accomplished through the medium of private corporations, and though the public may derive a benefit from such operations, the companies carrying on such enterprises are nevertheless private companies, whose business is prosecuted for private emolument and ad- vantage. For the purpose of taxation they stand upon the same footing as other private corporations upon which special fran- chises have been conferred. "The true distinction is between the attempted taxation of those operations of the states essential to the execution of its governmental functions, and which the state can only do itself, and those activities which are of a private character. The former, the United States may not interfere with by taxing the agencies of the state in carrying out its purposes ; the latter, al- though regulated by the state, and exercising delegated author- ity, such as the right of eminent domain, are not removed from the field of legitimate Federal taxation." Flint V. Stone Tracy Co. 220 U. S. 107, 172, 55 L. ed. 389, 421, 31 Sup. Ct. Eep. 342, Ann. Gas. 1912B, 1312, per Day, J. Held that a State engaged in the sale of alcoholic liquor was subject to the internal revenue tax imposed by the United States. South Carolina v. United States, 199 U. S. 437, 50 L, ed. 261, 26 Sup. Ct. Eep. 110, 4 Ann. Cas. 737. ^18 ANNOTATED STATUTE AND DIGEST. Held that intrastate railroad companies, although engaged' solely in the public service of a State, are subject to a Federal excise tax. Flint V. Stone Tracy Co. 220 U. S. 107, 55 L. ed. 389, 31 Sup. Ct. Eep. 342, Ann. Cas. 1912B, 1312. A giKm-public corporation, organized for the management of docks, was required to expend its income, after certain ex- penses of management, in reduction of the principal of its debt by means of a sinking-fund. When the debt -was paid, the taxes were to be reduced so as merely to cover expenses. Other payments were forbidden. Held, under an act taxing income before it should be paid to creditors or stockholders, that the surplus of income carried to the sinking-fund was taxable. A profit is a profit, irrespective of the mode of application. Mersey Docks, etc., Board v. Lucas, L. E. 8 App. Cas. 891 (1893), House of Lords. Lowrey v. Harbour Commissioners, 3 Times L. R. 516 (1887), Q. B. D., ace. A ^imsi-public corporation, organized to supply a city with water, was empowered to levy water-rates on the citizens to an amount sufficient to pay expenses and one per cent of all sums borrowed, and that percentage was to go into a sinking-fund. Held, that sums so paid into the sinking-fund were not taxable as profits. The corporation is a mere agent for the rate-payers, and they make no profit. Glasgow, etc. Commrs, v. Inland Revenue, 2 Ct. Sess. (4th Ser.) Cas. 708 (1875), Scot. Ct. Sess. Sed quwre, it appearing that the corporation was empowered to sell water upon special terms outside of the city, whether the surplus arising upon such transaction would not be a profit ? Ibid. A municipal corporation receiving tolls upon all coal landed on its breach or brought within its limits, which by a statute were to be applied on public works, held, taxable on the income so obtained. ANNOTATED STATUTE AND DIGEST. 719 Attorney General v. Black, L. K. 6 Exch. 308 (1871), Exch. Chamb. affirming s. c. Ibid. p. 78 (1871), Ct. Ex. Semble, otberwise if the tolls bad fallen merely on the in- habitants and not on strangers. Ibid. Provided, That whenever any State, Territory, or the District of Col- umbia, or any political subdivision of a State or Territory, has, prior to the passage of this Act, entered in good faith into a contract with any person or corporation, the object and purpose of which is to acquire, construct, operate or maintain a public utility, no tax shall be levied under the provisions of this Act upon the incom© derived from the operation of such public utility, so far as the pay- ment thereof will impose a loss or burden upon such State, Terri- tory, or the District of Columbia, or a political subdivision of a State or Territory; but this provision is not intended to confer upon such person or corporation any financial gain or exemption or to relieve such person or corporation from the payment of a tax as provided for in this section upon the part or portion of the said income to which such person or corporation shall be entitled under such con- tract. This is designed to protect the interests of the City of New York under its contracts for the construction of subways. See Admiral Realty Co. v. City of New York, 206 N. Y. 110, 99 N. E. 241. (b) Such income shall be ascertained by deducting from the gross amount of the income of such corporation, joint-stock company or association, or insurance company, received within the year from all sources, (first) all the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, including rentals or other payments required to be made as a condition to the continued use or possession of property; Above actual operating and business expenses, including expenses for materials purchased for manufacture or bought for resale. — Act of August 28, 1894, § 32. "Second. Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, joint stock company or association, or insurance company, received within the year from all sources, (first) all the ordinary and necessary expenses actually paid with- in the year out of income in the maintenance and operation of its busi- ness and properties, including all charges such as rentals or franchise payments, required to be made as a condition to the continued use or pos- session of property; (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends, paid within the year on policy '720 ANNOTATED STATUTE AND DIGEST. and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds; (third) interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness not exceeding the paid-up capital stock -of such corporation, joint stock company or association, or insurance com- pany, outstanding at the close of the year, and in the case of a bank, banking association or trust company, all interest actually paid by it within the year on deposits; (fourth) all sums paid by it within the jear for taxes imposed under the authority of the United States or of any state or territory thereof, or imposed by the government of any foreign country as a condition to carrying on business therein; (fifth) all amounts received by it within the year as dividends upon stock of other corpora- tions, joint stock companies or associations, or insurance companies, sub- ject to the tax hereby imposed: Provided, That in the case of a corpora- tion, joint stock company or association, or insurance company, organized under the laws of a foreign country, such net income shall be ascertained by deducting from the gross amount of its income received within the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia, (first) all the ordinary and necessary expenses actually paid within the jear out of earnings in the maintenance and operation of its business and property within the United States and its Territories, Alaska, and the District of Columbia, including all charges such as rentals or franchise payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the j^ear in business conducted by it within the United States or its Territories, Alaska, or the District of Columbia, not compensated by insurance or other- wise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds ; ( third ) Interest actually paid within the year on its bonded or other indebtedness -to an amount of such bonded and other indebtedness, not exceeding the proportion of its paid-up capital stock outstanding at the close of the year which the gross amount of its income for the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia bears to the gross amount of its income derived from all sources within and without the United States; (fourth) the sums paid by it within the year for taxes imposed Tinder the authority of the United States or of any State or Territory thereof; (fifth) all amounts received by it within the year as dividends upon stock of other corporations, joint stock companies, or associations, and insurance companies, subject to the tax hereby imposed. In the case ■of assessment insurance companies the actual deposit of sums with State or Territorial oflBcers, pursuant to law, as additions to guaranty or reserve funds shall be treated as being payments required by law to reserve ifunds." — Corporation Tax Law of August 5, 1909. ANNOTATED STATUTE AND DIGEST. T21 When taxes are imposed by a state on stockholders, and the corporation is authorized to deduct them from dividends, held, that the corporation could not deduct taxes so retained as ex- penses of its business. Central National Bank v. TJ. S. 137 U. S. 355, 34 L. ed. 703, 11 Sup. Ct. Eep. 126 (1890), Haelan, J., affirming U. S. V. Central National Bank, 24 Fed. 577 (1885), U. S. C. C. S. D. IST. Y., Wallace, J., which reversed s. c. 15 Fed. 222 (1883), U. S. D. C. S. D. IST. Y. Brown, J. And see s. c. 10 Fed. 612 (1882), U. S. D. C. S. D. IST. Y., Beown, J. A company, whose business consisted in buying and selling land and rights of land, bought a piece of vacant ground for 8981. and after erecting houses upon it burdened each house with a fen duty: the fen duties in all amounted to 1141. per annum. The company then sold the fen duties for 3,1351., but retained the land and houses. The Inland Revenue claimed Income Tax on the difference between 8981. and 3,1351. as profit earned by the company: Held, that the claim could not be sustained, inasmuch as the price of 3,1351. could not have been obtained if the ground had remained vacant, but was partly due to the erection of houses by the company. Furtado v. Cardonald Feuing Co. [1907], S. C. 36, 44 Scot. L. R. 66, Ct. of Sess. A golf club, the members of which were entitled on pay- ment of their subscriptions to play on the links, admitted, Tinder the terms of its lease, visitors, who were non-members, to play on the links and to use the club-house, on payment of certain green fees fixed by the lessors. The annual expendi- ture incurred in the maintenance of the golf course alone ex- ceeded the amounts of the green fees received from visitors. The commissioners for general purposes decided on appeal, that the club was chargeable under Sched. (D.) in respect of the green fees received from visitors, less such portion of the annual outlay in maintaining and keeping up the links and club-house, as the green fees bore to the entire annual income of the club or fund available for the maintenance and upkeep : — Held, that the club was carrying on an enterprise which was ■outside the scope of the ordinary functions of the club, and that any profits derived from the fees in question were chargeable imder Sched. (D.) ; and, further, that the method adopted by Foster Income Tax. — 46. 722 ANNOTATED STATUTE AND DIGEST. the commissioners of ascertaining the amount of the profits^ was erroneous, as being an arbitrary method having no neces- sary application to the facts, and therefore, in default of agree- ment, the case must be referred back to the commissioners to- ascertain the amount of the true profits. Carlisle and Silloth Golf Club v. Smith, [1912] 2 K. B. 177,. 81 L. J. K B. K S. 581, 106 L. T. K S. 573, 6 Tax. Cas. 48. A mortgage company, whose business consisted in lending- money on the security of land in Texas and elsewhere, raised money by issuing debentures, and lent it at higher rates of in- terest: — Held, that the cost of raising the debentures, such as commission paid to brokers, and other expenses, could not be de- ducted as trade expenses. Texas Land and Mortgage Co. v. Holtham (1894) 63 L. J. Q. B. ]Sr. S. 496, 10 Times L. E. 337, 3 Tax Cas. 255. A company borrowed money to be employed in the business,, and undertook, on the repayment of any capital sum, to pay- to the lenders, along therewith, a bonus of 10 per cent: — Held, that the bonus could not be claimed as a deduction. Arizona Copper Co. v. Smiles (1891), 29 Scot. L. E,. 134, 3- Tax Cas. 149. The business of selling annuities is to be taxed upon the same- principle as any other commercial concern, such as the selling of coals or corn, where the cost of the thing sold to the trader is one of the expenses incident to carrying on the trade. Dis- bursements made wholly and exclusively for the purposes of" a trade in annuities must be deducted in estimating the as- sessable "profits," as a grocer has to deduct the price paid by him for the tea or sugar which he retails. The decision of the- House of Lords may be regarded as having settled the fol- lowing points that — Held, that (1) There is no distinction be- tween the words "profits" and "gains." (2) "The amount of" the profits" means the same as "the balance of the profits." (3) "Payable out of profits" means "payable out of profits brought into charge." Per Lord Watson [1892] A. C. p. 320 : "In order to bring- annuities or other annual payments within the scope of the- rule, they must, in my opinion, either be directly charged upon profits, or be in themselves of such a character that they form a proper charge upon profits. . . . An annuity to the widow ANNOTATED STATUTE AND DIGEST. 723 of a deceased partner, interest on capital advanced by a partner, or upon money borrowed for tbe purposes of the business, are truly payable out of profits earned, and therefore ought not to be deducted in estimating the income yielded by the business." Per Lord Heeschell (p. 324) : "When read in connection with § 102, the rule clearly relates only to annuities payable out of profits and gains 'brought into charge' by virtue of the Act. ... I think the 4th rule was primarily designed to meet such a case as that in which a trader had contracted to make an annual payment out of his profits, as, for example, when he had agreed to make such a payment to a former part- ner, or to a person who had made a loan on the terms of re- ceiving such payment. But for the rule it might plausibly have been contended that in such a case a trader was only to return as his profits what remained after making such pay- ment." Gresham Life Assurance Society v. Styles [1892] A. C. 309, 62 L. J. Q. B. ]Sr. S. 41, 67 L. J. N. S. 479, 41 Week. Eep. 270. Under the Corporation Income Tax Law of 1909, held, that a life insurance company might deduct expenditures for ordinary renewals of office furniture, and uniforms of atten- dants, rugs, awnings, small hardware, door mats, win- dow shades, lamps, meters, electrical equipment, and other ar- ticles of a similar character, exceeding in one year $4,000, which were no greater than the previous yearly average of similar expenses and did not exceed five per cent, of the similar articles owned by the plaintiff. Mutual Benefit Life Insurance Co. v. Herold, 198 Fed. 199, 216. Held that in ascertaining the profits of the business of fire insurance, a deduction claimed in respect of "unearned pre- miums," could not be made. Imperial Fire Insurance Co. v. Wilson (1876), 35 L. T. N". S. 271, 1 Tax Cas. 71. Held, that, as fire insurance policies were contracts for one year only, premiums received for the year of assessment, or on an average of three years, deducting losses by fire during the same period and ordinary expenses, might be fairly taken as profits and gains of the company, without taking into account, 724 ANNOTATED STATUTE AND DIGEST. or making any allowance for, the balance of annual risks un- expired at the end of the financial year of the company. Scottish Union and National Assurance Co. v. Smiles (1889), 16 E. 461, 26 Scotch. L. E. 330, 2 Tax Gas. 551. The accounts of the company, on which the assessment was based, showed that the unexpired risks were not taken into ac- count for the purpose of ascertaining the amount of profits divisible among the company's shareholders, and the sums in respect of such risks were carried to general reserve after declaring the dividends out of the profits. It was held, by the House of Lords, that as it was not shown that the method of assessing, without deduction in respect of unexpired risks, was unfair, having regard to the facts of the particular case, the deduction claimed was inadmissible. In General Accident Assurance Corporation v. M'Gowan [1908] A. C. 207, 77 L. J. P. C. N. S. 38, 98 L. T. K S. 734, 5 Tax Cas. 308, an insurance company carried on the busi- ness of fire insurance, and issued policies for periods of twelve months and longer periods, the premiums being payable in ad- vance. The risk on the policies ran from the dates therein men- tioned. At the end of the financial year, a considerable number of policies were still running, under which the company were un- der liability to pay in the event of any loss. The company, since 1888, had carried forward annually in their accounts 40 per cent, of the yearly premium receipts as a reserve, in order to bring about the correct incidence, as between year and year, of the premium income which had to answer to accidental in- cidence of fire losses, and on the balance of which, over or under the losses and charges for the year, the profit or loss attach- ing to the business depended. The provision thus made of 40 per cent, amounted on December 31st, 1901, to £466,138, and rose, during the three years on which the assessment was based, to £522,472. The increase in the reserve then amounted to £56,334, and consequently afi'ected the return for the year of assessment by one-third, or £18,778. A deduction was claimed in respect of this sum. The General Commissioners of Income Tax, on the appeal by the company, were of opinion that the latter were entitled to carry a percentage of fire premiums re- ceived in one year, forward to reserve in respect of unearned premiums, which did not form part of the profits for the year, ANNOTATED STATUTE AND DIGEST. 725 and they found, in the case of the company, that 40 per cent, was a reasonable and proper allowance, and reduced the as- sessment accordingly: — Reld, by the House of Lords, that having regard to the finding of fact by the commissioners, the sum in question was properly deductible by the company, and that there was no rule of law by which to frame an estimate of the balance of profits and gains after allowing for the unexpired risks when the accounts were made up. It was a question of facts and figures in each case, whether the assess- ment was fair both to the Crown and to the subject (General Accident Assurance Corporation v. M'Gowan, discussed and explained). Per Lord Loeebuen, L. C. [1912] A. C. p. 454: "I am equally anxious that your lordships should not be sup- posed to have laid down that the method applied by the com- missioners in the present case has any universal application. If the Crown wishes in any future instance to dispute it, the Crown can do so by evidence, and it is not to be presumed that it is either right or wrong. A rule of thumb may be very desirable, but cannot be substituted for the only rule of law that I know of, namely, that the true gains are to be ascer- tained as nearly as it can be done." Sun Insurance OiSce v. Clark, [1912] A. C. 443, 81 L. J. K. B. N. S. 488, 106 L. T. K S. 438. Held that where not authorized by the articles of association, the payment of the income tax on director's fees out of the com- pany's funds, was an illegal payment. Boschoek Proprietary Co. v. Puke, [1906] 1 Ch. 148, 75 L. J. Ch. N. S. 261, 94 L. T. N. S. 398, 54 Week. Kep. 359. Traveling expenses of directors from their residences to the office of their company, were held to be inadmissible deduc- tions. Eevell V. Directors of Elworthy Brothers & Co. (1890),. 3 Tax Cas. 12. A company undertook to construct a railway in Brazil under a Government guarantee of 7 per cent. It raised capital by debentures at 5^ per cent, and devoted the 7 per cent, to pay- ment of debenture interest, and to the formation of a sinking fund to pay off the debentures: — Held, that the whole of the sum paid under the guarantee during construction, was liable 726. ANNOTATED STATUTE AND DIGEST. as interest, without deduction in respect of the amount applied to the sinking fund. Blake v. Imperial Brazilian Eail Co. (1884), 1 Times L. R. 68, 2 Tax Cas. 58. See also incidentally, City of London Contract Corporation v. Styles (1887), 4 Times L. E. 51, 2 Tax Cas. 239. A company constructed a railway in Hyderabad. The Niz- am's Government guaranteed an annuity for twenty years of 5 per cent on the issued share and debenture capital, to be ap- plied in paying interest on such capital, and in forming a sinking fund for the redemption of the debentures, subject to provisions for repayment of the sums paid, with interest, out of profits earned. — Held, that the whole annuity was charge- able with duty, without deduction, for the amount applied to the sinking fund. Nizam's State Rail Co. v. Wyatt (1890), L. R. 24 Q. B. Div. 548, 59 L. J. Q. B. K S. 430, 62 L. T. N. S. 765, 2 Tax Cas. 584. second, all losses actually sustained within the year and not com- pensated by insurance or otherwise, In the case of an individual, fourtli, losses actually sustained during the year incurred in trade or arising from fires, storms, or shipwreck, and not compensated for by insurance or otherwise, and debts ascertained to be worthless; fifth, debts due the taxpayer actually ascertained to be worthless and charged off within the year. B. supra. See citations there- under. Losses— Act of August 28, 1894, § 32. A new association formed by the incorporation of a partner- ship, was held to succeed to the concern within the meaning of this 4th rule, and that the extraordinary depression in the iron and coal trades, whereby the company was unable to sell either so large a quantity of coals, or to obtain so good a price as formerly, was a "specific cause;" and further, that the 6th case of Sched. (D.), applied, and under it the computation should be made on the amount of the full value of the profits and gains received annually, i. e., for the current year. Ryhope Coal Co. v. Foyer (1881), L. E. 7 Q. B. Div. 485, 45 L. T. N. S. 404, 30 Week. Rep. 87, 1 Tax. Cas. 343. A railway company discontinued certain steamships which, in the course of the business, had been running at a loss. In. ANNOTATED STATUTE AND DIGEST. Y27 estimating their profits for income tax on the basis of the in- come of the previous year (r. 3 of Wo. III. of Sched. (A,)), the company claimed to deduct the loss on the steamboats dur- ing that year : — Held, that they were entitled to do so ; the as- sessment must be based on the net profits of the whole under- taking for the year preceding the year of assessment, the loss (in the steamships being taken into account, as running steam- ships was a part of the undertaking of the company. Highland Eail. Co. v. Special Commissioners (1885), 13 R. 199, 23 Scot. L. E. 116, 2 Tax Cas. 151. The business, together with a distillery, of a firm of blenders, wine merchants, and exporters, was acquired and worked by a limited company. The firm had not commenced to work the ■distillery. At the appeal, the General Commissioners were of opinion, that the concern of the company was not a succession to that of the firm, within the 4th rule. The court decided that as the commissioners had held that there was not a sufficient or general identity between the two businesses, that question was one of fact and not of law, and there was nothing to show that the commissioners had arrived at a wrong legal result. Alexander Ferguson & Co. v. Aikin (1898), 4 Tax Cas. 36. A "tramp" steamer was sold, but no books, accounts, or list of customers were sold with it: — Held, that the new owners were not entitled to be assessed as successors in the business of the previous owners. The sale was not the sale of a business, but of "a corporeal moveable, which happened to be a ship." Watson Brothers v. Lothian (1902), 4 F. 795, 39 Scot. L. R. 604, 4 Tax Cas. 441. See also Farrell v. Sunderland Steamship Co. (1903), 88 L. T. I^. S. 741, 4 Tax Cas. 605, set out under r. 3, ante. The defendant company purchased the business and premises, etc., of a local bank, at Wolverhampton. They then for the first time, opened a branch at Wolverhampton on the premises so purchased, and there carried on business with the manager and staff previously employed by the local bank. The profits and expenses of the Wolverhampton business were merged in those of the defendant company as a whole, and there were no means of ascertaining what proportion, if any, of increase or decrease of the profits of the company had arisen from the 728 AJSTNOTATED STATUTE AND DIGEST, business purchased. Held, by the Court of Appeal, that there had been a succession within this rule. Bell V. National Provincial Bank of England [1904] 1 K. B. 149, 73 L. J. K B. N. S. 142, 90 L. T. N. S. 2, 52 Week. Kep. 406, 5 Tax Cas. 1. A tramway company was incorporated under a local Act. At a later date, the undertaking of the company was transferred to a new company, which also acquired at the same date the business of an omnibus company, and carried on the two busi- nesses simultaneously for a considerable period. Subsequently, the local authority purchased the tramway undertaking under a statutory power of compulsory purchase, and proceeded to ex- tend its area, and to substitute electric trams for the existing horse-drawn vehicles : Held, that the local authority were suc- cessors of the company in respect of their tramway business, and had not set up or commenced a new business by their recon- struction, and were therefore entitled to be assessed on the aver- age of the profits of the three preceding years. Per Bray, J., 95 L. T. ]Sr. S. p. 839 : "Railway companies are always spend- ing capital and extending their railways, and some of them have substituted electrical power for steam, but it could not be sug- gested that by doing this they were commencing or setting up a new business. It so happens here that the extension and modifi- cation was very great, and that it occurred just at the time when the respondents had bought the original undertaking, but I do not think this alters the case. There seems no reason why the revenue should be benefited by the accident of transfer at the time." Stockham v. Wallasey Urban District Council (1906) 95 L. T. ISr. S. 834, 71 J. P. 244. including a reasonable allowance for depreciation by use, wear and tear of property, if any; In computing the net income of individuals there is deducted" a reason- able allowance for exhaustion, wear and tear of property arising out of its use or employment in the business." B. supra. A reasonable allowance for depreciation of property, if any. — Corpora- tion Tax Law of August 5, 1909. Under such a provision, a mining corporation engaged in ex- tracting ore from its mines is entitled to an allowance for depre- ANNOTATED STATUTE AND DIGEST. 729 ciation equal to the value in place of the ore extracted and dis- posed of during the year. U. S. v. ISTippissing Mine Co. 202 Fed. 803. Upon the general subject of depreciation see Tr. Eeg. 127- 146 ; Ct. Mim. T. D. 1077, 2005, quoted supra, % 64. Under the Act of June 30, 1864, as amended by the Act of July 13, 1866, the tax was upon profits, not earnings, "carried to the account of any fund or used for construction." So held, where against sums carried to the account of some fund or used for construction, the corporation claimed to offset items 1, for loss and depreciation of book accounts; 2, depreciation in the value of bonds; 3, depreciation in the value of "the street connection track;" 4, losses on a purchase of capital stock, which offsets were allowed. Estimated depreciation of assets may be included in losses. Little Miami, etc., E. E. v. U. S. 108 U. S. 277, 27 L. ed. 724, 2 Sup. Ct. Eep. 627 (1883), Waite, C. J., reversing U. S. V. Little Miami, etc., E. E. 1 Fed. 700 (1880), U. S. Cir. Ct. S. Dist. Oh., Swing, J. It does not clearly appear in the report in 108 U. S. 277 that the depreciation was merely estimated, but that fact is clearly stated in 1 Fed. 700, at p. 702, and would seem to be the ratio decidendi. See also the report of the case at circuit in 26 Int. Eev. Eec. 101. The tax accrues upon all sums "made or added * * * to sur]>]us or contingent funds, at the moment of addition, and is not diminished by a subsequent loss of the whole or a part of the fund," e. g., by embezzlement. Solicitor General Phillips, 14 Ops. Atty. Gen. 643 (1874). Sums carried to the account of a repair fund come within the clause as to profits carried to the account of any fund or used for construction and cannot be deducted. Euling, 2 Int. Eev. Eec. 100. A sum set apart for depreciation, aside from repairs, is an addition to capital out of profits and therefore taxable under the English Act. Forder v. Handyside, L. E. 1 Exch. Div. 233 (1876). But see Dowell on Income Tax, 7th ed. 280. Depreciation of the value of machinery due to removal of business is not deductible. It is loss of capital. 730 ANNOTATED STATUTE AND DIGEST. Smith V, Westinghouse Brake Co. 2 Tax Cas. 357 (as stated in Dowell on Income Tax, 7th ed. p. 117, n.). A railway company were allowed as a deduction a sum ex- pended in repairs or renewals of rolling stock, and which has been sufficient to keep their rolling stock in good working con- dition and repair. They claimed a further deduction for wear and tear of newly added stock, which had not required any re- pair or renewal : — Held, that the deduction for wear and tear to be made under the above section was a deduction for di- minished value as a means of earning income, and not as a sale- able subject, and that inasmuch as the stock in question was un- diminished in value for the purpose of earning income, no fur- ther deduction could be allowed. Query, whether the words "as they may think just and reasonable" do not exclude review. Per Lord Gii-poed: "The company cannot get deduction for de- terioration twice over, first by deducting the actual expense of repair and renewal, and then by deducting an additional esti- mate for the samfe thing." Caledonian Eail. Co. v. Banks (1880), 8 K. 89, 18 Scot. L. R. 85, 1 Tax Cas. 487. A steamship company were held not to be entitled to an allow- ance in respect of depreciation of their ship by (a) loss of earn- ing power owing to the ship having become more or less obso- lete, or (b) diminution in market value apart from that caused by wear and tear. Burnley Steamship Co. v. Aikin (1894), 21 E. 965, 31 Scot L. E. 803, 3 Tax Cas. 275. A company owned a fleet of passenger and cargo steamers. The commissioners allowed a deduction of 5^ per cent, from the written-down value of the whole fleet in the company's books, as representing the diminished value of the ships by reason of wear and tear during the year of assessment. The company claimed a reduction of the assessment, on the ground of overcharge, conse- quent upon insufficient allowance for depreciation : — -Held, that the appeal must be refused. Leith, Hull, and Hamburg Steam Packet Co. v. Bain (1897), 3 Tax Cas. 560. The commissioners of income tax are not bound to take an average of the depreciation during the three preceding years, ANNOTATED STATUTE AND DIGEST. 731 but may adopt as their estimate the amount of the depreciation during the year immediately preceding that of assessments. Cunard Steamship Oo. v. Coulson [1899] 1 Q. B. 865, 68 L. J. Q. B. ISr. S. 554, 80 L. T. K S. 326, 4 Tax Cas. 63. A company owned a fleet of passenger and cargo steamers. In fixing the deduction for diminished value through wear and tear, the commissioners took into account that the sum annually allowed might be so invested as to produce interest at 3 per cent, per annum: — Held, that the commissioners were not entitled to make any deduction from the sum representing the wear and tear on account of any interest that might be earned on the sum allowed. Leith, Hull, and Hamburg Steam Packet Co. v. Musgrave (1899), 1 F. 1117, 36 Scot. L. E. 745, 4 Tax Cas. 80. A company owning a fleet of ships, claimed to be allowed a deduction of 5 per cent, on the original cost of the ships, as rep- resenting the diminished value by reason of wear and tear dur- ing the year. The commissioners found that the average dura- tion of the service of ships in the fleet was seventeen years, though the average duration of life was twenty-eight years; and that an allowance at the rate of 6 per cent, on the dimin- ished value of the fleet for the year of assessment, arrived at by taking the original cost of each vessel and writing it down year by year at the rate of 6 per cent, on the diminishing value, was a sufficient allowance to cover the diminished value by reason of wear and tear during the year : — Held, by the Queen's Bench Division, that the commissioners had dealt with all that was property before them, and that the questions were substantially questions of fact. On Appeal to the Court of Appeal, and upon a further statement made by the commissioners that interest was not taken into consideration, etc., the appeal was dismissed upon the ground that no question of law arose. Peninsular and Oriental Steam Navigation Co. v. Leslie (1900), 79 L. T. ]Sr. S. 118, 82 L. T. K S. 137, 4 Tax Cas. 177. This case was followed in British India Steam ISTavigation Co. v. Leslie (1900), 17 Times L. E. 104, 4 Tax Cas. 257, in which the facts were similar. A firm owned a fleet of ships of the average age of thirty-one years. Prior to the year of assessment there had been allowed 732 ANNOTATED STATUTE AND DIGEST. yearly an amoimt by way of deduction for diminished value by reason of wear and tear, such sums amounting in the aggregate to not less than 96 per cent, of the original cost. The breaking- up value in the year of assessment was considerably more than 4 per cent, of the original cost: — Held, that the commissioners were bound to consider to what extent there had been a diminu- tion of value during the year of assessment, and to decide what was a just and reasonable allowance in respect thereof, and that they were not entitled to take into account the allowances made in previous years, and further that a hulk, which had formerly been a sailing ship, and was used as a floating warehouse for coal, was "plant" within this section. Per Walton, J., [1906] 1 K. B., p. 316: "The case might be different if there were any evidence of an agreement between the appellants and the com- missioners that the allowance for depreciation should be calcu- lated upon the basis of its being an allowance which would at the end of a period of years, taking into account the breaking-up value of the vessels, fully replace the appellant's capital, and that after that date no further allowances should be made ; but there is no evidence to that effect, and no such agreement is re- lied upon." John Hall, Junior & Co. v. Rickman, [1906] 1 K. B. 311, 75 L. J. K. B. K S. 178, 94 L. T. K S. 224, 54 Week. Eep. 380. The London County Council purchased certain tramways from different companies. These tramways were formerly worked by horse power, but the council proceeded to recon- struct them in order to work them by electric traction. For the purpose of assessing the profits of these tramways for income tax, the practice had been adopted of deducting the amounts ac- tually expended on repairs and renewals in each year, in lieu of estimating the deduction to be made for depreciation under the provisions of § 12 of the Customs and Inland Revenue Act, 1878. By March 31st, 1904, thirty-eight miles of track had been reconstructed, of which five miles were worn out, and would have required reconstruction for horse traction. The remaining thirty-three miles were not worn out, but their life was much below the average life of a rail. A certain number of the horse traction cars, although not worn out, had been discarded, and others substituted. In the assessment to income tax of the ANNOTATED STATUTE AND DIGEST. 733 profits for the year ending April 5th, 1904, the Commissioners of Income Tax followed the practice previously adopted, but re- fused to allow any deduction in respect of the thirty-three miles of line referred to, or in respect of the cars which were not worn out : — Held, that no question of law was raised in the case, and further, that the practice adopted was not applicable, and that the appellants had no cause of complaint as they had re- ceived all that they were entitled to under the practice. London County Council v. Edwards (1909), 100 L. T. K S. 444, 73 J. P. K S. 213, 25 Times L. E. 319, 5 Tax Cas. 383. and in the case of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made; As it first passed the House, "on the basis of their original •cost in cash or the equivalent of cash" took the place of the phrase beginning "not to exceed." Under the Corporation Tax Law of 1909 it was held that a greater percentage, namely, 31.11, might be allowed for ex- tracted ore. U. S. v. ISTippissing Mines Co. 202 Fed. 803. See T. E. Dec, JSTos. 1742, 1755. A coal owner, who also owned the estate of which the mine formed part, in ascertaining the amount of his profits, claimed a deduc- tion in respect of capital lost through partial exhaustion of the mine: — Held, that the deduction was not allowable. Miller v. Pairie (1878), 16 Scot. L. E. 189. A mine owner was held, by the House of Lords, not to be entitled, in ascertaining the amount of his profits for assess- ment, to deduct a sum as representing the amount of capital ex- pended in making bores and sinking pits, which had been ex- hausted by the year's working (Kjiowles v. McAdam (1877), L. E. 3 Exch. Div. 33, 47 L. J. Bxch. N. S. 139, 37 L. T. N. S. 795, 26 Week. Eep. 114, held wrongly decided). Per Bael Cairns (1881), L. E. 6 App. Cas. p. 324: "I am not pre- pared to say that under the words of 5 & 6 Vict. chap. 35, a mine owner might not in some eases be entitled to an allow- ance in respect of the cost of sinking a pit, by means of which pit the minerals are gotten which are the source of profit for the year in which the pit was sunk. I desire to reserve my opinion on that point until the question arises. But in the present case the question is altogether different. It is, as now explained, can a mine owner write off and deduct from the gross earnings of his mine in a particular year, a sum to represent that year's de- preciation of all the pits in the mines, whenever sunk? I am •clearly of opinion that this cannot be done." Per Lord Pex- 734 ANNOTATED STATUTE AND DIGEST. ZANCE (p. 326) : "The words 'profits received therefrom,' are here introduced to define the annual value of the thing which is to be taxed, which is the 'mine,' and it could not, I think, be intended that for the purpose of calculating the 'annual value"" of a 'mine,' the original cost of the 'mine' itself, or any part of it, should be first deducted. On the contrary, the words 'profits received therefrom,' in this connection, mean, I think, the entire profit derived from the 'mine,' deducting the cost of working it, but not deducting the cost of making it." Per Lord Blackburn (p. 335) : "It was said by Lord Caiens in Gowan v. Christie L. E. 2 H. L. So. App. Gas. p. 284, 8 Mor. Min. Eep. 688, that a lease of mines 'is not in reality a lease at all in the sense in which we speak of an agricultural lease. There is no fruit; that is to say, there is no sowing and reaping in the ordinary sense of the term, and there are no periodical harvests. What we call a mineral lease is really, when properly considered, a sale out and out of a portion of the land.' I think this is a perfectly accurate statement. But the argument that no income tax should be imposed on what is, perhaps not quite accurately, called rent reserved on a mineral lease, because it is a payment by instal- ments of the price of minerals forming part of the land, any more than on the price paid down in one sum for the out and out purchase of the minerals forming part of the land, is, I think, untenable." (p. 339) : "I do not wish to lay down any gen- eral proposition, either that money expended in sinking pits can never be in the nature of expenses incurred within the five years in working the coal so as to be properly taken into account in estimating the profits made in that period ; or to say what, if any, the circumstances are under which it may be done. That, I think, had better be left to be determined when the case arises." Coltness Iron Co. v. Black (1881), L. E. 6 App. Cas. 315, 51 L. J. Q. B. W. S. 626, 45 L. T. IST. S. 145, 29 Week. Eep. 717, 1 Tax Cas. 287. See also incidentally, the following decision under Sched. (D.). An English company owning lands in Chili, on which they manufactured nitrates and iodine by working up certain deposits found on the land, claimed to be entitled, in estimating their yearly profits and gains, to make deductions in respect of the exhaustion of the deposits : — Held, by the House of Lords, ANNOTATED STATUTE AND DIGEST. 735 that they were not entitled to do so, the land being "capital" within the Income Tax Act, 1842. Alianza Co. v. Bell, [1906] A. C. 18, 75 L. J. K. B. K S. 44, 93 L. T. ISr. S. Y05, 54 Week. Kep. 413, 5 Tax Cas. 172. In the case of cost-book mines under the Stannaries Acts, where a call had been made upon the shareholders for the pur- pose of sinking a new shaft, the commissioners for general pur- poses had allowed a deduction in respect thereof, being of opin- ion, that in a cost-book mine there was no such thing as capital, and that there could be no profit in working such a mine until every expenditure had been met : — Held, that the commissioners were wrong, and that the question whether the expenditure was capital or not was one of fact. Morant v. Wheal Grenville Mining Co. (1894), 71 L. T. K S. 758, 3 Tax Cas. 298. A company sank a shaft of a tin mine about fifty fathoms further down, which extension, together with the old portion, was used as a ventilating shaft, and as a centre from which levels and roads could be cut for the purpose of discovering lodes or pockets of ore at a level below those portions of the mine which had been wholly or partially exhausted, and also for the purpose of raising and lowering men and materials, but not for the pur- pose of winning ore from a vertical lode. The sinking oper- ations occupied about two years and cost £2,940. The commis- sioners allowed the deduction of the said sum, being of opinion that the expenditure was proper working cost, and could not properly be dealt with as capital : — Held, that there was no evi- dence to support the finding of fact by the commissioners, and further that the expenditure was capital expenditure and not working expenditure, and that the company were in effect open- ing up a new mine and accordingly the deduction was not per- missible. Bonner v. Bassett Mines, Limited, Law Times,' Dec. 21st, 1912, p. 179. Kecouping Dead Rent from Eoyalties. — A mine was subject to a minimum dead rent. When the royalties exceeded the dead rent, the surplus might be retained until the company was re- couped the amount by which in former years the dead rent had exceeded the royalties : — Held, that in estimating the profits of 736 AITWOTATED STATUTE AND DIGEST. the mine, no deduction was allowable in respect of such surplus royalties so retained, although in previous years the dead rent had been paid and assessed when the mine had not commenced working. Broughton and Plas Power Coal Co. v. Kirkpatrick (1884), L. E. 14 Q. B. Div. 491, 54 L. J. Q. B. IST. S. 268, 33 Week. Eep. 278 ; 2 Tax Cas. 69. and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: In the case of assessment insurance companies, whether domestic or foreign, the actual deposit of sums with State or Territorial officers pur- suant to law, as additions to guarantee or reserve funds shall be treated as being payments required by law to reserve funds. G (c) infra. The net profits or income of all corporations, companies, or associa- tions shall include the amounts » * ♦ carried to the account of any fund.— Act of August 28, 1894, § 31. In the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds. — Act of August 5, 1909. Under the Act of 1909, held, that a deduction might be made ■of the additions to the reserve fund to secure payment upon supplementary policy contracts. Mutual Benefit Life Insurance Co. v. Herold, 198 Fed. 199, 212, explained supra. Provided, That mutual fire insurance companies requiring their mem- bers to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits re- turned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such por- tions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and rein- surance reserves: Provided further, That mutual marine insurance companies shall include in their return of gross income gross pre- miums collected and received by them less amounts paid for rein- surance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts be- tween the ascertainment thereof and the payment thereof and life insurance companies shall not include as income in any year such portion of any actual premium received from any individual ANNOTATED STATUTE AND DIGEST. 737 policyholder as shall have been paid back or credited to such indi- vidual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; All corporations, joint-stock companies or associations and insurance companies * * * shall render a true and accurate return * * * set- ting forth: (fifth) the total amount of all losses actually sustained dur- ing the year and not compensated by insurance or otherwise, stating sepa- rately any amounts allowed for depreciation of property, and in ease of insurance companies, the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided, further, that mutual fire insurance companies requiring their members to make premium deposits to provide for losses and expenseis ■shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income re- ceived by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the pay- ment of losses and expenses and reinsurance reserves: Provided further, That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums pre- viously paid by them, and interest paid upon such amounts between the ascertainment thereof and the payment thereof; and in case of a corpora- tion joint-stock company or association, or insurance company, organized under the laws of a foreign country, all losses actually sustained by it dur- ing the year in business conducted by it within the United States, not •compensated by insurance or otherwise, stating separately any amounts allowed for depreciation of property, and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on jpolicy and annuity contracts: Provided further, That mutual fire in- surance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsur- ■anee reserves; Provided, further. That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include In deductions from gross income amounts repaid to policyholders on ac- -count of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof; and life insurance companies shall not include as income in any year such j)ortion of any actual premiums received from any individual policyholder, Foster Income Tax. — 47. T38 iUSTNOTATED STATUTE AND DIGEST. or treated as an abatement of premium of such individual policyholder, within such year; — G. (c) infra. In the case of insurance companies the sums other than divi- dends paid within the year on policy or annuity contracts. — Act of August 5, 1909. See Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199, 212, and other cases cited supra, pp. 469—465. third, the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding one-half of the sum of its interest bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of its indebtedness not exceeding the amount of capital employed in the business at the close of the year: Provided, That in case of indebtedness wholly secured by collateral the subject of sale in ordinary business of such corporation, joint-stock company, or association, the total interest secured and paid by such company, corporation, or association within the year on any such indebted- ness may be deducted as a part of its expense of doing business: Provided further. That in the case of bonds or other indebtedness, which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed; and in the case of a bank, banking association, loan, or trust company, interest paid within the year on deposits or on moneys received for investment and secured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan or trust company; All corporations, joint-stock companies or associations and insurance companies * • • shall render a true and accurate return * * • get- ting forth • • • (sixth) the amount of interest accrued and paid within the year on its bonded or other indebtedness not exceeding one- half of the sum of its interest-bearing indebtedness and its paid-up cap- ital stock, outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of indebtedness not exceeding the amount of capital employed in the business at the close of the year, and in case of a bank, banking association, or trust company, stating separately all interest paid by it within the year on deposits; or in case of a corporation, joint-stock company or association, or insurance company, orga,nized under the laws of a foreign country, interest so paid on its bonded or other indebtedness to an amount of such bonded or other indebtedness not exceeding the proportion of its paid-up capital stock out- standing at the close of the year, or if no capital stock, the amount of capital employed in the business at the close of the year, which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its in- come derived from all sources within and without the United States; (seventh) the amount paid by it within the year for taxes imposed under ANNOTATED STATUTE AND DIGEST. 739 the authority of the United States and separately the amount so paid by it for taxes imposed by the Government or any foreign country. — G. (c) infra. (Third) interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness not ex- ceeding the paid-up capital stock of such corporation, joint-stock company or association, or insurance company, outstanding at the close of the year, and in the case of a bank, banking association, or trust company, all in- terest actually paid by it within the year on deposits. — Act of August 5, 1909. Under the Act of August 5, 1909, all interest upon a mortgage not assumed by the company, but encumbering land that it has bought, may be deducted ; but when the mortgage has been assumed, only so much of the interest thereupon as does not exceed the in- terest upon its capital stock. Attorney General Wickersham, 28 0p. Atty. Gen. 198. Under the same statute, held that where the ordinary business of a corporation is the purchase, sale, lease and management of land, interest upon bonds secured by a mortgage thereupon is de- ductible as ordinary and necessary expenses in the maintenance and operation of its business, and as charges required to be paid as a "condition of the continued use or possession" of its property. Anderson v. Forty-two Broadway Co. C. C. A. Second Ct. 313 Fed. 777 ; affirming Forty-two Broadway Co. v. Anderson, 309 Fed. 991 ; Certiorari granted by S. C. U. S. Oct. 36, 1914. A deduction cannot be allowed for interest paid from which the company failed to deduct the tax at the time of payment as required by the statute. City of London Contract Co. v. Styles, 4 Times L. E. 51 (1887), Ct. App. affirming s. c. 3 Times L. E. 513 (1887). fourth, all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof, or imposed by the government of any foreign country: 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. — B, supra. All corporations, joint-stock companies or associations and insurance companies * * * shall render a true and accurate return * ♦ * setting forth * • * (seventh) the amount paid by it within the year for taxes imposed under the authority of the United States and separately the amount so paid by it for taxes imposed by the government of any for- eign country. — G, (c) infra. That all state, county, municipal, and town taxes paid by corporations, companies or associations, shall be included in the operating and business expenses of such corporations, companies, or associations. — Act of August 28, 1894, § 32. Third. There shall be deducted from the gross amount of the net income of such corporation, joint-stock company or association, or insurance com- pany * * * (fourth) all sums paid by it within the year for taxes imposed under the authority' of the tjnited States or of any State or Ter- ritory thereof, or imposed by the government of any foreign country as a condition to carry on business therein. — Act of August 5, 1909. Provided, That in the case of a corporation, joint-stock company or association, or insurance company, organized, authorized, or existing under the laws of any foreign country, such net income shall be ascertained by deducting from the gross amount of its income ac- crued within the year from business transacted and capital invested v.ithin the United States, 740 ANNOTATED STATUTE AND DIGEST. For authorities upon what is income from business transacted and capital within the United States, see supra, pp. 339-343, 470-481. first, all the ordinary and necessary expenses actually paid within the year out of earnings in the maintenance and operation of its business and property within the United States, including rentals or other payments required to be made as a condition to the con- tinued use or possession of property; second, all losses actually sustained within the year in business conducted by it within the United States and not compensated by insurance or otherwise, including a reasonable allowance for de- preciation by use, wear and tear of property, if any, and in the case of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made; All loans actually sustained by it within the year in business con- ducted by it within the United States or its Territories, Alaska or the Dis- trict of Columbia not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property if any. — ^Act of August 5, 1909. For authorities on depreciation and mines see pp. 386-388,. 499-507, supra. and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided further, That mutual fire insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided further. That mu- tual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in de- ductions from gross income amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment thereof and the pay- ment thereof and life insurance companies shall not include as in- come in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of pre- mium of such individual policyholder, within such year As to domestic insurance companies, see supra in G (b). In the case of insurance companies the sums other than dividends, paid ANNOTATED STATUTE AND DIGEST. 741 within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to its reserve funds. — Act of August 5, 1909. For authorities, see pp. 459-466, supra. third, the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding the proportion of one-half of the sum of its interest bearing indebt- edness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the capital employed in the business at the close of the year which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States: Provided, That in the case of bonds or other indebtedness which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed; Or in case of a corporation, joint stock company or association, or insur- ance company, organized under the laws of a foreign country, interest 80 paid on its bonded or other indebtedness to an amount of such bonded and other indebtedness not exceeding the proportion of its paid-up capital stock outstanding at the close of the year, which the gross amount of its income for the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia, bears to the gross amount of its income derived from all sources within and without the United States; — Corporation Tax Act of August 5, 1909. fourth, all sums paid by it within the year for taxes imposed un- der the authority of the United States or of any State or Territory thereof or the District of Columbia. [In case of a domestic corporation,] "all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof, or imposed by the Government of any foreign country." — G (b) supra. [The return must state in the case of a domestic or foreign corpora- tion:] "(seventh) the amount paid by it within the year for taxes im- posed under the authority of the United States and separately the amount so paid by it for taxes imposed by the Government of any foreign coun- try."— G (c) infra. In the case of assessment insurance companies, whether domestic or foreign, the actual deposit of sums with State or Territorial officers, pursuant to law, as additions to guarantee or reserve funds shall be treated as being payments required by law to reserve funds. (c) the tax herein imposed shall be computed upon its entire net* income accrued within each preceding calendar year ending D»- 742 AX ROTATED STATUTE AND DIGEST. cember thirty-first: Provided, however, That for the year ending December thirty-first, nineteen hundred and thirteen, said tax shall be imposed upon its entire net income accrued within that portion of said year from March first to December thirty-first, both dates inclusive, to be ascertained by taking five-sixths of its entire net income for said calendar year: The said tax shall be computed upon the remainder of said net in come of each person subject thereto, accruing during each preceding calen- dar year ending December thirty-first: Provided, however, That for the year ending December thirty-first, nineteen hundred and thirteen, said tax shall be computed on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive, after deducting five-sixths only of the specific exemptions and deductions herein provided for. — D supra. Provided further. That any corporation, joint-stock company or asso- ciation, or insurance company subject to this tax may designate the last day of any month in the year as the day of the closing of its fiscal year and shall be entitled to have the tax payable by it computed upon the basis of the net income ascertained as herein provided for the year ending on the day so designated in the year preceding the date of assessment instead of upon the basis of the net income for the calendar year preceding the date of assessment; and it shall give notice of the day it has thus designated as the closing of its fiscal year to the collector of the district in which its principal business office is located at any time not less than thirty days prior to the date upon which its annual return shall be filed. Provided, That every corporation, joint-stock company or association, and insurance company computing taxes upon the income of the fiscal year which it may designate in the manner hereinbefore provided, shall pay the taxes due under its assessment within one hundred and twenty days aftr the date upon which it is required to file its list or return of income for assessment. — Subsection 6 (c) infra. All corporations, joint-stock companies or associations, and insurance companies subject to the tax herein imposed, computing taxes upon the income of the calendar year, shall, on or before the first day of March, nineteen hundred and fourteen, and the first day of March in each year thereafter, It shall be the duty of any person, partnership, firm, association, or corporation * * * in case of income tax on or before the first Mon- day of March in each year * * to make a list or return. — ^U. S. R. § 3173 as amended by this act, infra. Shall make and render to the collector of its collection district, on or before the first Monday of March in every year, beginning with the year eighteen hundred and ninety-five. — ^Act of August 28, 1894, § 35. ANNOTATED STATUTE AND DIGEST. 743 On or before the first day of March, nineteen hundred and ten, and the first day of March in each year thereafter. — Act of August 5, 1909. and all corporations, joint stock companies or associations, and in- surance companies, computing taxes upon the income of a fiscal year which it may designate in the manner hereinbefore provided, Provided further: That any corporation, joint-stock company or as- sociation, or insurance company subject to this tax may designate the last day of any month in the year as the day of the closing of its fiscal year * * ^ ■ and it shall give notice of the day it has thus designated as the closing of its fiscal year to the collector of the district in which its principal business office is located, at any time not less than thirty days prior to the date upon which its annual return shall be filed. — supra. shall render a like return within sixty days after the close of its said fiscal year, and within sixty days after the close of its fiscal year in each year thereafter, or in the case of a corporation, joint-stock company or association, or insurance company, organized or existing under the laws of a foreign country, in the place where its principal business is lo- cated within the United States, Or in the case of a corporation, joint stock company or association, or insurance company, organized under the Jaws of a foreign country, in tho place where its principal business is carried on within the United States. —Act of August 5, 1909. in such form as the Commissioner of Internal Kevenue, with the approval of the Secretary of the Treasury, shall prescribe. See the Rules and Regulations, infra. In such form as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe, — Act of August 5, 1909. shall render a true and accurate return under oath or affirmation of its president, vice president, or other principal officer, and its treasurer or assistant treasurer, A full return, verified by oath or affirmation, in such form as Commis- sioner of Internal Revenue may prescribe, of all the following matters for the whole calendar year last preceding the date of such return. — Act of August 28, 1894, § 35. A true and accurate return under oath or affirmation of its president, vice president, or other principal officer, and its treasurer or assistant treasurer. — Act of Aug. 5, 1909. to the collector of Internal Revenue for the district in which it has its principal place of business. To the collector of its collection district. — Act of August 28, 1894, § 35. To the Collector of Internal Revenue for the district in which such eor- 744 ANNOTATED STATUTE AND DIGEST. poration, joint stock company or association, or insurance company, has its principal place of business. — ^Act of August 5, 1909. setting forth (first) the total amount of its paid up capital stock outstanding, or if no capital stock, its capital employed in business, at the close of the year; (second) the total amount of its bonded and other indebtedness at the close of the year; (third) the gross amount of its income, received during such year from all sources, First. The gross profits of such corporation, company, or association, from all kinds of business of every name and nature. — Act of August 28, 1894, § 35. Setting forth, (first) the total amount of the paid-up capital stock of such corporation, joint-stock company or association, or insurance com- pany, outstanding at the close of the year; (second) the total amount oi the bonded and other indebtedness of such corporation, joint-stock com- pany or association, or insurance company at the close of the year; (third) the gross amount of the income of such corporation, joint-stock company or association, or insurance company, received during such year from all sources. ♦ » » Also the amount received by such corporation, joint stock company or association, or insurance company, within the year by way of dividends upon stock of other corporations, joint-stock companies or associations, or insurance companies, subject to the tax imposed by this section. — Act of August 5, 1909. and if organized under the lavrs of a foreign country the gross amount of its income received within the year from business tran- sacted and capital invested within the United States, And if organized under the laws of a foreign country the gross amount of its income received within the year from business transacted and cap- ital invested within the United States and any of its Territories, Alaska, and the District of Columbia. — Act of August 5, 1909. See pp. 470-481, supra. fourth, the total amount of all its ordinary and necessary expenses paid out of earnings in the maintenance and operation of the busi- ness and properties of such corporation, joint-stock compciny or association, or insurance company within the year. Second. The expenses of such corporation, company, or association ex- clusive of interest, annuities, and dividends. — ^Act of August 28, 1894. Fourth. The amount paid on account of interest, annuities, and divi- dends, stated separately. — Act of August 28, 1894. Fifth. The amount paid in salaries of four thousand dollars or less to each person employed. — Act of August 28, 1894. Sixth. The amount paid in salaries of more than four thousand dollars to each person employed and the name and address of each of such per- sons and the amount paid to each. — Act of August 28, 1894. (Fourth) the total amount of all the ordinary and necessary expenses actually paid out of earnings in the maintenance and operation of the ANNOTATED STATUTE AND DIGEST. 745 business and properties of such corporation, joint-stock company or as- sociation, or insurance company, within the year. — ^Act of August 5, 1909. stating separately all rentals or other payments required to be made as a condition to the continued use or possession of property, Stating separately all charges such as rentals or franchise payments required to be made as a condition to the continued use or possession of property. — ^Act of August 5, 1909. See pp. 470-481, supra. and if organized under the laws of a foreign country the amount so paid in the maintenance and operation of its business within the United States; And if organized under the laws of a foreign country the amount so paid in the maintenance and operation of its business within the United States and its Territories, Alaska, and the District of Columbia. — Act of August 5, 1909. See pp. 470-481, supra. fifth, the total amount of all losses actually sustained during the year and not compensated by insurance or otherwise. (Fifth) the total amount of all losses actually sustained within the year and not compensated by insurance or otherwise. — Act of August 5, 1909. stating separately any amounts allowed for depreciation of propeity, Stating separately any amounts allowed for depreciation of property. — Act of August 5, 1909. See pp. 470-481, supra. and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity, contracts: provided further, that mutual fire insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: provided further, that mut- ual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment thereof and the payment thereof and life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abate- ment of premium of such individual policyholder, within such year; and in case of a corporation, joint-stock company or association. 746 ANNOTATED STATUTE AND DIGEST. or insurance company, organized under the laws of a foreign coun- try, all losses actually sustained by it during the year in business conducted by it within the United States, not compensated by insur- ance or otherwise, stating separately any amounts allowed for de- preciation of property, and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided further, That mutual fire insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as in- come any portion of the premium deposits returned to their policy- holders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: Pro- vided further. That mutual marine insurance companies shall in- clude in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof and life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; Similar language is found in subsection g (b) supra, concerning the ascertainment of the net income of domestic and foreign insurance com- panies, with the additional clause in the case of assessment Insurance companies, whether domestic or foreign, that the actual deposit of sums with State or Territorial officers, pursuant to law, as additions to guar- antee or reserve funds shall be treated as being payments required by law to reserve funds. And in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addi- tion, if any, required by law to be made within the year to reserve funds; and in case of a corporation, joint-stock company or association, or in- surance company, organized under the laws of a foreign country, all lossei actually sustained by it during the year in business conducted by it within the United States or its Territories, Alaska, and the District of Columbia, not compensated by insurance or otherwise, stating separately any amounts allowed for depreciation of property, and in the case of insurance companies the sums other than dividends, paid within the year ■on policy and annuity contracts and the net addition, if any required by law to be made within the year to reserve fund. — Act of August 5, 1909. -sixth, the amount of interest accrued and paid within the year on its bonded or other indebtedness not exceeding one-half of the sum ANNOTATED STATUTE AND DIGEST. T4T of its interest bearing indebtedness and its paid-up capital stock, outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of indebtedness not exceeding the amount of capital employed in the business at the close of the year, and in the case of a bank, banking associa- tion, or trust company, stating separately all interest paid by it within the year on deposits; or in case of a corporation, joint-stock company or association, or insurance company, organized under the Jaws of a foreign country, interest so paid on its bonded or other indebtedness to an amount of such bonded or other indebtedness not exceeding the proportion of its paid-up capital stock outstand- ing at the close of the year, or if no capital stock, the amount of capital employed in the business at the close of the year, which the gross amount of its income for the year from the business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States; Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, joint-stock company or asso- ciation, or insurance company, * * ♦ (third) the amount of interest ac- •crued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding one-half of the sum of its interest bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of its indebtedness not exceeding the amount of capi- tal employed in the business at the close of the year: Provided, That in case of indebtedness wholly secured by' collateral the subject of sale in ordinary business of such corporation, joint-stock company, or associa- "tion, the total interest secured and paid by such company, corporation, or association within the year on any such indebtedness may be deducted as a part of its expenses of doing business: Provided further, That in the case of bonds or other indebtedness, which have been issued with a. ^aranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed; and in the case of a bank, banking association, loan, or trust company, interest paid within the year on deposits or on moneys received for in- vestment and secured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan, or trust company; » ♦ * (Sixth) the amount of interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other in- debtedness not exceeding the paid-up capital stock of such corporation, joint-stock company or association, or insurance company, outstanding at the close of the year, and in case of a bank, banking association or trust company, stating separately all interest paid by it within the year on deposits; or in case of a corporation, joint-stock company or associa- tion, or insurance company, organized under the laws of a foreign country, interest so paid on its bonded or other indebtedness to an amount of such bonded or other indebtedness not exceeding the proportion of its T48 ANNOTATED STATUTE AND DIGEST. paid-up capital stock outstanding at the close of the yesr, which the gross amount of its income for the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia, bears to the gross amount of its income derived from all sources within and without the United States. — Act of August 5, 1909. seventh, the amount paid by it within the year for taxes imposed under the authority of the United States and separately the amount so paid by it for taxes imposed by the government of any foreign country; "Such net income shall be ascertained by deducting • » * (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof, or imposed by the Government of any foreign country: Provided, That in the case of a corporation, joint-stock company or association, or insurance company,, organized, authorized, or existing under the laws of any foreign country,, such net income shall be ascertained by deducting * * * (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof or the District of Columbia." — Subsection G (b). Provided, That in stock company or association, or insurance com- pany, organized, authorized, or existing under the laws of any foreign country, such net income shall be ascertained by deducting from the gross amount of its income accrued within the year from business transacted and capital invested within the United States • * • (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof or the District of Columbia. — Subsection G (b) supra. (Seventh) the amount paid by it within the year for taxes imposed un- der the authority of the United States or any State or Territory thereof, and separately the amount so paid by it for taxes imposed by the gov- ernment of any foreign country as a condition to carrying on business therein. — ^Act of August 5, 1909. eighth, the net income of such corporation, joint-stock company or association, or insurance Company, after making the deductions in this subsection authorized. Third. The net profits of such corporation, company, or association, without allowance for interest, annuities, or dividends. — Act of August 28, 1894. (Eighth) the net income of such corporation, joint-stock company or association, or insurance company after making the deductions in this sec- tion authorized. — Act of August 5, 1909. All such returns shall as received be transmitted forthwith by the col- lector to the Commissioner of Internal Revenue. All such returns shall as received be transmitted forthwith by the col- lector to the Commissioner of Internal Revenue. — Act of August 5, 1909. ANNOTATED STATUTE AND DIGEST. 749 All assessments shall be made and the several corporations, joint-stock companies or associations, and insurance companies shall be noti- fied of the amount for which they are respectively liable on or be- fore the first day of June of each successive year, All assessments shall be made and the several corporations, joint stock ■companies or associations, or insurance companies, shall be notified of the amount for which they are respectively liable on or before the first day of June of each successive year. — Act of August 5, 1909. and said assessment shall be paid on or before the thirtieth day of June: That said tax shall be paid on or before the first day of July in each yea-r.— Act of August 28, 1894, § 32. Said assessments shall be paid on or before the thirtieth day of June. — Act of August 5, 1909. Provided, That every corporation, joint-stock company or association, and insurance company; computing taxes upon the income of the fiscal year which it may designate in the manner hereinbefore pro- vided, shall pay the taxes due under its assessment within one hundred and twenty days after the date upon which it is required to file its list or return of income for assessment; That any corporation, joint-stock company or association, or insurance company subject to this tax may designate the last day of any month in the year as the day of the closing of its fiscal year and shall be entitled to have the tax payable by it computed upon the basis of the net income ascertained as herein provided for the year ending on the day so designated in the year preceding the date of assessment. — Subdivision C. supra. except in cases of refusal or neglect to make such return, and in cases of false or fraudulent returns, in which cases the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time vyith- in three years after said return is due, make a return upon infor- mation obtained as provided for in this section See Subsection E, supra. That it shall be the duty of every corporation, company, or association doing business for profit to keep full, regular and accurate books of ac- count, upon which all its transactions shall be entered from day to day, in regular order and whenever a collector or deputy collector of tlie district in which any corporation, company, or association is assessable; shall be- lieve that a true and correct return of the income of such corporation, com- pany, or association has not been made, he shall make an affidavit of such belief and of the grounds on which it is founded, and file the same with the Commissioner of Internal Revenue, and if said Commissioner sliall, on examination thereof, and after full hearing upon notice givi>n to all par- ties, conclude there is good ground for such belief. He shall issue a request in writing to such corporation, company, or association to permit an inspec- tion of the books of such corporation, company, or association to be made; 750 AlfXOTATED STATUTE AND DIGEST. and if such corporation, company, or association shall refuse to comply with such request, then the collector or deputy collector of the district shall make from such information as he can obtain an estimate of thi^ amount of such income, and then add fifty per centum hereto, which said assessment so made shall then be the lawful assessment of such income. — Act of August 28, 1894, § 36. except in eases of refusal or neglect to make such return, and in cases of false or fraudulent returns, in which cases the Com- mission of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information obtained as above provided for, — Act of August 5, 1909, sec 38, Par. Fifth. Such a return may be made by the commissioner after the tax under the original return has been paid. Eliot Nat. Bank v. Gill (D. Mass.) 210 Fed. 933, Bingham, Ct. J. In determining the time, the first day should be excluded and the last included ; so that a discovery made on March 2, the third year after the return is due, justifies a new return by the com- missioner. lUd. The new return may be made when the original return was made in good faith, but was false through a mistake of law. lUd. Semble that where the discovery was made within three years,, the assessment may be subsequently corrected. Ibid. ANNOTATED STATUTE AND DIGEST, 751 or by existing law, See U. S. Rev. Stat. §§ 3173, 3176 (U. S. Comp. Stat 1901, pp. 2065, 2068). and the assessment made by the Commissioner of Internal Revenue thereon shall be paid by such corporation, joint stock company or association, or insurance company immediately upon notification of the amount of such assessment; and to any sum or sums due and unpaid after the thirtieth day of June in any year, or after one hun- dred and twenty days from the date on which the return of income is required to be made by the taxpayer, and after ten days' notice and demand thereof by the collector, there shall be added the sum of S per centum on the amount of tax unpaid and interest at the rate of 1 per centum per month upon said tax from the time the same becomes due. And all sums due and unpaid that day shall draw interest thereafter at the rate of six per centum per annum. — ^Act of Aug. 6, 1861, § 51. And to any sum or sums annually due and unpaid for thirty days after the thirtieth of June, as aforesaid, and for ten days after demand thereof by the collector, there shall be levied in addition thereto the sum of five per centum on the amount of duties unpaid, as a penalty, except from the estates of deceased and [or] insolvent persons. — Act of July 1, 1862, § 92. And to any sum or sums annually due and unpaid for thirty days after the thirtieth of June, as aforesaid, and for ten days after demand thereof by the collector there shall be levied in addition thereto the sum of ten per centum on the amount of duties unpaid, as a penalty, except from the estates of deceased and [or] insolvent persons. — Act of July 1, 1862, § 92. And to any sum or sums annually due and unpaid after the thirtiet[h] of June, as aforesaid, and for ten days after notice and demand thereof by the collector, there shall be levied in addition thereto the sum of ten per centum on the amount of duties unpaid, as a penalty. — ^Act of March 3, 1865, § 1. And to any sum or sums annually due and unpaid after the thirtieth of June, as aforesaid, and for ten days after notice and demand thereof by the collector, there shall be levied in addition thereto the sum of ten per centum on the account of duties unpaid, as a penalty, except from the es- tates of deceased or insolvent persons. — Act of July 13, 1866, § 1. And to any sum or sums annually due and unpaid after the thirtieth day of April, as aforesaid, and for ten days after notice and demand thtroof by the collector, there shall be levied in addition thereto the sum of five per centum on the amount of taxes unpaid and interest at the rate of one 752 ANN^OTATED STATUTE AND DIGEST. per centum per month upon said tax from the time the same became due, as a penalty, except from the estates of deceased, insane or insolvent per- sons. — ^Act of March 2, 1867, § 13. And in addition to any sum annually due and unpaid after the thir- tieth day of April, and for ten days after notice and demand thereof by the collector there shall be levied and collected, as a penalty, the sum of five per centum on the amount unpaid and interest on said amount at the rate of one per centum per month from the time the same became due, except from the estate of deceased, insane, or insolvent persons. — Act of July 14, 1870, § 10. And to any sum or sums annually due and unpaid after the first day of July as aforesaid, and for ten days after notice and demand thereof by the collector, there shall be levied, in addition thereto, the sum of five per centum on the amount of taxes unpaid, and interest at the rate of one per centum per month upon said tax from the time the same becomes due, except from the estates of deceased, insane, or insolvent persons. — Act of August 28, 1894, § 30. Semhle, that upon presentation of the oath permitted by § 93 of the Act of July 1, 1862, the collector had no discretion but to strike off the increase from the assessment, and Semhle, that mandamus would lie to compel him so to strike it off. Magee v. Denton, 5 Blatchf. 130. Fed. Cas. ISTo. 8,943 (1863), U. S. Cir. Ct. S. Dist. K Y. Hall, J. In a suit in equity to recover the amount of a tax imposed by a statute with interest at the rate of twelve per cent, until paid, the defendant admitted part of the tax to be due and paid so much of the tax with twelve per cent interest into court. Held, the sum so paid in being greater than the interest then accrued on the whole tax, which the plaintiff alleged to be due, that it should be applied, in accordance with the defendant's intention, to the principal and interest which the defendant admitted to be due, and further, that on the remainder of the tax decreed to be due interest should be computed at the rate of twelve per cent, until the date of the decree, and after that at the rate of only six per cent. Massachusetts v. Western Union Telegraph Co. 141 TJ. S. 40, 35 L. ed. 628, 11 Sup. Ot. Eep. 889 (1890), Gray, J. By mutual mistake of collector and taxpayer, the basis of the tax was underestimated and the tax underpaid. In a suit to ANNOTATED STATUTE AND DIGEST. 753 recover the balance due, held, that interest should not he al- lowed until demand. Second, etc. Street K. E. v. City of Philadelphia, 51 Pa. 465 (1866). Interest cannot be allowed upon taxes until they are fixed by an assessment or charge by the taxing officer and notice there- of to the taxpayers. Ibid. Interest was not allowed to the Government, where the re- fusal to pay taxes was induced by inconsistent department rulings, and where another suit for the statutory penalty was pending. U. S. V. Dollar Savings Bank, 15 Int. Eev. Eec. 193, Fed. Cas. No. 14,979 (1871), U. S. Cir. Ot. E. Dist. Pa. McKen- NAN, J. The demand, under the Act of June 30, 1864, must be a de- mand for payment, not merely a demand for a return as to property, and it must also be a demand for the specific amount to be paid.' U. S. V. Pacific Eailroad, 4 Dill. 71, Ped. Cas. No. 15,984 (1877), U. S. Cir. Ct. E. Dist. Mo. Millee, J. The state taxing officers having for a series of years collected taxes of the defendant at a certain rate, held that the state was estopped from collecting further taxes for the same period. Commonwealth v. Pennsylvania Co. 145 Pa. 266, 23 Atl. 549 (1891). Interest should be collected on taxes the payment of which was withheld during appeal ; but the penalty should be exacted only if the taxes are unpaid ten days after notice of rejection of claim. Euling, 10 Int. Eev. Eec. 57. (d) When the assessment shall be made, as provided in this section, the returns, together with any corrections thereof which may have been made by the commissioner, shall be filed in the office of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such: Provided, That any and all such returns shall be open to inspection only upon the order of the president, under rules and regulations to be prescribed by the Secretary of the Treasury and ^proved by the President: Provided further. That the proper offices of any State imposing a general income tax may upon the request of the governor there- of, have access to said returns or to an abstract thereof, showing Foster Income Tax. — 48. 754 AISTiS^OTATED STATUTE AND DIGEST. the name and income of each such corporation, joint-stock com- pany, association or insurance company, at such times and in such manner as the Secretary of the Treasury may prescribe. The proviso was inserted in the Senate. Sixth. 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 oiRce of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such. Seventh. It shall be unlawful for any collector, deputy col- lector, agent, clerk, or other officer or employee of the United States to divulge or make known in any manner whatever not provided by law to any person any information obtained by him in the discharge of his official duty, or to divulge or make known in any manner not provided by law any document received, evi- dence taken, or report made under this section except upon the special direction of the President; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding one thousand dollars, or by imprisonment not exceeding one year, or both, at the discretion of the court. — Act of August 5, 1909, Sec. 38. The rules for the collection of internal reA'enue provide : "All records in the offices of collectors of internal revenue or of any of their deputies are in their custody and control for purposes relating to the collection of the revenues of the United States onlv. They have no control of them and no discretion with re- gard to permitting the use of them for any other purpose. Col- lectors are hereby prohibited from giving out any special tax records or any copies thereof to private persons or to local of- ANNOTATED STATUTE AND DIGEST. 7u5 ficers, or to produce sucli records or copies thereof in a State court, whether in answer to subpoenas diices tecum or other- wise. Whenever such subpoenas shall have been served upon them, they will appear in court in answer thereto and respect- fully decline to produce the records called for, on the ground of being prohibited therefrom by the regulations of this depart- ment. The information contained in the records relating to special tax payers in the collector's office is furnished by these persons under compulsion of law for the purpose of raising revenue for the United States ; and there is no provision of law authorizing the sending out of these records or of any copies thereof for use against the special tax payers in cases not arising under the laws of the United States. The giving out of such records or any copies thereof by a collector in such cases is held to be contrary to public policy and not to be permitted. As to any other records than those relating to special tax payers, col- lectors are also forbidden to furnish them or any copies thereof at the request of any person. Where copies thereof are de- sired for the use of parties to a suit, whether in a State court or in a court of the United States, collectors should refer the persons interested to the following paragraph in rule X of the rules and regulations of the Treasury Department, namely: In all cases where copies of documents or records are desired by or on behalf of parties to a suit, whether in a court of the United States or any other, such copies shall be furnished to the court only and on a rule of the court upon the Secretary of the Treasury requesting the same. Whenever such rule of the court shall have been obtained collectors are directed to care- 756 ANlSrOTATED STATUTE AND DIGEST. fully prepare a copy of the record or document containing the information called for and send it to this office, whereupon it will be transmitted to the Secretary of the Treasury with a re- quest for its authentication, under the seal of the department, and transmission to the judge of the court calling for it, unless it should be found that circumstances or conditions exist which make it necessary to decline, in the interest of the public service, to furnish such a copy." This rule was authorized by the general authority conferred upon the Secretary of the Treasury by the Revised Statutes. U. S. Rev. Stat. Sec. 161 (U. S. Comp. Stat. 1901, p. 80). Boske V. Comingore, 177 U. S. 459, 460, 461, 44 L. ed. 846, 847, 20 Sup. Ct. Eep. 701. See Foster's Fed. Pr. 5th ed. § 339. And a revenue officer, who has been punished by a State court for contempt in refusing to produce copies of reports made to him by distillers, or of other records, will be released upon a writ of habeas corpus by the Federal courts. Boske V. Comingore, 177 U. S. 459, 44 L. ed. 846, 20 Sup. Ot. Eep. 701, s. c. Ee Comingore, 96 Fed. 552 ; Re Lamberton, 124 Fed. 446. See Foster's Fed. Pr. 5th ed. § 339. It was formerly held that income returns are not privileged communications, and the collector has no right to withhold them in evidence. Ruling, 10 Int. Eev. Eec. 5. Held, under the old Income Tax Act, that a clerk to the com- missioners was bound to produce under subpoena the defendant's appointment as collector, and to give evidence as to the latter's acts notwithstanding the oath. Lee v. Birrell (1813), 3 Campb. 336. A plaintiff by bill unsuccessfully sought to compel a defend- ant to make a discovery of his returns for income tax. Qucsre whether a discovery of income tax returns could, under any cir- cumstance, be compelled. The disclosure might render the de- fendant liable to penalties under the Income Tax Act. Mitchell V. Koecker (1849), 18 L. J". Ch. N. S. 294, 11 Beav. 380, 12 Beav. 44, 13 Jur. 797, per Lord Langdale, M. P. The Solicitor of Inland Eevenue declined to produce letters received from the defender, as being prejudicial to the public ANNOTATED STATUTE AND DIGEST. 757 service, and such refusal was upheld by the Court of Session in Scotland. Brown's Trustees v. Hay (1897), 35 Scot. L. E. 340, 3 Tax. Cas. 598. Damages were awarded against the defender, who had been employed in winding up the affairs of a firm of solicitors, and who had furnished to the Inland Revenue contents of documents relating to the business profits of a former client of such so- licitors. Brown's Trustees v. Hay (1898), 35 Scot. L. E. 877. In an action for damages for slander, it was held that the defender was not entitled to production of the pursuer's in- come tax returns. Gray v. Wyllie (1904), 6 F. 448, 41 Scot. L. E. 342. It has now been decided in Scotland that the production of the returns will not be ordered, but a diligence was allowed as to the receipts. Shaw V. Kay, 12 Scot. L. T. E. 495, 5 Tax Cas. 74 (1904). The court in Scotland formerly refused a motion for the pro- duction of income tax receipts. Christie v. Craik, 2 E. 1287, 37 Scot. L. E. 503 (1900). Maedonald v. Hedderwick, 3 F. 674, 38 Scot. L. R. 455 (1901). As to the production by the surveyor of taxes, in the wind- ing-up of a company, of balance sheets relating to income tax assessments. In re Hargreaves, Limited [1900], 1 Ch. 347, 48 Week. Eep, 241, 4 Tax Cas. 173. It was held that the defender was not entitled to production of the pursuer's income tax returns. Gray v. Wyllie, 41 Scot. L. E. 342 (1904). Held that the Crown has a right of discovery, but cannot be compelled to give discovery. Attorney-General v. Newcastle-on-Tyne Corporation [1897], 2 Q. B. 384, 66 L. J. Q. B. K S. 593, 77 L. T. W. S. 203. As to the production and discovery of documents generally 758 AITNOTATED STATUTE AND DIGEST. in revenue proceedings, etc., see Attorney-General v. Emerson (1882), L. E. 10 Q. B. Div. 191, 52 L. J. Q. B. K S. 67, 48 L. T. ]Sr. S. 18; and Attorney-General v. Newcastle-on-Tyne Corporation [1897], 2 Q. B. 384, 66 L. J. Q. B. K S. 593, 77 L. T. IST. S. 203. In the latter case, it was laid down that the Crown has a right of discovery, but cannot be compelled to give discovery. If any of the corporations, joint stock companies or associations, or insurance companies aforesaid, shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, And for any default in the making or rendering of such list or return, with the declaration annexed. — Act of June 30, 1864, § 120. And if the president or other chief officer of any corporation, company, or association, or in the case of any foreign corporation, company, or as- sociation, the resident manager or agent shall neglect or refuse to file with the collector of the internal revenue district in which said corporation, com- pany, or association shall be located or be engaged in business. — ^Act of August 28, 1894, § 32. And if such corporation, company, or association shall refuse to com- ply with such request. — § 36, post, p. 369. A statement verified by his oath or affirmation, in such form as shall be prescribed by the Commissioner of Internal Revenue, with the apptoval of the Secretary of the Treasury, showing the amount of net profits or in- come received by said corporation, company, or association during thi; whole calendar year last preceding the date of filing said statement as hereinafter required. — Act of August 28, 1897, § 32. or shall render a false or fraudulent return, such corporation, joint stock company or association, or insurance company shall be liable to a penalty of not exceeding $10,000. That if any person, corporation, joint-stock company, association, or in- surance company liable to make the return or pay the tax aforesaid shall refuse or neglect to make a, return at the time or times hereinbefore specified in each year, such person shall be liable to a penalty of not less than $20 or more than $1000. — Subsection F, supra. Shall forfeit as a penalty the sum of one thousand dollars. — Act of June 30, 1864, § 120, and see same penalty in § 122; Act of July 13, 1866, The corporation, company, or association making default shall forfeit as a penalty the sum of one thousand dollars and two per centum on the amount of taxes due, for each month until the same is paid. — Act of August 28, 1894, § 32. The only penalty provided by § 122 of the Act of June 30, ANNOTATED STATUTE AND DIGEST. 759 1864, as amended by the Act of July 13, 1866, is $1,000 fine, Erskine v. Milwaukee, etc. Ry. 94 U. S. 619, 24 L. ed. 298 (1876), Waite, C. J. The penalty of $1,000 was not increased by the Act of July 14, 1870. Elliott V. Ey. Co. 99 U. S. 573, 25 L. ed. 292 (1878), Waite, 0. J. H. That the word "State" or "United States" when used in this sec- tion shall be construed to include any Territory, Alaska, the Dis- trict of Columbia, Porto Rico, and the Philippine Islands, when such construction is necessary to carry out its provisions. That the provisions of this section shall extend to Porto Rico and the Philippine Islands: Provided, That the administration of the law and the collection of the taxes imposed in Porto Rico and the Philippine Islands shall be by the appropriate internal-revenue officers of those governments, and all revenues collected in Porto Rico and the Philippine Islands there- under shall accrue intact to the general governments, thereof, respectively: And provided further, That the jurisdiction in this section conferred upon the district courts of the United States shall, so far as the Philippine islands are concerned be vested in the courts of the first instance of said islands: And provided further, That nothing in this section shall be held to exclude from the computation of the net income the compensation paid any official by the governments of the District of Columbia, Porto Rico and the Philippine Islands or the political subdivisions thereof. — -Sub- section N, supra. I. That sections thirty-one hundred and sixty-seven, thirty-one hun- dred and seventy-two, thirty-one hundred and seventy-three, and thirty-one hundred and seventy-six of the Revised Statutes of the United States as amended are hereby amended so as to read as follows : "Sec. 3167. It shall be unlawful for any collector, deputy collector, agent, clerk, or other officer or employee of the United States to divulge or to make knovm 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 dis- closed in any income return by any person or corporation, cr 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 the amount or 760 ANNOTATED STATUTE AND DIGEST. source of income, profits, losses, or expenditures appearing in any income return; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding. $1,000 or by imprisonment not exceeding one year, or both, at the discretion of the court; and if the offender be an officer or em- ployee of the United States he shall be dismissed from office and be incapable thereafter of holding any ofHce under the Government." Before tue amendment: "Sec. 3167. If any collector or derputy collector, or any inspector, or other officer acting under the authority of any revenue law of the United States, divulges to any party, or makes known in any other manner than may be provided by law, the operations, style of work, or apparatus of any manufacturer or producer visited by him in the discharge of his offi- cial duties, he shall be subject to a fine of not exceeding one thousand dol- lars, or to be imprisoned for not exceeding one year, or to both, at the discretion of the court, and shall be dismissed from office, and be forever thereafter incapable of holding any office under the Government." "Sec. 3172. Every collector shall, from time to time, cause his depu- ties to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any inter- nal-revenue tax, and all persons owning or having the care and management of any objects liable to pay any tax, and to make a list of such persons and enumerate said objects." "Sec. 3173. It shall be the duty of any person, partnership, firm, association, or corporation, made liable to any duty, special tax, or other tax imposed by law, when not otherwise provided for, in case of a special tax, on or before the thirty-first day of July in each year, in case of income tax on or before the first day of March in each year, and in other cases before the day on which the taxes accrue, to make a list or return, verified by oath or affirma- tion, to the collector or a deputy collector of the district where located, of the articles or objects, including the amount of annual income charged with a duty or tax, the quantity of goods, wares, and merchandise made or sold and charged witti a tax, the several rates and aggregate amount, according to the forms and regulations to be prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, for which such per- son, partnership, firm, association, or corporation is liable: Provided, That if any person liable to pay any duty or tax, or owning, pos- sessing, 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 re- ANNOTATED STATUTE AND DIGEST. 761 quired 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, which, being distinctly read, consented to, and signed and verified by oath or affirmation by the person so owning, pos- sessing, or having the care and management as aforesaid, may be received as the list of such person: "Provided further, That in case no annual list or return has been ren- dered by such person to the collector or deputy collector as re- quired by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suitable age and dis- cretion, if such be present, otherwise to deposit in the nearest post office, a note or memorandum addressed to such person, requiring him or her to render to such collector or deputy collector the list or return required by law within ten days from the date of such note or memorandum, verified by oath or affirmation. And if any person, on being notified or required as aforesaid, shall refuse or neglect to render such list or return within the time required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax fails to do so at the time required, or delivers any return which, in the opinion of the collector, is false or fraudulent, or contains any undervaluation or understatement, it shall be lawful for the collector to summon such person, or any other person having possession, custody, or care of books of account containing entries relating to the business of such person, or any other person he may deem proper, to appear before him and produce such books, at a time and place named in the summons, and to give testimony or answer interrogatories, under oath, respecting any objects liable to tax or the returns thereof. The collector may summon any person residing or found within the State in which his district lies; and when the person intended to be summoned does not reside and can not be found within such State, he may enter any collection district where such person may be found and there make the examination herein authorized. And to this end he may there exercise all the authority which he might lawfully exercise in the district for which he was commissioned." That jurisdiction is hereby conferred upon the district courts of the United States for the districts within which any person summoned under this section to appear to testify or to produce books shall reside, to compel i such attendance, production of books, and testimony by appropriate process. K. infra. 762 ANNOTATED STATUTE AND DIGEST. "Sec. 3173. It shall be the duty of any person, partnership, firm, asso- ciation, or corporation, made liable to any duty, special tax, stamp, or tax imposed by law, when not otherwise provided for, on or before the first Monday of March in each year, and in other cases before the day of levy, to make a list or return, verified by oath or affirmation, to the deputy col- lector of the district where located, of the articles or objects charged with a, special duty or tax, the quantity of goods, wares, and merchandise made or sold, and charged with a specific or ad valorem duty or tax, the sev- eral rates and aggregate amount, according to the forms and regulations to be prescribed by the Commissioner of Internal Revenue, under the direc- tion of the Secretary of the Treasury, for which such person, partnership, firm, association, or corporation is liablei 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 occupation liable to pay any special tax as aforesaid, then, and in that case, it shall be the duty of the deputy collector to make such list or return, which, being dis- tinctly read, consented to, and signed and verified by oath or affirmation by the person so owning, possessing, or having the care and management as aforesaid, may be received as the list of such person: Provided further, That in case any person shall be absent from his or her residence or place of business at the time a deputy collector shall call for the annual list or return, and no annual list or return has been rendered by such person to the deputy collector as required by law, it shall be the duty of such deputy collector to leave at such place of residence or business, with some one of suitable age and discretion, if such be present, otherwise to deposit in the nearest post-office, a note or memorandum, addressed to such person, requiring him or her to render to such deputy collector the list or return required by law within ten days from the date of such note or memoran- dum, verified by oath or affirmation. And if any person on being notified or required as aforesaid shall refuse or neglect to render such list or return within the time required as aforesaid, or whenever any person who is re- quired to deliver a monthly or other return of objects subject to tax fails to do so at the time required, or delivers any return which, in the opinion of the collector, is false or fraudulent or contains any undervaluation or under-statement, it shall be lawful for the collector to summon such per- son or any other person, having possession, custody, or care of books of account containing entries relating to the business of such person, or any other person he may deem proper, to appear before him and produce such books, at a time and place named in the summons, and to give testimony or answer interrogatories, under oath, respecting any objects liable to tax or the returns thereof. The collector may summon any person residing or found within the State in which his district lies; and when the person intended to be summoned does not reside and cannot be found within such State, he may enter any collection-district where such person may be ANNOTATED STATUTE ANB DIGEST. 763 found, and there make the examination herein authorized. And to this end he may there exercise all the authority which he might lawfully exer- cise in the district for which he was commissioned." ■"Sec. 3176. When any person, corporation, company, or association refuses or neglects to render any return or list required by law, or renders a false or fraudulent return or list, the collector or any deputy collector shall make, according to the best information which he can obtain, including that derived from the evidence elicited by the examination of the collector, and on his own view and in- formation, such list or return, according to the form prescribed, of the income, property, and objects liable to tax owned or possessed or under the care or management of such person or corporation, company or association, and the Commissioner of Internal Revenue shall assess all taxes not paid by stamps, including the amount, if any, due for special tax, income or other tax, and in case of any return of a false or fraudulent list or valuation intentionally he shall add 100 per centum to such tax; and in case of a refusal or neglect, except in cases of sickness or absence, to make a list or return, or to verify the same as aforesaid, he shall add 50 per centum to such tax. In case of neglect occasioned by sickness or absence as afore- said the collector may allow such further time for making cUid delivering such list or return as he may deem necessary, not exceed- ing thirty days. The amount so added to the tax shall be collected at the same time and in the same manner as the tax unless the neg- lect or falsity is discovered after the tax has been paid, in which case the amount so added shall be collected in the same manner as the tax; and the list or return so made and subscribed by such collector or deputy collector shall be held prima facie good and suiBcient for all legal purposes." That if any person, corporation, joint-stock company, association, or in- surance company liable to make the return or pay the tax aforesaid shall refuse or neglect to make a return at the time or times hereinbefore speci- fied in each year, such person shall be liable to a penalty of not less than twenty dollars nor more than one thousand dollars. Any person or any •officer of any corporation required by law to make, render, sign, or verify any return who makes any false or fraudulent return or statement with in- tent to defeat or evade the assessment required by this section to be made •shill be guilty of a misdemeanor, and shall be fined not exceeding two thousand dollars or be imprisoned not exceeding one year, or both, at the ■discretion of the court, with the costs of prosecution. — Subsection F, supra. The collector or any deputy collector In every district shall enter into and upon the premises, if it be necessary, of every person therein who has taxable property and who refuses or neglects to render any re- turn or list required by law, or who renders a false or fraudulent return or list, and make, according to the best information which he can obtain, including that derived from the evidence elicited by the examination of the collector, and on his own view and information, such list ttr return, 764 ANNOTATED STATUTE AND DIGEST. aoeording to the form prescribed, of the objects liable to tax, owned or pos- sessed or under the care or management of such person, and the Commis- sioner of Internal Revenue shall assess the tax thereon, including the amount, if any, due for special tax, and in case of any return of a false or fraudulent list or valuation, he shall add one hundred per centum to such tax; and in case of a refusal or neglect, except in cases of sickness or absence, to make a list or return, or to verify the same as aforesaid, he shall add fifty per centum to such tax. In case of neglect occasioned by sickness or absence as aforesaid, the collector may allow such further time for making and delivering such list or return as he may deem necessary, not exceeding thirty days. The amount so added to the tax shall, in all cases, be collected at the same time and in the same manner as the tax; and the list or return so made and subscribed by such -collector or deputy collector shall be held good and sufficient for all legal purposes." — U. S. R. S. § 3176 before amendment. J. That it shall be the duty of every collector of internal revenue, to whom any payment of any taxes other than the tax represented by an adhesive stamp or other engraved stamp is made under the provisions of this section, to give to the person making such pay- ment a full written or printed receipt, expressing the amount paid and the particular account for which such payment was made; and whenever such payment is made such collector shall, if required, give a separate receipt for each tax paid by any debtor, on account of payments made to or to be made by him to separate creditors in such form that such debtor can conveniently produce the same separately to his several creditors in satisfaction of their respective demands to the amounts specified in such receipts; and such re- ceipts shall be sufficient evidence in favor of such debtor to justify him in withholding the amount therein expressed from his next payment to his creditor; but such creditor may, upon giving to his debtor a full written receipt, acknowledging the payment to him of whatever sum may be actually paid, and accepting the amount of tax paid as aforesaid (specifying the same) as a further satis- faction of the debt to that amount, require the surrender to him of such collector's receipt. All persons, firms, copartnership, companies, corporations, joint-stock companies or associations, and insurance companies, in whatever capacity acting, including lessees or mortgagees of real or personal property, trus- tees acting in any trust capacity, executors, administrators, agents, receiv- ers, conservators, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or payment of inter- est, rent, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual gains, profits, and in- come of another person, exceeding $3,000 for any taxable year, other than dividends on capital stock, or from the net earnings of corporations and ANNOTATED STATUTE AND DIGEST. 765 joint-stock companies or associations subject to like tax, who are required to make and render a return in belialf of another, as provided herein, to the collector of his, her, or its district, are hereby authorized and required to deduct and withhold from such annual gains, profits, and income such sum as will be sufiScient to pay the normal tax imposed thereon by this section, and shall pay to the officer of the United States Government au- thorized to receive the same, and they are each hereby made personally liable for such tax. — Subsection C, supra, K. That jurisdiction is hereby conferred upon the district courts of the United States for the district within which any person sum- moned under this section to appear to testify or to produce books shall reside, to compel such attendance, production of books, and testimony by appropriate process. Provided further. That in case no annual list or return has been ren- dered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collect- •or to leave at such place of residence or business, with some one of suit- able age and discretion, if such be present, otherwise to deposit in the near- est post ofSce, a note or memorandum addressed to such pereson, requir- ing him or her to render to such collector or deputy collector the list or re- -turn required by law within ten days from the date of such note or memo- randum, verified by oath or affirmation. And if any person, on being noti- fied or required as aforesaid, shall refuse or neglect to render such list or return within the time required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax fails to do so at the time required, or delivers any return which, in the •opinion of the collector, is false or fraudulent, or contains any undervalu- ation or understatement, it shall be lawful for the coltector to summon such person, or any other person having possession, custody, or care of 1)0oks of account containing entries relating to the business of such person, or any other person he may deem proper, to appear before him and pro- duce such books, at a time and place named in the summons, and to give testimony or answer interrogatories, under oath, respecting any objects liable to tax or the returns thereof. The collector may summon any per- son residing or found within the State in which his district lies; and when the person intended to be summoned does not reside and cannot be :found within such State, he may enter any collection district where such person may be found and there make the examination herein autliorized. And to this end he may there exercise all the authority which he might lawfully exercise in the district for which he was commissioned.U. S. E. S. § 3173 as amended by subsection I, supra. Xi. That all administrative, special, and general provisions of law, in- cluding the laws in relation to the assessment, remission, collection. 766 AIvTNOTATED STATUTE AND DIGEST. 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 ot this section and to the tax herein imposed. See U. S. R. S. §§ 3182, 3186, 3187, 3210, 3213-3216, 3220, 3229. These are explained in part I, supra. M. That the provisions of this section shall extend to Porto Rico and the Philippine Islands: Provided, That the administration of the law and the collection of the taxes imposed in Porto Rico and the Philippine Islands shall be by the appropriate internal-revenue ofEicers of those governments, and all revenues coUectd in Porto Rico and the Philippine Islands thereunder shall accrue intact to the general governments, thereof, respectively: That the word "State" or "United States" when used in this section shall be construed to include any Territory, Alaska, the District of Colum- bia, Porto Rico, and the Philippine Islands, when such construction is necessary to carry out its provisions. — Subsection H, supra. And provided further, That the jurisdiction in this section conferred upon the district courts of the United States shall, so far as the Philippine Islands are concerned, be vested in the courts of the first instance of said islands: That jurisdiction is hereby conferred upon the district courts of the United States for the district within which any person summoned under this section to appear to testify or to produce books shall reside, to com- pel such attendance, production of books, and testimony by appropriate process: — Subsection K, supra. And provided further. That nothing in this section shall be held to exclude from the computation of the net income the compensation paid any official by the governments of the District of Columbia, Porto Rico and the Philippine Islands or the political subdivisions thereof. That in computing net income under this section there shall be excluded the interest upon the obligations of a State or any political subdivision thereof, and upon the obligations of the United States or its possessions; also the compensation of the present President of the United States dur- ing the term for which he has been elected, and of the judges of the su- preme and inferior courts of the United States now in ofBce, and the com- pensation of all oflScers and employees of a State or any political sub- division thereof except when such compensation is paid by the United States Government. — Subsection b, supra. N. That for the purpose of carrying into effect the provisions of Section II of this Act, and to pay the expenses of assessing and collecting the income tax therein imposed, and to pay such sums ANNOTATED STATUTE AND DIGEST. 767 as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may deem necessary, for information, detection, and bringing to trial and punishment persons guilty of violating the provisions of this section, or conniving at the same, in cases where such expenses are not otherwise provided for by law, there is hereby appropriated out of any money in the Treasury not otherwise appropriated for the fiscal year ending June thirtieth, nineteen hundred and fourteen, the sum of $800,000, and the Com- missioner of Internal Revenue, with the approval of the Secretary of the Treasury, is authorized to appoint and pay from this appro- priation all necessary officers, agents, inspectors, deputy collectors, clerks, messengers and janitors, and to rent such quarters, purchase such supplies, equipment, mechanical devices, and other articles as may be necessary for employment or use in the District of Columbia or any collection district in the United States, or any of the Territories thereof: Provided, That no agent paid from this appropriation shall receive compensation at a rate higher than that now received by traveling agents on accounts in the Internal Revenue Service, and no inspector shall receive a compensation higher than $5 a day and $3 additional in lieu of subsistence, and no deputy collector, clerk, messenger, or other employee shall be paid at a rate of compensation higher than the rate now being paid for the same or similar work in the Internal Revenue Service. In the office of the Commissioner of Internal Revenue at Washing- ton, District of Columbia, there shall be appointed by the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury one additional deputy commissioner, at a salary of four thousand dollars per annum; two heads of divisions, whose compensation shall not exceed two thousand five hundred dollars per annum; and such other clerks, messengers, and employees, and to rent such quarters and to purchase such supplies as may be necessary: Provided, That for a period of two years from and after the passage of this Act the force of agents, deputy collectors, in- spectors, and other employees not. including the clerical force below the grade of chief of division employed in the Bureau of Internal Revenue in the city of Washington, District of Columbia author- ized by this section of this Act shall be appointed by the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury, under such rules and regulations as may be fixed by the Secretary of the Treasury to insure faithful and competent service, and with such compensation as the Commissioner of In- ternal Revenue may fix, with the approval of the Secretary of the Treasury, within the limitations herein prescribed: Provided fur- ther. That the force authorized to carry out the provisions of Sec- tion II of this Act, when not employed as herein provided, shall be employed on general internal-revenue work. ********* Section IV. 768 ANNOTATED STATUTE AND DIGEST. T. If any clause, sentence, 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 said 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 shall have been rendered. "Being of opinion that so much of the sections of this law as lays a tax on income from real and personal property is in- valid, we are brought to the question of the effect of that con- clusion upon these sections as a whole. It is elementary that the same statute may be in part constitutional and in part un- constitutional, and if the parts are wholly independent of each other, that which is constitutional may stand while that which is unconstitutional will be rejected. And in the case before us there is no question as to the validity of this act, except sections twenty-seven to thirty-seven, inclusive, which relate to the sub- ject which has been under discussion ; and as to them we think the rule laid down by Chief Justice Shaw in Warren v. Charles- town, 2 Gray, 84, is applicable, that if the different parts 'are so mutually connected with and dependent on each other, as con- ditions, considerations, or compensations for each other, as to warrant a belief that the legislature intended them as a whole, and that, if all could not be carried into effect, the legislature would not pass the residue independently, and some parts are unconstitutional, all the provisions which are thus dependent, conditional or connected, must fall with them.' Or, as the point is put by Mr. Justice Matthews in Poindexter v. Greenhow, 114 U. S. 270, 304, 29 L. ed. 185, 197, 5 Sup. Ct. Eep. 903, 962 : 'It is undoubtedly true that there may be cases where one part of a statute may be enforced as constitutional, and another be declared inoperative and void, because unconstitutional ; but these are cases where the parts are so distinctly separable that each can stand alone, and where the court is able to see, and to declare, that the intention of the legislature was that the part pronounced valid should be enforceable, even though the other part should fail. To hold otherwise would be to substitute, for the law intended by the legislature, one they may never have been willing by itself to enact.' And again, as stated by the same eminent judge in Spraigue v. Thompson, 118 U. S. 90, 95, 30 L. ed. 115, 117, 6 Sup. Ct. Eep. 988, where it was "urged that certain illegal exceptions in a section of a statute AlfNOTATED STATUTE AND DIGEST. 769 might be disregarded, but that the rest could stand : 'The in- superable difficultly with the application of that principle of construction to the present instance is, that by rejecting the ex- ceptions intended by the legislature of Georgia the statute is made to enact what confessedly the legislature never meant. It confers upon the statute a positive operation beyond the legis- lative intent, and beyond what any one can say it would have enacted in view of the illegality of the exceptions.' According to the census, the true valuation of real and personal property in the United States in 1890 was $65,037,091,197, of which real estate with improvements thereon made up $39,544,544,333. Of course, from the latter must be deducted, in applying these sections, all unproductive property and all property whose net yield does not exceed four thousand dollars ; but, even with such deductions, it is evident that the income from realty formed a vital part of the scheme for taxation embodied therein. If that be stricken out, and also the income from all invested per- sonal property, bonds, stocks, investments of all kinds, it is ob- vious that by far the largest part of the anticipated revenue would be eliminated, and this 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 woulo remain in substance a tax on occupations and labor. We cannot believe that such was the intention of Congress. We do not mean to say that an act laying by apportionment a direct tax on all real estate and personal property, or the income thereof, might not also lay excise taxes on business, privileges, employ- ments, and vocations. But this is not such an act; and the scheme must be considered as a whole. Being invalid as to the greater part, and falling, as the tax would, if any part were held valid, in a direction which could not have been contemplated except in connection with the taxation considered as an entirety, we are constrained to conclude that sections twenty-seven to thirty-seven, inclusive, of the act, which became a law without the signature of the President on August 28, 1894, are wholly inoperative and void." Pollock V. Farmers' Loan & Trust Co. 158 U. S. 601, 635- 637, 39 L. ed. 1108, 1125, 1126, 15 Sup. Ct. Eep. 912, per FULLEE, 0. J. U. That unless otherwise herein specially provided, this Act shall take effect on the day following its passage. Approved. 9.10 p. m. October third, nineteen hundred and thirteen. Foster Income Tax.-^9. PART IV. PREVIOUS INCOME TAX LAWS OF THE UNITED STATES. ACT OF AUGUST 5, 1861. 12 St. at L. 292, 309. Chaptee XLV. — An Act to Peovide Inceeased Revenue FEOM Imports, to Pat Inteeest on the Public Debt, AND FOE OthEE PuEPOSES. Section 49, And he it further enacted. That, from and after the first day of January next, there shall be levied, collected, and paid, upon the annual income of every person residing in the United States, whether such income is derived from any kind of property, or from any profession, trade, employment, or voca- tion carried on in the United States or elsewhere, or from any other source whatever, if such annual income exceeds the sum of eight hundred dollars, a tax of three per centum on the amount of such excess of such income above eight hundred dollars: Provided, That, upon such portion of said income as shall be derived from interest upon treasury notes or other securities of the United States, there shall be levied, collected, and paid a tax of one and one half per centum. Upon the in- come, rents, or dividends accruing upon any property, securi- ties, or stocks, owned in the United States by any citizen of 771 772 ACT OF AUGUST 5, 1861. the United States residing abroad, there shall be levied, col- lected, and paid a tax of five per centum, excepting that por- tion of said income derived from interest on Treasury notes and other securities of the Government of the United States, which shall pay one and one half per centum. The tax herein provided shall be assessed upon the annual income of the per- sons hereinafter named for the year next preceding the time for assessing said tax, to wit, the year next preceding the first of January, eighteen hundred and sixty-two; and the said taxes, when so assessed and made public, shall become a lien on the property or other sources of said income for the amount of the same, with the interest and other expenses of collection until paid: Provided, That in estimating said income, all national, state, or local taxes assessed upon the property, from which the income is derived, shall be first deducted. Section 50. And he it further enacted. That it shall be the duty of the President of the United States, and he is hereby authorized, by and with the advice and consent of the Senate, to appoint one principal assessor and one principal collector in each of the States and Territories of the United States, and in the District of Columbia, to assess and collect the internal duties or income tax imposed by this act, with authority in each of said oiEcers to appoint so many assistants as the public service may require, to be approved by the Secretary of the Treasury. The said taxes to be assessed and collected under such regula- tions as the Secretary of the Treasury may prescribe. The said collectors, herein authorized to be appointed, shall give bonds, to the satisfaction of the Secretary of the Treasury, in such sums as he may prescribe, for the faithful performance of their respective duties. And the Secretary of the Treasury shall prescribe such reasonable compensation for the assess- ment and collection of said internal duties or income tax as may appear to him just and proper; not, however, to exceed in any case the sum of two thousand five hundred dollars per annum for the principal ofiicers herein referred to, and twelve hundred dollars per annum for an assistant. The assistant collectors herein provided shall give bonds to the satisfaction ACT OF AUGUST 5, 1861. 773 of the principal collector for the faithful performance of their duties. The Secretary of the Treasury is further authorized to select and appoint one or more depositaries in each State for the deposit and safe-keeping of the moneys arising from the taxes herein imposed, when collected, and the receipt of the proper ofBcer of such depositary to the collector for the moneys deposited by him shall be the proper voucher for such collector in the settlement of his account at the Treasury De- partment. And he is further authorized and empowered to make such officer or depositary the disbursing agent of the Treasury for the payment of all interest due to the citizens of such State upon the Treasury notes or other Government securities issued by authority of law. And he shall also pre- scribe the forms of returns to be made to the department by all assessors and collectors appointed under the authority of this act. He shall also prescribe the form of oath or obliga- tion to be taken by the several officers authorized or directed to be appointed and commissioned by the President under this act, before a competent magistrate duly authorized to admin- ister oaths, and the form of the return to be made thereon to the Treasury Department. Section 51. And be it further enacted. That the tax herein imposed by the forty-ninth section of this act shall be due and payable on or before the thirtieth day of June, in the year eighteen hun- dred and sixty-two, and all sums due and unpaid at that day shall draw interest thereafter at the rate of six per centum per annum; and if any person or persons shall neglect or refuse to pay after due notice said tax assessed against him, her, or them, for the space of more than thirty days after the same is due and payable, it shall be lawful for any collector or assistant collector charged with the duty of collecting such tax, and they are hereby authorized, to levy the same on the visible property of any such person, or so much thereof as may be sufficient to pay such tax, with the interest due thereon, and the ex- penses incident to such levy and sale, first giving thirty days' public notice of the time and place of the sale thereof; and in case of the failure of any person or persons authorized to 774 ACT 01^ AUGUST 5, 1861. act as agent or agents for the collection of the rents or other income of any person residing abroad shall neglect or refuse to pay the tax assessed thereon (having had due notice) for more than thirty days after the thirtieth of June, eighteen hundred and sixty-two, the collector or his assistant, for the district where such property is located, or rents or income is payable, shall be and hereby is authorized to levy upon the property itself, and to sell the same, or so much thereof as may be necessary to pay the tax assessed, together with the interest and expenses incident to such levy and sale, first giv- ing thirty days' public notice of the time and place of sale. And in all cases of the sale of property herein authorized, the conveyance by the officer authorized to make the sale, duly executed, shall give a valid title to the purchaser, whether the property sold be real or personal. And the several collectors and assistants appointed under the authority of this act may, if they find no property to satisfy the taxes assessed upon any person by authority of the forty-ninth section of this act, and which such person neglects to pay as hereinbefore provided, shall have power, and it shall be their duty, to examine under oath the person assessed under this act, or any other person, and may sell at public auction, after ten days' notice, any stock, bonds, or choses in action, belonging to said person, or so much thereof as will pay such tax and the expenses of such sale ; and in case he refuses to testify, the said several collectors and as- sistants shall have power to arrest such person and commit him to prison, to be held in custody until the same shall be paid, with interest thereon, at the rate of six per centum per annum, from the time when the same was payable as aforesaid, and all fees and charges of such commitment and custody. And the place of custody shall in all cases be the same provided by law for the custody of persons committed for any cause by the authority of the United States, and the warrant of the col- lector, stating the cause of commitment, shall be sufficient au- thority to the proper officer for receiving and keeping such person in custody until the amount of said tax and interest, and all fees and the expense of such custody, shall have been fully paid and discharged; which fees and expenses shall be the same as are chargeable under the laws of the United States in other cases of commitment and custody. And it shall be ACT or JULY 1, ]SCl'. 775 the duty of such collector to pay the expenses of such custody, and the same, with his fees, shall be allowed on settlement of his accounts. And the person so committed shall have the same right to be discharged from such custody as may be allowed by the laws of the State or Territory, or the District of Columbia, where he is so held in custody, to persons committed under the laws of such State or Territory, or District of Columbia, for the non-payment of taxes, and in the manner provided by such laws; or he may be discharged at any time by order of the Secretary of the Treasury. ACT OF JULY 1, 1862. 12 St. at L. 432. Chaptek CXIX. — An Act to Provide Inteknal Eevenue TO Support the Government and to Pay Interest on THE Public Debt. Section 80. Railroads, Steamboats, and Ferry-Boats. And be it further enacted. That on and after the first day of August, eighteen hundred and sixty-two, any person or persons, firms, companies, or corporations, owning or possessing, or hav- ing the care or management of any railroad or railroads upon which steam is used as a propelling power, or of any steamboat or other vessel propelled by steam power, shall be subject to and pay a duty of three per centum on the gross amount of all the receipts of such railroad or railroads or steam vessel for the transportation of passengers over and upon the same; and any person or persons, firms, companies, or corporations, owning or possessing, or having the care or management of any railroad or railroads using any other power than steam thereon, or owning, possessing, or having the care or management of any ferry-boat, or vessel used as a ferry-boat, propelled by steam or horse-power, shall be subject to and pay a duty of one and a half per centum upon the gross receipts of such railroad or ferry-boat, respec- tively, for the transportation of passengers over and upon said 7Y6 railroads, steamboats, and ferry-boats, respectively; and any person, or persons, firms, companies, or corporations, owning, possessing, or having the care or management of any bridge authorized by law to receive toll for the transit of passengers, beasts, carriages, teams, and freight of any description over such bridge, shall be subject to and pay a duty of three per centum on the gross amount of all their receipts of every de- scription. And the owner, possessor, or person or persons hav- ing the care and management of any such railroad, steamboat, ferry-boat, or other vessel, or bridge, as aforesaid, shall, with- in five days after the end of each and every month, com- mencing as hereinbefore mentioned, make a list or return to the assistant assessor of the district within which such owner, possessor, company, or corporation may have his or its place of business, or where any such railroad, steamboat, ferry-boat or bridge is located or belongs, respectively, stating the gross amount of such receipts for the month next preceding, which re- turn shall be verified by the oath or affirmation of such OTvner, possessor, manager, agent, or other proper officer, in the manner and form to be prescribed from time to time by the Com- missioner of Internal Revenue, and shall also, monthly, at the time of making such return, pay to the collector or deputy collector of the district the full amount of duties which have accrued on such receipts for the month aforesaid; and in case of neglect or refusal to make said lists or return for the space of five days after such return should be made as afore- said, the assessor or assistant assessor shall proceed to estimate the amount received and the duties payable thereon, as herein- before provided in other eases of delinquency to make return for purposes of assessment ; and for the purpose of making such assessment, or of ascertaining the correctness of any such re- turn, the books of any such person, company, or corporation shall be subject to the inspection of the assessor or assistant assessor on his demand or request therefor; and in case of neglect or refusal to pay the duties as aforesaid when the same have been ascertained as aforesaid, for the space of five days after the same shall have become payable, the owner, possessor, or person having the management as aforesaid, shall pay, in addition, five per centum on the amount of such duties ; and for any attempt knowingly to evade the payment of such 1802. 777 duties, the said owner, possessor, or person having the care or management as aforesaid, shall be liable to pay a penalty of one thousand dollars for every such attempt, to be recovered as provided in this act for the recovery of penalties; and all provisions of this act in relation to liens and collections by distraint not incompatible herewith, shall apply to this section and the objects therein embraced: Provided, That all such persons, companies, and corporations shall have the right to add the duty or tax imposed hereby to their rates of fare whenever their liability thereto may commence, any limitations which may exist by law or by agreement with any person or company which may have paid, or be liable to pay, such fare to the con- trary notwithstanding. Section 81. Raileoad Bonds. And he it further enacted. That on and after the first day of July, eighteen hundred and sixty-two, any person or persons owning or possessing, or having the care or management of any railroad company or railroad corporation, being indebted for any sum or sums of money for which bonds or other evidences of indebtedness have been issued, payable in one or more years after date, upon which interest is, or shall be, stipulated to be paid, or coupons representing the interest shall be or shall have been issued to be paid, and all dividends in scrip or money or sums of money thereafter declared due or payable to stockholders of any railroad company, as part of the earnings, profits, or gains of said companies, shall be sub- ject to and pay a duty of three per centum on the amount of all such interest or coupons or dividends whenever the same shall be paid; and said railroad companies or railroad cor- porations, or any person or persons ovming, possessing, o^" having the care or management of any railroad company or railroad corporation, are hereby authorized and required to deduct and withhold from all payments made to any person, persons, or party, after the first day of July, as aforesaid, on account of any interest or coupons or dividends due and pay- able as aforesaid, the said duty of sum of three per centum ; and 778 ACT OF JULY 1, 1862. the duties deducted as aforesaid, and certified by the president or other officer of said company or corporation, shall be a receipt and discharge, according to the amount thereof, of said railroad companies or railroad corporations, and the owners, possessors, and agents thereof, on dividends and on bonds and other evidences of their indebtedness, upon which interest or coupons are payable, holden by any person or party what- soever, and a list or return shall be made and rendered within thirty days after the time fixed when said interest or coupons or dividends become due or payable, and as often as every six months, to the Commissioner of Internal Revenue, which shall contain a true and faithful account of the duties received and chargeable, as aforesaid, during the time when such duties have accrued or should accrue, and remaining unaccounted for; and there shall be annexed to every such list or return a declar- ation under oath or affirmation, in manner and form as may be prescribed by the Commissioner of Internal Revenue, of the president, treasurer, or some proper officer of said railroad company or railroad corporation, that the same contains a true and faithful account of the duties so withheld and received during the time when such duties have accrued or should ac- crue, and not accounted for, and for any default in the making or rendering of such list or return, with the declaration an- nexed, as aforesaid, the person or persons owning, possessing, or having the care or management of such railroad company or railroad corporation, making such default, shall forfeit, as a penalty, the sum of five hundred dollars ; and in case of any default in making or rendering said list, or of any default in the payment of the duty, or any part thereof, accruing or which should accrue, the assessment and collection shall be made according to the general provisions of this act. Section 82. Banks, Teust Companies, Savings Institutions, and In- SUEANCE Companies. And be it further enacted. That on and after the first day of July, eighteen hundred and sixty-two, there shall be levied, collected, and paid by all banks, trust companies, and savings ACT OF JULY 1, 1862. 77Q institutions, and by all fire, marine, life, inland, stock, and mutual insurance companies, under wliatever style or name known or called, of the United States or Territories, specially incorporated, or existing under general laws, or which may be hereafter incorporated or exist as aforesaid, on all dividends in scrip or money thereafter declared due or paid to stock- holders, to policy-holders, or to depositors, as part of the earn- ings, profits, or gains of said banks, trust companies, savings institutions, or insurance companies, and on -all sums added to their surplus or contingent funds, a duty of three per centum : Provided, That the duties upon the dividends of life insurance companies shall not be deemed due, or to be collected until such dividends shall be payable by such companies. And said banks, trust companies, savings institutions, and insurance com- panies are hereby authorized and required to deduct and with- hold from all payments made to any person, persons, or party, on account of any dividends or sums of money that may be due and payable, as aforesaid, after the first day of July, eighteen hundred and sixty-two, the said duty of three per centum. And a list or return shall be made and rendered within thirty days after the time fixed when such dividends or sums of money shall be declared due and payable, and as often as every six months, to the Commissioner of Internal Revenue, which shall contain a true and faithful account of the amount of duties accrued or which should accrue from time to time, as aforesaid, during the time when such duties remain unac- counted for, and there shall be annexed to every such list or return a declaration, under oath or affirmation, to be made in form and manner as shall be prescribed by the Commissioner of Internal Revenue, or the president, or some other proper officer of said bank, trust company, savings institution, or in- surance company, respectively, that the same contains a true and faithful account of the duties which have accrued or should accrue and not accounted for, and for any default in the de- livery of such list or return, with such declaration annexed, the bank, trust company, savings institution, or insurance com- pany making such default shall forfeit, as a penalty, the sum of five hundred dollars. 180 ACT OF JULY 1, 1862. Section 84. And he it further enacted. That on the first day of October, Anno Domini eighteen hundred and sixty-two, and on the first day of each quarter of a year thereafter, there shall be paid by each insurance company, whether inland or marine, and by each individual or association engaged in the business of insurance from loss or damage by fire, or by the perils of the sea, the duty of one per centum upon the gross receipts for premiums and assessments by such individual, association, or company during the quarter then preceding; and like duty shall be paid by the agent of any foreign insurance company having an ofiice or doing business within the United States. Section 86. Salaries and Pat of Officers and Peesons in the Service OF THE United States. And he it further enacted. That on and after the first day of August, eighteen hundred and sixty-two, there shall be levied, collected, and paid on all salaries of ofiicers, or pay- ments to persons in the civil, military, naval, or other employ- ment or service of the United States, including senators and rep- resentatives and delegates in Congress, when exceeding the rate of six hundred dollars per annum, a duty of three per centum on the excess above the said six hundred dollars; and it shall be the duty of all paymasters, and all disbursing officers, under the government of the United States, or in the employ thereof, when making any payments to officers and persons as aforesaid, or upon settling and adjusting the accounts of such officers and persons, to deduct and withhold the aforesaid duty of three per centum, and shall, at the same time, make a certifi- cate stating the name of the officer or person from whom such deduction was made, and the amount thereof, which shall be transmitted to the office of the Commissioner of Internal Eev- enue, and entered as part of the internal duties ; and the pay- roll, receipts, or account of officers or persons paying such duty, as aforesaid, shall be made to exhibit the fact of such pay- ment. act of july 1, 1862. 781 Section 88. Advertisement. And he it further enacted. That on and after the first day of August, eighteen hundred and sixty-two, there shall be levied, collected, and paid by any person or persons, firm, or company, publishing any newspaper, magazine, review, or other literary, scientific, or news publication, issued periodi- cally, on the gross receipts for all advertisements, or all matters for the insertion of which in said newspaper or other publi- cation, as aforesaid, or in extras, supplements, sheets, or fly- leaves accompanying the same, pay is required or received, a duty of three per centum; and the person or persons, firm, or company, owning, possessing, or having the care or management of any and every such newspaper or other publication, as aforesaid, shall make a list or return quarterly, commencing as heretofore mentioned, containing the gross amount of receipts as aforesaid, and the amount of duties which have accrued thereon, and render the same to the assistant assessor of the respective districts where such newspaper, magazine, review, or other literary or news publication is or may be published, which list or return shall have annexed a declaration, under oath or affirmation, to be made according to the manner and form which may be from time to time prescribed by the Com- missioner of Internal Revenue, or the owner, possessor, or person having the care or management of such newspaper, magazine, review, or other publication, as aforesaid, that the same is true and correct, and shall also, quarterly and at the time of making said list or retiirn, pay to the collector or deputy collector of the district, as aforesaid, the full amount of said duties ; and in case of neglect or refusal to comply with any of the provisions contained in this section, or to make and render said list or return, as aforesaid, for the space of thirty days after the time when said list or return ought to have been made, as aforesaid, the assistant assessor of the respective districts shall proceed to estimate the duties, as heretofore pro- vided in other cases of delinquency; and in case of neglect or refusal to pay the duties, as aforesaid, for the space of thirty days after said duties become due and payable, said owner, '?^82 ACT OF JULY 1, 1862. possessor, or person or persons having the care or management of said newspapers or publications, as aforesaid, shall pay, in addition thereto, a penalty of five per centum on the amount due; and in case of fraud or evasion, whereby the revenue is attempted to be defrauded or the duty withheld, said owners, possessors, or person or persons having the care or management of said newspapers or other publications, as aforesaid, shall forfeit and pay a penalty of five hundred dollars for each offense, or for any sum fraudulently unaccounted for; and all provisions in this act in relation to liens, assessments, and collections, not incompatible herewith, shall apply to this sec- tion and the objects herein embraced: Provided, That in all cases where the rate or price of advertising is fixed by any law of the United States, or Territory, it shall be lawful for the company, person or persons, publishing said advertise- ments, to add the duty or tax imposed by this act to the price of said advertisements, any law, as aforesaid, to the contrary notwithstanding: Provided further, That the receipts for ad- vertisements to the amount of one thousand dollars, by any per- son or persons, firm or company, publishing any newspaper, magazine, review, or other literary, scientific, news publication, issued periodically, shall be exempt from duty: And provided further. That all newspapers whose circulation does not exceed two thousand copies shall be exempted from all taxes for adver- tisements. Section 89. Income Duty. And he it further enacted. That for the purpose of modify- ing and re-enacting, as hereinafter provided, so much of an act, entitled "An act to provide increased revenue from imports to pay interest on the public debt, and for other purposes," approved fifth of August, eighteen hundred and sixty-one, as relates to income tax; that is to say, sections forty-nine, fifty (except so much thereof as relates to the selection and ap- pointment of depositaries), and fifty-one, be, and the same are hereby, repealed. ACT OF JULY 1, 1862. 783 Section 90. And he it further enacted. That there shall be levied, col- lected, and paid annually, upon the annual gains, profits, or income of every person residing in the United States, whether derived from any kind of property, rents, interests, diridends, salaries, or from any professional trade, employment, or vo- cation carried on in the United States or elsewhere, or from any other source whatever, except as hereinafter mentioned, if such annual gains, profits, or income exceed the sum of six hundred dollars, and do not exceed the sum of ten thousand dollars, a duty of three per centum on the amount of such an- nual gains, profits, or income over and above the said sum of six hundred dollars; if said income exceeds the sum of ten thousand dollars, a duty of five per centum upon the amount thereof exceeding six hundred dollars, and upon the annual gains, profits, or income, rents, and dividends accruing upon any property, securities, and stocks owned by the United States by any citizen of the United States, residing abroad, except as hereinafter mentioned, and not in the employment of the government of the United States, there shall be levied, col- lected, and paid a duty of five per centum. Section 91. And he it further enacted. That in estimating said annual gains, profits, or income, whether subject to a duty, as provided in this act, of three per centum, or of five per centum, all other national, state, and local taxes, lawfully assessed upon the prop- erty or other sources of income of any person as aforesaid, from which said annual gains, profits, or income of such person is or. should be derived, shall be first deducted from the gains, profits, or income of the person or persons who actually pay the same, whether o^vner or tenant, and all gains, profits, or income derived from salaries of ofiicers, or payments to per- sons in the civil, military, naval, or other service of the United States, including senators, representatives, and delegates in Congress, above six hundred dollars, or derived from interest or dividends on stocks, capital, or deposits in any bank, trust company, or savings institution, insurance, gas, bridge, ex- 784 press, telegraph, steamboat, ferry-boat, or railroad company, or corporation, or on any bonds or other evidences of indebted- ness of any railroad company or other corporation, which shall have been assessed and paid by said banks, trust companies savings institutions, insurance, gas, bridge, telegraph, steam- boat, ferry-boat, express, or railroad companies, as aforesaid, or derived from advertisements, or on any articles manu- factured, upon which specific, stamp or ad valorem duties shall have been directly assessed or paid, shall also be deducted; and the duty herein provided for shall be assessed and col- lected upon the income for the year ending the thirty-first day of December next preceding the time for levying and collect- ing said duty, that is to say, on the first day of May, eighteen hundred and sixty-three, and in each year thereafter: Pro- vided, That upon such portion of said gains, profits, or in- come, whether subject to a duty as provided in this act of three per centum or five per centum, which shall be derived from interest upon notes, bonds, or other securities of the United States, there shall be levied, collected, and paid a duty not exceeding one and one-half of one per centum, any thing in this act to the contrary notwithstanding. Section 92. And be it further enacted^ That the duties on income herein imposed shall be due and payable on or before the thirtieth day of June, in the year eighteen hundred and sixty-three, and in each year thereafter until and including the year eighteen hundred and sixty-six and no longer; and to any sum or sums annually due and unpaid for thirty days after the thirtieth of June as aforesaid, and for ten days after demand thereof by the collector, there shall be levied in addition thereto the sum of five percentum on the amount of duties unpaid, as a pen- alty, except from the estates of deceased and insolvent persons; and if any person or persons, or party, liable to pay such duty, shall neglect or refuse to pay the same, the amount due shall be a lien in favor of the United States from the time it was so due until paid, with the interest, penalties, and costs, that may accrue in addition thereto, upon all the property, and rights to ■ property, stocks, securities, and debts of every de- ACT OF JULY 1, 1862. 785 ficription from ■which the income upon which said duty is assessed or levied shall have accrued, or may or should accrue ; and in default of the payment of said duty for the space of thirty days, after the same shall have become due, and be de- manded as aforesaid, said lien may be enforced by distraint upon such property, rights to property, stocks, securities, and evidences of debt, by whomsoever holden; and for this pur- pose the Commissioner of Internal Revenue, upon the certifi- cate of the collector or deputy collector that said duty is due and unpaid for the space of ten days after notice duly given of the levy of such duty, shall issue a warrant in form and manner to be prescribed by said Commissioner of Internal Revenue, undei the directions of the Secretary of the Treasury, and by virtue of such warrant there may be levied on such property, rights to property, stocks, securities, and evidences of debt, a further sum to be fixed and stated in such warrant, over and above the said annual duty, interest, and penalty for nonpayment, sufficient for the fees and expenses of such levy. And in all cases of sale, as aforesaid, the certificate of such sale by the collector or deputy collector of the sale, shall give title to the purchaser, of all right, title, and interest of such delinquent in and to such property, whether the property be real or personal; and where the subject of sale shall be stocks, the certificate of said sale shall be lawful authority and notice to the proper corporation, company, or association, to record the same on the books or records, in the same manner as if transferred or assigned by the person or party holding the same, to issue new certificates of stock therefor in lieu of any original or prior certificates, which shall be void whether can- celled or not; and said certificates of sale of the collector or ■deputy collector, where the subject of sale shall be securities or other evidences of debt, shall be good and valid receipts to the person or party holding the same, as against any person ■or persons, or other party holding, or claiming to hold, posses- ■sion of such securities or other evidences of debt. Section 93. Avd he it further enacted. That it shall be the duty of all persons of lawful age, and all guardians and trustees, whether Foster Income Tax. — 50. 78 G ACT OF JULY 1, 1862. such trustees are so by virtue of their office as executors, ad- ministrators, or other fiduciary capacity, to make return in the list or schedule, as provided in this act, to the proper officer of internal revenue, of the amount of his or her income, or the income of such minors or persons as may be held in trust as aforesaid, according to the requirements hereinbefore stated, and in case of neglect or refusal to make such return, the assessor or assistant assessor shall assess the amount of his or her income, and proceed thereafter to collect the duty thereon in the same manner as is provided for in other cases of neglect and refusal to furnish lists or schedules in the general provision of this act, where not otherwise incompatible, and the assistant assessor may increase the amount of the list or return of any party making such return, if he shall be satisfied that the same is understated: Provided, That any party, in his or her own behalf, or as guardian or trustee, as aforesaid, shall be per- mitted to declare, under oath or affirmation, the form a ad manner of which shall be prescribed by the Commissioner of Internal Revenue, that he or she was not possessed of an in- come of six hundred dollars, liable to be assessed according to the provisions of this act, or that he or she has been assessed elsewhere and the same year for an income duty, under au- thority of the United States, and shall thereupon be exempt from an income duty ; or, if the list or return of any party shall have been increased by the assistant assessor, in manner as aforesaid, he or she may be permitted to declare, as aforesaid, the amount of his or her annual income, or the amount held in trust, as aforesaid, liable to be assessed, aa aforesaid, and the same so declared shall be received as the sum upon which duties are to be assessed and collected. ACT OF MABCH 3, 1863. 787 'ACT OF MAECH 3, 1863. 12 St. at L. 713, 718, 719. Chapter LXXIV. — An Act to Amend an Act entitled "An Act to Peovide Internal Revenue to Support THE Government and Pat iNTiaiEST on the Public Debt," Approved July First, Eighteen Hundred ani> Sixty-two, and for other Purposes. Section 1. Be it enacted, * * * * * » That section ninety-one be amended by striking out the word "gas" wherever it occurs, and by striking out the words "or on any articles manufactured" after the word "advertisements." That section ninety-three be amended so that in case of neg- lect or refusal to make the returns referred to in said section the proceedings thereafter for the assessment and collection of the duty shall be in the same manner as provided for in other cases of neglect. Section 3. And he it further enacted. That any person or persons, firm, company, or corporation, who shall issue tickets or contracts of insurance against fatal or non-fatal injury to persons while travelling by land or water, shall pay a duty of one per centum on the gross amount of all the receipts for such insurance, and shall be subject to all the provisions and regulations of existing law applicable thereto, in relation to insurance companies : Pro- vided, That no stamp duty shall be required upon tickets or con- tracts of insurance as aforesaid, when limited to fatal or non- fatal injury to persons while travelling. Section 7. And he it further enacted. That the commissioner of internal revenue be, and he is hereby, authorized to prescribe such meth- 788 ACT OTP MAECH 3, 1863. od for the cancellation of stamps as a substitute for or in addi- tion to the method now prescribed by law, as he may deem expe- dient and effectual. And he is further authorized in his discre- tion to make the application of such method imperative upon the manufacturers of proprietary articles, and upon stamps of a nominal value exceeding twenty-five cents each. Section 9. And he it further enacted. That any person or persons, firms, companies, or corporations, owning or possessing, or having the care or management of any ferry-boat, or vessel used as a ferry- boat, propelled by steam or horse-power, in lieu of the duties now imposed by law, shall be subject to pay a duty of one and one-half of one per centum upon the gross receipts of such ferry- boat ; and the return and payment thereof shall be made in the manner prescribed in the act to which this act is an amendment. Section 10. And he it further enacted. That on and after the first day of April, eighteen hundred and sixty-three, any person or persons, firms, companies, or corporations carrying on or doing an ex- press business shall, in lieu of the tax and stamp duties imposed by existing laws, be subject to and pay a duty of two per centum on the gross amount of all the receipts of such express business, and shall be subject to the same provisions, rules, and penalties, as are prescribed in section eighty of the act to which this is an amendment, for the persons, firms, companies, or corporations owning or possessing or having the management of railroads, steamboats, and ferry-boats ; and all acts or parts of acts incon- sistent herewith are hereby repealed. Section 11. And be it further enacted. That in estimating the annual gains, profit, or income, of any person, under the act to which this act is an amendment, the amount actually paid by such per- son for the rent of the dwelling-house or estate on which he re- sides shall be first deducted from the gains, profit, or income of such person. ACT OF JUNE 30, 1864. 789 ACT OE JUNE 30, 1864. 13 St. at L. 223, 275. Chaptee CLXXIII. — An Act to Provide Inteenai, Rev- enue TO Support the Government, to Pat Interest ON the Public Debt, and for other Purposes. Section 103. And be it further enacted^ That every person, firm, company, or corporation, owning or possessing, or having the care or man- agement of, any railroad, canal, steamboat, ship, barge, canal- boat, or other vessel, or any stage-coach or other vehicle engaged or employed in the business of transporting passengers or prop- erty for hire, or in transporting the mails of the United States, on any canal, the water of which is used for mining purposes, shall be subject to and pay a duty of two and one-half per centum upon the gross receipts of such railroad, canal, steamboat, ship, barge, canal-boat, or other vessel, or such stage-coach or other vehicle: Provided, That the duty hereby imposed shall not be charged upon receipts for the transportation of persons or prop- erty, or mails, between the United States and any foreign port ; and any person or persons, firms, companies, or corporations, owning, possesing, or having the care or management of any toll-road, ferry, or bridge, authorized by law to receive toll for the transit of passengers, beasts, carriages, teams, and freight of any description, over such toll-road, ferry, or bridge, shall be subject to and pay a duty of three per centum on the gross amount of all their receipts of every description. But when the gross receipts of any such bridge or toll-road shall not exceed the amount necessarily expended to keep such bridge or road in repair, no tax shall be imposed on such receipts : Provided, That all such persons, companies, and corporations shall have the right to add the duty or tax imposed hereby to their rates of fare whenever their liability thereto may commence, any limitation which may exist by law or by agreement with any person or com- pany which may have paid or be liable to pay such fare to the contrary notwithstanding. 790 ACT on- JVNT. 30, 1864. Section 104. And be it further enacted. That any person, firm, company, or corporation carrying on or doing an express business, shall be subject to and pay a duty of three per centum on the gross amount of all the receipts of such express business. Section 105. And be it further enacted. That there shall be levied, collect- ed, and paid a duty of one and a half of one per centum upon the gross receipts of premiums, or assessments for insurance from loss or damage by fire or by the perils of the sea, made by every insurance company, whether inland or marine or fire in- surance company, and by every association or individual en- gaged in the business of insurance against loss or damage by fire or by the perils of the sea; and by every person, firm, company, or corporation, who shall issue tickets, or contracts of insurance against injury to persons while traveling by land or water ; and a like duty shall be paid by the agent of any foreign insurance company having an office or doing business within the United States ; and that in the account or return to be rendered, they shall state the amount insured, renewed, or continued, the gross amount of premiums received and assessments collected, and the duties by law accruing thereon for the quarteT then next preceding. Section 107. And be it further enacted. That any person, firm, company, or corporation owning or possessing or having the care or manage- ment of any telegraphic line by which telegraphic despatches or messages are received or transmitted, shall be subject to, and pay a duty of, five per centum on the gross amount of all receipts of such person, firm, company, or corporation. Section 108. And be it further enacted. That any person, firm, or corpora- tion, or the manager or agent thereof, owning, conducting, or having the care or management of any theatre, opera, circus, ACT or JUNE 30, 1SC4. T91 museum, or other public exhibition of dramatic or operatic rep- resentations, plays, performances, musical entertainments, feats of horsemanship, acrobatic sports, or other shows which are opened to the public for pay, but not including occasional con- certs, school exhibitions, lectures, or exhibitions of works of art, shall be subject to and pay a duty of two per centum on the gross amount of all receipts derived by such person, firm, company, or corporation from such representations, plays, performances, ex- hibitions, shows, or musical entertainments. Section 109. And be it further enacted. That any person, firm, company, or corporation, owning or possessing, or having the care or management of any railroad, canal, steamboat, ship, barge, canal- boat, or other vessel, or any ferry, toll-road or bridge, as enumer- ated and described in section one hundred and two (three) of this act ; or carrying on or doing an express business ; or engaged in the business of insurance, as hereinbefore described ; or own- ing or having the care and management of any telegraph line, or owning, possessing, leasing, or having the control or manage- ment of any circus, theatre, opera, or museum, shall within twenty days after the end of each and every month, make a list or return in duplicate to the assistant assessor of the district, stating the gross amount of their receipts, respectively, for the month next preceding, which return shall be verified by the oath or aifirmation of such owner, possessor, manager, agent, or other proper officer, in the manner and form to be prescribed from time to time by the Commissioner of Internal Revenue; and shall also pay to the collector the full amount of duties which have accrued on such receipts for the month aforesaid. And in case of neglect or refusal to make said list or return for the space of ten days after such return should have been made as aforesaid, the assessor or assistant assessor shall proceed to • estimate the amount received and the duties payable thereon, and shall add thereto ten per centum, as hereinbefore provided in other cases of delinquency, to make return for purposes of assessment ; and for the purpose of making such assessment, or of ascertaining the correctness of any siich return, the books of any such person, firm, company, or corporation shall be subject 792 ACT OF JUNE 30, 1864. to the inspection of the assessor or assistant assessor on his demand or request therefor. And in case of neglect or refusal to pay the duties, with the addition aforesaid, when the same have been ascertained, for the space of ten days after the same shall have become payable, the owner, possessor, or person having the management as aforesaid, shall pay, in addition, ten per centum on the amount of such duties and addition ; and for any attempt knowingly to evade the payment of such duties, the said owner, possessor, or person having the care or management as aforesaid, shall be liable to pay a penalty of one thousand dollars for every such attempt, to be recovered as provided in this act for the re- covery of penalties. And all provisions of this act in relation to liens and collections by distraint, not incompatible herewith, shall apply to this section and the objects therein embraced. Segtion 110. And ie it further enacted, That there shall be levied, collected, and paid a duty of one twenty-fourth of one per centum each month upon the average amount of the deposits of money, sub- ject to payment by check or draft, or represented by certificates of deposit or otherwise, whether payable on demand or at some future day, with any person, bank, association, company, or cor- poration engaged in the business of banking ; and a duty of one twenty-fourth of one per centum each month as aforesaid, upon the average amount of the capital of any bank, association, com- pany, or corporation, or person engaged in the business of bank- ing beyond the amount invested in United States bonds ; and a duty of one twelfth of one per centum each month upon the aver- age amount of circulation issued by any bank, association, cor- poration, company, or person, including as circulation all certi- fied cheeks and all notes and other obligations calculated or intended to circulate or be used as money, but not including that in the vault of the bank, or redeemed and on deposit for said bank; and an additional duty of one sixth of one per centum, each month, upon the average amount of such circulation, issued as aforesaid, beyond the amount of ninety per centum of the capital of any such bank, association, corporation, company, or person, and upon any amount of such circulation, beyond the average amount of the circulation that had been issued as afore- ACT OF JUNE 30, 1864. T93 said by any such bank, association, corporation, company, or person, for the six months preceding the first day of July, eight- een hundred and sixty-four. And on the first Monday of Au- gust next, and of each month thereafter, a true and accurate re- turn of the amount of circulation, of deposit, and of capital as aforesaid, for the previous month, shall be made and ren- dered in duplicate by each of such banks, associations, corpo- rations, companies, or persons to the assessor of *he district in which any such bank, association, corporation, or company may be located, or in which such person may reside, with a declaration annexed thereto, and the oath or affirmation of such person, or of the president or cashier of such bank, association, corporation, or company, in such form and man- ner as may be prescribed by the Commissioner of Internal Kevenue, that the same contains a true and faithful statement of the amount of circulation, deposits, and capital as aforesaid, subject to duty as aforesaid, and shall transmit the duplicate of said return to the Commissioner of Internal Revenue, and within twenty days thereafter shall pay to the said Commis- sioner of Internal Revenue the duties hereinbefore prescribed upon the said amount of circulation, of deposits, and of cap- ital, as aforesaid, and for any refusal or neglect to make or to render such return and payment as aforesaid, any such bank, as- sociation, corporation, company, or person so in default shall be subject to and pay a penalty of two hundred dollars, besides the additional penalty and forfeiture in other cases provided in this act; and the amount of circulation, deposit, and capital, as aforesaid, in default of the proper return, shall be estimated by the assessor or assistant assessor of the district as aforesaid, upon the best information he can obtain; and every such penalty, together with the duties as aforesaid, may be recovered for the use of the United States in any court of competent jurisdiction. And in case of banks with branches ; the duty herein provided for shall be imposed upon the circulation of each branch, sever- ally, and the amount of capital of each branch shall be con- sidered to be the amount allotted to such branch ; and so much of an act entitled "An act to provide ways and means for the support of the government," approved March three, eighteen hundred and sixty-three, as imposes any tax on banks, their 794 ACT OF JUNE 30, 1864. circulation, capital, or deposits, other than is herein provided, is hereby repealed : Provided, That this section shall not apply to associations which are taxed under and by virtue of the act "to provide a national currency, secured by a pledge of United States bonds, and to provide for the circulation and redemption thereof;" nor to any savings bank having no capital stock, and whose business is confined to receiving deposits and loaning the same on interest for the benefit of the depositors only, and which do no other business of banking: And provided, further. That any bank ceasing to issue notes for cir'^ulation, and which shall deposit in the Treasury of the United States, in lawful money, the amount of its outstanding circulation, to be redeemed at par, under such regulations as the Secretary of the Treasury may prescribe, shall be exempt from any tax upon such circulation. Section 111. And he it further enacted. That every individual partnership, firm, and association, being proprietors, managers, or agents of lotteries, shall pay a tax of five per centum on the gross amount of the receipts from the said business; and all persons making such sales shall, within ten days after the first day of each and every month, make and render a list oi return in duplicate to the assistant assessor of the gross amount of such sales, made as aforesaid, with the amount of duty which has accrued or should accrue thereon ; which list shall have annexed thereto a declara- tion under oath or affirmation, in such form and signed by such officer, agent, or clerk, as may be prescribed by the Commis- sioner of Internal Revenue, that the same is true and correct, and that the said proprietors, managers, and agents shall on or before the twentieth day of each and every month, as aforesaid, pay the collector or deputy collector of the proper district the amount of the duty or tax as aforesaid. And in default of mak- ing such lists or returns, the said proprietors, managers, and agents, and all other persons making such sales, shall be subject to and pay a penalty of one thousand dollars, besides the addi- tions, penalties, and forfeitures in other cases provided ; and the said proprietors, managers, and agents shall, in default of pay- ing the said duty or tax at the time herein required, be subject to and pay a penalty of one thousand dollars, or be imprisoned ACT OF JUNE 30, 1864. 795 not exceeding one year. In all cases of delinquency in making said list, return, or payment, the assessments and collections shall be made in the manner prescribed in the provisions of this act in relation to manufactures, articles, and products: Pro- vided, That the managers of any sanitary fair, or of any chari- table, benevolent, or religious association, may apply to the col- lector of the district and present to him proof that the proceeds of any contemplated lottery, raffle, or gift enterprise will be ap- plied to the relief of sick and wounded soldiers, or to some oth- er charitable use, and thereupon the commissioner shall grant a permit to hold such lottery, raffle, or gift enterprise, and the said sanitary fair, or charitable or benevolent association, shall be exempt from all charge, whether from tax or license, in re- spect of such lottery, raffle, or gift enterprise: Provided, fur- ther. That nothing in this section contained shall be construed to legalize any lottery. Section 114. And he it further enacted. That there shall be levied, collect- ed, and paid by any person or persons, firm, or company, pub- lishing any newspaper, magazine, review, or other literary, sci- entific, or news publication, issued periodically, on the gross receipts for all advertisements, or all matters for the insertion of which in said newspapers or other publication, as aforesaid, or in extras, supplements, sheets, or fly-leaves, accompanying the same, pay is required or received, a duty of three per cent- nm; and the person or persons, firm or company, owning, pos- sessing, or having the care or management of any and every such newspaper, or other publication, as aforesaid, shall make a list or return on the first day of January, April, July, and October of each year, containing the gross amount of receipts as aforesaid, and the amount of duties which have accrued thereon, and render the same in duplicate to the assistant as- sessor of the district where such newspaper, magazine, review, or other literary or news publication is or may be published; which list or return shall have annexed a declaration, imder oath or affirmation, to be made according to the manner and form which may be from time to time prescribed by the Com- missioner of Internal Eevenue, of the owner, possessor, or per- 796 ACT OF JUNE 30, 1864. son having the care or management of such newspaper, mag- azine, review, or other publication, as aforesaid, that the same is true and correct; and shall also, quarterly, within ten days- after the time of making said list or return, pay to the col- lector or deputy collector of the district the full amount of said duties. And in case of neglect or refusal to comply with any of the provisions contained in this section, or tO' make and render said list or return, for the space of ten days after the time when said list or return ought to have been made, as aforesaid, the assistant assessors of the respec- tive districts shall proceed to estimate the duties as hereto- fore provided in other cases of delinquency; and in case of neglect or refusal to pay the duties, as aforesaid, for the spacf of ten days after said duties become due and payable, and have been demanded, said owner, possessor, or person or per- sons having the care or management of said newspapers or publications, as aforesaid, shall pay, in addition thereto, a penalty of ten per centum on the amount due. And in case of fraud or evasion, whereby the revenue is attempted to be de- frauded, or the duty withheld, said owners, possessors, or per- son or persons having the care or management of said news- papers or other publications, as aforesaid, shall forfeit and pay a penalty of one thousand dollars for each offense, or for any sum fraudulently unaccounted for. And all provisions in this act in relation to returns, additions, penalties, forfeitures, liens, assessments, and collection, not incompatible herewith, shall apply to this section and the objects herein embraced: Pro- vided, That in all cases where the rate or price of advertising is fixed by any law of the United States, state, or territory, it shall be lawful for the company, person or persons, publishing said advertisements, to add the duty or tax imposed by this act to the price of said advertisements, any law to the contrary not- withstanding ; and that the receipts for advertisements to the amount of six hundred dollars annually, by any person or per- sons, firm, or company publishing any newspaper, magazine, review, or other literary, scientific, or news publication, issued periodically, shall be exempt from duty : And provided, further, That all newspapers whose average circulation does not exceed two thousand copies shall be exempted from all taxes for adver- tisements. 797 Section 116. And he it further enacted. That there shall be levied, col- lected, and paid annually upon the annual gains, profits, or income of every person residing in the United States, or of any citizen of the United States residing abroad, whether derived from any kind of property, rents, interests, dividends, salaries, or from any profession, trade, employment, or vocation, car- ried on in the United States, or elsewhere, or from any other source whatever, except as hereinafter mentioned, if such an- nual gains, profits, or income exceed the sum of six hundred dollars, a duty of five per centum on the excess over six hun- dred dollars and not exceeding five thousand dollars; and a duty of seven and one half of one per centum per annum on the excess over five thousand dollars and not exceeding ten thousand dollars; and a duty of ten per centum on the excess over ten thousand dollars. And the duty herein provided for shall be assessed, collected, and paid upon the gains,, profits, or income for the year ending the thirty-first day of December next, preceding the time for levying, collecting, and paying said duty: Provided, That income derived from interest upon notes, bonds, and other securities of the United States, shall be included in estimating incomes under this section: Pro- vided; That only one deduction of six hundred dollars shall be made "from the aggregate incomes of all the members of any family composed of parents and minor children, or husband and wife, except in cases where such separate income shall be derived from the separate and individual estates, gains, or labor of the wife or child: And provided, further. That net profits realized by sales of real estate purchased within the year, for which income is estimated, shall be chargeable as income; and losses on sales of real estate purchased within the year, for which income is estimated, shall be deducted from the income of such year. Section 117. And he it further enacted. That in estimating the annual gains, profits, or income of any person, all national, state, and municipal taxes, other than the national income tax, lawfully V'98 ACT OF JUNE 30, 1864. assessed within the year upon the property or sources of income of any person, as aforesaid, from which said annual gains, profits, or income is or should be derived, shall be deducted, in addition to six hundred dollars, from the gains, profits, or income of the person who has actually paid the same, whether owner, tenant, or mortgagor; also the salary or pay received for services in the civil, military, naval, or other service of the United States, including senators, representatives, and dele- gates in Congress, above the rate of six hundred dollars per annum ; and- there shall also be deducted the income derived from dividends on shares in the capital stock of any bank, trust company, savings institution, insurance, railroad, canal, tura- pike, canal navigation, or slack-water company, and the in terest on any bonds, or other evidences of indebtedness of anj such corporation, or company, whi'^h shall have been assessed and the tax paid, as hereinafter provided; also the amount paid by any person for the rent of the homestead used or occu- pied by himself or his family, and the rental value of any homestead used or occupied by any person, or by his family, 'in his own right, or in the right of his wife, shall not be included and assessed as part of the income of such person. In estimating the annual gains, profits, or income of any per- son, the interest over and above the amount of interest paid upon all notes, bonds, and mortgages, or other forms of in- debtedness, bearing interest, whether due and paid or not, if good and collectable, shall be included and assessed as part of the income of such person for each year; and also all income or gains derived from the purchase and sale of stocks or other property, real or personal, and the increased value of live stock, whether sold or on hand, and the amount of sugar, wool, butter, cheese, pork, beef, mutton, or other meats, hay and grain, or other vegetable, or other productions of the estate of such person sold, not including any part thereof unsold or on hand during the year next preceding the thirty-first of December, shall be included and assessed as part of the income of such person for each year, and the gains and profits of all companies, whether incorporated 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. , In esti- ACT OF JUNE 30, 1864. 799 mating deductions from income, as aforesaid, when any person rents buildings, lands, or other property, or hires labor to carry on land, or to conduct any other business from which such income is actually derived, or pays interest upon any actual incumbrance thereon, the amount actually paid for such rent, labor, or interest shall be deducted ; and also the amount paid out for usual or ordinary repairs, not exceeding the average paid out for such purposes for the preceding five years, shall be deducted, but no deduction shall be made for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate: Provided, That in cases where the salary or other com- pensation paid to any person in the employment or service of the United States shall not exceed the rate of six hundred dollars per annum, or shall be by fees, or uncertain or irregular in the amount or in the time during which the same shall have accrued or been earned, such salary or other compensation shall be included in ' estimating the annual gains, profits, or income of the person to whom the same shall have been paid, in such manner as the Commissioner of Internal Revenue, under the directions of the Secretary of the Treasury, may prescribe. Section 118. And he it further enacted. That it shall be the duty of all persons of lawful age, and all guardians and trustees, whether such trustees are so by virtue of their ofiice as executors, ad- ministrators, or in other fiduciary capacity, to make a list or return under oath or afiirmation, in such form and manner as may be prescribed by the Commissioner of Internal Revenue, to the assistant assessor of the district in which he resides, of the amount of his or her income, or the income of such minors or persons as may be held in trust as aforesaid, according to the requirements hereinbefore mentioned, stating the sources from which said income is derived, whether from any kind of property, or the purchase and sale of property, rents, interest, dividends, salaries, or from any profession, trade, employ- ment, or vocation, or otherwise. And in case of neglect or refusal to make such return, the assessor or assistant assessor 800 ACT or JUNE 30, 1864. shall assess the amount of his or her income, and the duty thereon, in the same manner as is provided for in other cases of neglect and refusal to furnish lists or returns in the pro- visions of this act, where not otherwise incompatible; and the assistant assessor may increase the amount of the list or return, or of any party making such return, if he shall be satisfied that the same is understood: Provided, That any party in his or her own behalf, or as guardian or trustee, as aforesaid, shall be permitted to declare, under oath or affirm- ation, the form and manner of which shall be prescribed by the Commissioner of Internal Revenue, that he or she was not possessed of an income of six hundred dollars, liable to be assessed according to the provisions of this act, or may declare that he or she has been assessed elsewhere in the same year for, and has paid an income duty under authority of the United States, and shall thereupon be exempt from income duty in said district; or, if the list or return of any party shall have been increased by the assistant assessor, in manner as aforesaid, such party may be permitted to declare, under oath or aflSrmation, the amount of annual income, or the amount held in trust, as aforesaid, liable to be assessed, and the same, so declared, shall be received by such assistant assessor as true, and as the sum upon which duties are to be assessed and collected, except that the deductions claimed in such cases shall not be made or allowed until approved by the assistant assessor. But any person feeling aggrieved by the decision of the assistant assessor in such cases may appeal to the assessor of the district, and his decision thereon shall be final; and the form, time, and manner of proceedings shall be sub- ject to rules and regulations to be prescribed by the Com- missioner of Internal Eevenue. Section 119. And he it further enacted. That the duties on incomes here- in imposed shall be levied on the first day of May, and be due and payable on or before the thirtieth day of June, in each year, until and including the year eighteen hundred and seven- ty, and no longer; and to any sum or sums annually due and unpaid for thirty days after the thirtieth of June, as afore- ACT OF JUNE 30, 1864. 801 said, and for ten days after demand thereof by the collector, there shall be levied in addition thereto the sum of ten per centum on the amount of duties unpaid, as a penalty, except from the estate of deceased and insolvent persons. And if any person liable to pay such duty shall neglect or refuse to pay the same, after such demand, the amount due shall be a lien in favor of the United States from the time it was due until paid, with the interest, penalties, and costs that may accrue in addition thereto, upon all the property and rights to prop- erty belonging to such person; and in default of the payment of said duty aforesaid, said lien may be enforced by distraint upon such property, rights to property, stocks, securities, and evidences of debt, by whomsoever holden; and for this pur- pose the collector, aftei* demands duly given, as aforesaid, shall issue a warrant, in form and manner to be prescribed by the Commissioner of Internal Revenue, under the direc- tions of the Secretary of the Treasury, and by virtue of such warrant there may be levied on such property, rights to prop- ety, stocks, securities, and evidences of debt, a further sum, to be fixed and stated in such warrant, over and above the said annual duty, interest, and penalty for non-payment, sufficient for the fees, costs, and expenses of such levy. And in all cases of sale, as aforesaid, the certificate of such sale by the collector shall vest in the purchaser all right, title, and in- terest of such delinquent in and to such property, whether the property be real or personal; and where the subject of sale shall be stocks, the certificate of said sale shall be lawful authority and notice to the proper corporation, company, or association, to record the same on the books or records, in the same manner as if transferred or assigned by the person or party holding the same, to issue new certificates of stock there- for in lieu of any original or prior certificates, which shall be void whether canceled or not. And said certificates of sale of the collector, where the subject of sale shall be securi- ties or other evidences of debt, shall be good and valid receipts to the person holding the same, as against any person holding, or claiming to hold, possession of such securities or other evidences of debt. Foster Income Tax. — 51. 802 act of june 30, 1864. Section 120. And he it further enacted. That there shall be levied and col- lected a duty of five per centum on all dividends in scrip or money thereafter declared due, and whenever the same shall be payable, to stockholders, policy-holders, or depositors, as part of the earnings, income, or gains, of any bank, trust company, savings institution, and of any fire, marine, life, inland insurance company, either stock or mutual, under what- ever name or style known or called, in the United States or territories, whether specially incorporated or existing imder general laws, and on all undistributed sums, or sums made or added during the year to their surplus or contingent funds; and said banks, trust companies, savings institutions, and in- surance companies shall pay the said duty, and are hereby au- thorized to deduct and withhold from all payments made on account of any dividends or sums of money that may be due and payable as aforesaid, the said duty of five per centum-. And a list or return shall be made and rendered to the assessor or assistant assessor in duplicate, and one of said lists or re- turns shall be transmitted, and the duty paid to the Commis- sioner of Internal Revenue within thirty days after the time when any dividends or sums of money become due or payable as aforesaid; and said list or return shall contain a true and faithful account of the amount of duties as aforesaid; and there shall be annexed thereto a declaration of the president, cashier, «r treasurer of the bank, trust company, savings in- stituti(^, or insurance company, under oath or afiirmation, in form afia manner as may be prescribed by the Commissioner of Internal Eevenue, that the same contains a true and faithful account of the duties as aforesaid. And for any default in the making or rendering of such list or return, with such declaration annexed, the bank, trust company, savings insti- tution, or insurance company, making such default, shall for- feit as a penalty the sum of one thousand dollars; and in case of any default in making or rendering said list or return, or of any default in the payment of the duty as required, or any part thereof, the assessment and collection of the duty and penalty shall be in accordance with the general provisions of law in other cases of neglect and refusal: Provided, That the ACT OF JUNE 30, 1864. 803 duty upon the dividends of life insurance companies shall not be deemed due or to be collected until such dividends shall be payable by such companies, nor shall the portion of premiums returned by mutual life insurance companies to their policy- holders be considered as dividends or profits under this act. Sbctioit 121. And he it further enacted. That any bank legally authorized to issue notes as circulation, v^hich shall neglect or omit to make dividends or additions to its surplus or contingent fund as often as once in six months, shall make a list or return in duplicate, under oath or affirmation of the president or cash- ier, to the assessor or assistant assessor of the district in vyhich it is located, on the first day of January and July in each year, or within thirty days thereafter, of the amount of profits which have accrued or been earned and received by said bank during the six months next preceding said first days of Jan- uary and July; and shall present one of said lists or returns and pay to the collector of the district a duty of five per centum on such profits; and in case of default to make such list or return and payment within the thirty days as .afore- said, shall be subject to the provisions of the foregoing sec- tion of this act: Provided, That when any dividend is made which includes any part of the surplus or contingent fund of any bank, trust company, savings institution, insurance or railroad company, which has been assessed and the duty paid thereon, the amount of duty so paid on that portion of the surplus or contingent fund may be deducted from the duty on such dividend. SECTioisr 122. And be it further enacted. That any railroad, canal, turn- pike, canal navigation, or slack-water company indebted for any money for which bonds or other evidences of indebtedness have been issued, payable in one or more years after date, upon which interest is stipulated to be paid, or coupons repre- senting the interest, or any such company that may have de- clared any dividend in scrip, or money due or payable to its 804 ACT OF JUNE 30, 1864. stockholders, as part of the earnings, profits, income, or gains of sucli company, and all profits of such company carried to the account of any fund, or used for construction, shall be subject to and pay a duty of five per centum on the amount of all such interest, or coupons, dividends, or profits, -when- ever the same shall be payable; and said companies are here- by authorized to deduct and withhold from all payments, on account of any interest, or coupons and dividends due and payable as aforesaid, the duty of five per centum; and the pay- ment of the amount of said duty so deducted from the in- terest, or coupons, or dividends, and certified by the president or treasurer of said company, shall discharge said company from that amount of the dividend, or interest, or coupon, on the bonds or other evidences of their indebtedness so held by any person or party v^hatever, except vyhere said companies may have contracted otherwise. And a list or return shall be made and rendered to the assessor or assistant assessor in duplicate, and one of said lists or returns shall be transmitted and the duty paid to the Commissioner of Internal Eevenue within thirty days after the time when said interest, coupons, or dividends become due and payable, and as often as every six months; and said list or return shall contain a true and faithful account of the amount of the duty, and there shall be annexed thereto a declaration of the president or treasurer of the company, under oath or affirmation, in form and manner as may be prescribed by the Commissioner of Internal Eev- enue, that the same contains a true and faithful account of said duty. And for any default in making or rendering such list or return, with the declaration annexed, or of the payment of the duty as aforesaid, the company making such default shall forfeit as a penalty the sum of one thousand dollars ; and in case of any default in making or rendering said list or return, or of the payment of the duty, or any part thereof, as aforesaid, the assessment and collection of the duty and penalty shall be made according to the provisions of law in other cases of neglect or refusal. Section 123. And be it further enacted. That there shall be levied, col- ACT or JUNE 30, 1864. 805 lected, and paid, on all salaries of officers, or payments for services to persons in the civil, military, naval, or other em- ployment or service of the United States, including senators and representatives and delegates in Congress, when exceed- ing the rate of six hundred dollars per annum, a duty of five per centum on the excess above the said six hundred dollars; and it shall be the duty of all paymasters, and all disbursing officers, under the government of the United States, or in the employ thereof, when making any payments to officers and persons as aforesaid or upon settling and adjusting the ac- counts of such officers and persons, to deduct and withhold the aforesaid duty of five per centum, and shall, at the same time, make a certificate stating the name of the officer or per- son from whom such deduction was made, and the amount thereof, which shall be transmitted to the office of the Com- missioner of Internal Revenue, and entered as part of the internal duties; and the pay-roll, receipts, or account of offi- cers or persons paying such duty, as aforesaid, shall be made to exhibit the fact of such payment. And it shall be the duty of the several auditors of the Treasury Department, when auditing the accounts of any paymaster or disbursing officer, or when settling or adjusting the accounts of any such officer, to require evidence that the duties or taxes mentioned in this section have been deducted or paid over to the Commissioner of Internal revenue : Provided, That payments of prize money shall be regarded as income from salaries, and the duty there- on shall be adjusted and collected in like manner. Sectiok 178. That consuls of foreign countries in the United States, who are not citizens thereof, shall be, and hereby are, exempt from any income tax imposed by this act which may be derived from their official emoluments, or from property in such countries: Provided, That the governments which such consuls may repre- sent shall extend similar exemptions to consuls of the United States. 806 JOINT EESOLUTION OF JULY 4, 1864. JOmT EESOLUTION OF JULY 4, 1864. 13 Stat, at L. 417. [No. 77] Joint Resolution Imposing a Special Incomb DUTT. That in addition to the income duty already imposed by law, there shall be levied, assessed, and collected on the first day of October, eighteen hundred and sixty-four, a special income duty upon the gains, profits, or income for the year ending the thirty-first day of December next preceding the time herein named, by levying, assessing, and collecting said duty of all persons residing within the United States, or of citizens of the United States residing abroad, at the rate of five per centum on all sums exceeding six hundred dollars, and the same shall be levied, assessed, estimated, and collected, except as to the rate, according to the provisions of existing laws for the collection of an income duty, annually, where not applicable hereto; and the Secretary of the Treasury is hereby authorized to make such rules and regulations as to time and mode, or other matters to enforce the collection of the special income duty herein provided for, as may be necessary: Provided, That in estimating the annual gains, profits, or income, as aforesaid, for the foregoing special income duty, no deductions shall be made for dividends or interest received from any association, corporation, or company, nor shall any quired, shall wilfully obstruct or delay the Execution of this Act, or shall negligently conduct or wilfully misconduct him- self in the Execution of this Act, he shall forfeit the Sum of One hundred Pounds, and shall be dismissed from the said Office, and be rendered incapable of again acting as Clerk or Clerk's Assistant in the Execution of this Act or any other Act for granting Duties under the Management of the Commis- sioners of Stamps and Taxes. X, And be it enacted. That no Person herein required to be qualified in respect of Estate shall be capable of acting as a Commissioner for General Purposes in the Execution of this Act for any District or Division of any County at large within England (the County of Monmouth and the Dominion of Wales excepted), or of any of the Ridings of the County of Yorh, or of the County or Divisions of Lincoln, or in or of any of the several Cities and Towns of London, Westminster, Bris- tol, Exeter, Kingston-^pon-Hull, Newcastle-upon-Tyne, Nor- wich, Birmingham, Liverpool, Leeds, Manchester, King's Lynn, and Great Yarmouth, unless such Person be seised or possessed of Lands, Tenements, or Hereditaments in Great Britain of the Value of Two hundred Pounds per Annum or more, of his own Estate, being Freehold or Copyhold, or Leasehold for a Term whereof not less than Seven Years are unexpired, over and above all Ground Rents, Incumbrances, and Reservations payable out of the same respectively, or unless such Person shall be possessed of Personal Estate of the Value of Five thousand Pounds, or a Personal Estate, or an Interest therein, producing an annual Income of Two hundred Pounds, or of Lands, Tenements, or Hereditaments, and Personal Estate, or an Interest therein, being together of the annual Value of Two hundred Pounds, estimating in every such Case One hun- dred Pounds Personal Estate as equivalent to Pour Pounds per Annum, and an Interest from Personal Estate of Pour Pounds per Annum as equivalent to One hundred Pounds Per- ACT OP 5 & 6 VICT., C. 35. 931 sonal Estate, or unless such Person be the eldest Son of some Person who shall be seised or possessed of a like Estate of Thrice the Value required as the Qualification of a Commis- sioner, in right of his own Estate, for such County at large. Riding, Division, or City. XL And be it enacted, That no Person herein required to be qualified in respect of Estate shall be capable of acting as a Commissioner for General Purposes in execution of this Act in any District or Division of the County of Monmouth, or of any County in Wales, or for any City, Borough, Cinque Port, Liberty, Franchise, Town, or Place in England or Wales (other than the Cities and Towns herein-before mentioned), unless such Person be seised or possessed of an Estate of the like Nature and of Pour Eifths of the Value required for the Estate of a Commissioner acting for a District or Division of a County at large in England as aforesaid, or unless such Per- son be the eldest Son of some Person who shall be seised or possessed of some Estate of Thrice the Value required as the Qualification of a Commissioner, in right of his own Estate, for the same County, City, Borough, Cinque Port, Liberty, Eranchise, Town, or Place. XII. And be it enacted. That no Person hereby required to be qualified in respect of Estate shall be capable of acting as a Commissioner for General Purposes in execution of this Act for any Shire or Stewartry in Scotland unless such Person be en- feoft in Superiority or Property, or possessed as Proprietor or Life Renter, of Lands in Scotland to the Extent of One hun- dred and fifty Pounds Scots per Annum valued Rent, or unless such Person be possessed of Personal Estate of the Value of Eive thousand Pounds, or of Personal Estate, or an Interest therein, producing an annual Income of Two hundred Pounds Sterling, or be enfeoft or possessed as aforesaid of Lands and Personal Estate, or an Interest therein, being together of the annual Value of Two hundred Pounds Sterling, estimating in every such C,ase One hundred Pounds Personal Estate as equiv- alent to Eour Pounds per Annum, and an Interest from Per- sonal Estate of Eour Poimds per Annum as equivalent to One hundred Pounds Personal Estate, or unless such Person be the 932 ACT OF 5 & 6 VICT., C. 35. eldest Son of some Person who shall be enfeoft or possessed of a like Estate of Twice the Value required as the Qualification of a Commissioner in right of his own Estate, for such Shire or Stewartry. XIII. And be it enacted. That no Person herein required to be qualified in respect of Estate shall be capable of acting as a Commissioner for General Purposes in execution of this Act for any City or Borough in Scotland unless such Person be enfeoft or possessed of an Estate of the like ISTature and of Three Eifths of the Value required for the Estate of a Commissioner acting for any Shire or Stewartry in Scotland, or unless such Person be the eldest Son of some Person enfeoft or possessed of some Estate of Thrice the Value required as the Qualification of a Commissioner, in right of his own Estate, for the same City or Borough.'' XIV. Provided always, and be it enacted, That no Estate consisting of Lands or Tenements, as the Qualification of a Commissioner, shall be required to be situate in the County, Riding, Division, Shire, or Stewartry for which any Person shall be a Commissioner: Provided also, that the Proof of Qualification where required shall lie on the Person acting in the Execution of this Act, in such Manner as is by Law direct- ed with respect to Commissioners acting in the Execution of the said Land Tax Act.* XV. Provided also, and be it enacted, That nothing herein contained shall be construed to require any Qualification of a Commissioner in the District of the Palaces of Whitehall and Saint James Westminster, for any Officer who shall have here- tofore acted or may hereafter act as a Commissioner for putting in execution the said Land Tax Act in the said District, other than the Possession of their respective Ofiices ; nor in any Shire or Stewartry in Scotland, for any Provost, Baillie, Dean of Guild, Treasurer, Master of the Merchants Company, or Deacon Convenor of the Trades for the Time being of any Royal Burgh "> The words "And be it enacted, ' The words "And be it enacted, that" and "or stewartry," wherever that" and "shire, or stewartry" are they occur, in this and subsequent repealed by 53 & 54 Vict., c. 51. sections are repealed by 53 & 54 Vict., c. 51. ACT OF 5 & C VICT., C. 35. 933 in Scotland, nor any Baillie for the Time being of any Borough of Eegality or Barony of Scotland, nor the Factors for the Time being on the several forfeited Estates annexed to the Crown by an Act passed in the Twenty-fifth Year of the Eeign of King Oeorge the Second, who shall be respectively appointed Com- missioners for executing the said Land Tax Act in any Shire or Stewartry in Scotland; nor for any Commissioner for Special Purposes acting in the Execution of any of the Powers or Pro- visions of this Act. XVI. And be it enacted, That whenever it shall be deemed by the Commissioners for the General Purposes of this Act to be expedient that certain of the Powers herein contained shall be executed by Commissioners other than and in addition to the Persons to be chosen or appointed as aforesaid, such Addition- al Commissioners shall be chosen by the Commissioners for Gen- eral Purposes acting in the same District; for which Purpose the said Commissioners, being duly qualified as required by this Act shall, with the Consent of the major Part of them assembled at any Meeting to be held for that Purpose, set down in Writing Lists of the Names of such Persons residing within their respective Districts as shall in the Opinion of such Com- missioners be fit and proper Persons to act as such Additional Commissioners, which Lists shall contain the l^ames of so many of those Persons as the said Commissioners shall in their Dis- cretion, after taking into consideration the Size of each District, and the Number of Persons to be assessed therein, think requi- site for the due Execution of this Act; which Lists, being re- spectively signed by such Commissioners, shall be a sufficient Authority for such Additional Commissioners being respective- ly qualified as herein-after is mentioned, and they are hereby authorized to take upon themselves the Execution of the several Powers of this Act according to the Provisions thereof: Pro- vided always, that the Persons appointed to supply Vacancies in any District may be chosen and act as Additional Commis- sioners until their Services shall be required as Commissioners for General Purposes: Provided also, that no Person shall be capable of acting as such Additional Commissioner who shall not be seised or enfeoft or possessed of an Estate of the like 934 Nature, and of One Half the Value, herein required for the Estate of a Commissioner for General Purposes in the same District : Provided also, that where no Additional Commission- ers shall be named and appointed in any District, the Commis- sioners appointed for General Purposes shall execute this Act in such District in all Matters and Things hereby authorized to be done by Additional Commissioners. XVII. Provided always, and be it enacted. That if in any City, Liberty, Franchise, Cinque Port, Town, or Place, for which separate Commissioners have been appointed to act in execution of the said Land Tax Act, there shall not be found a sufficient Number of Persons, qualified as directed by this Act, and willing to act as Commissioners for General Purposes, or as Additional Commissioners, it shall be lawful to appoint, as such Commissioners or Additional Commissioners, any Persons residing in such City, Liberty, Franchise, Cinque Port, Town, or Place, who shall be liable to be assessed imder the Provisions contained in this Act for annual Profits, however arising, to the Amount of Two hundred Pounds or upwards. XVIII. And be it enacted. That whenever a new Appoint- ment of Commissioners shall take place they shall execute this Act as well with respect to the Duties which shall not but which ought to have been assessed in any former Year, and with re- spect to Arrears of Duties assessed in any former Year under this Act, as to the Assessments to be made in such Year in which they shall be appointed, and shall have the like Powers to as- sess, levy, and collect such Duties and Arrears as they have to assess, levy, and collect the Duties assessed by them; for all which Acts such Appointment shall be a sufficient Authority, subject to the Regulations of this Act. XIX. And be it enacted. That whenever the said Commis- sioners for General Purposes shall have named such Additional Commissioners as aforesaid, they shall cause Notice thereof in Writing, signed by Two or more of them, to be delivered to the said Additional Commissioners by the Assessors of the respec- tive Parishes or Places where they reside, naming the Day and Place appointed by the Commissioners for General Purposes for the First Meeting of the said Additional Commissioners, ACT OF 5 or ought to have been abated as aforesaid, if the said Lands had Foster Income Tax. — 63. 994 ACT OF 5 & 6 VICT., C. 35, belonged to a Proprietor of full Age and of sound Mind, and capable of such Consent as aforesaid. LXXXV. And be it enacted, That whenever from the Cause aforesaid the like Loss shall be sustained on Lands in the Oc- cupation of the Owner, and the same shall be proved on Oath before the said Commissioners to their Satisfaction, it sball be lawful for them to abate in the several Assessments made in respect of the Property in or Occupation of the said Lands, and to discharge the whole or any Part of the said respective Duties, and in proportion to the Loss so sustained, and to the Amount which the said Commissioners shall be of opinion would or ought to have been abated as aforesaid if the said Lands had been demised to a Tenant, and a proportionate Abatement had been made to such Tenant under the Circum- stances of the said Loss. LXXXVI. And be it enacted. That if any Person shall be guilty of making any false Claim for such Abatement as afore- said, or shall be guilty of any Fraud or Contrivance in making such Claim, or in obtaining any such Abatement, or shall fraud- ulently or untruly declare the Amount or Value of such Loss, or the Amount or Value of any Abatement made or agreed to be made, in the Eent of the Lands in his Occupation, on ac- count of such Loss, with Intent fraudulently to obtain any such Abatement, he shall forfeit the Sum of Pifty Pounds, and Treble the Amount of Duty charged on him in respect of the said Lands; and if the Owner of any such Lands, or any other Person whatever, shall aid, abet, or assist any Person charged to the said Duties in making such false or fraudulent Claim, or shall fraudulently or untruly declare the Amount or Value of any Abatement made or agreed to be made in the Eent of the said Lands or the Amount of such Loss, with In- tent fraudulently to obtain for himself, or for his Tenant, or for the Owner or Tenant of the said Lands, any such Abate- ment as aforesaid, every such Owner or other Person aforesaid shall forfeit the Sum of One hundred Pounds. LXXXVII. And be it enacted. That the First Assessment to be made after the Fifth Day of April One thousand eight hundred and forty-two, of the Duties chargeable under either ACT or 5 & 6 VICT., c. 35. 995 of the Schedules marked (A.) or (B.) of this Act, shall he and remain in force for the Space of Three Years, without requir- ing Returns from the Parties charged therein for the Second or Third Tear of such Assessment, and without altering the Names of the Parties charged, notwithstanding a Change in the Occupation or Interest of or in the Premises charged in such Assessment may have happened ; and the like Sums shall be levied thereon for the Second and Third Years respectively as shall or ought to have been levied thereon for the First Year^ and the Assessment shall be subject to the like Exemptions and Allowances for the Second and Third Years respectively as were granted for the Pirst Year; and the Amount charged! in such Assessment shall be paid by Pour Instalments in each Year, on the Days and Times herein speciiied for Payment of such Instalments, subject nevertheless to be varied and altered in the following Cases; (videlicet j,) Pirst. — If the Inspector or Surveyor shall find or discover that any Person hath been under-rated in such Assessment, or omitted to be charged therein for the Pirst Year, or hath ob- tained an Exemption or Allowance for the Pirst Year which ought not to be allowed for the Second or Third Year, it shall be lawful for such Inspector or Surveyor to surcharge such Assessment for the Second or Third Year, in like Manner in all respects as he is authorized to surcharge the Assessment under the like Circumstances for the Pirst Year of Assessment, provided that such Surcharge shall be made in the single Duty,, and no Increase shall be made thereon above the Rate of Duty hereby granted, unless the Commissioners shall be of opinion that the Assessment for the Pirst Year was, in the Particular surcharged, deficient through the wilful Default or Neglect o£ the Party to be charged: Second. — If any Person not chargeable in the Pirst Year of Assessment shall become chargeable in the Second or Third; Year it shall be lawful for the Assessor, Inspector, or Sur- veyor to require the like Returns, and to proceed to the As- sessment of such Person in like Manner for the Second or Third Year, as if the whole Assessment of the Parish, Place,, or District had commenced in that Year: 996 ACT OF 5 & 6 VICT., C. 35. Third. — If any Person shall find himself aggrieved by the Continuance of such Assessment for the Second or Third Year, by occasion of his being over-rated therein, he may appeal from the same in that Year on delivering Ten Days ]!Totice of such his Intention to the Inspector or Surveyor, together with a true and perfect Schedule of the annual Value of the Prop-, erty charged on him for that Year, in like Manner as he might- have appealed against the same Assessment under the like Cir- cumstances for the First Year, and no Payment on such As- sessment for the Pirst or Second Year shall be construed to preclude such Appeal ; provided that for any vexatious Appeal v(fithout reasonable Cause it shall be lawful for the Commis- sioners to award reasonable Costs for the Attendance of the Inspector, Surveyor, or Assessor to be added to the Assessment and levied therewith for the Use of such Inspector, Surveyor, or Assessor, and which shall be paid to them respectively in like Manner as any other Payments under this Act may be made to them: Fourth. — It shall be lawful for the respective Collectors to levy and gather the Assessment for the Second and Third Years respectively on the Occupiers for the Time being by the same Eate or Book which shall have been delivered to them for the First Year, unless the Commissioners shall revoke the Appoint- ment of the said Collectors, or shall alter or vary the Assess- ments, and deliver to them a new Rate or Book for the Second, or Third Year: Fifth. — The Duplicates of the Commissioners shall be made for each Year, and delivered to the proper Ofiicer for Eeceipt and at the Head Office for Stamps and Taxes, containing the like Particulars for the Second and Third Years respectively as are herein required for the First Year of Assessment, vary- ing only the Amounts therein to be specified if the Case shall require the same; and all the Powers, Eegulations, Matters, and Things contained in this Act for rectifying any Assess- ment, or increasing or diminishing the Duty according to Cir- cumstances, or for levying the same, shall be in force for the Second and Third Years respectively, in respect of the Sums to be levied in those respective Years, and shall be applied in ACT OF 5 & 6 VICT., C. 35. 99Y those respective Years, as fully and effectually as if the As- sessment had been made for those Years respectively under the Directions and Eegulations of this Act. LXXXVIII. And be it enacted, That the Duties hereby granted, contained in the Schedule marked (C), shall be as- sessed and charged under the following Eules, which Eules shall be deemed and construed a Part of this Act, and to refer to the said last-mentioned Duties, as if the same had been in- serted imder a special Enactment. i SCHEDULE (C.) Rules for assessing and charging the Duties under Schedule (C.) The said last-mentioned Duties shall be paid by the Persons and Corporations respectively intrusted with the Payment of the Annuities, Dividends and Shares of Annuities, therein charged, on behalf of the Persons, Corporations, Companies, or Societies entitled thereto, their Executors, Administrators, Successors, or Assigns, and shall be assessed by the Commis- sioners hereby authorized or appointed for those Purposes; and shall extend to all public Annuities whatever payable in Great Britain out of any public Revenue in Great Britain or else- where, and to all Annuities payable in Ireland out of the Reve- nue of the United Kingdom, to or for the Use or Benefit of any Person not resident in Ireland,^'' and also to all Dividends and Shares of such Annuities respectively which shall become payable after the Fifth Day of April One thousand eight hun- dred and forty-two, except in the following Cases of Exemp- tion from the said Duties ; viz. Pirst.— The Stock, Dividends, or Interest of any Friendly Society legally established under any Act of Parliament re- lating to Friendly Societies; provided it shall appear by the Eules of any such Society deposited or to be deposited with the Commissioners for the Eeduction of the National Debt, or 17 The phrase "and to all annuities land," has been repealed by 37 & payable in Ireland", to and includ- 38 Vict., c. 96. ing the words "nonresident in Ire- 998 ACT OF 5 & 6 VICT., c. 35. with the Trustees of any Savings Bank, that the Sums as- sured by any such Society to any Individual, or to any Person nominated by or to claim under him, shall not exceed the Sum of Two hundred Pounds, or the Amount of any Annuity or Annuities granted or to be granted by any such Society to any Individual, or to any Person nominated by or to claim under him, shall not exceed the Sum of Thirty Pounds per Annum: Provided also, that when any Property belonging to any such Society shall be invested in the public Securities in the Bank of England, the said last-mentioned Property shall be duly claimed and proved by any Trustee or Treasurer of any such Society, or by any Member thereof, before the said Commis- sioners for Special Purposes: Second. — The Stock or Dividends of any Savings Bank established or to be established under the Provisions of an Act jpassed in the Ninth Year of the Eeign of King George the Pourth, intituled An Act to consolidate and amend the Laws relating to Savings Banks, arising from Investments with the Commissioners for the Reduction of the N^ational Debt; and also the Dividends or Interest payable by the Trustees of any Savings Bank upon any Funds therein deposited belonging to any Depositor or to any charitable Institution: Third. — The Stock or Dividends of any Corporation, Fra- ternity, or Society of Persons, or of any Trust established for charitable Purposes only; or which, according to the Kules or Regulations established by Act of Parliament, Charter, Decree, Deed of Trust, or Will, shall be applicable by the said Cor- poration, Fraternity, or Society, or by any Trustee, to charit- able Purposes only, and in so far as the same shall be applied to charitable Purposes only; or the Stock or Dividends in the Names of any Trustees applicable solely to the Repairs of any Cathedral, College, Church, or Chapel, or any Building used solely for the Purpose of Divine Worship, and in so far as the same shall be applied to such Purposes, provided the Applica- tion thereof to such Purposes shall be duly proved before the said Commissioners for Special Purposes by any Agent or Factor on the Behalf of any such Corporation, Fraternity, or Society, or by any of the Members or Trustees: ACT OE 5 & 6 VIOT., C. 35. 999 Fourtli. — The Stock or Dividends transferred to the Ac-, counts in, the Books of the Bank of England in the Name or under the Description of the Lord High Treasurer of England or of the Commissioners of Her Majesty's ^' Treasury, or the Commissioners for the Reduction of the National Debt, in pur- suance of any Act or Acts of Parliament; provided that the Governor and Company of the Bank of England shall from Time to Time cause to be transmitted to the said Commis- sioners for Special Purposes an Account of the total Amount of Stock which shall have been transferred to the said respective Accounts, also the Payments to be made by the Commissioners for the Reduction of the National Debt on account of the Waterloo Subscription Funds: Fifth. — The Stock or Dividends belonging to Her Majesty, in whatever Name the same may stand in the Books of the Bank of England, and also the Stocks or Dividends of any accredited Minister of any Foreign State resident in Great Britain, pro- vided the Property thereof shall, if standing in the Name of any Trustee, be duly proved before the said Commissioners for Special Purposes by such Trustee. LXXXIX. And for the assessing and charging of the said Annuities payable to the Company of '^ the Bank of England and to the South Sea Company respectively, at the Receipt of the Exchequer as aforesaid, and the Profits attached thereto respectively, and also for the assessing and charging of all Annuities payable by the Commissioners for Reduction of the National Debt, and the Dividends and Shares of all other An- nuities, payable out of any public Revenue, which are or shall be intrusted for Payment to the Companies of the Bank of England and Sovih Sea respectively; be it enacted, That the respective Companies, Corporations, and Commissioners hav- ing the Distribution or Payment of the said several Annuities, Dividends, and Shares shall from Time to Time, as often as the Payments thereon shall become due, deliver to the respec- tive Commissioners, appointed for the Purpose of assessing 18 The words "Lord High Treasur- repealed by 53 & 54 Viet., e. er of England or of the Commission- 51. ers of her Majesty's" and "the gov- 19 The words "the company of" ernor and company of", have been are repealed by 53 & 54 Vict., e. 51. 1000 ACT OF 5 & 6 VICT., O. 35. the Duties thereon as aforesaid, true and faithful Accounts in Writing, in Books to be provided for that Purpose, of the sev- eral Amounts of such Annuities and Profits attached to the same, vyhich shall be paid to the said Companies respectively, in respect of their Corporate Stock, and of such Dividends and Shares of Annuities as shall be intrusted to any of such Com- panies, Corporations, or Commissioners, for Payment to the Persons, Corporations, and Companies entitled thereto, and the Amount of Duty chargeable thereon at the Rate before di- rected, without Deduction on any Pretence vs^hatever, except as herein is allowed, distinguishing therein the separate Ac- count of each Person, Corporation, Company, and Society en- titled unto any Part, Dividend, or Share of such Annuities respectively, as the same shall stand in the Books of the said respective Companies, or at the said Exchequer, in such Man- ner as that the Part, Dividend, and Share of each Person, Corporation, Company, and Society, of or to such Annuities respectively, may be distinctly charged and assessed to the said Duty; and the said respective Commissioners shall from Time to Time make an Assessment of the Duty which shall appear to be chargeable on the Accounts so delivered to the best of their Judgment and Belief, and shall from Time to Time de- liver the said Books of Assessments, signed by them respective- ly, to the said Commissioners for Special Purposes; and the said Commissioners for Special Purposes shall forthwith cause Two Certificates on Parchment to be made out, under their Hands and Seals, containing the total Amounts of Duty, and of the Annuities, Dividends, and Shares whereon the said Duty shall have been charged contained in each Assessment, together with the proper Title or Description of the Corporation, Com- pany, or Persons having the Distribution or intrusted with the Payment of such Annuities, Dividends, and Shares respective- ly; and they shall transmit one of such Certificates to the re- spective Commissioners for making such Assessments, and the other Certificate to the Head Office for Stamps and Taxes in England. XC. And for the assessing and charging of the Annuities, Dividends, and Shares of Annuities payable by the Governor 1001 and Company of the Bank of Ireland out of the public Eeve- nue of the United Kingdom to Persons not resident in Ireland, be it enacted, That in every Case in which Payment of any such Annuities, Dividends, and Shares of Annuities as last aforesaid shall be demanded or applied for by any Attorney, Agent, Trustee, or other Person for or on the Behalf or for the Use or Benefit of any Person not resident in Ireland, the Person demanding or applying for the Payment of such An- nuities, Dividends, or Shares of Annuities, before receiving the same, shall (whether he shall be required to do so by the said Governor and Directors of the said Bank or not) deliver to the Cashier of the said Bank a Declaration, signed by such Applicant, containing a Statement of the Amount and Descrip- tion of the Stock in respect of which such Annuities, Dividends, or Shares are payable, and the Name and Place of Abode of every Person for whom, or on whose Behalf, or for whose Use or Benefit, such Applicant requires the Payment thereof, and declaring whether or not such last-mentioned Person was resi- dent in Ireland, within the Intent and Meaning of this Act, at the Time when such Annuities, Dividends, and Shares re- spectively became payable; and in every Case in which Pay- ment of any such Annuities, Dividends, or Shares of Annuities shall be demanded or applied for by any Person for or on the Behalf of any other Person, under or by virtue of any Letter or Power of Attorney, or other delegated Authority, the said Governor and Directors, or the Cashier or other Officer of the said Bank, having the Payment of any such Annuities, Divi- dends, or Shares of Annuities, shall, before paying the same, require such Declaration and Statement to be made and de- livered as herein-bef ore directed ; and if the Person demanding or applying for such Payment shall refuse to make or sign and deliver such Declaration and Statement on being required to make and deliver the same as aforesaid, the Person for whom or on whose Behalf he shall demand or apply for such Pay- ment shall be deemed to be not resident in Ireland, and such Annuities, Dividends, or Shares of Annuities shall be charged 1002 ACT OP 5 & 6 VICT., C. 35. accordingly with the Duties granted by this Act: Provided always, that no Person (other than a Member of either House of Parliament entitled to be exempted from the Duties of As- sessed Taxes under the Provisions in that Behalf contained in the Acts relating to the said last-mentioned Duties) tjhall be deemed to be resident in Ireland^ within the Intent and Mean- ing of this Act, who shall have been absent from Ireland, at one Time or several Times, for a Period equal in the whole to Six Months or more during the Space of One Year immedi- ately preceding the Day on which such Annuities, Dividends, and Shares shall respectively have become payable.*" XCI. And be it enacted. That whenever it shall appear by any such Declaration or Statement as aforesaid that any such Annuities, Dividends, or Shares of Annuities are payable by the said Governor and Company of the Bank of Ireland, to or for the Use or Benefit of any Person not resident in Ireland, and also whenever any Person applying for Payment of any such Annuities, Dividends, or Shares of Annuities shall refuse to make or sign and deliver such Declaration and Statement, on being required to make and deliver the same as aforesaid, the Commissioners herein-before appointed for that Purpose shall assess and charge the Duties hereby granted upon and in re- spect of all such Annuities, Dividends, and Shares of Annui- ties, and shall make out and transmit their Certificates of such Assessments in lilce Manner as is herein-before provided with respect to the Assessments to be made by the Commissioners appointed for assessing and charging the Duties on Annuities payable out of the Revenue of the United Kingdom in Eng- land; and in all other Cases where any such Annuities, Divi- dends, or Shares of Annuities shall be payable by the said Governor and Company to or for the Use or Benefit of any Person not resident in Ireland, but which shall not be assessed and charged by the said Commissioners in the Manner herein- before directed, by reason of the Fact of such Nonresidence not having been made to appear to them in manner aforesaid, such Annuities, Dividends, and Shares which have been re- 50 Repealed by 37 & 38 Vict., c. 96. ACT OF 5 & 6 VICT., C. 35. 1003 •ceived or become payable in the preceding Year shall be ac- counted for in Great Britain by the Person entitled thereto, or beneficially interested therein, and shall be charged and assessed under the Eules and Kegulations of Schedule (D.) of this Act, whether the same shall be received in Great Britain -or not.^^ XCII. And be it enacted, That if any Person shall receive ■of the Governor and Company of the Bank of Ireland any Annuity, Dividend, or Share of Annuity payable out of the public Revenue of the United Kingdom, for or on the Behalf •of or for the Use or Benefit of any Person not resident in Ireland, without previously delivering to the Cashier of the ■said Bank the Declaration and Statement by this Act directed to be delivered in such Case, or if any Person shall make, sign, ■or deliver any Declaration or Statement which shall not truly set forth the Name and Place of Residence of the Person, and ■of every Person for whom, or on whose Behalf, or for whose Use or Benefit, he shall apply for Payment of any such An- nuity, Dividend, or Share of Annuity as aforesaid, the Person who shall neglect or omit to deliver such Declaration and State- ment as aforesaid, or who shall make, sign, or deliver any un- true Declaration or Statement, shall be liable to the Payment to Her Majesty of Treble the Amount of the Duty chargeable on such Annuity, Dividend, or Share of Annuity; and if any Person shall wilfully and fraudulently omit to deliver such Declaration and Statement, or shall wilfully make, sign, or de- liver any false Declaration or Statement, or shall make or practice any fraudulent Contrivance or Device whatever, with Intent to defraud Her Majesty of the Duty chargeable under this Act on any such Annuity, Dividend, or Share of Annuity as aforesaid, he shall forfeit the Sum of One hundred Pounds, over and above Treble the Amount of the said Duty.^^ XCIII. And be it enacted. That the respective Corporations, Companies, and Persons entitled unto such Annuities and Profits attached thereto, or intrusted with the Payment of the Annuities, Dividends, or Shares of such public Annuities as 21 Repealed by 37 & 38 Vict., c. 28 Repealed by 37 & 38 Vict., c. 96. 96. 1004 ACT OF 5 & 6 VICT., C. 35. are herein-tefore described, shall, on Notice of the Amount of each Assessment, from Time to Time to be made as aforesaid (which Notice shall be given from Time to Time, as and when, the Annuities, Dividends, and Shares aforesaid shall become payable, and before Payment thereof), set apart and retain the Amount of Duty so assessed for the Purposes of this Act;. and every such setting apart and retaining of the said Duties- shall be deemed a Payment thereof by and on the Behalf of the- Persons, Corporations, and Companies entitled unto the said Annuities, Dividends, and Shares respectively; and all Per- sons, Corporations, and Companies entitled to such Annuities or Profits attached thereto or to any Part thereof, or to such Dividends or Shares of Annuities as aforesaid, are hereby re- quired, on Receipt of the Eesidue of the said Annuities, Prof- its, Dividends, and Shares, over and above the Duty so assessed,, to allow such Payments in respect of the said Assessments;. and the Corporations and Persons having the Distribution of such Annuities, or intrusted with such Payments, shall be and. are hereby acquitted and discharged of so much Money, as. if the same had actually been paid unto the Persons to whom such Annuities, Profits, Dividends, and Shares did or might, belong, or were by Law payable. XCIV. And be it enacted. That all Monies so set apart at, the Bank of England^ the Bank of Ireland^ and the South Sea House respectively,'^* and by the Commissioners for the Ee- duction of the Naitional Debt, as before directed, shall be pai4 from Time to Time into the Account to be kept at the Bank of England with the Receiver General of Stamps and Taxes,, as herein-after directed, accompanied with a Certificate of the Amount of the Assessment under which the same shall be so- paid, under the Hands of Two or more of the Commissioners, making such Assessment; and the Governor and Company of the Bank oi England shall also cause the Amount of such As- sessment as shall from Time to Time be charged on the Trad- ing Profits of the said Company to be paid into the said Ac- count. 28 The words "the Bank of Ire- spectively", have been repealed by land and the South Sea House re- 37 & 38 Viet., c. 96. ACT OP 5 & 6 VICT., C. 35. 1005 XCV. Provided always, and be it enacted. That in respect of any of the Annuities, Dividends and Shares of Annuities, ■chargeable under Schedule (C.) by the respective Commis- sioners for those Purposes, it shall not be required of them to make, an Assessment for any Amount or Payment, v?here the half-yearly Payment on such Annuities, Dividends, or Shares shall not. amount to Fifty Shillings, but that the Annui- ties, Dividends, and Shares vfhereof the half-yearly Payment ■shall not amount to Pifty Shillings shall be accounted for and charged under the Third Case of Schedule (D.) by which Profits of an uncertain annual Value are directed to be charged : Provided also, that no Person shall be required to return any Statement of the Profits of such Annuities, Dividends or Shares, the half-yearly Payment whereof shall amount to Pifty Shillings or more, and which are herein-before directed to be assessed in manner aforesaid, or be liable to any Penalty for not returning the same, but all such Dividends and Shares whereof the half-yearly Payment shall not amount to Fifty Shillings, and which shall be paid without such Assessment, shall be duly returned in the Manner before directed, under the Penalty before contained. XCVI. And be it enacted. That every Person (other than the Governor and Company of the Bank of England, the Di- rectors of the Hast India Company, and the Commissioners for the Reduction of the ISTational Debt,) intrusted with the Pay- ment of Annuities, or any Dividends or Shares of Annuities, payable out of the public Revenue of any Colony or Settlement belonging to the Crown of the United Kingdom, to any Per- sons, Corporations, or Companies in Great Britain, or acting therein as Agent, or in any other Character before described, shall, without further Notice or Demand thereof, deliver or cause to be delivered into the Head Office for Stamps and Taxes in England an Account in Writing containing their Names and Residences, and a Description of the Annuities, Dividends, and Shares intrusted to them for Payment, within One Calendar Month after the same shall have been required by public Notice in the London Gazette, and shall also, on De- mand by the Inspector authorized for that Purpose by the 1006 ACT OF 5 & 6 VICT., C. 35. Commissioners of Stamps and Taxes, deliver or cause to be- delivered to him, for the Use of the said Commissioners for Special Purposes, true and perfect Accounts of the Amount of Annuities, Dividends, and Shares payable by them respective- ly; and the said Commissioners for Special Purposes shall make an Assessment thereon under Schedule (C.) at the Eate before prescribed, subject to Diminution on occasion of any Exemptions to be allowed by the said Commissioners for Spe- cial Purposes, giving Notice of the Amount thereof to the re- spective Persons intrusted with such last-mentioned Payments, who shall respectively pay the Duty on the said Annuities,. Dividends, and Shares, on behalf of the Persons, Corporations, and Companies entitled unto the same, out of the Monies in. their Hands; and they shall be acquitted of such Payments in like Manner, and the like Proceedings in all respects shall be had under the said Commissioners for Special Purposes, as are before directed in respect of Annuities payable out of the public Revenue of the United Kingdom: Provided always,^ that the Persons intrusted with such Payment shall from Time to Time pay the Duty so assessed thereon into the Bank of England J to the Account to be kept at the Bank of England as aforesaid with the Receiver General of Stamps and Taxe:, and shall be answerable for such Payment, and which Duty so assessed shall, in default of such Payment, be recoverable against the Persons respectively intrusted with such Payments as other Duties charged on the Parties may be recovered against them; and if any Person intrusted with the Payment of any such last-mentioned Annuities, or any Dividends or Shares thereof, in the Manner herein mentioned, or acting therein as Agent, or in any other Character herein described, shall neg- lect or refuse to deliver an Account of his Name and Residence in the Manner herein directed, or, after Demand, shall neglect or refuse to deliver an Account as aforesaid of the Amount of such Annuities, Dividends, and Shares as he is intrusted with the Payment of, or in the Payment of which he shall act as Agent, or in any other Character herein described, he shall forfeit the Sum of One hundred Pounds, over and above the Duty chargeable on such Annuities, Shares, or Dividends. ACT OF 5 & 6 VICT., C. 35. 1007 XCVII. And be it enacted, That any Interest payable out of the public Eevenue on Securities issued or to be issued at the Exchequer or other public Office, by -whatever Names such Securities shall be called, shall be charged to the said Duties under the Eules contained in Schedule (C.) by the Commis- sioners for assessing the Profits of Offices in the said Ex- chequer or other Office aforesaid at which the same shall be made payable, and the Interest payable by the East India Com- pany on the Bonds issued or to be issued by them shall be charged to the said Duties under the like Rules by the Commis- sioners herein-before appointed for that Purpose, which said Commissioners respectively shall execute this Act, in relation to the Profits arising from such Securities and Bonds as afore- said, in like Manner as the Commissioners appointed by this Act are empowered to assess the Profits arising from Annui- ties payable out of the public Eevenue in other Cases ; and the said Commissioners respectively hereby authorized to execute this Act in relation to such Securities and Bonds as aforesaid, shall appoint Assessors and Collectors of the said Duties aris- ing from such Securities and Bonds from and amongst the Officers intrusted with the Payment or Discharge of such Secu- rities and Bonds, who shall respectively at the Time of Pay- ment or Discharge thereof compute the Duty thereon, and after such Computation shall enter the same in a Certificate of Assessment, and certify the same to the proper Officer ap- pointed for the Payment or Discharge of such Securities and Bonds, which Officer is hereby empowered to stop and detain the said Duty, and to pay the same into the Bank of England to the Credit of the Eeceiver General of Stamps and Taxes, in discharge of such Assessment; and every Person receiving or purchasing any such Security or Bond in circulation, with current Interest thereon, shall be entitled and is hereby em- powered to deduct from such Interest the Proportion of Duty which will become chargeable thereon, in like Manner and under the like Powers and Penalties as may be done in other Cases of Payment of Interest, and as if such current Interest were then due and charged to the said Duty ; and the like Com- putation and Assessment shall be made whenever a new Se- 1008 ACT OF 5 & 6 VICT., C. 35. curity or Bond shall he issued in discharge of any former Se- curity or Bond, with Interest, or in discharge of Interest due on any former Security or Bond ; and the Person receiving such new Security or Bond in exchange for any former Security or Bond, with Interest, or for such Interest, shall pay to the prop- er Officer at the Time of receiving such new Security or Bond the full Duty computed on the Interest payable on the said form- er Security or Bond. XCVIII. Provided always, and be it enacted, That all Claims of Exemption under any of the Rules contained in Schedule (C.) from the said Duties on Annuities, Dividends and Shares of Annuities, payable out of the Bevenue of the United Kingdom, shall be made to the Commissioners for Special Purposes at the Head Office for Stamps and Taxes in England, according to the following Rules; videlicet, First. — Every Claim shall be made in Writing, in such Form as the Commissioners of Stamps and Taxes shall direct, and the said Commissioners for Special Purposes shall require the same to be verified on the Affidavit of every such Person as they shall think necessary, such Affidavit to be made as before directed in all Cases cognizable before the said Com- missioners, and they shall have Authority to demand and re- quire, from every such Person as they shall think proper to be examined touching such Claim, true Answers upon Oath, to be made as before directed, to all such Questions as they shaU think material in such Claim: Second. — Whenever the Commissioners for Special Purposes shall have allowed any such Exemption, they shall give an Order for Payment of the Sums retained for the Duties on such Annuities, Dividends and Shares, in respect of which they shall have allowed such Exemption, to the respective Claimants, or to the Attornies or Agents who shall have been authorized to receive the said Annuities, Dividends and Shares, on behalf of the said Claimants; and such Payment shall be made in like Manner as is herein-before provided with re- spect to Allowances to be granted under !N"umber V. of Sched- ule (A.) of this Act. XCIX. And be it enacted, That if any Person shall, with ACT OF 5 & 6 VICT., 0. 35. 1009 Intent to defraud Her Majesty, falsely or fraudulently make any Claim to be exempted, either in his own Behalf or any other, from the Duty charged on such Annuities, or any Divi- dends or Shares thereof, contrary to the Intent of this Act, every such Person shall forfeit the Sum of One hundred Pounds, and if such Claim shall be made by any Person in his own Behalf he shall moreover be liable to be assessed in Treble the Duty to be charged on the said Annuities and Shares. C. And be it enacted. That the Duties hereby granted, con- tained in the Schedule marked (D.), shall be assessed and charged under the following Pules, which Rules shall be deemed and construed to be a Part of this Act, and to refer to the said last-mentioned Duties, as if the same had been in- serted under a special Enactment, Schedule (D.) The said last-mentioned Duties shall extend to every De- scription of Property or Profits which shall not be contained in either of the said Schedules (A.), (B.), or (C), and to every Description of Employment of Profit not contained in Schedule (E.), and not specially exempted from the said re- spective Duties, and shall be charged annually on and paid by the Persons, Bodies Politic or Corporate, Fraternities, Fel- lowships, Companies, or Societies, whether Corporate or not Corporate, receiving or entitled unto the same, their Executors, Administrators, Successors, and Assigns respectively. Rules for ascertaining the said last-mentioned Duties in the particular Cases herein mentioned. First Case. — Duties to be charged in respect of any Trade, Manufacture, Adventure, or Concern in the Nature of Trade, not contained in any other Schedule of this Act. Rules. First. — The Duty to be charged in respect thereof shall be computed on a Simi not less than the full Amount of the Bal- Foster Income Tax. — 64. 1010 ACT OF 5 & 6 VICT., C. 35. anee of the Profits or Gains of such Trade, Manufacture, Ad- venture, or Concern upon a fair and just Average of Three Years, ending on such Day of the Year immediately preceding the Year of Assessment on which the Accounts of the said Trade, Manufacture, Adventure, or Concern shall have been, usually made up, or on the Fifth Day of April preceding the Year of Assessment, and shall be assessed, charged, and paid without other Deduction than is herein-after allowed: Pro- vided always, that in Cases where the Trade, Manufacture,. Adventure, or Concern shall have been set up and commenced within the said Period of Three Years, the Computation shall be made for One Year on the Average of the Balance of the Profits and Gains from the Period of first setting up the same: Provided also, that in Cases where the Trade, Manu- facture, Adventure, or Concern shall have been set up and commenced within the Year of Assessment, the Computation, shall be made according to the Rule in the Sixth Case of this. Schedule : Second. — The said Duty shall extend to every Person, Body Politic or Corporate, Fraternity, Fellowship, Company, or So- ciety, and to every Art, Mystery, Adventure, or Concern car- ried on by them respectively, in Great Britain or elsewhere, as- aforesaid; except always such Adventures or Concerns on or about Lands, Tenements, Hereditaments, or Heritages as are mentioned in Schedule (A.), and directed to be therein, charged : Third. — In estimating the Balance of Profits and Gains, chargeable under Schedule (D.), or for the Purpose of assess- ing the Duty thereon, no Sum shall be set against or deducted from, or allowed to be set against or deducted from, such Prof- its or Gains, on account of any Sum expended for Eepairs of Premises occupied for the Purpose of such Trade, Manufac- ture, Adventure, or Concern, nor for any Sum expended for the Supply or Eepairs or Alterations of any Implements, Uten- sils, or Articles employed for the Purpose of such Trade, Manu- facture, Adventure, or Concern, beyond the Sum usually ex- pended for such Purposes according to an Average of Three Years preceding the Year in which such Assessment shall be 101.1 made; nor on account of Loss not connected with or arising out of such Trade, Manufacture, Adventure, or Concern; nor on account of any Capital withdrawn therefrom; nor for any Sum employed or intended to be employed as Capital in such Trade, Manufacture, Adventure, or Concern; nor for any Capital employed in Improvement of Premises occupied for the Purposes of such Trade, Manufacture, Adventure, or Con- cern; nor on account or under Pretence of any Interest which might have been made on such Sums if laid out at Interest; nor for any Debts, except bad Debts proved to be such to the Satisfaction of the Commissioners respectively; nor for any average Loss beyond the actual Amount of Loss after Adjust- ment; nor for any Sum recoverable under an Insurance or Contract of Indemnity: Pourth. — In estimating the Amount of the Profits and Gains arising as aforesaid no Deduction shall be made on account of any annual Interest, or any Annuity or other annual Pay- ment, payable out of such Profits or Gains. Second Case. — The Duty to be charged in respect of Pro- fessions, Employments, or Vocations, not contained in any other Schedule of this Act. Rules. First. — The said Duty on Employments shall be construed to extend to every Employment by Retainer in any Character whatever, whether such Retainer shall be annual, or for a longer or shorter Period; and to all Profits and Earnings of whatever Value, subject only to such Exemptions as are herein- after granted: Second. — The Duty to be charged shall be computed at a Sum not less than the full Amount of the Balance of the Prof- its, Gains, and Emoluments of such Professions, Employments, or Vocations (after making such Deductions, and no other, as by this Act are allowed,) within the preceding Year,^* end- **The words "within the preced- 34, § 48, quoted infra, which pro- ing year" have been repealed, at vided that the duty must be comput- least by implication, by the Income ed upon a fair and just average of Tax Act of 1853, 16 & 17 Vict., c. three years. 1012 ing as in the First Case, to be paid on the actual Amount of such Profits or Gains, without any Deduction, subject to the like Provisions as are made in the First Case in respect of the Period of Average, in the Cases of setting up and commencing such Profession, Employment, or Vocation within the Period herein limited: Third.— The Third and Fourth Eules in the First Case shall also extend to the Profits arising under the Second Case, as far as they are applicable. Rules applying to both the preceding Cases. First. — In estimating the Balance of the Profits or Gains to be charged according to either of the First or Second Cases, no Sum shall be set against or deducted from, or allowed to be set against or deducted from such Profits or Gains, for any Dis- bursements or Expences whatever, not being Money wholly and exclusively laid out or expended for the Purposes of such Trade, Manufacture, Adventure, or Concern, or of such Profession, Employment, or Vocation; nor for any Disbursements or Ex- pences of Maintenance of the Parties, their Families or Estab- lishments; nor for the Pent or Value of any Dwelling House or domestic Ofiices, or any Part of such Dwelling House or domestic Ofiices, except such Part thereof as may be used for the Purposes of such Trade or Concern, not exceeding the Pro- portion of the said Kent or Value herein-after mentioned; nor for any Sum expended in any other domestic or private Pur- poses, distinct from the Purposes of such Trade, Manufacture, Adventure, or Concern, or of such Profession, Employment, or Vocation : Second. — The Computation of the Duty to be charged in respect of any Trade, Manufacture, Adventure, or Concern, or any Profession, whether carried on by any Person singly or by any One or more Persons jointly, or by any Corporation, Com- pany, Fraternity, or Society, shall be made exclusive of the Profits or Gains arising from Lands, Tenements, or Heredita- ments occupied for the Purpose of such Profession, Trade, Manufacture, Adventure, or Concern: Third. — The Computation of Duty arising in respect of any ACT OF 5 & 6 VICT., C. 35. 1013 Trade, Manufacture, Adventure, or Concern, or any Profession, carried on by Two or more Persons jointly, shall be made and stated jointly and in one Sum, and separately and distinctly from any other Duty chargeable on the same Persons, or either or any of them; and the Eeturn of the Partner who shall be first named in the Deed, Instrument, or other Agreement of Copartnership (or where there shall be no such Deed, Instru- ment, or Agreement, then of the Partner who shall be named singly, or with Precedence to the other Partner or Partners, in the usual Name, Stile, or Firm of such Copartnership, or, where such precedent Partner shall not be an acting Partner, then of the precedent acting Partner,) and who shall be resi- dent in Oreat Britain, (and who is hereby required, under the Penalty herein contained for Default in making any Return required by this Act, to make such Eeturn on behalf of him- self and the other Partner or Partners whose Names and Resi- dences shall also be declared in such Return,) shall be sufficient Authority to charge such Partners jointly: Provided always, that where no such Partner shall be resident in Oreat Britain, then the Statement shall be prepared and delivered by their Agent, Manager, or Factor resident in Great Britain, jointly for such Partners, and such joint Assessment shall be made in the Partnership Name, Stile, Firm, or Description; and no separate Statement shall be allowed in any Case of Partnership, except for the Purpose of the Partners separately claiming an Exemption as herein directed, or of accounting for separate Concerns; provided that if any Partner being entitled to Ex- emption shall declare the Proportion of his Share in such Part- nership, Trade, Profession, or Concern, in order to a separate . Assessment for the above Purpose, it shall be lawful to charge such Partner separately; but if no such Claim be made, then such Assessment shall be made jointly, according to the Amount of the Profits and Gains of such Partnership.^* Provided also,, that any joint Partner in such Trade, Profession, or Concern,, 85 The words beginning ''except been repealed by the Finance Act of for the purpose of the partners Sep- 1907, 7 Edw. VII, c. 13, % 30 (li, arately," to and including "profits and third schedule thereto, and gains of such partnership," have 1014 ACT OF 5 & 6 VICT., C. 35. which shall have been already returned by such precedent Part- ner as aforesaid, may return his Name and Place of Abode, and that he is such Partner, without returning the Amount of Duty payable in respect thereof, unless the Commissioners respective- ly shall think proper to require a further Return, in which Case it shall be lawful for such Commissioners to require from every such Partner the like Return, and the like Information and Evidence, as they are hereby entitled to require from the precedent Partner: Pourth. — If amongst any Persons engaged in any Trade, Manufacture, Adventure, or Concern, or in any Profession, in Partnership together, any Change shall take place in any such Partnership, either by Death, or Dissolution of Partnership as to all or any of the Partners, or by admitting any other Part- ner therein, before the Time of making the Assessment, or with- in the Period for which the Assessment ought to be made under this Act, or if any Person shall have succeeded to any Trade, Manufacture, Adventure, or Concern, or any Profession, with- in such respective Periods as aforesaid, the Duty payable in respect of such Partnership, or any of such Partners, or any Person succeeding to such Profession, Trade, Manufacture, Ad- venture, or Concern, shall be computed and ascertained accord- ing to the Profits and Gains of such Business derived during the respective Periods herein mentioned, notwithstanding such Change therein or Succession to such Business as aforesaid, unless such Partners, or such Person succeeding to such Busi- ness as aforesaid, shall prove, to the Satisfaction of the respec- tive Commissioners, that the Profits and Gains of such Busi- ness have fallen short or will fall short from some specific Cause, to be alleged to them, since such Change or Succession took place, or by reason thereof: Fifth. — Every Statement of Profits to be charged under this Schedule shall include every Source so chargeable on the Person delivering the same on his own Account, or on account of any other Person, and every Person shall be chargeable in respect of the whole of such Duties in one and the same Division, and by the same Commissioners, (except in Cases where the same Person shall be engaged in different Partnerships, or the same ACT OF 5 & 6 VICT., C, 35. 1015 Person shall be engaged in different Concerns relating to Trade or Manufacture in divers Places, in each of which Cases a sep- arate Assessment shall be made in respect of each Concern at the Place where such Concern if singly carried on ought to be ■charged as herein directed,) and every such Statement on the Behalf of any other Person for which such Person shall be chargeable as acting in any of the Characters before described, or on the Behalf of any Corporation, Fellowship, Fraternity, Company, or Society, shall include every Source chargeable as last aforesaid, and shall be delivered in that Division where such Person, Corporation, Fellowship, Fraternity, Company, or Society would be chargeable if acting on his or their own Behalf. Third Case. — The Duty to be charged in respect of Profits of an uncertain annual Value not charged in Schedule (A.) First. — The Duty to be charged in respect thereof shall be computed at a Sum not less than the full Amount of the Profits or Gains arising therefrom within the preceding Year, ending as in the First Case, to be paid on the actual Amount of such Profits or Gains, without any Deduction : Second.— The Profits on all Securities bearing Interest pay- able out of the public Revenue (except Securities before direct- ed to be charged under the Rules of Schedule (C), and on all Discounts, and on all Interest of Money, not being annual In- terest, payable or paid by any Person whatever, shall be charged according to the preceding Pule in this Case : Third. — Whenever the Commissioners shall, on Examina- tion, find that any Lands occupied by a Dealer in Cattle, or by a Dealer in or Seller of Milk, (which Lands shall have been estimated and charged on the Kent or annual Value,) are not sufficient for the Keep and Sustenance of the Cattle brought on the said Lands, so that the Pent or annual Value of the said Lands cannot afford a just Estimate of the Profits of such Deal- er, it shall be lawful for the said Commissioners to require a Return of such Profits, and to charge such further Sum there- on as, together with the Charge in respect of the Occupation of the said Lands, shall make up the full Sum wherewith such 1016 ACT OF 5 & 6 VICT., C. 35, Trader ought to be charged in respect of the like Amount of Profits charged according to the First Eule in this Case. Fourth Case. — The Duty to be charged in respect of Interest arising from Securities in Ireland or in the British Plantations in America, or in any other of Her Majesty's Dominions out of Great Britain, and Foreign Securities, except such Annuities, Dividends, and Shares as are directed to be charged under Schedule (C.) of this Act. The Duty to be charged in respect thereof shall be computed on a Sum not less than the full Amount of the Sums (so far as the same can be computed) which have been or will be received in Great Britain in the current Year, vdthout any Deduction or Abatement. Fifth Case. — The Duty to be charged in respect of Posses- sions in Ireland, or in the British Plantations in America, or in any other of Her Majesty's Dominions out of Great Britain, and Foreign Possessions. The Duty to be charged in respect thereof shall be computed on a Sum not less than the full Amount of the actual Sums annually received in Great Britain, either for Remittances from thence payable in Great Britain, or from Property imported from thence into Great Britain, or from Money or Value re- ceived in Great Britain, and arising from Property which shall not have been imported into Great Britain, or from Money or Value so received on Credit or on Account in respect of such Eemittances, Property, Money, or Value brought or to be brought into Great Britain, computing the same on an Average of the Three preceding Years, as directed in the First Case, without other Deduction or Abatement than is herein-before allowed in such Case. Sixth Case. — The Duty to be charged in respect of any an- nual Profits or Gains not falling under any of the foregoing Rules, and not charged by virtue of any of the other Schedules contained in this Act. The Nature of such Profits or Gains, and the Grounds on which the Amount thereof shall have been computed, and the Average taken thereon (if any), shall be stated to the Commis- sioners, and the Computation shall be made either on the ACT OF 5 & 6 VICT., C. 35. lOlT Amount of the full Value of the Profits and Gains received annually, or according to an Average of such Period greater or less than One Year, as the Case may require, and as shall be directed by the said Commissioners; and such Statement and Computation shall be made to the best of the Knowledge and Belief of the Person in receipt of the same or entitled thereto. CI. Provided alvs^ays, and be it enacted, That nothing here- in contained shall be construed to restrain any Person carrying on, either solely or in Partnership, Two or more distinct Trades, Manufacturers, Adventures, or Concerns in the Nature of Trade, the Profits whereof are made chargeable under the Rules of Schedule (D.), from deducting or setting against the Prof- its required in One or more of the said Concerns the Excess of the Loss sustained in any other of the said Concerns over and above the Profits thereof, in such Manner as may be done under this Act where a Loss shall be deducted from the. Profits of the same Concern, or to restrain any of such Persons from making separate Statements thereof, or to restrain any such Person renting a Dwelling House, Part whereof shall be used by him for the Purposes of any Trade or Concern or any Profession hereby charged, from deducting or setting off from the Profits of such Trade, Concern, or Profession such Sum not exceeding Two Third Parts of the Kent hond fide paid for such Dwelling House, with the Appurtenances, as the said respective Commis- sioners shall on due Consideration allow; and the respective Commissioners shall have Authority to allow such Deductions as in other Cases, and to assess such Person accordingly. GIL And be it enacted. That upon all Annuities, yearly Interest of Money, or other annual Payments, whether such Payments shall be payable within or out of Great Britain, eith- er as a Char<^e on any Property of the Person paying the same by virtue of any Deed or Will or otherwise, or as a Reservation thereout, or as a personal Debt or Obligation by virtue of any Contract, or whether the same shall be received and payable half-yearly or at any shorter or more distant Periods, there shall be charged for every Twenty Shillings of the annual Amount thereof the Sum of Seven-pence, without Deduction, according to and under and subject to the Provisions by which 1018 ACT OB' the Duty in the Third Case of Schedule (D.) may be charged; provided that in every Case where the same shall be payable out of Profits or Gains brought into charge by virtue of this Act no Assessment shall be made upon the Person entitled to such Annuity, Interest, or other annual Payment, but the whole of such Profits or Gains shall be charged with Duty on the Person liable to such annual Payment, without distinguishing such annual Payment, and the Person so liable to make such annual Payment, whether out of the Profits or Gains charged with Duty, or out of any annual Payment liable to Deduction, or from which a Deduction hath been made, shall be authorized to deduct out of such annual Payment at the Rate of Seven- pence for every Twenty Shillings of the Amount thereof, and the Person to whom such Payment liable to Deduction is to be made shall allow such Deduction, at the full Rate of Duty here- by directed to be charged, upon the Receipt of the Residue of such Money, and under the Penalty herein-after contained, and the Person charged to the said Duties having made such Deduction shall be acquitted and discharged of so much Money as such Deduction shall amount unto, as if the Amount there- of had actually been paid unto the Person to whom such Pay- ment shall have been due and payable ; but in every Case where any annual Payment as aforesaid shall, by reason of the same being charged on any Property or Security in Ireland, or in the British Plantations, or in any other of Her Majesty's Do- minions, or on any Poreign Property or Foreign Security, or otherwise, be received or receivable without any such Deduc- tion as aforesaid, and in every Case where any such Payment shall be made from Profits or Gains not charged by this Act, or where any Interest of Money shall not be reserved or charged or payable for the Period of One Year, then and in every such Case there shall be charged upon such Interest, An- nuity, or other annual Payment as aforesaid the Duty before mentioned, according to and under and subject to the several and respective Provisions by which the Duty in the Third Case of Schedule (D.) may be charged: Provided always, that wlicre any Creditor on any Rates or Assessments not chargeable by this Act as Profits shall be entitled to such Interest, it shall ACT OF 5 & 6 VICT., C. 35. 1019 be lawful to charge the proper Officer having the Management ■of the Accounts with the Duty payable on such Interest, and every such Officer shall be answerable for doing all Acts, Mat- ters, and Things necessary to a due Assessment of the said Duties, and Payment thereof, as if such Eates or Assessments •were Profits chargeable under this Act, and such Officer shall be in like Manner indemnified for all such Acts, as if the said Eates and Assessments were chargeable. cm. And be it enacted, That if any Person shall refuse to allow any Deduction authorized to be made by this Act out of any Payment of annual Interest of Money lent, or other Debt bearing annual Interest, whether the same be secured by Mort- gage or otherwise, he shall forfeit for every such Offence Treble the Value of such Principal Money or Debt ; and if any Person shall refuse to allow any Deduction authorized to be made by this Act out of any Eent or other annual Payment mentioned in the Ninth and Tenth Eules of E"o. IV. Schedule (A.), or out of any Annuity or annual Payment mentioned in Schedules (C.) or (E.), or in the next preceding Clause, save such annual Interest as aforesaid, every such Person shall for- feit the Sum of Fifty Pounds; and all Contracts, Covenants, and Agreements made or entered into, or to be made or entered into, for Payment of any Interestj Eent, or other annual Pay- ment aforesaid, in full, without allowing such Deduction as aforesaid, shall be utterly void. CIV. And be it enacted. That whenever it shall be proved, to the Satisfaction of the said respective Commissioners acting in the District where any Person making the Application shall reside, that any Interest of Money, Annuity, or other annual Payment shall be annually paid out of the Profits and Gains bond fide accounted for and charged by virtue of this Act at the Eate and according to the Eules specified in Schedule (D.), without any Deduction on account thereof, it shall be lawful for such Commissioners to grant a Certificate thereof, under the Hands of any Two of them, in such Form as shall be provided under the Authority of this Act, which Certificate shall entitle the Person so assessed, upon Payment of such Interest, Annui- ty, or other annual Payment, to abate and deduct so much there- 1020 ACT OF 5 & 6 VICT., C. 35. of as a like Rate on such Interest, Annuity, or other annual Payment would amount unto ; and every Person to whom such Interest, Annuity, or other annual Payment shall be paid shall allow such Deductions and Payments, upon Receipt of the Residue of such Interest, Annuity, or other annual Payment, and the Person paying the same shall he acquitted and dis- charged of so much Money as a like Rate thereon would amount unto, as if the same had actually been paid unto the Person to whom such Interest, Annuity, or other annual Payment shall have been due and payable; provided no such Certificate shall be required where such Payments are to be made out of the Profits or Gains arising from- Lands, Tenements, Heredita- ments, or Heritages, as before mentioned, or of any Office or Employment of Profit, or out of any Annuity, Pension, Stipend, or any Dividend or Share in such public Annuities as are here- in mentioned, but such Deductions may be made without having obtained such Certificate. CV. Provided always, and be it enacted. That any Corpora- tion, Fraternity, or Society of Persons, and any Trustee for charitable Purposes only, shall be entitled to the same Exemp- tion in respect of any yearly Interest or other annual Payment chargeable under Schedule (D.) of this Act, in so far as the same shall be applied to charitable Purposes only, as is herein- before granted to such Corporation, Eraternity, Society, and Trustee respectively in respect of any Stock or Dividends chargeable under Schedule (C.) of this Act, and applied to the like Purposes; and such Exemption shall be allowed by the Commissioners for Special Purposes, on due Proof before them, and the Amount of the Duties which shall have been paid by such Corporation, Fraternity, Society or Trustee in respect of such Interest or yearly Payment, either by Deduction from the same or otherwise, shall be repaid, under the Order of the said Commissioners for Special Purposes, in the Manner herein- before provided for the Repayment of Sums allowed by tbem, in pursuance of any Exemption contained in the said Schedule (C.) CVI. And bo it enacted, That every Person being a House- holder (except Persons engaged in any Trade, Manufacture, ACT OF 5 & 6 VICT., C. 35. 1021 Adventure, or Concern, or any Profession, Employment, or Vocation,) shall be charged to the said Duties contained in .Schedule (D.) by Commissioners acting for the Parish or Place where his Dwelling House shall be situate; and every Person ongaged in any Trade, Manufacture, Adventure, or Concern, or any Profession, Employment, or Vocation, shall be charge- able by the respective Commissioners acting for the Parish or Place where such Trade, Manufacture, Adventure, or Concern shall be carried on, or where such Profession, Employment, or Vocation shall be exercised, whether such Trade, Manufacture, Adventure, or Concern shall be carried on, or such Profession, Employment, or Vocation shall be exercised, wholly or in part only in Great Britain, or whether such Person shall be engaged in One only or more of such Concerns, except where the same Person shall be engaged in different Concerns, and a Loss from one Concern shall be set off or deducted from the Profits of another Concern; and every Person not being a Householder, nor engaged in any Trade, Manufacture, Adventure, or Con- cern, nor in any Profession, Employment, or Vocation, who shall have any Place of ordinary Residence, shall be charged by the Commissioners acting for the Parish or Place where he shall ordinarily reside; and every Person not herein-before described shall be charged by the Commissioners acting for the Parish or Place where such Person shall reside at the Time of beginning to execute this Act in each Tear by giving such general Notices as are herein mentioned, or shall first come to reside after the Time for giving such general ISTotices; and €very such Charge made in such Parish or Place shall be valid and effecutal, notwithstanding the subseqiient Removal of the Person so charged from the Parish or Place ; and in order that the Place where the said last-mentioned Duties are to be charged may be ascertained, every Person is hereby required, on the Delivery of any List or Statement as aforesaid, at the same Time to deliver a Declaration in Writing signed by him de- claring in what Place he is chargeable, and whether he is en- gaged in any Trade, Manufacture, Adventure, or Concern, or in any Profession, Employment, or Vocation, or not, and if he shall be so engaged in any Trade, Manufacture, Adventure, or 1022 ACT OF 5 & 6 VICT., C. 35. Concern, or any Profession, Employment, or Vocation, also declaring the Place where the same shall be carried on or ex- ercised, and every particular Concern, Profession, or Employ- ment in which he shall be engaged in such Place in Oreat Brit- ain, whether wholly in Oreat Britain, or in part only, as afore- said; provided that where any Trade shall be carried on in Great Britain by the Manufacture of Goods, Wares, or Mer- chandize, the Assessment thereon shall be at the Place of Man- ufacture, although the Sales of such Goods, Wares, or Merchan- dize shall be elsewhere: Provided always, that every Person not being engaged in any Trade, Manufacture, Adventure, or Concern, or in any Profession, Employment, or Vocation, hav- ing Two or more Houses or Places at which he shall be ordinari- ly resident, shall be charged at such of the Parishes or Places wherein the Dwelling House is situate in which he shall be ordinarily resident at the Time of beginning to execute this Act in each Year in manner aforesaid, or in which he shall first come ordinarily to reside after giving such general Notices, as aforesaid : Provided always, that the Duty to be assessed by virtue of this Act, in respect of the Profits or Gains arising from Possessions or Securities in Ireland, upon any Person resident in Great Britain as aforesaid, may be stated to and assessed by the respective Commissioners acting for the respec- tive Places where the Persons receiving or entitled unto the same shall reside; and if the same shall be received by any Agent, Attorney, or Factor, such Agent, Attorney, or Factor shall make such Eetum of the Name and Place of Abode of the Person entitled thereto as is herein required to be made of other Persons of full Age resident in Great Britain, and if the Person entitled thereto shall not be of full Age, or not resident in Great Britain, such Agent, Attorney, or Factor shall be answerable for doing all Acts, Matters, and Things required by this Act to be done in order to the assessing such Profits to the said last-mentioned Duties, and paying the same.** CVII. Provided always, and be it enacted. That Persons holding Offices in Ireland, and residing in Great Britain, and 28 The concluding proviso, which duty to be assessed", has been re- begins "Provided always, that the pealed by 37 & 38 Vict., c. 96. ACT OF 5 & 6 VICT., C. 35. 1023 Persons usually residing in Ireland, and serving in Parliament, who shall or may be exempted from the Duties of Assessed Taxes under the Provisions in that Behalf contained in the Acts relating to the said last-mentioned Duties, shall, under the like Circumstances under which such Exemptions are to be claimed, be chargeable to the Duties under this Act in like Manner only as Subjects of Her Majesty residing out of Great Britain.^'' CVIII. And be it enacted, That the Duty to be assessed by virtue of this Act in respect of the Profits or Gains arising from Foreign Possessions or Foreign Securities, or in the British Plantations in America, or in any other of Her Majesty's Do- minions, may be stated to and assessed by the respective Com- , missioners acting for the respective Places herein-after men- tioned, videlicet^ London, Bristol, Liverpool and Glasgow, ac- cording to the Eegulations herein-after mentioned, as if such Duty had been assessed upon the Profits or Gains arising from Trade or Manufacture carried on in such Places respectively ; and such Duty shall be stated to and assessed and charged by the Commissioners acting for such of the said Places at or nearest to which such Property shall have been first imported into Greai Britain, or at or nearest to which the Person who shall have received such Remittances, Money, or Value from thence, and arising from Property not imported as aforesaid, shall re- side; and in default of the Owner or Proprietor thereof being- charged, the Trustee, Agent, or Receiver of such Profits or Gains shall be charged for the same, and shall be answerable for the doing all such Acts, Matters, and Things as shall be re- quired by this Act to be done, in order to the assessing such Profits to the Duties granted by this Act, and paying the same, whether the Person to whom the said Profits belong shall be resident in Great Britain or not : Provided always, that when- ever the Produce or the Profits or Gains arising from such Possessions or Securities as last aforesaid shall have been im- ported partly into the Port of London, and partly into any of the Outports of Bristol, Liverpool, or Glasgow, or shall have « Repealed by 37 & 38 Vict., c. 96. 1024 ACT OF 5 & 6 VICT., C. 35. been received by any Person partly in tbe City of London and partly in any of the said Outports, within the Period of making Tip the Account on which the Duty is chargeable by this Act according to the Rules herein contained, the whole of the Duty chargeable in respect of such Produce, Profits, or Gains so im- ported or received shall be assessed and charged by the Commis- sioners acting for the said City of London, and not elsewhere, and as if the whole of the said Produce or the said Profits or Gains arising within the said Period had been imported into or received in London; and whenever such Produce or Profits or Gains arising as aforesaid shall have been within such Period wholly imported into or received at the said Outports of Bristol, Liverpool, and Glasgow, and different Parts thereof shall have been imported into or received at Two or more of such Out- ports, the Duty chargeable thereon shall be assessed and charged at One of such Places only, and in One Account, and at such of the said Places at which the major Part in Value of such Produce or Profits or Gains shall have been so imported or received; provided that the Statements of such Produce, Profits, or Gains shall be delivered to the Commissioners act- ing for each Place at which any Part of the said Produce or Profits or Gains shall have been so imported or received, and transmitted by the respective Commissioners to the Head Office for Stamps and Taxes in England, and the" Commissioners of Stamps and Taxes shall cause all such Statements to be sent to the Commissioners acting for the Place where the Duty thereon shall appear by such Statements to be chargeable ac cording to this Act, who shall accordingly assess the same in One Sum. CIX. And be it enacted. That the Profits arising from the Docks called the London Docks, the East and West India Docks, and Saint Katherine Dock respectively, situate in the County of Middlesex, shall be assessed by the Commissioners acting for the City of London. ex. And be it enacted. That every Person having Two Eesi- dences, or carrying on any Trade or exercising any Profession in different Parishes, Places, or in any Place different from the Place of his ordinary Residence, shall, if required by the respec- c. 35. 1025 tive Commissioners, deliver at each such Parish or Place the like Lists, Declarations, and Statements as he is hereby re- quired to deliver in the Parish or Place where such Person ought to be charged, but shall not be liable to any Double Charge by reason thereof; and all Lists, Declarations, and Statements containing the Amount of Profits chargeable under Schedule (D.) may be delivered to the respective Persons and in manner herein directed, sealed up, if superscribed with the IvTame and Place of Abode of, or Place of exercising the Profes- sion or carrying on Trade by, the Person by whom the same shall have been made. CXI. And be it enacted, That all Statements of Profits and Gains described in Schedule (D.) (except Statements where- on Assessments are to be made by the Commissioners for Special Purposes, as herein-after authorized,) shall be laid before the Additional Commissioners or the Commissioners for General Purposes acting as Additional Commissioners in their respec- tive Districts, who shall appoint Meetings for taking all State- ments then and from Time to Time to be delivered to them into consideration, within a reasonable Time after the Inspector or Surveyor shall have had the Examination of such Statements ; and in case the said Additional Commissioners respectively shall be satisfied that any such Statements have been bond fide made according to the Provisions of this Act, and so as to en- able the Commissioners to charge the respective Persons re- turning the same with the full Duties with which thev ought respectively to be charged on account thereof, and in case no Information shall be given to the said Commissioners of the Insufiiciency thereof, or no Objection shall be made thereto by the Inspector or Surveyor, which he is hereby empowered to make for sufficient Cause, the said Commissioners shall direct an Assessment to be made of the Duties chargeable on such Statement by virtue of this Act. CXII. Provided always, and be it enacted, That where the Surveyor or Inspector shall apprehend the Determination made by the said Commissioners to be contrary to the true Intent and Meaning of this Act, and shall then declare himself dis- satisfied with such Determination, it shall be lawful for him to Foster Income Tax. — 65. 1026 ACT OF 5 & 6 VICT., C. 35. require the said Commissioners to state specially and sign the Case upon which the Question arose, together with their De- termination thereupon; which Case the said Commissioners are hereby required to state and sign accordingly, and to de liver to the said Inspector or Surveyor, to be by him transmit- ted to the Commissioners for General Purposes for the same District, who shall with all convenient Speed return an Answer to the Case so transmitted, with their Opinion thereon sub- scribed; and according to such Opinion the Assessment which shall have been the Cause of such Appeal shall be altered or con- firmed. CXIII. And be it enacted, That in every Instance in which any Person shall have made default in the Delivery of any Statement, such Person not having been otherwise charged to the said last-mentioned Duties, or if the said Additional Com- missioners shall not be satisfied with the Statement delivered by any Person, or any Objection shall be made thereto by the Inspector or Surveyor, (which he is hereby authorized and re- quired to make in Writing, setting forth the Cause thereof, whenever he shall see sufficient Cause,) or the said Commission- ers shall have received, any Information of the Insufiiciency of any Statement, the said Commissioners shall make an Assess- ment on such Person in such Sum as, according to the best of their Judgment, ought to be charged on him by virtue of this Act; which Assessment shall be subject to an Appeal, accord- ing to the Directions herein-after contained. CXIV. And be it enacted, That whenever the Additional Commissioners shall think it proper to refer any Statement to the Commissioners for General Purposes without making any Assessment thereon, it shall be lawful for them so to do on de- livering to the last-mentioned Commissioners the Case in Writ- ing relative to such Statement, as the same shall appear to the said Additional Commissioners, with any Matter in question between them, either as to Law or Fact ; and the said Commis- sioners for General Purposes shall proceed to inquire into the Merits of such Statement, in like Manner as they would have been hereby authorized to do in case the said Additional Com- missioners had made an Assessment on such Statement, and ACT OF 5 & 6 VICT., 0. 35. 1027 the Party charged had appealed against the same, and there- upon an Assessment shall be made according to the Determi- nation of the said Commissioners for General Purposes. CXV. And be it enacted. That the Inspector or Surveyor, being sworn as aforesaid, shall and may at all seasonable Times inspect and examine any Assessment which shall be made by the Additional Commissioners, before the Delivery thereof to the Commissioners for General Purposes, and in case he shall discover any Error in the same which in his Judgment shall require Amendment, he shall certify the same to the said Ad- ditional Commissioners by whom the Assessment shall have been made, and the said Additional Commissioners, upon suf- ficient Cause being shown to them, shall amend the same as in their Judgment the Case shall require. CXVI. And be it enacted, That in every Case where the In- spector or Surveyor shall object to the Amount of the Duty charged by any Assessment made by the Additional Commis- sioners, which he is hereby empowered to do in any Case npon sufficient Cause, he shall state such Objection in Writing to the said Additional Commissioners, who shall thereupon certify the same, together with the Reasons for making such Assess- ment, and any Information they shall have obtained respect- ing the same, to the Commissioners for General Purposes ; and the said Inspector or Surveyor shall also give such Notice there- of to the Party assessed as he is required to do by the said sev- eral Acts relating to the Duties of Assessed Taxes in Cases of Surcharge, in order that the Party so charged may be at liberty to appear before the said Commissioners for General Purposes in support of such Assessment. CXVII. And be it enacted. That the said Additional Com- missioners shall cause Certificates of Assessments to be duly made out, from Time to Time as the same shall be completed,, distinguishing the Ward, Parish, or Place within their respec- tive Districts for which each such Assessment shall be made, which shall contain the. Names and Surnames of the Parties' charged, and the Sums which they respectively ought to pay by virtue of this Act, and shall cause such Certificates to be en- tered in Books provided for that Purpose according to such 1028 ACT OF 5 & 6 VICT., C. 35. Forms as shall be transmitted to them by the Commissioners of Stamps and Taxes; and the said Additional Commissioners shall sign such Assessments, and from Time to Time deliver the same, so entered and signed, to the Commissioners for Gen- eral Purposes, under Cover sealed up, and shall also cause the Statements returned to them by the Parties so assessed, or by the Assessors relating to such Assessments, to be delivered at the same Time, sealed up in the like Manner, to the said Com- missioners for General Purposes ; provided that no Assessment made by Additional Commissioners, or Persons acting as such, shall be delivered to the respective Parties until the Expiration of Fourteen Days after the Assessment, so signed as aforesaid, shall have been delivered to the Commissioners for General Purposes, or the Persons acting as such, and the Inspector or Surveyor shall have had Notice thereof. CXVIII. And be it enacted, That if any Person shall think himself aggrieved by an Assessment made by the said Addition- al Commissioners, or by any Objection to such Assessment made by any Surveyor or Inspector as aforesaid, it shall be lawful for him, on giving Ten Days Notice thereof in Writing to the Inspector or Surveyor, to appeal to the Commissioners for Gen- eral Purposes in the same District where such Assessment was made, who shall hear and determine such Appeal; and the Commissioners for General Purposes shall from Time to Time appoint Days for hearing Appeals as soon after any Assess- ments shall be returned to them by the Additional Commission- ers as conveniently can be done, and the Assessors shall cause ISTotice of the Days so appointed to be given to the respective Appellants, and the Meetings of the Commissioners for the Purpose of hearing Appeals shall be held from Time to Time, within the Time limited by the said Commissioners, with or without Adjournment; and no Appeal shall be received after the Time so limited, except on the Ground of Diminution of Income, as herein mentioned: Provided always, that if any Person shall be prevented, by Absence, Sickness, or other rea- sonable Cause, to be allowed by the said Commissioners, from making or proceeding upon his Appeal within the Time so linaited, it shall be lawful for the said Commissioners to give ACT OF 5 upon the Person v?ho shall have entered into such Contract of Com- position, shall be made by the Commissioners for Special Pur- poses in a Sum eqvial to the aggregate Amount of the said First Year's Assessment, with the said additional Rate thereon ; and it shall not be necessary for such Person to deliver any further List, Declaration, or Statement of Profits described in the said Schedule (D.), during the said Term of Composition: Pro- vided always, that if the Person upon whom such Assessment ■as aforesaid shall have been made shall neglect or refuse to enter into and sign such Contract of Composition within the Time herein limited for that Purpose, the Assessment so made, without the said additional Rate, shall be collected, levied, and recovered in like Manner as any other Assessment made by the Commissioners executing this Act.^® CXLIV. And be it enacted, That the Contract of Composi- tion may be made in the following Form ; videlicet, "WHEREAS an Assessment of the Duties on Profits and Gains chargeable under Schedule (D.) of an Act passed in the Year of Queen Victoria, intituled An Act \^set forth the Title of this Act], hath been duly made by Two of the Commission- ers for Special Purposes acting in the Execution of the said Act, upon A.B. of, &c., in the Sum of for the Year •ending on the Fifth Day of April One thousand eight hundred ^nd forty-three, and the said A.B. is desirous of compounding for the said Duties, as allowed by the said Act, for the Term herein-after mentioned : We, the undersigned, Two of the Commissioners for Special Purposes acting in the Execution of the said Act, have, by virtue and in pursuance of the Power and Authority thereby .given to us in this Behalf, contracted and agreed with the said A.B. for a Composition for the said Duties, chargeable or which «9 Repealed by 37 & 38 Vict., c. 96. 1048 ACT OF 5 & 6 VICT., C. 35. may become chargeable upon him under the said Schedule (D.), during the Term of Three Years, to be computed from the Fifth Day of April One thousand eight hundred and forty-two, and the following are the Terms of such Composition; (that is to say,) The said A. B., his Heirs, Executors, or Administrators, shall well and truly pay to for the Use of Her Majesty, in each and every Year of the said Term, the Sum of (being the Amount of the said Assessment, together with an Ad- dition thereto at and after the Rate of One Shilling for every Twenty Shillings of the Sum assessed as aforesaid) by Four equal quarterly Instalments; {videlicet;) First Instalment, on or before the Twentieth Day of June; Second Instalment, on or before the Twentieth Day of 8ef- ternber; Third Instalment, on or before the Twentieth Day of De- cember; Fourth Instalment, on or before the Twentieth Day of March, in each and every Year of the Term aforesaid : Provided always, that the Instalments now due and payable according to the Tenor of this Contract shall be paid, together with the Instalment, on or before the Day of now next ensuing. Dated this Day of (Signed) (Commissioners for Special Pur- ) poses under the Act Vict. Cap. Witness to the signing) hereof by the said A. B.^ A. B. the Party hereto. Inspector [or Surveyor] of Taxes." And every such Contract of Composition shall be made in Two Parts, which shall be severally signed by Two Commissioners for Special Purposes, and by the Person compounding, the signing whereof by such Person shall be witnessed and attested by the Inspector or Surveyor of the District in which such Per- son shall reside, or be chargeable for the said Duties, and one of such Parts of the said Contract so signed shall be delivered to the Person compounding, and the other Part shall be trans- ACT OF 5 & 6 VICT., C. 35. 104& mitted to the Head Office for Stamps and Taxes in England or Scotland, as the Case may be ; and every such Contract shall be an Authority for the Commissioners for Special Purposes to make an Assessment on the Party compounding for each respec- tive Year of the said Term of Composition in the Sum specified in such Contract as the annual Amount to be paid for such Com- position, and to cause the same to be collected, levied, and paid over at such Times and in such Manner, and by all or any of such Ways and Means, as are herein respectively appointed,, prescribed, or authorized in relation to any other Assessment made by Commissioners acting in the Execution of this Act: Provided always, that whether any such Assessment as herein- before authorized to be made on the Party compounding shall be made or not, the Sum specified in such Contract of Com- position as the annual Amount to be paid by the Party com- pounding, and the several Instalments thereof, when and as they respectively become payable according to the Tenor and Effect of such Contract, shall be a Debt due to the Queen's Maj- esty from the said Party compounding, his Heirs, Executors,. and Administrators, and shall be recoverable by all or any of the Ways or Means by which any such Debt may be recovered, together with full Costs of Suit, and all Charges and Expences attending the same: Provided also, that if any Person who shall have compounded as aforesaid shall die, or become bankrupt. or insolvent, before the Expiration of the said Term of Three Years, his Contract of Composition shall cease and determine on the Fifth Day of April next after his Death, Bankruptcy,, or Insolvency, save and except as to any Instalment of Duty which before the said Day shall have become payable and shall then remain unpaid.^" CXLV. And be it enacted, That if any Person who shall propose to compound for the Duties chargeable under Schedule (D.) of this Act shall wilfully make or deliver any false List,. Declaration, or Statement of Profits or Gains described in the said Schedule, or wilfully conceal or omit to state any of such his Profits or Gains, or any Part or Portion thereof, or any 30 Repealed by 37 & 38 Vict., c. 96. 1050 ACT OF 5 & 6 VICT., C. 35. other Matter or Thing required by this Act to be stated in such List, Declaration, or Statement, or if any Person shall by any fraudulent Means procure an Assessment to be made upon him for a less Amount of the said Duties than he shall be chargeable with, in order to compound thereon, or if any Person shall by any fraudulent Means whatever cause or procure a Contract of Composition to be made or entered into with him for a less Amount of Duty than he ought to be charged with, every Person so offending in any of the Cases aforesaid shall forfeit the Sum of Fifty Pounds, and the Contract of Com- position, if any shall have been made with such Person, shall be void and of no effect, and the Party shall be charged and assessed as if no such Contract had been made : Provided never- theless, that any Sum of Money which may have been paid under or in pursuance of such Contract shall be forfeited to Her Majesty." CXLVI. And be it enacted. That the Duties hereby granted, contained in the Schedule marked (E.) shall be assessed and charged under the following Rules, which Rules shall be deemed and construed a Part of this Act, and to refer to the said last- mentioned Duties, as if the same had been inserted under a special Enactment. Schedule (E.) Rules for charging the said Duties. First. — The said Duties shall be annually charged on the Persons respectively having, using, or exercising the Offices or Employments of Profit mentioned in the said Schedule (E.), or to whom the Annuities, Pensions, or Stipends mentioned in the same Schedule shall be payable for all Salaries, Fees, Wages, Perquisites, or Profits whatsoever accruing by reason of such Offices, Employments, or Pensions, after deducting the Amount of Duties or other Sums payable or chargeable on the same by virtue of any Act of Parliament, where the same have been 31 Repealed by 37 & 38 Vict., c. 96. ACT 01' 5 & G VICT., C. 35. 1051 Teally and bona fide paid and borne by the Party to be •charged; and each Assessment in respect of such Offices or Employments shall be in force for One whole Year, and shall be levied for such Year without any new Assessment, notwith- :standing a Change may have taken place in any such Office or Employment, on the Person for the Time having or exercising the same; provided that the Person quitting such Office or Employment, or dying within the Year, or his Executors or Administrators, shall be liable for the Arrears due before or at the Time of his so quitting such Office or Employment, or dy- ing, and for such further Portion of Time as shall then have ■elapsed, to be settled by the respective Commissioners, and his Successor shall be repaid such Sums as he shall have paid on account of such Portion of the Year as aforesaid ; and each As- sessment in respect of such Annuity, Pension, or Stipend shall be in force for One whole Year, unless the same shall cease or ■expire within the Year, by Lapse, Death, or otherwise, from which Period the Assessment thereon shall be discharged: Second. — The said Duties to be assessed by the respective •Commissioners for all the Offices in each Department in the Place where the said Commissioners shall execute their Offices, although certain of the Offices in the same Department may be executed elsewhere, and shall be due and payable from the respective Officers, and their respective Successors, for the Time being : Third. — The said Duties shall be paid on all public Offices and Employments of Profit of the Description herein-after men- tioned within Great Britain; (videlicet,) any Office belonging to either House of Parliament, or to any Court of Justice, whether of Law or Equity, in England or Scotland, Wales, the Duchy of Lancaster, the Duchy of Cornwall, or any Criminal or Justiciary or Ecclesiastical Court, or Court of Admiralty, or Commissary Court, or Court-martial ; any public Office held under the Civil Government of Her Majesty, or in any Coun- ty Palatine, or the Duchy of Cornwall; any Commissioned Officer serving on the Staff, or belonging to Her Majesty's Army, in any Kegiment of Artillery, Cavalry, Infantry, Royal Marines, Royal Garrison, Battalions, or Corps of Engineers or 1052 ACT OP 5 & 6 VICT., C. 35. Royal Artificers ; any Officer in the Navy, or in tlie Militia or Volunteers ; any Office or Employment of Profit held under any Ecclesiastical Body, whether Aggregate or Sole, or under any public Corporation, or under any Company or Society, vs^hether Corporate or not Corporate ; any Office or Employment of Prof- it under any public Institution, or on any public Foundation, of whatever Nature or for whatever Purpose the same may be established ; any Office or Employment of Profit in any County^ Hiding, or Division, Shire or Stewartry, or in any City, Bor- ough, Town Corporate, or Place, or under any Trusts or Guar- dians of any Fund, Tolls, or Duties to be exercised in such County, Riding, Division, Shire, or Stewartry, City, Borough,. Town Corporate, or Place; and every other public Office or- Employment of Profit of a public Nature : Fourth. — -The Perquisites to be assessed under this Act shall be deemed to be such Profits of Offices and Employments as. arise from Fees or other Emoluments, and payable either by the Crown or the Subject, in the Course of executing such Of- fices or Employments, and may be estimated either on the Profits of the preceding Year, or of the fair and just Average- of One Year of the Amount of the Profits thereof in the Three- Years preceding; such Years in each Case respectively ending on the Fifth Day of April in each Year, or such other Day of each Year on which the Accounts of such Profits have been usually made up : Fifth. — In all Cases where any Salaries, Fees, Wages, or other Perquisites or Profits, or any Annuities, Pensions, or- Stipends, shall be payable at any public Office, or by any Officer of Her Majesty's Household, or by any of Her Majesty's Re- ceivers or Paymasters, or by any Agent employed in that Be- half, the Duties chargeable under this Act in respect of such Salaries, Fees, Wages, Perquisites, or Profits, or in respect of such Annuities, Pensions, or Stipends, shall be detained and stopped out of the same, or out of any Money which shall be payable upon such Salaries, Fees, Wages, Perquisites, or Prof- its, or upon such Annuities, Pensions, or Stipends, or for the- Arrears thereof, whenever the same shall happen, and be ap- plied to the Satisfaction of the Duties on such Offices or Em- ACT OF 5 & 6 VICT., C. 35. 1053 ployments, or on such Annuities, Pensions, or Stipends respec- tively, (not being otherwise paid,) in the Manner directed by this Act; and whenever the same so payable shall be assessed by the Commissioners for General Purposes in their respective Districts, they shall transmit an Account of the Amount of the Duty assessed to the Office where the same are payable, in order that the Amount so assessed may be there stopped or detained : Sixth. — In all Cases where the Salaries, Fees, Wages, Al- lowances, or Profits of any Officer chargeable to the said Duties shall not arise out of any of the Offices mentioned in the fore- going Kule, but shall arise from any other Office or Employ- ment of Profit chargeable to the said Duties, and the Salaries, Fees, Wages, Perquisites, or Profits shall be payable at such ■Office by any Officer thereof, or by any Receiver of the same respectively, or by any Agent employed in that Behalf, the Du- ties chargeable under this Act in respect of such Salaries, Pees, Wages, Perquisites, or Profits shall be detained and stopped out of the same, or out of any Money which shall be paid upon such Salaries, Fees, Wages, Perquisites, or Profits, or for Ar- rears thereof, whenever the same shall happen, and be applied to the Satisfaction of the Duties (not otherwise paid) in the Manner directed by this Act : Seventh. — Such Portion of the said Duties on Offices or Em- ployments of Profit, or on Annuities, Pensions, or Stipends, as are charged with any Sum of Money payable to any other Per- son, shall be deducted out of the Sum payable to such other Person as a like Rate on such Sum would amount unto ; and all such Persons, their Agents and Receivers, shall allow such Deductions and Payments upon Receipt of the Residue of such Sums: Eighth. — Such Portion of the said Duties charged on any Office or Employment of Profit executed by any Deputy or Clerk, or other Person employed under the Principal in such Office, and paid by such Principal out of the Salary, Fees, Wages, Perquisites, or Profits of such Principal, shall be de- ducted out of the Salary or Wages so payable as a like Rate on such Salary or Wages would amount unto; and all such Deputies, Clerks, and other Persons so employed shall allow 1054 ACT OF 5 & 6 VICT., C. 35. to their respective Principals sueli Deductions and Payments upon the Receipt of the Residue of such Salaries or Wages : Ninth.- — In estimating the Duty payable for any such Office or Employment of Profit, or any Pension, Annuity, or Stipend, all official Deductions and Payments made upon the Eeceipt; of the Salaries, Fees, Wages, Perquisites, and Profits thereof,, or in passing the Accounts belonging to such Office, or upon the- Receipt of such Pension, Annuity, or Stipend, shall be allowed to be deducted, provided a due Account thereof be rendered to the said Commissioners, and proved to their Satisfaction:; Tenth. — In all Cases where any Annuity or Pension shall be payable out of any particular Branch of the public Revenue,, and at the Office of that Branch of Revenue, the Commissioners, acting for that Department shall have Authority to assess and levy the same as a Salary or Wages payable thereout. CXLVII. And be it enacted. That every Person to be as- sessed for his Office or Employment shall be deemed to have exercised the same at the Head Office of the Department under which such Office or Employment shall be held, and shall be rated for such Office or Employment as if exercised at such Head Office, although the Duties of such Office or Employment shall be performed, or the Profits or any Part thereof arising from such Office or Employment shall be payable elsewhere,, within or out of Great Britain; and all Assessments made on any inferior Officer, wherever he shall exercise his Office or Employment, shall be rated accordingly in the same District, where such Head Office shall be established; and every Office' shall be deemed to belong to and to be assessed by or under the principal Officers of that Department by or under whom the Appointment to such Office was made, provided that where such Appointment shall be made by any inferior Officer in any De- partment, then such Office shall be assessed by the same Com- missioners by whom such inferior Officer shall be chargeable for his Office : Provided that where any such Appointment shall be held under the Great Seal or Privy Seal, either of England or Scotland, or shall be made under the Royal Sign Manual, or where any such Appointment shall be under the Hands or ACT OB 5 & 6 VICT., C. 35. 1055 Seals of tlie Commissioners of Her Majesty's Treasury,'^ and the same shall not be exercised in the Department of the Treas- ury, then the Officer holding the same shall be assessed in that Department where the Office shall have been executed: Pro- vided also, that nothing herein contained shall be construed to limit the Eight herein-before given to Commissioners of the District of assessing Officers before described within their re- spective Jurisdictions, although such Officers, or any of them,, may not be held under their Appointment, or the Profits of such Offices may not be payable by them or their Order. CXLVIII. Provided always, and be it enacted, That noth- ing herein contained shall extend or be construed to extend to charge any Person resident in Irelaiid with the Duties con- tained in the said Schedule (E.) in respect of any public Of- fice or Employment the Duties whereof are necessarily and permanently performed in Irelamd?^ CXLIX. Provided always, and be it enacted. That the like Allowances shall be granted to the Trustees of the British Museum, in respect of any Charge under Schedule (A.) to be made on the Lands and Tenements vested in such Trustees, as are granted to Colleges and other Properties mentioned in No. VI. of that Schedule; and the like Exemptions shall be al- lowed in respect of any Dividends of Stock vested in such Trus- tees, or any of them, or in any other for their Use, as are granted to charitable Institutions by this Act ; and no Salary or Payment made or to be made out of Her Majesty's Exchequer to such Trustees for the Use of such Institutions shall be charged at the said Exchequer, provided all Salaries of Officers or Persons employed under the said Trustees shall be charged on the said Officers respectively. CL. And be it enacted. That the several Commissioners au- thorized to act in the Execution of this Act in relation to the Duties on Offices or Employments of Profit, and on Pensions or Stipends, as soon after their Appointment respectively as conveniently can be done in their respective Departments, shall 32 The words "Commissioners of 33 Repealed by 37 & 38 Vict., c. her Majesty's" have been repealed 96. by 53 & 54 Vict., c. 51. 1056 ACT OF 5 & 6 VICT., C. 35. meet in some convenient Place, in order to qualify themselves by taking the Oaths prescribed by the said recited Acts relating to the Duties of Assessed Taxes, and shall have Power to elect a Clerk and Assessors, and in Cases where the Duties cannot be stopped and detained at the Department of Office of the said Commissioners, or for which the said respective Commissioners shall act, Collectors of the said Duties to be assessed by them from and amongst the Officers in their respective Departments, and separate Assessors and Collectors in each such Department, Tinder the Cognizance of the same Commissioners, which As- sessors shall, within a Time to be fixed by the respective Com- missioners, deliver to them their Certificates of Assessment, in Writing under their Hands, to be verified upon their Oaths, of the full and just annual Value of all Offices and Employ- ments of Profit chargeable under this Act in the Department for which they shall be appointed Assessors, and of all Pensions and Stipends, estimated according to this Act, with the Names and Surnames of the several Officers and Persons entitled to Pensions or Stipends, and the several Sums of Money they ought to pay by virtue of this Act, at the Rate of Seven-pence for every Twenty Shillings of such Value, without Abatement or Deduction, and without Concealment or Favour, upon pain of Forfeiture for every Neglect in the Premises of any Sum not exceeding One hundred Pounds nor less than Twenty Pounds, which said Assessors are hereby strictly enjoined and required, with all Care and Diligence, to charge and assess themselves, and all other Officers, Clerks, and Persons em- ployed in their respective Departments of Office, and with re- spect to the Duty on Pensions or Stipends to charge and assess all Persons entitled unto any such Pensions or Stipends, and respectively to make their Assessments according to the Pro- visions of this Act ; and every such Assessor shall have free Ac- cess to all Documents and Papers whatever in their respective Offices touching the Salaries, Fees, Wages, Perquisites, and Profits of any Officer, Clerk, or Person aforesaid, belonging to their respective Offices, and touching the Amount of the re- spective Pensions or Stipends, and shall be at liberty, whenever the same may be necessary, to require Eetums from the Par- ACT OF 5 & 6 VICT., C. 35. 1057 ties themselves, according to the Provisions of this Act, that they may be enabled to make a true Assessment in pursuance thereof. CLI. Provided always, and be it enacted, That no Person shall, in respect of the Profits arising from Offices or from Pensions or Stipends chargeable before the respective Com- missioners appointed for those Purposes in their respective De- partments of Office as aforesaid, be liable to the Penalty herein contained for not returning a Statement of the Profits arising from such Office, Pension, or Stipend, in pursuance of any gen- eral Notice herein-before directed, nor in any Case except where the Assessor for those Profits respectively shall have re- quired a Return thereof in pursuance of the next preceding Clause. CLII. And be it enacted. That in every Case where any Person holding such Offices or Employments, or being entitled Tinto any Pension or Stipend as aforesaid, shall claim to be ■exempt from such Assessment, the Commissioners shall never- theless set down in such Assessment the Names of such Persons, and the full and just annual Value of such Offices, Employ- ments, Pensions, or Stipends ; and the Claim to such Exemption shall be preferred and examined, and the Merits thereof shall be heard and determined, under the Regulations of this Act with respect to other Assessments. CLIII. And be it enacted, That where any Office or Em- ployment of Profit chargeable by this Act is or shall be executed by Deputy, such Deputy shall, in all Cases where he shall be in the Receipt of the Profits thereof, be answerable for and shall pay such Assessment as shall be charged thereon, and de- duct the same out of the Profits of such Office or Employment ; and where the Salaries, Eees, Wages, Emoluments, or Profits of any Officer or Officers in any such Office shall be receivable by any One or more of the said Officers for the Use of such Officer, or as a Eund to be divided amongst such Officers in •certain Proportions, the Officer or Officers receiving such Sala- ries, Eees, Wages, Perquisites, or Profits shall be answerable for the Duties charged thereon, and shall pay the same, and ING CASES. brosini v. United States, 187 TJ. S. 1, 47 L. ed. 49, 23 Sup. Ot. Eep. 1, 12 Am. Grim. Eep. 699 ; Jones v. Keep, 19 Wis. 390; Swift V. Comes, 20 Wis. 398; Sayles v. Davis, 22 Wis. 227; Fifield v. Close, 15 Mich. 505; State ex rel. Lakey v. Gar- ton, 32 Ind. 1, 2 Am. Kep. 315. The franchise to be a corporation is a means employed by the state government in the exercise of its powers and functions. M'CuUoch V. Maryland, 4 Wheat. 410, 4 L. ed. 602 ; Angell & A. Priv. Corp. 10th ed. p. 23 ; Hale v. Henkel, 201 U. S. 43, 50 L. ed. 652, 26 Sup. Ct. Eep. 370; California v. Southern P. E. Co. 127 U. S. 1, 32 L. ed. 150, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073. The corporation tax law, if the tax falls upon "carrying on or doing business," must fail for want of equality and uniform- ity in the tax thereby imposed. State, Agens, Prosecutor, v. Newark, 37 W. J. L. 415, 18 Am. Eep. 729; Ee Washington Ave. 69 Pa. 352, 8 Am. Eep. 255; Kentucky E. Tax Cases, 115 U. S. 321, 29 L. ed. 414, 6 Sup. Ct. Eep. 57 ; Magoun v. Illinois Trust & Sav. Bank, 170 U. S. 283, 42 L. ed. 1037, 18 Sup. Ct. Eep. 594; Cook v. Marshall County, 196 U. S. 261, 49 L. ed. 471, 25 Sup. Ct. Eep. 233 ; Michigan C. E. Co. v. Powers, 201 TJ. S. 245, 50 L. ed. 744, 26 Sup. Ct. Eep. 459; Adams v. Kuykendall, 83 Miss. 571, 35 So. 830; State v. Ide, 35 Wash. 576, 67 L.E.A. 280, 102 Am. St. Eep. 914, 77 Pac. 961, 1 A. & E. Ann. Cas. 634. The corporation tax law is unequal in its operation, in that it taxes corporations, joint stock companies and associations, and exempts individuals and co-partnerships carrying on the same business and deriving net income from the same sources as in the case of such bodies. Knowlton v. Moore, 178 U. S. 109, 44 L. ed. 996, 20 Sup. Ct. Eep. 747 ; State v. Ide, 35 Wash. 576, 67 L.E.A. 280, 102 Am. St. Eep. 914, 77 Pac. 961,. 1 A. & E. Ann. Cas. 634. Eequiring a corporation to make a return under penalty for failure to do so constitutes a search within the meaning of the 4th Amendment. Boyd V. United States, 116 U. S. 616, 29 L. ed. 746, 6 Sup. Ct. Eep. 524; Hale v. Henkel, 201 U. S. 43, 50 L, ed. 652, 26 Sup. Ct. Eep. 370 ; Clinton v. Phillips, 58 111. 102, 11 Am. Eep. 52. FLINT V. STONE TBACY CO. 1161 To engage in interstate commerce is a constitutional right, and not a privilege ; therefore Congress cannot prohibit the ex- ercise of such right. Crutcher v. Kentucky, 141 U. S. 47, 35 L. ed. 649, 11 Sup. Ct. Rep. 851 ; Eeid v. Colorado, 187 U. S. 137, 47 L. ed. 108, 23 Sup. Ct. Eep. 92, 12 Am. Crim. Rep. 506 ; Employers' Lia- bility Cases (Howard v. Illinois C. R. Co.) 207 U. S. 463, 52 L. ed. 297, 28 Sup. Ct. Rep. 141 ; Western U. Teleg. Co. v. Kansas, 216 U. S. 1, 54 L. ed. 355, 30 Sup. Ct. Rep. 190; Paul V. Virginia, 8 Wall. 168, 19 L. ed. 357; Pullman Co. v. Kan- sas, 216 U. S. 56, 54 L. ed. 378, 30 Sup. Ct. Rep. 232. The power to regulate does not include the power to pro- hibit. Miller v. Jones, 80 Ala. 89; Bronson v. Oberlin, 41 Ohio St. 476, 52 Am. Rep. 90 ; Ex parte Patterson, 42 Tex. Crim. Rep. 256, 51 L.R.A. 654, 58 S. W. 1011 ; Duckwall v. ISTew Albany, 25 Ind. 283 ; McConvill v. Jersey City, 39 IST. J. L. 38 ; People v. Gadway, 61 Mich. 285, 1 Am. St. Rep. 578, 28 ]Sr. W. 101; Mernaugh v. Orlando, 41 Fla. 433, 27 So. 34; Re Hauck, 70 Mich. 396, 38 IST. W. 275; State v. DeBar, 58 Mo, 395; Sweet v. Wabash, 41 Ind. 7; Andrews v. State, 3 Heisk. 165, 8 Am. Rep. 8 ; Ex parte Byrd, 84 Ala. 17, 5 Am. St. Rep. 328, 4 So. 397; State, Miihlenbrinck, Prosecutor, v. Long Branch, 42 K J. L. 364. If Congress cannot tax the business of interstate commerce or interstate commerce itself, it is hard to conceive how it can tax the privilege of doing such business. Western U. Teleg. Co. v. Kansas, 216 U. S. 1, 54 L. ed. 355, 30 Sup. Ct. Rep. 190. Mr. /. B. Foraher argued the cause and filed a brief for ap- pellant in No. 420 : The measure of the tax must have some natural, legal, ap- propriate relation to the thing taxed ; otherwise there may result inequality and injustice. This, of itself, is sufficient reason for refusing so to construe this law as to lay the tax on the cor- poration, or its franchise, or its facility, the result of which would, of necessity, be the grossest inequality. Knowlton v. Moore, 178 IT. S. 76, 44 L. ed. 983. 20 Sup. Ct. Rep. 747. 1162 LBAD-IIfG CASES. If the law be construed to lay the tax on the corporation, its franchise, or its facility to transact business, we cannot possibly have uniformity of operation. Gulf, C. & S. F. E. Co. V. Ellis, 165 U. S. 159, 41 L. ed. 669, 17 Sup. Ct. Eep. 255. If the law be construed to lay the tax on the franchise, to be a corporation, then at once arises the question whether it is not unconstitutional because of an infringement upon the sovereign right of the state to grant franchises to be corporations. California v. Central P. E. Co. 127 U. S. 1, 32 L. ed. 150, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073; Veazie Bank V. Fenno, 8 Wall. 547, 19 L. ed. 487. Corporations and their franchises, created by the states, to act as agencies or instrumentalities of state governments, can- not be made the subject of Federal taxation, either directly or indirectly. The Binghamton Bridge (Chenango Bridge Co. v. Bingham- ton Bridge Co.) 3 Wall. 51, 18 L. ed. 137; New Orleans Gas- light Co. V. Louisiana Light & H. P. & Mfg. Co. 115 U. S. 663, 29 L. ed. 521, 6 Sup. Ct. Eep. 252. To say that a business shall be taxed, as an occupation, when found in the hands of a corporation, and that it shall go exempt from taxation when found next door, in the hands of a co- partnership or an individual, is purely arbitrary and manifestly unreasonable and unjust. American Sugar Eef. Co. v. Louisiana, 179 U. S. 92, 45 L. ed. 103, 21 Sup. Ct. Eep. 43 ; Billings v. Illinois, 188 U. S. 102, 47 L. ed. 403, 23 Sup. Ct. Eep. 272 ; Gulf, C. & S. F. E. Co. V. Ellis, 165 U. S. 155, 41 L. ed. 668, 17 Sup. Ct. Eep. 255. Mere words and names will not be allowed to change the legal effect of a plain statutory provision, or alter the familiar rules of construction. Pollock V. Farmers' Loan & T. Co. 157 U. S. 580, 39 L. ed. 818, 15 Sup. Ct. Eep. 673 ; Galveston, H. & S. A. E. Co. v. Texas, 210 U. S. 217, 52 L. ed. 1031, 28 Sup. Ct. Eep. 638. The search and seizure provided for in this corporation tax measure are unreasonable. Boyd v. United States, 116 U. S. 616, 29 L. ed. 746, 6 Sup. Ct. Eep. 524; Entick v. Carrington, 19 How. St. Tr. 1029; Hale V. Henkel, 201 U. S. 43, 44, 50 L. ed, 652, 653, 26 Sup. FLIWT V. STONE TEACT CO. 1163 Ct. Rep. 3Y0 ; Ee Pacific E. Commission, 32 Fed. 250 ; Ee Com- ingore, 96 Fed. 557, affirmed in 177 U. S. 470, 44 L. ed. 850, 20 Sup. Ct. Eep. 701. Messrs. Alton C. Dustin, George B, Siddall, Arthur F. Odlin, and Richard Inglis also filed a brief for appellant in No. 420 : The name whereby a tax is called is not controlling. Nichol V. Ames, 173 U. S. 509, 43 L. ed. 786, 19 Sup. Ct. Eep. 522 ; Knowlton v. Moore, 178 U. S. 41, 44 L. ed. 969, 20 Sup. Ct. Eep. 747; Snyder v. Bettman, 190 U. S. 249, 47 L. ed. 1035, 23 Sup. Ct. Eep. 803 ; Brown v. Maryland, 12 Wheat. 419, 6 L. ed. 678; Home Sav. Bank v. Des Moines, 205 U. S. 508, 51 L. ed. 901, 27 Sup. Ct. Eep. 571 ; Delaware, L. & W. E. Co. V. Pennsylvania, 198 TJ. S. 341, 49 L. ed. 1077, 25 Sup. Ct. Eep. 669 ; Fairbank v. United States, 181 U. S. 283, 45 L. ed. 862, 21 Sup. Ct. Eep. 648, 15 Am. Crim. Eep. 135; Pollock v. Farmers' Loan & T. Co. 157 U. S. 429, 39 L. ed. 759, 15 Sup. Ct. Eep. 673; Powers v. Detroit, G. H. & M. E. Co. 201 U. S. 543, 50 L. ed. 860, 26 Sup. Ct. Rep. 556 ; Eobbins v. Taxing Dist. 120 U. S. 489, 30 L. ed. 694, 1 Inters. Com. Rep. 45, 7 Sup. Ct. Rep. 592 ; Philadelphia & S. Mail S. S. Co. V. Pennsylvania, 122 U. S. 326, 30 L. ed. 1200, 1 Inters. Com. Rep. 308, 30 Sup. Ct. Rep. 1118; Leloup v. Mo- bile, 127 U. S. 640, 32 L. ed. 311, 2 Inters. Com. Rep. 134, 8 Sup. Ct. Rep. 1380; Cook v. Pennsylvania, 97 U. S. 566, 24 L. ed. 1015; Almy v. California, 24 How. 169, 16 L. ed. «44; Dobbins v. Erie County, 16 Pet. 435, 10 L. ed. 1022; Weston V. Charleston, 2 Pet. 449, 7 L. ed. 481 ; Brown v. Mary- land, 12 Wheat. 419, 6 L. ed. 678. The tax is an income tax. Pollock V. Farmers' Loan & T. Co. 157 U. S. 429, 39 L. ed. 759, 15 Sup. Ct. Rep. 673 ; Pollock v. Farmers' Loan & T. Co. 158 U. S. 601, 39 L. ed. 1108, 15 Sup. Ct. Rep. 912; Mcol v. Ames, 173 U. S. 509, 519, 520, 43 L. ed. 786, 793, 19 Sup. Ct. Rep. 522 ; Knowlton v. Moore, 175 U. S. 41, 52, 53, 79-83, 44 L. ed. 969, 974, 975, 984^986, 20 Sup. Ct. Rep. 747; Fair- bank V. United States, 181 U. S. 283, 296, 45 L. ed. 862, 868. 21 Sup. Ct. Rep. 648, 15 Am. Crim. Rep. 135 ; Patton v. Brady, 184 U. S. 608, 618, 46 L. ed. 713, 718, 22 Sup. Ct. Rep. 493 ; Thomas v. United States, 192 U. S. 363, 370, 48 L. ed. 481, 1164 LEAD-ING CASES. 483, 24 Sup. Ct. Eep. 305; Spreckels Sugar Kef. Co. v. ire Clain, 192 U. S. 39Y, 48 L. ed. 496, 24 Sup. Ct. Eep. 376 ; Hafemann v. Gross, 199 U. S. 342, 350, 50 L, ed. 220, 225, 26 Sup. Ct. Eep. 80. It is necessary to recognize that the Pollock Case repudiated the principle upon which Hylton v. United States, 3 Dall. 171, 1 L. ed. 556, and also Springer v. United States, 102 U. S.. 586, 26 L. ed. 253, were decided. With these two cases out of the way, the remaining de- cisions fall naturally into two classes and the constitutional classification becomes fairly clear. Pacific Ins. Co. v. Soule, 7 Wall. 433, 19 L. ed. 95 ; Veazie Bank v. Penno, 8 Wall. 533, 19 L. ed. 482 ; Scholey v. Eew, 23 Wall. 331, 23 L. ed. 99; Michigan C. E. Co. v. Collector (Michigan C. E. Co. v. Slack) 100 U. S. 595, 25 L. ed. 647; Merchants' Wat. Bank v. United States, 101 U. S. 1, 25 L. ed. 979 ; ISTieol v. Ames, 173 U. S. 509, 43 L. ed. 786, 19 Sup. Ct. Eep. 522 ; Knowlton v. Moore, 178 U. S. 41, 44 L. ed. 969, 20 Sup. Ct. Eep. 747; Treat v. White, 181 U. S. 264, 45 L. ed. 853, 21 Sup. Ct. Eep. 611 ; Patton v. Brady, 184 U. S. 608, 46 L. ed. 713, 22 Sup. Ct. Eep. 493; Thomas v. United States, 192 U. S. 363, 48 L. ed. 481, 24 Sup. Ct. Eep. 305 ; Spreckels Sugar Eef. Co. v. McClain, 192 U. S. 397, 48 L. ed. 496, 24 Sup. Ct. Eep. 376 ; Cornell v. Coyne, 192 U. S. 418, 48 L. ed. 504, 24 Sup. Ct. Eep. 383; McCray v. United States, 195 U. S. 27, 49 L. ed. 78, 24 Sup. Ct. Eep. 769, 1 A. & E. Ann. Cas. 561. The distinction between all of the above taxes and the present tax is that each of the above taxes was laid with respect to some particular thing. They were specific, while this is general. They were imposed because of the exercise of some particular right or privilege, while this tax is upon income generally, im- posed solely by reason of ownership. Thomas v. United States, 192 U. S. 363, 370, 48 L. ed. 481, 483, 24 Sup. Ct. Eep. 305. The states cannot interfere with the full and free exercise of the powers delegated to the national government. M'Culloch V. Maryland, 4 Wheat. 316, 4 L. ed. 579 ; Osborn V. Bank of United States, 9 Wheat. 738, 6 L. ed. 204; Weston V. Charleston, 2 Pet. 449, 7 L. ed. 481 ; New York ex rel. Bank of Commerce v. Tax Comrs. 2 Black, 620, 17 L. ed. 451 ; Bank. FLINT V. STOWE TEACY CO. 1165 Tax Case (New York ex rel. Bank of Commonwealth v. Tax .& A. Comrs.) 2 Wall. 200, 17 L. ed. 793; The Banks v. New York (New York ex rel. Bank of N. Y. Nat. Bkg. Asso. v. -Connelly) 7 Wall. 16, 19 L. ed. 57 ; Dobbins v. Erie County, 16 Pet. 435, 10 L. ed. 1022 ; California v. Central P. K. Co. 127 IT. S. 1, 32 L. ed. 150, 2 Inters. Com. Kep. 153, 8 Sup. •Ct. Eep. 1073; Union P. E. Co. v. Peniston, 18 Wall. 5, 29- 31, 21 L. ed. 787, 791, 792. The national government cannot interfere with the full and :free exercise of the powers reserved to the states. The Collector v. Day (Buffington v. Day) 11 Wall. 113, 20 L. ed. 122 ; United States v. Baltimore & O. E. Co. 17 Wall. 322, 21 L. ed. 597; Pollock v. Farmers' Loan & T. Co. 157 U. S. 429, 584, 39 L. ed. 759, 820, 15 Sup. Ct. Eep. 673; Am- brosini v. United States, 187 U. S. 1, 47 L. ed. 49, 23 Sup. ■Ct. Eep. 1, 12 Am. Grim. Eep. 699 ; Texas v. White, 7 Wall. 700, 725, 19 L. ed. 227, 237 ; Briscoe v. Bank of the Common- wealth, 11 Pet. 317, 9 L. ed. 732. The powers of the separate states within their own spheres are as complete as are the sovereignty and independence of the general government within its sphere. Cooley, Const. Lim. 7th ed. p. 64; United States v. Balti- more & O. E. Co. 17 Wall. 322, 327, 21 L. ed. 597, 599; license Tax Cases, 5 Wall. 462, 471, 18 L. ed. 497, 500. If classification of subjects for taxation is not founded upon reason, but is wholly arbitrary, it takes the property of the citi- zen without due process of law, contrary to the 5th Amendment. Bell's Gap E. Co. v. Pennsylvania, 134 U. S. 232, 236, 33 L. ed. 892, 894, 10 Sup. Ct. Eep. 533 ; Gulf, C. & S. F. E. Co. V. Ellis, 165 U. S. 151, 160, 41 L. ed. 667, 670, 17 Sup. Ct. Eep. 255; Magoim v. Illinois Trust & Sav. Bank, 170 U. S. 283, 293, 295, 42 L. ed. 1037, 1042, 1043, 18 Sup. Ct. Eep. 594; Nicol v. Ames, 173 U. S. 509, 520, 43 L. ed. 786, 793, 19 Sup. Ct. Eep. 522. Mr. JoTin G. Johnson argued the cause, and, with Messrs. Frederic Jesup Stimson, Lawrence M. Stockton, and Harris Livermore, filed a brief for appellants in Nos. 425 and 457: Both the 5th and 14th Amendments to the Federal Consti- tution presuppose equality before the law. 1166 LEADING CASES. Harding r. People, 160 111. 459, 32 L.E.A. 447, 52 Am. St. Eep. 344, 43 K E. 624; Carroll v. Greenwich Ins. Co. 199 U. S. 401, 410, 50 L. ed. 246, 26 Sup. Ct. Eep. 66 ; Mobile & 0, E. Co. V. Tennessee, 153 U. S. 486, 506, 38 L. ed. 793, 800, 14 Sup. Ct. Eep. 968; Cooley, Const. Lim. 6tli ed. pp. 479- 483, 490. The states cannot, directly or indirectly, burden the exercise by Congress of the powers committed to it by the Constitution, nor may Congress burden the agencies or instrumentalities em- j)loyed by the states in the exercise of their powers. The Collector v. Day (Buffington v. Day) 11 "Wall. 113- 124, 20 L. ed. 122-126 ; Fifield v. Close, 15 Mich. 505 ; Cooley, Const. Lim. 6th ed. p. 592. A state may not tax the corporate franchise of a Federal corporation (M'CuUoch v. Maryland, 4 Wheat. 316, 4 L. ed. 579 ; California v. Central P. E. Co. 127 U. S. 41, 32 L. ed. 157, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073), nor may it tax its business if it be a Federal function, such, for instance, as interstate commerce; nor can a state impose a franchise tax even on the stock of corporations incorporated in other states and doing business in the state imposing the tax, if it do not tax its own corporations in the same manner. Southern E. Co. v. Greene,. 216 U. S. 400, 54 L. ed. 536, 30 Sup. Ct. Eep. 287, 17 A. & E. Ann. Cas. 1247; Western U. Teleg. Co. v. Kansas, 216 U. S. 1, 54 L. ed. 355, 30 Sup. Ct. Eep. 190. The creation of a corporation appertains to sovereignty. M'Culloch V. Maryland, 4 Wheat. 410, 4 L. ed. 602, Mr. Frederic Jesup SUinson also argued the cause on re- argument, and with Messrs. John 0. Johnson, Lawrence M. Stockton, Harris Liivermore, and /. Grant Fortes, filed a brief for appellants, in N^os. 425 and 457: The states are not subordinate, not "a part" of the Fed- eral government in the sense of being a part of a homogeneity, but are sovereignties of equal dignity, indestructible, equally important, and in their own demesne equally supreme. Texas v. White, 7 Wall. 700, 725, 19 L. ed. 227, 237; Lane Coianty v. Oregon, 7 Wall. 71, 76, 19 L. ed. 101, 104; New York ex rel. Bank of Commerce v. Tax Comrs. 2 Black, 620, FLINT V. STONE TRACY CO. 116T 623, 17 L. ed. 451, 452 ; Pollock v. Farmers' Loan & T. Co. 157 U. S. 429, 583, 584, 39 L. ed. 759, 820, 15 Sup. Ct. Kep. 673 ; The Collector v. Day (Buffington v. Day) 11 Wall. 113, 20 L. ed. 122. The United States have no power under the Constitution to tax either the instrumentalities or the property of a state. Van Brocklin v. Tennessee (Van Brocklin v. Anderson) 117 U. S. 151, 155, 29 L. ed. 845, 846, 6 Sup. Ct. Eep. 670; Cooley, Const. Law, 3d ed. p. 61. Is there anything in the reasoning of Mr. Justice Bradley in California v. Central P. E. Co. 127 U. S. 1, 40, 41, 32 L. ed. 150, 157, 158, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073, which indicates that it is to be applied to the state government taxing a Federal corporate franchise, and not to the converse proposition ? A tax on the income or trafSc made under the franchise is not different from a tax on the franchise. Osborn v. Bank of United States, 9 Wheat. 738, 6 L. ed. 204 ; Home Ins. Co. v. New York, 134 U. S. 594, 33 L, ed. 1025, 10 Sup. Ct. Eep. 593. Unless the Federal government is given wider and other powers of taxation by the Constitution, despite the 5th Amend- ment, than are given to the commonwealth by the practically unlimited provisions for taxation in the Constitution of Massa- chusetts, the decisions of the supreme court of Massachusetts are decisive of the point that the "commodity" of having a capital stock represented by assignable shares is not taxable. Gleason v. McKay, 134 Mass. 419 ; O'Keeffe v. Somerville, 190 Mass. 110, 112 Am. St. Eep. 316, 76 N. E. 457, 5 A. & E. Ann. Cas. 684; Minot v. Winthrop, 162 Mass. 113, 26 L.E.A. 259, 38 ISr. E. 512; Opinions of Justices, 196 Mass. 603, 85 K E. 545. Mr. Frederic B. Coudert filed a brief for appellants in Nos. 431 and 432 : The tax is one upon the franchise or right to be a corpora- tion, granted by the state. Mercantile Nat. Bank v. New York, 121 U. S. 138, 160, 30 L. ed. 895, 7 Sup. Ct. Eep. 826; Home Ins. Co. v. New York, 134 U. S. 594, 33 L. ed. 1025, 10 Sup. Ct. Eep. 593; Society 1168 LEADING CASES. for Savings v. Coite, 6 Wall. 594, 18 L. ed. 897; Provident Inst. V. Massachusetts, 6 Wall. 611, 18 L. ed. 907. Neither the state courts nor the legislatures, by giving the tax a particular name, or by the use of some form of words, can take away our duty to consider its nature and effect. Galveston, H. & S. A. K. Co. v. Texas, 210 U. S. 227, 52 L. ed. 1037, 28 Sup. Ct. Eep. 638. To characterize the tax as an occupation or business excise is to pervert history. Such taxes are a special class, common in England and the United States. Dov^ell, History of Taxation; Patton v. Brady, 184 U. S. 608, 46 L. ed. 713, 22 Sup. Ct. Eep. 493 ; Mcol v. Ames, 173 IT. S. 509, 43 L. ed. 786, 19 Sup. Ct. Eep. 522 ; Chesebrough V. United States, 192 U. S. 253, 48 L. ed. 432, 24 Sup. Ct. Eep. 262 ; Thomas v. United States, 192 U. S. 363, 48 L. ed. 481, 24 Sup. Ct. Eep. 305. Where the Pederal government has an exclusive right of con- trol or regulation, that right cannot be taxed by a state. M'Culloeh V. Maryland, 4 Wheat. 316, 435, 4 L. ed. 579, 608; Weston v. Charleston, 2 Pet. 449, 7 L. ed. 481; Osborn v. Bank of United States, 9 Wheat. 738, 6 L. ed. 204; New York ex rel. Bank of Commerce v. Tax Comrs. 2 Black, 620, 17 L. ed. 451; The Banks v. New York (New York ex rel. Bank of N. Y. Nat. Bkg. Asso. v. Connelly) 7 Wall. 16, 19 L. ed. 57; Moran v. New Orleans, 112 U. S. 69, 28 L. ed. 653, 5 Sup. Ct. Eep. 38; Harman v. Chicago, 147 U. S. 396, 37 L. ed. 216, 13 Sup. Ct. Eep. 306; California v. Central P. E. Co. 127 U. S. 1, 32 L. ed. 150, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073 ; Dobbins v. Erie County, 16 Pet. 435, 10 L. ed. 1022 ; People ex rel. Edison Electric Light Co. v. Campbell, 138 N. Y. 543, 20 L.E.A. 453, 34 N. E. 370 ; Com. v. West- inghouse Electric & Mfg. Co. 151 Pa. 265, 24 Atl. 1107, 1111. The cases in which this court has applied the same principle to the protection of the state governments against the Federal government are: The Collector v. Day (Buffington v. Day) 11 Wall. 113, 20 L. ed. 122 ; United States v. Baltimore & 0. E. Co. 17 Wall. 322, 21 L. ed. 597; Mercantile Nat. Bank v. New York, 121 U. S. 138, 162, 30 L. ed. 895, 904, 7 Sup. Ct. Eep. 826; Pol- lock V. Farmers' Loan & T. Co. 157 U. S. 429, 39 L. ed. 759, FLINT V. STONE TEACY CO. 1109 15 Sup. Ct. Kep. 673 ; Ambrosini v. United States, 187 TJ. S. 1, 47 L. ed. 49, 23 Sup. Ct. Eep. 1, 12 Am. Grim. Eep. 699; South Carolina v. United States, 199 U. S. 437, 449, 468, 50 L. ed. 264, 272, 26 Sup. Ct. Eep. 110, 4 A. & E. Ann. Cas. 737. See also, as to other inherent limitations upon Federal legisla- tion: United States v. Dewitt, 9 Wall. 41, 19 L. ed. 593 ; Keller V. United States, 213 U. S. 138, 53 L. ed. 737, 29 Sup. Ct. Eep. 470, 16 A. & E. Ann. Cas. 1066. If the precise case here has not before arisen, its exact con- verse has, and if it be admitted, as it always has been, and still must be, that this principle of immunity is reciprocal, then indeed it must be conceded that this court has adjudicated the very question here involved. California v. Central P. E. Co. 127 U. S. 1, 32 L. ed. 150, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073. Even as a tax on franchises it is a tax on property, and hence direct. It is the settled law of this court that a corporate fran- chise is personal property. Gulf & S. I. E. Co. V. Hewes, 183 U. S. 66, 46 L. ed. 86, 22 Sup. Ct. Eep. 26 ; Postal Teleg. Cable Co. v. Adams, 155 U. S. 696, 39 L. ed. 315, 5 Inters. Com. Eep. 1, 15 Sup. Ct. Eep. 268, 360; Atlantic & P. Teleg. Co. v. Philadelphia, 190 U. S. 160, 47 L. ed. 995, 23 Sup. Ct. Eep. 817. Mr. Richard Eeid Rogers argued the cause and filed a brief for appellants in No. 442 : A grant of a corporate franchise is the exercise of a sovereign faculty. California v. Central P. E. Co. 127 U. S. 1, 40, 32 L. ed. 150, 157, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073. And this power was not alienated by the several states to the national government. Briscoe v. Bank of the Commonwealth, 11 Pet. 257, 9 L. ed. 709. The states cannot even indirectly tax a corporate franchise granted by the national government. M'Culloch V. Maryland, 4 Wheat. 316, 4 L. ed. 579; Os- born V. Bank of United States, 9 Wheat. 768, 6 L. ed. 211; Brown v. Maryland, 12 Wheat. 419, 6 L. ed. 678 ; Weston v. Foster Income Tax. — 74. 1170 LEADING CASES. Charleston, 2 Pet. 449, Y L. ed. 481 ; Ifew York ex rel. Bank of Commerce v. Tax Comrs. 2 Black, 628, 17 L. ed. 454 ; Bank Tax Case (New York ex rel. Bank of Commonwealth v. Tax & A. Comrs.) 2 Wall. 200, 17 L. ed. 793 ; Owensboro Wat. Bank V. Owensboro, 173 U. S. 664, 43 L. ed. 850, 19 Sup. Ct. Eep. 537; First Nat. Bank v. Stone, 174 U. S. 438, 43 L. ed. 1038, 19 Sup. Ct. Eep. 876; California v. Central P. E. Co. 127 U. S. 41, 32 L. ed. 157, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073 ; "Van Allen v. Assessors (Churchill v. Utica) 3 Wall. 573, 591, 18 L. ed. 229, 237. In the respect stated, the state and Federal governments are upon an equal footing. The Collector v. Day (Buifington v. Day) 11 Wall. 113, 128, 20 L. ed. 122, 127; Union P. E. Co. v. Peniston, 18 Wall. 5, 30, 21 L. ed. 787, 791 ; Van Brocklin v. Tennessee (Van Brocklin v. Anderson) 117 U. S. 151, 162, 29 L. ed. 845, 849, 6 Sup. Ct. Eep. 670; Income Tax Cases (Pollock v. Farm- ers' Loan & T. Co.) 157 U. S. 584, 39 L. ed. 820, 15 Sup. Ct. Eep. 673 ; Knowlton v. Moore, 178 U. S. 41, 59, 44 L. ed. 969, 977, 20 Sup. Ct. Eep. 747; Plummer v. Coler, 178 U. S. 115, 117, 44 L. ed. 998, 999, 20 Sup. Ct. Eep. 829 ; Ambrosini V. United States, 187 U. S. 1, 7, 47 L. ed. 49, 52, 23 Sup. Ct. Eep. 1, 12 Am. Crim. Eep. 699 ; South Carolina v. United States, 199 U. S. 437, 50 L. ed. 261, 26 Sup. Ct. Eep. 110, 4 A. & E. Ann. Cas. 737. The act of Congress is unconstitutional in so far as it at- tempts to impose a tax upon the franchises of foreign cor- porations, or, at least, upon their right to carry on a purely intrastate business, — a matter over which the Federal govern- ment has no control. License Tax Cases, 5 Wall. 462, 471, 18 L. ed. 497, 500; Covington & C. Bridge Co. v. Kentucky, 154 U. S. 204, 210, 38 L. ed. 962, 965, 4 Inters. Com. Eep. 649, 14 Sup. Ct. Eep. 1087. The tax is so unequal that, by definition, it is not a tax within the delegated power of Congress to impose. Gulf, C. & S. F. E. Co. V. Ellis, 165 U. S. 150, 159, 41 L. ed. 666, 669, 17 Sup. Ct. Eep. 255 ; Southern E. Co. v. Greene, 216 U. S. 400, 417, 54 L. ed. 536, 541, 30 Sup. Ct. Eep. 287, 17 A. & E. Ann. Cas. 1247. FLINT V. STONE TKACY CO. 1171 Messrs. Charles H. Tyler, Owen D. Young, Burton E. Eames, and Randolph Frothingham filed a brief for appellant in No. 443: The care and management of real estate investments by a corporation do not constitute the carrying on or doing busi- ness. People ex rel. Parker Mills v. Tax Comrs. 23 K Y. 242; Ee Alabama & C. R. Co. 9 Blatchf. 390, Fed. Cas. JSTo. 124. The act is invalid as laying a burden upon an instrumentality of the state. California v. Central P. E. Co. 127 U. S. 1, 32 L. ed. 150, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073 ; Union P. E. Co. V. Peniston, 18 Wall. 5, 21 L. ed. 787; The Collector v. Day (Buffington v. Day) 11 Wall. 113, 20 L. ed. 122; Fifield V. Close, 15 Mich. 505; Smith v. Short, 40 Ala. 385; Warren, V. Paul, 22 Ind. 276 ; Jones v. Keep, 19 Wis. 369 ; Union Bank V. Hill, 3 Coldv7. 325; Moore v. Quirk, 105 Mass. 49, 7 Am. Eep. 499 ; United States v. Owens, 100 Eed. 70. The act is invalid because of lack of equality. Connolly v. Union Sewer Pipe Co. 184 U. S. 540, 46 L, ed. 679, 22 Sup. Ct. Eep. 431. Messrs. Jed L. Washhum, WilVam D. Bailey, and Oscar Mitchell filed a brief for appellant m No. 446: As an excise tax, the same is invalid, not only as not being uniform throughout the United States, whether we say intrin- sically or geographically, but because it is so fraught with dis^ criminations, inequalities, and arbitrary exemptions as to be' without the taxing power, and is obnoxious to the fundamental' principles of our government. Magoun v. Illinois Trust & Sav. Bank, 170 U. S. 2'83, 42! L. ed. 1037, 18 Sup. Ct. Eep. 594; Pacific Ins. Co. v. SouH 7 Wall. 433, 19 L. ed. 95. The tax that will fall upon the defendant, the Clark Iron Company, and operate to deplete the revenues distributable tw its stockholders, falls upon its income by v^ay of rentals andl royalties from the use and occupation of its lands, and is there^ fore, within the decisions of this court, a tax upon the land! itself, — a direct tax, unconstitutional and void. Pollock V. Farmers' Loan & T. Co. 157 U. S, 42^., 39 L. ed. 1172 LEADING CASES. 759, 15 Sup. Ct. Eep. 673; Pollock v. Farmers' Loan & T. Co. 158 U. S. 601, 39 L. ed. 1108, 15 Sup. Ct. Eep. 912; State v. Evans, 99 Minn. 223, 108 N. W. 958, 9 A. & E. Ann. Cas. 520; Bainbridge, Mines & Minerals, Am. ed. p. 197; United States V. Gratiot, 14 Pet. 526, 10 L. ed. 573 ; 2 Snyder, Mines, chap. 2, p. 932 ; Offerraan v. Starr, 2 Pa. St. 394, 44 Am. Dec. 211, 10 Mor. Min. Eep. 614; Moore v. Miller, 8 Pa. 273 ; Hyatt V. Vincennes JSTat. Bank, 113 U. S. 408, 28 L. ed. 1009, 5 Sup. Ct. Eep. 573 ; Lehigh Zinc & L Co. v. Bamford, 150 U. S. 665, 37 L. ed. 1215, 14 Sup. Ct. Eep. 219 ; Tennessee Oil, Gas & Mineral Co. v. Brown, 65 C. C. A. 524, 131 Fed. 696 ; Eaynolds V. Hanna, 55 Fed. 783 ; Co. Litt. 53-b ; Clegg v. Eowland, L. E. 2 Eq. 160, 35 L. J. Ch. K S. 396, 14 L. T. K S. 217, 14 Week. Eep. 530, 17 Eng. Eul. Cas. 725, 8 Mor. Min. Eep. 520. As a tax laid only when the income is received by corpora- tions, it is also subject to the charge that it is, in effect, an at- tempt to levy a tax upon the corporate franchises of such corpo- rations, and, as such, it cannot be sustained. M'CuUoch V. Maryland, 4 Wheat. 316, 4 L. ed. 579 ; The Col- lector V. Day (Buffington v. Day) 11 Wall. 113, 20 L. ed. 122; Weston V. Charleston, 2 Pet. 449, 7 L. ed. 481 ; California v. Oentral P. E. Co. 127 U. S. 1, 32 L. ed. 150, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073; Home Ins. Co. v. New York, 134 U. S. 594, 33 L. ed. 1025, 10 Sup. Ct. Eep. 593 ; Wisconsin 'C. E; Co. V. Price County, 133 U. S. 496, 33 L. ed. 687, 10 Sup. Ct. Eep. 341 ; Union P. E. Co. v. Peniston, 18 Wall. 5, 21 L. ed. 787; Osborn v. Bank of United States, 9 Wheat. 738, 6 L. ed. 204; West Eiver Bridge Co. v. Dix, 6 How. 507, 12 L. ed. 535 ; San Bernardino County v. Southern P. E. Co. 118 U. S. 417, 30 L. ed. 125, 6 Sup. Ct. Eep. 1144; Pollock v. Farmers' Loan & T. Co. 157 U. S. 584, 39 L. ed. 820, 15 Sup. Ct Eep. 673. The law not only denies equal protection, but operates to de- prive parties of their property without due process of law, and ignores the provision that excessive fines shall not be imposed. Cooley, Const. Lim. 6th ed. p. 434 ; Harding v. People, 160 111. 459, 32 L.E.A. 445, 52 Am. St. Eep. 344, 43 N. E. 624; Bank of Columbia v. Okely, 4 Wheat. 244, 4 L. ed. 561 ; San Bernardino County v. Southern P. E. Co. 118 U. S. 423, 30 L. ed. 127, 6 Sup. Ct. Eep. 1144; Ex parte Young, 209 U. S. FLINT V. STONE TEACY CO. 117? 123, 52 L. ed. 714, 13 L.E.A.(KS.) 932, 28 Sup. Ct. Kep. 441, 14 A. & E. Ann. Cas. 764. Mr. Charles Howard 'Williams argued the cause and filed a brief for appellants in No. 456 : The tax imposed is an income tax, pure and simple ; for, al- though the name is changed, the court will regard the substance rather than the name. The tax is therefore invalid. Western U. Teleg. Co. v. Kansas, 216 U. S. 1, 27, 54 L. ed. 355, 366, 30 Sup. Ct. Eep. 190; Home Sav. Bank v. Des Moines, 205 U. S. 510, 51 L. ed. 906, 27 Sup. Ct. Eep. 571 ; Income Tax Cases (Pollock v. Farmers' Loan & T. Co.) 157 U. S. 429, 39 L. ed. 759, 15 Sup. Ct. Eep. 673; Pollock v. Farmers' Loan & T. Co. 158 U. S. 601, 39 L. ed. 1108, 15 Sup. Ct. Eep. 912. Considered as an excise, the tax is not uniform. It does not apply to all of a class alike, neither is it imposed on all of a class throughout the United States. It is therefore invalid. Pollock V. Farmers' Loan & T. Co. 157 U. S. 429, 39 L. ed. 759, 15 Sup. Ct. Eep. 673 ; United States v. Singer, 15 Wall. Ill, 121, 21 L. ed. 49, 51 ; Head Money Cases (Edye v. Eobert- son) 112 U. S. 580, 594, 28 L. ed. 798, 802, 5 Sup. Ct. Eep. 247; Cooley, Taxn. p. 215; M'CuUoch v. Maryland, 4 Wheat. 316, 435, 4 L. ed. 579, 608. The tax is not equal on all members of the classes it seeks to reach, exempting without basis some and taxing others. It is therefore invalid. Citizens' Sav. & L. Asso. v. Topeka, 20 Wall. 655, 22 L. ed. 455 ; Cooley, Const. Lim. pp. 598, 607, 615 ; People ex rel. De- troit & H. E. Co. V. Salem, 20 Mich. 473, 4 Am. Eep. 400 ; Albany City Nat. Banlt v. Maher, 20 Blatchf. 341, 9 Fed. 884 ; Mugler V. Kansas, 123 U. S. 623, 661, 31 L. ed. 205, 210, 8 Sup. Ct. Eep. 273 ; Coe v. Errol, 116 U. S. 517, 524, 529, 29 L. ed. 715, 717, 719, 6 Sup. Ct. Eep. 475 ; Soon Hing v. Crowley, 113 U. S. 703, 709, 28 L. ed. 1145, 1147, 5 Sup. Ct. Eep. 730; Connolly v. Union Sewer Pipe Co. 184 U. S. 540, 560, 46 L. ed. 679, 690, 22 Sup. Ct. Eep. 431 ; Cook v. Marshall County, 196 U. S. 274, 49 L. ed. 476, 25 Sup. Ct. Eep. 233; Seaboard Air Line E. Co. v. Seegers, 207 U. S. 76, 52 L. ed. 109, 2& Sup. Ct. Eep. 28. 1174 LEADING CASES. In the same way the tax offends the due-process clause of the Constitution. It in effect assesses certain corporations for the benefit of others which are exempted. It is therefore invalid. Lowell V. Boston, 111 Mass. 454, 15 Am. Eep. 39 ; Citizens' Sav. & L. Asso. v. Topeka, 20 Wall. 655, 22 L. ed. 455; Hur- tado V. California, 110 U. S. 516, 535, 28 L. ed. 232, 238, 4 Sup. Ct. Eep. Ill, 202 ; Leeper v. Texas, 139 U. S. 462, 468, 35 L. ed. 225, 227, 11 Sup. Ct. Eep. 579 ; Giozza v. Tiernan, 148 U. S. 657, 662, 37 L. ed. 599, 601, 13 Sup. Ct. Eep. 721 ; Caldwell v. Texas, 137 U. S. 692, 697, 34 L. ed. 816, 818, 11 Sup. Ct. Eep. 224; Bank of Columbia v. Okely, 4 Wheat. 235, 244, 4 L. ed. 559, 561 ; Madisonville Traction Co. v. St. Bernard Min. Co. 196 U. S. 239, 49 L. ed. 462, 25 Sup. Ct. Eep. 251. The effect of the tax under the provisions of the present law is to create favored classes, contrary to the provisions of the Constitution. Citizens' Sav. & L. Asso. v. Topeka, 20 Wall. 655, 22 L. ed. 455 ; Leeper v. Texas, 139 U. S. 462, 468, 35 L. ed. 225, 227, 11 Sup. Ct. Eep. 579. The present tax cannot stand as an excise on the privilege to exist, for that right comes from the state, and is not taxable by the Federal government. Ambrosini v. United States, 187 TJ. S. 1, 47 L. ed. 49, 23 Sup. Ct. Eep. 1, 12 Am. Crim. Eep. 699 ; Texas v. White, 7 Wall. 700, 19 L. ed. 227 ; The Collector v. Day (Buffington v. Day) 11 Wall. 113, 127, 20 L. ed. 122, 126 ; Pollock v. Farm- ers' Loan & T. Co. 157 U. S. 584, 39 L. ed. 820, 15 Sup. Ct. Eep. 673 ; South Carolina v. United States, 199 U. S. 453, 50 L. ed. 266, 26 Sup. Ct. Eep. 110, 4 A. & E. Ann. Cas. 737. The administrative features of the act are invalid because they offend the provisions of articles 4 and 5 of the Amendment to the Constitution. Boyd V. United States, 116 U. S. 627, 29 L. ed. 749, 6 Sup. Ct. Eep. 524; People ex rel. Ferguson v. Eeardon, 197 N". Y. 244, 27 L.E.A.(]Sr.S.) 141, 134 Am. St. Eep. 871, 90 N. E. 829; Eobson v. Doyle, 191 111. 566, 61 IST. E. 435; Counsel- man V. Hitchcock, 142 U. S. 562, 35 L. ed. 1113, 3 Inters. Com. Rep. 816, 12 Sup. Ct. Eep. 195 ; People ex rel. Taylor v. Forbes, 143 ]Sr. Y. 219, 38 N. E. 303; People ex rel. Lewisohn v. O'Brien, 176 W. Y. 253, 68 K E. 353, 15 Am. Crim. Eep. 97; Emery's Case, 107 Mass. 172, 9 Am. Eep. 22. FLINT V. STONE TEACY CO. 1175 Mr. Howard n. Williams also filed a brief for appellants in No. 456. Solicitor General Bowers argued the cause, and, with Attor- ney General Wickersham, filed a brief (by special leave) for the United States: Numerous decisions of this court show that this tax is an ex- cise upon the conduct or transaction of business. They may be put for convenience into five groups : (1) A case identical with the present, holding that a tax de- clared in the statute to be laid on business in an amount "equiv- alent to" a certain percentage of income is an excise on the transaction of the business. Spreckels Sugar Kef. Co. v. McClain, 192 U. S. 397, 48 L. ed. 496, 24 Sup. Ct. Eep. 376. (2) Cases even stronger than the Spreckles Case, in that they hold that a tax laid in terms on the income of a business — instead of being laid in terms upon the business in an amount equal or equivalent to a percentage of the income — is still an excise upon the business. Pacific Ins. Co. v. Soule, 7 Wall. 433, 19 L. ed. 95; Michi- gan C. K. Co. V. Collector (Michigan C. E. Co. v. Slack) 100 U. S. 595, 25 L. ed. 647; United States v. Erie R. Co. 106 U. S. 327, 27 L. ed. 151, 1 Sup. Ct. Eep. 223 ; Springer v. United States, 102 U. S. 586, 26 L. ed. 253. (3) Cases holding various taxes to be excises on business, though they are laid in terms upon property engaged in the busi- ness. Provident Inst. v. Massachusetts, 6 Wall. 611, 18 L. ed. 907; Hamilton Mfg. Co. v. Massachusetts, 6 Wall. 632, 18 L. ed. 904; Veazie Bank v. Fenno, 8 Wall. 533, 19 L. ed. 482 ; United States V. Singer, 15 Wall. Ill, 21 L. ed. 49 ; Merchants' Nat. Bank v. United States, 101 U. S. 1, 25 L. ed. 979. (4) A case exhibiting an excise on business under a stat- ute which, instead of laying the tax in terms on property en- gaged in the business, required the tax to be equal to a certain percentage of property so engaged. Society for Savings v. Coite, 6 Wall. 594, 18 L. ed. 897. (5) Cases which, while not relating to business, classify as excises various taxes imposed by Congress upon special trans- 1176 LEADING CASES. actions concerning property, or upon the enjoyment or exercise of particular privileges or advantages connected with property. Scholey v. Kew, 23 Wall. 331, 23 L. ed. 99 ; Knowlton v. Moore, 178 U. S. 41, 44 L. ed. 969, 20 Sup. Ct. Kep. 747 j Plummer v. Coler, 178 U. S. 115, 44 L. ed. 998, 20 Sup. Ct. Eep. 829 ; Murdock v. Ward, 178 U. S. 139, 44 L. ed. 1009, 20 Sup. Ct. Eep. 775; United States v. Perkins, 163 U. S. 625, 41 L. ed. 287, 16 Sup. Ct. Eep. 1073 ; Snyder v. Bettman, 190 U. S. 249, 47 L. ed. 1035, 23 Sup. Ct. Eep. 803 ; Thomas v. United States, 192 U. S. 363, 48 L. ed. 481, 24 Sup. Ct. Eep. 305; New York ex rel. Hatch v. Eeardon, 204 U. S. 152, 51 L. ed. 415, 27 Sup. Ct. Eep. 188, 9 A. & E. Ann. Cas. 736; Mcol v. Ames, 173 U. S. 509, 43 L. ed. 786, 19 Sup. Ct. Eep. 522. The established rule that the states may tax property used in interstate commerce, though they may not tax the business of interstate commerce or income from that business, shows that a tax upon the business is different from a tax upon the property employed in that business, and so is not direct. Philadelphia & S. Mail S. S. Co. v. Pennsylvania, 122 U. S. 326, 30 L. ed. 1200, 1 Inters. Com. Eep. 308, 7 Sup. Ct. Eep. 1118; Galveston, H. & S. A. E. Co. v. Texas, 210 U. S. 217, 52 L. ed. 1031, 28 Sup. Ct. Eep. 638 ; Pullman's Palace Car Co. V. Pennsylvania, 141 U. S. 18, 35 L. ed. 613, 3 Inters. Com. Eep. 595, 11 Sup. Ct. Eep. 876; Adams Exp. Co. v. Ohio State Auditor, 166 U. S. 185, 41 L. ed. 965, 17 Sup. Ct. Eep. 604; Fargo v. Hart, 193 U. S. 490, 48 L. ed. 761, 24 Sup. Ct. Eep. 498. A tax on the business of the company is not, in legal view, a tax on the shares of the company's stock or on the income from those shares. Logan County v. United States, 169 U. S. 255, 42 L. ed. 737, 18 Sup. Ct. Eep. 361; Knowlton v. Moore, 178 U. S. 41, 44 L. ed. 969, 20 Sup. Ct. Eep. 747; Plummer v. Coler, 178 U. S. 115, 44 L. ed. 998, 20 Sup. Ct. Eep. 829 ; Murdock v. Ward, 178 U. S. 139, 44 L. ed. 1009, 20 Sup. Ct. Eep. 775 ; United States V. Perkins, 163 U. S. 625, 41 L. ed. 287, 16 Sup. Ct. Eep. 1073 ; Snyder v. Bettman, 190 U. S. 249, 47 L. ed. 1035, 23 Sup. Ct. Eep. 803. Even a tax laid directly on corporate property is not a tax on the separate shares of the corporation's stock. BXINT V. STONE TEACY CO. 117Y Owensbor© ISTat. Bank v. Owensboro, 173 U. S. 664, 43 L. ed. 850, 19 Sup. Ct. Eep. 537; 'New Orleans v. Citizens' Bank, 167 TJ. S. 371, 42 L. ed. 202, 17 Sup. Ct. Eep. 905 ; Home Sav. Bank v. Des Moines, 205 IT. S. 503, 51 L. ed. 901, 27 Sup. Ct. Kep. 571. The converse proposition, that a tax on shares is not a tax on the property of the company, is also settled. Van Allen v. Assessors (Churchill v. Iltica) 3 "Wall. 573, 18 L. ed. 229 ; New York v. Tax & A. Comrs. 4 Wall. 244, 18 L. ed. 344 ; Bradley v. Illinois, 4 Wall. 459, 18 L. ed. 433 ; First Nat. Bank v. Kentucky, 9 Wall. 353, 19 L. ed. 701 ; Cleveland Trust Co. V. Lander, 184 U. S. Ill, 46 L. ed. 456, 22 Sup. Ct. Rep. 394. The tax does not become direct in the special case of a com- pany engaged mainly, or even solely, in the business of hand- ling or dealing in real estate. Spreckels Sugar Eef. Co. v. McClain, 192 IT. S. 397, 48 L. ed. 496, 24 Sup. Ct. Rep. 376 ; Com. v. Hamilton Mfg. Co. 12 Allen, 298 ; Scholey v. Eew, 23 Wall. 331, 23 L. ed. 99 ; Thomas V. United States, 192 TJ. S. 363, 48 L. ed. 481, 24 Sup. Ct. Eep. 305. The tax is not an infraction of the general power of the states to authorize the formation of corporations and joint stock com- panies. Michigan C. R. Co. v. Collector (Michigan C. R. Co. v. Slack) 100 TJ. S. 595, 25 L. ed. 647; United States v. Erie E. Co. 106 U. S. 327, 27 L. ed. 151, 1 Sup. Ct. Eep. 223; Spreckels Sugar Eef. Co. v. McClain, 192 U. S. 397, 48 L. ed. 496, 24 Sup. Ct. Eep. 376 ; Veazie Bank v. Eenno, 8 Wall. 533, 547, 19 L. ed. 482, 487; Enowlton v. Moore, 178 U. S. 41, 59- 61, 44 L. ed. 969, 977, 978, 20 Sup. Ct. Eep. 747; Thomas v. United States, 192 U. S. 363, 48 L. ed. 481, 24 Sup. Ct. Eep. 305 ; Nicol v. Ames, 173 U. S. 509, 43 L. ed. 786, 19 Sup. Ct. Eep. 522; South Carolina v. United States, 199 U. S. 437, 50 L. ed. 261, 26 Sup. Ct. Eep. 110, 4 A. & E. Ann. Cas. 737. The adjudications of this court concerning state taxation of the business or franchises of a corporate agent of the United States are irrelevant to the question of the power of the United States to tax the business or franchises of miscellaneous corpora- tions formed under state laws. 11V8 LEADING CASES. M'Oulloch V. Maryland, 4 Wheat. 316, 4 L. ed. 579 ; Osborn V. Bank of United States, 9 Wheat. T38, 6 L. ed. 204; Thom- son V. Union P. E. Co. 9 Wall. 5Y9, 19 L. ed. 792 ; Union P. R. Co. V. Peniston, 18 Wall. 5, 21 L. ed. 787 ; California v. Cen- tral P. R. Co. 127 U. S. 1, 32 L. ed. 150, 2 Inters. Com. Eep. 153, 8 Sup. Ct. Eep. 1073 ; Western U. Teleg. Co. v. Texas, 105 U. S. 460, 26 L. ed. 1067. Even if a state should actually assume the operation of a rail- road, whether directly or indirectly, through a special corporate agency, or should assume to do any other kind of business, the operations of the state in the business would be taxable by the United States. South Carolina v. United States, 199 U. S. 437, 50 L. ed. 261, 26 Sup. Ct. Eep. 110, 4 A. & E. Ann. Cas. 737. If the business of a public-service company, incorporated by a state, could be deemed an activity of the state itself, and even if such activity of the state could be held to be beyond the tax- ing power of the United States unless the state should assent to the tax, still such assent by the state to taxation of the busi- ness by the United States would be inferred, in the absence of legislative declaration to the contrary by the state. Eeagan v. Mercantile Trust Co. 154 U. S. 413, 38 L. ed. 1028, 4 Inters. Com. Eep. 575, 14 Sup. Ct. Rep. 1060. The tax is not imposed upon state or municipal bonds, or upon the income of such bonds, forming part of the business as- sets of the company whose business is taxed ; and the company's income from such bonds is to be included in the computation of its net income. Society for Savings v. Coite, 6 Wall. 594, 18 L. ed. 897 ; Provident Inst. v. Massachusetts, 6 Wall. 611, 18 L. ed. 907 ; Hamilton Mfg. Co. v. Massachusetts, 6 Wall. 632, 18 L. ed. 904; Merchants' ISTat. Bank v. United States, 101 U. S. 1, 25 L. ed. 979 ; Veazie Bank v. Fenno, 8 Wall. 533, 19 L. ed. 482 ; Home Ins. Co. v. New York, 134 U. S. 594, 33 L. ed. 1025, 10 Sup. Ct. Eep. 593 ; Murdock v. Ward, 178 U. S. 139, 44 L. ed. 1009, 20 Sup. Ct. Eep. 775 ; Plummer v. Coler, 178 U. S. 115, 44 L. ed. 998, 20 Sup. Ct. Rep. 829 ; Van Allen v. Assessors (Churchill v. Utica) 3 Wall. 573, 18 L. ed. 229; ISTew York v. Tax & A. Comrs. 4 Wall. 244, 18 L. ed. 344; Bradley v. Illi- nois, 4 Wall. 459, 18 L. ed. 433 ; First Nat. Bank v. Kentucky, FLINT V. STONE TRACT CO. 1179 9 Wall. 353, 19 L. ed. 701 ; Cleveland Trust Co. v. Lander, 184 U. S. Ill, 46 L. ed. 456, 22 Sup. Ct. Kep. 394; Fieklen v. Tax- ing Dist. 145 U. S. 1, 36 L. ed. 601, 4 Inters. Com. Rep. 79, 12 Sup. Ct. Rep. 810 ; Tiernan v. Rinker, 102 TJ. S. 127, 26 L. ed. 104. The constitutional requirement of uniformity in "all duties, imposts, and excises" imposed by Congress (clause 1 of § 8 of art. 1, of the Constitution) calls for no more than geographical "uniformity. Knowlton v. Moore, 178 U. S. 41, 44 L. ed. 969, 20 Sup. Ct. Hep. 747. The propriety of classifying corporations and joint stock com- panies together, for like taxation, is illustrated, and indeed con- other special corporate power, in aid of the business of the lessee. 'We therefore do not pass upon the question whether, if it should 1246 LEADING CASES. do SO, it would be taxable under the act in question. We ean- not, however, agree with the contention made in behalf of the government, that because the Minehill Company retains its franchise of corporate existence, maintains its organization, and holds itself ready to exercise its franchise of eminent domain, or other reserved powers, if and when required by the lessee, and ready to resume possession of the property at the expiration of the lease, it is therefore to be treated as doing business, in respect of the railroad, within the meaning of the corporation tax law. As to these matters the case is governed by what was said by the court in Flint v. Stone Tracy Co. 220 U. S. 145, 55 L. ed. 411, 31 Sup. Ct. Rep. 342, Ann. Cas. 1912B, 1312 : "It is therefore apparent, giving all the words of the statute f^ffect, that the tax is imposed not upon the franchises of the corporation, irrespective of their use in business, nor upon the property of the corporation, but upon the doing of corporate or insurance business, and with respect to the carrying on there- of." And again, p. 150, — "The tax is not payable unless there be a carrying on or doing of business in the designated capacity, and this is made the occasion for the itax, measured by the standard prescribed." There remains to be considered the fact that the Minehill Company has a considerable amount of personal assets known as its "contingent fund," in the form of investments (the amount and particulars are not specified), from which it derives an annual income of about $24,000; that it keeps a deposit in bank, receives and collects interest upon such deposit, and dis- tributes the income thus received, as well as the rentals received from the Reading Company (after payment of expenses and taxes), to its stockholders in the form of dividends. In our opinion the mere receipt of income from the property leased (the property being used in business by the lessee, and not by the lessor) and the receipt of interest and dividends from in\'ested funds, bank balances, and the like, and the distribu- tion thereof among the stockholders of the Minehill Company, amount to no more than receiving the ordinary fruits that arise from the ownership of property. The ground of the decision in the Pollock Case was that a tax upon income received from real estate and invested personal property (as distinguished from income received from the transaction of business) was in MC COACH V. MINEHILL & S. H. E. CO. 1247 effect a direct tax upon the property itself, and therefore invalid unless apportioned according to population. In the Flint Case, in sustaining the act of 1909 as a tax upon the privilege of doing business in corporate form, against the objection that it in- cludes -within its reach the income of real estate and personal property not used in the business, and not the subject of taxa- tion, the court said (220 U. S. 163) : "The measure of such tax may be the income from the property of the corporation, although a part of such income is derived from property in it- self nontaxable." And again, after referring to previous de- cisions (220 U. S. 165) : "It is therefore well settled by the decisions of this court that when the sovereign 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 nontaxable. Ap- plying 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 Con- gress to impose, it is no valid objection that this measure in- cludes, in part, at least, property which, as such, could not be directly taxed. * * * The tax must be measured by some standard, and none can be chosen which will operate with absolute justice and equality upon all corporations. Some cor- porations do a large business upon a small amount of capital; others with a small business may have a large capital. A tax upon the amount of business done might operate as unequally as a measure of excise as it is alleged the measure of income from all sources does. Wor can it be justly said that invest- ments have no real relation to the business transacted by a corporation. The possession of large assets is a business ad- vantage of great value ; it may give credit which will result in more economical business methods ; it may give a standing which shall facilitate purchases ; it may enable the corporation to enlarge the field of its activities and in many ways give it business standing and prestige." In short, the inclusion of income derived from property in arriving at the measure of the tax to be imposed with respect to the doing of corporate business was sustained largely because the property not used in the business, and the income from 1248 LEADIlirG CASES. such property, have a fair relation to the business itself, and may contribute materially to its proper and economical con- duct. But that reasoning furnishes no support for the con- tention that the mere receipt of income from property, and the payment of organization and administration expenses inci- dental to the receipt and distribution thereof, constitute such a business as is taxable within the meaning of the act of 1909. The distinction is between (a) the receipt of income from out- side property or investments by a company that is otherwise engaged in business ; in which event the investment income may be added to the business income in order to arrive at the measure of the tax; and (b) the receipt of income from property or investments by a company that is not engaged in business ex- cept the business of owning the property, maintaining the in- vestments, collecting the income, and dividing it among its stockholders. In the former case the tax is payable ; in the lat- ter not. And so, upon the whole, we think the court below correctly held that the present case is governed by Zonne v. Minneapolis Syndicate, 220 U. S. 187, 55 L. ed. 428, 31 Sup. Ct. Eep. 361, and that the taxes under consideration were unlawfully im- posed. Judgment afBrmed. Mr. Justice Day, dissenting: I am unable to concur in the opinion of the majority of the court. It seems to me that, applying the principles laid down in the Corporation Tax Cases (Flint v. Stone Tracy Co.) 220 U. S. 107, 55 L. ed. 389, 31 Sup. Ct. Eep. 342, Ann. Cas. 1912B, 1312, the Minehill & Schuylkill Haven Eailroad Com- pany is a corporation doing business within the meaning of the law, and subject to the tax. We are advised by a brief filed by an amicus curiae that the decision in this case will affect a number of cases now pending, and, owing to its importance as affecting the public revenue, I feel justified in briefly stating the grounds of my dissent. The corporation tax is imposed under the terms of the law upon every corporation organized for profit, having a capital stock represented by shares, and engaged in business in any itate. Every such corporation is subject to a special excise tax with respect to the carrying on or doing of business, equivalent MO COACH V. MINEHILL & S. H. E. CO. 1249 to 1 per cent upon the entire net income over and above $5,000, received by it from all sources during the taxing year. This tax, it -wsLs held in 220 U. S., was constitutionally imposed, and rests upon the doing of business with the advantages which inhere in the peculiarities of corporate or joint stock organiza- tion. As was said in that case, doing business is a very compre- hensive term, embracing about everything in which a person can be employed, and the definition of business as "that which occupies the time, attention, and labor of men for the purpose of a livelihood or profit" was adopted and approved. As is said in the majority opinion, the precise question in this case is. Was the Minehill Company doing business in the sense in which the term is employed in the law, or had it gone out of business in such substantial sense that it was no longer subject to the law ? I do not care to restate the facts, which are developed fully in the majority opinion. It therein appears that the Minehill Company, while it has leased its railroad for a term of years, still maintains corporate organization, keeps an office and an office force, and collects the rentals from the lessee company, and distributes the sums among its shareholders. It has also agreed to keep up its corporate organization, and, if necessary, to use its corporate powers for the benefit of the lessee. And its activities do not stop here. The affidavit in defense, filed by the collector, which I understand the Pennsylvania prac- tice takes as true, shows that the company receives annually sums of money as interest on deposits, and maintains a con- tingent fund from which it also receives annual sums as divi- dends. The return discloses that the amount of dividends re- ceived for the year ending December 31, 1909, as interest on deposits, and from its contingent fund, was $24,471.07. The nature and amount of the investments are not specified in the record, but they must be very considerable, in view of the an- nual income derived. We are therefore brought to the direct question, is a live corporation which, though it has leased its railroad property for a term of years, maintains and has agreed to maintain its corporate organization, collects and distributes an annual rental of $252,612, keeps and maintains an office and an office force at large expense, deposits money upon interest, and receives and distributes the earnings thereof, invests a large fund which, Foster Income Tax. — 79. 1250 LEADING CASES. together with interest on deposits, yields over $24^000 a year, doing business within the meaning of the corporation tax act? The amount of business done is utterly immaterial. The doing of any business with the advantages which inhere in corporate organization brings the corporation within the terms of the act.. Such was the ruling in the Mint Case, after full consideration) by this court of the terms and scope of the law. It is said, however, that this ease is controlled by the ruling in the Zonne Case, which was decided at the same time as the Flint Case (220 U. S. 187, 55 L. ed. 428, 31 Sup. Ct. Rep. 361). It seems to me that the present case is quite unlike that- one. There the corporation, which owned a piece of real estate, had leased it for a term of 130 years at an annual rental of $61,000, and had, at the same time, amended its corporate organization so as to limit its powers to the sole purpose of holding the title to the lands leased, and of receiving and dis- tributing among its stockholders the rentals that accrued un- der the lease, and the proceeds from any disposition of the land.. This was the whole extent of its activity, and the amounts- derived therefrom represented its entire income. In that case the court held that the corporation had practically gone out of business, and had disquaifiled itself from any activity in respect thereof, and therefore did not come within the scope of the act. In the present case the corporation has not disqualified itself from business activity. It maintains a considerable force in active employment, and, entirely apart from the receipts from the railroad lease, so deposits and invests its funds as to create,. in these days of low interest upon good investments, an annual income of over $24,000, as appears by its return. The amount derived from investments depends upon the exercise of judg- ment and the efficiency of management. If business includes everything that occupies the time, attention, and labor of men for profit, it seems to me that these facts show that the Mine- hill Company is carrying on business in the present instance. I am unable to agree that a corporation whose officers and agents are engaged in its behalf in selecting banks in which tO' deposit large sums of money, in passing upon and choosing securities in which corporate funds are to be invested, and then in distributing the interest and profits accruing therefrom among ALDEEMAN V. WELLS. 1251 Its stockholders, is not engaged in doing business in the sense that the corporation in the Zonne Case was not. I think the present case is much nearer the ruling made by this court in the Corporation Tax Cases in the matter of the realty companies therein involved. Take, for instance, the Park Realty Company. That corporation was organized to work, develop, sell, and convey real estate; to lease, exchange, hire, or otherwise acquire property; to erect, alter, or improve buildings; to conduct, operate, manage, or lease hotels, etc. It appeared that at the time of the imposition of the tax the sole business or property owned by the Realty Company was the Hotel Leonori. It was leased for twenty-one years at an annual rental of $55,000. The corporation was engaged in no business, except the management and lease of that hotel property, and was in receipt of no other income than that derived from its rental, and had no assets other than that property and the in- come thereof. It was held to be doing business within the mean- ing of the act. The Minehill Company, it seems to me, is doing more and a greater variety of business than was attributed' to the Park Realty Company as the basis of the assessment upon it. Others of the realty companies held taxable in the Corpora- tion Tax Cases, it seems to me, were engaged in as little busi- ness activity as is the corporation herein involved. With deference to the majority opinion, I think the Minehill Company, upon the facts here adduced, is engaged in business and ought to be held liable to the tax. Mr. Justice Hughes and Mr. Justice Lamar concur in this dissent. SOUTH CAROLINA SUPREME COURT. D. W. ALDERMAN, Appt., v. L. L. WELLS, County Treas- urer, Respt. [85 S. C. 507, 67 S. E. 781; 21 Ann. Cas. 193, 27 L.E.A.(N.S.) 864, with note.] Tax — income — graduation — validity. ]. A graduated income tax which exempts incomes under a speeifie- sonable ground, — some difference which bears a just and proper relation to the attempted classification, — and is not a mere ar- bitrary selection. Fraser v. McConway & T. Co. 82 Fed. 258; Juniata Lime- stone Co. V. Fagley, 187 Pa. 193, 42 L.R.A. 442, 67 Am. St. Rep. 579, 40 Atl. 977 ; Wanser v. Hoos, 60 N. J. L. 482, 64^ Am. St. Rep. 600, 38 Atl. 449 ; Cotting v. Kansas City Stock Yards Co. (Cotting v. Godard) 183 U. S. 79, 46 L. ed. 92,. 22 Sup. Ct. Rep. 30 ; Johnson v. Goodyear Min. Co. 127 Cal.. 4, 47 L.R.A. 338, 78 Am. St. Rep. 29, 59 Pac. 304; Re Pell,. 171 K Y. 48, 57 L.R.A. 540, 89 Am. St. R«p. 797, 63 N. E. 789. The act denies the equal protection of the laws. Raymond v. Chicago Union Traction Co. 207 U. S. 20, 52 L. ed. 78, 28 Sup. Ct. Rep. 7, 12 A. & E. Ann. Cas. 757; Cum- mings V. Merchants' Nat. Bank, 101 U. S. 153, 25 L. ed. 903 ;. Pelton V. Commercial Nat. Bank, 101 U. S. 143, 25 L. ed. 901 ;, New York v. Weaver, 100 U. S. 539, 25 L. ed. 705 ; State ex. rel. Johnson v. Chicago, B. & Q. R. Co. 195 Mo. 228, 113 Am. St. Rep. 661, 93 S. W. 784; Laurens v. Anderson, 75 S. C. 62, 117 Am. St. Rep. 885, 55 S. E. 136, 9 A. & E. Ann. Cas.. 1003; Standard Oil Co. v. Spartanburg, 66 S. C." 37, 44 S. E. 377. The tax is not equal and uniform. State v. Tucker, 56 S. C. 516, 35 S. E. 215 ; Re Page, 60 Kan. 842, 47 L.R.A. 68, 58 Pac. 478; Hamilton v. Wilson, 61 Kan. 511, 48 L.R.A. 238, 59 Pac. 1069 ; State Central R. Co. Prosecutor v. State Assessors, 48 N. J. L. 1, 57 Am. Rep. 516, 3 Atl. 789 ; State v. Ide, 35 Wash. 576, 67 L.R.A. 280, 102 Am. St. Rep. 914, 77 Pac. 961, 1 A. & E. Ann. Cas. 634. 1254 LEADING CASES. Where tax boards intentionally assess property belonging to different persons, such as individuals and corporations, at differ- ent rates or by different systems of valuation, it amounts to a denial of the rule of uniformity and equality prescribed by the Constitution. Cincinnati Southern E. Co. v. Guenther, 19 Fed. 398; Cum- mings V. Merchants' ISTat. Bank; Pelton v. Commercial Nat. Bank ; ' and People v. Weaver, — supra ; Dundee Mortg. Trust Invest. Co. v. Parrish, 11 Sawy. 92, 24 Fed. 202 ; Taylor v. Louisville & N. K. Co. 31 C. C. A. 537, 60 U. S. App. 166, 88 Fed. 350; Eailroad & Teleph. Cos. v. Board of Equalizers, 85 Fed. 302 ; State v. Columbia, 6 S. C. 1 ; Murph v. Landrum, 76 S. C. 21, 56 S. E. 850. As to double taxation, see: — San Francisco v. Mackey, 10 Sawy. 300, 21 Fed. 539, s. c. 22. Fed. 602 ; Detroit Citizens' Street E. Co. v. Detroit, 125 Mich. 673, 84 Am. St.Eep. 589, 85 N. W. 96, 86 IST. W. 809; Brown v. Maryland, 12 Wheat. 419, 444, 6 L. ed. 678, 687 ; Weston V. Charleston, 2 Pet. 449, 7 L. ed. 481; Dobbins v. Erie County, 16 Pet. 435, 10 L. ed. 1022; Almy v. California, 24 How. 169, 16 L. ed. 644; Philadelphia & S. Mail S. S. Co. V. Pennsylvania, 122 U. S. 326, 30 L. ed. 1200, 1 Inters. Com. Eep. 308, 7 Sup. Ct. Eep. 1118 ; Chicago v. Collins, 175 111. 445, 49 L.E.A. 408, 67 Am. St. Eep. 224, 51 N. E. 907 ; 27 Am. & Eng. Enc. Law, pp. 607-609. The tax is invalid, because the statute exempts incomes under $2,500 from the payment of such tax, and thereby creates an unlawful discrimination. Pollock V. Farmers' Loan & T. Co. 157 U. S. 429, 39 L. ed. 759, 15 Sup. Ct. Eep. 673 ; Citizens' Sav. & L. Asso. v. Topeka, 20 Wall. 655, 22 L. ed. 455 ; Parkersburg v. Brown, 106 U. S. 487, 27 L. ed. 238, 1 Sup. Ct. Eep. 442 ; Barbour v. Louisville Bd. of Trade, 82 Ky. 645 ; Lexington v. McQuillin, 9 Dana, 513, 35 Am. Dec. 159 ; Sutton v. Louisville, 5 Dana, 28; Cooley, Taxn. 2d ed. 215; 1 Hamilton's Works 1885 ed. 270. The statute is unconstitutional for the reason that the greater part of plaintiff's income was derived from dividends from stock in corporations, and, as these corporations had previously paid all taxes required by the state laws, to compel payment by plain- ALBEEMAN V. WELLS. 1255 tiff would amount to unjust discrimination against stockholders of corporations. San Francisco v. Mackey, 10 Sawy. 300, 21 Fed. 539. A general tax is one imposed on all persons within the ter- ritorial limits, according to the value of their property, in con- sideration of the protection which the government affords alike to all. Gould V. Baltimore, 59 Md. 378 ; Meier v. Kelly, 20 Or. 86, 25 Pac. 73; Illinois C. E. Co. v. Decatur, 147 U. S. 190, 37 L. ed. 132, 13 Sup. Ct. Eep. 293 ; Shurtleff v. Chicago, 190 111. 473, 60 N. E. 870 ; State ex rel. Donnelly v. Hobe, 106 Wis. 411, 82 N. W. 336. Messrs. J. Fraser Lyon, Attorney General, and J. H. Lesesne for respondent. Hydrick, J., delivered the opinion of the court: The plaintiff paid his income tax for the year 1905, under protest, and brought this action to recover it back, under the provisions of § 413 of the Civil Code of 1902. He alleges that the act which authorized the levy and collection of the tax is unconstitutional because it denies to him the equal protection of the laws and due process of law, in that: (1) Incomes under $2,500 are not taxed, and incomes over said amount are taxed; this being an arbitrary and unreasonable classification, and not being founded on the said income support-- ing a family, or being used in any particular manner or by any class of persons. (2) That incomes less than $5,000 pay a tax of 1 per cent, and incomes from $10,000 to $15,000 pay a tax of 2^ per cent. (3) That said tax includes all natural persons, and excludes all corporations. (4) That nearly all of plaintiff's income for the year for which the said tax was as- sessed was derived from dividends received from stock in cor- porations chartered under the laws of the state of South Caro- lina, and the said corporations had been required to pay the franchise tax in the proportion to the amount of their capital stock, as required by the laws of the state of South Carolina, and, in addition, the said corporations had been taxed and re- quired to pay taxes upon their property for usual state, county, and municipal purposes; and the same amounts to an unreason- able discrimination against and tax upon the stockholders of 1256 LEADING OASES. corporations. (5) In that no tax is assessed against the in- crease in values of property during the year, or from property sold at greater than cost price, or for any increase in market values of stock, bonds, or other investments; this being an un- reasonable and arbitrary classification of property for taxation. (6) In that no deduction is made for any interest or other like expenditures which reduce the net income, and are not exempt in said act as expenses of carrying on business. (Y) In that no deduction is made for taxes or other assessments paid the gov- ernment; the said income tax act thereby being a tax on other taxes, and subjecting some property to double and treble taxa- tion. (8) In that no deduction is allov?ed for losses, -without regard to the nature or cause of same. He also alleges that it violates §§ 2 and 3, art. 10, of the Constitution, and that it was repealed by § 5, supply act 1905 (act February 18, 1905 [24 Stat. atL. p. 993]). To a proper understanding of the questions involved, it will be necessary to set out the first two sections of the act, which is incorporated in §§ 325 to 331 of the Civil Code of 1902. "Sec. 325. There shall be annually assessed, levied, and col- lected upon the gains, gross profits, and income received during the preceding calendar year by every citizen of this state, whether such gains, profits, or income be derived from any kind of property, rents, interests, dividends, or salaries, or from any profession, trade, employment, or vocation carried on in this state or from any other source whatever, a tax of 1 per cent on the amount so derived over and above $2,500 and up to $5,000 ; 1^ per cent on $5,000 and over, up to $7,500; 2 per cent on $7,500 and over, up to $10,000 ; 2^ per cent on $10,000 and over, up to $15,000; 3 per cent on $15,000 and over; and a like tax shall be assessed, levied, and collected annually upon the gains, profits, and income from all property owned, and every business, trade, or profession carried on in this state by persons residing without this state, excepting such corporations as are hereinafter excepted : Provided, that in estimating the gains, profits, and income there shall not be included interest upon such bonds or securities of this state, or of the United States, the principal and interest of which are, by the law of their issue, exempt from taxation. "Sec. 326. In computing incomes, the necessary expenses ALDEEMAIT V. WELLS. 1257 actually incurred in carrying on any business, occupation, or profession, not including remuneration to the taxpayer for personal supervision or the support and maintenance of his. or her family, shall be deducted from the gross income or revenue; and the v^ord 'income,' as used in this article, shall be deemed and taken to mean 'gross profits:' Provided, that no deduction shall be made or allowed for any amount paid out or contracted for permanent improvements or betterment made to increase the value of any property, or estate, or for the increase of capital, capital stock, or assets." Section 327 defines the words "citizen" and "person," as used in the act, as including all natural persons, copartners, and members of any incorporated association, and as excluding all corporations chartered by the laws of the United States or of this or any other state. Section 328 provides that the taxes shall be levied and collected at the same time and in the same manner and by the same officers as other taxes, and that they shall be paid into the state treasury, as other general state taxes. Sections 329 and 330 provide for the time and manner of mak- ing returns, and penalties for failure to make returns, and for making wilfully fraudulent returns, and also that "the tax and the additions thereto as a penalty [are] to be assessed and col- lected in the manner provided for in the case of failure to make returns or lists of personal property." Section 331 is as fol- lows: "In every respect not herein specified, the returns for and the levy and collection of the tax provided in this article- shall be subject to all the provisions of law relative to the assess- ment and collection of taxes on personal property." As one of the objections to the act is that it takes plaintiff's property "without due process of law," we state briefly, but substantially, the method of procedure in ordinary cases, re- quired by the statutes of this state relative to the assessment and collection of taxes on personal property, which, by the terms of the income tax act, are made applicable to the assessment and collection of taxes thereunder. Between the 1st of January and the 20th of February in every year all persons are required to- make a statement of return, on oath, to the county auditor of" all such property, giving its value. The returns for each tax district are subsequently submitted to and passed upon by a board of assessors appointed for such district, who are sworn. 1258 LEADING CASES. to fairly and impartially assess the value of sucli property. If the board increases the aggregate valuation put upon his prop- erty by the taxpayer by as much as $100, notice must be given to the taxpayer, and he has the right of appeal to the county board of equalization, which is composed of the chairman of the boards of assessors for the several tax districts in the county, who are sworn fairly and impartially to discharge the duties im- posed upon them by law. They hear all grievances and appeals from the valuations and assessments made by the boards of as- sessors, and may take testimony in regard to the same. If they raise the valuation of any property, the owner must be notified. If the taxpayer cannot get relief from the board of equalization, he has the right of appeal to the comptroller general, to whom all the testimony relative to each grievance must be forwarded, and he acts thereupon. After the assessments are fixed, the taxes, if not paid within the time prescribed by law, are col- lected by distress or by execution. If a taxpayer conceives that a tax assessed against him is unjust or illegal for any cause, he may pay the same under protest, and bring his action against the treasurer in' the court of common pleas to recover it back. Under that provision of the law, this action was brought. That provision of the 14th Amendment to the Constitution of the United States, which it is claimed this act violates, reads as follows: "No state shall make or enforce any law which shall abridge the privileges or immunities of citizens' of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws." Sec. 5, art. 1, of the Constitution of this state is to the same effect, and in nearly the same words. The rights guar- anteed by these constitutional provisions have been the subject of frequent judicial consideration. The courts have not at- tempted to give a definition of the meaning of the words "due process of law" so as to cover all possible cases, nor have they undertaken to say what would or would not, under all circum- stances, satisfy the guaranty of "the equal protection of the laws," but have generally been content to proceed by the process of inclusion and exclusion in ascertaining their intent and meaning, and their application to the facts of each case, as it is presented for decision, and with giving the reasons upon which the decision is rested. ALDEBMAW V. WELLS. 1259 The claim that the act deprives the plaintiff of his property without due process of law, and denies him the equal protection of the laws, raises questions under the Federal Constitution, upon which the decisions of the Supreme Court of the United States are authoritative and controlling. In solving these ques- tions we must therefore be guided by the decisions of that court. In the Kentucky E. Tax Cases, 115 U. S. 321, 29 L. ed. 414, 6 Sup. Ct. Hep. 57, the court considered a statute of the state of Kentucky, which involved both these constitutional guaran- ties. Upon the question of what is due process of law in the matter of levying and collecting taxes, the court, by M.Y. Justice Matthews, said : "It has, however, been repeatedly decided by this court that the proceedings to raise the public revenue by levying and collecting taxes are not necessarily judicial, and that 'due process of law,' as applied to that subject, does not imply or require the right to such notice and. hearing as are con- sidered to be essential to the validity of the proceedings and judgments of judicial tribunals. Notice by statute is generally the only notice given, and that has been held sufficient. 'In judging what is "due process of law," ' said Mr. Justice Brad- ley, in Davidson v. New Orleans, 96 U. S. 97, 107, 24 L. ed. 616, 620, 'respect must be had to the cause and object of the taking, whether under the taxing power, the power of eminent domain, or the power of assessment for local improvements, or none of these ; and, if found to be suitable or admissible in the special case, it will be adjudged to be "due process of law," but if found to be arbitrary, oppressive, and unjust, it may be declared to be not "due process of law." ' In its application to proceedings for the levy and collection of taxes, it was said in McMillen v. Anderson, 95 U. S. 37, 42, 24 L. ed. 335, 336, that it 'is not and never has been, considered necessary to the validity of a tax * * * that the party charged should have been present or had an opportunity to be present, in some tribu- nal when he was assessed.' This language, it is true, was used in the decision of a case in reference to a license tax, where all the circumstances of its assessment were declared by statute, and nothing was intrusted to the discretion of public officers; but in the State R Tax Cases, 92 U. S. 575, 610, 23 L. ed. ■663, 672, where the ascertainment of the taxable value of rail- i-oads was the duty of a board, as in the present cases, whose 1260 LEADIITG CASES. assessment was challenged for the reason that the proceeding was not 'due process of law' for want of notice and a hearing, it was said by Mr. Justice Miller, delivering the opinion of the court: 'This board has its time of sitting fixed by law. Its sessions are not secret. No obstruction exists to the appearance of anyone before it to assert a right or redress a wrong; and in the business of assessing taxes, this is all that can be rea- . sonably asked.' " See also Cass Farm Co. v. Detroit, 181 U. S. 396, 45 L. ed. 914, 21 Sup. Ct. Eep. 644. Upon the guaranty of the equal protection of the laws the same court, speaking through Mr. Justice Bradley, in Bell's Gap R Co. V. Pennsylvania, 134 TJ. S. 232, 33 L. ed. 892, 10 Sup. Ct. Eep. 533, said: "The provision in the 14th Amend- ment, that no state shall deny to any person within its jurisdic- tion the equal protection of the laws, was not intended to pre- vent a state from adjusting its system of taxation in all proper and reasonable ways. It may, if it chooses, exempt certain classes of property from any taxation at all, such as churches,, libraries, and the property of charitable institutions. It may impose different specific taxes upon different trades and professions, and may vary the rates of excise upon various products; it may tax real estate and personal prop- erty in a different manner; it may tax visible property only, and not tax securities for payment of money; it may allow deductions for indebtedness, or not allow them. All such regulations, and those of like character, so long as they proceed within reasonable limits and general usage, are within the discretion of the state legislature, or the people of the state- in framing their Constitution. But clear and hostile discrim- inations against particular persons and classes, especially such, as are of an unusual character, unknown to the practice of our- governments, might be obnoxious to the constitutional prohibi- tion. It would, however, be impracticable and unwise to at- tempt to lay down any general rule or definition on the subject that would include all cases. They must be decided as they arise. We think that we are safe in saying that the 14th: Amendment was not intended to compel the state to adopt am iron rule of equal taxation. If that were its proper construc- tion, it would not only supersede all those constitutional pro- visions and laws of some of the states whose object is to secure* AliBEEMAlT V. WELLS. 1261 equality of taxation, and whidi are usually accompanied with qualifications deemed material, but it would render nugatory those discriminations which the best interests of society require, which are necessary for the encouragement of needed and use- ful industries, and the discouragement of intemperance and vice, and which every state, in one form or another, deems it expedi- ent to adopt." In Magoun v. Illinois Trust & Sav. Bank, 170 U. S. 283, 42 L. ed. 1037, 18 Sup. Ct. Eep. 594, the constitutionality of a statute of the state of Illinois was affirmed. The statute im- posed a graduated tax on legacies and inheritances, and divided the beneficiaries into three classes; the first and second being composed of lineal and collateral relations of the decedent, and the third being composed of more distant relatives and strangers. On the first class a tax of 1 per cent was imposed on all sums in excess of $2,000; on the second, 2 per cent on all sums in excess of $2,000 ; and on the third, 3 per cent on all sums over $500 and less than $10,000, increasing 1 per cent on each succeeding $10,000 up to $50,000, above which amount it was 6 per cent. The act was attacked on the ground that it denied to the plaintiff the equal protection of the laws. In disposing of the question, the court said: "What satisfies this equality [equal protection of the laws] has not been, and probably never can be, precisely defined. Generally it has been said that it only requires the same means and methods to be applied impar- tially to all the constituents of each class, so that the law shall operate equally and uniformly upon all persons in similar circumstances." The right of the legislature of the state to make reasonable classifications of persons and property for public purposes has been so often afiirmed by the courts that it can no longer be questioned. If the classification is not arbi- trary, — that is, if it bears reasonable relation to the purposes to be effected, — and if the constituents of each class are all treated alike, under similar circumstances and conditions, the rule of equality is satisfied. It is contended by appellant that this act violates the pro- visions of § 1, art. 10, of the Constitution of this state, which requires the legislature to provide for a uniform and equal rate of assessment and taxation, and prescribe regulations to secure a just valuation for taxation for all property. The section. 1262 LEADING CASES. however, has this important proviso: "That the general as- sembly may provide for a graduated tax on incomes." These provisions must be construed together, and by the proviso taxes on incomes are excepted from the requirement of a uniform and equal rate of assessment and taxation of all property; for it is impossible to conceive hov7 a tax on incomes could be graduated without exempting some incomes, or without making the tax higher on some than on others. If the tax is so graded, those paying the lower tax are exempted to the extent of the difference. The determination of the amount of income that shall be wholly exempted, and the method and ratio of gradua- tion, were left by the Constitution to the discretion of the legis- lature, and with the exercise of that discretion the courts have no concern. Necessarily the exercise of such a discretion must to some extent be arbitrary. The next objection to the act is that it results in double taxa- tion. The contention is that plaintiff's income was derived from dividends received upon his stock in corporations chartered and doing business under the laws of the state, and as these cor- porations had paid taxes on their property, and also on their franchises, a tax on plaintiff's income is double taxation. There is much room for discussion and difference of opinion as to what really amounts to double taxation. But the weight of au- thority and reason sustains the taxation of shares of stock in a corporation to the holder thereof, nothwithstanding the cor- poration has paid taxes on its property and also on its fran- chises. The rents and profits derived from real estate, and the products of the farm, may be taxed, though the land from which they are derived has also been taxed. The profits of a business may be taxed, though the property in the business, bought on credit, has been taxed to the owner, and the debt he owes there- for has been taxed to the creditor, and the property covered by mortgage may be taxed to the owner, and the mortgage thereon to the mortgagee. Cooley, Taxn. 3d ed. 387 et seq. These may be instances of double taxation in one sense, yet they are not within the rule of uniformity and equality prescribed by the Constitution, which forbids the taxation twice of the same prop- erty for the same purpose, while other property, under similar circumstances and conditions, is taxed only once. There is no constitutional inhibition against such taxation; and in the ab- AIJ)EKMAN V. WEXLS. 1263 senee of constitutional restriction, the power of the legislature to tax is limited only by its own discretion and its responsibility to its constituents. It has been said the power to tax- is an inherent right of sovereignty necessary to its existence, and limited only by its necessities. Judge Cooley, in his work on Taxation, at page 392, says: "We make out, therefore, no conclusive case against a tax when we show that it reaches twice the same property for the same purpose. This may have been intended, and, in many cases at least, is admissible." Next, it is alleged that the act violates § 2, art. 10, of the Constitution of this state, which declares: "The general as- sembly shall provide for an annual tax sufficient to defray the estimated expenses of the state for each year," — in that it at- temps to provide for taxation for more than one year, regard- less of the estimated expenses of the state for years in which the same is to be collected. This is merely an assumption on the part of the appellant. By the terms of the statute the tax is levied annually, and is applied to the expense of the state in the year in which it is collected. We are bound to assume that, in estimating the annual expenses of the state, the legislature takes into consideration all the sources of income to the state, . including the income tax, and fixes the general levy accordingly. It is also contended that the act violates § 3, art. 10, of the Constitution, which provides: "ISTo tax shall be levied except in pursuance of a law which shall distinctly state the object of the same, to which object the tax shall be applied." The title of the act (22 Stat, at L. p. 529) is: "An Act To Eaise Eeve- nue for the Support of the State Government by the Levy and Collection of a Tax on Income." That is certainly a distinct statement of the object to which the tax shall be applied. The last point made is that the act was repealed by the supply act of 1905. Section 5 of that act requires the auditors and treasurers of the several counties to collect the taxes levied un- der and in pursuance of its provisions, and forbids their collect- ing any other tax whatsoever, except, amongst others, "such special tax or collection as is authorized under any act or joint resolution of the general assembly." It seems to us the excep- tion clearly covers the income tax. But it is argued that this is not a special tax. We think it is. The word "special" is de- fined in the Standard Dictionary as "having in a peculiar and 1264 LEADING CASES. distinguishing degree some characteristic or characteristics ; out of the ordinary." It seems, from the numerous objections urged by plaintiff against this tax, that he at least considers it "out of the ordinary," and as "having in a peculiar and distinguish- ing degree some characteristics" of a very objectionable nature. But there are no express words of repeal in the supply act, and there is certainly no necessary implication of such an intention on the part of the legislature. On the contrary the same pro- vision will be found in each supply act since the passage of the income tax act, and, notwithstanding that provision, the in- come tax act was incorporated in the Code of 1902, and was amended in 1905 by repealing the 8th section of the original act. This clearly shows that the legislature did not intend by that provision in the general supply act to repeal the income tax act. Judgment affirmed. SUPREME COURT OF WISCONSIN. STATE EX REL. BOLENS v. EREAR, Secretary of State, et al. WINDING et al. v. SAME. [148 Wis. 456, 134 N. W. 673.] 1. The courts of Wisconsin can restrain public oflScers from enforcing an unconstitutional law which invades private or public rights. 2. The Supreme Court of Wisconsin has original jurisdiction of a suit for an injunction when a State officer is about to perform an offi- cial act materially affecting the interests of the people at large, which is contrary to law, or is imposed on him by the terms of an unconsti- tutional law — statute. 3. The Supreme Court of Wisconsin will not take original jurisdic- tion: (1) In a case which although involving a question publioi juris ir local in its effect, unless the remedy in the lower courts ia lacking or it absolutely inadequate. STATE EX EEL. BOLENS V. EEEAE. 1265 (2) In a case involving a mere private interest or one whose pri- mary purpose is to redress a private wrong. 4. A case will not be dismissed because there is a private interest involved with the public interest, provided the private interest be inci- dental merely, and the vindication of the public right be the primary purpose of the action. 5. An action involving a private as well as a public interest will not be dismissed merely because the private interest may drop out, provided the public and private interests be severable and the public interest still exists. 6. The Constitution has not given the State circuit court the power to use the writ of injunction as a prerogative jurisdictional writ, as it has been given to the Supreme Court, hence such circuit court has not the power in an action not brought by the Attorney-General, but on the relation of a private citizen only, to use the writ for prerogative pur- poses. 7. A taxpayer's action is to restrain the illegal use or squandering of municipal funds, being for the benefit of a limited class of citizens, and not to vindicate the rights of the whole people, is not within the origi- nal jurisdiction of the Supreme Court. 8. Where a State statute (Wis. Laws 1911, ch. 658) imposing an in- <;ome tax, made an important change in the tax policy of the State, and was intended to supplant the taxation of personal property previously existing and to provide an income tax in lieu thereof, and such act -was claimed to be unconstitutional, the claim involved the interests of the whole people of the State, and authorized the Supreme Court, at the instance of a private relator, to take original jurisdiction to re- rstrain, until the constitutionality thereof has been determined, the officers of the State, charged with the enforcement of such law, from taking steps to enforce the same, and from expending State funds in such enforcement. 9. Constr. art. 13, § 9, provided that the rule of taxation shall be uniform, and taxes may be levied on such property as the legislature may prescribe. This was amended in 1908 by adding a provision that -taxes may also be imposed on incomes, privileges, and occupations, which taxes may be graduated and progressive. Held, that such amendment expressly authorized income taxation of a progressive char- acter, in addition to taxation of property, and that taxation of income derived from property was not the same as taxation of the property itself, and that consequently Laws 1911, c. 658, was not unconstitu- tional in taxing real property, and also the rents derived therefrom as imposing double taxation. 10. The equality clause of the Fourteenth Amendment of the Federal Constitution did not impose upon the States an unbending rule of equal taxation, the states being authorized to make exemptions, levy different rates on different classes, tax such property and make such deductions as they choose, then provisions to that end proceeding Foster Income Tax — 80. 1266 LEADING OASES. within, reasonable limits and general usage being valid so long as they are within their own constitutions. 11. The Wisconsin statute (Laws 1911, ch. 658) in so far as it pro- vided a progressive rate of taxation on incomes, according to the size of the income, was not unconstitutional as depriving taxpayers of the equal protection of the laws. 12. The partial invalidity of a separable provision of a State statute does not invalidate the entire act, where it does not appear that the Legislature would not have passed the act, without the invalid pro- vision, had it been advised of its unconstitutionality. 13. The Wisconsin income tax act (Laws 1911, ch. 658), in so far as it permits the board of review to increase the assessments of a non- resident without notice, while requiring notice to be given to a resi- dent, is not in violation of Constitution U. S. art. 4, § 2, providing that the citizens of each state shall be entitled to all the privileges and im- munities of citizens of the several states. 14. The Wisconsin Constitution (Art. 13, § 9) provides that all county officers whose election or appointment is not provided for by the Constitution shall be elected by the electors or appointed by the proper county authorities, as the Legislature shall direct, that all city, town, and village officers whose election or appointment is not provided for, by the Constitution shall be elected by the electors of the proper mu- nicipality or appointed by such municipal authorities as the legisla- ture may designate; that all other officers whose offices may thereafter be created by law shall be elected by the people, or appointed as the Legislature may direct. Eeld, that the office of assessor of incomes created by Laws 1911, ch. 638, was a new office within the fourth class, the election or appointment to which could be provided for in any way that the Legislature in its discretion, might direct, and hence that so much of the statute as provided for the appointment of such asses- sors by the State Tax Commission was not invalid as violating the con- stitutional guaranties of local self-government. 15. The Wisconsin statute (Laws 1911, ch. 658) providing for the imposition of an income tax was not unconstitutional as a delegation of the legislative power in so far as it authorized the State Tax Com- mission to appoint income tax assessors, and authorized the commis- sion to fix their salaries. 16. There being a sufficient ground for classification between indi- viduals and partnerships in the imposition of the tax on incomes by Wisconsin Laws of 1911, ch. 658, the statute was not invalid as an un- just discrimination against partnerships, although exemptions al- lowed to individuals are denied to partnerships therein. 17. Since the term "income" may be properly defined as that which comes in to a person as payment for labor, or services rendered in some office, or as gain from lands, business, the investment of capital, &c., Bo much of the Wisconsin Act (Laws 1911, ch. 658) imposing a tax on incomes, as provides that the estimated rental of residence properly STATE EX EEL. BOLENS V. EEEAE. 1267 occupied by the owner, should be considered as income, is not invalid on the theory that, as it was not income in the strict sense of the term, it can not be made such by a legislative fiat. 18. There being a proper ground for distinction in the taxation of incomes between families living together and unmarried persons, or per- sons, though married, living separately, so much of the Wisconsin Act (Laws 1911, ch. 658), as provided that the income of a wife living with her husband should be added to the income of the husband, and the income of children under eighteen living with their parents should be added to that of the parent, or parents, and only one exemption should be allowed, was not objectionable as discriminatory. 19. The statute, although not adopted until July 15, 1911, providing for the imposition of the Wisconsin income tax, was not retroactive because it assessed incomes received during the year 1911, nor because it included the profits derived from the sale of property bought at any time within three years previously. 20. There being a reasonable basis for classification in the taxation of incomes between individuals and corporations, the Wisconsin stat- ute (Laws 1911, ch. 658) was not invalid as creating an unjust dis- crimination, although it provided a rate of taxation for the incomes of corporations different from that prescribed for individuals. 21. A statute imposing an income tax is not invalid in toto because it does not specifically except national banks, nor the salaries of ofB- cers which are not taxable under the Constitution; and if national banks or public officers can not constitutionally be subjected to the tax, the law will be construed as not applying to them. (Jan. 9, 1912.) The first case was an original suit by the State, on relation of Harry W. Bolens, against James A. Frear, Secretary of State, and others, to restrain them, as state officers, from en- forcing the income tax law (Wisconsin Laws 1911, c. 658). It was heard upon a demurrer to the complaint. The second case was an appeal from a judgment in an action in the circuit court by Arthur Winding and others against the same defend- ants, in which a demurrer to the complaint was sustained. For the relator, Bolens, there was a brief by Messrs. Carpen- ter & Pass, and oral argument by Mr. Benjamin Pass. For the appellants Winding and others there was a brief by Messrs. Flanders, Bottwm, Fawseit & Bottwm, attorneys, and a separate brief by Mr. Oeo. D. Ycm Dyhe, of counsel, and oral argument by Messrs. J. G. Flanders, C. F. Fawsett, and Geo. D. Van Dyke. For the defendants and respondents there was a brief by the Attorney General and Mr. Bussell Jackson, deputy attorney gen- 1268 LEADING CASES. eral; a separate brief by Mr. J. E. Dodge, special counsel for the state ; separate briefs by Mr. Geo. G. Greene, counsel ; and oral argument by Mr. Jackson, Mr. Dodge, and Mr. Greene. Briefs were also filed by the following attorneys as amici curiw. Messrs. F. C. WinJcler; Miller, Mack & Fairchildj David S. Wegg; Lines, Spooner, Ellis & Quarles; and Oscar M. Fritz. WiNSLOw, Ch. J., delivered the opinion of the court: These are actions in equity brought for the purpose of en- joining the secretary of state and other state officers, including the tax commission, from paying out any state moneys, or doing any other administrative acts, in the enforcement of the newly passed income tax law of this state, known as chapter 658, Laws of 1911, on the ground that said act is unconstitutional. The Bolens action is an action sought to be brought within the original jurisdiction of this court, after refusal by the at- torney general to bring it. This court, upon application for leave to bring the action upon the relation of Bolens (a tax- payer), granted such leave, but expressly provided in the order that the question whether such action was an action properly within the original jurisdiction of this court should be reserved and argued with the demurrer upon the merits. The Winding Case is an action originally brought in the circuit court for Dane county by various persons and corporations who claim that they will be injuriously affected in various different ways by the provisions of the law. A demurrer on the three groimds of want of jurisdiction, want of legal capacity to sue, and in- sufficiency of facts having been sustained by the circuit court, the plaintiffs appeal to this court, and all the cases were argued together ; briefs being also filed by several members of the bar as amici curiae. The law which is attacked in these actions adds thirty sec- tions to the statutes, and also makes very substantial changes by amendment and repeal in §§ 1036 and 1038 of the existing statutes, relating to the taxation of personal property. The first section of the law is numbered 1087m — 1, and provides generally for the taxation of all incomes received during the year 1911, and annually thereafter. Section 1087m — 2 provides: (1) That the term "person," as used in the act, shall include STATE EX EEL. BOLENS V. FEBAE. 1269 "any individual, firm, copartnership, and every corporation, joint-stock company, or association organized for profit and hav- ing a capital stock represented by shares," imless otherwise stated. (2) That the term "income" shall include: a. All rent of real estate, including estimated rental of resi- dence property occupied by the owner. b. Interest on loans or evidences of debt of any kind. c. Wages, salaries, or fees derived from services, provided that salaries of public officers are not to be included in those cases where the taxation thereof would be repugnant to the Constitution. d. All dividends or profits from stock, or from the purchase and sale of any property acquired within three years previously, or from any business whatever. e. Royalties derived from the possession or use of franchises or legalized privileges of any kind. f. All other income from any source, except such as is ex- empted by the act. (3) That "the tax shall be assessed, levied, and collected upon all income, not hereinafter exempted, received by every person residing within the state, and by every nonresident of the state upon such income as is derived from sources within the state or within its jurisdiction. So much of the income of any person residing within the state as is derived from rentals, stocks, bonds, securities, or evidences of indebtedness shall be assessed and taxed, whether such income is derived from sources within or without the state ; provided that any person engaged in business within and without the state shall, with respect to income other than that derived from rentals, stocks, bonds, securities, or evidences of indebtedness, be taxed only upon that proportion of such income as is derived from business transact- ed and property located within the state, which shall be deter- mined in the manner specified in subdivision (e) of § 1770b, as far as applicable." Section 1087m — 3 provides, in substance, for the following deductions by corporations and joint-stock companies : a. Sums paid within the year for personal services of all 1270 LEADING CASES. oiEcers and employees actually employed in the production of the income. b. Other ordinary and necessary expenses paid within the year in the maintenance and operation of its business and prop- erty, including reasonable depreciation of the property from which the income is derived. All bonds issued by a corporation shall be deemed an interest in the property and business of the corporation, and so much of the interest on the bonds as is represented by the ratio of the total property located and busi- ness transacted in the state to the whole property and business of the corporation as provided in subdivision 3 of 1087m — 2 shall be subject to taxation at the same rate as the income, and shall be assessed to the bondholders under the general desig-na- tion of "the bondholders of" the particular corporation on the property of the corporation prior to other liens, and, unless paid by the bondholders, shall be enforced against the corporation, which may. deduct the amount of the tax from the next interest payment on the bonds. c. Losses sustained during the year not compensated for by insurance or otherwise. d. Sums paid within the year for taxes imposed by any other state upon the source from which the income taxed by this act is derived. e. Dividends or income received during the year from stocks or interest in any firm, corporation, or joint-stock company, the income of which has been assessed under this act. f. Interest received from bonds or securities exempt from taxation under United States laws. By § 1087m — 4 it is provided, in substance, that persons other than corporations and joint-stock companies shall be al- lowed the following deductions : a. Ordinary and necessary expenses actually paid in carry- ing on the business from which the income is derived, including a reasonable allowance for depreciation in the property from which the income is derived. b. Losses during the year not compensated by insurance or otherwise. c. Dividends or incomes from stocks or interest in any firm STATE EX EEL. BOLENS V. FEEAE. 1271 or corporation, the income of wHcli has been assessed under this act. d. Interest paid during the year on existing indebtedness. e. Interest on bonds or securities exempt under United States laws. f. Salaries received from the United States by United States officials. g. Pensions received from the United States. h. Taxes (other than inheritance taxes) paid during the year on the property or business from which the income is derived. i. Devises, bequests, or inheritances received during the year upon which an inheritance tax has been paid. j. Life insurance to the amount of $10,000 received by per- sons legally dependent on the decedent. Section 108Ym — 5 provides in substance for the following exemptions : (1) a. To an individual, $800. b. To husband and wife, $1,200. c. For each child under eighteen years, $200. d. For each additional person legally and wholly dependent on the taxpayer for support, $200. e. These exemptions do not apply to non-residents, nor to firms, corporations, or joint-stock companies. In computing such exemptions and the amounts of taxes payable under § 1087m — 7, the income of a wife living with her husband shall be added to the husband's, and the income of each child living with its parent or parents shall be added to the parents' income. (2) Income of mutual, savings, or loan and building associa- tions, and of any religious, scientific, educational, benevolent, or other association not organized or conducted for pecuniary profit. (3) Income from property and privileges by persons now required to pay taxes or license fees into the state treasury in lieu of taxes. Such persons shall continue to pay taxes and license fees as heretofore. (4) Income received by the United States, the state, and all counties, cities, villages, school districts, or other political units of the state. Section 1087m — 6 provides, in substance, that the tax, after 1272 LEADING CASES. making such deductions and exemptions, shall be computed at the following rates: (1) a. On first $1,000 or part thereof, 1% li% 11% 2% b. it second " c. 11 third " d. li fourth " e. 11 fifth " f. « sixth " g- It seventh " h. it eighth " i. it ninth " j- a tenth " k. it eleventh " 1. it twelfth " 3% H% 4% 4^% 5% H% On any sum exceeding $12,000, 6% (2) Provided that the tax on corporations and joint-stock companies (after deductions) shall be computed as follows: a. If the income equals 1 per cent or less of assessed value of property used in acquiring the income, the rate shall be ^ of 1 per cent of such income. b. If the income equals more than 1 but not more than 3 per cent of such value, 1 per cent of the income. c. If more than 2, but not more than 3, per cent, 1^ per cent of the income. d. If more than 3, but not more than 4, per cent, 2 per cent of the income. e. If more than 4, but not more than 5, per cent, 2^ per cent of the income. f. If more than 5, but not more than 6, per cent, 3 per cent of the income. g. In like manner the tax shall increase at the rate of 1 of 1 per cent for each additional 1 per cent or fraction thereof which the taxable income bears to the property employed in the acqui- sition of the income, until the rate of profits equals 12 per cent of property employed in the acquisition of the income, when such rate shall continue as a proportional rate of 6 per cent of such taxable income. Section 1087m — 7 provides as follows : "The legislature in- tends subs. 2 of § 1087m — 6 of this act to be a separate part thereof, so that said subsection may fail or be declared invalid . STATE EX EEL. BOLENS V. FEEAE. 127o- without adversely affecting any other part of the act ; provided that, in event of its failing or being declared invalid, the in- comes of corporations, joint-stock companies, and associations shall be subject and shall be construed to have been subject to taxation at the rates specified in subs. 1 of § 1087m — 6, and said incomes shall be reassessed by the Tax Commission and taxed for the years for which the rates provided in subs. 2 of § 1087m— 6 shall have failed." The next fourteen sections of the act are administrative pure- ly. By their terms the enforcement of the act is placed in the hands of the state tax commission, which is authorized and re- quired to divide the state into taxing districts, and appoint an assessor of incomes in each district. The manner in which in- comes are to be assessed and the taxes are to be collected is fully provided for, but it is not necessary to insert the pro- visions here, as no question is raised upon the details of these provisions. Section 1087m — 22 provides, in substance, that the place at which the income tax shall be assessed, levied, and collected shall be determined as follows: (1) Persons deriving income from within and without the state, or from two or more political subdivisions of the state, shall report the parts so separately derived in separate accounts in such form as the tax commission may prescribe. (2) The entire taxable income of a resident of the state shall be combined for purpose of determining exemptions and rate of tax, but the taxes shall be paid to the several towns, cities, and villages in proportion to the income derived from each, counting the income derived from without the state as derived from the town or city of the taxpayer's residence. (3) The income of nonresidents derived from sources within the state shall be separately assessed and taxed in the town, city, or village from which it is derived. (4) All laws not in conflict with this act, regulating time,, place, and manner of collecting unpaid personal property taxes, shall apply to the income tax. Section 1087m — 23 provides that the revenue derived from the income tax shall be divided — 10 per cent to the state, 20 per cent to the county, and 70 per cent to the town, city, or village in which it is assessed, levied, and collected. 1274 LEADING CASES. Section I087ni — 'it abolishes the office of county supervisor of assessment on and after the first Monday in January, 1912, and provides that the county supervisor of incomes shall, after that 'date, perform all the duties imposed by law upon the coun- ty supervisor of assessment. Section 1087m — 26 provides that any person paying a tax on personal property during any year may present his receipt therefor, and have the same accepted by the tax collector to its full amount in payment of income tax during said year, and that any bank paying taxes upon the shares of its individual stockholders may present the receipt therefor, and have the same accepted in payment of taxes upon the income of the bank during that year. Section 1087m — 27 provides that nothing in the act shall affect in any way the taxes for the year 1911 or the collection or enforcement thereof. By the amendment to § 1036 of the Statutes of 1898 there is taken out of the items of personal property subject to taxation ^'all debts due from solvent debtors, whether on account, note, contract, bond, mortgage, or other security, or whether such debts are due or to become due," also "moneys," and by the amendment to subdivision 10 of § 1038, Stat. 1898, the follow- ing property is made exempt from taxation : "All moneys, all debts due or to become due to any person, and all stoclcs and bonds not otherwise specially provided for." By the concluding sections of the act certain other changes are made in exemptions from taxation, which have the effect of somewhat enlarging such exemptions, especially in the line of personal ornaments and belongings and agricultural imple- ments, but the details of these changes are not necessary to be stated. At the inception of the Bolens Case, the question of jurisdic- tion is sharply raised ; and it is very strongly argued, especially in a brief filed by General F. G. Winkler, that this is not a case properly within the original jurisdiction of this court, as that jurisdiction has been defined and limited by the cases com- mencing with the Eailroad Gases in 35 Wis. 425. The argument, in brief, is that 1jie action is nothing more nor less than a taxpayer's action ; that such actions may properly be entertained in the case of illegal expenditures by cities, STATE EX EEL. BOLENS V. FKEAE. 1275 ■counties, villages, or other municipalities, but cannot properly be brought against state officers, because, in effect, they are ac- tions against the state, and the state cannot be sued without its consent. This objection might perhaps be summarily dis- posed of by a brief reference to the case of State ex rel. Eaymer V. Cunningham, 82 Wis. 39, 51 IST. W. 1133, where a case of similar character, brought on the relation of a taxpayer, was •entertained and decided upon the merits against objection to the jurisdiction, and by further reference to the cases of State ex Tel. Garrett v. Froehlich, 118 Wis. 129, at page 143, 61 L.K.A. 345, 99 Am. St. Eep. 985, 94 IST. W. 50; State ex rel. Rosen- bein v. Frear, 138 Wis. 173, 119 K W. 894, and Ee Filer & S. Co. 146 Wis. 629, 132 IST. W. 684, in each of which cases the :i'ight to maintain similar actions in this court is either im- pliedly or expressly asserted. We do not feel, however, that we ought to dispose of this very important question without thoroughly examining it for several quite persuasive reasons. Eeference to the cases just •cited will show that the question never has been discussed in any opinion. In the Eaymer Case, which is the first of the series and which was a case brought on the relation of a tax- payer to enjoin the payment of money to the state superintend- ent of public instruction, under a law which violated an express constitutional prohibition, it was said, in substance, that it was held in the case of State ex rel. Atty. Gen. v. Cunningham, 81 Wis, 440, 15 L.E.A. 561, 51 N. W. 724, that such an action was within the original jurisdiction of this court, and would be entertained. It is very clear that the Cunningham Case was not such a case, and involved very different considerations. The Cunningham Case was an action brought on the relation of the attorney general to enjoin the secretary of state from giving election notices under an apportionment law which was held to deprive a very large number of the voters of the state of political rights guaranteed to them by the Constitution. This was held to be an invasion of the liberties of the people, and hence the case came clearly within the original jurisdiction of this court as laid down in the Eailroad Cases. No question of the wrongful expenditure of state funds, nor of a taxpayer's right to invoke the original jurisdiction of this court to prevent such expenditure, was involved or mentioned in the case. 1276 LEADING CASES. No discussion of the question appears in the other cases cited, so it seems clear that the court has not yet taken up and consid- ered the question as an original one. It has been spoken of as a very important question, and ad- visedly so spoken of. Laws vsrhich are framed to meet and cor- rect some existing situation deemed by the legislature to be undesirable will generally, or at least frequently, involve the expenditure of some money in their enforcement. If, whenever such a law is passed, it is within the power of any taxpayer, however paltry his contribution to the public funds, to come into this court and invoke its original jurisdiction, and compel it to pass upon the validity of the law, it is not difficult to fore- cast the result. Every important law will be adverse to the interests of some taxpayers, and with such a principle estab- lished this court stands in great danger of becoming to all in- tents and purposes a third chamber of the legislature not named in the Constitution, but exercising a veto power over the other houses when invoked by any taxpayer. The power to pass upon the constitutionality of laws when the question arises in the course of ordinary litigation is a great power, one to be exercised with the greatest possible caution and wisdom, but the power to take up and pass upon a law involving the expenditure of any state funds as soon as it is passed at the suggestion of any tax- payer, and place a judicial veto upon its execution, is a still greater one. No higher power than this can well be conceived in a government such as ours, certainly no power will demand greater wisdom in its exercise, if it exist. This court has unquestionably taken the position in a num- ber of well-considered cases that the courts can and will restrain public officers from enforcing an unconstitutional law which invades private or public rights. State ex rel. Atty. Gen. v. Cunningham, 81 Wis. 440, 15 L.E.A. 561, 51 N. W. 724; State ex rel. Lamb v. Cunningham, 83 Wis. 90, 17 L.E.A. 145, 35 Am. St. Eep. 27, 53 N. W. 35 ; Bonnett v. Vallier, 136 Wis. 193, 17 L.E.A.(N.S.) 486, 128 Am. St. Eep. 1061, 116 N. W. 885; Wadhams Oil Co. v. Tracy, 141 Wis. 150, 123 N. W. 785, 18 Ann. Cas. 779. But this court has clearly recognized that this power is a delicate one, and to be used only with a wise discretion. It was said in the last case cited that "it will not do to make of the courts, by equitable interfer- STATE EX EEL. BOLENS V. FEEAE. 1277 ence, a sort of a superior upper house to consider and pass, in general and particular as well, upon legislative enactments." Concerning this power, Judge Dodge very rightly observes in his brief in the present case: "No higher power can be con- ceived than that of the judiciary to stay the action of the co- ordinate executive or legislature from an act or policy which the latter conscientiously believe to be constitutional and for public welfare. As the power is transcendent, its exercise must be with caution and moderation; albeit with courage. The frequency of the attempts by individuals to invoke this power of veto invites the anxious consideration of the wisdom and pro- priety of its exercise in each case." The question now before us is whether this court has con- sciously and advisedly held that it is sulficient to call for the exercise of this extreme power that a taxpayer come into court and demand that the public treasury be protected from the ex- penditure of funds under a law concerning whose constitu- tionality there may be doubt. The consideration of this question has prompted us to make a re-examination of the entire question of the original jurisdic- tion of this court, and to make an attempt to classify the signifi- cant decisions upon the subject, in the hope that thereby the scope and purpose of that jurisdiction, as the court has en- deavored to define and limit it, may be better understood. The results of this re-examination are now to be stated as briefly as may be. The constitutional grant of jurisdiction to the supreme court (§3, art. 7, Wis. Const.), after providing that it shall have appellate jurisdiction coextensive with the state, provides that it "shall have a general superintending control over all in- ferior courts ; it shall have power to issue writs of habeas corpus, mandamus, injunction, quo warranto, certiorari, and other orig- inal and remedial writs, and to hear and determine the same." Since the decision of the Eailroad Cases, 35 Wis. 425, it has been very well understood that by this section of the Con- stitution three distinct and independent grants of power or ju- risdiction were made to this court, viz.: (1) The appellate power; (2) the power of superintending control over inferior courts; and (3) the original jurisdiction to be exercised by 1278 LEADING CASES. means of the writs named in tbe section. We are only con- cerned hero with the grant of original jurisdiction. It will be at once noticed that this grant is practically un- limited in extent, except as it may be said to be limited by the scope of the writs named, and it is for this reason probably that (with the exception of the Blossom Case, 1 Wis. 317, to be re- ferred to later) practically no attempt was made, prior to the decision in the Railroad Cases, to discuss the purpose or limits of the original jurisdiction. It was very frequently exercised, but plainly with no clear or logical idea of the purposes for which it was given to the court, unless possibly it may be said that there was the idea that the wrong to be redressed or pre- vented must be a wrong affecting the public, or some part of the public of a given locality or class, as distinguished from a wrong aifecting individuals only. Habeas corpus was so frequently used that the citation of the- cases would be mere surplusage. Mandamus to compel official action by local or municipal officers was also very frequent. Thus the court entertained and decided upon the merits actions of mandamus to compel town assessors to reduce an assessment. of personal property (State ex rel. Ward v. Assessors, 1 Wis. 345) ; to compel a circuit judge to hold court in a new county (State ex rel. Powers v. Larrabee, 1 Wis. 200) ; to compel county supervisors to strike property from the assessment roll (State ex rel. Beebe v. LaFayette County, 3 Wis. 816) ; to com- pel highway commissioners to act (State ex rel. Doxtador v. Bailey, 6 Wis. 291) ; to compel a school district clerk to make- an official report to the town clerk ( State ex rel. School Dist. v. Eaton, 11 Wis. 29) ; to compel county officers to locate their offices at a certain place as a means of testing the validity of county-seat elections (Atty. Gen. v. Fitzpatrick, 2 Wis. 542 j State ex rel. Cothren v. Lean, 9 Wis. 279 ; State ex rel. Spauld- ing V. Elwood, 11 Wis. 17 ; State ex rel. Field v. Saxton, 11 Wis. 27; State ex rel. Gates v. Fetter, 12 Wis. 566) ; to compel town supervisors to audit damages allowed in laying out a high- way (State ex rel. Van Vliet v. Wilson, 17 Wis. 687) ; to- compel a city council to levy and collect a tax to pay a judg- ment or pay the expense of work done for the city (State ex rel. Soutter v. Madison, 15 Wis. 30 ; State ex rel. Christopher V. Portage, 12 Wis. 562, s. c. 14 Wis. 550; State ex rel. Carpen- STATE EX REL. BOLENS V. FEEAE. 12Y9> ter V. Beloit, 20 Wis. 79; State ex rel. Hasbrouck v. Mil- waukee, 25 "Wis. 122) ; to compel a county board to admit one duly elected as a member to sit and act as such (State ex rel. Gill v. Milwaukee County, 21 Wis. 443) ; to compel tlie mayor of a city to appoint certain officers (State ex rel. Atty. Gen. V. O'Neill, 24 Wis. 149) ; to compel a city treasurer to deliver certain books to the county clerk (State ex rel. Saar V. Hundhausen, 26 Wis. 432) ; to compel the transfer of pris- oners from the Milwaukee jail to the house of correction (State ex rel. Kennedy v. Brunst, 26 Wis. 412, 7 Am. Eep. 84) ; to compel county supervisors to erect county buildings (State ex rel. Park v. Portage County, 24 Wis. 49); to compel county supervisors to provide certain officials with office rooms (State ex rel. Keenan v. Milwaukee County, 25 Wis. 339) ; to compel the Milwaukee Chamber of Commerce to restore a member to his rights and franchises as a member (State ex rel. Graham v. Milwaukee Chamber of Commerce, 20 Wis. 63), and doubtless other cases may be found. It should be noted in this connection that in one case (State ex rel. Board of Education v. Haben, 22 Wis. 101) the court declined to entertain an action of mandamus against the treas- urer of a city to compel him to pay over the school moneys in his hands to the school board, giving as a reason that the remedy in the circuit court was ample. Judge Cole there states that the practice of applying to the supreme court for writs of man- damus against local officers was becoming very common, and that, in view of the increasing duties of the court, and in pur- suance of a rule of court then recently adopted, it would be held in the future that "wherever there is anything in the ap- plication which shows that it would be unavailing if made at the proper circuit, or where from the nature of the questions involved it would seem necessary and proper that the suit be commenced in the supreme court, jurisdiction will be enter- tained ; otherwise it will not be, but parties will be required to make their application to the circuit court." This rule seems, however, to have been more honored in the breach than in the observance, as the cases just cited, which came up after the Haben Case, abundantly testify. Quo warranto cases to try the title to public office, from that of governor down to school director, were very frequent. Thus 1280 LEADING CASES. the writ was used to try the title to the office of governor in State ex rel. Bashford v. Barstow, 4 Wis. 567 ; of district at- torney in Atty. Gen. ex rel. Carpenter v. Ely, 4 Wis. 420 ; of treasurer of a city in State ex rel. Leach v. Von Baumbach, 12 Wis. 310; of school director in State ex rel. Law v. Perkins, 13 Wis. 411; of circuit judge in State ex rel. Atty. Gen. v. Messmore, 14 Wis. 115 ; of sheriff in State ex rel. Peacock v. Orvis, 20 Wis. 235 ; of justice of the peace in State ex rel. Hol- - sidered as affecting the "sovereignty of the state, its francMsesy or prerogatives, or the liberties of its people." Such an attempt would manifestly have been as unwise as it would have been? futile. Human prescience is not equal to such a task. Sc the court wisely contended itself with announcing the general! principle, leaving itself free to judge in each case whether the' contingency which justified and required the use of the juris- diction had arisen. Since the decision of those cases this court has faithfully endeavored to follow the general rules laid down in them. Numerous applications for the exercise of the original jurisdiction have been made, and of these many have been', granted and some have been refused. The question of the ap-- plication of the general rules aforesaid has arisen and beens discussed and decided in a number of cases presenting wide- ly different problems. Sufiicient time has now elapsed so that it should be possible to draw from these decisions some gen- eral conclusions as to the limits of the jurisdiction as the court has administered it. If this can be done, it certainly ought to be helpful in the future administration of the jurisdic- tion, not because it will or can put up the bars so that no future- case can be brought within the jurisdiction unless it has its- prototype in the past, but because every discussion and ruling upon the question as a new case is presented should be helpful- in developing some philosophical and orderly rules for the appli- cation of the general abstract principles laid down in the two> cases last named to concrete cases as they arise in the future.. With this idea in mind, a brief review of the significant cases- decided since the decisions in the Railroad Cases will now be* undertaken, and an attempt will be made to classify them. I. The most numerous cases probably are the habeas corpvis cases, and they may well be first disposed of. The first of these cases where the question of the jurisdiction was discussed was the Pierce Case, 44 Wis. 411, where, in spite of the vigorous protest of Chief Justice Ryan, it was held that the state had. 1286 LEADING CASES. SO vital an interest in the liberty of every one of its citizens that the question whether a citizen was unlawfully deprived of that liberty involved the interest of the public at large. The rea- soning by which the unlawful imprisonment of a single citizen is held to involve the interests of the public at large, so as to justify the use of the original jurisdiction of the supreme court, may seem somewhat strained, but the decision has been followed without question in numerous cases since that time, and, further- more, it is to be noticed that the legislation of the state from tht earliest days of the state had provided for the issuance of the writ by any justice of the supreme court, and by chapter 45 of the Laws of 1864 had further provided that all applications for the writ on behalf of a person confined in the state prison must be made to the supreme court, or one of the justices thereof. This latter provision has remained upon the statute book ever since (§ 3409, Stat. Wis. 1898), and this court has held that it applies to applications made by persons confined upon convic- tion for felony in the Milwaukee House of Correction as well. State ex rel. Heiden v. Eyan, 99 Wis. 123, 74 IST. W. 544. It does not seem necessary or useful to cite the numerous habeas corpus cases which have been entertained by this court since the Pierce Case. ■ II. Next may be considered the quo warranto cases, and of these we have found but five cases which seem of any signifi- cance; namely. State ex rel. Wood v. Baker, 38 Wis. 71; Atty. Gen. V. West Wisconsin E. Co. 36 Wis. 467; State ex rel. Atty. Gen. v. Milwaukee, L. S. & W. E. Co. 45 Wis. 579; State ex rel. Eadl v. Shaughnessey, 86 Wis. 647, 57 IST. W. 1105 ; Ee Holland, 107 Wis. 178, 83 K W. 319. The first of these cases was brought to try the title to the office of county clerk, and it was held that contests concerning the title to county offices were not within the jurisdiction marked out for itself by the court in the Eailroad Oases, but that because the title of the judge of the circuit court to the office of congressman depended on the same votes which were questioned in the case, and hence he could not with propriety sit. The case came within the exception suggested in the Eau Claire Case; namely, cases where the ordinary jurisdiction of the circuit is entirely inadequate. The evident meaning of this case is that contests over local offices will not be entertained. STATE EX EEL. BOLENS V. FEEAE. 1287 unless the situation be such that the remedies in local courts are absolutely inadequate. It may well be doubted whether such a case as the Wood Case would now be entertained, in view of the ease with which, under present laws, another judge can be at once called in to try a case where the circuit judge is disqualified or declines to sit. The second and third cases named were actions brought to forfeit corporate charters granted by the state to railroad companies because of breach of duty on the part of the companies. They unquestionably fall within the jurisdiction as defined in the Railroad Cases, for in such an action the state is suing to punish the abuse or misuse of fran- chises granted by it in its sovereign capacity. In this connec- tion it is pertinent to note that the legislature, by §§ 3240 et seq. of the statutes (Rev. Stat. 1878 and Stat. 1898), has for many years provided for actions in the name of the state to vacate corporate charters,, which may be brought either in the supreme or circuit court, as this court may direct. See State ex rel. Lederer v. International Invest. Co. 88 "Wis. 512, 43 Am. St. Rep. 920, 60 N. W. 796. In the Shaughnessey Case it was sought to use the original jurisdiction of this court to try the title to the ofiice of justice of the peace, and jurisdiction was declined on the ground that it was a local matter purely, which did not affect the state at large. For the same reason ju- risdiction was declined in the Holland Case, in which it was sought to test the validity of the incorporation of a village. III. Next may well be classed the two great cases of Atty. Gen. V. Chicago & JST. W. R. Co. 35 Wis. 425, and Atty. Gen. V. Eau Claire, 37 Wis. 400, in the first of which the state sued to prevent the great public-service corporations of the state from systematically violating and defying laws regulating their rates in the interest of the whole people, which laws were in effect amendments to the corporate charters of the companies; and in the second of which the state sued to prevent a purpresture in one of the great navigable rivers of the state connecting with the Mississippi river, which the state is bound to keep open as a common highway to the people of this state and of the United States. Upon the same general ground this court later enter- tained an action on the relation of the attorney general to pre- vent the tearing up of a railroad ; the idea being that a railroad operated under a franchise granted by the state is a state high- 1288 LEADING CASES. way whose destruction affects the interests of the state at large. State ex rel. Atty. Gen. v. Frost, 113 Wis. 623, 88 N. W. 912, 89 ]Sr. W. 915. The great public interests involved in these cases are so apparent as to obviate the necessity of comment up- on them. In the case of State v. St. Croix Boom Corp. 60 Wis. 565, 19 N. W. 396, however, the court declined jurisdiction of a case very similar to the Eau Claire Case, because the St. Croix river was a river on the boundary of the state, as to which the state was under no trust to keep it open. IV. In the next class may be placed the cases where it has been sought, by mandamus or mandatory injunction, to compel a state officer to perform a ministerial duty. Under this head, the cases involving performance of important duties imposed on state officers by the general election laws form a striking group, the first of these cases being the case of State ex rel. McDill v. State Canvassers, 36 Wis. 498, where mandamus was sought to compel the state board of canvassers to declare a certain re- sult from the returns of a congressional election, and the court deemed the case one wherein the original jurisdiction should be exercised, although the office in issue was in a sense local, be- cause the circuit judge himself was the opposing candidate, and could not act judicially upon such a question, hence the remedy in the circuit court was utterly inadequate. It is instructive to note that after this decision, by chapter 231 of the Session Laws of 1880, the legislature passed an act regulating the procedure in mandamus cases brought in the supreme court against any board of canvassers to compel the delivery of a certificate of election to either of the offices of member of the legislature, con- gressman, or presidential elector; thus apparently giving the legislative sanction to the idea that controversies concerning the canvass of votes at general elections for either of such offices so far affected the prerogatives of the state, or the liberties of the people, or both, as to come fairly within the original jurisdic- tion of the court. The substance of this provision has ever since remained a part of the mandamus statute. Section 3452, Stat. Wis. 1898. Other cases where the original jurisdiction has been invoked to compel the performance of official duty imposed by general election laws are the cases of State ex rel. Kustermann V. State Canvassers, 145 Wis. 294, 130 IST. W. 489; State ex rel. Cook v. Houser, 122 Wis. 534, 100 N. W. 964, State ex STATE EX EEL. BOI*ENS V. FEEAE. 1289 rel. Bancroft v. Frear, 144 Wis. 79, 140 Am. St. Kep. 992, 128 ]Sr. W. 1068, and State ex rel. Kinder v. Goff, 129 Wis. 668, 9 L.E.A.(KS.) 916, 109 N". W. 628. The first of these last-named actions was practically the same as the McDill Case, the second and third were cases involving the duty of the sec- retary of the state, under general election laws, to place the names of certain persons upon the official ballot as nominees of a great political party for state offices, and the Einder Case was a very good example of the exceptional cases where, though the office in issue was purely local, jurisdiction was assumed because of the absolute inadequacy of the remedy in the lower courts, and the abstract question involved was a question affecting the interests of the entire public. Another group of significant cases under the fourth head are the mandamus actions brought to compel payment of funds from the state treasury to the persons or corporations alleged to be entitled thereto by law. In this group fall State ex rel. Bell v. Harshaw, 76 Wis. 230, 45 N. W. 308, brought to compel the state treasury to pay over certain moneys in the state treasury to certain counties; State ex rel. !N"ew Richmond v. Davidson, 114 Wis. 563, 58 L.E.A. 739, 88 N. W. 596, 90 IST. W. 1067, brought to compel the state treasurer to pay over to the city of New Richmond an appropriation made by the legislature on account of damages suffered by the city in a cyclone; State ex rel. Garrett v. Froehlich, 118 Wis. 129, 61 L.R.A. 345, 99 Am. St. Rep. 985, 94 IST. W. 50, brought to compel auditing of claims against the state for the Keeley treatment of drunkards at pri- vate sanitariums; State ex rel. Buell v. Frear, 146 Wis. 291, 34 L.R.A. (KS.) 480, 131 IST. W. 832, brought to compel au- diting of salaries of the civil service commission and its em- ployees; and State ex rel. Bashford v. Frear, 138 Wis. 536, 120 N. W. 216, 16 Ann. Gas. 1019, brought to compel auditing of the salary of a justice of this court. Under this head, also, naturally fall the cases involving the issuance or revocation of licenses and patents, and of these the case of State ex rel. Drake v. Doyle, 40 Wis. 175, 186, 22 Am. Rep. 692, is the most significant. Here mandamus was in- voked against the secretary of state upon the mere relation of a private individual in order to compel that officer to revoke the license of a foreign insurance company, because it had com- 1290 LEADING CASES. mitted an act which, under the state law, worked a forfeiture of its license. In this case the attorney general appeared for the secretary of state, and suggested that the relator's personal griev- ance had been settled. Nevertheless the action went on as the suit of the state to vindicate and preserve "the prerogatives of the state in its sovereign character," and a peremptory manda- mus was awarded. Other cases of this general nature are State ex rel. Anderson V. Timme, 60 Wis. 344, 18 IST. W. 837, brought to compel the issuance of a patent by the commissioners of public lands ; State ex rel. Abbot v. McFetridge, 64 Wis. 130, 24 IST. W. 140, to compel issuance of a license to a railroad company to do busi- ness, on the allegation that it had fully paid the legal license fees; also, the case of State ex rel. Covenant Mut. Ben. Asso. V. Eoot, 83 Wis. 667, 19 L.E.A. 271, 54 IST. W. 33, brought to compel the state insurance commissioner to issue a license to a foreign insurance company which had fully complied with the law. This last case, however, was directly overruled in the case of Ee Court of Honor, 109 Wis. 625, 85 K W. 497, where this court refused to entertain an exactly similar action, on the ground that the primary right sought to be vindicated was private, and the public right, if involved at all, was only incidentally affected, and hence the circuit court was the appro- priate tribunal to pass on the question in the first instance. Whether this ruling does not in effect negative jurisdiction in the Timme and McFetridge Cases, just cited may be a question of some doubt, but it is not necessary to determine it here. The case of State ex rel. Guenther v. Miles, 52 Wis. 488, 9 N. W. 403, where the original jurisdiction was used on the relation of the state treasurer to compel a county treasurer to make an official return, is not significant, as the question of jurisdiction was not raised. V. In the last class fall the cases where it is sought to re- strain a state ofiicer (and in exceptional cases a county officer) from committing an unlawful act which will affect the preroga- tives of sovereignty of the state, or the liberties of the people. The most conspicuous examples in this class of cases are the so-called "Gerrymander Cases," State ex rel. Atty. Gen. v. Cun- ningham, 81 Wis. 440, 15 L.E.A. 561, 51 N. W. 724, and State ex rel. Lamb v. Cunningham, 83 Wis. 90, 17 L.E.A. 145, STATE EX EEL. BOLEXS V. FEEAE, 1291 35 Am. St. Eep. 27, 53 K W. 35,— the first of which was brought by the attorney general himself, and the second by a private relator on leave of the court, after the attorney general had refused to act. In these cases it was sought to enjoin the secretary of state from carrying out the terms of an apportion- ment law, on the ground that the law violated the commands of the Constitution, and was void. Here, for the first time, this court held that it could and would, on the relation of a private •citizen, prevent a state officer from enforcing an unconstitu- tional law which injuriously affected the liberties of the people as an imfair and unconstitutional division of the legislative ■election districts of the state must necessarily do. In neither •of these cases was jurisdiction sustained, because of the alleged unlawful expenditure of public funds, nor because of the fact that the relator was a taxpayer, but in both the ground was that an injury to the people of the state was about to be committed by depriving many voters of their just and constitutional rights in the election of the legislative bodies of the state under the form of a law which violated the express command of the Con- stitution. The evident idea was that the relator was in no sense the plaintiff. Hs simply brought the matter to the attention of the court, and, when he had performed this function, he ceased to be of importance. The suit became from its inception the suit of the state to vindicate the liberties of its people generally. Following these cases at a considerable distance in time, but practically identical in principle, are the so-called "Twenty per cent, — Cases," — State ^x rel. McGrael v. Phelps, 144 Wis. 1, 35 L.E.A.(KS.) 353, 128 K W. 1041, and State ex rel. Han- na V. Frear, 144 Wis. 58, 128 N. W. 1061,— where, on the re- lation of private individuals, state and county officers were sought to be enjoined from enforcing a law requiring that, in order to be represented on the official ballot, a political party must cast at the primary 20 per cent of its vote for governor at the last preceding general election. The ground taken was that this provision was an unreasonable, unconstitutional re- striction or infringement on the freedom of the ballot, and hence it affected the liberties of the people. Although objec- tion to the jurisdiction was formally taken in these cases, it was not pressed, it was not discussed, and the court simply said that it saw no reason why jurisdiction should not be exercised. 1292 XEADING CASES. In this class, if anjwhere, must naturally fall the case of State ex rel. Eaymer v. Cunningham, 82 Wis. 39, 51 N. W. 1133, which has been previously cited, brought on the relation of a taxpayer to prevent the payment of salary to a state officer over and above the amount limited by the Constitution. As has been before said in this opinion, the jurisdiction in that, case was sustained by brief reference to the first Gerrymander- Case, which is quite plainly a different case. Unquestionably the real ground was that the legislature was by express com- mand of the Constitution prohibited from paying to the state- superintendent out of the state funds any sum exceeding $1,200 per annum. Hence the law attacked in that case, which direct- ed payment of a greater sum every year, was absolutely void, and the state itself was entitled to the intervention of the extra- ordinary jurisdiction of this court to protect iself from uncon- stitutional and unlawful depletion of its treasury by its own officers. In both the Eosenhein Case, 138 Wis. 173, 119 IST. W. 894,. and the Filer & S. Case, 146 Wis. 629, 132 IST. W. 584, the- applications to bring actions on the relation of taxpayers were denied, because it was considered in each case that no unlawful expenditure of funds by state officers was threatened, but in the first-named case it was expressly said, and in the second it was assumed, that, in order to prevent illegitimate expendi- ture of state funds, an equitable action on the initiative of a. taxpayer, after refusal by the attorney general, would be prop- erly within the original jurisdiction of this court. There are- several other cases which have more or less bearing on the general question which will be briefly mentioned. In the case- of Re Hartung, 98 Wis. 140, 73 N. W. 988, it was sought to> use the original jurisdiction of this court by way of injunction to put an end to a public nuisance in the town of Wauwatosa, consisting of the depositing of garbage on the surface of land to the discomfort of a very large neighborhood ; but it was held that such a wrong, though public, was not a wrong aftecting- the sovereignty, franchises, or prerogatives of the state, or the liberties of the people at large, and that the remedy was in the- local courts. This seems to be an entirely logical application of the general principle laid down in the Eailroad Cases that,, even though a question be publici juris, it will not call for the-. STATE EX EEL. BOLENS V. FEEAK. 129:! \ise of the original jurisdiction if it be merely local in its effect. The sequel to this case, which appears by reference to State ex rel. Hartung v. Milwaukee, 102 Wis. 509, 78 N. W. Y56, is also instructive. After the decision in Ee Hartung, supra, the relator went to the circuit court, and, after refusal by the attorney general, was allowed to bring an action in the circuit court in the name of the state to enjoin the further continuance of the alleged public nuisance. The case was tried on the merits and an injunction refused, and on appeal to this court it was held that the circuit court was not given the writ of injunction for prerogative purposes, as this court was, and that hence the action below was never in fact an action by the state, notwith- standing its title, but was an action by a private party. In view of this last-named decision, the recent case of State ^x rel. Van Alstine v. Frear, 142 Wis. 320, 125 IST. W. 961, 20 Ann. Cas. 633, becomes interesting, if not important. This case was an action brought in the circuit court in the name of the state, after refusal to act by the attorney general, upon the relation of a taxpayer; the object being to enjoin the sec- retary of state and state treasurer from carrying out the pro- visions of the primary election law, and especially from audit- ing or paying claims or bills for expenses arising under the law, on the ground of unconstitutionality of the law. The jurisdic- tion of the circuit coiirt in this case was not challenged by demurrer, nor was it raised or considered either in the lower court, or in this court, yet it seems quite manifest that it was a case where injunction was used in the circuit court for pre- rogative purposes contrary to the principle laid down in the case ■of State ex rel. Hartung Milwaukee, just cited. However, as the question of jurisdiction passed sub silentio, the case is not significant. Before proceeding to draw general conclusions from these decisions as to the field of the original jurisdiction, so far as iiny field has been marked out by the decisions, it may be well, in order to avoid misapprehension, to notice the fact that the legislature by § 3200, stat. 1898, has consented that the state may be sued in the supreme court by any person having a just claim which has been disallowed by the legislature. Actions brought under this section are, of course, brought by virtue of the consent of the state, without which the sovereign itself can- 1294 LEADING CASES. not be sued. Nothing said in this opinion is to be construed as having any bearing on this section or the actions brought under it. The affirmative result of the significant cases since the Rail- road Cases is, as it seems to us, that the original jurisdiction of this court may be rightly invoked when there is a showing made either that (1) a citizen is wrongfully deprived of hi& liberty; (2) a state office has been usurped; (3) a franchise grantable only by the state has been usurped, abused, or for- feited; (4) a law regulating public-service corporations in the- interest of the people is systematically disobeyed and set at naught; (5) a navigable river, which the state is bound to keep open as a highway for all, is obstructed or encroached upon, or a public railroad built under a charter granted by the state is about to be destroyed; (6) a state officer declines to perform a ministerial duty, in the performance of which the people at large have a material interest; (7) a state officer is about to- perform an official act materially affecting the interests of the people at large, which is contrary to law or imposed upon him by the terms of a law which violates constitutional provisions; or (8) the situation is such in a matter publici juris that the remedy in the lower courts is entirely lacking or absolutely in- adequate, and hence jiirisdiction must be taken or justice will be denied. It is not meant by this attempted classification that no cases which do not fall within one or the other of the classes can ever call for the exercise of the original jurisdic- tion, but simply that cases falling within these general classes have been held to be properly within the original jurisdiction. In addition to these eight affirmative propositions, the de- cided cases justify the statement of several negative propositions which are also helpful upon the general question. These are: (1) A case, although involving a question publici juris, will not come within the jurisdiction if it be only local in its effect, subject only to the exception named in the eighth class. (2) A case involving a mere private interest, or one whose primary purpose is to redress a private wrong, will not be entertained. (3) A case will not be dismissed, however, because there is a private interest involved with the public interest, provided the private interest be incidental merely, and the vindication of the public right be the primary purpose of the action. (4) STATE EX EEL. BOLENS V. EEEAE. 1295 An action involving a private as well as a public interest will not be dismissed merely because the private interest may drop out, provided the public and private interests be severable and the public interest still exists. (5) The Constitution has not given the circuit court the povrer to use the vs^rit of injunc- tion as a prerogative jurisdictional writ, as it has been given to the supreme court, hence the circuit court has not the power in an action not brought by the attorney general, but on the relation of a private citizen only, to use the writ for prerogative purposes. It seems to us now that the real fundamental philosophy of the original jurisdiction and its use has not been at all times fully apprehended by the court, even since the elaborate dis- cussion in the Eailroad and Eau Claire Cases, but, after this review of the authorities, it seems quite simple, and it really comes down to a few propositions which, when thoroughly un- derstood, solve many difficulties. This transcendent jurisdiction is a jurisdiction reserved for the use of the state itself when it appears to be necessary to vindicate or protect its prerogatives or franchises, or the lib- erties of its people. The state uses it to punish or prevent wrongs to itself or to the whole people. The state is always the plaintiff, and the only plaintiff, whether the action be brought by the attorney general, or, against his consent, on the relation of a private individual under the permission and direction of the court. It is never the private relator's suit. He is a mere incident. He brings the public injury to the attention of the court, and the court, by virtue of the power granted by the Con- stitution, commands that the suit be brought by and for the state. The private relator may have a private interest which may be extinguished (if it be severable from the public in- terest) , yet still the state's action proceeds to vindicate the pub- lic right. The fact that in many cases, as, for example, cases of unlawful imprisonment, the private wrong and the public wrong are so closely identified that the ending of the private wrong necessarily puts an end to the public wrong, makes no difference with the principle. These propositions, if correct, and we believe they are, dem- onstrate very clearly that there can be no such thing as a taxpayer's action (as that action is known in the circuit courts) 1296 LEADING CASES. brought in the supreme court within the original jurisdiction. The philosophy of the taxpayer's action in the circuit court is that the taxpayer is a member of a municipal corporation, who, by virtue of his contributions to the funds of the municipality, iias an interest in its funds and property of the same general ■quality as the interest of a stockholder in the funds of a busi- ness corporation, and hence, when corporate officers are about to illegally use or squander its funds or property, he may appeal to a court of equity on behalf of himself and his fellow stock- holders (i. e., taxpayers) to conserve and protect the corporate interests and property from spoliation by its ovm officers. The taxpayer himself is the actual party to the litigation, and represents not the whole public, nor the state, nor even all the inhabitants of his municipality, but a comparatively limited •class ; namely, the citizens who pay taxes. In short, he sues for a class. No such thing is known in the exercise of the original juris- diction of this court. In actions brought within that jurisdic- tion the state is the plaintiff, and sues to vindicate the rights •of the whole people. The Bolens Case cannot, therefore, be held to come within the original jurisdiction of this court, if it be a mere taxpayer's action. This conclusion, however, by no means leads to the result that the original jurisdiction may not properly be used at the instance and upon the relation of a private individual to stay, hy appropriate writ, the expenditure of the state's funds for purposes expressly or by necessary implication forbidden by the Constitution. Such use of funds by a state officer is cer- tainly as much a breach of duty and an injury to the state as the refusal to pay out funds which have been lawfully ap- propriated, or the failure to obey the provisions of general elec- tion laws ; but in such case the action is the action of the state as truly as if brought by the attorney general, not the action •of the taxpaying relator. If this be true, we can see no logical escape from the con- clusion that, where state officials are about to spend the state's money in executing an imconstitutional law, the state may pre- vent the threatened misapplication of its funds by the same means. This seems to us the only logical basis upon which STATE EX EEL. BOLENS V. FEEAE. 1297 the case of State ex rel. Raymer v. Cunningham, 82 Wis. 39, 59 ISr. W. 1133, can rest. But it must be recognized that such a power is extreme. To arrest the hand of a state officer as he is about to carry out the command of the legislature is indeed a serious step, one not to be taken summarily, or without profound consideration. As the power is great, it should be exercised with a wisdom and discretion commensurate with its greatness. No trivial grounds should impel the court to permit its exercise. This court will certainly not feel obliged, in every case where there is a threat- ened expenditure of state funds under a law of doubtful con- stitutionality, to allow an action of this nature to be brought in the name of the state, but will feel entirely free to leave the question of constitutionality to be settled as it may arise in ordinary litigation. The defiance of express or implied con- stitutional commands may be so flagrant and patent as to make the exercise of this great power appear justifiable, if not abso- lutely necessary, and in such case it will be exercised courage- ously. This court will, however, judge of the exigency in each •case as it arises, and will endeavor to guard the great power from being used in trifling cases or to accomplish ulterior pur- poses. In the present case we go no further than to state these gen- ■eral principles. We do not find it necessary to decide whether the alleged illegal expenditure of funds alone presents a case of such exigency as to justify the use of the original jurisdic- tion of this court to prevent such expenditure. There are other -and more important features in the present case which, in our judgment, present a proper case for the exercise of the original jurisdiction. The law which is attacked here, if it be valid, makes a rad- ical change in the present system of taxation over the whole state. Since the days when Hampden refused to pay the ship money, unjust taxation has been deemed, by English speaking nations, at least, to vitally concern, if not to destroy, the lib- erties of the people. Such taxation has been deemed to justify armed resistance, and, if need be, revolution. Insistence upon it cost Charles I. his life and England an empire. If this law in its essential provisions violates constitutional provi- Foster Income Tax. — 82. 1298 LEADING CASES. sions, and hence is void, taxation under it is, of course, unjust, and the sums which may be collected under it are unlawfully collected. It makes in terms a very sweeping change in the methods of taxation in every taxing district of the state, and shifts the burdens of taxation so that many will pay more than under the old system, while taany will pay less. If it should go into operation for a year or two and then be held unconstitutional in some actual case, the confusion created in the financial affairs of the state and of every municipality would unquestionably be great. We cannot but regard any serious question as to the constitutionality of such a law as a question seriously affecting the prerogatives of the state, as well as the liberties of the people ; hence we conclude that the case presented is one justly calling for the exercise of the orig- inal jurisdiction of this court. Many provisions of the law are attacked as offending against either the Federal or the state Constituti-ons. We shall only treat the contentions which might, from some point of view, be considered as going to the validity of the whole act. As to those minor provisions, which are properly to be regarded as matters of detail, we shall express no opinion. This is in accord with our well-established custom in cases of this nature. Wadhams Oil Co. v. Tracy, 141 Wis. 150, 123 K W. 785, 18 Ann. Cas. 779 ; State ex rel. Buell v. Frear, 146 Wis. 291, 34 L.E.A.(]Sr.S.) 480, 131 N. W. 832; Borgnis v. Falk Co. 147 Wis. 327, 37 L.RA.(N.S.) 489, 133 K W. 209, 2 N. C. C. A. 834. A few general observations may not be out of place before taking up for consideration the specific claims of uncon- rititutionality which are urged upon our attention. The law in question, if valid, works a very important change in the general taxation policy of the state. Ever since the foun- dation of the state government it has been the policy of the state to levy its general taxes upon property, either real or personal, with the exception of the inheritance taxes and the license taxes first levied on railroads and latterly upon other public-service corporations. The Constitution of the state, though not forbidding excise taxation, as determined in the in- heritance tax case (Nunnemacher v. State, 129 Wis. 190, 9 L.E.A.(N.S.) 121, 108 K W. 627, 9 Ann. Cas. 711), contained only one brief section on the general subject of taxation ; namely, STATE EX EET.. BOEEIS'S V. FREAK. I'l'.)',) •§ 1 of article 8, reading as follows : "The rule of taxation shall be uniform, and taxes shall be levied upon such property as the legislature shall prescribe." Under this section property taxation has been the rule, with the exceptions just noted, un- til the passage of the present law. This law, however, is but the concrete embodiment of a popular sentiment which has been abroad for some time. The legislatures of 1905 and 190Y (Laws 1907, chap. 661) passed a resolution recommending the amendment of the section of the Constitution quoted, by the addition of the following words: "Taxes may also be imposed on incomes, privileges, and occupations, which taxes may be graduated, and progressive £ind reasonable exemptions may be provided." This change was ratified by the people at the gen- eral election held in November, 1908, and thus was clearly expressed, by both legislature and people, the idea that some form of general taxation in addition to, or in place of, property taxation, might well be adopted. The attempt has now been made to carry out this idea, and we have the result before us in the present law. With the political or economic policy or expediency of the law, we have nothing to do. If it be within constitutional lines, it represents and embodies public policy, because it is enacted by that branch of the government which determines public policy. It may be well to note, however, that income taxation is no new and untried experiment in the field of taxation. It has been in use in various forms, and generally with the progres- sive feature, by many of the civilized governments of the world for decades, which in some instances run into centuries. It has been used at various times by nearly or quite twenty of our own states, and is now in use in several of them. It was used for a brief period by the government of the United States, and is now in successful operation in practically all of the great nations of the civilized world, except the United States. The fundamental idea upon which its champions rest their argument in its favor is that taxation should logically be imposed accord- ing to ability to pay, rather than upon the mere possession of property, which for various reasons may produce no revenue to the owner. It is argued that •'here should be as nearly as practicable equality of sacrifice among the various taxpayers, and that a 1300 LEADING CASES. tax levied at a uniform or proportional rate can rarely, if ever, produce equality of sacrifice; that 1 per cent of a small income, which just suffices to support its owner, is a far larger relative contribution to the public treasury than 1 per cent of an income so large that it cannot be exhausted by its owner, except by means of lavish and extravagant expenditures. We are not to be understood by these remarks to be ad- vancing arguments in support of the policy or expediency of the law, but simply as showing that in passing the law the legislature is only adopting a scheme of taxation which has been approved for many years by many of the most enlightened governments of the world, and has the sanction of many thought- ful economists. By the present law it is quite clear that personal property taxation for all practical purposes becomes a thing of the past. The specific exemptions of all money and credits and the great bulk of stocks and bonds, as well as of all farm machinery, tools, wearing apparel, and household furniture in actual use, regardless of value, goes far to eliminate taxation of personal property; while the provision that he who pays personal prop- erty taxes may have the amount so paid credited on his income tax for the year seems to put an end to any effective taxation of personal property. That taxation of such property has proven a practical failure will be admitted by all who have given any attention to the subject. Doubtless this was one of the main arguments in the legislative mind for the passage of the present act. By this act the legislature has, in substance, declared that the state's system of taxation shall be changed from a system of uniform taxation of property (which so far as personal property is concerned has proven a failure) to a system which shall be a combination of two ideas; namely, taxation of persons progressively, according to ability to pay, and taxation of real property uniformly, according to value. We pass from these general observations to consideration of the specific grounds of unconstitutionality alleged. I. It is first claimed with much earnestness and ability that the act violates the provisions of the 14th Amendment to the Federal Constitution. One of the contentions under this head is that the progressive features of the act are discriminatory, if not absolutely confiscatory. Another contention is that the STATE. EX KEL. BOLENS V. FBEAB. 1301 act provides for double taxation, and for botb reasons it is claimed that it denies to citizens the "equal protection of the laws." It is said in support of this contention that the United States Supreme Court in the Pollock Case, 157 U. S. 429, 39 L. ed. 759, 15 Sup. Ct. Eep. 673, has held that taxation of io'iome derived from land is in fact taxation of the land itself, hence that the act provides for double taxation; first, of the land in specie, and next, of the income therefrom. It seems that this claim may be very easily met. The question in the Pollock Case was whether the taxation of rentals of land was direct taxation within the meaning of that term as used in the Constitution of the United States; and it was held to be the same, in substance, as a tax on the land itself, and hence a direct tax. This may be admitted for the purposes of the case, but it does not appear to, in any way, decide the question here at issue, or even to be very persuasive. The question there was of the power of Congress under that clause of the Federal Constitution which forbids any direct Federal tax, except one levied in proportion to the population. The question here is primarily of the power of the legislature of Wisconsin under its Constitution to levy an income tax in addition to a real estate tax; and, secondarily, whether such a tax denies to anyone the equal protection of the laws. The inapplicability of the rule of the Pollock Case to the case here presented seems so plain as to require little comment. There can be no doubt of the proposition that income taxation of a progressive character, in addition to taxation of property, is directly authorized by the Constitution of Wisconsin as amended in 1908. Words could hardly be plainer to express that idea than the words used. From them it clearly appears that taxation of property and taxation of incomes are recognized as two separate and distinct things in the state Constitution. Eoth may be levied, and lawfully levied, because the Constitu- tion says so. However philosophical the argument may be that taxation of rents received from property is in effect taxation of the property itself, the people of Wisconsin have said that "property" means one thing, and "income" means another; in other words, that income taxation is not property taxation, as the words are used in the Constitution of Wisconsin. That they may say so, and lawfully say so, there is no doubts 1302 LEADING CASES. unless some restriction in the Federal Constitution is thereby violated ; and we are pointed to none, save the clause guaranty- ing "equal protection of the lavi's." That this clause does not apply to the case seems very well settled by the language of the Supreme Court of the United States itself in the great case of Michigan C. R. Co. v. Powers, 201 TJ. S. 245, at pages 292, 293, 50 L. ed. 744, 761, 762, 26 Sup. Ct. Eep. 459, 462, where it is said : "There is no general supervision on the part of the nation over state taxation j and in respect to the latter the state has, speaking generally, the freedom of a sovereign both as to objects and methods. It was well said by Judge Wanty, delivering the opinion of the circuit court in this case (Michigan R Tax Cases [C. C] 138 Fed. 232) : 'There can at this time be no question, after the frequent and uniform ex- pressions of the Federal Supreme Court, that it was not de- signed by the 14th Amendment to the Constitution to prevent a state from changing its system of taxation in all proper and reasonable ways, nor to compel the states to adopt an ironclad rule of equality, to prevent the classification of property for purposes of taxation, or the imposition of different rates upon different classes." It is enough that there is no discrimination in favor of one as against another of the same class, and the method for the assessment and collection of the tax is not in- consistent with natural justice.' " This doctrine has been stated and restated in many forms, but with substantially the same meaning in many Federal cases, beginning with the case of Bell's Gap R. Co. v. Pennsylvania, 134 U. S. 232, 33 L. ed. 892, 10 Sup. Ct. Eep. 533, nearly all of which are cited in the Powers Case at the close of the clauses above quoted. It seems unnecessary to quote or descant upon them. The sum and sub- stance of it is that the 14th Amendment never was intended to lay upon the states an unbending rule of equal taxation. The states may make exemptions, levy different rates upon different classes, tax such property as they choose, and make such de- ductions as they choose, and, so long as they obey their own Constitutions and proceed within reasonable limits and general usage, there is no power to say them nay. With regard to the progressive feature, it is aptly said in Knowlton v. Moore, 178 U. S. 41, at page 109, 44 L. ed. 969, 996, 20 Sup. Ct. Rep. 747, 774, by the present chief justice, STATE EX EEL. liOLEXS \. FEEAE. IdUO that "taxes imposed with reference to the ability of the person upon whom the burden is placed to bear the same have been levied from the foundation of the government. So, also, some authoritative thinkers and a number of economic writers con- tend that a progressive tax is more just and equal than a pro- portional one. In the absence of constitutional limitation, the question whether it is or is not is legislative, and not judicial." 'No more need be said as to the progressive feature. Expressly permitted as it is by our own Constitution, and clearly not within the inhibitions of the lith Amendment, the progressive feature is in no respect objectionable. It was suggested in the Knowlton Case, supra, that possibly the case might arise where exactions so arbitrary and confiscatory might be imposed under the guise of progressive taxation that the question would arise whether judicial power should not afford relief under inherent and fundamental principles of justice, but, as there is plainly no ground for such a contention here, there is no need of con- sidering the question. II. It is argued that the provisions which deny to nonresi- dents the exemptions which are allowed to residents, and which allow the board of review to increase the assessment of a non- resident without notice, while requiring notice to be given to a resident, violate § 2 of article 4 of the Federal Constitution, which provides that "the citizens of each state shall be entitled to all privileges and immunities of citizens in the several states." The question as to the validity of the provision allow- ing exemptions to residents of the state and denying them to nonresidents is raised, and received some attention in the briefs, but was not mentioned in the oral arguments. We regard it as a question involved in considerable doubt, and one not neces- sary to be passed upon noW. It cannot be imagined for a moment that the legislature would have failed to pass the act had it not contained this pro- vision, and we prefer to wait until the question is presented in a concrete case, at which time there will be opportunity to fully consider it after comprehensive briefs and arguments. It seems that the Supreme Court of the United States decided in Ward v. Maryland, 12 Wall. 418, at page 430, 20 L. ed. 449, 452, that one of the privileges and immunities protected by the section quoted is the right "to be exempt from any higher 1304 LEADING CASES. taxes or excises than are imposed by the state upon its own citizens." Other decisions relied on upon the same side are Ee Stanford, 126 Gal. 112, 45 L.RA. 788, 58 Pac. 462, and Sprague v. Fletcher, 69 Vt. 69, 37 L.E.A. 840, 37 Atl. 239, and the cases cited in the latter case. On the other side re- liance is placed on the analogy of the laws providing for ex- emptions from execution seizure, which confine their benefits to residents, and upon Travellers' Ins. Co. v. Connecticut, 185 U. S. 364, 46 L. ed 949, 22 Sup. Ct. Eep. 673. So far as the provision allowing the increasing of an assess- ment against a nonresident without notice is concerned, this would seem to be almost a necessity if power to increase the as- sessment of a nonresident is to be given to the board at all, other- wise the nonresident would only need to stay out of the state to prevent the possibility of an increase of his assessment. We do not consider that this latter provision affects in any way the privileges or immunities which are covered by the constitutional provision cited. III. The claim is made that the law violates the constitu- tional guaranties of local self-government by placing the power of appointment of the various assessors of incomes in the state tax commission. These guaranties in substance are (1) that all county officers, except judicial officers, shall be chosen by the electors of the county every two years (Wis. Const, art. 6, § 4) ; (2) that all county officers whose election or appoint- ment is not provided for by the Constitution itself shall be elected by the electors or appointed by the proper county au- thorities, as the legislature shall direct; (3) that all city, town, and village officers, whose election or appointment is not pro- vided for by the Constitution, shall be elected by the electors of the proper municipality or appointed by such municipal authorities as the legislature shall designate; (4) that all other officers whose election or appointment is not provided for by the Constitution and all officers whose offices may thereafter be created by law shall be elected by the people, or appointed as the legislature may direct. Wis. Const, art. 13, § 9. These provisions have been quite fully considered and expounded by this court in several cases, and it seems unnecessary to add to the quite complete discussions of the subject to be found iv O'Connor v. Fond du Lac, 109 Wis. 253, 53 L.E.A. 831, 85 STATE EX EEL. BOLENS V. FEEAE. 1305 N. W. 327, and State ex rel. Gubbins v. Anson, 132 "Wis. 461, 112 N. W. 475. It is sufficient to say that we do not regard the office of assessor of incomes, as provided for by this act, as either a county, city, town, or village office ; nor do we regard it as an office existing in substance at the time of the adoption of the Constitution, or essential to the existence or efficiency of either of said municipal divisions of the state, but rather an entirely new office within the fourth class above named, whose election or appointment may be provided for in any way that the legislature may in its discretion direct. The further contention is made that it is a delegation of legislative power to vest in the state tax commission the power of appointing assessors of incomes and fixing their salaries. This objection is met and fully answered in State ex rel. Gub- bins V. Anson, supra, and in Kevisor's Case, 141 Wis. 592, 124 N. W. 670, 18 Ann. Cas. 1176. IV. A number of contentions are made with regard to the exemption features of the act, and, first, it is said under this head that the allowance of exemptions to individuals and the denial of them to partnerships is unjust discrimination. The question depends, of course, upon whether there is any valid ground for classification. Is there such a substantial difference between the classes as to reasonably suggest or call for the propriety of different treatment? We are clearly of opinion that this question must be answered in the affirmative. A part- nership ordinarily has certain distinct and well-known advan- tages in the transaction of business over the individual, arising from the fact that it allows a combination of capital, brains, and industry, and thus makes it possible to accomplish many things which an individual in the same business cannot accom- plish. Further than this, however, there is another considera- tion. If the partner have individual income from other sources than the partnership business (as many do), his exemptions will be allowed to him out of the individual income, and thus, if he were also allowed exemptions from the partnership in- come, he would be allowed double exemptions. Altogether there seems to be ample reason for the classification. The exemptions themselves do not seem to be seriously attacked, nor do we see any reason why they should be. The most striking exemption is that of life insurance to the amount of $10,000 1306 LEADING CASES. in favor of one legally dependent on the deceased; but, while this is somewhat large, we cannot say that it is unreasonable, nor that there is not ample ground for classifying legally de- pendent persons, and extending an exemption to them which is denied to others. Attack is made upon the provision which directs that a tax- payer who has paid a personal property tax for the year shall be entitled to have the amount so paid credited upon his income tax. There is said to be no just ground for this distinction, but it seems quite clear to us that there is. In fact, it seems to be rather a means of equalizing the burden of the new form of tax- ation, than to be really an exemption. It was evidently done with the idea of accomplishing, without too violent a shock to taxing machinery, the substantial elimination of personal prop- erty taxation, and the substitution thereof of "ability" taxation. The practical result is that the taxpayer who has taxable per- sonal property and the taxpayer who has none each pays taxes according to his ability as evidenced by his income. In this connection, though not perhaps in its logical order, may be considered the objection to that provision of the act which directs that the estimated rental of residence property occupied by the owner shall be considered as income. It is said that this is not income, and that calling it income does not make it income. It may be conceded that things which are not in fact income cannot be made such by mere legislative fiat, yet it must also be conceded, we think, that income in its general sense need not necessarily be money. Clearly it must be money or that which is convertible into money. The Century Dictionary de- fines it as that which "comes in to a person as payment for labor or services rendered in some office, or as gain from lands, busi- ness, the investment of capital," etc. The clause was doubtless inserted in an effort to equalize the situation of two men each possessed of a house of equal rental value, one of whom rents his house to a tenant, while the other occupies his house him- self. Under the clause in question, the two men with like prop- erty are placed upon an equal footing, and in no other way ap- parently can that be done. Under the English income tax laws, it has been held that where a man has a residence or right of residence which he can turn into money if he chooses, and he occupies the residence himself, the annual value of the rental STATE EX EEL. BOLENS V. FEEAR. 1307 forms part of his income. Corke v. Fry, 32 Scott L, E. 341. We discover no objection to the provision in question. Objection is also made to the provision that the income of a wife living vrith her husband shall be added to the income of the husband, and the income of each child under eighteen years of age living with its parent or parents shall be added to that of the parent or parents. This is another case of classification, and it is only justifiable in case there is some substantial differ- ■ence of situation which suggests the advisability of difference of treatment. We think there clearly is such a difference in this: That experience has demonstrated that otherwise there will be many opportunities for fraud and evasion of the law, which the close relationship of husband and wife or parent and ■child makes possible, if not easy. The temptation to make col- orable shifts and transfers of property in order to secure double or even triple exemptions, if there were not some provision of this kind in the law, would unquestionably be very great. There is no such temptation or opportunity in the case of the single man, or the man and wife who are living separately. One further objection we overrule here without comment, for the reason that it seems very unsubstantial ; namely, the objec- tion that the law is retroactive and void, because assessed on in- comes received during the entire year 1911, while it did not go into effect until July 15th of that year, and also because it in- cludes profits derived from the sale of property purchased at any time within three years previously. V. A strong argument is made attacking the validity of § 1087m — 22, which provides, in substance, that the income of a resident derived from different political subdivisions of the state shall be combined for the purpose of determining the exemptions and the rate, while the income of a nonresident is to be separate- ly assessed and taxed in each of the municipalities from which it is derived. A table is submitted showing that under this rule if A, a resident, derived $1,000 from each of thirteen different towns or cities, he will be required to pay a tax of $367, be- cause his income is aggregated, and consequently becomes in large part subject to the higher rates, while if B, a nonresident, receives the same income from the same sources, he will only pay the smallest rate, t. e., 1 per cent of each $1,000, amounting to only $130. This, it is said, is unjust discrimination against 1308 LEADIITG CASES. the residents of the state, and deprives them of the privileges and immunities which are granted to the citizens of other states in violation of the Federal Constitution. This presents the question whether such a discrimination can be made between residents and nonresidents, only this time the discrimination seems to be against the resident and in favor of the nonresident. This question, also, we deem one not necessary to be decided now, and we intimate no opinion upon it. It does not seem that the case will frequently arise, but, if it does, it can be then treated. We do not regard it as in any respect important in con- sidering the validity of the act as a whole. VI. Much complaint is made of that part of § 1087m — 6- which provides a different rate of taxation for the income of corporations from the rate prescribed for individuals, and this also is said to be unjust discrimination. Again, the question is whether there be substantial differences of situation between individuals and corporations which suggest and justify this dif- ference in treatment, and again it seems that the answer must be, "Yes." The corporation is an artificial creation of the state, endowed with franchises and privileges of many kinds which the individual has not. It might be said with truth that the clause could be justified on the ground that it is an amendment to every corporate charter, which the legislature has the un- doubted right to make, but it is not necessary to rely on that proposition. The corporate privileges, which are exclusively held by corporations, and the real differences between the situ- ation of a corporation and an individual, among which may be mentioned the fact that the corporation never is obliged to pay an inheritance tax, plainly justify a difference of treatment in the levying of the income tax. Were the income tax a tax upon property, there could be no difference in rate, for taxation of property must still be on a uniform rule ; but, as has been here- tofore noted, it is not a tax upon property within the meaning of our Constitution. VII. The minor objections that the law in terms includes all corporations, and does not specifically except national banks, nor name the oiEcers whose salaries cannot be constitutionally taxed, are very easily disposed of. If national banks or any public officers cannot constitutionally be subjected to the tax, the law will be construed as not applying in such cases, just as STATE EX EEL. UOLENS V. FEEAE. 1309 § 1770b, Stat. (Laws 1907, chap. 562), although in general terms covering all business, has been held not to apply to inter- state business. VIII. We come now to certain serious objections which are made to the provisions of §§ 1087m — 2, subd. 3 and 1087m — 3 (b). The first of these sections provides, in substance, that a resident shall be taxed upon all of his income arising from rent- als, stocks, bonds, securities, or evidences of debt, whether the same be derived from sources within or without the state, but that the nonresident shall only be taxed on income derived from sources within the state, or within its jurisdiction, but that any person doing business both within and without the state shall, as respects that part of his income not derived from rentals, stocks, bonds, and securities, be taxed only on that proportion thereof which is derived from business transacted and property located within the state, to be determined in the manner speci- fied in subdivision "e" of § 1770b, Stat. (Laws 1907, chap. 562), as far as applicable. The general purpose of the section is quite evident, namely, to tax a resident upon his whole income and a non-resident only upon his income plainly derived from sources within the territorial jurisdiction of the state, and to provide that, where either person is engaged in a business interstate in its character, he shall only be taxed on that portion of the income derived from business transacted and property, located within the state, according to the rule pre- scribed in § 1770b for determining that proportion of capital stock of a foreign corporation doing business in this state, which must be reported to the secretary of state. The rule so imported into the statute is an arbitrary rule, and need not be stated at length in the view we now take of our duty with regard to this contention. Two fundamental objections are made to this section : First, that the state cannot tax the incomes of nonresidents, no matter from what source derived ; and, second, that the attempt to tax a part of the profits derived from an interstate business, under the rule adopted, must necessarily result in a taxation of the receipts of interstate commerce, and hence a regulation there- of, which is in violation of that clause of the Federal Constitu- tion which gives to Congress the power to regulate commerce b& tween the states. 1310 LBADlX(f CASES. We shall decide neither of these questions now. If the sec- tion be open to either or both of these objections, or any others, we cannot regard that fact as fatal to the act. The legislature evidently intended to avoid both of the objections made. They had a difficult and delicate subject to deal with. Had they been authoritatively informed that they could not constitutionally tax a nonresident's income at all, and could not divide the in- come derived partially from state and partially from interstate business, we have no idea that they would on that account have abandoned their purpose to pass the law. Again, if they pro- vided an improper rule for the division (conceding that a di- vision can be made at all), there seems no reason why the rule may not be rejected and the proper rule, which will carry out the fundamental purpose of the provision, be used. In any event, we are fully satisfied that the rejection of any or all of the provisions objected to in this section cannot reasonably be held to invalidate the whole act. When these questions are presented to us in a case actually arising, we shall be able to give them far more critical examina- tion in the light of arguments and briefs directed exclusively to them. For the present, therefore, we leave the various ob- jections to the validity of those parts of this section which are attacked, without answer. For the same reasons we decline at the present time to pass upon the objections to the second section referred to under this head. That section provides generally that a proportion of the interest on corporate bonds (to be ascertained in the same man- ner as the proportionate taxable income is ascertained in the preceding section) shall be taxed against the bondholders and paid by the corporation, and deducted from the next interest payment on the bonds. Many serious objections on behalf of foreign bondholders are made to this provision, from the fun- damental objection that there is no power to levy such a tax at all, to the minor objection that the rule for ascertaining the pro- portion is incorrect. As we do not deem it necessary to pass upon any of these objections, we need not make particular state- ment concerning them now. The subject will be entirely open for discussion when an actual case arises necessitating a decision upon this section. STATE EX EEL. BOI/ENS V. FEEAE. 1311 We have reviewed all of the objections made to the law which we deem of sufficient importance to require specific mention or treatment. As a whole, we regard the law constitutional. If there be provisions which will not stand the test, they are not provisions of such a nature that they must be considered as the inducement to or as the compensation for the balance of the law. They may drop out, and leave the law intact in its funda- mental and essential features. As to the Winding Case commenced in the circuit court, a few words should be said. This was an action brought by a number of persons and corporations who alleged that they were taxpayers, and that they and their fellow taxpayers would be unlawfiiUy taxed, and compelled to pay large sums under the alleged unconstitutional law, thus causing a multiplicity of suits ; and praying that the officers of the state be enjoined from executing the law, and from paying any moneys out of the public treasury in its execution. This seems to be a taxpayers' action pure and simple, brought in the circuit court to stay the hands of state officers from pay- ing moneys out of the state treasury. We have already held in this opinion that no taxpayers' action can be maintained in the supreme court against the auditing or disbursing officers of the state. If such relief is sought, it must be in an action by the state itself, either brought by the attorney general, or, in case of his refusal, by authority of the court itself, upon the re- lation of a private citizen. It would seem, a fortiori, that no taxpayers' action should be entertained in the circuit court, where the purpose is to halt the auditing and disbursing officers of the state. We regard this as the better administration. It is enough that this court has the power to authorize such an ac- tion if the exigency demands. To divide up that power, and scatter it among the trial courts of the state, and allow every such court to judge of the exigency, might well lead to the bring- ing of many improvident actions. It is fitting that such an ex- treme power be vested in this court alone. The result is that in the Bolens action the demurrer to the complaint must be sustained upon the merits, and judgment or- dered dismissing the complaint, without costs ; in the Winding 1312 LEADING CASES. Case the order sustaining the denmrrers must be affirmed, and the action remanded, with directions to dismiss the complaint for lack of jurisdiction. It is so ordered. Keewin and Baenes, JJ., took no part in the decision of the question of jurisdiction. Maeshall, J. dissenting in part : I concur in the decision and in the stated general character of this court's original jurisdiction, viz., that it is wholly of a prerogative character, to be exercised in the name of the sov- ereign, — the state, standing for the people as an entirety. I concur that prerogative judicial jurisdiction under the Constitution is reserved wholly to this court, and that an ordi- nary taxpayers' action to vindicate private rights is entirely outside of that field. I do not concur in the view that the circuit courts have no jurisdiction of taxpayers' actions to enjoin illegal disbursements or waste of state money under the guise of an unconstitutional legislative enactment. The jurisdiction of such circuit courts is as boundless under the Constitution, as to all ordinary mat- ters, as can be the violations of legal or equitable rights. It was lodged there by the people in the beginning. It cannot be given, taken away, or modified, legitimately, by any fiat of this court or in any way except in the manner pointed out in the fun- damental law, without invading the field of usurpation. The historical treatment of this court's administration of its original jurisdiction is not to be taken, I apprehend, as intended to indicate that its power is fenced about by mere precedents, or at all, except by the broad prerogative purposes of the grant. So far as the classification of precedents illustrates the general nature of the jurisdiction respecting what is and what is not within the field of prerogative purpose, it is very valuable, but should be regarded, I think, in that light only. Any situation calling for remedial activity which falls within the prerogative field falls within the original jurisdiction of this court, regard- less of whether there is any precedent to fit the case ; but whether such jurisdiction should be exercised or not in any given case must necessarily rest, more or less, in judicial discretion. STATE EX EEL. BOLENS V. FEEAR. 1313 I do not concur in the restrictive character of the decision. I think the court should meet now and decide now, plainly and permanently, each of the important questions discussed by coun- sel, which, obviously, must be decided by this court sooner or later, and the earlier the better for all concerned. Any delay, I think, should be avoided, if possible, thus obviating the oc- currence of a period of uncertainty characterized by expensive litigation and business disturbance attributable to failure by this court to grapple now, after the full argument had, efEcient- ly with the matters referred to. Judicial progress along that line is the correct judicial policy. It is wholly within the court's power to so progress. It is the need of the times. The whole people of the state, as it were, are before this court in this case, invoking it to make a full decision. It is due to them to re- spond as effectually as practicable. At some future time I will substitute for this brief memo- randum an opinion in support of the suggestions made. Timlin, J., dissenting in part: Chapter 658, Laws of 1911, relating to the taxation of in- comes and making an appropriation for salaries of officers and other expenses of executing and administering the statute, was enacted by the legislature, approved by the governor, and pub- lished July 15, 1911. The act went into effect as law from and after its passage and publication, and officers were appointed to administer this law, but no assessment or levy of tax had been made, and the time for enforcing the provisions of this act had not arrived when these suits were begun. I shall consider these suits separately, taking up first that begun in the circuit court by Arthur Winding and F. W. Gezelschap individually and as ■copartners, the Wisconsin Trust Company a corporation, sev- eral other natural persons, a national bank, and the Milwaukee Coke & Gas Company, a corporation. These plaintiffs, evident- ly selected because of diversity of relations to the act in ques- tion, affected differently by different sections of the act, but all desirous of escaping payment of the tax, hence interested in the question of the constitutionality of the statute, join in a tax- payers' suit in their own behalf and in behalf of all the other income taxpayers of the state, against three members of the state tax commission, the secretary of state, and the state treas- Foster Income Tax. — 83. 1314 LEADING CASES. urer. The cause of action alleged is that the act above referred to is null and void because in violation of the Constitution of the state of Wisconsin and of the Constitution of the United States, and that the members of the state tax commission will, unless restrained by injunction through their subordinate ap- pointees acting under said statute, exact and collect large sums of money from many residents and citizens of Wisconsin, which collections will lead to a multiplicity of suits to recover back the moneys so collected, or to a multiplicity of suits by the state to collect the fines and penalties provided in and by said act to be enforced against those persons who refuse to comply with the act. On these grounds they pray for an injunction restraining the state tax commissioners and their subordinate administra- tive officers from attempting to enforce the act, and restraining the secretary of state, who is by the state Constitution audi- tor, from auditing, and the state treasurer, who is also a consti- tutional officer, from paying salaries, bills, or expenses of any kind incurred under or payable by the terms of the act in ques- tion. This act carries in it a legislative appropriation for such purpose. This is therefore a bill by taxpayers to enjoin the enforcement of a statute levying taxes upon incomes, on the ground that the statute is unconstitutional, which bill is sought to be upheld upon the equitable ground that it takes the place of a multiplicity of suits or actions, but, so far as the secretary of state and the state treasurer are concerned, it is a bill to re- strain the payment of moneys out of the state treasury for the purpose of administering or enforcing a law claimed to be in- valid. As to the latter defendants, who have no part in exe- cuting or enforcing the act except auditing and paying bills, salaries, and expenses under the legislative appropriation, the bill is maintainable only upon the ground that each individual taxpayer in the state has a proprietary interest cognizable in equity in the funds of the state treasury in analogy to the share- holder in a private corporation or the taxpayer in a municipal corporation. Land, Log & Lumber Co. v. Melntyre, 100 Wis. 245, 256, 69 Am. St. Eep. 915, 75 K W. 964, op. and cases. The circuit court sustained a demurrer to this complaint, and from that order the plaintiffs appealed to this court. This demurrer went expressly to the point that the circuit court had no jurisdiction of the action, and also to the point that the com- STATE EX EEL. BOXENS V. PEEAE. 1315 plaint did not state facts sufficient to constitute a cause of ac- tion ; so that both these questions are before us on this appeal. Generally speaking, the law does not give a private remedy for the redress of a public wrong. One damaged or threatened by an unlawful act which affected him only as it affected that sec- tion of the public holding the same legal relation to such act could not, at common law or in equity, maintain an action against the doer of such act. And it mattered not that his dam- ages were greater. If they were of the same nature, and diff- ered only in degree, the v^rong was still a public wrong. The rule has been applied in a great variety of cases in this court. Enos V. Hamilton, 27 Wis. 256; Cohn v. Wausau Boom Co. 47 Wis. 314, 2 K W. 546; Baier v. Schermerhom, 96 Wis. 372, 71 N. W. 600 ; Stedman v. Berlin, 97 Wis. 505, 73 IST. W. 57; Liermann v. Milwaukee, 132 Wis. 628, 13 L.K.A.(N.S.) 253, 113 ]Sr. W. 65 ; Linden Land Co. v. Milwaukee Electric E. & Light Co. 107 Wis. 493, 83 IST. W. 851 ; Pedrick v. Eipon, 73 Wis. 622, 3 L.E.A. 269, 41 K W. 705 ; Bell v. Platteville, 71 Wis. 139, 36 W. W. 831 ; Stone v. Oeonomowoc, 71 Wis. 155, 36 N. W. 829 ; Gilkey v. Merrill, 67 Wis. 459, 30 K W. 733, and cases cited; Sage v. Fifield, 68 Wis. 546, 32 K W. 629; Harley v. Lindemann, 129 Wis. 514, 8 L.E.A.(]Sr.S.) 124, 109 ]Sr. W. 570 ; Foster v. Eowe, 132 Wis. 268, 111 K W. 688 ; Carstens v. Fond du Lac, 137 Wis. 465, 119 K W. 117; Nast V. Eden, 89 Wis. 610, 62 N. W. 409. It has been sometimes said by law writers and courts that this rule rested upon the consideration that, if one suit could be maintained in such case, each person affected might also bring suit, and thus the defendant be ruined by litigation. This con- sideration has special significance and force in a state where the law permits suits to be brought by private persons against administrative officers charged with the duty of enforcing the law. Few officers would attempt an efficient administration at such risk, and the ultimate result must be either injustice or inefficiency. But there is another reason for the rule, which lies deeper and upon a broader foundation of governmental policy. That is the policy which places the prosecution of public wrongs in the hands of the public prosecutors and out of the hands of those who may be actuated by private revenge or gain, malice, or political intrigue. Biemel v. State, 71 Wis. 444, 37 K W. 1316 LEADING CASES. 244, 1 Am. Crim. Eep. 556. If the state, as a sovereign, is ta have its proper and lawful recognition in our jurisprudence, it is, in the absence of statute, subject to no defense of laches, no limitation of time, and no liability to suit; and it must also be regarded as the repository of governmental policy and politi- cal discretion. When and how it will assert and enforce its sov- ereign prerogatives is often a political question, a matter of state policy; and to leave these great questions in the hands of every private litigant has a tendency to create confusion in jurisprudence, lack of wisdom in state policy, and contempt for authority. In the great case of Atty. Gen. v. Chicago, M. & St. P. R. Co. 35 Wis. 425, Chief Justice Eyan said at page 529 : ^'Relief against public wrong is confined to informations by the attorney general." See further for illustration Saylor v. Penn- sylvania Canal Co. 183 Pa. 167, 63 Am. St. Eep. 749, 38 Atl. 598. The victim of robbery, battery, or arson may have a pri- vate action for damages against the wrongdoer, suspended, ac- cording to some, until the pending public or state prosecution is at an end, and not concluded by the result of the public prose- cution. But there there is coincident and contemporaneous with the public wrong a private wrong suffered by the victim, distinct and different from that suffered by any other member of the public. Where all are affected alike by the wrongful act, the lan- guage of the cases and many of the actual adjudications indi- cate that there is no private actionable wrong, not merely a lack of remedy. Cases infra and supra. An exception to these gen- eral rules was recognized in the case of taxpayers, first in this state, I think, in Peck v. School Dist. 21 Wis. 516, and this doc- trine received the approval of the Supreme Court of the United States in Crampton v. Zabriskie, 101 U. S. 601, 25 L. ed. 1070. Since then the scope of the taxpayers' action so-called has been greatly extended by this court, and its decisions have not always been consistent. In Peck V. School Dist. supra, the action was brought by cer- tain taxpayers whose personal property had been levied upon and advertised for sale, to restrain local administrative officers from action taken contrary to statute and consequently outside of their jurisdiction, to the private injury of plaintiffs. Their remedy for this conceded private wrong would ordinarily be at law. But the contract which formed the basis for the tax was STATE EX KEL. BOLENS V. FKEAE. 1317 found to be fraudulent, thus arousing the jurisdiction of equity, and the injunction against the enforcement of the tax sustained upon the ground that, the jurisdiction of equity having once rightfully attached, it should be made effectual for the purpose? of complete relief. The decision of the court was written by Chief Justice Dixon. When the question was presented about four years later in a suit by taxpayers, involving no recognized ground of equity jurisdiction, but showing the plaintiffs to be taxpayers threatened with the enforcement of an illegal tax, precisely as it is presented by the complaint in the instant case, except that there it was averred the local administrative officers acted without their statutory jurisdiction, while here it is averred that the legislature of the state acted without its con- stitutional jurisdiction, the same distinguished jurist, denying the injunction, said, among other things: "The general prin- ciple that equity possesses no power to revise, control, or cor- rect the action of public political or executive officers or bodies is, of course, well understood. It never does so at the suit of a private person, except as incidental and subsidiary to the pro- tection of some private right or the prevention of some private wrong, and then only when the case falls within some acknowl- edged and well-defined head of equity jurisprudence. It is upon this principle that bills to restrain the collection of a tax have in general been dismissed [citing cases]. But there are other reasons why equity will refuse its aid in a case like this, and which are most ably pointed out in the opinions in Doolittle V. Broome County, 18 N. Y. 155, and in Sparhawk v. Union Pass. R. Co. 54 Pa. 401. The grounds are too remote, intan- gible, and uncertain, and the public inconvenience which would ensue from exercise of the jurisdiction would be enormous. It would lie in the power of every taxpayer to arrest all proceed- ings on the part of the public officers and political bodies in the discharge of their official duties, and assuming to be the cham- pion of the community, to challenge them in its behalf to meet ' him in the courts of justice to defend and establish the correct- ness of their proposed official acts, before proceeding to the per- formance of them. A pretense more inconsistent with the due execution of public trusts and the performance of official duties could hardly be imagined." Judd v. Fox Lake, 28 Wis. 683. This case has been cited and followed many times: Tn Gilkej 1318 LEADING CASES. V. Merrill, 67 Wis. 459, 30 N. W. 733, wherein it was express- ly adjudicated that an action will not lie in behalf of a taxpayer to set aside the taxes of a city or other municipality generally, Judd V. Fox Lake is cited to support the rule that there must be some distinct principle of equity jurisprudence under which the case is brought, other than the mere illegality of the gen- eral taxes and its necessary and usual consequences ; in Pedrick V. Eipon, 73 Wis. 622, 3 L.E.A. 269, 41 IST. W. 705, to the effect that the mere passage of a resolution and intent to enforce it are not sufficient to support a taxpayers' suit; in Sage v. Fifield, 68 Wis. 546, 32 IST. W. 629, to the same effect; in Foster v. Eowe, 132 Wis. 268, 111 N. W. 688, to the effect that no action will lie by a taxpayer in his own behalf and in behalf of other tax- payers to restrain the levy and collection of the taxes of a mu- nicipality generally. See also Harley v. Lindemann, 129 Wis. 514, 8 L.K.A.(E'.S.) 124, 109 K W. 570. If the equitable ground of the prevention of a multiplicity of suits could be in- voked to support such a taxpayers' action, for the reason that the collection of an invalid tax will breed a multitude of suits at law to recover back the taxes, or on the ground that it will re- quire a multitude of suits or proceedings in the nature of suits by the state to collect the taxes, then manifestly the foregoing cases were incorrectly decided, for all invalid tax levies give rise to suits to recover back the taxes, and generally the nonpayment of taxes is followed by penalties of some kind. Such suits are also forbidden by the rule which prohibits the courts to enter- tain suits by a private citizen to vindicate a public right, or that which prohibits a court of equity from employing its pre- ventive remedies so as to interfere in a wholesale way with the collection of the public revenues. But I think they were cor- rectly decided upon either ground. See Bell v. Platteville, 71 Wis. 139, 36 N. W. 831, and reasons there given for refusing to entertain the taxpayers' suit ; Stone v. Oconomowoc, 71 Wis. 155, 36 ]Sr. W. 829; Harley v. Lindemann, 129 Wis. 514, 8 L.E.A.CN.S.) 124, 109 N. W. 570; Carstens v. Fond du Lac, 137 Wis. 465, 119 K. W. 117. In the latter case the right of a taxpayer to sue in behalf of other taxpayers is denied where the plaintiff merely seeks to relieve his property of a tax which he claims to be void. In Giblin v. North Wisconsin Lumber Co. 131 Wis. 261, 120 Am. St. Eep. 1040, 111 K W. 499, the cases STATE EX BEL. BOLENS V. FEEAE. 1319 are cited -which hold that a decree in a taxpayers' suit is bind- ing upon all the taxpayers and citzens of the municipality con- cerned in the litigation. The taxpayers' suit, as both created and limited by judicial decisions in this state, has been produc- tive of very beneficial results in preventing municipal maladmin- istration, conserving municipal funds and property, and keeping fraudulent or erring municipal officers within their jur- isdiction. But the fact that it has cured some ills does not prove it a panacea. It has its limitations, as above shown, founded upon sound policy even with respect to subordinate municipal ofiicers. For stronger reasons, those limitations must be ap- plied when the suit is state wide in its operation, and is, in ef- fect, a suit against the state to prevent the entire state levy and collection of a tax, on the averment that the law sought to be enforced is unconstitutional. The state as such has immunity from actions except where expressly authorized by statute, and here no such statute exists covering the instant case. The state officers in the execution of a law have a wider latitude of dis- cretion than municipal officers. Taxpayers' suits against the latter are brought to vindicate some law, here to annul a stat- ute. The taxpayer here attempts to represent a large constitu- ency, and the arrest bv injunction of all the taxes of the state surely implies a wider scope of power, larger interference with administrative officers, and multiplication of the serious conse- quences mentioned in the quotation from Judd v. Fox Lake, supra. It seems apparent that, under the decisions of this court, the first action cannot be supported as a taxpayers' action based upon the avoidance of a multiplicity of actions at law or suits in equity. The other ground averred in support of the com- plaint is, as said, based upon the claim that each taxpayer of the state has an equitable proprietary interest in the funds in the state treasury or an interest of such a nature that equity will recognize it, and protect it by injunction against the constitu- tional fiscal officers of the state, to prevent them from paying out of such treasury funds for the execution or administration of an unconstitutional law under the rule applied to municipali- ties in Land, Log & Lumber Co. v. Mclntyre, 100 Wis. 245, at page 256 op., 69 Am. St. Eep. 915, 75 N. W. 964; Cole's Es- tate, 102 Wis. 1, 72 Am. St. Kep. 854, 78 JST. W. 402, and other 1320 LEADING CASES. cases in this court. But the situations are not analogous. The state is not to be put upon the level of a private or of a munici- pal corporation. The former is the sovereign; the latter the subjects. The courts have jurisdiction in an action against a municipality as against a natural person. They have no juris- diction of actions against the state except with the consent of the state expressed by the legislative branch of the government and approved by the executive. Unlike the Federal Constitu- tion and the Constitutions of most of the states, the Constitution of this state creates and recognizes not three, but four, branches of government — ^legislative, executive, administrative, and ju- dicial. Administration is logically, and in most cases legally, recognized as an exercise of the executive power. The heads of the great administrative departments of the United States government derive their power from the grant of executive pow- er in the Federal Constitution, and their lawful acts are treated as acts of the chief executive ; and in some instances an injunc- tion against them to prevent the enforcement of law challenged as unconstitutional was put upon the same level as a like in- junction against the President. Mississippi v. Johnson, 4 Wall. 475, 18 L. ed. 437 ; Georgia v, Stanton, 6 Wall. 50, 18 L. ed. 721, and cases in Rose's Notes. The administrative officers named in article 6 of our state Constitution are secretary of state, treasurer, and attorney general for the state, and sher- iffs, coroners, registers of deeds, and district attorneys for the counties. Among the duties of the secretary of state prescribed by the Constitution is that "he shall be ex officio state auditor." There is no general grant of the whole administrative power to any one of or to all these officers, and doubtless this and § 4 of article 5, which requires of the governor that "he shall expedite all such measures as may be resolved upon by the legislature, and shall take care that the laws be faithfully executed," is suf- ficient authority for the legislature to impose upon the governor and upon subordinate administrative officers, like the state tax commissioners, all necessary administrative powers not by the Constitution vested in the administrative officers therein men- tioned. There is also found in our state Constitution some ex- press limitations upon the power of the legislature over the funds in the state treasury, and some restrictions of that power by necessary implication. Instance, § 18 of article 1, which STATE EX EEL. BOLENS V. FEEAE. 1321 provides that no money shall be drawn from the treasury for the benefit of religious societies or religious or theological semi- naries ; also § 2, art. 8, which forbids an appropriation for the payment of any claim (except claims of the United States and judgments) not filed within six years after the claim accrued; and there are others. State ex rel. New Eichmond v. David- son, 114 Wis. 563, op. of Dodge, J., at page 580, 58 L.K.A. 739, 88 N. W. 596, 90 N. W. 1067. There are restrictions by necessary implication, as § 1, art. 10, which provides that the compensation of the superintendent of public instruction shall not exceed the sum of $1,200 annually. State ex rel. Raymer V. Cunningham, 82 Wis. 39, 50, 51 IST. W. 1133. But these only accentuate the application, to all other treasury disburse- ments, of the rule fundamental in popular representative gov- ernments, that the popular branch of the state legislature, or the legislative branch of the government, shall control the public purse. Expressio unius est exclusio alterius. In no system is the judiciary the guardian of the public treasury except as the Constitution, by restrictions upon legislative power in this di- rection, may have so provided that a judicial controversy not involving political discretion may arise. The manner in which appropriations of money must be made is regulated, and there is a general provision, recognizing the authority of the legisla- tive branch of the government over the public funds, to the effect that no money shall be paid out of the treasury except in pur- suance of an appropriation made by law. There is in the in- stant case an appropriation made by law, but it is contended that this appropriation, being made for the purpose of ad- ministering or carrying into effect an unconstitutional law, is itself unconstitutional. What provision of the Constitution does it conflict with if we suppose the premises correct? The state legislature is not expected to find a grant of power to it in the state Constitution. Where there is no restriction, it possesses the power. Com. v. Plaisted, 148 Mass. 375, 2 L.E.A. 142, 12 Am. St. Rep. 566, 19 N. E. 224. There is no such restriction upon the power of the legislature over the public funds. On the contrary, it may well be within the duty, at least it is with- in the discretion, of the legislature that all laws, even invalid laws, be enforced, and thus brought to the test before the courts In the ancient well-understood and lawful way. But, in any 1322 LEADING CASES. event, the courts have no authority to interfere by injunction, and thus forestall attempts to enforce the law. This because the taxpayer has no interest in the funds in the public treasury to restrain these officers, and because the court has no power to create such an interest in the taxpayer, and because the court does not possesses the power where no constitutional interdict intervenes to control the disbursements of public funds as against the legislative branch of the government. But of this here- after. It further seems to me obvious that a suit by a taxpayer against such fiscal officers of the state, based upon the claim that a statute is unconstitutional, is a suit by a private person against the state not going upon any apprehended destruction or confiscation of his property or clouding his title, as we say in legal phrase not quia timet, but ostensibly as champion of the public interests and in self -assumed protection of public funds, but really to avoid payment of the tax by arresting the power of the state in its attempt to execute the law by furnish- ing the funds for that purpose. That this is a suit against the state is settled by authority here and elsewhere. It falls within the rule of State ex rel. Drake v. Doyle, 40 Wis. 175, 22 Am. Eep. 692, sixth paragraph of opinion and the cases there se- lected for approval. Stephens v. Texas & P. E. Co. 100 Tex. 177, 97 S. W. 309 ; Lord & P. Chemical Co. v. Board of Agri- culture, 111 N. C. 135, 15 S. E. 1032; State ex lel. Hart v. Burke, 33 La. Ann. 498 ; Poindexter v. Greenhow, 114 U. S. 270, 29 L. ed. 185, 5 Sup. Ct. Eep. 903, 962, and cases in Rose's ISTotes, and Fitts v. McGhee, 172 U. S. 516, 43 L. ed. 535, 19 Sup. Ct. Rep. 269, are in point, and other cases can be found. Quoting from the last cited case: "If because they were law officers of the state, a case could be made for the pur- pose of testing the constitutionality of the statute by an injunc- tion suit brought against them, then the constitutionality of every act passed by the legislature could be tested by a suit a.gainst the governor and the attorney general, based upon the theory that the former as the executive of the state was, in a general sense, charged with the execution of all its laws, and the latter, as attorney general, might represent the state in litigation involving the enforcement of its statutes. That would be a very convenient way for obtaining a speedy judicial determination of STATE EX EEL. BOLENS V. FEEAR. 1323 questions of constitutional law -which may be raised by indi- viduals, but it is a mode which cannot be applied to the states of the Union consistently with the fundamental principle that they cannot, without their assent, be brought into any court at the suit of private persons." See also Ex parte Young, 209 TJ. S. 157, 52 L. ed. 728, 13 L.E.A.(]Sr.S.) 932, 28 Sup. Ct. Eep. 441, 14 Ann. Cas. 764, et seq. op. But there emerges here what is perhaps a larger question. To say that the courts have jurisdiction to review statutes at the suit of any taxpayer of the state who seeks to enjoin the pay- mert of moneys out of the state treasury for the administration or enforcement of those statutes is to establish a general revi- sory jurisdiction in the courts over all legislation before any ac- tual judicial or justicable controversy has otherwise arisen. I may safely say, that no statute is received with unani- mous approval. A taxpayer may always be found. It is no answer to say that the court has a discretion as to when it will recognize this right of the taxpayer or issue its injunc- tion. That only changes the principle which it is sought to in- graft upon our form of government, to the extent that we are to modify the statement of it by saying: "The courts have the power in their discretion to review all legislation," etc. To my mind it is an obvious fallacy to say that this power or this discretion extends only to the review of unconstitutional stat- utes. As well might one say that courts had jurisdiction to try only guilty persons charged vdth crime. The inquiry pro- posed is whether or not the act in question is unconstitutional, and it is to entertain such inquiry and decide it for or against the validity of the statute that the jurisdiction exists if it exist at all. To recognize a power resident in the courts by which that branch of the government could supervise legislation in this way would be to create a radical change in our plan of govern- ment as heretofore understood. This must be quite apparent to those who have extended their legal studies beyond the mi- nutiae of adjudged cases and the rules of private right, and have acquired some knowledge of the principles of government. All revenue measures and most other statutes involve some charge upon the public treasury for their administration. All acts of the legislature involve the expenditure from the state treasury of at least printing and publishing. Therefore all stat- 1324 LEADING CASES. utes would at this preliminary stage be subject to judicial re- view. In reply to a suggestion of this kind from the bench, one of the learned counsel for plaintiffs suggested that this expense was so small that a suit would not be entertained because de minimis non curat lex. But this answer overlooked the cases of Mueller v. Eau Claire County, 108 Wis. 304, 84 JST. W. 430, and Chippewa Bridge Co. v. Durand, 122 Wis. 85, 108 op. 106 Am. St. Kep. 931, 99 'N. W. 603, wherein it was held that the court will not inquire into the amount or extent of the taxpayer's in- terest so long as he is a taxpayer. Besides, it overlooked the con- sideration that in a Republic founded upon the equality of its citizens before the law, it would be quite inconsistent with fun- damentals to rest the jurisdiction to review legislative acts at this preliminary stage of their existence upon the wealth of the tax- payer who comes in to represent himself and the public. ifTor can the amount of the charge which the law imposes on the state treasury affect this question, which is one of jurisdiction. No statute gives the taxpayer an interest in the funds in the state treasury. The courts must invent that species of property right if it is to have recognition in the courts. The courts also have considerable discretion in granting or withholding injunctions. This inevitably leads to the conclusion that the court is asked to create or recognize a right not given by common law or stat- ute, and then exercise its discretion to issue an injunction to prevent threatened invasion of this right, and all for the pur- pose of making an occasion or an opportunity to review the con- stitutionality of a statute at the preliminary stage of its exist- ence before its enforcement is attempted, and before any con- troversy otherwise justifiable has arisen. To do so would conflict with the notion of constitutional law and the powers of the judicial branch of the government with reference to declaring laws unconstitutional announced in Marbury v. Madison, 1 Cranch, ISY, 2 L. ed. 60, and many cases since. It has been said that courts never declare a statute unconstitutional, but being confronted with a judicial question which it may not evade, and with a Constitution which commands one thing and a statute which commands the opposite, they reluctantly and unavoidably obey the paramount, not the subordinate, command. The result of the grave duty thus forced upon the court is un- constitutionality of the statute, because it is incapable of en- STATE EX EEL. BOLENS V. FKEAE. 1325 forcement in the courts which speak last. But here we are asked not only to compare the statute with the Constitution, but to make the occasion for so doing, and to hold for the purpose of enabling us to do so by legislation, legal fiction, or unprece- dented judicial decision, that every taxpayer has a proprietary interest in the funds in the state treasury. The controversy At this stage concerning the constitutionality of a statute is the same which was or might have been presented to the judiciary committees of the legislature, or to the legislature in session, the same as that waged before the governor to induce him to veto the act. It is in the nature of an appeal from the legisla- tive and executive branches of the government to the judicial. "The theory upon which, apparently, this suit was brought is that parties have an appeal from the legislature to the courts ; and that the latter are given an immediate and general super- vision of the constitutionality of the acts of the former. Such is not true. Whenever, in pursuance of an honest and actual -antagonistic assertion of rights by any one individual against another, there is presented a question involving the validity of any act of any legislature, state or Federal, and the decision necessarily rests on the competency of the legislature to so en- -act, the court must, in the exercise of its solemn duties, deter- mine whether the act be constitutional or not ; but such an exer- cise of power is the ultimate and supreme function of courts. It is legitimate only in the last resort, and as a necessity in the de- termination of real, earnest, and vital controversy between in- dividuals. It never was the thought that, by means of a friend- ly suit, a party beaten in the legislature could transfer to the 'Courts an inquiry as to the constitutionality of the legislative act." Chicago & G. T. R. Co. v. Wellman, 143 U. S. 339, 36 L. ed. 176, 12 Sup. Ct. Eep. 400. See also Charles Eiver Bridge v. Warren Bridge, 11 Pet. 420, 9 L. ed. 773 ; Georgia V. Stanton, 6 Wall. 50, 18 L. ed. 721 ; Mississippi v. Johnson, 4 Wall. 475, 18 L. ed. 437. An injunction will not issue to re- strain the execution of an unconstitutional law merely on the -ground that it is unconstitutional. Thompson v. Canal Fund, 2 Abb. Pr. 248 ; Birmingham v. Cheetham, 19 Wash. 657, 54 Pac. 37; People ex rel. Alexander v. District Ct. 29 Colo. 182, ■68 Pac. 242. I am convinced that the decision below was cor- j-ect, and should be affirmed. 1326 LEADING CASES. In the second suit a private citizen who is also a taxpayer seeks as relator to begin in this court an action by and in the name of the state against the secretary of state and state treas- urer for the purpose of enjoining them from paying out funds from the state treasury for salaries and other expenses of admin- istering this law, and also against the members of the state tax commission, enjoining the latter from exercising the duties and powers conferred upon them by the act in question, all upon the ground that this act is unconstitutional. As against the secretary of state and state treasurer, the ostensible purpose of the bill is to protect the state treasury. As against the state tax commission the real purpose of relator, to avoid paying income tax is disclosed. No steps have been taken to enforce the law, and the time for its enforcement has not arrived. Ap- plication was by relator made to the attorney general to begin and prosecute this suit. That official refused, and the relator on this showing with the usual averments of irreparable in- jury, etc., seeks to arouse the original jurisdiction of this court to entertain the suit to put his private counsel in the place of the attorney general to prosecute it, and to have the state at this stage of existence of the statute enjoin its own officers from col- lecting its own revenue upon the averments that the statute iS; unconstitutional. The constitutional grant of power to this court is that "the judicial power of this state, both as to matters of law and equity, shall be vested in a supreme court, circuit courts, courts of probate, and justices of the peace." Art. 7, § 2. "The supreme court, except in cases otherwise provided in this Constitution, shall have appellate jurisdiction only which shall be coextensive with the state. * * * The supreme court shall have a general superintending control over all inferior courts ; it shall have power to issue writs of habeas corpus, man- damus, injunction, quo warranto, certiorari, and other original and remedial writs, and to hear and determine the same." Art. Y, § 3. That portion of the last above quoted section giving power to issue the writs mentioned and to hear and determine the same was construed to confer upon this court original juris- diction of all judicial controversies within the scope of and in- stituted by the issuance of such writs at common law, but it was said that the court would only exercise the power thus granted in controversies affecting the sovereignty of the state, its fran- STATE EX EEL. BOLENS V. FEEAE. 1327 chises and prerogatives, or the liberties of its people. It was also decided that the writ of injunction found in this section, associated with the so-called prerogative writs, might also, for this reason be employed to assert the prerogatives of sovereignty. Cases collected in State ex rel. Lamb v, Cunningham, 83 Wis. 90, 17 L.E.A. 145, 35 Am. St. Eep. 27, 53 K W. 35. Eules regulating the exercise of the original jurisdiction as distin- guished from the appellate jurisdiction of this court, while ap- propriate and desirable to facilitate our work, are not funda- mental. Power is derived from the Constitution, not from such rules which only operate to regulate the manner of its exercise. They merely serve to indicate when the parties litigant should approach this court in the first instance, and when reach this court by appeal or writ of error. There is, I think, a marked inconsistency between such cases as State ex rel. Drake v. Doyle, 40 Wis. 175, 22 Am. Eep. 692, Ee Hartung, 98 Wis. 140, 73 K W. 988, and State ex rel. Stengl v. Cary, 132 Wis. 501, 112 N. W. 428, and other cases found in our reports and referred to in the opinion written by Chief Justice Winslow herein. I am quite satisfied with the opinion of the court in this respect, but fear it will meet the usual fate of mere judicial warnings, and be again disregarded when a new exigency arises. The Constitution vests in this court only judicial power, thus exclud- ing by implication political, administrative, and legislative pow- er. The power to institute a suit by and in the name of the state cannot logically be said to be an exercise of judicial pow- er. It is rather executive or administrative. The attorney general, district attorneys, the governor, and other officers pos- sess this power, although they exercise no judicial power. It is only by historical associations of the words "judicial power," as distinguished from scientific definition, that the act of institut- ing a suit in court in the name of the state can be called an ex- ercise of judicial power. Assuming it to be settled by precedent that the judicial power mentioned in our Constitution is that power formerly exercised by the court of King's bench and the chancery courts in England, still that power fell short of au- thorizing an attack, by suit, upon the acts of co-ordinate depart- ments of government, by any writ, before any legal controversy had arisen by the attempted execution of such acts. How, then, did this court acquire jurisdiction to authorize the institution 1328 LEADING CASES. of and then to entertain such a suit ? Neither logical analysis of the term "judicial power," nor historical association, warrants the exercise. The restriction of suits against the state is quite impotent if every taxpayer of the state, while he cannot make the state a defendant in his suit, may nevertheless make the state a plaintiff in a civil action against the same state officers to fight his battle for him. If these state officers represent the state in an action against them to restrain them from enforcing the law, they occupy the same legal position, and make the same claims when this form of making the state plaintiff is complete. We can hardly say that the controversy has become a suit by the state against the state, for that would be absurd. We can- not liken the state to a trustee seeking the advice and direction of the court, for that presupposes a supervisory jurisdiction over the trust and in the court, and begs the question. We can- not find an analogy in the governments of those states like Mas- sachusetts, where the governor or the legislature may call upon the court for an opinion in advance of enactment and of litiga- tion, because there it is conceded that the courts in giving such opinion act not in a judicial, but in a political, capacity. Opin- ion of the Justices, 126 Mass. 557, 566. Turn this as we will, we are always confronted with the fact that, whether the tax- payer is plaintiff or the state plaintiff, the suit involves a claim on the part of this court of power to revise and review acts of the legislature with reference to their constitutionality, before any judicial controversy has arisen other than a controversy nursed into life and existence by this court for the purpose of such revision. All that I have said and quoted with reference to the action in the name of the taxpayer on this point applies to this action. Of the two I would prefer the taxpayers' suit, because this is subject to the same weakness and also savors of subterfuge. Sovereignty is one and indivisible. But in the exercise of sov- ereign power all the great departments of government, must con- cur. The manner of this concurrence is regulated by the division of governmental powers in the Constitution, and the lim- itations placed upon each department arising from this division or from express or necessarily implied restrictions found in the organic law. This sometimes impairs efficiency, but it promotes liberty. The most promptly efficient government is a despot- STATE EX EEL. B0LE]5rs V. FEEAE. 1329 ism. It is the wisdom of the spendthrift which sacrifices future advantage for immediate gratification. The statesmen who founded the American Republic understood these things, and made deliberate choice between a government of liberty and one of temporary and prompt efficiency. The result thus far has justified their judgment. In the prevailing plan of government the guardianship of the funds in the public treasury, except when otherwise specially provided, is committed to the legis- lative branch of the government, which is responsible to the peo- ple. The judicial branch of the government is to take no part in political questions. In consummation of the exercise of the sov- ereign power, it is to act last, and to act only when aroused by an actual judicial controversy. Until it comes before the court incidentally in such controversy, the question of the constitu- tionality of a statute is a political, not a judicial, question. There is therefore no jurisdiction resident in the courts, as there is in the legislature and the governor, to declare an act uncon- stitutional in advance of a judicial controversy which neces- sarily involves that question. The court, therefore, has no juris- diction to create such controversy by authorizing what is, to my mind, a fictitious suit in behalf of the state against its own officers, where the ground for such a suit is that these officers are about to collect taxes under a general tax law. That is merely a statement of the rule that what cannot constitutionally be directly done cannot be done by indirection. The latter breaks down the American republican form of government as •well as the former. Examining from another viewpoint. In a case where a bounty was granted to manufacturers of sugar by Congress, and the disbursing officer of the treasury refused payment under the belief that the act of Congress was unconstitutional and the stat- ute authorized a, suit against the United States, an actual justi- ciable controversy thus arose. But even here and imder a Con- stitution carrying delegated power, only the Supreme Court of the United States decided as set forth in the second paragraph of the syllabus : "It is within the constitutional power of Con- gress to determine whether claims upon the public treasury are founded upon moral and honorable obligations, and upon prin- ciples of right and justice; and having decided such questions in the affirmative, and having appropriated public money for Foster Income Tax. — 84. 1330 LEADING CASES. the payment of such claims, its decision can rarely, if ever, be the subject of review by the judicial branch of the government." United States v. Eealty Co. 163 U. S. 427, 41 L. ed. 215, 16 Sup. Ct. Eep. 1120, approved in Allen v. Smith, 173 U. S 389, 43 L. ed. 741, 19 Sup. Ct. Eep. 446, cited in State ex rel. Garrett v. Froehlich, 118 Wis. 143, 61 L.E.A. 345, 99 Am. St. Eep. 985, 94 E". W. 50. If we compare the instant case with the above, we will find that here no justiciable controversy has arisen, but the court is asked to make one by authorizing a suit in the name of the state upon the petition of a taxpayer, and that here we are asked to decide in such suit that the legislature which possesses all power not forbidden had no power or discre- tion to make an appropriation of public moneys for the pur- pose of enforcing a statute passed by its legislature and ap- proved by its executive. I think this court has no jurisdiction so to do. For the court to decide before its judicial power is aroused by a legal controversy is to assume a jurisdiction not given to it by law. I think the assumption of such jurisdiction changes the form of government as heretofore established and understood, and therefore we are justified in disregarding or overruling precedents in this court which might, by mere logical inference, seem to support this suit. I think we should have the courage to stop before taking this last step fraught with such consequences. In this connection, I wish to mention the case of State ex rel. Eosenhein v. Frear, 188 Wis. 173, 119 IST. W. 894, which was a motion for leave to bring suit in the name of the state. When that motion was presented, it will be remembered by those present that I protested vigorously from the bench against countenancing any such proceeding. I thought then, and I still think, that the suit there suggested was preposterous. If the legislature of Wisconsin had not been a body of rather feeble temper, it might not be entirely discreet for judicial officers to assert the right to launch and determine such a suit. But the motion was denied, and I regret to say that I gave no careful attention to the language of the opinion denying the motion, and neglected to dissent therefrom. I do not think either that the complaint states a cause of action in favor of the state and against its officers. The mere fact that taxes will be collected from a large number of its citizens by the state authorities for STATE EX EEL. BOLENS V. FEEAB. 1331 the state creates no actionable -wrong against the state. All gen- eral laws affect all the people of the state, and all police regula- tions curtail their rights or liberties to some extent. But this gives no right of action to the state. ITeither can a general tax law, be it ever so new. The notion that the state has a right of action to test such laws is, to say the least, very novel. ISTor does the fact that a law which appears on its statute books and is about to be enforced at some expense upon the state treasury do so. It is the legal and constitutional way in which to handle a law whether that law be valid or invalid. It is the proper mode of getting that law before the courts. It merely amounts to saying that the officers of the state are about to enforce the state statutes in such manner as to create justiciable contro- versies which will thus come before the court in the ancient established and orderly way. Surely such attempt is not action- able. If the statute is valid, it is their duty to enforce it ; and it is, in any event, their duty to obey it until it is held to be invalid by the judicial branch of the government in a judicial controversy of which the latter branch has jurisdiction. If the legislature has discretion to recognize merely moral obliga- tions and appropriate money for their payment, it surely may appropriate money for enforcing even a void act, and thus bringing it to the judicial test in an actual controversy. It may be that in the march of progress and the evolution of govern- ments the change in the plan of our government created or con- firmed by the decision herein is inevitable. But I distrust, and I think not through timidity, the steady progress of this court always in the direction of grasping more power. This will establish the judiciary as a political branch of the government, and displace it from that place of dignified impartiality which it has so long and so successfully filled. This extension of power is the progress which has always resulted in the wreck of human institutions. I have now made my protest against it in Re Ee- visor, 141 Wis. 592, 124 K W. 670, 18 Ann. Cas. 1176, in State ex rel. Kustermann v. Board of Canvassers, 145 Wis. 294, 130 N. W. 489, in State ex rel. Eosenhein v. Frear, 138 Wis. 173, 119 ]Sr. W. 894, in Lawler v. Brennan, 150 Wis. 115, 134 N". W. 154, 136 ISr. W. 1058, and in the instant case, and so discharged what I conceive to be my duty. In any view of the case, even that taken in the majority opinion, it seems to me 1332 LEADING CASES. the second action should be dismissed for want of jurisdiction as against the secretary of state and the state treasurer. But I consider that this court has, under the Constitution of this state, no jurisdiction to review the statute at this stage of its existence and in this way in either case. The assumption of the jurisdiction so to do cannot be justified upon the compara- tive futility of such review demonstrated by the result in this case. Marshall, J., filed the following additional opinion March 15, 1912 (148 Wis. 542, 135 IST. W. 164) : I fully determined to write, at length, in substitution for the above. On further reflection it seems to do so might give un- warranted dignity to some suggestions voiced in these cases which were, as is supposed, effectually foreclosed more than a century ago, and so are not, generally, and should not, efficient- ly, be deemed open for discussion. After the uniform holdings here, through many important adjudications, that public money in the public treasury is a sub- ject of trust for all the people for public purposes, and disburs- able only pursuant to valid legislation, and that every taxpayer is a cestui que trust, having sufficient interest in preventing abuse of the trust to be recognized in the field of this court's pre- rogative jurisdiction as a relator in proceedings to set sovereign authority in motion by action in the name of the state for pre- vention or redress, any suggestions to the contrary, however well supported as an original proposition, might well have but a pass- ing notice. The same is true of the question of whether an ac- tion against a state officer to prevent disbursement of public money in the enforcement of an invalid act of the legislature is against the state in any proper sense. It has been held over and over again, in terms or in effect, that such an action is to be re- garded as against the person in his individual, not his official, capacity, and so not against the state, — so held very recently most significantly by the Supreme Court of the United States in Ex parte Young, 209 U. S. 123, 52 L. ed. 714, 13 L.E.A. (KS.) 932, 28 Sup. Ct. Kep. 441, 14 Ann. Cas. 764, followed here in Bennett v. Vallier, 136 Wis. 193, 17 L.E.A. (N.S.) 486, 128 Am. St. Kep. 1061, 116 E". W. 885. It is essential to strictly maintain here the foregoing stated STATE EX EEL. BOLENS V. FEEAK. 1333 principles. Only by so doing can this court fully perform its great function as the supreme efficient conservator, defender, and preserver of the inherent and guaranteed rights of the people. The court will not swerve from the proper course for which it was given independent status, "through fear, favor, affection, or hope of reward." I know every member of it is firm in that. ISTo unreasonable impatience elsewhere, if such exists, will be permitted to interfere with the sturdy perform- ance of constitutional duty here. While paying due deference to co-ordinate departments, it must expect that deference in re- turn. There must be no hesitation through fear of censure or thought of timing the judicial harpstrings to harmonize with temporary conditions, as we here advocated outside at times. In that there is no division of sentiment here. I have too much respect for the law-making power to indulge the idea that there is any dominating thought there hostile to the willing performance of duty here to test enactments by con- stitutional restraints on all proper occasions, and put the stamp of judicial disapproval thereon when manifestly required, be- cause of the enactment being evidently not law in fact, though law in form; and too much respect for the average legislative sentiment not to see through the vista of momentary impatience, — sometimes exhibited, at the failure of legislative effort, — to the considerate judgment of after-reflection, which may always be depended upon to approve and honor full performance of judicial duty, to appreciate that when there is a conflict between an act and the Constitution, as seems to the court created to view the matter, it must decide between them, and "as the Con- stitution is superior to any ordinary act of the legislature, the Constitution, and not the ordinary act, must govern the case to which they both apply." Marbury v. Madison, 1 Cranch, 137, 2 L. ed. 60. On the other hand, I have too high regard for the great trust reposed in the instrumentalities chosen for now to give vitality to the judicial function, to think that, if there be any considerable sentiment momentarily elsewhere inimical to full performance of duty here, it can exert efficient influence in that regard. Generally speaking, I apprehend the sentiment of the public is in favor of a prompt, thorough treatment of constitutional questions as they arise. The people want to know, and have a right to know, and legislative instrumentali- 1334 LEADING CASES. ties desire to have them know, at the earliest practicable mo- ment, just where they stand with reference to important new, far-reaching enactments. The fundamental law, as it has been construed, and the func- tion of this court as to applying the rule of the Constitution to legislative enactments and using its prerogative power against anyone assuming to act for the state who would otherwise inter- fere with guaranteed rights under the guise of an invalid en- actment, must be maintained. No one can win enduring fame by failing to appreciate that and be ready to vigorously vindi- cate it. The court, with practical unanimity, reached the conclusion that all constitutional questions presented and argued in the cases, in some of them, were within the court's power to con- sider and decide; but to what extent to respond was within its discretion. That left much to judicial propriety, convenience, exigency, and expediency, resulting in the court going only so far as was vital to the existence of the commission, with power to enforce the dominating features of the law. Not to go that far was thought would be well nigh, if not quite, abuse of dis- cretion; not doubting competency to go further and decide all important questions so ably discussed. Obviously there is left a broad field for very much and very perplexing litigation, to the probable great prejudice of public and private welfare. The field so left untouched was as fully covered by eminent coun- sel as it is liable to ever be. The whole crop of legitimate con- troversies was fully ripe for the judicial harvest. All interests called loudly for the chosen instrumentality for the work to grapple with the proffered task. In my opinion, the waste of energy and expense attributable to failure to do so might well have been avoided. It was according to precedent to take the course adopted, I confess. But should precedent efficiently bar the wheels of progress toward a more full response to such an appeal for judicial determination ? It seems not. This court can well view with satisfaction its progressive course as to meeting judicial controversies squarely, casting aside the ancient method of dilatory, fencing, mere piecemeal decision, delaying the finality by technical dispositions, deplet- ing to public and private resources, and disappointing and ex- hausting to those resorting to the courts for redress and preven- STATE EX KBL. BOLENS V. PEEAK. 1335 tion of wrongs. There is room for further progress. Impa- tience with the law's delays, sometimes significantly manifested, will disappear without any change in the law of procedure, by changes of method within the province of the court to make of its own motion, demonstrating that the fault supposed to exist is, in the main, in the administration of the law, rather than in the law itself. Seeming opportunity for worth-while progress is most invit- ing in cases like those before us. Where a new law which is questioned as to its meaning and its legitimacy in many impor- tant minor features as well as the dominant done, — a law of far- reaching character, materially affecting the people generally and bristling with complications, each presenting, from some reason- able standpoint, serious difficulty, is brought early here for examination in all such aspects, — brought by the exercise of prerogative power, so that all the people, as it were, are repre- sented at the bar to the end that the enactment, so far as valid, may be vigorously enforced and cheerfully submitted to, and the mischiefs ordinarily flowing from such a course for a time and the law then being found full of infirmities, may be avoid- ed, why should not the earliest opportunity afforded be willingly taken to carry the whole mass of things to the consultation room and patiently and finally solve the uncertainties, thus promptly affording peace to the state and its people in respect to the mat- ter ? The power exists to do it. Universal acclaim is in favor thereof. We are here to vitalize the power intrusted to us to do it. We have time therefor. We are as able now for the task as we probably ever will be. If we have not had as efficient help as we are likely to have at any future time, the power is ample to call for and obtain further assistance from eminent advo- cates of opposing theories. Then why hesitate? Is there any good reason for it? I cannot perceive any satisfactory answer in the affirmative to the foregoing. Hesitation is largely from judicial custom to delay grappling with questions so long as possible, with the thought that time will either render doing it unnecessary, or a decision may perhaps be later made under more favorable circumstances, and habit to minimize judicial labor where prac- ticable without affecting the grade of it, to the end that each of the controversies brought here may have its due proportion of 1336 LEADING CASES. attention. I confess the court's burdens are heavy and that the easiest way of escape from danger, if any exists, of which I must say I am not conscious, of its being unduly so, is by limit- ing decisions to actual necessities of cases as they arise. That was for a time given as a sufScient justification for limiting ac- tivity of prerogative jurisdiction to a very narrow field and limiting it therein to the essentials of each particular situation. State ex rel. Board of Education v. Haben, 22 Wis. 101 ; Ee Court of Honor, 109 Wis. 625, 85 IST. W. 497. While the scope of the prerogative power was early definitely stated, and it has thus been maintained, if the burden of work here was ever a legitimate excuse for not exercising jurisdic- tion, within such scope, to make a full decision in a case thought to be of a character to warrant the court in stepping aside from its ordinary labor to entertain it at all, that ended long since. When such doctrine took root there were but three members of the court and the equipment for labor was very crude compared to that now afforded. There is certainly no longer need for leav- ing anything undone which might properly be done, because of the burden of work. So, again, the inquiry is suggested, why should not the court in all cases of great public interest, make the fullest practicable decision instead of leaving as much ground uncovered as prac- ticable? In such a situation as this it seems that the court should not cease its labors till the whole subject in all impor- tant details shall have been exhausted. If any such shall not have been fully presented, or been overlooked, opportunity should be given, if help can be reasonably expected thereby, for further discussion at the bar, so in the end that the court may furnish executive officers and the people a plain, certain guide to go by. I urged that at first and again on the motion for re- hearing. There are many important questions left undecided. Each may furnish ground for expensive litigation. To settle all in detail will require large public and private expenditure which must be charged to waste. Conservation of time and money and peace, avoiding all such waste, can be effected by just a few days' more time now, which could well be spared to devote to the matter. A motion for a rehearing was denied March 12, 1912. HAIGHT V. PITTSBUEG, FT. W. & C. E. CO. 1337 UNITED STATES SUPREItfE COURT. SAMUEL HAIGHT, Plff. in Err. v. THE PITTSBUEG, FT. WAYNE AND CHICAGO KAILROAD COM- PANY. [See S. C, 6 Wall., 15-18, 18 L. ed. 818.] Clause In railroad mortgage — effect as to tax — right of company to deduct tax from coupons. A clause in a mortgage made by a railway company that the com- pany shall pay the principal and interest without any deduction for any taxes or assessments whatsoever has no application to the income tax of bondholders under the 122d section of the Internal Revenue Act of 1864. The company is authorized to deduct or withhold the amount of such when paid by it, from the coupons or interest due by it on such mortgage and the accompanying bonds. [No. 301.] Submitted Jan. 29, 1868. Decided Feb. 10, 1868. In error to the Circuit Court of the United States for the Western District of Pennsylvania. The following is a copy of the opinion of the court below, containing the statement of the case referred to and approved in the opinion of this court: "On the 10th day of April, 1857, Samuel Haight and wife conveyed to the Pittsburg, Fort Wayne and Chicago Eailway Company a lot of ground in the City of Pittsburg for $105,000. $5,000 was paid in hand, and for the residue of the purchase money, Mr. Haight received one hundred bonds of $1,000 each, with coupons attached, bearing seven per cent., payable semi- annually. Those bonds are secured by mortgage on the prem- ises, containing in the clause of defeasance the usual stipula- tion, 'without any fraud or further delay, and without any deduction, defalcation, or abatement, to be made of anything for, or in respect to any taxes, charges, or assessments whatso- ever.' By the Internal Revenue law the interest upon those bonds is subject to a tax of five per cent. The bonds have nearly twenty years yet to run, and the mortgage upon the above recited clause of which it is claimed the defendants have incurred the liability to pay this tax, could 1338 LEADING- CASES. not be sued for foreclosurs until a year and a day after tte maturity of the bonds. As the mortgage is a mere security for the payment of the bonds and their accruing interest, their satisfaction would be its discharge. We must then recur to the coupons, upon which property this suit is instituted. What are they but income — ^the annual profit upon money safely in- vested ? There is no special contract to pay government taxes upon the interest. The measure of the defendants' liability is expressed in the bonds as being debt and interest only. They have nothing to do with the taxes which the government may impose upon the plaintiff for the interest payable to him. The clause in the mortgage cannot enlarge the obligation which the mortgage was given to secure ; that is, the payment of debt and interest. It is to be found in all mortgages, and if the doctrine contended for by the plaintiff be sound, the standard by which the imposition of taxes should be regulated would be in propor- tion to a man's poverty and not his wealth; for the mortgagor would be bound to pay, not only his own taxes, but those of the mortgagee. It was admitted at the argument that the plain- tiff, a citizen of New York, paid no internal tax on these bonds at the place of his residence. It is, therefore, no case of double taxation. It was to be paid somewhere, and it was to meet in- vestments like this in banks, railroads, insurance and other com- panies, that the 122d section of the Act of 1864 was passed. Congress enjoined it as a duty upon all such corporations to deduct and withhold from all payments on account of any inter- est or coupons and dividends due and payable, the tax of five per cent. ; and provided that the payment of the same shall dis- charge the said companies from that amount of the interest or coupon, unless where said companies have contracted otherwise. And it was properly so provided, for citizens of the United States, resident both at home and abroad, sometimes forget the institutions in which their capital is invested." Judgment having been entered in accordance with this opin- ion in the court below, the case was brought here on a writ of error. Mr. Joseph Knox, for plaintiff in error : The plaintiff contends that the Company cannot deduct the taxes set forth in the stated case from the interest due the plain- tiff, because it has, in the language of the Act of Congress, ^'contracted otherwise." In discussing the question, the defendant and the court be- HAIGHT V. PITTSBUEG, FT. W. & C. E. CO. 1339 low were brought to tte conclusion adverse to the plaintiff, by holding that the tax imposed in the 122d section was a tax on the income of the plaintiff as income, and not a tax on the thing ■or interest of the bond. When this section is read by itself and without reference to the other sections, this construction ap- pears to be the natural one; but when the whole Act is read, we think that the better construction is, that the tax is imposed •on the thing and not on the income. See Acts of July 1st, 1862; March 3d, 1865; July 13th, 1866; March 2d, 1867; June 3d, 1864. Messrs. W. H. Lowrie and Robert McKnight, for defendant in error: The whole duty of the defendant to the plaintiff is shown by the bonds and coupons, and they show no contract to pay taxes. The mortgage is merely collateral security for the performance of these, the principal contracts, and when it is satisfied the mortgage is fundus officio and must be discharged. It is un- reasonable to suppose that a principal contract is intended to be enlarged by giving security for its performance. The clause relied on by the plaintiff is common to all mort- gages, in its substance at least, and its purpose is plain. The legal title is by the mortgage, in form at least, transferred to the mortgagee and, in possession or not, he may possibly be subject to the taxes on the land, or the mortgagor may pay them while the title is in the mortgagee ; and this clause means that in that case the mortgagee shall not be required to give back the land or the title without being refunded all taxes thus paid by him, or kept clear of all, as well as paid the prin- cipal debt and interest. Men everywhere will be surprised if it be decided that this is a contract to pay all taxes on the debts secured by such mortgages ; for there are state as well as federal taxes on debts bearing interest. The condition annexed to the collateral security means merely to regulate the terms on which the pledge is to be held or ap- plied or resorted to, and affects only the title to that. If that be not needed for the enforcement of the principal contract, then the contract of pledge with all its conditions goes for noth- ing. Its conditions cannot be transfused as contracts with the principal obligation. This is a tax upon a part of plaintiff's income, and it is quite absurd to suppose that the defendant intended a contract to 1340 LEADING CASES. pay that, irrespective of the place where the plaintiff might reside, and be taxed for his income, whether in New York, Lon- don, Algiers or Japan. This is clearly a tax on the plaintiff, and he never would have thought of charging it to defendant had it not been for the pe- culiar way in which, for the convenience and advantage of the government, it is collected; it is not because of this form, any less the plaintiff's own tax paid by him according to law, and not one which the defendant has contracted to pay. The cases of taxing ground rents and the land out of which they issue bear some analogy to this. But, under a similar covenant by the terre-tenant for the payment of taxes in such cases, he is not bound to pay the taxes on the ground rent with- out an express covenant to do so. Franciscus v. Eeigart, 4 Watts, 120 ; Eobinson v. Allegheny Co., 7 Pa., 161; Piatt, Covenants, 211, etc. Here there can be no pretense that there is any such contract. Mr. Justice Griee delivered the opinion of the court: The facts in this case are properly stated and the law correctly decided by the learned judge of the circuit court. The provision in the condition of the mortgage "that it shall be void on payment of debt and interest, without any deduction made for or in respect of any taxes, charges or assessments what soever," has reference only to covenants between mortgagor and mortgagee, and is usual in every mortgage, in order to secure the mortgagee, who may not be in possession, from a demand for taxes incurred while the mortgagor was in possession. It can have no possible application to the income tax of bond- holders. The 122d section of the Eevenue Act of June 30, 1864, ch. 172 (13 Stat, at L. 284), which requires all corpora- tions "to deduct and withhold from all payments on account of any interest or coupons and dividends, due and payable, the tax," etc., was not only for greater facility of collection, but to insure its payment by foreigners who may enjoy large in- comes from such securities. The corporations often contract to pay for the bondholder all such taxes ; but when they have not so contracted they are authorized to deduct or withhold the amount of the tax. In all assessments of income tax, the citizen is credited with the amount thus detained; so that here is no double taxation. Judgment affirmed. NOKTHEEN C. K. CO. V. JACKSON. 1341 UNITED STATES SUPREME COURT. TKE NOETHERN CEITTEAL EAILWAY COMPANY, Plaintiff in Err., v. JOHJST G. JACKSON. [7 Wall., 262-269, 19 L. ed. 88.] Pennsylvania Tax Law — effect of, on coupons — Act of June 30, 1864— of March 10 and July 13, 1866. Pennsylvania law taxing money owing by solvent debtors, by bond or otherwise, is not operative upon coupons of bonds upon a railroad company lying partly without the State. By the Act of June 30, 1864, it was not the intent of Congress to impose an income tax on non-resident aliens. Whether the subsequent Acts of March 10th and July 13th, 1866, which imposed a, tax on alien non-resident bondholders, are within the power of Congress, this court expresses no opinion. [No. 16.] Argued Mar. 17, 1869. Decided Feb. 1, 1869. In error to the Circuit Court of the United States for the Dis- trict of Maryland. The case is stated by the court. Messrs. J. Mason Campbell and Bernard Carter, for plaintiff in error: It is submitted — That section 122 of the Internal Eevenue Act, passed June 30, 1864, covers, by express and adequate language, the whole question as far as the national tax is concerned. The language used is plain and not susceptible in itself of misconstruction. It applies in terms to all the coupons of the class named, and to all holders of such coupons, without any other exception or reservation than the obvious one of cases cov- ered by special contracts. No exception is in terms made in favor of aliens. The true view taken of the 122d section of the Act of Con- gress of June 30, 1864, 13 Stat, at L. p. 284, ch. 173, is, that it is a tax on the whole property of the corporation ; or tax on the income of the Corporation, treating the Corporation, for this purpose, as a natural person; and taking its whole revenue after deducting working expenses, it imposes a tax of five per 1342 LEADING CASES. cent, on this revenue. Now, these net earnings are ascertained', first, by taking what is appropriated to paying interest on ita bonds, if any it has; and, second, by taking the amount paid for dividends to its stockholders; these two sums embrace its whole net earnings; these are what are taxed, and the tax thu» imposed having been paid to the United States, only what is left is to be paid to the holders of the bonds in the one case^ and the owners of the stock in the other. The same principle is acted on in sections 120, 121 of same Act. The plaintiff in error, though incorporated by the State of Maryland, has existence and is in the exercise of its powers in Pennsylvania, in consequence of the legislation of that State,, and the proceedings set forth in the record; and having its habitation as well as its property there, and issuing the bondsi held by defendant in error under its laws, is subject to and em- braced by the tax laws of that State. Laws of Pa. 1854, No. 531 ; Laws of Md. 1854, ch. 250 ; Bank of U. S. v. Deveaux, 5 Cranch, 61 ; Bk. of Augusta v, Earle, 13 Pet. 519; Society, etc. v. New Haven, 8 Wheat. 482 j Binney's Case, 2 Bland (Md.), Ch. 143; E. E. Co. v. Letson, 2 How. 497. The 32d section of the Act of Apr. 29, 1844 (Purd. Dig. 949), enumerates the objects of taxation, and among others, "money owing by solvent debtors." The 34th section imposes a tax of three mills on every dollar of the value of the properties enumerated in the 32d section. The Act of May 1, 1854 (Purd. 942), places a legislative construction upon the Act of 1844. The right to deduct the tax from the coupons is declared by the Act of April 30, 1864, sec. 3 (Purd. 1378). These several Acts have received a judicial interpretation by the highest legal tribunal in that State, in the recent case of Maltby v. E. & C. E. E. Co. 52 Pa. 140. By that decision the tax is sustained, as well as the right of the Company to deduct it from the amount of the coupons, without reference to the citizenship or residence of the holder.. This court will adopt the construction placed on the Pennsyl- vania Statutes by the Supreme Court of that State, in the case of Maltby v. E. & C. E, E. Co. 52 Pa. 140, although this de- NORTHERN C. R. CO. V. JACKSON. 1343 cision was rendered after the decision of the circuit court now under review. U. S. V. Morrison, 4 Pet. 124, 6 Pet. 291, 4 Wall. 217 (71 U. S. XVIII. 342). The State of Pennsylvania, as well as the United States, had a clear right to impose the taxes in question, and the fact that the defendant in error is a British subject and resident abroad, is altogether immaterial. The principles announced in the authorities hereto appended,, support this proposition. McCulloch V. Maryland, 4 Wheat. 429 ; Prov. Bank v. Bil- lings, 4 Pet. 561 ; Tilghman, Ch. J. in Milne v. Moreton, & Binn. 353 ; Ogden v. Saunders, 12 Wheat. 358 ; Story, Confl. L. sees. 549, 550 ; Harrison v. Sterry, 5 Cranch, 289. The taxes in question are not taxes on the person of the de- fendant in error, but on his property, which in this case is the' debt due to him, as evidenced by the bonds of the plaintiff in error, which are secured on the whole of its property in Mary- land and Pennsylvania ; this debt, for the purposes of taxation, has location here. We deduce this proposition from the cases cited under the last point, and also from the following: 16 Pet. 447; Gordon V. Appeal Tax Court, 3 How. 133; The Tax Cases, 12 Gill & Johnson, 117. Messrs. Oeorge H. William's and Wm. A. Fisher, for de- fendant in error: The defendant in error will insist that, by the true construc- tion of the Internal Revenue Act of Congress, approved June 30, 1864, no attempt was made to tax the incomes of persons, except of citizens of the United States wherever resident, and the incomes of residents, whether citizens or not. Sees. 116, 117, 122. That, for like reasons, the State of Pennsylvania had no right to tax the coupons on bonds where both debtor and creditor were outside its territory, and neither of them its subject. That the Northern Central Railway Company was a Maryland Corpo- ration, and had no legal existence as such in Pennsylvania, and the coupons were payable at the Company's ofBce in Baltimore. Ohio & Miss. R. R. v. Wheeler, 1 Black, 286 (66 U. S. XVII. 130) ; State v. IST. C. R. R. Co. 18 Md. 213, 216. 1344 LEADIIiTG CASES. That, by the true construction of the Tax Laws of Pennsyl- vania, no such attempt has been made. Bank of Hamilton v. Dudley, 2 Pet. 574; Swift v. Tyson, 16 Pet. 18. Mr. Justice Nelson delivered the opinion of the court : This is a writ of error to the Circuit Court of the United States for the District of Maryland. The suit was brought by Jackson, a non-resident alien, against the Northern Central Railway Company, incorporated by the State of Maryland, to recover $2,650 coupons attached to bonds issued by the Company. A copy of one is as follows: "The Northern Central Hallway Company will pay to the bearer, January 1, 1865, $30, being a half year's interest on bond No. 1827 for $1,000. J. S. Lies, Treasurer." The signature of the treasurer was admitted. The plaintiff then proved a demand of payment, at which time and place the Company offered to pay the amount, deducting the tax of five per centum per annum to the United States, under an Act of Congress; and a further tax of three mills per dollar of the principal of each bond claimed to be due to the State of Penn- sylvania; which offer of payment was refused. The plaintiff also gave in evidence charters incorporating the Northern Central Railroad Company by the State of Maryland, and of Pennsylvania, and rested. Defendant then gave in evidence the articles of consoli- dation of four railroad companies, one of which had been in- corporated by the State of Maryland, and the three others by the State of Pennsylvania, embracing a line of road extending from Baltimore to Sunbury, Pennsylvania. This consolidation was entered into by the respective com- panies in pursuance of the Acts of the Legislatures of the two States ; and by means of which the four companies were merged in one, called the Northern Central Railway Company, and was incorporated by the same name by the Legislature of each State. The stockholders of the old companies received from the new twice the number of shares held by them in the old and, upon the receipt of which, the old shares were canceled after this Company was thus organized and the directors elected ; and, on the 20th December, 1855, it executed a mortgage to a Board of Trustees upon the entire line of its road from Baltimore to NOKTHEEN C. R. CO. V. JACKSON. 1345 Sunbury, including all its property and estate situate within both the States, which mortgage was given to secure the pay- ment of $2,500,000 in bonds, to be issued in amounts therein specified. The bonds were issued by the Company accordingly. A portion of them is in the hands of the plaintiff, the coupons attached to which are the subject of this suit. Upon this state of the case, it is insisted on the part of the defense that the Northern Central Eailway Company is en- titled to have a deduction from the coupons of three mills per dollar, of the principal of each bond as a tax imposed on the same by the State of Pennsylvania. This is denied by the plaintiff. It has been argued for the plaintiff, that the Acts of the Legislature of Pennsylvania, when properly interpreted, do not embrace the bonds or coupons in question; but it is not impor- tant to examine the subject; for, it is not to be denied, as the courts of the State have expounded these laws, that they au- thorize the deduction, and if no other objection existed against the tax, the defense would fail. If this was an open question we should have concurred with the interpretation of the court be- low, which concurred with the views of the plaintiff's counsel. These Acts, as expounded, tax "money owing by solvent debt- ors whether by promissory note, penal or single bill, bond or judgment," and imposed three mills on the dollar of the prin- cipal, payable out of the interest, and it is made the duty of the president or other officer of the Company, who pays the coupons or interest to the holder, to retain the amount of the tax. Nor shall we inquire into the competency of the Legisla- ture of Pennsyvania to impose this tax, upon general principles, as we shall place the objection upon other and distinct grounds, though we must say, that the tax upon the promissory note or bond, given by the resident debtor, and the withholding of the amount from the interest due to the non-resident holder, would seem to be a tax upon such nonresident. It is not a tax of the money loaned, because that belongs to the resident debtor, for which he is taxable ; it is a tax on the security, the bond, which is in the hands of the non-resident holder. The ground upon which we place the objection in this case to the tax is, in brief, that the bonds, amounting to $2,500,000, of which those in question are a part, were issued by this Corn- Foster Income Tax. — 85. 1346 LEADING CASES. pany upon the credit of tte line of road, its franchises and fix- tures, extending from Baltimore to Sunbury, a given portion of which line lies within the jurisdiction of the State of Maryland. The old Company, to which, this line belonged, by the Act of Consolidation, transferred it, with its fixtures and all other in- terests connected therewith, including their stock, to the new organization which have issued these bonds. The security, therefore, pledged and bound for the payment of them and of the interest embraces this Maryland portion of the road; and in case of a failure to pay the principal or interest, this portion with its franchises and fixtures would be liable to sale in satis- faction of the bonds and interest. I^ow, it is apparent, if the State of Pennsylvania is at liberty to tax these bonds, that, to the extent of this Maryland portion of the road, she is taxing property and interest beyond her ju- risdiction. This portion avails her tax roll as effectually as if it was situate within her own limits. The Maryland portion is not liable for the payment of any specified part or quantity of these bonds thus taxed, but is liable, with all its interests, for the whole amount, the same as that portion of the road with- in the State of Pennsylvania. The bonds were an issue, in the usual way, by this N. C. Railway Co., and the security given by mortgage on the entire line of the road. 'No portion of the bonds belong to one part more than to another. No severance was made of the bonds and, therefore, none can be made, in the taxation, with reference to the line within the respective juris- diction of the States. If the tax is permitted as it respects one bond, it must be as it respects all. Again; if Pennsylvania can tax these bonds, upon the same principle Maryland can tax them. This is too apparent to re- quire argument. The only difference in the two cases is, that the line of road is longer within the limits of the former than within the latter. Her tax would be a more marked one beyond the jurisdiction of the State, as the property and interest out- side of its limits would be larger. The consequence of this tax of three mills on the dollar, if permitted, would be double taxation of the bondholder. Each State could tax the entire issue of bonds, amounting, as we have seen to $2,500,000. The effect of this taxation upon the bondholder is readily NOETHEEN C. R. CO. V. JACKSON. 1347 seen. A tax of three mills per dollar of the principjil, at an interest of six per centum, payable semi-annually, is ten per centum per annum of the interest. A tax, therefore, by each State, at this rate, amounts to an annual deduction from the coupons of twenty per centum ; and if this consolidation of the line of road had extended into ISTew York or Ohio, or into both, the deduction would have been thirty or forty. If Pennsylvania must tax bonds of this description, she must confine it to bonds issued exclusively by her own corporations. Our conclusion on this branch of the case is, that to permit the deduction of the tax from the coupons in question, would be giving effect to the Acts of the Legislature of Pennsylvania upon property and interests lying beyond her jurisdiction. The next question is, whether or not the coupons were subject to a tax of five per centum per annum to the United States on the 1st of July, 1866, when they became due. The first income tax was imposed by the Act of Congress, passed August 5th, 1861. (12 Stat, at L. 309). The 49th sec. of that Act directed to be levied and collected upon the annual income of every person residing in the United States, from whatever source derived, a tax of three per centum on the amount of the excess of such income over $800 ; and, upon the income, rents or dividend accruing upon property, etc., owned in the United States by any citizen residing abroad, at tax of five per centum. The next Act was passed July 1, 1862 (lb. p. 473), and sec. 90 directed to be levied and collected a tax of three per centum on the annual income of every person residing in the United States, over $600 and under $10,000, and exceeding $10,000, a tax of five per centum; and upon the income of citi- zens residing abroad a tax of five per centum. The next section provides that the portion of income derived, among other things, from interest on bonds, or other evidences of indebtedness of any railroad company or other corporation which shall have been assessed and paid by said companies, shall be deducted from that prescribed in the previous section; and section 81 directs that this tax on the bonds and evidences of indebtedness shall be paid by the companies which may deduct the same to the payment of interest to the bondholders. The next is the Act of June 30, 1864 (13 U. S. St., 281, sec. 1348 LEADING CASES. 116), and directs the levy and collection of a tax of five per centum upon the excess of income, and every person residing in the United States, or of any citizen residing abroad, over $600 and under $5,000 ; seven and a half per centum over $5,000 and not exceeding $10,000, and a tax of ten per centum over $10,- 000. The next section provides for the same deduction from the income arising out of bonds and other evidences of indebtedness of railroad companies, as in the Act of July 1, 1862, and also for the payment of the same by the companies. This Act was in force when the coupons in question fell due, and is the one by which the tax of five per centum claimed on the bonds of the plaintiff must be determined. The court below held that the Act did not include a nonresident alien, and di- rected a verdict and judgment for the whole amount of interest. The decision was placed mainly on the ground that, looking at the several provisions bearing upon the question, and giving to them a reasonable construction, it was believed not to be the in- tent of Congress to impose an income tax on non-resident aliens ; that they were not only not included in the description of per- sons upon whom the tax was imposed, but were inpliedly ex- cluded by confining it to residents of the United States and citizens residing abroad; and that the deduction from the pre- scribed income of the interest on these railroad bonds, when paid by the companies, was regarded as simply a mode of col- lecting this part of the income tax. We concur in this view. It is not important, however, to pursue the argument, as Con- gress has since, in express terms, by the Acts of March 10th and July 13th, 1866, imposed a tax on alien non-resident bond- holders. The question hereafter will be, not whether the laws embrace the alien non-resident holder, but whether it is compe- tent for Congress to impose it ; upon which we express no opin- ion. The judgment of the court below is affirmed. Mr. Justice Cliffoud dissenting: I dissent from the opinion and judgment of the court in this case, because I think the taxes in question, both state and fed- eral, were legally assessed, and that the officers of the railway company properly deducted the same from the amount of the coupons described in the declaration. Also dissenting, Mr. Justice Swatne. ■UNITED STATES V. WHITEIDGE. 1349 UNITED STATES SUPREME COURT. UNITED STATES, Petitioner, v. FEEDEEIOK: W. WHIT- RIDGE, as Eeceiver of the Third Avenue Eailroad Com- pany et al. (No. 466.) UNITED STATES, Petitioner, v. ADEIAN H. JOLINE and Douglas Eobinson, as Eeceivers of the Metropolitan Street Eailv/ay Company et al. (No. 467.) [231 U. S. 144, 58 L. ed. — ] Internal revenue — Federal corporation tax — effect of receivership. The income derived from the management of street railway lines by receivers authorized and required by the order for their appointment tO' manage and operate such railways, and to discharge their public duties subject to the supervision of the court, is not subject to the excise tax imposed by the act of August 5, 1909 (36 Stat, at L. chap. 6, pp. 11, 112-117, U. S. Comp. Stat. Supp. 1911, pp. 741, 946), § 38, upon the doing or carrying on of business in a corporate capacity. [Nos. 466 and 467.] Argued October 21, 1913. Decided November 10, 1913. Two writs of Certiorari to the United States Circuit Court of Appeals for the Second Circuit to review decrees which affirmed decrees of the District Court for the Southern District of New York in favor of the receivers of street railway companies in suits to require them to make returns of the net income for the; purpose of the Federal corporation tax law. Affirmed. See same case below, 117 C. C. A. 556, 198 Fed. 774. The facts are stated in the opinion. Mr. Assistant Attorney General Graham for the United States. Messrs. Joseph H. Choate, Jr., and Matthew 0. Flermngi for respondent in No. 466. Messrs. Arthur H. Masten and Ellis W. Leaven-morth foB- re- spondent in No. 46'Z. 1350 LEADIIiG CASES. Mr. Justice Pitney delivered the opinion of the court : These cases were heard together in the district court and in the circuit court of appeals (sub nom. Pennsylvania Steel Co. V. New York City K. Co. 193 Fed. 286, 117 C. C. A. 556, 198 Fed. 774). They were argued together in this court, and may be disposed of in a single opinion. In the years 1909 and 1910 certain lines of street railway in the city of Ifew York, that may be conveniently designated as the Third Avenue system, were in the hands of the respond- ent Whitridge, as receiver, under orders made in the year 1908 by the circuit court of the United States for the southern dis- trict of New York in actions pending therein against the sev- eral proprietary companies. One of these actions was a fore- closure suit; the others were creditors' actions based upon the insolvency of the respective companies. The powers conferred upon the receiver did not vary in any respect now material, and so a recital of the substance of one of the orders will suffice as an example. This order constituted Whitridge receiver of all the railroads and other property of the company, including tracks, cars, and other rolling stock and equipment, easements, privi- leges, and franchises, and the tolls, earnings, income, rents, is- sues, and profits thereof, with authority "to run, manage, and operate the said railroads and properties, to collect the rents, income, tolls, issues, and profits of said railroads and property, to exercise the authority and franchises of said defendant, and discharge its public duties, acting in all things subject to the supervision of this court." By the same order the officers, agents, and employees of the company were required to turn over and deliver to the receiver all of the said property in their hands or under their control, and the company was enjoined from interfering in any way with his possession or manage- ment. In the same years (1909 and 1910) certain other lines of street railway in the city of New York, which may be described as the Metropolitan system, were in the possession of the re- spondents Joline and Robinson as receivers, appointed in the year 1907 by the circuit court of the United States for the same district, in several actions therein pending against the corpora- tions which were owners of these lines. The orders appointing these receivers contain provisions substantially similar to those UNITED STATES V. WHITEIDGE. 1351 already recited. See Ee Metropolitan E. Eecelvership (Ee Eeisenberg) 208 U. S. 90, 93-96, 52 L. ed. 403-405, 28 Sup. Ct. Eep. 219. In the year 1911, petitions were filed in the circuit court in behalf of the United States, praying for orders directing the re- ceivers to make returns of the net income of the respective rail- way corporations for the years 1909 and 1910, to the collector of internal revenue, in the manner required by the provisions of the corporation tax law (act of August 5, 1909, § 38, 36 Stat at L. chap. 6, pp. 11, 112-117, U. S. Comp. Stat. Supp. 1911, pp. 741, 946). The applications were resisted by the receivers on the ground that the respective corporations did not, during the years 1909 and 1910, carry on any business in respect of the property that was in their hands as such receivers ; that they as such receivers managed, controlled, and operated the same, and carried on all the business in respect thereto, and received all the income aris- ing therefrom, not acting in place of the directors and officers of the respective companies, but as officers of the court; and that they were therefore not subject to the provisions of the act. Jurisdiction of the controversy having been transferred to the district court by virtue of the new Judicial Code, § 290 [36 Stat, at L. 1167, chap. 231, U. S. Comp. Stat. Supp. 1911, p. 243], that court sustained the contention of the receivers (193 Fed. 286) and the circuit court of appeals affirmed this de- cision (117 C. C. A. 556, 198 Fed. 774). The cases are brought here by writs of certiorari. As had been repeatedly pointed out by this court, the corpo- ration tax law of 1909 — enacted, as it was, after Congress had proposed to the legislatures of the several states the adoption of the 16 th Amendment to the Constitution, but before the ratifi- cation of that Amendment — imposed an excise tax, and not in any sense a tax upon property or upon income merely as income. It was enacted in view of the decision of this court in Pollock v. Farmers' Loan & T. Co. 157 U. S. 429, 39 L. ed. 759, 15 Sup. Ct. Eep. 673, 158 U. S. 601, 39 L. ed. 1108, 15 Sup. Ct. Eep. 912, which held the income tax provisions of a previous law (act of August 27, 1894, 28 Stat, at L. chap. 349, pp. 509, 553, §§ 27 etc., U. S. Comp. Stat. 1901, p. 2260) to be unconstitutional because amounting in effect to a direct tax upon property within 1352 LEADING CASES. the meaning of the Constitution, and because not apportioned in the manner required by that instrument. As was said in Elint v. Stone Tracy Co. 220 U. S. 107, 145, 55 L. ed. 389, 411, 31 Sup. Ct. Eep. 342, Ann. Cas. 1912 B, 1312, ante, 739, respecting the act of August 5, 1909 : "The tax is imposed not upon the franchises of the corporation irre- spective of their use in business, nor upon the property of the corporation, but upon the doing of corporate or insurance busi- ness, and, with respect to the carrying on thereof, in a sum equi- valent to 1 per centum upon the entire net income over and above $5,000 received from all sources during the year; that is, when imposed in this manner it is a tax upon the doing of business with the advantages which inhere in the peculi- arities of corporate or joint-stock organizations of the character described. As the latter organizations share many benefits of corporate organization, it may be described generally as a tax upon the doing of business in a corporate capacity." This interpretation was adhered to and made the basis of decision in Zonne v. Minneapolis Syndicate, 220 U. S. 187, 55 L. ed. 428, 31 Sup. Ct. Eep. 361 and McCoach v. Minehill & S. H. E. Co. 228 U. S. 295, 300, 57 L. ed. 842, 33 Sup. Ct. Eep. 419, ante, 825. A reference to the language of the actf is sufficient to show t Sec. 38. That every corporation . . . organized for profit and hav- ing a capital stock represented by shares . . . organized under the lavrs of the United States or of any state . . . and engaged in business in any state . . . shall be subject to pay annually a special excise tax with re- spect to the carrying on or doing business by such corporation . . . equiv- alent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclu- sive of amounts received by it as dividends upon stoclc of other corpora- tions . . . subject to the tax hereby imposed . . . Second. Such net income shall be ascertained by deducting from the gross amount of the income of such corporation . . . received within the year from all sources, (first) all the ordinary and necessary expenses actually paid within the year out of income in the maintenance and oper- ation of its business and properties . . . And on or before the first day of March, nineteen hundred and ten, and the first day of March in each year thereafter, a true and accurate return under oath or affirmation of its president, vice president, or other princi- pal officer, and its treasurer or assistant treasurer, shall be made by each of the corporations . . . subject to the tax imposed by this section, to the collector of internal revenue for the district in which such corporation , . . has its principal place of business. UNITED STATES V. WHITEIDGE. 1353 that it does not in terms impose- a tax upon corporate property or franchises as such, nor upon the income arising from the conduct of business unless it be carried on by the corporation. Nor does it in terms impose any duty upon the receivers of cor- porations or of corporate property, with respect to paying taxea upon the income arising from their management of the corpo- rate assets, or with respect to making any return of such income. And we are unable to perceive that such receivers are within the spirit and purpose of the act, any more than they are with- in its letter. True, they may hold, for the time, all the fran- chises and property of the corporation, excepting its primary franchise of corporate existence. In the present cases, the re- ceivers were authorized and required to manage and operate the railroads, and to discharge the public obligations of the corpora- tions in this behalf. But they did this as ofBcers of the court,, and subject to the orders of the court; not as oiBcers of the re- spective corporations, nor with the advantages that inhere in corporate organization as such. The possession and control of the receivers constituted, on the contrary, an ouster of corporate management and control, with the accompanying advantages and privileges. Without amplifying the discussion, we content ourselves with saying that, having regard to the genesis of the legislation, the constitutional limitation in view of which it was evidently framed, the language employed by the lawmaker, and the reason and spirit of the enactment, all considerations alike lead to the conclusion that the act of 1909 did not impose a tax upon the income derived from the management of corporate property by receivers, under such conditions as are here presented. Decrees affirmed. 1354 FOEMS OF PROTEST. PART VIII. FORMS OF PROTEST. A ( Individual— Form 1040) PROTEST. To the Secretary of the Treasury, the Commissioner of Internal Revenue, and the Collector of Internal Revenue for the District of Dated, , 1914. Sirs : The undersigned, who, under protest and duress, has (have) executed and verified the annexed "Return of Annual Net Income of Individuals," upon Official Form 1040, as prescribed by the United States Treasury De- partment, protests (protest) against being required to make said return, and against its form, and against the assessment of any tax based thereon, or otherwise, against the undersigned under, or allegedly under, the provi- sions of Section II of the Act of Congress approved October 3rd, 1913, on the ground that the rights of the undersigned under the Constitution and/or laws of the United States are thereby violated, and specifically, but not exclusively, on the following grounds of protest: (1) That insofar as said Act and/or the decisions of the Treasury De- partment require a deduction "at the source" from income and thus de- prive the owner of such income of the use and benefit of the moneys so deducted, prior to the assessment of said tax against him, the same are in conflict with the V Amendment to such Constitution. (2) That the decisions of the Treasury Department and/or the annexed form of return and/or said Act, insofar as they contemplate a tax upon anything other than what is included in the word "incomes," as used in the XVI Amendment to the Constitution of the United States, are con- trary to law and to such Constitution, because, insofar as said tax is a direct tax, it is laid without apportionment among the States, and, inso- far as it is an excise tax, it is arbitrary, unequal, not uniform throughout the United States, not within the taxing or other powers of Congress, and is in conflict with the V Amendment to such Constitution. (3) That the decisions of the Treasury Department and/or the annexed form of return and/or said Act are contrary to law and said Constitution insofar as they require the inclusion, for the purpose of said tax, of in- come, (a) — received prior to October 3, 1913, such income having become prin- cipal assets prior to the passage of said Act, and Congress being therefore powerless to tax the same without apportionment among the States; ( 6 ) — accrued, in whole or in part, prior to the ratiflcation of the XVI Amendment to such Constitution by the Legislatures of three-fourths of the several States and/or the certification thereof by the Secretary of State of the United States. (4) That fhe decisions of the Treasury Department and/or the annexed form of return are contrary to law and said Act insofar as they POEMS OF PEOTEST. 1355 (o) — fail to allow an exemption for the tax year 1913 of $2500 or $3333.33, as the case may be, with reference to the "additional" tax; ( 6 ) — fail to allow, with reference to the "additional" tax, the deduction from gross income of "income derived from dividends on the stock or from the net earnings of corporations, joint-stock companies, associations, or insurance companies subject to like tax ; " (e) — require the inclusion in item 7 on page 2 of said return of income received from fiduciaries, derived "from dividends on the stock or from the net earnings of corporations, joint-stock companies, associations, or insurance companies subject to like tax" or from "the interest upon the obligations of a State or any political subdivision thereof, and upon the obligations of the United States or its possessions;" {d) — require the inclusion in said return of income derived from "in- terest upon the obligations of a State or any political subdivision thereof, and upon the obligations of the United States or its possessions ; " (e) — require, with reference to the "normal" tax, a return of income "derived from dividends on the stock or from the net earnings of corpora- tions, joint-stock companies, associations, or insurance companies sub- ject to like tax;" (/) — require a return of income as "net income" without first allowing for the deduction of "income derived from dividends on the stock or from the net earnings of corporations, joint stock companies, associations, or insurance companies subject to like tax" and consequently call for a return by individuals not having a net income of $3,000 for the taxable year; ig) — depart from the method of computation prescribed by said Act as follows: "That for the year ending December thirty-first, nineteen hun- dred and thirteen, said tax shall be computed on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive, after deducting five-sixtlis only of the specific ex- emptions and deductions herein provided for; " {h) — require the inclusion among "income on which tax has not been de- ducted and withheld at the source," of income, the payment of the tax upon which has been assumed by debtors from whom such income is derived, such income being paid in full by the debtors to the individual without exemption being claimed; (i) — require an individual having a net income of less than $3,000 for the tax year, March 1st to December 31, 1913, to make a return; (/) — restrict the exemption for the tax year 1913 of a husband and wife, living together and having separate incomes, to a total joint exemp- tion of $3333.33 on their aggregate income; (k) — require a joint or separate return from a husband and wife, living together and having separate incomes, when neither one has a separate income in excess of $3,000 for the tax year; (i) — require a husband or a wife, having a separate net income of less than $3,000 for the tax year, March 1st to December 31, 1913, to make any return, or to include therein a return of the separate income of his wife or her husband, as the case may be; 1356 POEMS 01" PROTEST. (m) — require a husband or a wife, having a separate income in excess of $3,000, to include in his or her return a return of the separate income of his wife or her husband, as the case may be, or require the one not having a separate income in excess of $3,000 to make a return of hi* or her separate income; (n) — require or permit the assessment of an "additional" tax, based up- on the aggregate income of a husband and wife, living together and having separate incomes, when neither one has a separate income in excess of $20,000. Respectfully Submitted, Name Name Address [Comment: The form of protest appearing above is one pre- pared by a committee of representatives of New York banks and trust companies.] (For Corporations.) PROTEST. To the Secretary of the Treasury, the Commissioner of Internal Revenue, and the Collector of Internal Revenue for the District of Dated, 1914. Sirs : The undersigned, having, under protest and duress, executed and caused to be verified the annexed "Return of Annual Net Income" upon Official Form No. , as prescribed by the United States Treasury Department, protests against being required to make said return, and against its form, and against the assessment of any tax based thereon, or otherwise, against the undersigned under, or allegedly under, the provisions of Section II. and/or Paragraph S of Section IV. of the act of Congress approved Oct. 3, 1913, on the ground that the rights of the undersigned under the Constitution and/or laws of the United States are thereby violated, and specifically, but not exclusively, on the following grounds of protest: (1) — That said provisions of said act are in many respects arbitrary, unequal, confiscating, inquisitorial, oppressive, and unjust, and their validity cannot be supported upon any legal interpretation of the XVI. amendment to such Constitution. (2) — That in so far as said act and/or the decisions of the Treasury De- partment require or compel the undersigned to deduct and withhold moneys "at the source" from the income of another person, or to keep books and records, incur expenses, file returns, expend labor or perform services, in order that the Federal Government may be aided in assessing and/or col- FOEMS OF PEOTEST. 1357 lecting the alleged income tax of another person, the same are in conflict with the V. amendment to such Constitution. (3) — Ihat the decisions of the Treasury Department and/or the annexed form of return and/or said act, in so far as they contemplate a tax (except strictly an excise tax with respect to the carrying on or doing of business, equivalent to 1% upon net income received during the period from Jan. 1 to Feb. 28, 1913) upon anything other than what is included in the word "income," as used in the XVI. amendment to such Constitution are con- trary to law and to such Constitution, because, in so far as said tax is a ■direct tax, it is laid without apportionment among the States, and, in so far as it is an excise tax, it is arbitrary, unequal, not uniform throughout the United States, not within the taxing or other powers of Congress, and is in conflict with the V. amendment of such Constitution. (4) — That the decisions of the Treasury Department and/or the annexed form of return and/or said act are contrary to law and such Constitution in so far as they require the inclusion, for the purpose of tax under said Section II. of said act, of income. (o) — received or accrued prior to October 3, 1913, such income having become principal assets prior to the passage of said act, and Congress being therefore powerless to tax the same without apportionment among the States; (6) — accrued, in whole or in part, prior to the ratification of the XVI. amendment to such Constitution by the Legislatures of three-fourths of the several States and/or the certification thereof by the Secretary of the United States. (5) — That the decisions of the Treasury Department and/or the annexed form of return and/or said act are contrary to law and such Constitution in so far as, for the purpose of tax under said Paragraph S of Section IV. of said act, tliey {a) — require a return from corporations, joint stock companies or as- sociations, and insurance companies, not carrying on or doing business; (6) — require a return from organizations or associations not carrying on or doing business by virtue of any charter, license or franchise; (c) — require the inclusion of income derived or accrued between January 1, 1913, and February 28, 1913, from dividends on the stock or from the net earnings of other corporation, joint stock companies, associations, or insurance companies subject to like tax. (6) — That the decisions of the Treasury Department and/or the annexed form of return and/or said act contrary to law and such Constitution in so far as they (o) — require the inclusion in said return of income derived from "in- terest received upon the obligations of a State or political subdivision thereof and upon the obligations of the United States or its possessions.'' (6) — discriminate between "individuals" on the one hand and "corpora- tions, joint stock companies or associations, and insurance companies" on the other hand in the matter of the exemption allowed to "individuals" un- der Paragraph C of said Section II. of said act; (c) — discriminate between "individuals" on the one hand and "corpora- 1358 TBEASUEY EEGULATIONS. tions, joint-stock companies or associations, and insurance companies" on the other hand, in that the latter, but not the former, are required to make return of and pay tax upon the amount received by them "as individuals 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," (d) — prescribe that net income shall be ascertained by taking, for the period January 1 to February 28, 1913, one-sixth, and for the period March 1 to December 31, 1913, five-sixths of the entire net income for the calendar year 1913. The protest is printed on a sheet of the same size as the forms for the use of corporations, for convenience in filing. [Comment: The form of protest appearing above is one prepared by a committee of representatives of New York banks and trust companies.] PART IX. TREASURY REGULATIONS AND RULINGS. Regulations concerning the tax imposed by section 2, act of October 3, 1913, on net income of individuals, cor- porations, joint-stock companies, associations, and insurance companies. Teeasuey Department, Office of Commissioner of Internal Revenue, Washington, D. C, January 5, IQlJf.. PART 1. Individual Income Returns and Collections. Persons taxable. Article 1. Section 2 of the above-named act imposes a tax of 1 per centum (designated as the normal tax) on net incomes arising or accruing from all sources during the preceding calendar year to — TEEASUKY EEGULATIONS. 135& (a) Every citizen of the United States, whether residing at home or abroad; and (h) Every person residing in the United States, though not a citizen thereof; and (c) From all property owned and from every business, trade, or profession carried on in the United States, by a per- son residing elsewhere. Additional or super tax. Art. 2. Said section also imposes an additional tax on all net incomes of individuals exceeding $20,000, as follows: 1 per cent on incomes exceeding $20,000 and not exceeding $50,000. 2 per cent on incomes exceeding $50,000 and not exceeding $75,000. 3 per cent on incomes exceeding $75,000 and not exceeding $100,000. 4 per cent on incomes exceeding $100,000 and not exceeding $250,000. 5 per cent on incomes exceeding $250,000 and not exceeding $500,000. 6 per cent on incomes exceeding $500,000. Net income defined. Art. 3. The net income shall consist of the total gains, profits, and income derived from all sources (designated as gross income) less deductions numbered first to sixth, in- clusive, specifically enumerated in paragraph B of the act. (See article 6.) Normal tax; upon what computed. In computing the taxable income for the purposes of the normal tax there shall be deducted from the net income as above ascertained : (a) The amount included in the gross income received as dividends upon the stock or from the net earnings of any corpo- ration, joint-stock company, association, or insurance company which is taxable upon its net income, (6) The amount of income the tax upon which has been paid or withheld for payment at the source ; and (c) The specific exemption of $3,000 or $4,000, as the ease may be, except in the case of nonresident aliens. Gross income. What it includes. Art. 4. Gross income includes all gains, profits, and in- come derived from — (a) Salaries, wages, or compensation for personal service of whatever kind and in whatever form paid. (b) Professions, vocations, business (including income from copartnerships), trade, commerce, or sales or dealings in prop- 1360 TEEASTJEY EEGULATIONS. erty, growing out of tlie ownership or use of or interest in, real or personal property. (c) Interest, rent, dividends, securities, or transaction of any lawful business carried on for gain or profit. (See art. 67 as to interest on deposits and certificates of deposit.) (d) Gains or profits and income derived from any source whatever, including the income from, but not the value of, property acquired by gift, bequest, devise or descent. The foregoing is held to include all income, gains, and profits arising or accruing from all sources whatever in the calendar year for which the return is made, except as herein- after specifically stated. Income exempt from taxation. Art. 5. The following items should not be included as gross income : (a) Value of property acquired by gift, bequest, devise, or descent during the year. (b) Proceeds of life insurance policies paid upon the death of the person insured to beneficiaries, or payments made by or credited to the insured, on life insurance, endowment, or an- nuity contracts, upon the return thereof to the insured at the maturity of the term mentioned in the contract, but this shall not be construed to mean that interest payments to beneficiaries from insurance companies shall not be included as income. (c) Income derived from interest upon the obligations of a State or any political subdivision thereof and upon the obli- gations of the United States or its possessions ; (d) The compensation of the President of the United States in office at the time of the passage of the act of October 3, 1913, during the terra for which he was elected, and the judges of the Supreme and inferior courts of the United States in office at the time of the passage of the act of October 3, 1913 ; (e) The compensation of all officers and employees of a State or any political subdivision thereof, including public- school teachers, etc. When such State officers or employees are compensated by the United States, they must include such in- come as taxable. Art. 6. Deductions and exemptions allowed in computing taxable income for the purposes of the normal tax. TEEASUEY EEGULATIONS. 1361 Deductions allowed under paragraph B, Under paragraph B the following items are to be deducted from the geoss income : 1. The amount of necessary expenses actually paid for carry- ing on business, but not including business expenses of partner- ships and not including personal, living, or family expenses. 2. All interest paid within the year on personal indebtedness of the taxpayer incurred in the conduct of business. 3. All National, State, county, school, and municipal taxes paid within the year (not including those assessed against local benefits). 4. Losses actually sustained during the year incurred in trade or arising from fires, storms, or shipwreck and not com- pensated for by insurance or otherwise. 5. Debts due to the taxpayer which have been actually ascer- tained to be worthless and charged off within the year. 6. Amount representing a reasonable allowance for the ex- haustion, 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 cent of the gross value at the mine of the output for the year for which the computation is made, hut not including the expense of restoring property or making good the exhaustion thereof, for which an allowance is or has been made, nor for any amount paid for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate. "Gross value at tlie mine" defined. The term "gross value at the mine," as used in paragraphs B and G of section 2 of the act of October 3, 1913, prescribing a limit to the amount which may be deducted in the return of individuals and corporations as depreciation in the case of mines, is held to mean the bona fide marlfet value of ore, coal, crude oil, and gas at the mine or well, where such value is established by actual sales at the mine or well; and in case the market value of the product of the mine or well is established at some other place than at the mine or well, or on the basis of the bullion or metallic value of the ore, then the gross value at the mine is held to be the value of the ore, coal, oil, or gas sold, or of the metal produced, less transportation, reduction, and smelting charges. 7. The amount included in gross income received as divi- dends upon the stock, or upon the net earnings, of any corpo- ration, joint-stock company, association, or insurance company -which is taxable upon its net income. Foster Income Tax. — 86. 1362 TlUiASUEY EEGULATIONS. 8. The amount of income, the normal tax upon which has been paid or withheld for payment at the source of income. Gifts or donations made during the year not to be deducted. None of the above items of deduction shall include money or other items of value disposed of by gift, donation, or endow- ment. Exemptions allowed under parag:rapli C. Under paragraph C the personal exemption of $3,000 or $4,- 000, as the case may be, is to be deducted from the net income except in the cases of nonresident aliens. (See arts. 7, 9, and 10.) Tax computed on the calendar year except for 1913. Art. 7. The act provides that the said normal tax shall be computed on the remainder of said net income accruing during each preceding calendar year, and that for the year ended De- cember 31, 1913, said tax shall be computed on the net income accruing from March 1 to December 31, both dates inclusive, after deducting five-sixths only of the specific exemptions and deductions authorized. A specific exemption, therefore, of $2,- 500 or $3,333.33, as the case may be, will be allowed for the year 1913. Income of nonresident aliens subject to the normal tax. Art. 8. The income of nonresident aliens subject to the normal tax of 1 per cent shall consist of the total gains, profits, and income derived from all property owned, and from every business, trade, or profession carried on and capital invested within the United States (to be designated as gross income), less deductions (1 to 8, inclusive) specifically enumerated in paragraph B of the act (see Art. 6), in so far as said deduc- tions relate to said gains, profits, etc. Exemption under paragraph G not allowed in computing taxable incomes of nonresident aliens. The specific exemption in paragraph C of the act can not be allowed as a deduction in computing the normal tax of nonresi- dent aliens. Nonresident aliens subject to additional or surtax. IN'onresident aliens are subject to additional or surtax the same as prescribed in the case of citizens of the United States or persons residing in the United States. The responsible heads, agents, or representatives of said non- resident aliens who are in charge of the property owned or busi- TEEASUIIY EEGUI.AT10NS. 1363 ness carried on or capital invested sliall make full and complete return of said income and shall pay the tax as provided herein. Speci&c exemption allowed to single person or married persons living apart. Art. 9. Under' paragraph C, every single person and every married person not living with husband or wife in the sense below defined, who has a net income exceeding $3,000 per an- num, is liable to pay the normal tax under this law, but in mak- ing return for such tax such person may claim an exemption of $3,000 from his or her total net income. Specific exemption allowed with respect to aggregate income of husband and wife. Art. 10. Husband and wife living together are entitled to an exemption of $4,000 only from the aggregate net income of both, which may be deducted in making the return of such in- come for taxation. However, when the husband and wife are separated and living permanently apart from each other each shall be entitled to an exemption of $3,000. If husband and wife have separate estates one return may be made showing income of each. If the husband and wife not living apart have separate es- tates, 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 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. ■ Wife's return of separate estate to be attached to husband's return or husband's income may be included in wife's return. If a wife has a separate estate managed by herself as her own separate property and receives an income of $3,000 or over, she may make return of her own income, and if the hus- band has other net income, making the aggregate of both in- comes more than $4,000, 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 may be made from the aggregate of both incomes. The tax in such case, how- ever, will be imposed only upon so much of the aggregate in- come of both as shall exceed $4,000. Return required if either husband or wife has an income of $3,000 or over. If either husband or wife separately has an income equal to or in excess of $3,000, a return of annual net income is re- 1364 TEEASUEY EEGULATIONS. quired under tlie law, and such return must include the income of both, and in such case the return must be made even though the combined income of both be less than $4,000. Return required if a^gre^ate income of husl)and and wife is in excess of $4,000, although neither may have an income of $3,000 or over. If the aggregate net income of both exceeds $4,000, an an- nual return of their combined incomes must be made in the manner stated, although neither one separately may have an income of $3,000 per annum. They are jointly and separately liable for such return and for the payment of the tax. When status is to be determined. The single or married status of the person claiming the spe- cific exemption shall be determined as of the time of claiming such exemption if such claim be made within the year for which return is made, otherwise the status at the close of the year. Interest in partnership profit; how reported. Art. 11. His or her prorata share of the net profits de- rived from a partnership business, whether or not divided and paid out shall be included in the personal return of each part- ner. Partnerships as such, not liable to tax, but statement may be required. Art. 12. Partnerships, as such, are not subject to the in- come tax, and are only required to make return when requested to do so by the Commissioner of Internal Revenue or the col- lector of internal revenue for the district in which said part- nership has its principal place of business ; and when a return is required it shall give a complete and correct statement of the gross income of the said partnership and also a complete state- ment of the actual expenses of conducting the business of said partnership, and the net profits and the name and address of each member of said partnership, and their respective interest in the net profit thus reported. Partnership profits to be Included in returns made by individual partners. Art. 13. The net annual profits of a partnership when di- vided and paid to the members thereof shall be included by each individual partner receiving same in his annual return of net income, and the tax shall be paid thereon as required by law. When the annual profits of a partnership are not distrib- uted and paid to the members thereof the respective interest of each member in said profits shall be ascertained, and the in- dividuals entitled thereto shall include the said amount in their TEEAStTBY REGULATIONS. 1365 annual return as a part of their gross income, the same as if said profits had been distributed and paid to them. Individual partnership profits. Art. 14. Undivided annual net profits of partnerships thus returned by the individual members thereof, and tax paid there- on, shall not, when said profits are actually distributed and paid to such members, be again included in their annual return as a part of their gross income. Partnerships, as such, may file certificate claiminer deduction. Partnerships owning interest coupons or registered interest orders may claim deduction for legitimate expenses incurred in business by filing the proper certificate with the withholding agent. (See article 47.) EETUENS. When returns of annual net income of $3,000 or over are to be mads. Art. 15. Each person of lawful age whose net income is $3,000 or over shall, on or before the 1st day of March, 1914, and on or before the 1st day of March each year thereafter, file an accurate return of income under oath or affirmation, except as herein provided. (See article 8.) Where filed. If the person making the return of income has his place of business in the collection district in which he resides, the re- turn shall be filed with the collector of that district. If his principal place of business is elsewhere, the return shall be filed in the district in which that business is located. In the case of an individual residing in a foreign country return shall be made to the collector of internal revenue for the district where his principal business is carried on within the United States. Form of return. Art. 16. The required return will be made on Form 1040 in accordance with the instructions printed thereon, and will specifically set forth — 1. All income received from each specific source and the total thereof. 2. All the separate items of deduction claimed under para- graph B of this law. 3. The amount of specific exemption claimed under para- graph C. 1366 TJtEASUlti: ItEGULATIONS. 4. All amounts of income upon which tax has been withheld at source by withholding agent or agents. When return will be made by ^ardian or duly authorized agrenti Art. 17. When by reason of minority, 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. Executor or administrator to make return in case of death, In the case of the death of a person whose net income for the part of the year during which he lived was $3,000 or over, return of net income shall be made by the executor or adminis- trator of the estate of the deceased, and in computing the tax- able income of such estate there shall be allowed the specific exemption provided by law. ITotice of failure to file return to be served on guardian or agent. Art. 18. 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 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. Evidence may be filed showing nonliability to make return. The person upon whom such notice is served may, however, when the facts warrant, 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 had filed the return with some other collector. Returns not required of persons for whom full returns have been made by others. Art. 19. Any individual whose net income is less than $20,000, for whom full return has been made by others as with- holding agents, shall not be required to make a return. Beturns to be prepared by collector in certain cases. Art. 20. If any person liable to pay an income tax for him- self or others shall fail to make and deliver the return required by law, but shall consent to disclose the particulars of any busi- ness or occupation liable to pay such tax, it shall be the duty of the collector or deputy collector to make such list or return, which being distinctly read and consented to, signed, and veri- fied by oath or aifirmation by the person liable to make such return, the same may be received as the list or return of such person. TEEASUKY BEGULATIONS. 1367 . Refusal or neglect to make return, Art. 21, In case any person liable to make return shall neglect or refuse to make or render a list or return, or shall render a willfully false or fraudulent return, it shall be the duty of the collector, after due notice has been given, to make such list, according to the best information he can obtain by the ex- amination of such person, or any other evidence.^ ■^™*'*y '<" failure to make return or for making false return. When duly certified by the collector, the said list thus pre- pared shall be the return of said person and the tax so ascer- tained to be due, together with the 50 per cent or 100 per cent penalty incurred, shall be assessed and collected. Returns to be verified by oath or afl&rmation. Art. 22. The annual return must be verified by oath or af- firmation of the person making the same. Collectors are direct- ed by law to require every return to be so verified by the per- son rendering it. The afiidavit may be made before the collec- tor for the district or before any officer authorized by law to administer oaths. Extension of time to file return may be panted. Art. 23. When the return is not filed within the required time by reason of sickness or absence of the individual, an extension of time, not exceeding 30 days from March 1, with- in which to file such return may be granted by the collector, provided a written application therefor is made by the indi- vidual within the period for which such extension is desired. Returns to be forwarded to Commissioner of Internal Revenue by registered mail. Art. 24. The annual returns will be forwarded by collec- tors by registered mail to the Commissioner of Internal Reve- nue with the list for the month in which the returns are filed. Collectors must provide that said returns and all forms relat- ing thereto are securely sealed in envelopes or packages before forwarding the same. Assessments; notification of; -when to be paid. Art. 25. All assessments shall be made by the Commission- er of Internal Revenue, and all persons shall be notified of the amount for which they are respectively liable on or before the 1st day of June of each successive year, and said assessments shall be paid on or before the 30th day of June, except in cases 1 For method of procedure in such eases, see sects. 3173 and 3176, Rev. Stat., and also Form 1045, the form of notice to be given in such eases. 1368 TEEASUEY EEGULATIONS. of refusal or neglect to make such return and in cases of false or fraudulent returns, in which cases the Commissioner of In- ternal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information obtained, as provided by the law, and the assess- ment made by the Commissioner of Internal Revenue thereon shall be paid by such person or persons immediately upon no- tification of the amount of such assessment. Penalty for failure to pay tax. To any sum or sums due and unpaid after the 30th day of June in any year, and for 10 days after notice and demand thereof 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 said tax from the time the same be- came due, except from the estates of insane, deceased, or in- solvent persons. Penalties for failure to make returns. Art. 26. If any person, corporation, joint-stock company, association, or insurance company liable to make returns or pay tax shall refuse or neglect to make returns at the time or times specified in each year, such person shall be liable to a penalty of not less than $20 nor more than $1,000. Penalties for making: false or fraudulent returns. Any person or any officer of any corporation required by law to make, render, sign, or verify any return who makes any false or fraudulent return or statement with intent to defeat or evade the assessment required by law to be made shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000 or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. Art. 27. Nothing in the law or these regulations shall be construed to release a taxable person from liability for income tax, nor shall any contract entered into after the act of Octo- ber 3, 1913, took effect be valid in regard to any Federal in- come tax imposed upon a person liable to such payment. Art. 28. For regulations relative to the claiming of exemp- tions and deductions on income, the tax on which is to be deducted and withheld at the source, see article 33. TEEASUEY EEGUIiATIONS. 1369 PART 2. Collections at the Source. Collections at source applies only to the normal tax imposed upon individuals. Collec- tion at source not operative until Nov. 1, 1913. Art. 29. The deductions and payment of the tax at the source of income applies only to the normal tax imposed upon individuals and shall not be construed to require any of such tax to be withheld prior to the 1st day of November, 1913. Persons, firms, etc., required to withhold tax at the source. Art. 30. Paragraph E of section 2 of the act provides . that — All persons, firms, copartnerships, companies, corporations, joint-stoek companies or associations, and insurance companies, in whatever capacity acting, including lessees or mortgagors of real or personal property, trus- tees acting in any trust capacity, executors, administrators, agents, receiv- ers, conservators, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual gains, profits, and in- come of another person, exceeding $3,000 for any taxable year, other than dividends on capital stock, or from the net earnings of corporations and joint-stock companies or associations subject to like tax, who are required to make and render a return in behalf of another, as provided herein, to the collector of his, her, or its district, are hereby authorized and re- quired to deduct and withhold from such annual gains, profits, and in- come such sum as will be sufficient to pay the normal tax imposed there- on by this section, and shall pay to the officer of the United States Gov- ernment authorized to receive the same; and they are each hereby made personally liable for such tax. Withholding agrents. Art. 31. All persons, firms, etc., mentioned in the above- quoted paragraph 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 pay- able. Income as to which tax is to be withheld. Art. 32. The income from which the normal tax of 1 per cent is to be withheld by withholding agents includes all items of income exceeding in the aggregate $3,000 and payable to any one person during the year, except : (a) Dividends on capital stock or from the net earnings of corporations and joint-stock companies or associations and in- surance companies subject to like tax. 1370 TKEASUEY EEGULATIOK-S. (&) 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. Incomes derived from the following professions and voca- tions come under this head: Agents compensated on the com- mission basis, lawyers, doctors, authors, inventors, and other professional persons whose income is irregular and indefinite. Such persons shall make personal return of all their income, provided their total net income from all sources is $3,000 or Special fees and annual retainers. over. For example: When a lawyer receives a retainer of $5,000 as a special fee, a deduction therefrom shall not be made by the payer; but when a lawyer receives a retainer of $5,000 per annum, and the exemption claim is $3,000, $2,000 of such income would be taxed and the tax retained at the source; or if his exemption claimed should be $4,000, $1,000 of such income would be taxed and the tax thereon withheld at the source. (c) Items listed in article 5, which are wholly exempt from tax. Exemptions under paragraph C. Certificate to be filed witll withholdingr aerent. Art. 33. (a) In all cases where the income tax of a per- son is withheld and deducted and paid or to be paid at the source, such person shall not receive the benefit of the deduc- tion and exemption allowed in paragraph C (see arts. 9 and 10) except by an application to the collector for refund nf the tax unless he shall, not less than SO days prior to the day on which the return of his income is due, file with the person who is required to withhold and pay tax for him, a certificate claim- ing the benefit of such exemption, and thereupon no tax shall Penalty for making: false representations to obtain exemption. be withheld upon the amount of such exemption. If any per- son for the purpose of obtaining any allowance or reduction by virtue of a claim for such exemption, either for himself or for any other person, knowingly makes any false statement or false or fraudulent representation, he shall be liable to a pen- alty of $300. Deductions under paragraph B. (b) 'Nor shall any person under the foregoing conditions TEEAStTET EEGULATIONS. 1371 he allowed the benefit of any deduction provided for in sub- section B (see art. 6, 1 to 6) unless he shall, not less than 30 days prior to the day on which the return of his income is Form 1008 to be filed with withholding: ae:ent or collector. ^ue, either file with the person who is required to withhold and pay tax for him a true and correct return (on Form 1008) of his annual gains, profits, and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf by the person required to withhold and pay the tax and the debtor or withholding agent will only withhold the tax on the payments made in excess of the deductions claimed on said form. Or such person may likewise make application for de- ■ductions to the collector of the district in which return is made ■or to be made for him. Certificate filed on behalf of minora or insane persons. If such person is a minor or an insane person, or is absent from the United States, or is unable owing to serious illness to make the return and application above provided for, the return and application may be made for him or her by the person required to withhold and pay the tax, he making oath on certificate (Form 1009) under the penalties of this act that he has sufficient knowledge of the affairs and property of his beneficiary to enable him to make a full and complete return for him or her, and that the return and application made by him are full and complete. claims for refund. (c) "When, however, claims for exemption and deductions as above described 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, Hevised Statutes, said claims to be made either by the with- holding agent against whom the assessment was made, or by the person on account of whom such taxes were withheld. Claims for abatement. Claims for abatement of taxes erroneously assessed, or which are excessive in amount, may, prior to collection thereof, be tiled under the provisions of said section 3220, Kevised Stat- utes, either by the withholding agent against whom the assess- ment was made, or by the persons on account of whom such taxes were withheld. 1372 TEEASUllY EEGULATIONS. Taxes withheld not to be forwarded to collector until notices of- assessment have beett received. In the monthly list returns as now prescribed a space is provided to show the amount of taxes which the withholding agent may remit to the collector when such returns are filed. The withholding agents will not, however, forward to the col- lector amounts withheld by him until notices of assessment are received from the collector. Claims for exemption and deductions may be filed with the withholding agent and claims for deductions may be filed with the collector, not later than SO days prior to March 1. Withholding agents to he furnished statement of deductions claimed through collector. In eases where claims for deductions are filed with the col- lector within the time prescribed, the collector will immediately furnish the withholding agent (whose name and address must be shown on Form 1008) with a statement of the amount of deductions claimed, and said withholding agent shall not with- hold and pay the normal tax to the extent of the deductions claimed as per said list. Withholding agents should not file their annual returr until after the expiration of the time allowed persons to file claims for exemptions and deductions and if claims for deduc- tions are filed with the collector in the required time, yet not in sulficient time to have the adjustment made by the with- holding agent, the collector will make the adjustment on the withholding agent's return and in reporting such withholding agent for assessment will make allowance for the amount of such deductions claimed. Notice of such adjustment, however, must be furnished the withholding agent. Tax withheld to be paid to collector of district. Art. 34. The normal tax of 1 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. Tax withheld by one agent not to be again withheld by another agent. 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 with- hold the normal tax of 1 per cent thereon, provided that any such person, firm, or organization other than the debtor who has withheld said tax, shall file with the collector of internal TREASURY REGULATIONS. 1373 revenue for his, her, or its district, a certificate (Form 1006) showing from whom and in what amount the tax has been so withheld. Returns to be made to collector of internal revenuei Art. 35. 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, accompanied by all certificates relat- ing thereto, and there shall also accompany said returns all certificates claiming exemptions and deductions which are not required to be listed thereon; and on or before the 1st day of March in each year said withholding agents shall likewise file their annual returns for the preceding calendar year. Annual returns (Forms 1041 and 1042) must be accompanied by all certificates claiming exemptions and deductions relating thereto. Art. 36. For regulations as to assessment and collection of taxes from withholding agents, see article 25 and "Assess- ments and collections," Part 4. Income derived from interest upon bonds and mortgages or deeds of trust or other similar obligations of corpora- tions, etc. Tax on income derived from interest on bonds, etc., to be deducted. Art. 37. Under the law a tax of 1 per cent, designated as the normal tax, shall be deducted at "the source," beginning November 1, 1913, from all income accruing and payable to any person subject to such tax which may be derived from interest upon bonds and mortgages, or deeds of trust, or other similar obligations, including equipment trust agreements and receivers' certificates of corporations, joint-stock companies or associations, and insurance companies, although such interest does not amount to $3,000. Interest on State and Government obligations exempt. 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 1374 TEEASUEY REGULATIONS. in connection with coupons or registered interest orders for such interest will not be required. Term "debtor" to apply to all corporations, etc., and to duly appointed withholding and paying: agents. Art. 38. The term "debtor," as hereinafter used, shall apply to all corporations, joint-stock companies or associations, and insurance companies; and such "debtor" may appoint withholding and paying agents to act for it in matters per- taining to the collection of this tax, upon filing with the col- lector of internal revenue for the district a proper notice of the appointment of such agent or agents. Where such with- holding agent is so authorized by the debtor corporation, he may file with the collector of his district the required returns and accompanying certificates (arts. 50 and 51), in which case the assessment of the tax withheld by him will be made in that district. Unless such authority is 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. Tax to be deducted and withheld by debtor corporation. Art. 39. For the purpose of collecting the tax on all cou- pons and registered interest originating or payable in the United States, the source shall be the debtor (or its withhold- ing and paying agent in the United States), who shall deduct Banks and individuals taking interest coupons for collection. the tax when the same is to be withheld, and no other bank, trust company, banking firm, or individual taking coupons or interest orders for collection, or otherwise, shall withhold the tax thereon, where such coupons or orders for registered interest Certificates of ownership to accompany interest coupons for collection. are accompanied by certificates of ownership signed by the owners of the bonds upon which the interest matured. 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. (See Arts. 43 and 46.) Substitute certificates, when permitted. Art. 40. Responsible banks, bankers, and collecting agents receiving coupons for collection with the aforesaid certificates of ownership attached, may present the coupons with the at- tached certificates to the debtor or withholding agent for collec- TKEASUEY EEGULATIGNS. 1375 tion, or such certificates may be detached and forwarded direct to the Commissioner of Internal Eevenue, provided such bank, banker, or collecting agent shall substitute for such certificates Record to be kept by collecting agent. its own certificate, and shall keep a complete record of each transaction, showing — 1. Serial number of item received. 2. Date received. 3. Name and address of person from whom received. 4. Name of debtor corporation. 5. Class of bonds from which coupons were cut. 6. Face amount of coupons. 7. Exemptions from tax claimed by owner under paragraph C. For the purpose of identification, such substitue certificates should be numbered consecutively, and corresponding numbers given the original certificates of ownership. Privilege of substituting certificates extended to foreign countries. The permission here granted will extend to responsible banks, bankers, and collecting agents in foreign countries, through whom collection of such interest coupons is made. The various substitute certificates hereby authorized will correspond with the form numbers of the ownership certificates detached by the collecting agent, except that the substitute certificates' form numbers will be followed by the letter "a." Kormal tax to be deducted before payment of interest. Art. 41. A debtor whose bonds may be registered, both as to principal and interest, shall deduct the normal tax of 1 per cent from the accruing interest on all bonds before send- ing out checks for said interest to registered owners or before paying such interest upon interest orders signed by the regis- tered holders of said bonds unless there shall be filed with said debtor or its fiscal agent (not later than 30 days prior to March 1), through whom said interest is customarily paid, the proper certificates claiming exemption from liability for said tax as herein provided, executed — claims for exemption from tax, by whom same may be filed. By a citizen or resident of the United States, the bona fide owner of the registered obligations, who may claim exemption nnder paragraph C, section 2, of the income tax law, or By corporations, joint-stock companies, associations, or in- IStG TEEASUEY EEGULATIONS. surance companies organized in the United States, or organiza- tions, associations, fraternities, etc., which are either taxable or exempt from taxation, as provided in paragraph G, sub- division (a), of the act, or By a bona fide resident and citizen of a foreign country, claiming exemption as such. Certificates of ownership to specify bonds and amount of interest due. Art. 42. If the owners of the bonds are individuals who are citizens or residents of the United States, the aforesaid certificates shall accompany the coupons, or, with respect to the interest on registered bonds, shall be filed with payer of said interest, and such certificates shall describe the bonds and show the amount of coupons attached or the amount of interest due such owners on registered bonds and the name and address of the owners, and if registered in names other than the owners such names with addresses shall also be given. Such certificates shall also show whether the claimants do or do not then claim Claim for exemption under paragraph C. exemption from taxation at the source, under paragraph C, articles 9 and 10 ($3,000, and under certain conditions $4,000), as to the income represented by such coupons or interest. The certificates will be prepared on Form 1000 and must show the amount, if any, of exemption claimed, the total amount of exemption to which the claimant is entitled and must be signed by the claimants, who shall use their ordinary business signatures. The certificates shall also show the post- ofiice and street address of the claimants, the internal-revenue district, and the date when signed. Certificates may be signed by duly authorized agents, etc. Art. 43. Duly authorized agents may sign such certificates for the persons for whom they act, and withholding agents, banks, or others, with whom such certificates are filed, if satis- fied as to the identity and responsibility of the persons so sign- ing, shall stamp or write on the face of each such certificate "Satisfied as to identity and responsibility of agent," giving Certificates to be verified by withholding agents. name and address of person thus certifying. Certificates so verified may be accepted by all other persons, firms, or organi- zations to whom presented, without question as to authority of such agent. If the person, firm, or organization first receiving such certificate is not satisfied as to the agent's identity and TBEASLltV KICGULATIONS. 1377 responsibility, then, in that event, the agent shall furnish evi- dence of his authority to so act, which will be retained by the person, firm, or organization receiving it, and the certificate of ownership shall be indorsed as above provided. Tax to be deducted before payment of interest. ^ Art. 44. Whenever interest coupons, accompanied by a cer- tificate of an individual who is a citizen or resident of the United States, are presented to a debtor or its withholding agent for payment, or whenever interest is payable to such individual on a bond registered as to both principal and inter- est, the debtor or its withholding agents shall deduct and with- hold the amount of the normal tax, except to the extent that exemption is claimed in the certificate of ownership (Form 1000). Where the interest to be paid is registered, the same form of certificate shall be used where exemptions are claimed, and it shall be filed with the debtor at least five days before the due date of such interest. Tax on interest payable to certain corporations, etc., not to be deducted. Art. 45. If the owners of the bonds are corporations, joint- stock companies, associations, or insurance companies organized in the United States, no matter how created or organized, or organizations, associations, fraternities, etc., which are either taxable or exempt from taxation as provided in paragraph G, subdivision (a) of the act, the debtor is not required to with- hold or deduct the tax upon income derived from interest on such bonds, provided coupons or orders for interest from such bonds shall be accompanied by a certificate of the owners there- of certifying to such ownership, which certificates shall be filed with the debtor when such coupons or interest orders are presented for payment. Certificates of corporations claiming exemption. Such certificate will be made on Form 1001, and must be signed in the name of the organization (stating its place of business) by the president, secretary, or some other principal ofiicer of the said corporation or organization duly authorized to sign same, and must be properly dated. Certificates of nonresident aliens. Art. 46. Coupons, or orders for registered interest, payable in the United States, representing the interest on bonds owned by nonresident aliens, must be accompanied by the prescribed Foster Income Tax — 87. 1378 TEEASUEY EEOTJLATIONS. certificate (Form 1004), but this certificate may be signed either by the owner or, in behalf of the owner, by a reputable bank or bankers or other responsible collecting agency, certify- ing to the ownership of the bonds and giving the name and address of the bona fide nonresident and alien owners, and when such certificate is thus attached the normal tax of 1 per cent on such coupons or interest orders need not be withheld at the source by the debtor or collecting agency. Unless such proof of foreign ownership is furnished, the normal tax of 1 per cent should be deducted. Foreign organizations engaged in business within the United States are subject to the normal tax of 1 per cent per annum upon the amount of net income accruing from business trans- acted and capital invested within the United States; but said organizations shall be exempt from having any part of their income withheld by a debtor or withholding agent, and claim for such exemption will be made on Form 1018. Certi&cates filed iy partnership, showing interest of individual in partnership profits, .etc. Art. 47. Inasmuch as individual members of a partner- ship are liable for income tax upon their respective interest in the net earnings of such partnership, the partnership may file with the withholding agent a notice signed in the name of the partnership, by a member thereof, claiming a deduction of a specific amount on account of the legitimate expense incurred in conducting the business of said partnership; and upon re- ceipt of said notice said withholding agent shall not withhold, and shall not be held liable for, the normal tax on the amount of income equal to the amount of deduction claimed in said notice ; but in no event shall the total of the amounts claimed, as pro- vided herein, be in excess of the total amount of the actual legitimate annual expenses incurred by said partnership in the conduct of its business. Application for such deduction shall be made on Form 1011. Foreign partnerships, certificate of ownership may be filed by. Art. 48. Foreign partnerships or firms, all the members of which are both citizens, or subjects, and residents of a for- eign country, which are the ovraers of bonds and mortgages or deeds of trust or other similar obligations, including equipment trust agreements, receivers' certificates, and stocks of corpora- tions, joint-stock companies or associations and insurance com- TBEASUEY REGULATIONS. . 1379 panics, organized or doing business in the United States, may file with the debtor or withholding agent, with their coupons or orders for registered interest, or orders for other income derived from property or investments in the United States, a certificate and notice of ownership (Form 1016) setting forth the above facts ; and the debtor or withholding agent shall not withhold any part of said income. Foreign partnership, composed of nonresident foreigners and citizens of United States. Art. 49. Where a foreign partnership or firm is composed of both nonresident foreigners and citizens of the United States, or foreigners residing in the United States or its pos- sessions, the certificate of ownership shall show this fact, and the name and legal address of each member of said partnership who is a citizen of the United States, or who is a foreigner residing in the United States or its possessions, shall be given on the back of said certificate, and no part of said income shall be withheld. The said certificate and notice of ownership in either case above provided shall be on Form 1014. Monthly list return. Art. 50. Withholding agents are required to file in dupli- cate a monthly list return (Form 1012) giving a list of all coupon or interest payments made on which the normal tax of 1 per cent was deducted and withheld from interest payments made upon bonds or other similar obligations, and shall show the name and address in full of the ovmers of the bonds, amount of the income, amount of exemption claimed, amount of income on which withholding agent is liable for tax, and the amount of tax withheld. Forms 1012a, 1012b, and 1012c are to be used where Form 1012 does not afford sufficient space in which to enter all items. Summary of monthly lists may ' be used. Form 101 2d, when necessary to be used, shall be made in duplicate and shall be a summary of the monthly list return, Form 1012, as made in detail by the withholding agent, and the said summary and lists thereto attached when properly filled in and the summary signed and sworn to shall constitute the complete monthly list return of the withholding agent mak- ing same as fully as if each list attached to the summary was signed and sworn to separately. An annual list return (Form 1013) in duplicate is also required to be made by debtors or withholding agents of the 1380 TEEASUEY EEGULATIONS. normal tax of 1 per cent withheld from interest payments made upon bonds or other similar obligations, and it shall be filed on or before March 1 of each calendar year. Monthly list to constitute a part of the annual list return. Art. 51. The monthly list return in the form as required herein shall constitute a part of the annual list return to be made by debtors or withholding agents, and the debtor or with- holding agent will not be required, in making an annual list return of the tax withheld from income derived from interest upon bonds and mortgages or deeds of trust, or other similar obligations of corporations, joint-stock companies or associa- tions and insurance companies, to again make an itemized list of the amount of tax withheld from each person, but will give in the annual list return the totals of the monthly list return for each month of the year for which annual list return is made. 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 with- holding 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. Until the further ruling on this subject by this department no list return is required to be made of certificates of ownership accompanying coupons or registered interest orders filed with a debtor or withholding agent when the owners of the hands are not subject to having Certificates to be forwarded to collector. the normal tax withheld at the source, but all such certificates of ownership shall be forwarded by the debtor or withholding agent to the collector of internal revenue for the district, on or before the 20th day of the month succeeding that in which said certificates of ownership were received. TEEASUllY EEGULAtlOKS. 1381 B. Income derived from interest upon bonds, mortgages, etc., paid by first bank or collecting agency when certificates of owners are not filed. Interest coupons or orders, not accompanied by certificate. Art. 52. Where the coupons or interest orders are not ac- companied by certificates as heretofore prescribed, the first bank, trust company, banking firm, or individual, or collecting agency receiving the coupons or interest orders for collection, or otherwise, shall deduct and v^ithhold the tax and shall attach to such coupons or interest orders its own certificate (Form 1002), giving the name and address of the owner of, or the person presenting such coupons or interest orders if the owner is not known, with a description of the coupons or interest orders ; also setting forth the fact that they are withholding the tax upon them ; whereupon the debtor shall not again withhold the tax on said coupons or interest orders, but in lieu thereof shall deliver to the Collector of Internal Revenue the certificate of such bank, trust company, etc., which is withholding such tax money. Identity of persons presenting interest coupons to be established. Any corporation, collecting agency, or person first receiving from the owner any interest coupons or orders for the collec- tion of registered interest should require the persons tendering such coupons or orders for registered interest to satisfactorily establish their identity. Monthly and annual list returns. Art. 53. Withholding agents receiving coupons or interest orders not accompanied by certificates of owners are required to file monthly and annual list returns in duplicate. The required monthly list return (Form 1044) shall give a list of all coupon or interest payments made on which the nor- mal tax of 1 per cent was deducted and withheld and shall show the name and address in full of the owner of, or the person presenting such coupons or interest orders, if the owner is not known, amount of the income subject to tax and the amount of tax withheld. An annual list return (Form 1044a) is also required to be made by such withholding agents, showing the amount of tax 1382 TEEASUEY EEGULATIONS. withheld during the preceding year on income of this charac- ter. This return must be filed on or. before the 1st day of March of each calendar year. The monthly list returns in the form as required herein shall constitute a part of the annual list return to be made, and the withholding agent will not be required, in making an annual list return of the tax thus withheld, to again make an itemized list of the amount of tax withheld from each person, but will give in the annual list return the totals of the monthly list returns for the year for which annual list return is made. Income derived from coupons, checks, or bills of exchange on foreign bonds, mortgages, dividends, etc. Collection of coupons, checks, bills of exchange, etc. Art. 54. All persons, firms, or corporations undertaking for accommodation or profit (this includes handling either by way of purchase or collection) the collection of coupons, checks, bills of exchange, etc., for or in payment of interest upon bonds issued in foreign countries, and upon foreign mortgages or like obligations, and for any dividends upon stock or interest upon obligations of foreign corporations, associations, or insurance companies engaged in business in foreign countries, are re- License to he obtained from Commissioner of Internal Revenue. quired by law to obtain a license from the Commissioner of Internal Revenue. Application for license to be made to collector of district. Art. 55. Applications for such license (Form' 1017) will be made to the collector for the district in which such business is to be carried on. Upon the acceptance of such application the collector will issue to the applicant without cost a license (Form 1010) which will continue in force until revoked or canceled. Blank forms of such license, bearing the fac simile signature of the Commissioner of Internal Revenue, will be furnished collectors on requisition, who will in all cases coun- Fenalty for failure to obtain license. tersign the same before issuing it to applicant. Failure to obtain a license or to comply with regulations is punishable by a fine TKEASUEY EEGULATIONS. 1383 not exceeding $5,000 or imprisonment not exceeding one year, or both, in the discretion of the court. Art. 56. Where the collector is not sufficiently informed as to the entire responsibility of the applicant, or where in Bond may be required in certain cases. any case he deems it advisable, the Commissioner of Internal Eevenue may upon the recommendation of the collector require of the applicant a bond, in duplicate, with satisfactory sureties, in a penal sum at least equal to the estimated amount of tax to be withheld by such applicant during any one year. A form of bond to be given in such cases will be furnished collectors on application for the same. Where licenses are issued with- out bond, the collector will each year inquire into and satisfy himself of the financial responsibility of the licensee. Art. 57. When any person, firm, or corporation shall have branch offices and desire to collect foreign interest or dividend License to be obtained for branch offices. income through said branch offices, the application for license or licenses shall be made by the person, firm, or corporation through its principal office for its branch office or offices. Ap- Application for license to be certified to collector of district in wbicb branch offices are located. plication for licenses in such cases shall be made to the col- lector of internal revenue for the district in which the home office is located. The names and addresses of the branch offices shall be furnished to the collector in the application of the said principal, and if the requirements of the foreging regulations have been complied with to the satisfaction of the collector, he shall certify this fact to the collector of internal revenue for the district in which the branch office is located, and the collector to whom this certification is made shall issue to such branch office a license, as in the case provided in article 55. Normal tax on interest collected to be withheld by agent. Art. 58. The licensed person, firm, or corporation first re- ceiving any such foreign items for collection or otherwise, shall withhold therefrom the normal tax of 1 per cent, and statement as to tax withheld to be indorsed or appended to coupons, checks, etc. will be held responsible therefor. Such licensee shall indorse or stamp on each such coupon, check, or bill of exchange, when practicable, the words "Income tax withheld by" (giving his or their name, address, and date), which shall be sufficient 1384 TEEASUEY EEGULATIOl^S. evidence to relieve subsequent holders or purchasers from the duty of also withholding the income tax. If the size or nature of such coupons, checks, etc., makes it impracticable to make said indorsement thereon, a statement identifying the item on which tax is withheld and bearing said indorsement may be attached thereto with the same effect as if the indorsement was made directly thereon. Licensee to furnish collector of district with list of taxes deducted, etc. Art. 59. Such licensee shall obtain the names and addresses of the persons from whom such items are received and shall prepare a list of same in duplicate (on Form 1043) and file it with the collector of internal revenue for his district not later than the 20th day of the month next succeeding the month in which such items were paid. The list shall be dated, and shall contain the names and addresses of the taxable persons, the character and amount of income, amount of exemption claimed, amount of income on which withholding agent is liable for tax, and the amount of tax withheld. In addition to the monthly lists the licensee will, on or before the 1st day of March in each year, file with the collector in duplicate a return (Form 1043a), showing the amount of income paid and the amount of tax withheld by him during the preceding year and such other information as the form prescribes. The monthly list return in the form as required herein shall constitute a part of the annual list return to be made by the licensee as withholding agent, and he will not be required, in making an annual list return of the tax withheld from income described in article 54, to again make an itemized list of the amount of tax withheld from each person, but will give in the annual list return the totals of the monthly list return for each month of the year for which annual list return is made. claims for exemption under paragraph may be filed. Art. 60. In the event such coupons, cheeks, or bills of ex- change above mentioned are presented for collection by an in- dividual claiming the benefit of the exemptions allowable under paragraph C (arts. 9 and 10), such individual shall be per- mitted to avail himself of the exemption claimed, upon sign- ing on the form heretofore prescribed for coupons payable in the United States, and no tax shall be deducted for the amount Organizations exempt from having tax withheld at the source. of the exemption so claimed ; or if such items are presented by TEEASUEY EEGULATIONS. 1385 corporations, joint-stock companies, or associations and insur- ance companies, organized in the United States, the form of certificate heretofore prescribed for such organizations shall be used, and in such instances no tax shall be deducted. Certificates of exemption to be forwarded with monthly list returns to collector. Art. 61. In both instances the licensee first receiving such items shall retain such certificates for delivery with the lists aforesaid, and with respect to said coupons, checks, or bills of exchange, said licensee shall attach thereto (identifying the items) or indorse or stamp thereon the words "Income tax exemption claimed through" (giving name and address of licensee), which shall be sufficient evidence to relieve subse- quent holders or purchasers from the duty of also withholding the tax thereon. The provisions for collection of the tax on foreign obliga- tions herein set forth includes the interest upon all foreign bonds, even though the coupons may, at the option of the holder, be payable in the United States as well as in some foreign country. liicensee to keep records. Art. 62. All persons licensed shall keep their records in such manner as to show from whom every such item has been received, and such records shall be open at all times to the inspection of internal-revenue officers. D. Income derived from wages, rent, interest, or other fixed and determinable gains, profits, and income. Wages, salaries, rents, etc. Art. 63. The above title 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. ("Income derived from interest upon bonds and montgages, or deeds of trust, or other similar obligations of corporations, etc.," and "Income derived from coupons, checks, or bills of exchange on foreign bonds, mortgages, dividends, etc.," which have been covered by regu- lations under such titles, are not to be included here.) 1386 TEEAStJEY BEGULATIONS. Withholding agents to deduct and pay tax. Art. 64. Copartnerships, companies, corporations, joint- stock companies or associations, insurance companies, in what- ever capacity acting, including lessees, mortgagors of real or personal property, trustees acting in any trust capacity, execu- tors, administrators, agents, receivers, conservators, employers and all officers and employees of the United States, hereinafter referred to as "debtors" or v?ithholding agents, having the control, receipt, custody, disposal, or payment of income as described in article 63, shall deduct and withhold from such annual gains, profit, and income, when the same shall have reached an aggregate amount in excess of $3,000, such sum as will be sufficient to pay the normal tax of 1 per cent imposed by law, 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 busi- ness. Tax to be withheld on periodical payments when they aggregate $3,000. Art. 65. A withholding agent who pays monthly, or periodically during the year, interest, rents, salaries, wages, etc., shall not withhold the said tax until such time as the interest, rents, salaries, wages, etc., shall have reached an aggregate amount in excess of $3,000. When such amount has been reached, such agent shall withhold the tax on the whole $3,000 and any excess thereof, unless the person to whom the Exemption under para^aph C may be claimed. income is due files a notice claiming exemption under para- graph C (as provided in art. 33 (a)), in which case the with- holding agent shall withhold only the tax on the income in excess of said exemption of $3,000 or $4,000 (as the case may be), and the tax so withheld shall be paid as required by law. Deductions under paragraph B may be claimed. Art. 66. In case the person to whom the income is due is entitled to any deductions under paragraph B, he may avail himself of such deductions by filing with the withholding agent Eorm 1008, as provided in article 33 (b), in which case the withholding agent will only withhold the tax on such income in excess of the deductions claimed on said form. Tax not to be withheld by banks on interest paid on deposits. Art. 67. Banks, bankers, trust companies, and other bank- ing institutions receiving deposits of money, are not required TEEASUEY EEGULATIOITS. 1387 to "withhold at the source the normal income tax of 1 per cent on interest paid, or accrued, or accruing to depositors, whether on open accounts or on certificates of deposit; but all such interest, whether paid or accrued and unpaid, must be included in the annual income return of the person entitled to receive such interest, whether on open account or on the certificate of deposit. Tax to 1)6 withheld on payment of interest notes, or notes eiven for rent. Art. 68. When a note shall have been given in payment of interests, rents, or other income accruing after March 1, 1913, the maker of the note, as the "debtor" and as the "source" where the income originates, is required, in paying such note, to withhold the normal tax of 1 per cent on the entire amount of the note, if in excess of $3,000, unless claim for exemption or deductions under article 33 (a) or 33 (b) is filed, in which case the said tax shall be withheld only on the amount of said note in excess of the exemption or deductions so claimed. Purchasers of interest notes as to which tax has not heen withheld. If any person who has purchased or discounted any such notes omitted, in acquiring them from previous holder, to make a deduction or allowance for said tax, he can look for relief only to the person from whom the notes were obtained, as the "debtor," the maker of said notes, is required to deduct, with- hold, and pay to the collector of internal revenue the amount of the normal tax of 1 per cent which may be due thereon. Annual list return by withholding agents. Art. 69. Withholding agents shall make an annual list re- turn (Form 1042), in duplicate, to the collector of internal revenue for the district in which the withholding agent resides or has his principal place of business on or before the 1st day of March in each year, showing the names and addresses of per- sons who have received incomes in excess of $3,000, on which the normal tax of 1 per cent has been deducted and withheld during the preceding year. This return must be accompanied by all forms presented claiming exemptions and deductions. 1388 TllEASUEY EEGULATIONS. E. Fiduciaries, GuardianSi etc., as fiduciary agents, to deduct tax, Art. 70. Guardians, trustees, executors, administrators, agents, receivers, conservators, and all persons, corporations, or associations acting in any fiduciary capacity hereinafter re- ferred to as fiduciary agents, wHo hold in trust an estate of another person or persons, shall be designated the "source" for Notice of deduction to lie filed with other withholding agents. the purpose of collecting the income tax, and by filing notice with other debtors or vrithholding agents said fiduciary shall be exempt from having any income, due to them as such, withheld for any income tax by any other debtor or withholding agent. Other debtors or withholding agents upon receipt of such notice shall not withhold any part of such income from said fiduciary and will not in such case be held liable for normal tax of 1 per cent due thereon. The form of notice to be filed with the debtor or withholding agent by fiduciary will be on Form 1015. Where such exemption is not claimed, notice thereof on Form 1019 should be filed with the withholding agent. Annual return to be made to the collector of the district. Art. 71. Fiduciaries shall, on or before March 1 of each year, make and render a return of the income coming into their custody or control and management from each trust or estate when the annual interest of any beneficiary in said trust or estate is in excess of $3,000. This return (Form 1041) must be filed with the collector for the district in which the fiduciary resides or has his principal place of business, and shall contain an itemized statement of the gross income and deductions claimed. Notice of failure to file return as required shall be served upon the fiduciary. (See art. 18.) The entries on the first page of Form 1041 in column headed "Amount of income paid or accrued to beneficiaries" should not include their respective shares of income derived from divi- dends on -the stock or from the net earnings of corporations, joint-stock companies, etc., subject to like tax or the income on which the normal tax of 1 per cent has been deducted and with- held at the source by the debtor or the prior withholding agent, TBEASUEY EEGULATIONS. 1389 as these two items of income are treated as deductions in deter- mining the amount of income subject to tax for which the fidu- ciary as withholding agent has to account. When the share of any beneficiary, therefore, in the amount stated on line 3 of the first page of said return is in excess of $3,000, return must be made. Beturn to include only income accruing from trust, unless otherwise authorized hy beneficiary. Art. 72. As each such fiduciary acts solely in behalf of the beneficiaries of the trust, the annual return required in such cases has reference only to the income accruing and payable through said fiduciary, and not to the income of the beneficiary derived from other sources. If, however, such fiduciary is legal- ly authorized to act for such beneficiary as agent or attorney in fact, he may in such case also make for the beneficiary the per- sonal annual return (Form 1040) required by law. Annual return to include list of beneficiaries, showing tax withheld from each. Art. 73. The annual return of the fiduciary shall contain a list of the name and full address of each beneficiary and the share of said income to which each may be entitled. There must also be entered opposite the name of each beneficiary the amount of exemption, if any, claimed by him, the amount of in- come on which the fiduciary is liable for tax, and the amount of tax withheld, 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 organization, the return shall be signed and sworn to by the president, secretary, or treasurer of said organization. Return to be made of undistributed income accruing during the year. Art. 74. Fiduciaries having control of any portion of an annual income accruing during the year, but not distributed or paid to the beneficiaries during the year, shall, in rendering their annual return (Form 1041), give the name and address of each of said beneficiaries having a distributive interest in said in- come, and shall furnish all information called for in such re- turns. The fiduciary shall in all such cases withhold and pay to the collector, as provided by law, the normal tax of 1 per cent upon the distributive interest of each of said beneficiaries when in excess of $3,000, the same as if said income was actual- Claim for exemption of undistributed income. Paragraph C. ly distributed and paid. Exemption under paragraph C, how- 1390 TEEASUEY EEGULATIONS. ever, may be claimed by the beneficiary or his legal representa- tive by filing his claim for exemption with the fiduciary agent. Tax withheld on undivided income not to be again withheld when income is distributed. Art. 75. When the normal tax on undivided annual net in- come has been so withheld, such tax shall not be again withheld when such portion of the income is actually distributed and paid to said beneficiary, PART 3. Relating to the Income Tax imposed by sections 2 and 4 of the act of October 3, 1913, on corporations, joint-stock companies or associations, and insurance companies. Organizations subject to tax. Art. 76. Under the provisions of sections 2 and 4 of the act of October 3, 1913, every corporation, joint-stock company or association, and every insurance company organized in the United States, no matter how created or organized, except those specifically exempted, shall be subject to pay annually an income One per cent on entire net income. tax of 1 per centum per annum upon the entire net income aris- ing or accruing from all sources during the preceding calendar or fiscal year, as the case may be. Certain exceptions as to tax- ability will be noted specifically hereinafter. Foreign corporations subject to the tax. Art. 77. A similar tax shall be levied, assessed against, and paid annually by corporations, joint-stock companies or associa- tions, and insurance companies organized, authorized, or exist- ing under the laws of any foreign country upon the amount of net income accruing from business transacted and capital in- vested within the United States during such year. Corporations defined. Art. 78. "Corporation" or "corporations," as used in these regulations, shall be construed to include all corporations, joint- stock companies or associations, and all insurance companies coming within the terms of the law, and such organizations will hereinafter be referred to as "corporations." Associations, real estate trusts, etc., subject to tax. Art. 79. It is immaterial how such corporations are created or organized. The terms "joint-stock companies" or "associa- tions" shall include associates, real estate trusts, or by whatever TEEASUEY KEGULATIONS. 1391 name known, which carry on or do business in an organized capacity, whether organized under and pursuant to State laws, trust agreements, declarations of trusts, or otherwise, the net income of which, if any, is distributed, or distributable, among the members or share owners on the basis of the capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share of capital which each has in- vested in the business or property of the organization, all of which joint-stock companies or associations shall, in their or- ganized capacity, be subject to the tax imposed by this act Corporations required to make returns. Art. 80. Every corporation not specifically enumerated as exempt shall make the return of annual net income required by law whether or not it may have any income liable to tax, or whether or not it shall be subordinate to or controlled by an- Mutual telephone and mutual insurance companies not exempt. other corporation. Mutual telephone companies, mutual insur- ance companies, and like organizations, although local in char- acter, and whose income consists largely from assessments, dues, and fees paid by members, do not come within the class of cor- porations specifically enumerated as exempt. Their status un- der the law is not dependent upon whether they are or are not organized for profit. Not coming within the statutory exemp- tion, all organizations of this character will be required to make returns of annual net income, and pay any income tax thereby shown to be due. For this purpose the surplus of receipts of the year over expenses will constitute the net income upon which the tax will be assessed. A railroad or other corporation which has leased its proper- ties in consideration of a rental equivalent to a certain rate of dividends on its outstanding capital stock and the interest on the bonded indebtedness, and such rental is paid by the lessee directly to the stock and bond holders, should, nevertheless, make a return of annual net income showing the rental so paid as hav- ing been received by the corporation. Interest deduction by corporations operating leased or purchased lines. Art. 81. A railroad company operating leased or purchased lines shall include all receipts derived therefrom, and, if bonded indebtedness of such lines has been assumed, such operating company may deduct the interest paid thereon to an amount not exceeding one-half of the sum of its interest-bearing indebt- 1392 TEEASUEY EEGULATIONS. edness and its paid-up capital stock outstanding at the close of the year. Lessee corporations not to include capital stock or indebtedness of lessor corporations. Art. 82. Corporations operating leased lines should not include the capital stock of the lessor corporations in their own statement of capital stock outstanding at the close of the year. The indebtedness of such lessor corporations should not be in- cluded in the statement of the indebtedness of the lessee unless the lessee has assumed the same. Each leased or subsidiary com- pany will make its own separate return, accounting for therein all income which it may have received by way of dividends, rentals, interest, or from any other source. Joreign corporations having branch offices in United States to desi^ate principal oClDe. Art. 83. 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. Corporations organized during year to make returns. Art. 84. A corporation organized during the year should render a sworn return on the prescribed form, covering that portion of the year (calendar or fiscal) during which it was engaged in business or had an income accruing to it. Corporations going into liquidation. Art. 85. Corporations going into liquidation during any tax period may, at the time of such liquidation, prepare a "final return" covering the income received or accrued to them during the fractional part of the year during which they were engaged in business, and immediately file the same with the collector of the district in which the corporations have their principal places of business. Limited partnerships. Art. 86. Limited partnerships are held to be corporations within the meaning of this act and these regulations, and in their organized capacity are s^ibject to the income tax as corpo- rations. Corporations exempt from tax. Art. 87. The act specifically enumerates and exempts from its provisions and requirements labor, agricultural, or horticul- tural organizations, mutual savings banks not having a capital stock represented by shares, fraternal beneficiary societies, or- ders, or associations operating under the lodge system, or for the exclusive benefit of the members of a fraternity itself oper- TEEASUEY EEGULATIONS. 1393 ating under the lodge system, and providing for the payment of life, sick, accident, and other benefits to the members of such societies, orders, or associations, and dependents of such mem- bers, domestic building and loan associations, cemetery com- panies organized and operated exclusively for the mutual bene- fit of their members, any and all corporations or associations organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of vyhose net income inures to the benefit of any private stockholder or individual, business leagues, chambers of commerce, or boards of trade not organized for profit, no part of the net income of which inures to the benefit of the private stockholder or individual, and civic leagues or similar organizations not organized for profit, but operated exclusively for the promotion of social welfare. Domestic lluilding and loan associations defined. Mutuality essential. Domestic building and loan associations are among those enumerated as exempt from the requirements of the law. A do- mestic building and loan association is held to be one organized under and pursuant to the laws of the United States, or of a State or Territory thereof, or under the laws applicable to Alas- ka or the District of Columbia. Mutuality in operation and in the distribution of profits and benefits is essential to exemption. Therefore, in order to come within the exempted class such asso- ciations must not only be "Domestic," as defined, but they must be organized and operated exclusively for the mutual benefit of the members; that is, all the profits and benefits provided for in the articles of association and by-laws must be ratably dis- tributed among all members regardless of the kind of stock held, according to the amount of money they have on deposit. An association issuing different classes of stock upon which different rates of interest or dividends are guaranteed or paid, does not come within the exempted class. Corporations must estaMish their Tig:ht to exemption. Art. 88. AH corporations and all beneficiary societies enumerated above shall by afiidavit, or otherwise, at the request of the collector or Commissioner of Internal Eevenue, establish their right to the exemption provided, in which case it will not be sufficient to merely declare that they are exempt, but they must show the character and purpose of the organization, the manner of distributing the net income, if any, or that none of Foster Income Tax. — 88. 1394: TEEASUEY EEGULATIONS. the net income inures to the benefit of any private stockholder or individual. In the absence of such a showing, such organiza- tions may, at any time, be required to make returns of annual net income or disclose their books of account to a revenue officer for examination in order that the status of the company may be determined. Society or association subject to exemption defined. Art. 89. A society or association "operating under the lodge system" is considered to be one 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. Cemetery companies organized for mutual benefit of their members, exempt. Art. 90. Cemetery companies organized and operated ex- clusively for the mutual benefit of their members are exempt. The provisions of the law clearly indicate that companies which operate cemeteries for profit are liable to the tax. The status of cemetery associations under the law will, therefore, depend upon the character and purpose of the organization and what dis- position is made of the income. Corporations whose status as to exemption is in doubt must make return. Art. 91. Any corporation, concerning whose status under the law there is any doubt, or which does not clearly come with- in one or another of the classes of those specifically enumerated as exempt, should file a return (in blank if desired) and attach thereto a statement setting out fully the nature and purpose of the organization, the source of its income, and what disposition is made of it, and particularly of any surplus. Co-operative dairies not issuing stock and allowing patrons dividends, exempt. Art. 92. Co-operative dairies not issuing stock and allowing patrons dividends based on butter fat in milk furnished are not liable. In such case the "dividends" are the purchase price of the raw material furnished. When income from public utilities is not taxable. Art. 93. The income derived from any public utility or from the exercise of any essential governmental function, which income accrues to any State, Territory, the District of Colum- bia, or any political subdivision of a State, Territory, or the District of Columbia, and any income accruing to the govern- ment of the Philippine Islands, or to Porto Eico, shall not be subject to the tax imposed by this act. In cases wherein any TREASUEY EEGULATIONS. 1395 State, Territory, or the District of Columbia, or any political subdivision of a State, or Territory, shall ha to, prior to the passage of this act, contracted in good faith with any person or corporation to acquire, construct, operate, or maintain a public utility, no income tax pursuant to this act shall be levied upon the income derived from the operation of such public utility, so far as the assessment and payment of such tax will impose a loss or burden upon such State, Territory, District of Columbia, Persons or corpoiations not exempt. or political subdivision. But the person or corporation is not relieved from the payment of the tax upon that portion of the. income accruing to him, or it, under such contract. Partnerships not taxable as corporations. Art. 94. Ordinary copartnerships are not, as such, subject to the tax imposed by this act, but the individual members of any such partnership are liable for income tax only in their in- dividual capacity on their respective shares of the earnings of such partnership, whether such earnings be distributed or not. What constitutes paid-up capital stock. Art. 95. Pull amount of stock, as represented by the par value of the shares issued, is to be regarded as the paid-up capi- tal stock, except when such stock is assessable on account of de- ferred payments, or payable in installments, in which case the amount actually paid on such shares will constitute the actual paid-up capital stock of the corporation. Gross income, how determined. Art. 96. The following definitions and rules are given for determining the gross income of various classes of corporations :. Gross income of hanks and other financial institutions. Gross income of banks and other financial institutions con- sists of the total revenue derived from the operation of the busi- ness, including income, gains, or profits from all other sources,, as shown by the entries on the books of account, within the cal- endar or fiscal year for which the return is made. Gross income of insurance companies. Art. 97. Gross income of insurance companies consists of the total revenue derived from the operation of the business, in- cluding income, gains, or profits from all other sources, as shown by the entries on the books of account within the calendar or fiscal year for which the return is made, except as modified by the express exemptions of the articles which apply to- m.utual fire, mutual marine and life insurance companies. 1396 TEEASUET EEGULATIONS. Gross income of mutual fire insurance companies. Art. 98. Mutual fire insurance companies, whicli require their members to make premium deposits to provide for losses and expenses, shall not return as gross income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves. Mutual marine insurance companies. Art. 99. Mutual marine insurance companies may include in their deductions from gross income amounts repaid to policy- holders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof, such amounts and interest having been included in gross income. Art. 100. Life insurance companies are authorized to omit from gross income such portion 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 Deferred dividends deductible, when. premium. In so far as "deferred dividends" payable at a stated period represent "a portion of any actual premium re- ceived," such deferred dividends may be included in the amounts to be omitted from gross income for the year in which they were actually paid back, credited to the policyholder, or applied as an abatement of premium. In the case of dividends credited or apportioned annually to the policyholder, only the aggregate amount so actually credited or apportioned during the premium- paying period, and not any accretions thereto, can be excluded from gross income. In the case of whole-life or five-year dis- tribution policies, deferred dividends may be excluded from gross income to the extent that they are paid back, or credited to the insured, or used as an abatement of his annual premiums. Gross income of insurance companies, to include what. Art. 101. Gross income of insurance companies, as defined above, will include net premium income as reported to the State insurance departments, except the foregoing items specifically exempted in the act, and, in the case of life insurance companies, surrender values applied in any manner, consideration for sup- plementary contracts involving and not involving life contin- TEEASUEY EEGULATIONS. 139Y gencies, and all other income, gains, or profit as shown by the books of account. Consideration for supplementary contracts. Art. 102. Applied surrender values and consideration for supplementary contracts not involving life contingencies in- cluded 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. Supplementary statement to accompany returns. Art. 103. All insurance companies should include and at- tach to their returns a supplementary statement showing, for life companies, the aggregate of items "of such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policy- holder, or treated as an abatement of premium of such individu- al policyholder within such year ;" in the case of mutual fire in- surance companies a statement showing "any portion of the premium deposits returned to their policyholders;" and in the case of mutual marine companies "amovmts repaid to policy- holders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment thereof and the payment thereof," which are, or may be, omitted from gross income. (For authorized deductions, on account of losses, etc., see Arts. 113 and 147.) Gross income of manufacturing companies. Art. 104. Gross income of manufacturing companies shall consist of the total sales of manufactured goods during the year covered by the return, increased or decreased by the gain or loss as shown by the inventories of finished and unfinished products, raw material, etc., at the beginning and end of the year. To this amount should be added the income, gains, or profits from all other sources as shown by the books of account. Gross income of mercantile corporations. Art. 105. Gross income of mercantile companies shall in- clude the total merchandise sales during the year, increased or decreased by the gain or loss as shown by the inventories of merchandise at the beginning and end of the year for which the return is made ; to this amount should be added the income, gains, or profits derived from all other sources as sho;svn by the books of account. 1398 TEEASUBY EEGULATIONS. Gross income of miscellaneous companies. Art. 106. Gross income of miscellaneous corporations con- sists of the total revenue derived from the operation and man- agement 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 as shown by the books of account. Definition of gross income* Art. 107. It will be noted from these definitions that the 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 appreciation in values of assets, if taken up on the books of account as gain ; also profits made from the sale of assets, investments, etc. Income derived from sale of capital assets. Art. 108. For the purpose of determining the income re- sulting from the sale of capital assets and the amount to be accounted for as income under this act, there shall be included any and all profit resulting from such sale aijd which may be apportioned to the period during which the corporation tax law (sec. 38, act of Aug. 5, 1909) was in force and effect, which was not returned as income during that period. Ascertaining net income from the sale of capital assets. Art. 109. In ascertaining net income derived from the sale of capital assets, if such assets were acquired subsequent to January 1, 1909, the difference between the selling price and the buying price shall constitute an item to be added to or sub- tracted from gross income according to whether the selling price was greater or less than the buying price. If the capital assets were acquired prior to January 1, 1909, the amount of profit or loss representing the difference between the selling and buying price is to be prorated to determine the proportion of the gain or loss arising subseqiient to January 1, 1909, and the propor- tionate part belonging to the years subsequent to January 1, 1909, shall be added to or deducted from the gross income for the year in which the sale was made. Profit or loss arising from the sale of such assets. Art. 110. For the purpose of determining the profit or loss arising from the sale of such assets, there shall be added to the price actually realized from the sale any amount which has heretofore been set aside and deducted from gross income TEEASUEY EEGULATIONS. 1399 by way of depreciation since January 1, 1909, which has not been paid out in making good such depreciation on the property sold. Changes in book value of assets. Art. 111. In the case of changes in book values of capital assets resulting from a reappraisal of property, the consequent gains or losses shall be computed for the return in the manner prescribed above in the case of the sale of capital assets. Result of annual adjustment of values to be shown in return. In cases wherein there is an annual adjustment of book values of securities, real estate and like assets, and the increases and decreases in values, thus indicated, are taken up on the books and reflected in the profit and loss account, such readjusted values will be taken into account in making the return of annual net income and no prorating will be required. If such adjust- ment had been made annually prior to March 1, 1913, the book value of the assets at that date will be taken as the basis for determining gain or loss resulting from subsequent sale, ma- turity, or adjustment. The adjustment referred to will com- prehend assets which have increased in value as well as those which have decreased. Where corporations are engaged in more than one class of business. Art. 112. 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. Net income, how ascertained. Art. 113. The net income shall be ascertained by deducting from the gross amount of the income of such corporation re- ceived within the year from all soiirces : Ordinary and necessary expenses. rirst. All the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, including rentals or other payments required to be made as a condition to the continued use or possession of property. Loss sustained within the year. Second. All losses actually sustained within the year and not compensated by insurance or otherwise, including a reason- Depreciation, able allowance for depreciation by use, wear and tear of prop- erty, if any, and in the case of mines, a reasonable allowance 1400 TEEASUBY EEGiULATIONS. for depletion of ores and all natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made; and in the case of insurance companies, the net addition, if any, required by law to be made within the year to reserve funds, and the sums other than dividends paid within the year on policy and annuity con- tracts, except as provided in the cases of mutual fire, mutual marine, and life insurance companies. Interest accrued and paid within the year. Third. The amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding one-half of the sum of its interest-bearing indebted- ness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, on the amount of its indebted- ness not exceeding the amount of capital employed in the busi- Interest on indebtedness secured hy collateral. ness at the close of the year : Provided, That in case of indebt- edness wholly secured by collateral the subject of sale in ordi- nary business of such corporation, joint-stock company, or asso- ciation, the total interest secured and paid by such company, corporation, or association within the year on any such indebt- edness may be deducted as a part of its expense of doing busi- Tax paid on guaranteed honds not deductible. ness : Provided further. That in the case of bonds or other indebtedness, which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduc- tion for the payment of the tax herein imposed shall be allowed ; and in the case of a bank, banking association, loan, or trust company, interest paid within the year on deposits or on moneys received for investment and secured by interest-bearing certifi- cates of indebtedness issued by such bank, banking association, loan, or trust company. Taxes paid within the year. Fourth. All sums paid within the year for taxes imposed under the authority of the United States, or any State or Terri- tory thereof, or imposed by the government of any foreign country. General expenses. Art. 114. Expenses of operation and maintenance shall in- clude 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, and all other expenses incurred in the operation of TEEASDEY REGULATIONS. 14:01 the business except such as are required by the act to be segre- gated in the return. Cost of buildings on leased grounds. Art. 115. The cost of erecting permanent buildings on ground leased by a company is a proper deduction as a rental charge, provided such buildings are left on the ground at the expiration of the lease as a part of the rental payment. In such case the cost will be prorated according to the number of years constituting the term of the lease and the annual deduction will be made accordingly. Expense, foreign steamship companies. Art. 116. General expenses, such as coal, ship stores, etc., of foreign steamship companies, shall be prorated as provided in the act for interest deductions in the case of foreign corpo- rations. Commissions to salesmen paid in stock. Art. 117. Commissions allowed salesmen, paid in stock, may be deducted as expense if so charged on books at the actual value of such stock. Additions and betterments. Art. 118. Amounts expended in additions and betterments which constitute an increase in capital investment are not a proper deduction. Compensation based on stockholding not deductible. Art. 119. Amounts paid as compensation or additional com- pensation to officers or employees, which amounts are based upon the stockholdings of such officers or employees, are held to be dividends, and although paid in lieu of salaries or wages, are not allowable deductions from gross income, for the reason that dividends are not deductible. Gifts, pensions, or gratuities not deductible. Art. 120. Amounts paid for pensions to retired employees, or to their families, or others dependent upon them, or on ac- count of injuries received by employees, are proper deductions as "ordinary and necessary expenses;" gifts or gratuities to employees in the service of a corporation are not properly deduc- tible in ascertaining net income. Donations which are deductible. Art. 121. Donations made for purposes connected with the operation of the property when limited to charitable institutions, hospitals, or educational institutions, conducted for the benefit 1402 TEEASUEY EEGULATIONS. of its employees, or their dependents, shall be a proper deduc- tion for ordinary and necessary expenses. Reserves for insurance. Art. 122. Funds set aside by a corporation for insuring its own property are not a proper deduction, but any loss actually sustained and charged to such fund may be deducted. Materials and supplies. Art. 123. In ascertaining expenses proper to be included in the deductions to be made under the item of "Expenses," corporations carrying materials and supplies, on hand for use should include in such expenses the charges for materials and supplies only to the amount that the same are actually disbursed and used in operation and maintenance during the year for which the return is made. Xosses sustained during the year. Art. 124. The deduction for losses must be losses actually sustained during the year and not compensated by insurance or otherwise. It must be based upon the difference between the cost value and salvage value of property or assets, including in the latter value such amount, if any, as has, in the current or previous years, been set aside and deducted from gross income by way of depreciation, as elsewhere defined, and has not been paid out in making good such depreciation. Bad debts charged oif. Art. 125. Bad debts, if so charged off the company's books, during the year, are proper deductions. But such debts, if sub- sequently collected, must be treated as income. Reserves not deductihle. Art. 126. Eeserves to take care of anticipated or probable losses are not a proper deduction from gross income. Loss due to removal of buildings. Art. 127. Loss due to voluntary removal of buildings, etc., incident to improvements is either a proper charge to the cost of new additions or to depreciation already provided, as the facts may indicate, but in no case is it a proper deduction in determining net income, except as it may be reflected in the reasonable amount allowable as a deduction for depreciation of the new building. Any loss claimed because of the voluntary removal of a building is presumed to have been covered by previ- ous depreciation charges ; otherwise the amount of such loss will constitute a part of the cost of the new building. TEEASUEY EEGULATIONS. 1403 Losses from sale of capital assets. Art. 128. All losses claimed arising from sale of capital assets should be arrived at in the manner prescribed in article 109, defining gains arising from sale of capital assets. Depreciation defined. Art. 129. The deduction for depreciation should be the esti- mated amount of the loss, accrued during the year to which the return relates, in the value of the property in respect of which such deduction is claimed, that arises from exhaustion, wear and tear, or obsolescence out of the uses to which the property is put, and which loss has not been made good by payments for ordi- nary maintenance and repairs deducted under the heading of expenses of maintenance and operation. This estimate should Depreciation how determined. be formed upon the assumed life of the property, its cost, and its use. Expenses paid in any one year in making good exhaus- tion, wear and tear, or obsolescence in respect of which any de- duction for depreciation is claimed must not be included in the deduction for expense of maintenance and operation of thd property, but must be made out of accumulated allowances, de- ducted for depreciation in current and previous years. Depreciation deductible, how treated. Art. 130. The depreciation allowance, to be deductible, must be, as nearly as possible, the measure of the loss due to wear and tear, exhaustion, and obsolescence, and should be so entered on the books as to constitute a liability against the assets •of the company, and must be reflected in the annual balance sheet of the company. The annual allowance deductible on this account should be such an amount as that the aggregate of the annual allowances deducted during the life of the property, with respect to which it is claimed, will not, when the property is worn out, exhausted, or obsolete, exceed its original cost. Incidental repairs. Art. 131. Incidental repairs which neither add to the value of the property nor appreciably prolong its life, but keep it in an operating condition, may be deducted as expenses. Depreciation of reserve. Art. 132. Depreciation set up on the books and deducted from gross income can not be used for any purpose other than making good the loss sustained by reason of the wear and tear, exhaustion, or obsolescence of the property with respect to which it was claimed. If it develops that an amount has been reserved 1-404 TEEASUEY EEGULATIONS. or deducted in excess of the loss by depreciation, the excess shall be restored to income and so accounted for. Diversion of depreciation reserve. Art. 133. If any portion of the depreciation set up is di- verted to any purpose other than making good the loss sustained by reason of depreciation, the income account for the year in which such diversion takes place must be correspondingly in- creased. Shrinkage in book values. Art. 134. Depreciation in book values of capital assets shall be treated in the return in the manner prescribed in the case of loss from the sale of capital assets (art. 109), but amounts arbitrarily charged off will not be allowed as deduc- tions except so far as they represent an actual shrinkage in values which may be determined to have taken place during the year for which the return is made. Art. 135. Where a corporation holds bonds which were pur- chased at a rate above par and said corporation shall propor- tionately reduce the value of those bonds on its books each year so that the book value shall be the redemption value of the bonds when such bonds become due and payable, the return of annual net income of the corporation holding such bonds may Amortization of bonds. show the depreciation on account of amortization of such bonds. The requirement is, however, that the amount carried to the amortization account each year shall be equitably proportioned with respect to the difference between the purchase price and the maturing value and the number of years to elapse until the bonds become due and payable. With respect to bond issues where such bonds are disposed of for a price less than par and are redeemable at par, it is also held that because of the fact Loss to be prorated. that such bonds must be redeemed at their face value, the loss sustained by reason of their sale for less than their face value may be prorated by the issuing corporation in accordance with the life of the bond. Good will. Art. 136. "Good will" represents the value attached to a business over and above the value of the physical property, and is such an entirely intangible asset that no claim for deprecia- tion in connection therewith can be allowed. TEEASUKY REGULATIONS. 1405 Art. 137. An allowance for depreciation of patents will be made on the following basis : Depreciation on patents. The deduction claimed for exhaustion of the capital assets as represented by patents to be made in the return of annual net income of a corporation for any given year shall be one- seventeenth of the actual cost of such patents reduced to a cash How determined. basis. Where the patent has been secured from the Govern- ment by a corporation itself, its cost would be represented by the various Government fees, cost of drawings, experimental models, attorneys' fees, etc. Where the patent has been purchased by the corporation for a cash consideration, the amount would rep- resent the cost. Where the corporation has 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 of the patent to the cor- poration. Deduction in case of obsolescence of patents. Art. 138. With respect to the depreciation of patents, one- seventeenth of the cost is allowable as a proper deduction each year until the cost of the patent has been returned to the cor- poration. Where the value of a patent has disappeared through obsolescence or any other cause and the fact has been established that the patent is valueless, the unreturned cash investment re- maining in the patent may be claimed as a total loss and be de- ducted from gross income in the return of annual net income for the year during which the facts as to obsolescence or loss shall be established, such unreturned cash value to be fixed in ac- cordance with the proportion that the number of years which the patent still has to run bears to the full patent period of 17 years. Depreciation of timlier land. Art. 139. Corporations owning tracts of timber lands and Temoving therefrom and selling, or otherwise disposing of the timber will be permitted to deduct from their gross income on account of depreciation or depletion an amount representing the original cost of such timber, plus any carrying charges that may have been capitalized or not deducted from income. The pur- pose of the depreciation or depletion deduction is to secure to the corporation, when the timber has been exhausted, an aggre- 1406 TEEASUET EEGULATIONS. gate amount which, plus the salvage value of the land, will equal the capital actually invested in such timher and land. Deductions to cease, when. Art. 140. When an amount sufficient to return this capital has heen secured through annual depreciation deductions no further deduction on this account shall he allowed. For the purpose of increasing the deduction on this account no arbitrary increase in values shall he made, unless such increase in value shall be returned as income for the years in which the increase in value was taken up on the books. Depreciation of natural deposits. Art. 141. The depreciation of coal, iron, oil, gas, and all other natural deposits must be based upon the actual cost of the properties containing such deposits. In no case shall the an- niial deduction on this account exceed 5 per cent of the gross value at the mine (well, etc.) of the output for the year for which the computation is made. Definition of "^oss value" at the mine. Art. 142. The term "gross value at the mine," as used in paragraphs B and G of section 2 of the act of October 3, 1913, prescribing a limit to the amount which may be deducted in the return of individuals and corporations as depreciation in the case of mines, is held to mean the market value of ore, coal, crude oil, and gas at the mine or well, where such value is es- tablished by actual sales at the mine or well; and in case the market value of the product of the mine or well is established at some place other than at the mine or well, or on the basis of the bullion or metallic value of the ore, then the gross value at the mine is held to be the value of the ore, coal, oil, or gas sold, or of the metal produced, less transportation, reduction, and smelting charges. Hate of deduction to be reduced, when. If the rate of 5 per cent per annum shall return to the cor- poration its capital investment prior to the exhaustion of the deposits, the rate on which the annual deduction for depletion of deposits is based must be lowered in accordance with the es- timated number of years it will take to exhaust the estimated reserves. Deduction to cease, when. In case the reserves shall be in excess of the estimates, no further deduction on account of depletion shall be made where the capital investment has been returned to the corporation. TREASUBY EEGULATIONS. 1407 Depreciation of plant, etc. Art. 143. In addition to the deduction to measure the loss due to depletion, the corporation will be allowed the usual de- preciation of its machinery, equipment, etc., such depreciation to be determined on the basis of the cost and estimated life of the property with respect to which the depreciation is claimed. Corporations leasing oil or gas. Art. 144. Corporations leasing oil or gas territory shall base their depletion deduction upon the cost of the lease, and not upon the estimated value, in place, of the oil or gas. Corporations operating mines. Art. 145. Corporations operating mines (including oil or gas wells) upon a royalty basis only can not claim depreciation because of the exhaustion of the deposits. Unearned increment. Art. 146. Unearned increment will not be considered in fixing the value on which depreciation shall be based. Deduction of losses, depreciation, payments on policy contracts 1)y insurance companies. Art. 147. (a) Under item 5 (a) of the return form, the insurance company may take credit for all losses actually sus- tained during the year and not compensated by insurance or otherwise, including losses resulting from the sale or maturity of securities or other assets, as well as decreases by adjustment of book values of securities, in so far as such decreases repre- sent actual declines in values which have taken place during the year for which the return is made ; also losses from agency bal- ances, or other accounts, charged off as worthless; losses by de- falcation ; premium notes voided by lapse, when such notes shall have been included in gross income. This item will not, how- ever, include payments on policy contracts. Losses by shrinkage in value of property. (h) In this item may be deducted actual losses sustained within the year by reason of the depreciation of property, which shall have been so entered on the books of the company as to con- stitute a liability against its assets. An arbitrary depreciation deduction claimed in the return, but not evidenced by book en- try, can not be allowed. Policy contracts paid. (c) In this item credit will be taken for all death, disability, or other policy claims, including fire, accident, and liability losses, matured endowments, annuities, payments on installment policies, surrender values, and all claims actually paid under the 1408 TREASURY REGULATIONS. terms of policy contracts. Salvage need not be included in gross income if deducted in ascertaining the net amount paid for Losses incurred and unpaid not deductible. losses under policy contracts. Reserves covering liabilities for losses incurred, reported, resisted, adjusted or unadjusted but not paid, can not be deducted from gross income under this or any other item of the return. Additions to reserves required by law, how determined. (d) The reserve funds of insurance companies to be consid- €red in computing the deductible net addition to reserve funds are held to include only the reinsurance reserve and the reserve for supplementary contracts required by law in the case of life insurance companies, the unearned premium reserves required by law in the case of iire, marine, accident, liability, and other insurance companies, and only such other reserves as are spe- cifically required by the statutes of a State within which the company making the return is doing business. The reserves used in computing the net addition must not include the reserve on any policies the premiums on which have not been accounted for in gross income. For the purpose of this deduction, the net ad- dition is the excess of the reserve at the end of the year over that at the beginning of the year and may be based upon the highest authorized reserve required by any State in which the company making the return does business. Assessment company reserves. In the case of assessment insurance companies, the actual deposits of sums with the State or Territorial officers pursuant to law, as additions to guaranty or reserve funds, shall be treated as payments required by law to reserve funds. Mutual marine insurance companies will deduct under item 5 (e) amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof. What constitutes allowable interest deduction. Art. 148. The amount of interest accrued and paid within the year by a corporation on an amount of bonded or other indebtedness not in excess of one-half of the sum of the interest- bearing indebtedness and the paid-up capital stock outstanding at the close of the year, or, if no capital stock, on the amount of interest-bearing indebtedness not exceeding the amount of cap- ital employed in the business at the close of the year, constitutes TEEASTJEY EEGULATIONS. 1409 an allowable deduction; that is, the maximum principal, upon which interest for the purpose of this deduction, can be com- puted must not exceed, in the one case, one-half of the sum of the interest-bearing indebtedness and the capital stock outstand- ing at the close of the year, or, in the other case, must not ex- ceed the amount of capital employed in the business at the close of the year. The interest to be deductible must have been computed on the proper principal at the contract rate and must have been actually paid within the year. Interest paid as rental deductible. Interest paid pursuant to contract on an indebtedness se- cured by mortgage on real estate occupied and used by a cor- poration, 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 Interest on mortgage on real estate in which corporation has equity not deductible. to be made as a condition to the continued use and possession of the property. If, however, 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 in- debtedness of the corporation within the meaning of the law and the interest paid on such mortgage will be deductible only to the extent that it, with interest on other obligations of the corpora- tion, is within the limit fixed by the act. Banks and banking associations. Art. 149. In the case of banks and banking associations, loan or trust companies, interest paid within the year on de- posits, or on moneys received for investment and secured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan or trust company, may be allowably deducted from the gross income of such corporations. Interest paid on indebtedness. Art. ISO. Interest paid on indebtedness, wholly secured by collateral the subject of sale in ordinary business of such cor- porations, is also deductible to the full amount of such interest paid. This contemplates that the entire interest received on the collateral securing such indebtedness shall be included in the gross income returned. Diiferent rates of interest. Art. 151. Interest on bonded or other indebtedness bearing different rates of interest may be deducted from gross income Foster Income Tax. — 89. 1410 TEEASUEY EEGTJLATIONS. during the year, provided the aggregate amount of such indebt- edness on which the interest is paid does not exceed the limit prescribed by law, and in case the indebtedness is in excess of the amount on which interest may be legally deducted the in- debtedness bearing the highest rate may be first considered in computing the interest deduction and the balance, if any, will be computed upon the indebtedness bearing the next lower rate actually paid, and so on until interest on the maximum prin- cipal allowed has been computed. Taxes deductible. Art. 152. All sums paid within the year for taxes imposed under the authority of the United States or of any State or Territory thereof, or imposed by the government of any foreign country, are deductible from gross income. Taxes not deductible. Art. 153. Taxes paid for local benefits are not deductible. Taxes paid by a corporation pursuant to a contract guaranteeing that the interest payable on its bonds or other indebtedness shall be free from taxation are not deductible. Tax on capital stock of banks. Art. 154. Banks paying taxes assessed against their stock- holders because of their ownership of the shares of stock issued by such banks can not deduct the amount of taxes so paid in making their return for the income tax imposed by this act unless specially authorized to do so by the laws of the State in which they do business. The shares of stock are the property of the stockholders, and such holders are primarily liable for the tax. Import duties. Alt. 155. Import duties or taxes are not deductible under the item of taxes paid during the year, but should be included in arriving at the cost of goods under item No. 4 (expenses). Reserves for taxes. Art. 156. Reserves for taxes can not be allowed, as the law specifically provides that only such sums as are paid within the year for taxes shall be deducted. Foreign corporations subject to tax. Art. 157. Foreign corporations shall be subject to the nor- mal tax of 1 per cent computed upon the net income received by or accruing to such corporations from business transacted and capital invested in this country. For the purpose of the tax the net income of such foreign organizations shall be ascertained TEEASUEY EEGULATIONS. 1411 hj deducting from tke gross income arising, received, or accru- ing from business done and capital invested in this country the deductions enumerated in the act, which deductions shall be Deductions confined to expenses of business done in the United States. limited to expenditures or charges actually incurred in the main- tenance and operation of the business transacted and capital invested in the United States, or, as to certain charges, such pro- portion of the aggregate charges as the gross income from busi- ness done and capital invested in the United States bears to the aggregate income vfithin and without the United States. In other words, the deductions from the gross income of a foreign corporation doing business in this country should, as nearly as possible, represent the actual expenses and authorized charges incident to the business done and capital invested in this coun- try 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. How deductions shall he evidenced. Art. 158. It is immaterial whether the deductions except for taxes and losses are evidenced by actual disbursements in cash, or whether evidenced in such other way as to be properly acknowledged by the corporate officers and so entered on the books of the corporation as to constitute a liability against the assets of the corporation making the return. Deductions for taxes, however, should be the aggregate of the amounts actually paid, as shown on the cash book of the corporation. Deductions for losses should be confined to losses actually sustained and charged off during the year and not compensated by insurance or otherwise. Except as the same may be modified by the provisions of the act, limiting certain deductions and authorizing others, the net income as returned for the purpose of the tax should be the same as that shown by the books or the annual balance sheet. Tax on net income of corporations for the year 1913. Art. 159. The tax imposed upon the income of corpora- tions, whether domestic or foreign, shall be computed upon the net income, ascertained in the manner hereinbefore indicated, except that for the year ending December 31, 1913, the income tax will be imposed upon the net income accrued from March 1 to December 31, both dates inclusive, and such amount of net 1412 TEEASUBY REGULATIONS, income is ascertained by taking five-sixths of the entire net income for said calendar year. Special excise tax on corporations. Art. 160. The special excise tax on corporations provided for in the act of August 5, 1909, is reaffirmed and made opera- tive and effective as to the period from January 1 to February 28, 191C, both dates inclusive, which said tax shall be computed upon one-sixth of the entire net income of said corporations for said year, and the net income shall be ascertained in accordance V7ith the provisions of the income-tax law. Return and assessment. For the year 1913 it shall be necessary to make but one re- turn and assessment for all taxes imposed in the income-'tax law upon corporations, either by way of income or excise, which re- turn and assessment shall be made at the times and in the man- ner provided in section 2 of the act of October 3, 1913. No specific exemption allowalile as a deduction. Under the present law, no specific exemption is allowable, as was the case under the corporation-tax law; hence the assess- ment will be based upon the entire net income of the corporation arising or accruing to it from all sources during the entire year for which the return is made. Inventories. Art. 161. In order that certain classes of corporations may arrive at their correct income, it is necessary that an inventory, or its equivalent, of materials, supplies, and merchandise on hand for use or sale at the close of each calendar year shall be made in order to determine the gross income or to determine the expense of operation. Physical inventory. A physical inventory is at all times preferred, but where a physical inventory is impossible and an equivalent inventory is equally accurate, the latter will be acceptable. An equivalent inventory is an inventory of materials, sup- plies, and merchandise on hand taken from the books of the corporation. Corporations, classes of. Art. 162. For the purpose of this tax, corporations are di- vided into five classes, as follows : Class A. Class A. Financial and commercial, including banks, bank- ing associations, trust companies, guaranty and surety corapa- TEEASUEY EEGULATIONS. 1413 nies, title insurance companies, building associations (if for profit), and insurance companies, not specifically exempt. Class B. Class B. Public service, such as railroad, steamboat, ferry- boat, and stage-line companies ; street-railway companies ; pipe- line, gas-liglit, and electric-light companies ; express companies, telegraph and telephone companies. Class C. Class C. Indiistrial and manufacturing, such as mining, oil and gas producing companies, lumber and coke companies; rol- ling mills ; foundry and machine shops ; sawmills ; flour, woolen, cotton, and other mills ; manufacturers of cars, automobiles, ele- vators, agricultural implements, etc. ; manufacturers or refiners of sugar, molasses, sirups, or other products; ice and refriger- ating companies; slaughterhouse, tannery, packing, or caiming companies; printing and publishing companies, etc. Class D. Class D. Mercantile, including all dealers (not otherwise classed as producers or manufacturers) in coal, lumber, grain, produce, and all goods, wares, and merchandise. Class E. Class E. Miscellaneous, such as architects, contractors, hotel, theater, or other companies or associations not otherwise classi- fied. Form of return. Art. 163. Under the authority conferred by this act, forms of return have been prescribed, in which the various items speci- fied in the law are to be stated. Blank forms of this return will be forwarded to collectors and should be furnished to every corporation, not expressly exempted, on or before January 1 of each year, in the case of corporations making their returns for the calendar year, or on or before the first day of the next fiscal year in the case of corporations making returns for their fiscal year. Failure on the part of any corporation, joint- stock company, association, or insurance company liable to this tax to receive a prescribed blank form will not excuse it from making the return required by law, or relieve it from any pen- alties for failure to make the return in the prescribed time. Corporations not supplied with the proper forms for making the return should make application therefor to the collector of internal revenue in whose district is located its principal place 1414 TEEASUET BEGTTLATIOlfS. of business in ample time to have its return prepared, verified, and filed with the collector on or before the last due date as here- inafter defined. Failure in this respect subjects it not only to 50 per cent additional tax, but to the specific penalty imposed for delinquency. Each corporation should carefully prepare its return so as to fully and clearly set forth the data therein called for. Imperfect or incorrect returns will not be accepted as meeting the requirements of the law. Penalties imposed hy act. Art. 164. To any sum or sums due and unpaid after the date for payment stated in the notice and demand issued by the collector there shall be added the sum of 5 per cent of the amount so unpaid, and interest at the rate of 1 per cent per month. To the amount assessable on the basis of the net income there shall be added 50 per cent in case of refusal or neglect of a corporation to make a return or 100 per cent in case of a false or fraudulent return. For refusal or neglect to make a return within the prescribed time, or for a false or fraudulent return, the corporation so offending shall be liable to a specific penalty not exceeding $10,000. Any person divulging unlaw- fully any information whatever disclosed by a return shall be punished by a fine not exceeding $1,000, or by imprisonment not exceeding one year, or both. Any person or any officer of any corporation required by law to make, render, sign, or verify any return, who makes any Fraudulent returns. false or fraudulent return or statement with intent to defeat or evade the assessment required by section 2, act of October 3, 1913, shall be guilty of a misdemeanor and shall be fined not exceeding $2,000 or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. Fiscal year; how established. Art. 165. The Federal income-tax law authorizes corpora- tions, joint-stock companies, etc., under certain conditions to make their returns on the basis of an established "fiscal year" or consecutive 12-months period, which may be other than the calendar year. Pursuant to this provision the following instructions are is- sued for the guidance of collectors and other interested parties : May designate day for closing of fiscal year and must give at least 30 days' notice to collector of the day so designated. Any corporation, joint-stock company, or association, or any TEEASUET EEGULATIONS. 1415 insurance company subject to the tax imposed by this act may, at its option, have the tax payable by it computed upon the basis of the net income arising or accruing from all sources during its fiscal year, provided that it shall designate the last day of the month selected as the month in which its fiscal year shall close as the day of the closing of its fiscal year, and shall, not less than 30 days prior to the date upon v?hich its annual return is to be filed give notice, in writing, to the collector of internal revenue of the district in which its principal place of business is located, of the day it has thus designated as the closing of such fiscal year. Illustration of fiscal year. Art. 166. In pursuance of this provision, a corporation or like organization subject to this tax may, for example, designate the 30th day of September as the day for the closing of its fiscal year, whereupon its return of annual net income shall be filed with the collector of internal revenue of the district in which its principal place of business is located not later than 60 days after the close of its said proposed fiscal year; that is to say, on or before the 29th day of November next succeeding. The date of the closing of the fiscal year having been desig- nated, notice thereof must be given to the collector not less than 30 days prior to the last day of such 60-day period. In the case just instanced the notice must be given not later than Oc- tober 29. If such designation (September 30, 1913) had been made and notice given, as hereinbefore indicated, as to the closing of the fiscal year 1913, the corporation would be authorized to make its return and have the tax payable by it computed upon the basis of the net income arising or accruing to it during the period from January 1 to September 30, 1913, both dates inclusive. Collectors must make a record of the designation of the "fiscal year." Art. 167. Collectors of internal revenue receiving notices of the selection and designation of the "fiscal years," as above indicated, will make record of the same, recording (a) the name of the corporation or like organization, (&) the date when no- tice was given, (c) the day designated for the closing of the fis- cal year, and (d) the date when the return under such designa- tion must be filed, which must be, as above stated, not later than 1416 TEEASUEY EEGULATIONS. the last day of the 60-day period next following the day desig- nated as the close of the fiscal year. Unless notice was siven within prescribed time, calendar year will govern. Art. 168. If it shall appear that for the year 1913 the no- tice was given within the prescribed time — that is, within 30 days of the last day of the 60-day period — the 1913 return may be made as of the fiscal year so established; otherwise it will be made on the basis of the calendar year until such time as the designation shall be duly made and notice thereof properly given. Designation and notice can not be retroactive. Art. 169. The designation and notice can not be retroac- tive; that is to say, if a corporation now designates April 30, 1914, as the date of the closing of its fiscal year and gives notice of such designation, it would not be authorized to make a return for the four months ended April 30, 1913, and then for the fiscal year ended April 30, 1914, nor would it be authorized to make one return covering the entire 16 months ended April 30, 1914. In the case of such corporation the return for the year must be made for the calendar year ended December 31, 1913, and then, assuming that designation and notice had been prop- erly made and given, it may make a return for the four months ended April 30, 1914, and thereafter the return will be made on the basis of the fiscal year so established. Where fiscal year is not properly established, returns must be made for calendar year. Art, 170. In all cases where a fiscal year is not established as above prescribed returns must be made on the basis of the calendar year, in which case such returns must be filed on or before the 1st day of March next succeeding such calendar year. Such returns in either case provided must be verified under oath or aifirmation of its president or other principal ofiicer, and its treasurer or assistant treasurer ; that is to say, by two different persons acting in the official capacity indicated. Returns made on basis of fiscal year not so designated can not be accepted. Art. 171. If it shall appear in any case that returns have been made to the collector on the basis of a fiscal year not desig- nated as above indicated, the corporations making such returns will be advised that such returns can not be accepted, but must be made to cover the business of the calendar year. Returns for 1913 must be made on new forms. Art. 172. Returns made under this act and pursuant to TllEASUKY ItKGULATIOAS. 1417 these instructions must be made on the new forms prescribed by this department. The forms heretofore in use, under the special excise tax law, can not be used for making returns for either the fiscal or calendar year 1913. Extension not to exceed 30 days. Art. 173. An extension of time within which a return may be filed can in no case exceed 30 days from the date on which the return is due and can be granted only upon written application to the collector, and in case of sickness or absence of an officer whose signature to the return is required, such application to be made prior to the expiration of the period for which the ex- tension is desired. Returns properly mailed in time to reach collector not su1)ject to penalty under certain conditions. Art. 174. If a return is made and placed in the United States mails, properly addressed, and postage paid, in ample time, in due course of mails, to reach the office of the collector or deputy collector on or before the last due date, no penalty will be held to attach should the return not be actually received by such officer until subsequent to that date. Last due date defined. Art. 175. "Last due date," as hereinbefore used, is con- strued to mean the last day upon which a return is required to be filed in accordance with the provisions of the law, or the last day of the period not exceeding 30 days covered by an extension of time granted by the collector. When due date falls on Sunday or le^al holiday. Art. 176. When the due date as above defined falls on Sun- day or on a legal holiday, the last due date will be held to be the day next following such Sunday or legal holiday and the return should be made to the collector not later than such follow- ing day, or, if placed in the mails, it should be posted in ample time to reach the collector's office, under ordinary handling of the mails, on or before the date on which the return is thus made due in the office of the collector. Assessment and payment of taxes. Art. 177. All assessments against corporations, etc., making returns for the calendar year are required to be made and the several corporations, joint-stock companies, etc., notified of the For calendar year. amount for which they are liable on or before the 1st of June of each successive year, and said assessments shall be paid on 1418 TEEASLTEY EEGULATIONS. 27otice of assessment. or before the 30th day of June of such year. In the case of corporations making returns for the fiscal year, the assess- ments shall be made and notice given on or before the expira- tion of 90 days from the date when the returns were required to be filed, and the taxes assessed against such corporations, etc., shall be paid within 120 days after the date upon which the returns were required to be filed. In case of refusal or neglect by a corporation, etc., to make a return, and in case of false or fraudulent return, the commissioner, upon the discovery there- of within three years after such returns are due, shall make a return upon information obtained in the manner provided in the act, and the assessment made on the basis of such return shall be paid immediately upon notice and demand given by the collector. 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 the tax unpaid and interest at the rate of 1 per cent per month until paid shall be added to the amount of such tax. Returns are public records, subject to inspection upon order of the President. Art. 178. 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 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 to the corporation itself or to its duly authorized attorney. Information to States which impose income taxes. Art. 179. Upon request of the governor of a State which imposes a general income tax, the proper officers of such State may have access to the returns filed by corporations doing busi- ness in such States, or to an abstract thereof showing the name and income of such corporations, etc., at such times and in such manner as the Secretary may prescribe. 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. Certified copies of returns. Art. 180. At the request of the Attorney General, or by direction of the Secretary of the Treasury, certified copies of TEEASUBY EEGULATIONS. 1419 xeturns may he made and delivered to the United States dis- trict attorneys for their use as evidence in the prosecution or defense of suits in which the collection or legality of the tax assessed on the basis of such returns is involved, or in any suit to vsfhich the United States Government and the corporation, etc., making the return are parties and in which suit such cer- tified copies would constitute material evidence. Penalty for giving information in regard to returns. Art. 181. The disclosure by any collector, deputy collector, agent, clerk, or other ofiicer or employee of the United States to any person 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 exceed- ing one year, or both, at the discretion of the court, and if the offender is an ofiicer or employee of the United States he shall be dismissed and be incapable thereafter of holding any ofiice under the United States Government. Bookkeeping. Art. 182. No particular system of bookkeeping or account- ing will be' required by the department. 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. Books of account best guide to income. Art. 1S3. The books of a corporation are assumed to re- flect 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. Omitted taxes may be assessed. Art. 184. In cases wherein corporations have neglected or refused to make returns, and in cases wherein returns made are found, upon investigation or otherwise, to be false or fraudu- lent, the commissioner may, upon discovery thereof, at any time within three years after said return is due, make return upon the information obtained in the manner provided in the act, and 1420 TEEASUEY EBGULATIONS. the tax so discovered to be due, together with the additional tax prescribed, shall be assessed, and the amount thereof shall bo paid immediately upon notice and demand. Corporations subject to normal tax. Art. 185. 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 1 per cent of their entire net income regard- less of the amount of such net income. Examination of books. Art. 186. For the purpose of verifying any return, made pursuant to this act, the Commissioner of Internal Revenue may, by any duly authorized revenue agent or deputy collector, cause the books of such corporation to be examined, and if awch 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 notic3 and demand. For the purpose of such examination, the books of corporations shall be open to the examining ofBcer, or shall be produced for this purpose upon summons issued by any properly authorized officer. PART 4. Assessment and Collection. Taxes due to be reported on assessment lists. Art. 187. All income taxes found to be due will be re- ported by collectors on their assessment lists. Form 23-A in the case of corporations, and on Form 23-B in the case of individ- uals and withholding agents. Names to be listed in alphabetical order. Art. 188. The names of corporations subject to tax will be listed on Form 23-A, according to their designated class, and in alphabetical order as to each class. Names of individuals subject to tax will be listed on Form 23-B, alphabetically, with- Names of withholding ag;ents, how to be listed. out reference to class or rate of tax. Following such names there will be listed, alphabetically, the names of all withhold- ing or licensed collecting agents, and the aggregate amount of tax withheld by each, as shown by the annual returns rendered by them. An assessment against each person, firm or company. TEEASUEY EEGDLATIONS. 1421 from whose income the tax has been so withheld, will be un- necessary in such cases. Assessment against withholding agents to he deferred until annual reports are received. Art. 189. To avoid, as far as possible, the assessment of taxes as to which claims for exemption or deduction may be filed under article 33, collectors will delay reporting for assess- ment taxes remaining in the hands of withholding agents, until the annual reports of such agents, which must be filed not later than March 1 in each year, are received. Returns, when to he made. Art. 190. Eeturns of withholding agents (including those of licensed collecting agents) as to interest payments shall be made monthly and returns containing summaries of said month- ly returns shall be made annually. (See Part 2, A. B., and C.) Eeturns of individuals (see Part 1), corporations (see Part 3), and withholding agents, withholding tax on wages, salaries, rents, etc. (see Part 2, D), and fiduciaries acting as withhold- ing agents (see Part 2, E) shall be made annually. All month- ly returns are required to be made on or before the 20th day of each month for the preceding month. All annual returns are required to be made on or before the 1st day of March in each year, except in the case of corporations which have given due notice of the termination of their fiscal year, in which cases the prescribed return is to be filed within 60 days after the termination of such fiscal year. Corporations may include in returns for year 1913 income suhject to special excise tax. Art. 191. Corporations which are subject to the special excise tax on income received during the months of January and February, 1913, may, under the provisions of section 4, paragraph S, of the act of October 3, 1913, irtclnae such in- come, as also the income taxable under said act, in one return for the year 1913. In each such case one assessment only will be made. Returns of income to he forwarded with assessment lists. Art. 192. All returns of income, whether of individuals or corporations, should be forwarded with the assessment list ren- dered. Where in any case the collector has reason to believe False or fraudulent returns. that any return rendered is false or fraudulent, he will prepare and retain in his office a copy of such return, and will note on the original and under the head of "Remarks" of his assess- 1422 TEEASUEY EEGULATIONS. ment list the words "Investigation pending." He will In all such cases make his investigation in the manner prescribed in section 3173, Revised Statutes, and paragraph D of said act of October 3, 1913; and he will report the results of his investi- gation to the Commissioner of Internal Revenue, referring to the list, folio, and line on which the assessment was reported. Certain returns of withholding agents to he in duplicate. Art. 193. Monthly and annual returns of withholding agents (including those of licensed agents) as to interest pay- ments and the annual returns of withholding agents with- holding tax on wages, salaries, etc., will be made in duplicate, one copy of which will be retained by the collector in his office and one copy transmitted to the Commissioner of Internal Revenue. Annual returns of withholding agents (including those of licensed agents) as to interest payments, and returns of withholding agents as to wages, salaries, etc., and of fiduci- aries will be forwarded by the collector with his list, Form 23-B, on which the tax withheld is reported for assessment. Certificates and returns to be forwarded as soon as received. Art. 194. All certificates of exemption or deductions, filed by or on behalf of persons subject to tax, will be forwarded by the collector as soon as received; and all such certificates, re- ports, and returns, before being transmitted to the commis- sioner, will have stamped thereon the name and number of the district ; will be arranged (unfolded) in alphabetical order and, in the case of corporations, according to the designated class to which they belong. Care should be taken to have all such papers, when so arranged, carefully secured by cord or other fastening, so as to insure their receipt in like order. This is especially necessary in view of the large number of like papers which will be forwarded from the various districts. Beports and returns to he at once examined by collectors. Art. 195. In order that assessment lists may be promptly prepared and forwarded, collectors will see that all reports and returns to be listed are examined as received, and that no delay occurs in this branch of the work. Special diligence in this matter is necessary, as sufficient time must be given for the re- examination of such returns in the commissioner's office before Assessment lists to he prepared and forwarded without delay. assessment is made. The forwarding of assessment lists, how- ever, should in no case be delayed, beyond the time allowed, on TEEASUEY EEGULATIONS. 1423 account of unexamined returns, as such returns can be examined and reported on a subsequent list. As the law limits the time in which these assessments are to be made and notice of assess- ment given, collectors will assign to this work all available force in their respective offices. Notice to be sent to delinquents. Art. 196. Where the required returns are not iiled within the prescribed time, either by individuals or corporations, notice on Form 1045, should in each case be sent to the delinquent. (For authorized extension of time, see articles 23 and 173.) Notice of assessment. Art. 197. When assessment has been made, collectors will, on receipt of their returned lists, at once issue preliminary notices of assessment (Form 647), and where in any case the tax assessed is not paid on or before the 30th day of June, or in case of corporations designating their own fiscal year, within 120 days following the date on which the return should have Demand for tax, penalty, and interest. been filed, notice and demand (Form 17) should be at once issued, and unless the tax 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, however, be served in case of failure to file the required return within the statutory period. Notice of assessment to be sent immediately on return of list. Art. 198. Pending assessment on returns forwarded to the commissioner, collectors will have prepared the necessary notices of assessment, with properly addressed envelopes, to be used immediately on return of their assessment lists. rayments, abatements, and outstanding balances. Art. 199. ytatements of payment, abatement, and out- standing balances of such assessed taxes will be rendered month- ly by collectors on special Form 325. Such statements will be prepared in the same manner as required in the case of assess- ments on the regular Form 23, except that in Statement III the outstanding balances on the various lists will be reported in Outstanding balances to be carded by collectors. aggregate only. Items constituting such balances, however, will be carded by collectors, but only as to such as were assessed during the month for which the return is rendered, thus avoid- ing detailed statements each month of outstanding balances 1424 TEEASUEY EJ3GULATI0NS. previously reported. A separate card (Forni 1020) will be used for each such item ; and all cards so prepared each month should be arranged alphabetically, and so forwarded by the col- lector with his report on special Form 325. W. H. OSBOEN, Commissioner of Internal Revenue. Approved : W. G. MgAdoo, Secretary of the Treasury. U. S. EEVISED STATUTES. Sec. 3220. Refund of taxes, penalties, etc. The Commissioner of Internal Revenue, subject to regula- tions prescribed by the Secretary of the Treasury, is authorized, on appeal to him made, to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties col- lected 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 taxes collected by him, with the cost and expenses of suit ; also all damages and costs recov- ered against any assessor, assistant assessor, collector, deputy collector, or inspector, in any suit brought against him by rea- son of anything done in the due performance of his official duty : 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, state- ment, or return was not false or fraudulent and did not contain any understatement or undervaluation. [Comment: The Section of the Revised Statutes reprinted above is referred to in the regulations. Art. 33, Page 159, supra.] TEEASUEY EEGULATIONS. 1425 (T. D. 1916.) Income tax. Kegulations prescribing form of certificate to be furnished by foreign or- ganizations engaged in business in the United States and subject to the income tax on interest or other income collectible at the source. Teeasuey Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, December 5, 19 IS. Foreign organizations engaged in business witliin the United States are subject to the normal tax of one per centum per annum upon the amount of net income accruing from business transacted and capital invested within the United States; but eaid organizations shall be exempt from having any part of its income withheld by a debtor or withholding agent. The certificate to be furnished by foreign organizations en- gaged in business in the United States shall be in substantially the following form: (Form 1018.) Certificate to he fu/mished by foreign organizations engaged in business in the United States. I, the of the (Give name.) (Give ofiScial position.) , a of (Name of organization.) (Character of organization.) , located at (Country.) (PostoflSce address.) do solemnly declare that said is a foreign ( Give name of organization. ) organization, engaged in business in the United States, and is the owner of $ bonds of the denomination of $ each, Nos of the known as (Give name of debtor.) (Describe particular issue of bonds.) bonds, from which were detached the accompanying coupons, due 191-, amounting to $ , or upon which there matured 191-, $ of registered interest, or is the owner of , (Property or investments.) upon which there was accrued , 19 1-, $ of in- come. Foster Income Tax. — 90. 1426 TEEASUEY KEOULATIO^TS. Under the provisions of the Income Tax Law of October 3, 1913, the said organization is subject to the normal tax of one per centum per annum upon the amount of net income accruing from business transacted and capi- tal invested within the United States, for which tax it will make its return in due course, but it hereby claims exemption from having the said normal tax of one per cent on said income withheld at the source. Date Name Address (Dist. office.) (Official position.) Of (Name of organization.) W. H. OsBOBN, Commissioner. Approved : W. G. McAdoo, Secretary of the Treasury. (T. D. 1920.) Income tax. Income tax ruling that certificates of ownership heretofore executed, or which may hereafter be executed, by the owners of bonds, etc., or their duly authorized agents, need not be signed with the full Christian name of the owner or agent, but the said owner, or agent, may use his ordinary or usual business signature. Teeasuey Depaetment, Office of Commissionee of Inteestal Revenue, WasMngton, D. C, December BO, 19 IS. To collectors of internal revenue: Certificates of ownership, heretofore executed by the owners of hoiids, etc., or their duly authorized agents, in compliance with the income tax regulations and signed either with the Christian name or the ordinary or usual business signature, and giving the full address of the owner, shall be accepted by debtor organizations or their duly authorized withholding agents. Hereafter, it will not be required that ownership certificates be signed with the full Christian names of the owners by the TREASrUY EEGULATIOXS. 1427 owners, or their duly authorized agents, but the said owners or agents may use their ordinary or usual business signatures, pro- vided it identifies them and is accompanied by their complete address. W. H. OSBOBN, Commissioner. Approved: W. G. McAnoo, Secretary. [Released for publication December 22, 1913.] (T. D. 1922.) Income tax. Collection at the source of .income tax from certain municipal district or local bonds and other obligations. Tbeasuey DepAETMENTj Office of Commissionee of Internal Revenue, Washington, D. C, December 2J^, WIS. Until January 15, 1914, and thereafter until further in- structions are issued, the income derived in the shape of interest from the obligations, general or special, of any State, or of any County, Municipality, or taxing District therein, shall be exempt from the collection of the income tax at the source, whether the payment of such obligation is provided for by gen- eral or local taxation, or out of a general, special or separate fund. Any regulation or ruling of the Bureau of Internal Revenue in conflict herewith is hereby suspended as above provided. W. H. OSBOEN, Com,missioner. Approved : W. G. McAdoo, Secretary. (Comment: This ruling modifies T. D. 1892, page 53, and T. D. 1910, page 77.) 1428 TEEAS'JEY EEGULATIONS. (T. D. 1946.) Income tax. Special assessment districts created under the laws of tlie sev- eral States for public purposes, such as the improvement of streets and public highways, the provision of sewerage, gas and light, and the reclamation, drainage or irrigation of bodies of land, and levee and school districts are held to be political subdivisions of a State. Teeasuky Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, February 10, 1914. To collectors of internal revenue: Referring to paragraph B, section 2 of the Income Tax Law, which reads as follows: "That in computing net income there shall be excluded inter- est upon the obligations of a State or any political sub- division thereof," you are informed that under date of January 30, 1914, The Honorable, The Attorney General, held that special assess- ment districts created under the laws of the several States for public purposes, such as the improvement of streets and public highways, the provision 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 districts 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 usage and inherent necessities of government have always been re- garded as public. Levee and school districts, when lawfully created under the authority of the State and which are authorized by the laws of the State to levy a tax to meet the obligations of such districts, are also held to be political subdivisions of a State within the meaning of the Income Tax law. TEEASUEY EEGULATIONS. 1429 The income derived from interest upon the obligations of all such public districts shall, therefore, be excluded in com- puting net income for the income tax. This decision supersedes Treasury Decision 1910. .W. H. OsBORiir, Commissioner. Approved; C. S. Hamlin, Acting Secretary. [Comment: See T. D. 1922, p. 98 ; T. D. 1910, p. 77, and T. D. 1892, p. 53.J Teeasuey Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, February 10, 1914. To collectors of internal revenue : All Collectors of Internal Revenue "who have not already done so will please arrange to inform the public, in their re- spective districts, through the press or other means of publicity without cost to the Government or by posting appropriate notices, that any assistance or information which may be re- quired in connection with preparing and filing their Income Tax Returns will be gladly and promptly furnished by apply- ing to or calling at any Internal Revenue Oifice. In pursuance of the above. Collectors should assign from the present office forces, an employee or employees, as the case may require, who should be thoroughly posted on the provisions of the Income Tax law and all Treasury Decisions and Regulations in connection with same, particularly with relation to the Per- sonal Tax and the filing of Individual Returns, to promptly furnish the public with information desired when calling at the various Internal Revenue Offices. W. H. OsBOEN, Commissioner. Approved : C. S. Hamlin, Acting Secretary. [Comment: The above is a copy of a mimeograph letter sent to Collectors.] 1430 TEEASUEY EEGULATIOKS. Washington, D. C.j Fehrvury 12, 1914. The Secretary of the Treaaury. Sir: I have the honor to acknowledge your letter of the 20th ultimo, requesting an opinion upon a question arising in the administration of your Department, and involving the inter- pretation of that provision of the Income Tax Law which re- quires the withholding of the tax at its source, in its applica- tion to interest, etc., due copartuerships, The provision is as follows : "All persons, firms, copartnerships, companies, corporations, joint-stock companies or associations, and insurance companies, in whatever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, agents, receivers, conservators, em- ployers, and all oificers and employees of the United States having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, premiums, annuities, compensa- tion, remuneration, emoluments, or other fixed or determinable annual gains, profits, and income of another person, exceeding $3,000 for any taxable year, other than dividends on capital stock, or from the net earnings of corporations and joint-stock companies or associations subject to like tax, who are required to make and render a return in behalf of another, as provided herein, to the collector of his, her, or its district, are hereby authorized and required to deduct and withhold from such an- nual gains, profits, and income such sum as will be sufficient to pay the normal tax imposed thereon by this section, and shall pay to the officer of the United States Government authorized to receive the same ; and they are each hereby made personally liable for such tax. * * * " The Act provides for administrative regulations governing the assessment and collection of the tax, to be promulgated by the Commissioner of Internal Revenue, with your approval. Accordingly, regulations have been issued covering the with- holding at the source, under the above provision of law, of fixed or determinable gains, etc., due to a co-partnership which in substance provide for a certificate filed with the debtor on be- TKEASUKV EEGULATIONS. 1431 Tialf of the partnership stating its ownership, and claiming as a deduction the legitimate expenses of the business; whereupon the debtor shall withhold from the partnership the tax upon the balance (T. D., 1887, T. D. 1905). As I understand, your question is whether these regulations are in conformity with the provisions of the Income Tax Law. In my judgment, they are not. The Act throughout speaks, in connection with the incidence of the tax, of "person" or "persons," "citizens of the United States whether residing at home or abroad," "any individual," "person of lawful age." Evidently a co-partnership does not come within such descriptions. This is clearly brought out in the specific provision for the taxation of copartnerships, which reads as follows : " * * * 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, and any such firm, when requested by the Commis- sioner of Internal Revenue, or any district collector, shall for- ward to him a correct statement of such profits and the names of the individuals who would be entitled to the same, if distribut- ed: * * *" It is clear, therefore, that the Act has adopted the view of a partnership taken by the general law, namely, that "the in- terest of each partner in the partnership property is his share in the surplus, after the partnership debts are paid" (U. S. v. Huck, 8 Pet., 271, 275) ; "the property or effects of a partner- ship belong to the firm and not to the partners, each of whom is entitled only to a share of what may remain after payment of the partnership debts and after a settlement of the accounts between the partners," (Bank v. Carrollton E. R., 11 Wall., 624, 628). Since the Act only permits withholding, at the source, of interest, etc., of a "person," and since the individual members of a partnership have no right to the credits of the partnership, either by the general law or under the provisions of the Income Tax Act, a debtor of a partnership has no interest, 1432 TEEASUKY EEGULATIONS. rent, etc., of the individual members of the partnership and has, therefore, nothing to withhold as to them. He owes the partnership only, and the partnership is not a taxable person under the provisions of the Act. Respectfully, (Signed) J. C. McREYNOLDS, Attorney General. (T. D. 1957.) Income tax. Partnerships are not subject to Income Tax, but are required to file certificates of ownership of bonds, etc., in connection with coupon and registered interest payments to prevent with- holding of their income at the source. Tbeasuey Depaktment, Office of Commissioner of Internal Revenue,, Washington, D. C, March 12, 1914. To collectors of internal revenue: Referring to the following provision in Paragraph D of the Income Tax Law : "That any persons carrying on business in partnership shall be liable for income tax only in their individual capac- ity, and the share of the profits of a partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid, under the provisions of this section, and any such firm, when requested by the Commis- sioner of Internal Revenue, or any district collector, shall forward to him a correct statement of such profits and the names of the individuals who would be entitled to the same, if distributed ;" it is held : That the income of partnerships, per se, is not sub- ject to the income tax. The provisions of the law "relating to the deduction and payment of the tax at the source of income" do not apply to the income of partnerships, as such. Taxable members of partnerships will be required to account, in their in- TEEASUKY EEGULATIONS. 1433 dividual returns, for their respective shares or interest in the partnership profits, whether the same are divided and distribu- ted or not. Partnerships owning "bonds and mortgages, or deeds of trust and other similar obligations of corporations, joint-stock com- panies or associations, and insurance companies," shall file cer- tificates of ownership, in Form 1001, evidencing the fact of partnership ownership, when presenting for collection or pay- ment coupons or interest orders for interest upon said obliga- tions ; and when such certificates are filed, the tax on such interest payments to partnerships shall not be withheld. The last sentence in Art 14, page 35, and Art. 47 of Income Tax Eegulations No. 33, providing for claim by partnerships for deduction for legitimate expense incurred in conducting the business of a partnership, are hereby superseded and repealed. W. H. OsBOEN, Commissioner. Approved: W, G. McAdoo, Secretary. INCOME FEOM PARTNERSHIPS. Tbeasuey Depabtment, Washington, D. C, March 27, 1914. (Vignette) S. H. B. Office of COMMISSIONEE OF InTEENAL REVENUE IN EEPLYING EEFEE TO INCOME TAX The Corporation Trust Company, Warren N. Akers, Washington Secretary, Colorado Building, Washington, D. 0. Sie: This oifice is in receipt of your letter of March 27, 1914, making the following inquiries : "1. Referring to T. D. 1957, is it material to the Bureau 1434 TEEASUKY REGULATIONS. of Internal Eevenue whether Form 1001 or Form 1003 is used? "2. Is it the position of the Bureau that income received from a partnership cannot be traced to its source behind the partnership for the purpose of claiming individual exemp- tion?" In reply: 1. Treasury Decision 1957 provides for the use of Form 1001 by partnerships for the same reason that Form 1001 is provided for use by corporations ; viz., the provisions of the lav? "relating to the deduction and payment of the tax at the source of income" do not apply to the income of partnerships or corporations, as such. The fact of partnership identity can be as well estab- lished by Form 1003 as 1001, and, therefore, in cases where Form 1003 is used it may be accepted and no tax should be withheld. 2. There can be no withholding against a partnership except through laches of the partnership. In the event of withholding against a partnership it has its remedy by making a proper show- ing. The title to property and effects of a partnership is in the firm, and not the partners. The interest of each partner in the partnership property is his share in the surplus after the part- nership debts are paid. The identity of income, as it comes to a partnership, is lost upon its receipt by the partnership. The character of partner- ship profits divisible between partners has no reference to any character which, as income accruing to the partnership, it may have borne prior to receipt by the partnership. It is therefore held that "income received from a partnership cannot be traced to its source behind the partnership for the purpose of claiming individual exemption." Kespectfully, G. E. Fletchee, Acting Commissioner. TEEASUBY REGULATIONS. 1435 (T. D. 1974.) Income Tax. Change of regulations as to certificates of ownership in connec- tion with interest orders or checks for interest on registered bonds. Tbeasuet Depaetment, Office of Commissioner of Internal Revenue, Washington, D. 0., April 21, 1914. To collectors of internal revenue: Articles 41 to 46 [pp. 163-165] of the regulations are hereby amended so as to require, in the case of interest payments on bonds registered as to both principal and interest, that debtors in such cases shall deduct the normal tax of one per cent from ac- cruing interest on all such bonds before sending out orders or checks for said interest to registered owners, unless there shall be filed with said debtor, at least five days before the due date of said interest, the prescribed certificates claiming exemption. Where such certificates are so filed, the said debtors shall stamp or write on the interest orders or checks, as the case may be, "Exemption claimed by certificate filed with debtor." Where prescribed certificates are not so filed, said debtor shall deduct and withhold the normal tax of one per cent from the amount of such payment, and shall stamp or write on the interest order or checks, as the case may be, "Income tax withheld by debtor." Responsible banks, bankers, or collecting agents receiving for collection interest orders or checks bearing the aforesaid endorse- ments, may present said interest orders or checks for collection, without requiring that certificates of ownership be filed there- with. Certificates of ownership are not required to accompany in- terest orders or 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 1436 TEEASUEY EEGULATIONS. [p. 83] ; but claim for exemption 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. Where because of failure to file certificates claiming exemp- tion, in compliance with above regulations, a part of the income from interest on registered bonds has been withheld for the pay- ment of the normal income tax, debtors may, upon the filing of the proper certificates as provided in Article 42 [p. 163], In- come Tax Regulations, to the extent of exemption claimed, re- lease and pay to the persons entitled thereto the amount of such income so withheld. W. H. OSBOEN, Commissioner. Approved : W. G. McAdoo, Secretary. OWNEESHIP CERTIFICATES— STEEET ADDEESS. [From the records of the Corporation Trust Company, p. 242.]; Teeasuey Depaetment, Office of Commissionee of iNTEEisrAL Revenue,. Washington, D. C, April 23, 1914. L. F. SaileEj Esq., Assistant Cashier, The E'ational Park Bank, New York, N. Y. Sie: Replying to your letter of April 15, 1914, relative to street address on certificates, you are advised that banks should exer- cise care in securing full post office address on certificates. Where no street address is given, this ofiice will assiime that same is not necessary in addressing mail, and certificates will N^OT be returned for correction. Respectfully, (Signed) L. F. Speee, Deputy Commissioner. TEEASUEY EEGULATIONS. 1437 OWNEKSHIPCEETIFICATES— IDENTIFICATION OF SIGNATUKES. Teeasuet Depaetment, Office of Commissionj;e of Inteenal Revenue, Washington, D., C, April 16, 1914:. The National Paek Bank, -" New York City. ' Gentlemen : This office is in receipt of your letter of April 2, 1914, in- quiring if it is necessary when an income tax certificate is signed in behalf of an owner by a reputable foreign bank, or a bank in this country, to identify the signature of such bank after the same form that is required when the income tax certificate is signed in behalf of the owner by an agent or attorney. In reply you are advised that the regulations provide that reputable banks or collecting agents may execute the certificate of ownership, which is required to be filed by non-resident aliens, and the endorsement "satisfied as to identity and responsibility of agents" is NOT required. KespectfuUy, (Signed) L. F. Speee, De-pt. Commissioner. (T. D. 1995.) Income tax. Assessed taxes — Notice and demand, Form 17. Notice of and demand for assessed taxes to be issued promptly to secure tax lien, penalty, and interest in case of nonpay- ment. 1438 tukasdey eeoulatioks. Teeasuey Depaetment, Office of Commissionee of Inteenal Revenue^ Washington, D. C, June 12, 1914. To collectors of internal revenue: It appears that certain collectors hold that notice of assess- ment and demand, Form 17, is not necessary to create a liabili- ty to 5 per cent penalty and interest at 1 per cent per month in the case of income tax remaining unpaid after June 30 or oth^r due date. This view as to the requirements of the law is clear- ly wrong and contrary to the instructions (Art. 197, Eegs., 33) issued on the subject. The necessity of issuing Form 17 is twofold — fii-st, to deter- mine the date when 5 per cent penalty accrues and interest at 1 per cent per month begins to run, and, second, to complete the Government's lien on property belonging to the taxpayer. In special excise and income-tax assessments a notice on Form 647 is required to be given in all cases where the required return is filed in due time. This, however, is simply a preliminary notice of assessment, to be followed, in case of non-payment, by a formal notice and demand which the law clearly contemplates and which the courts hold to be necessary before the delinquent taxpayer becomes chargeable with penalty and interest. In all cases, therefore, where an assessed tax remains unpaid after it becomes due a notice on Form 17 should be at once issued, to be followed when necessary, by Forms 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 has occasioned a considerable loss to the Gov- ernment of penalty and interest, especially where claims for abatement were pending. W. H. OsBOEi>rE, Commissioner of Internal Revenue. (T. D. 1996.) Income tax. Co-operative dairies and like organizations do not fall within the classes of organizations enumerated in subsection G, Sec- TBEASUEY REGULATIONS. 1439 tion 2, Act of October 3, 1913, as exempt, and are required to make returns of annual net income. Teeasuey Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, June 15, 1914. To collectors of internal revenue: Attention is called to Article 92 of Eegulations No. 33, Ap- proved January 5, 1914, [page 180] in which it is provided that cooperative dairies not issuing stock and allowing patrons dividends based on the percentage of butter fat in milk fur- nished, are not liable to the requirements of Section 2, Act of October 3, 1913. This Article is amended to the effect that cooperative dairy associations, whether issuing capital stock or not, are required to make returns of annual net income pursuant to the require- ments of this act. The only corporations, joint-stock companies, or associations, or insurance companies, exempt from the requirements of this act are those which fall within one or another of the classes specifically enumerated in the first proviso of subsection G of the act cited, as exempt. Cooperative dairies, no matter how organized, do not appear to fall within any of these exempted classes and will, therefore, be required to make returns. In the preparation of their returns, cooperative dairies may include in their deductions from gross income the amount ac- tually paid to members and patrons for milk, but any amount retained at the end of the year over and above expenditures will be returned as net income upon which the tax will be computed and assessed. ■ In so far as Article 92, hereinbefore referred to, is in conflict with this ruling, it is hereby revoked, and Collectors will require all organizations of this character to make returns of annual net income and in other respects comply with the requirements of the Federal income tax law as it applies to corporations, joint- stock companies, or associations, and insurance companies. 1440 TEEASUEY EEGULATIONS. In SO far as applicable, this ruling also applies to mutual or cooperative telephone companies, farmers' insurance companies, and like organizations. W, H. OsBOENj Commissioner of Internal Bevenue, Approved : W. G. McAdoo, Secretary of the Treasury. (T. D. 1997.) Income tax. Monthly list returns not to be made under oath. Teeasuey Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, June 16, 1914. To collectors of internal revenue: The requirement that monthly list returns be made under oath (as provided by Articles 35, 50, 53 and 59, Income Tax Eegulations No. 33, vphen filed by withholding agents on or before the 20th of the month following that in which withhold- ing occurred) is hereby waived. In all cases the annual list return required of withholding agents (of which the monthly list returns will form a part as required by regulations) will be made, sworn to and filed as now required by existing regulations and the jurat for the annual list return will cover the entire return as thus made up. EespectfuUy, W. H. Osboek, Commissioner, Approved : W. G. McAdoo, Secretary. TEEASDRY EEGULATIONS. 1441 (T. D. 2005.) Income tax. Loss: Instructions and rules for determining what amount is to be allowed as a deduction for loss in a return of income. Depreciation allowed by law does not include sbrinkage in value of stocks, bonds, etc. Teeasuey Depaetment, Office of Commissionee of Inteenal Revenue, Washingtoiij D. C, July 8, 1914. To collectors of internal revenue and revenue agents: 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 deter- mining the amount of deductible loss allowable to individuals and corporations under the fourth deduction [Paragraph B, page 7], and second deduction, for domestic corporations [Par- agraph Or, page 16], and second deduction, for foreign corpora- tions [Paragraph G, page 18]. The loss considered here has in it no element of "deprecia- tion" 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 an- nual net income for the 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. The depreciation 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 depreciation or loss. Losses may be sustained by individuals or corporations on Foster Income Tax. — 91. 1442 TEEASUEY EEGULATIONS. personal or real property. Only those losses are deductible which are sustained during the tax year "in trade" — ^that is, the business which engages tne time, attention and labor of any one for the purpose of livelihood, profit or improvement. 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 incurred in trade, and be determined and ascertained upon an actual, a completed, a closed transaction. Losses sustained by individuals or corporations from the sale of or dealings in personal or real property growing out of own- ership or use of or interest in such property, will not be deducti- ble at all unless they are an incident of, connected with and grow out of the business of the individual or corporation sus- taining the loss, and 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 head- ing is ascertained to be deductible, the entire amount of the loss will be deductible except where the property, in connec- tion with which the loss occurred, was acquired prior to March 1, 1913, in the case of individuals, and prior to January 1, 1909, in the case of corporations, and then, and in such event, the loss ascertained will be prorated over the whole time the property was held, and that part of the whole loss apportioned to the taxable period will be taken into account in annual re- turns of income. In prorating, fractional parts of years will not be considered Loss is the difference between selling price and cost, where the selling price is less than cost. Cost of property purchased prior to the incidence of the special excise tax (January 1, 1909) or the incidence of the income tax (March 1, 1913) will be the actual price paid for the property, including the expense incident to the procurement of the property in the first instance and its sale thereafter, to- gether with carrying charges of interest, insurance and taxes actually paid prior to the incidence of tax (special assessments, if any, "actually paid" as "local benefits" in connection with TKEASUET REGULATIONS. 144:£> real estate) ; provided that where, up to the incidence of the tax, the expense of carrying property has exceeded the income from it, the difference between the expense of carrying and the income from the property shall be added to the purchase price and the sum thus ascertained shall be the cost of the property; and provided further, that in the case of property purchased prior to the incidence of the tax and sale thereof subsequent to the incidence of the tax, there shall be excluded from considera- tion in ascertaining cost any items of income, expense, interest and taxes previously taken into account in preparing a return of annual net income. The cost of property acquired subsequent to the incidence of the tax will be the 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 development, if any. All existing rulings and regulations in conflict herewith are hereby annulled and superseded. W. H. OSBOEN, Commissioner. Approved : W. G. McAdoo, Secretary. (T. D. 2013.) Income tax. iN'on-resident aliens; Amendment of Article 8 of Regulations 33, providing for the collection of tax on income of non- resident aliens derived from trades or professions in the United States. Theasuet Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, Aug. 12, 1914. To collectors of internal revenue: Article 8, Income Tax Regulations 33 [Page 150], is hereby amended by adding thereto the following: The person, firm, company, co-partnership, corporation, joint- 1444: TKEASUKY EEGULATIONS. 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 periodical gains, profits and income, of whatever kind, to a non-resident alien, under any contract or otherwise, and which payment shall represent income of a non- resident alien from the exercise of any trade or profession with- in the United States, shall make return for such non-resident alien on form 1040 and shall pay any and all tax-normal and additional tax — chargeable upon the said income of such non- resident alien. So that Article 8 as amended shall read: Art. 8. The income of non-resident aliens subject to the normal tax of 1 per cent, shall consist of the total gains, prof- its, and income derived from all property owned, and from every business, trade, or profession carried on within the United States (to be designated as gross income), less de- ductions (1 to 8, inclusive) specifically enumerated in Para- graph B of the Act (see Art. 6), in so far as said deductions relate to said gains, profits, etc. The specific exemption in Paragraph C of the Act cannot be allowed as a deduction in computing the normal tax of non-resident aliens. N'on-resident aliens are subject to additional or surtax the same as prescribed in the case of citizens of the United States or persons residing in the United States. The responsible heads, agents, or representatives of said non-resident aliens who are in charge of the property owned or business carried on shall make full and complete return of said income and shall pay the tax as provided herein. 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 pay- ment of fixed or determinable annual or periodical gains, profits and income, or whatever kind, to a non-resident alien, under any contract or otherwise, and which payment shall TltEASUltY E£GUX>ATIOKS. 1445 represent income of a non-resident alien from the exercise of any trade or profession within the United States, shall make return for such non-resident alien on form 1040 and shall pay any and all tax — normal and additional tax — chargeable upon the said income of such non-resident alien. W. H. OSBOEW, Commissioner. Approved : W. G. McAdoo, Secretary. (T. D. 2022.) Income tax. Waiver until further notice of Regulation requiring the filling in on certificates of numbers of bonds. Teeasuet Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, October 3, 1914. 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 ex- tended to October 31, 1914, by T. D. 1985, issued May 28, 1914, — is hereby waived until further notice. RoBT. Williams, Jb., Acting Commissioner, Approved : W. G. McAdoo, 8ecreta/ry. 1446 TEEASUEY EEGULATIONS. (T. D. 2023.) Income tax. Amending Article 58, Income Tax Regulations 33, requiring endorsement or stamp on foreign coupons, checks, bills of ex- change, etc. Tebasuey Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, October 12, 1914. To collectors of internal revenue: Article 58, Income Tax Regulations, 33, [page 170] is hereby amended to read as follows : Article 58. The licensed person, firm or corporation first receiving such foreign items for collection, or otherwise, shall withhold therefrom the normal tax of one per cent., and will be held responsible therefor. If the foreign item is in the form of a check or bill of exchange, the words "Income Tax withheld by " (giving name, address and date) shall be endorsed or stamped thereon by such licensee; but if the item is repre- sented by a coupon or coupons from bonds, the licensee shall attach thereto a statement identifying the same, and the endorse- ment or stamp showing the tax withheld shall be placed on the statement instead of the coupon or coupons. Said endorsement or stamp shall be sufficient evidence of tax withheld to relieve subsequent holders or purchasers from the obligations of withholding. Approved : W. G. McAdoo, Secretary. RoBT. Williams, Je., Acting Commissioner. TEEASUEY EEGULATIONS. 1447 ONE OWITEESHIP CEETIFICATE SUFFICES FOE COUPONS OF DIFFEEENT DATES FEOM SAME BOND ISSUE. Teeasuet Depaetment, Washington, D, C, November 2, 1914, W. G. P. The Corporation Trust Company, Colorado Building, Washington, D. C. Gentlemen : This office is in receipt of your letter dated October 29, 1914, requesting information in regard to certificates of ownership filed in connection with coupons which became due at different dates. In reply you are advised that the owner of the bonds may file one certificate in connection with coupons which became due at different dates, provided the coupons are from bonds of the same debtor corporation and of the same issue, but the dates on which the coupons became due should be shown. When listing such a certificate on Form 1012 only one entry is necessary. Eespectfully, G. E. Fletchee, Deputy Commissioner. [From the records of The Corporation Trust Company, p. 319]. Extent to which T. D. 2023 (page 312) modifies T. D. 1992 (page 272). Teeasuet Depaetment, Inteenal Eevenue Seevice, New York, N. Y., November 9, 1914. Irving National Bank, Woolworth Building, New York City. SiEs: Your letter under date of October 31st addressed to Eobt. 1148 TEEASUBY EEGtTLATIONS. Williams, Jr., Acting Commissioner, has been referred to this office for reply. You are advised that T. D. 2033 [page 312] does not modi- fy, in any way, the ruling contained in Treasury Decision 1992 [page 272], except that a licensee shall place no endorse- ment or stamp on a coupon detached from a foreign bond, and shall attach thereto a statement identifying the same, and the endorsement or stamp showing the tax withheld shall be placed on the said statement instead of on the coupon. When coupons, detached from bonds of a foreign corporation and payable wholly within the United States, or within or withr out the United States, at the option of the owner of the bonds, are received by a licensee with certificates of ownership, claim- ing or not claiming exemption, attached, they shall be treated exactly the same as domestic items, and the said certificates shall accompany the coupons when forwarded for payment to the American fiscal agent of the foreign corporation. Respectfully, (Signed) Chaeles W. Andeeson, Collector. [From the records of The Corporation Trust Company, p. 321.] (T. D. 2048.) Income tax. Taxable status of dividends paid on the capital stock from the current net earnings or established surplus created from the net earnings of corporations, joint-stock companies or associations, and insurance companies taxable upoij their net income. Treasuet Department, Office of Commissioner of Internal Revenue, Washington, D. C, November 12, 1914. To collectors of internal revenue: Dividends from the net earnings or established surpliis cre- ated from the net earnings of any corporation, joint-stock com- TEEASUKY EEGULATIONS. 1449 pany or association and insurance company, are vested in the stockholder on the date on which such dividends are declared, whether distributed or not, and regardless of the time when the surplus or undivided profits from which such dividends are de- clared were earned and entered on the books of the corporation as such. Dividends so declared should be acoonnted for in full in the returns of income of individuals for the year in which they become due and payable, whenever the amount of income is sufficient to require the inclusion of dividends, as provided in Paragraph D of the Income Tax Law and T. D. 1945, and should be included in the gross income of corporations, etc., regardless of the amount of income. All decisions and regulations which are in conflict herewith are hereby revoked. (T. D. 2049.) Income tax certificates. Income tax certificates which are not required by specific stat- ute, but by regulations only, are not subject to tax as "cer- tificates required by law" under Act of October 22, 1914. Teeasuey Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, November 12, 1914. Sie: In reply to your verbal inquiry as to whether certificates of ownership, certificates of exemption, and other certificates re- quired by the Income Tax Eegulations but not by specific stat- ute are subject to tax as certificates required under the Internal Eevenue Act of October 22, 1914, I beg to advise yqu that they are not. While regulations made pursuant to and under authority of law as a rule have the force and effect of law, it is held by this office that it was not the intent of Congress to tax certificates 1450 TEEASUEY EEGULATIONS. which are required by regulations of the Department for its own purposes and not by any express provision of law. Eespectfully, W. H. OSBOEIT, Commissioner. Me. . (T. D. 2077.) The gain or loss resulting from the sale of capital assets and ap- portioned to the years subsequent to January 1, 1909, should be increased or decreased, accordingly as there was gain or loss, by the amount of depreciation charged off since January 1, 1909, and not used to make good such depreciation. Teeasuey Depaetment, Office of Commissionee of Inteenal Revenue, Washington, D. C, November 21, 1914. To collectors of internal revenue: Article 110 of Regulations ISTo. 33 [Page 184] should be, and is hereby, amended to read as follows : "Art. 110. — For the purpose of determining the amount of profit or loss arising from the sale of capital assets ac- quired prior to January 1, 1909, which shall be taken into account by corporations in making their returns of annual net income, the ga:n or loss represented by the difference between the purchase price and the selling price shall be prorated according to the number of years the assets were held prior to their sale, and the amount thus apportioned, or apportionable, to the years subsequent to January 1, 1909, shall be included in or deducted from the gross income of the year in which the assets were sold, accordingly as they were sold for more or less than their original cost. To any gain thus apportioned and to be included in income there should be added any amount, or amounts, which had been charged against and deducted from gross income, dur- ing the years since the inception of the special excise tax law, on account of depreciation and which had not been paid out in making good the depreciation — that is, any TEEASUKY REGULATIONS. 1451 amount charged off subsequent to January 1, 1909, on ac- count of the depreciation of the assets sold and not used to make good such depreciation shall be added to the gain apportioned to these years and will be included in the in- come of the year in which the property was sold. Like- wise, for the purpose of a deduction from gross income of the year in which the assets were sold, loss resulting from any such sale, apportionable to the years subsequent to January 1, 1909, will be reduced by the amount of the un- used portion of the depreciation charged off with respect to such assets since January 1, 1909." This ruling, in so far as it relates to depreciation, applies on- ly to such tangible property as is subject to wear and tear, exhaustion and obsolescence, and is not to be construed as recog- nizing 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. (See T. D. 2005, Page 28T.) (T. D. 2079.) Income Tax liability and withholding requirements in connec- tion with quarters, heat and light, mileage, reimbursement for actual expenses, and per diem allowances in lieu of subsistence while traveling under orders, furnished or paid by the Government to officers and employees. TEEAStTEY DePAETMENT, Office of Commissionee of Inteenal Revenue, Washington, D. C, November 24, 1914. To collectors of internal revenue : All decisions and regulations which are in conflict with the holdings that follow are hereby revoked. (a) mCOME TAX LIABILITY. (1) QUAETEES: Commutation of quarters and the money equivalent of quarters furnished in kind shall be re- turned as income. 1452 TEEASUKT EEGULATIOKS. When quarters are furnished in kind, of a less number of rooms than the number allowed by law, the money equivalent only of the number of rooms actually assigned shall be returned as income. When quarters are furnished in kind, of a greater number of rooms than the number allowed by law, it is to be assumed that the excess number is assigned for the convenience of the Government, and the money equivalent only of the num- ber of rooms allowed by law shall be returned as income. (2) HEAT AND LIGHT: Amounts received by, or paid an officer for heat and light shall be returned as income. j.his includes the money equivalent, as fixed by the Govern- ment, of heat and light furnished to an officer occupying public quarters. * (3) MILEAGE: The difference between the amount re- ceived as mileage and the amount of actual necessary expenses incurred on a journey shall be returned as income. Mileage, as such, is not gain, profit, or income to the officer, as he is required to pay his actual expenses while traveling un- der mileage orders. The gain, profit, or income is the difference between the amount received as mileage and the amount prop- erly expended by the officer while traveling ; and this difference, only, should be returned as income. The actual expenses to be deducted by the individual before ascertaining his gain, profit, or income on account of mileage are the expenses for which reimbursement would be made by the Government if he had traveled on an actual expense basis in- stead of a mileage basis. (4) EEIMBUESEMENT FOE ACTUAL EXPENSES: Amounts paid by the Government in the nature of reimburse- ment for subsistence and other items of actual expenses incurred while absent on business for the Government are not required to be returned as income. (5) PEE DIEM ALLOWANCES IN LIEU OF SUB- SISTENCE WHILE TEAVELING UNDEE OEDEES: The difference between the amount received as a per diem al- lowance and the amount of actual necessary expenses incurred on a journey shall be returned as income. TKEASUEY KEGULATIONS. 1453 (b) WITHHOLDING EEQUIEEMENTS. Payments in connection -with (1) QUAKTEKS, (2) HEAT AND LIGHT, (3) MILEAGE, (4) KEIMBUKSEMENT FOR ACTUAL EXPENSES, and (5) PEE DIEM ALLOW- ANCES IN LIEU OF SUBSISTENCE WHILE TEAVEL- ING UNDEE OEDEES 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 an- nual or periodical gains, profits, and income" under the require- ments of the Income Tax Law. Procedure for handling coupons from bonds of corporations exempt from income tax. Treasuey Department, Washington, D. C, November 18, 1914. Geo. H. Moore, Esq., Collector of Internal Eevenue, St. Louis, Mo. Sir: Inclosed find letter from the Mercantile Trust Company, St. Louis, Missouri, dated November 12, 1914, stating that in a letter from this office to the Corporation Trust Company, dated July 30, 1914, [page 297] appears the following in connection with the collection of coupons from bonds of organization ex- empt under the first proviso of paragraph G from the with- holding features of the Income Tax Law. "If such coupons are presented to a bank or collection Agency for collection in the ordinary course a Certificate of Ownership and Exemption should be attached thereto, or the normal tax will be deducted and withheld." The company inquires whether a certificate of Ownership and Exemption should be filed with covipons from bonds of such an organization. You may inform the company that under the present ruling of this office a Certificate of Ownership should be attached to coupons from bonds of organizations exempt under the first 1454 TEEASUEY KEGULATIONS. proviso of paragraph G from the withholding features of the Income Tax Law. This Certificate need not claim exemption as the debtor corporation, or the fiscal agent, should pay the full amount of the coupon whether the certificate filed there- with claims exemption or not. It is only when coupons from bonds of such an organization are presented for collection unaccompanied by a certificate of ownership that the normal tax is required to be deducted and withheld therefrom. EespectfuUy, (Signed) L. F. Speee, Deputy Commissioner. [From the Records of The Corporation Trust Company, p, 336]. December 11, 1914. Tax exempt covenant on bonds. [Comment: The following is an extract from a letter just received by the Collector of Internal Revenue, Boston, from the Treasury Department.] "You are advised, and should so inform Messrs. Horn- blower & Weeks, that the issuance of bonds containing a" 'tax free,' or 'no deduction' clause is not prohibited by any provision of the Federal Income Tax Law. However, paragraph E, section 2, of the act of October 3, 1913, pro- vides : " 'Nothing in this section shall be construed to re- lease a taxable person from liability for income tax, nor shall any contract entered into after this act takes effect be valid in regard to any federal income tax imposed upon a person liable to such payment.' "Therefore such a clause will not release a taxable per- son from liability for income tax on income derived from such bonds, and the debtor corporations, or its duly au- thorized agent in paying coupons from such bonds, will TEEASUEY EEGULATIO]SrS. 1455 be held responsible for the normal tax due in snob cases when no tax is withheld and no exemption claimed." [From the records of The Corporation Trust Company, p. 337]. Corporation assuming payment of bonds and coupons under mortgage of individual — Duty as to withholding tax. Teeasuey Depaetment, Ofeice op Commissionee of Inteeistal Revenue, Washington, November 4, 1914. First Trust and Savings Bank, Eoy C. Osgood, Assistant Trust Officer, Chicago, 111. SiEs: This office is in receipt of your letter of October 31, 1914, asking whether certificates should accompany coupons from bonds under the following circumstances : An individual issues coupon bonds secured by a mort- gage upon real estate. Subsequently a corporation pur- chases the real estate and assumes (as between the mort- gagor and itself) the payment of bonds and coupons. After the purchase by the corporation, is it necessary for ownership certificates to accompany the coupons when they are presented for payment? This office holds that the situation is not changed by the pur- chase by the corporation. The corporation purchased only the mortgagor's equity of redemption; (and the mortgagor's pos- session) ; the property is. the security and the character of the bond obligation remains unchanged and as created, even though the corporation is to pay all interest and will ultimately pay oif the mortgage. There will be no withholding by the cor- poration (it being placed in the stead of the mortgagor) until the interest payment to any one person in any year is $3,000 or over. [From the records of The Corporation Trust Company, p. 338]. 1136 TltEASDKY EEGULA.TIONS. (T. D, 2090.) Income tax. Synopsis of rulings on questions relating to the income tax im- posed by Section 2 of the Act of October 3, 1913. Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C, December 14, 1914. The following synopsis of rulings on questions relating to the income tax imposed by section 2 of the Act of October 3, 1913, on individuals, corporations, joint-stock companies, associations, and insurance companies, is published for the information of in- ternal revenue officers and others concerned. All rulings, or parts of rulings, heretofore made which are in conflict herewith are hereby revoked. PART I. Rulings in Relation to Personal Income Tax. Actors and Actresses. If costumes purchased by actors and actresses are used exclusively in the production of a play, and are not adapted for occasional personal use, and are not so used, a deduction may be claimed on account of such deprecia- tion in their value as occurs during the year on account of wear and tear arising from their use in the productions of the play, or to their becoming obsolete at the close of the production. Administration of estates, expenses of. Expenses of ad- ministration of an estate, such as court costs, attorneys' fees, ex- ecutors' commissions, etc., are chargeable against the corpus of the estate and are not allowable deductions in a return of a fidu- ciary on Form 1041. Administrators. See Executors and administrators. Agent. The word "agents" as used in paragraphs D and E of the income-tax law in connection with the words "control, re- TKEASUEY KEGULATIONS. 1457 ceipt, custody, disposal or payment of income to another per- Bon," does not relate to agents not acting in a fiduciary capacity. Agents not acting in a fiduciary capacity have no responsibility with reference to withholding the tax on, or making a return of, income turned over to resident aliens or citizens of the United States; but the responsible heads, agents, or representatives of non-resident aliens who are in charge of property owned, busi- ness carried on, or capital invested within the United States, shall make full and complete returns of the income therefrom on Form 1040, revised, and pay the tax thereon. See ISTon-resident alien, agent of. Agent, real estate. See Real estate agent. Agent for non-resident alien. See JSTon-resident alien, agent of. Aids' pay. See Pay. Alimony. Alimony is regarded as fixed and determinable income, and in cases where it is in excess of $3,000 the person paying such alimony is required to withhold the normal tax on the same unless exemption is claimed under paragraph C, in which case the normal tax will be withheld only on the amount paid in excess of the exemption claimed. It must be accounted for as income if, together with other income, the recipient is in receipt of a net income of $3,000 or more. It is regarded as a personal expense to the person paying it and is, therefore, not an allowable deduction in his return. Annuity. The amount paid under a life insurance, endow- ment, or annuity contract is not income when returned to the person making the contract, either upon the maturity or sur- render of the contract; but the amount by which the sum re- ceived exceeds the sum paid and coming into the hands of the person making the contract and payment is income. When the settlement under such a contract is made in more than one payment each payment will be considered as being composed of interest and a proportionate part of the principal. Where the entire annuity is composed of an interest return upon the principal sum paid therefor, the entire annuity is income. Assessments on stock. Assessments made by a corporation on its capital stock are regarded as an investment of capital Foster Income Tax. — 92. 1458 TEEASUBY EEGULATXONS. and do not constitute an allowable deduction in the return of the individual. Bad debt. See Debt. Beneficiary. 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 exemption claimed, and the amount of income on which the normal tax has been with- held at source, and is also liable for the additional tax assessable on the amount of net income received by him in excess of $20,- 000; and in order to determine whether the net income of a beneficiary is or is not in excess of $20,000 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 per- sonal annual return. Board of education, requirements of with reference to withholding. See Eent. Bond, premium on. Where an employee is required to fur- nish bond and pay the premium on such bond, as a necessary in- cident of his employment, the premium on the bond will consti- tute an allowable deduction in computing net income. Bonds containing tax-free covenant clause. The stipula- tion in bonds whereby the tax which may be assessed against them, or the income therefrom is guaranteed, is a contract wholly between the corporation and the bondholder, and in so so far as the income tax law applies, the Government will not differentiate between coupons from bonds of this character and those from bonds carrying no such guaranty. The debtor cor- poration or its duly authorized withholding agent will be held responsible for the normal tax due in such cases when no ex- emption is claimed. When coupons are accompanied by cer- tificates of ownership in which no exemption is claimed, the in- come from such coupons may be included in the return of the individual (under column A, p. 2, of Form 1040, revised) as income upon which the normal tax of 1 per cent has been paid or is to be paid at the source. (T. D. 1948.) Bonds, interest on. The exchange of interest coupons for funding bonds is a payment of interest on the bonds and the in- income tax should be imposed and paid upon such interest as TEEASUEY EEGULATIONS. 1459 income for the year in whicli it 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 represent- ed by the coupons. Book value. Book values which reflect a shrinkage in the value of assets are not a basis for determining taxable income. (T. D. 2005.) Certificate of merit, pay for. See Pay. Certificate of ownership. 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, own- ership 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. Certificates. 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 themselves may do so if they will strictly observe the requirements of the department as to size, print, form, color, and contents. (T. D. 1939.) Certificates to be used in claiming exemption from with- holding on income derived from foreign sources. See In- come derived from coupons, checks, etc. Citizenship. An American woman who marries a foreigner takes the nationality of her husband and can not claim exemp- tion under paragraph C. Clubs. All clubs are not exempt from the provisions of the income-tax law, even though not operated for profit. A club desiring to be registered as an exempt organization should file with the Commissioner of Internal Revenue a copy of its char- ter, or an affidavit of its principal officer, setting forth the na- ture of its organization, the purpose for which organized, the source, if any, from which it derives income, and the disposi- tion made of such income as is received by it for consideration and determination as to whether or not it comes within the class of organizations held to be exempt under the provisions of para- graph G of the income-tax law. 14C0 TBEASUltY BEGULATIONS. Commission. 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 com- puting net income. Commission on renewal premium. See Renewal premium. Commissions. See Compensation. Commissions paid salesmen. Commissions paid to sales- men as a part of the expense of conducting business are allow- able deductions to the payer of the commission. Such commis- sions, however, are income and should be accounted for in the return of the person receiving them. When indefinite as to amount and time of accrual, they are not subject to withholding. Commutation of heat and light. Amounts paid on account of commutation of heat and light are not subject to withhold- ing. (T. D. 2079.) Commutation of quarters. Payments made on account of commutation of quarters are not subject to withholding. (T. D. 2079.) Compensation. (1) A person receiving a salary in excess of $4,000, and, in addition, a commission of 1 per cent on all sales, the exact amount due on account of commissions not be- ing determinable until February following the year in which the commissions were earned, at which time both his salary for the preceding year and his commissions are paid to him, should return as income, for the year in which payment was made, the aggregate amount received on account of salary and commis- sions. The normal tax should be deducted and withheld there- from when the combined payments of salary and commissions aggregate in excess of $3,000, subject to authorized exemption claimed. The normal tax deducted from these payments should be accounted for on the withholding agent's return. Form 1042, for the year in which the deductions were made. (2) Where an employee is paid a sum equal to two years' salary on condition that he surrender his contract of employ- ment, such sum should be reported by him on his annual re- turn as income, and if the sum paid exceeds $3,000, the nor- mal tax should be deducted and withheld therefrom, subject to authorized exemption claimed. TREASURY EEGULATIOiVS. 1461 (3) When profits distributed by a corporation to an em- ployee, together with payments of the employee's salary, aggre- gate in excess of $3,000, the normal tax should be deducted and withheld therefrom, subject to authorized exemption claimed. Compensation for service upon an annual, monthly, or weekly basis. Where a service and payment period is divided by the end of a taxable year, the compensation for the period so divided at the end of the year will be accounted for in the re- turn for the year in which payment is made and received. Where the service is of such nature as to be compensated by fee, or of such nature that no portion of the amount becomes due until the service is completed, then the total amount of the compensation should be included in the return for the year in which the compensation is received. Compensation, value of quarters furnished, part of. Where an individual is furnished living quarters in addition to- salary, the rental value of such living quarters is regarded as- compensation subject to the income tax. Corporation notes for a period of one year or less. See Promissory note of corporations. Corporations, equipment trust notes of. See Equipment trust notes. Corporations, obligations of. Obligations of corporations similar to bonds, mortgages, deeds of trust, etc., for income-tax purposes are held to be those obligations of corporations which, though not bonds, mortgages, or deeds of trust, are similar in form, purpose, or in being extended beyond the time of ordi- nary, bankable, commercial paper. Interest payments on ordi- nary, bankable, commercial paper of corporations payable to in- dividuals are subject to withholding at the source only when the payment to any one individual within a taxable year ex- ceeds $3,000. On all other obligations of corporations, etc., payable to individuals, interest payments are subject to with- holding regardless of the amount of interest payment. See Mortgage, property purchased subject to. Corporations, principal place of business of. The princi- pal place of business of a corporation is the place or office in 1432 TEEASUEY EEGULATIONS. which are kept the books of account and other data from which the return is to be prepared. Corporations, property purchased by, subject to mort- gage. See Mortgage, property purchased subject to. Corporations, residence of. Corporations whose business is done wholly in Porto Porto Eico and the Philippine Islands, even though incorporated in the United States, are held to be resident corporations of these possessions, and will make re- turns and pay the income tax to the collectors of internal rev- enue having jurisdiction there. Costumes. See Actors and actresses. Debt. A bad or worthless debt, as contemplated by the income-tax law, and which may be deducted in a return of income, is a debt which has been actually ascertained to be worthless and charged ofF within the taxable year. Decedent, return of a. See Executors and administrators. Deductions, paragraph B. (1) ITecessary expenses ac- tually paid in carrying on any business, not including per- sonal, living, or family expenses. (2) All interest paid within the year by a taxable person on indebtedness. (3) All national. State, county, school, and municipal taxes paid within the year, not including those assessed against local benefits. (4) Losses actually sustained during the year incurred in trade or arising from fires, storms, or shipwreck and not com- pensated for by insurance or otherwise. (5) Debts due to the taxpayer actually ascertained to be worthless and charged off within the year. (6) A reasonable allowance for the exhaustion and 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 cent of the gross value at the mine of the output for the year for which the computation is made; but no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made provided that no deduction shall be allowed for any amount paid out for new buildings, permanent improvements. TEEASUKY REGULATIONS. 1463 or betterments made to increase the value of any property or estate. (See Paragraph B, section 2, act of October 3, 1913.) Depreciation. See Actors and actresses. Dividends declared by foreign corporations transacting business wholly within the United States. See Foreign cor- porations, property owned and business transacted wholly within the United States. Drainage, irrigation and reclamation districts, interest on bonds of. See Special assessment districts. Employees, foreign, of domestic corporations. See Foreign employees of domestic corporations. Equipment trust notes. Equipment trust notes secured by mortgage issued by a corporation are subject to withholding. Temporary receipts issued pending preparation 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 payment of interest, requisite certificates of ownership claiming or not claiming of exemption should be filed. Executors and administrators. If the net income of a decedent from January 1 of the year in which he died to the date of his death, was $3,000 or over, a return for such de- cedent must be made by the executor or administrator on Form 1040, revised, and such executor or administrator may claim all deductions and exemption to which the decedent would have been entitled under the law. Exempt organizations. Any organization which has been held by the Commissioner of Internal Revenue to come within the class of organizations enumerated in paragraph Gr of the income-tax law is not required to deduct and withhold the normal tax from the amount of any salary or interest paid by it, and it is subject to no requirements of said law. However, the owner of bonds issued by such an organization is not re- lieved from the filing of certificates of ownership, with cou- pons detached from such bonds when presenting same to a bank or other collecting agency for collection or otherwise, or to the debtor corporation or its duty designated paying agent for payment; and while such an organization as the source of 1464 TREASURY KEG CLATIOJSS. income is under no obligation to withhold the tax in cases where no exemption is claimed, it should, nevertheless, forward with a letter of transmittal such certificates as are received by it to the collector of internal revenue for its district on or before the 20th day of the month next succeeding that in which the said certificates were received. No special form of certificate has been issued for presentation with coupons detached from bonds of exempt organizations, but certificates in the usual form, claiming or not claiming exemption, may be used. (T. D, 1967.) Where such organizations have an issue of registered bonds, they should, before sending out checks issued in payment of registered interest, stamp or write across the face of such check, "Corporation exempt under paragraph G from withholding;" otherwise the first bank or collecting agent would deduct and withhold the normal tax therefrom. Exempt organizations, salaries paid by. Salaries paid by corporations, which corporations have been held to be exempt from the income tax under paragraph G of the income-tax law, are subject to the income tax and should be returned as income by the individual, but the corporation is not required to with- hold the tax. Exemption and deductions allowed in the return of a de- cedent. See Executors and administrators. Exemption, husband and wife. See Husband and wife. Exemption on income received from partnerships. See Partnerships, identity of income. Expense. Taxes paid by a tenant to a landlord are consid- ered as additional payment for rent and are deductible as an expense of carrying on business. Failure to render a return, penalty for. Every person hav- ing a net income of $3,000 or more for the calendar year is required to render a return, and the penalty provided by law for refusal or neglect to file a return will be enforced regard- less of the fact that the net income may be less than the exemp- tion to which the individual is entitled. Farm buildings, depreciation of. Depreciation of farm buildings, other than a dwelling occupied by the owner, actually TEEASUEY EEGULATIONS. 1465 sustained within the year, in excess of repairs made, will be considered an allowable deduction. Fiduciary. "Fiduciary" is a term which applies to all per- sons or corporations that occupy positions of peculiar confidence toward others, such as trustees, executors, or administrators; and a fiduciary, for income-tax purposes, is any person or cor- poration that holds in trust an estate of another person or per- sons. There may be a fiduciary relationship between an agent and a principal ; but the word "agent" does not denote a "fiduciary" within the meaning of the income-tax law. Fiduciary, return of. Fiduciaries are required to make a return on Form 1041, revised, whenever the interest of any one beneficiary in the income from the estate or trust subject to the normal tax is in excess of $3,000. This duty can not be delegated to another person. When the interest of any one beneficiary exceeds $3,000 and a return is required, the name and full address of each beneficiary and the share of income to which entitled, even though it be less than $3,000, must be shown; and in all eases where the beneficiary's interest is in excess of $3,000 the fiduciary is required to withhold the nor- mal tax unless exemption is claimed under paragraph C, and then only on the amount in excess of the exemption so claimed. A fiduciary acting for a beneficiary in more than one estate or trust is required to account for each estate separately, and if the amount of income from no one estate exceeds $3,000, no return or withholding will be required. 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. A fiduciary acting for a minor or insane person having a net income in excess of $3,000 will make the return for his ward on Form 1040, revised, and will not be required to file a return on Form 1041, revised, unless he has more than one wa,rd by reason of the same estate or trust. Then, in that event, a re- turn will be required on Form 1041, revised, and a separate return on Form 1040 for each ward having a net income of $3,000 or more for the calendar year. 1466 TEEASUEY EEGULATIONS. Dividends in the hands of a fiduciary and belonging to a beneficiary are not subject to the normal tax, but will be sub- ject to the additional tax to the beneficiary whenever the benefi- ciary's income from all taxable sources is in excess of $20,000. (T. D. 1943.) Fire-insurance policy, premiums paid on. See Insurance premium. Foreign corporations, interest on bonds of. See Income derived from coupons, checks, etc. Foreign corporations, property owned and business transacted wholly within the United States. Dividends de^ clared and paid by a foreign corporation which derives its en-' tire 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 man- ner as dividends from domestic corporations. Foreign employees of domestic corporations. Salary re- ceived by a foreign employee of a domestic corporation for services rendered entirely in a foreign land is not subject to deduction and withholding of the normal tax at source. Foreign mortgages, income from. See Income derived from coupons, checks, etc. Foreign service pay. See Pay. Gift, property acquired by. The value of property ac- quired by gift is not subject to income tax, but all gains, profits, or income derived therefrom are subject to tax, and if the prop- erty 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. Gifts. See Voluntary offering. Gratuity. Where the monthly salary of an officer or em- ployee is paid for a limited period after his death to his widow in recognition of the services rendered by her husband, no serv- ices 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 TEEASUEY EEGULATIONS. 1467 deduction as an expense of carrying on business in the return of the person, firm, or corporation paying same. Guardian, return of. See Fiduciary, return of. Heat and light. Amounts received by or paid for an officer for heat and light shall be returned as income. This includes the money equivalent, as fixed by the Govern- ment, of heat and light furnished to an officer occupying public quarters. (T. D. 2079.) Heat and light, commutation of. See Commutation of heat and light. Husband and wife. Where either dies during the year, having a net taxable income of $3,000 or more, a return of in- come should be made by the executor or administrator of the deceased as of the date of his death, and the executor or admin- istrator may claim an exemption of $4,000 under paragraph C. The survivor when making a return at the end of the year for the entire year will be allowed the applicable exemption for the single or married status existing at the close of the year. Husband and wife, additional tax computed on separate income of. The regulations of the department requiring the incomes of husband and wife to be combined and authorizing the aggregate exemption of $4,000 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 mini- mum amounts upon which the surtax at the graduated rates is to be calculated. Income derived from coupons, checks, or bills of ex- change on foreign bonds, mortgages, dividends, etc. Amounts received by citizens or residents of the United States for or in payment of interest upon bonds issued in foreign countries, and upon foreign mortgages or like obligations, and for any dividends upon stock or interest upon obligations of foreign corporations, associations, or insurance companies en- gaged in business in foreign countries, are subject to the in- come tax. (Art. 54, regulations Wo. 33.) The licensed person, firm, or corporation first receiving such 1468 TllEASUliY EJiGULATIONS. foreign item for collection, or otherwise, shall withhold there- from the normal tax of 1 per cent and will be held responsible therefor unless exemption is claimed. If the foreign item is in the form of a cheek or bill of ex- change, the word "Income tax withheld by " (giving name, address, and date), or the words, "Income-tax exemption claimed through " (giving name and address of li- censee), as the case may be, shall be indorsed or stamped there- on by such licensee ; but if the item is represented by a coupon or coupons from bonds, the licensee shall attach thereto a state- ment identifying the same, and the indorsement or stamp show- ing the tax withheld, or exemption claimed, shall be placed on the statement instead of the coupon or coupons. Such indorsement or stamp shall be sufficient evidence of tax withheld, or exemption claimed, to relieve subsequent hold- ers or purchasers, from the obligations of withholding. (T. D. 2023, arts. 60-61, regulations 33.) Claims for exemption from withholding on income other than from interest on bonds may be made by individuals or [on] Form 1007; by firms, organizations, or fiduciaries on Form 1063 ; claims for exemption from withholding on interest from bonds may be made by individuals on Form lOOOB; by firms and organizations on Form 1001 ; and by fiduciaries on Form 1015. (T. p. 1998.) Insurance premium. Premiums paid for insurance on property which is not occupied by the owner as a dwelling, but is rented or leased to secure an income, constitute allowable de- ductions in computing net income. Premiums paid on life insurance by the insured do not con- stitute allowable deductions under the income-tax law. Premiums paid on life insurance taken out by a partnership upon the lives of individual members of such partnership con- stitute allowable deductions in ascertaining the net earnings of the partnership. However, when such policies mature, or upon the death of the insured partner, the amount received as life insurance should be included in the gross income of the partnership. Investment certificates. Investment securities issued by TEEASUEY EEGULATIONS. 1469 a corporation for a term of years are corporate obligations with- in the meaning of the income-tax law. Judges, salary of. The salary of judges of the Supreme and inferior courts of the United States appointed subsequent to October 3, 1913, and of judges who have been retired is sub- ject to the income tax and to the withholding provisions of the income-tax law. Landlord. A landlord in receipt of annual rental from a tenant in excess of $3,000 may, at the time the amount of rental payments aggregates $3,000, file with the tenant a claim for exemption under paragraph C of the income-tax law (Form 1007, revised). He may, also, after December 31 of the taxa- ble year, file with the tenant, or with the collector of internal revenue, a claim for deductions under paragraph B on Form 1008, revised. For duties of tenant with reference to withholding, see Ten- ant. (T. D. 1965.) Legacy. The general policy of the law and rule of inter- pretation require that legacies in all cases, unless clearly in- consistent with the intention of the testator, should be held to be vested rather than contingent. Where there is a vested interest 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. Life insurance policy, premiums paid on. See Insurance premium. Living quarters furnished. See Compensation, value of quarters furnished part of. Local benefits, taxes assessed against. Taxes paid pur- suant to assessments levied by special districts, such as irriga- tion, 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 allowable deductions in a return of annual net income. Losses in trade. "Only those losses are deductible which are sustained during the tax year 'in trade.' Loss to be de- ductible must be an absolute loss, not a speculative or fluctuat: ing valuation of continuing investment, but must be an actual r470 TEEASUEY EEGULATIONS. loss, actually sustained and ascertained during the tax year for which the deduction is sought to be made; it must be in- curred in trade and be determined and ascertained upon an actual, a completed, a closed transaction." The term "in trade," as used in the law and in Treasury Decision 2005, is held to 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. 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 with re- spect to either or more than one line of business, and his status as such dealer must be clearly established. (T. D. 2005.) Mileage. The difference between the amount received as mileage and the amount of actual necessary expenses incurred on a journey shall be returned as income. Payments on ac- count of mileage are not subject to withholding. (T. D. 2079.) Minor child, return of. See Guardian, natural. Mortgage, property purchased subject to. An individual issues coupon bonds secured by a mortgage upon real estate. Subsequently a corporation purchases the real estate and as- sumes (as between the mortgagor and itself) the payment of bonds and coupons. Held: That the situation is not changed by the purchase by the corporation. The corporation pur- chased only the mortgagor's equity of redemption (and the mortgagor's possession) ; the property is the security, and the character of the bond obligation remains unchanged and as created, even though the corporation is to pay all interest and TEEASUEY EEGULATIONS. 1471 will ultimately pay off the mortgage. There will be no with- holding by the corporation (it being placed in the stead of the mortgagor) until the interest payment to any one person in any year exceeds $3,000. (See Public utility.) Municipality, obligation of. See Public utility and Mort- gage, property purchased subject to. Naval officers. See Oaths. Non-resident alien, agent of. The responsible heads, agents, or representatives of non-resident aliens who are in charge of the property owned or business carried on within the United States by non-resident aliens shall make full and com- plete returns of the income therefrom on Form 1040 revised, and shall pay any and all tax, normal and additional, assessed upon the said income of such non-resident aliens. (T. D. 2013.) Notary public. See Oaths. Oaths. (1) A return of income rendered by an individual residing abroad may be acknowledged before any duly ap- pointed oiEcer of the country in which he resides, authorized to administer oaths and use an official seal. (2) If a return is executed in a State before a notary who is not required by the laws of the State to use a seal, and none is used, the notary should file with the Commissioner of In- ternal Revenue the certificate of an officer possessing a seal, showing that he is duly commissioned and authorized to ad- minister oaths; otherwise the certificate will not be recognized. (3) Returns acknowledged before commanding officers of naval vessels while at sea, or in foreign ports, will be accepted. (4) Returns executed before a summary court officer, United States Army, will not be accepted. Ownership certificates. Ownership certificates should be filed with coupons of exempt organizations when presented for collection. (See Exempt organizations.) Partnership — identity of income. The character of part- nership profits divisible between persons has no reference to any character which, as income accruing to the partnership, it may have borne prior to receipt by the partnership. It is therefore held that income received from a partnership can not be traced 1472 TBEASUEY EEGULATXONS. to its source behind the partnership for the purpose of claim- ing individual exemption. Income when accrued. It is held that the income from a partnership accrues to the individual partner at the time his distributive interest is determined and reducible to possession. In the returns of income made by individuals for the calendar year, therefore, there should be included such income accruing from the business of partnerships for their business years as may have been definitely ascertained by means of a book bal- ance, whether distributed or not. In other words, members of partnerships are required to make returns of income like other individuals for the calendar year, and should include in their returns the net proceeds of their interest in partnership profits ascertained at the end of the business year falling within the calendar year for which the individual return is being ren- dered. Pay. Congress has clearly specified the conditions under which officers and enlisted men are entitled to foreign service pay, aids' pay, and pay for certificate of merit, and such items of income are considered as fixed and determinable and sub- ject to the withholding provisions of the income-tax law. Penalty for failure to render a return. See Failure to ren- der a return, penalty for. Pension, foreign. License not required for collection of foreign pensions paid to resident aliens or citizens of the United States. Pensions. Pensions paid by the United States Government are subject to the income tax. Per diem allowances in lieu of subsistence while travel- ing under orders. The difference between the amount re- ceived as a per diem allowance and the amount of actual neces- sary expenses incurred on a journey shall be returned as in- come and is not subject to withholding. (T. D. 2079.) Power of attorney, fiduciary relation can not be created by. A person can not, by a power of attorney, delegate to another a duty which he himself could not perform, and inas- much as an individual can not relieve a withholding agent from the withholding requirements of the income-tax law by filing TliEASUKY EEOULATIONS. 1473 Form 1015, a person holding a power of attorney from an- other is without authority to file this 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. Premium on bond. See Bond, premium on. Principal place of business of corporations. See Corpora- tions, principal place of business of. Profit from sale of real estate. Profit is the difference be- tween the selling price and the cost where the selling price is more than the cost. "Cost of property purchased prior to the incidence of the special excise tax (Jan. 1, 1909), or the incidence of the in- come tax (Mar. 1, 1913), will be the actual price paid for the property, including the expense incident to the procurement of the property in the first instance and its sale thereafter, to- gether with carrying charges of interest actually paid, insur- ance, and taxes actually paid prior to the incidence (special assessments, if any, 'actually paid' as 'local benefits' in con- nection with real estate) ; provided that where, up to the inci- dence of the tax, the expense of carrying property has exceeded the income from it, the difference between the expense of carrying and the income from the property shall be added to the purchase price, and the sum thus ascertained shall be the cost of the property; and provided further, that in the case of property purchased prior to the incidence of the tax and sale thereof subsequent to the incidence of the tax, there shall be excluded from consideration in ascertaining cost of any items of income, expense, interest and taxes previously taken into account in preparing a return of annual net income. "The cost of property acquired subsequent to the incidence of the tax will be the 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 im- provement or betterment, if any." 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 Foster Income Tax. — 93. 1474 TEEASUEY EEGULATIONS. acquired prior to March 1, 1913, in the case of individuals, or prior to January 1, 1909, in the case of corporations; and then and in such event the profit will be prorated over the whole time the property was held, and that part of the whole profit apportioned to the taxable period will be reported in annual returns of income. In prorating^ fractional parts of years will not be considered. For income-tax purposes, where there is an actual sale and transfer, profit will be considered as realized even though pay- ment is to be made in installments, as notes for deferred pay- ments are secured by the title to the property, and presumably bear interest and are held to be worth, in cash, their face value. In case of default on installment payments there may be charged off as bad debts the amount of such unpaid install- ments less the salvage value of the real estate repossessed. (T. D. 2005.) Profit sharing. See Compensation. Promissory note of corporations. A simple promissory note not exceeding one year in time is not "similar to bonds, mortgages, or deeds of trust of corporations," and the interest on such a note is not subject to withholding except when the amount of interest thereon, payable to an individual in any one year, is in excess of $3,000 or when the interest thereon is paya- ble to a non-resident alien, in which latter case the tax should be withheld regardless of the amount of interest payment. Public utility. 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. (See Mortgage, property purchased subject to.) Quarters. Commutation of quarters and the money equiva- lent of quarters furnished in kind shall be returned as income. When quarters are furnished in kind of a less number of rooms than the number allowed by law, the money equivalent only of the number of rooms actually assigned shall be returned TEEASUBY KEGDLATIOjMS. 1475 as income. When quarters are furnished in kind of a greater number of rooms than the number allowed by law, it is to be assumed that the excess number is assigned for the convenience of the Government, and the money equivalent only of the num- ber of rooms allowed by law shall be returned as income. (T. D. 2079.) Quarters, commutation of. See Commutation of quarters. Real estate agent. Eeal estate agents are not required to deduct and withhold the normal tax from rents collected, even though the amount is in excess of $3,000. The 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 with- holding the tax can not be transferred from the debtor to such agent, because such transfer would simply be transferring the duty of withholding to the landlord himself. Real estate, profit from sale of. See Profit from sale of real estate. Reimbursement for actual expenses. Amounts paid by the Government in the nature of reimbursement for subsistence and other items of actual expense incurred while absent on business for the Government, are not required to be returned as income. (T. D. 2079.) Renewal premium. Commissions on renewal premiums for insurance are income when received and income for the period in which received. Rent. Where a tenant rents two pieces of property from the same owner, the tenant should combine the payments, and when such payments so combined aggregate in excess of $3,000 the normal tax should be deducted and withheld, subject to authorized exemptions claimed. Where a board of education for a school district rents prop- erty at an annual rental exceeding $3,000, such board of educa- tion is regarded as a tenant and should withhold the normal tax, subject, however, to the exemption claimed. A lessee paying rent in excess of $3,000 a year under a lease from two or more individuals must make deduction from all 1-±7G TliEASUKV IJiUULATIONS. payments to individuals in excess of $3,000 unless certificates of exemption are filed. He should ascertain in what propor- tion the rent is divided by the use .of office [revised] Form lOOOB, which may be adapted and executed by one of the parties in interest, the others executing Form 1007. The with- holding should be made from the income of individuals and not from the aggregate amount paid. This situation is not different if the lessors are husband and wife if their individual interests are separate. The situation is not changed if, by instruction, the actual payments of rent are made to one lessor, the payments to be distributed by him. Where notes are given in payment of rent, the lessee's obligation to withhold is not altered. The lessee's obligation is the same as in the case of cash rental, withholding occurring at the time the notes are given, and not at maturity. When rental payments in excess of $3,000 a year are payable to a fiduciary, who fails or refuses to file Form 1063, agreeing to act as the source, the beneficiaries are not entitled to file exemption certificates directly, the lease having been taken from the fiduciary. If the fiduciary's certifi- cate is not filed, the lessee should withhold 1 per cent on the entire amount. The lessee is not presumed to have knowledge of the beneficiaries unless they are parties to the lease. Rent. See Living quarters. Return of fiduciary or guardian. See Fiduciary, return of. Returns, execution of. See Oaths. Salaries, withholding on, 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 and pay em- ployees salaries of $3,000 or over per annum, will be required to withhold on the basis of the calendar year. Salary of judges. See Judges, salary of. Salary paid in advance. See Compensation. Salary paid to widow for a limited time after death of employee. See Gratuity. Scrip. Scrip certificates issued by a corporation to its stock- holders in lieu of dividends, such script certificates bearing TEKASUiiY JiKU U JvATlOJS S. 1477 interest payable semi-annually and redeemable at a specified time not longer than one year from date of issue, are not cor- porate obligations similar to bonds, mortgages, or deeds of trust, and the interest payable thereon will not be subject to withholding except when the amount thereof payable to an individual in a calendar year exceeds $3,000. Payment in scrip is held to be equivalent to payment in cash, and when the amount of such scrip payment to any one individual in a calendar year is in excess of $3,000 the tax must be withheld and accounted for in excess of exemption claimed. Special assessment districts. Special assessment districts created under the laws of the several States for public purposes, such as the improvement of streets and public highways, the provision for sewerage, gas, and light, and the reclamation, drainage, or irrigation of bodies of land, and levee and school districts, are held to be political subdivisions of a State, and income derived from interest upon the obligations of such dis- tricts shall not be included in computing net income. (T. D.. 1946.) Taxes paid pursuant to assessments levied by such special assessment districts are held to be "taxes against local benefits," and are, therefore, not allowable deductions in computing net income. Stock dividends. Stock dividends when required to be in- cluded in a return of income should be accounted for at the valuation placed upon the stock by the corporation when said stock dividends were issued. Summary court officers. See Oaths. Taxes. Taxes paid by citizens or resident aliens of the United States to a foreign country are not allowable deductions in computing net income. The provision of law for the deduc- tion of taxes applies only to taxes paid to the United States,, or to some State or political subdivision thereof in the United States. Taxes, special. See Special assessment districts. Tax-free covenant clause. See Bonds containing tax-free covenant clause. Tenant. See Kent. Theatrical profession. See Actors and actresses. 1478 TEEASUKY EEGULATIONS. Voluntary offering. Easter offerings, and fees received by clergymen for funerals, masses, marriages, baptisms, etc., are considered income subject to tax under the provisions of tiie income-tax law of October 3, 1913. Christmas gifts, hov^ever, are not considered income within the meaning of the law and should not be included in a return. Withholding from rents. See Kent. Worthless debt. See Debt. PART II. Rulings in Relation to Corporation Income Tax. Agricultural and Horticultural Associations. Agricultural and horticultural associations specifically enum- erated as exempt are held to be such associations as county fairs, or like organizations, not themselves engaged in agricul- tural or horticultural pursuits, but which, by means of awards, premiums, etc., are intended to encourage better production and no part of whose income inures to the benefit of any private stockholder or individual. (T. D. 1737.) [Corporation Ex- cise Tax — T. D. issued December 5, 1911.] Corporations engaged in agricultural or horticultural pur- suits for profit are liable under the law to make returns and to pay the income tax thereby shown to be due. Agricultural organizations. Corporations owning sugar or other plantations and disposing of the products thereof are held to be operating for profit and are not entitled to exemption as agricultural organizations. Bank guaranty fund. The reserve required to be set aside by banks in various States and kept and maintained in said hanks as a guaranty of depositors in the banks of said States — which said guaranty fund is subject to draft by said banking commissions or boards, in amounts to be determined by said State banking commissions or boards, only for the purpose of supplying deficiencies in estates of failed or insolvent banks — is not an expenditure and can not be considered either as a tax or an expense. It is a reserve required to be kept and main- TEEASUEY EEGULATIONS. 1479 tained for a certain and specifically designated purpose. The amounts actually expended from such fund in paying there- from drafts of the State banking commissions or boards on said fund are in the nature of insurance cost, and as such may be deducted as a business expense. The reserve, per se, is not deductible in a return of income. Capital of a corporation. The amount received by a cor- poration for the original issue and sale of its capital stock is held to be the capital of the corporation. In cases where the stock, as originally issued, is sold at a price greater or less than the par value, neither the premium nor the discount will be taken into account in determining the n6t income of the cor- poration for the year in which the stock is sold. This is purely a capital transaction and the income is neither increased nor decreased by reason of the sale, per se, of the stock at a price greater or less than its par value. Collateral the subject of sale in ordinary course of busi- ness of a corporation (expense of business). As used in the act, the expression "collateral the subject of sale," etc., refers to physical or tangible property bound for the perform- ance of certain covenants or payment of certain obligations, and which physical or tangible property is the "subject of sale in the ordinary business of a corporation" owning the same. Where such corporation is, as a matter of its ordinary business, engaged in buying and selling, or dealing in such property, the interest actually paid within the year on indebtedness wholly secured by such collateral may be allowably, deducted from gross income as an expense of doing business, without regard to the limit of deductible interest as otherwise provided by the statute. The corporation, etc., must be organized and operated for the purpose of buying, selling, and dealing in the particular kind of property which becomes the collateral in question, and the particular property pledged for the debt upon which the interest is paid must be the "subject of sale in the ordinary business of the corporation." Real estate mortgaged, and the property of corporations organized for and engaged in the business of buying, selling, and dealing in real estate ; warehouse receipts representing property the subject of sale in the ordinary busi-^ 1480 TKEASUHY EliGULATIOISIS. ness of the corporation owning the same, and which warehouse receipts are pledged as collateral for such corporation's own debt, are examples where the interest paid will be deductible as a "business expense" and not be subject to the statutory limi- tation as to interest deduction. (See T. D. 1993.) Corporation — Exempt. Cooperative dairies are not. (T. D. 1996.) Corporations in existence but part of year. All corpora- tions having an existence as such during all or any portion of a year, unless coming within the classes specifically enumerated as exempt, are required to make returns. Dissolved corpora- tions whose fiscal year coincides with 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 make returns covering the period from the beginning of the fiscal year to the- date of dissolution; and new corporations will make return for the period from the date of their organization to December 31. The net income in all such cases will be ascertained in the manner set out in Para- graph G of the act. Donations. Donations by corporations which legitimately represent a consideration for a benefit flowing directly or in- 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, as donations to a hospital upon consideration that employees of the corporation are to have a ward for their use in case of accident or illness. The absence of consideration moving in some form to the corpora- tion will make a contribution a mere gratuity. Gratuities are now allowable deductions in a return of income by corporations. Donations made for purposes connected with the operation of the property, when limited to charitable institutions, hospi- tals, or educational institutions conducted for the benefit of the employees of a corporation or their dependents, shall be proper as a deduction under the head of expense in the return of the corporation. Earnings or dividends not deductible. Every corporation, no matter how closely related it may be to any other corpora- TKEASUUY EEGULATIOKS. 1481 tion, is required to make return of annual net income and to pay any income tax thereby shown to be due. Parent, holding, or other corporations must include in their gross income, and can not deduct therefrom, any dividends or share of earnings which they may receive from a subsidiary, related, or any other corporation. The fact that the parent or holding company owns all the stock of the subsidiary company is immaterial and will not warrant such parent company in omitting or deducting dividends from gross income. The Federal income-tax law fixes a specific rule by which the net income, for the purposes of the tax, is to be computed. That rule makes no provision for the exclusion or deduction from the taxable income of dividends received. Expense (spending or treating money.) So-called spend- ing or treating money actually advanced by corporations to their traveling salesmen as a part of selling expense of the product of such corporations is an allowable deduction in a re- nrn of income by such corporation. There must be some show- ing that all the allowance claimed as a deduction was actually expended for the purpose for which the allowance was made, namely, the selling of the product of the corporation in ques- tion. Fiscal year (corporation). The financial year of a corpo- ration, etc. at the end of which the accounts are balanced. — For income-tax purposes, in the absence of designation other- wise, all returns are required to be made on the basis of the calendar year. The privilege of making a return of income on the basis of a fiscal year other than the calendar year is limited to corporations or institutions which make returns and pay tax as corporations. The statute provides that returns must be made on the basis of a calendar year unless the cor- jioration, etc., involved shall designate a fiscal year, other than the calendar year, in the manner provided by the statute. "When the calendar year shall have passed, a return of income for the entire period of such calendar year is then due and must be made out and filed with the proper collector of internal revenue on or before March 1 then next following. This is true even of corporations and institutions making return as corporations, 1482^ TEEASUEY EKGtULATIONS. except that such corporations, etc., are given the privilege of filing with the collector of internal revenue (with whom their return must be filed) not less than 30 days (more, but. not less) prior to March 1 (the date when the return on the basis of a calendar year is to be filed), a notice, in writing, setting forth that such corporation, etc., has designated the last day of some month in the year (other than the last day of December) as the day of the closing of its fiscal year, and that from the date so designated as the close of its fiscal year its books have been or will be kept on the basis of such designated fiscal year. When this said notice is filed with the collector of internal revenue, a return must then be made on or before March 1 for such part of the calendar year elapsed as is not included in the said designated fiscal year, and return for the full desig- nated fiscal year must be made and filed within 60 days next succeeding the last day of said designated fiscal year. This rule will apply whether the designation affects the future or past, provided always that the return of income can not cover more than 12 consecutive months. Example : 1914 1915 A X B C Y Z Jan. 1 June 30 Dec. 31 Mar. 1 June 30 Aug. 29 AB is calendar year and C is March 1, the time when return on the basis of the calendar year must be filed. At any time not less than thirty days prior to C a corporation may file with the collector with whom its return of income must be filed a notice in writing setting forth that said corporation, etc., has designated the last day of some month in the year (other than December 31) as the day of the close of its fiscal year, as June 30, represented by X; thereafter, on March 1, a return will be filed for the period AX. XY represents the first designated fiscal year, and for this said fiscal year a return of income must be made (covering the period XY) subsequent to June 30 and on or before August 29 ; in other words, the sixty-day period next following the close of the fiscal year. Thereafter returns TEEASUEY EEGULATIONS. 1483 of income will be made and filed annually subsequent to June 30, and on or before August 29. (See T. D. i!001.) Gifts to corporation — Income. The value or amount of a gift to a corporation is held to be income to such corporation and should be returned as such for the year in which the gift is received. The provision of the act of October 3, 1913, which exempts gifts, bequests, etc., from the tax imposed by the act applies to individuals and not to corporations. Horticultural societies. 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 membership fees, dues, and assessments to meet necessary expenses are horticultural societies within the meaning of the law and are hot subject to tax or required to make returns. Interest.' Individuals are permitted a deduction of "all interest paid within the year * * * on indebtedness ;" corpora- tions are permitted a deduction of interest paid within the year on an amount measured by "the amount of capital stock, or capital employed, plus one-half the interest-bearing debt," both outstanding at the close of the year. A foreign corporation in determining the maximum principal upon which interest for the purpose of a deduction may be computed will add to the amount of its paid-up capital stock, or if no capital stock, then the amount of capital employed in business, one-half the interest-bearing indebtedness, both out- standing at the close of the year. Such proportion of this sum as the gross income derived from business transacted in this country bears to the gross income received from business done or capital invested, both within and without the United States, will constitute the maximum principal upon which interest for the purpose of a deduction from the income in the United States may be computed. For instance, if the gross income in the United States is one-fourth of the entire gross income, then one-fourth of the sum of the paid-up capital stock plus one-half the interest-bearing indebtedness will be the maximum 1484 TEEASUKY KEGULATIOXS. principal upon which interest deductible from the United States income may be computed. Life insurance in favor of corporations. In cases wherein corporations pay premiums on insurance policies insuring, in favor of the corporations, the lives of officers or others, such premiums may be allowably deducted from the gross income of the corporations paying the same. In all such cases the proceeds of the policies when paid at maturity or upon death of the insured shall be returned by the corporation as income for the year in which such proceeds were received. Paid-up capital stock outstanding at close of year. "Paid-up capital stock outstanding at the close of the year," when used in connection with "interest-bearing indebtedness," to determine the maximum principal upon which interest for the purpose of an authorized deduction is to be computed, means the par value of shares issued as reported in Item 1 of the return form, and will not include the surplus carried by the corporation. (See T. D. 1960 for method of computation, and T. D. 1993 for regulation as to deduction of interest paid on indebtedness wholly secured by collateral, the subject of sale, in the ordinary course of business.) Pensions paid employees, etc. Amounts paid for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, are proper deductions as ordinary and necessary expenses. Gifts or gratuities to employees in the service of a corporation are not properly deductible in ascertaining net income of the corporation. Philippine and Porto Rican corporations. Such corpora- tions organized under laws of the United States or any State thereof, resident in the 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 possesisons and resident in said possessions, they are re- quired to pay their tax in the Philippines or in Porto Eico, as the case may be. The law provides that corporations shall make their returns "to the collector of internal revenue for the TEEASUEY KEGULATIONS. 1485 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. Public utility (business expense). In case of a public utility constructed, operated, or maintained under contract with any city, [State] Territory, or the District of Columbia, or a city where a portion of the net earnings of such public utility is payable under such contract to the State, Territory, etc., the amount so paid may be deducted by the public utility operating under such contract as an "expense of business." (See Art. 93, Eeg. 33.) Rent. Payments measured by a fixed percentage on the stock of a railroad corporation whose lines are leased by an- other railroad corporation and which rent is payable by the lessee directly to the stockholders of the lessor corporation, have, under the income tax law with respect to the corporation pay- ing such sums, the status of a rental payment. In such cases there are two corporations involved, the lessor and the lessee — one the rent payer and the other the rent re- ceiver. To the lessee rental payments are an expense of opera- tion ; to the lessor the rentals are an income. A contract which provides that the rentals shall be paid to a third party, not a party to the contract, does not change the character of the payment, nor relieve the lessor from liability to tax on the rental income which the lessee pays to it or to such third party. The income of the third party, the stock- holder, is dividends on the stock which he holds in the lessor company. Dividends can not be paid unless the lessor has an income out of which to pay them. Hence the lessor company is required under the law to return as income the rentals which the lessee is required to pay. In paying direct to the stock- holders the lessee is acting as the agent of the lessor, and the amounts received by stockholders are, in effect and in fact, dividends received out of the earnings of the lessor. Return (corporation). A corporation organized and trans- acting no business within the calendar year of its organi- zation must, nevertheless, make and file a return on the basis 1486 TEEASUliY REGULATIONS. 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. The duty to make a return de- pends upon corporate or associational existence and not upon the receipt of income. Return period. The return for a completed period must be made independently of any other period. A corporation changing from the basis of a calendar year to a fiscal year, and because of said change having a part of the calendar year, for which return is to be made, will be required to make a separate return for the fraction of the calendar year, and an- other separate return for the entire fiscal year; as June 30 being designated as the end of the fiscal year, the part of the calendar year from January 1 to June 30 must be covered in a retiirn to be made on or before March 1, then following, and on or before 60 days next following June 30 (next after the filing of return for the fractional part of a calendar year) a return must be made and filed for the entire fiscal year of the corporation. (T. D. 2029.) W. H. OSBOEN, Commissioner of Internal Revenue. Approved : W. G. McAdoo, Secretary of the Treasury. [Comment: Keleased for publication December 18, 1914.] TEBASUBY EEGULATIONS. 1487 (T.D. 2109.) Inco7Tie tax. Non-Eesident Aliens — Amendment of Article 8 of Eegulations 33j providing for the collection of tax on income of non-resident aliens. Tebasuey Depabtment, Office of Commissionee of Inteenal Revenue, Washington, D. C, December 28, 1914. To collectors of internal revenue: Treasury Decision 2013 [page 294] of August 12, 1914, amending Article 8, Income Tax Regulations No. 33, is amend- ed to make Article 8 read as follows, the words in italics con- stituting the further amendments : Art. 8. The income of non-resident aliens subject to the normal tax of 1 per cent shall consist of the total gains, profits, and income derived from all property owned and from every business, trade or profession carried on within the United States (to be designated as gross income), legs deductions (1 to 8, inclusive) specifically enumerated in paragraph B of the Act (see Art. 6), in so far as said deductions relate to said gains, profits, etc. The specific exemption in paragraph C of the Act can not be allowed as a deduction in computing the normal tax of non-resident aliens. Non-resident aliens are subject to additional or surtax the same as prescribed in the case of citizens of the United States or persons residing in the United States. The responsible heads, agents, or representatives of said non-resident aliens who are in charge of the property oivned or husiness carried on shall make full and complete return of the income therefrom on Form 1040 and shall pay any and all tax, normal and additional, assessed upon the said income of such non-resident aliens. The person, firm, company, copartnership, corporation, joint-stock company or association, and insurance company, in the United States, citizen or resident alien, in whatever 1488 TREASURY REGULATIONS. capacity acting, having the control, receipt, disposal, or pay- ment of fixed or determinable annual or periodical gains, profits, and income, of whatever kind, to a non-resident alien, under any contract or otherwise, which payment shall represent income of a non-resident alien from the exercise of any trade or pro- fession within the United States, shall deduct and withhold from such annual gains, profits, and income, regardless of amount, and pay to the officer of the United States Government authorized to receive the same, such tax as will he sufficient to pay the normal tax of one per cent imposed thereon by law; and shall make an annual return on Form 1042. Form 1008, Revised, claiming the benefit of deductions and refund of excess tax withheld, as provided by paragraphs B and E of the Federal Income Tax Law may be filed by the non-resi- dent alien with the withholding agent or Collector of Internal Revenue for the district in which the return is made or is to be made. W. H. OSBOEN, Commissioner of Internal Revenue. Approved : Wm. p. Malburn, Acting Secretary of the Treasury. INDEX. PREPARED BY EMMA FREAM. See also Annotated Statute and Digest. A. Abatement : claim for, of tax, may be filed when, by whom, § 97, p. 425. Absence : from United States, who may make claim for deductions (Form 1008) for, § 81, p. 327. Accruals, § 59, pp. 218, 558-560. Actions : for trespass or conversion against the collector or deputy collector, § 124, p. 515. against Commissioner of Internal Revenue, § 120, p. 499. Acquired: definition of, § 57, p. 210. Additional tax, § 3, p. 6 ; § 44, pp. 181, 182, 566-568. nonresident alien subject to, computed since as for citizens of United States, § 37, p. 159; § 44, p. 183. regulations for, § 44, p. 181. Additions and betterments: constituting increase in capital investment not deductible expense of corporations, § 43, p. 180; § 63, p. 227. Adjustment : assessment of tax withheld, withholding agent to be notified, § 81, p. 331. Administrator : return by, g 74, p. 268; § 78, p. 287. is fiduciary when, § 74, p. 268; § 78, p. 287. make return of income deceased person; when and what, § 80, p. 311. (See Deduction at the Source.) Advance in value, not income, § 46, p. 189. Adult members of family, § 72, p. 264. Adults, returns by, § 74, p. 269. Foster's Income Tax. — 94. 1489 ]490 INDEX. AflBdavit: verifying return of income, before whom made, § 83, p. 363. Agents : authorized, may sign for principal, certificate of ownership of bond, § 103, p. 446. compensated on commission basis, income of, not subject to with- holding at source, § 97, p. 419. making returns, § 74, p. 269. signing for principal, certificate of ownership of bonds, to furnish evidence of authority to act, when, § 103, p. 446. Agricultural organizations : exempt from law, § 41, p. 163. Aliens, nonresident: deduction at the source of debt due, when made, § 1487. duly authorized agent of, to make return for and pay tax, when, § 37, p. 159. See late ruling, p. 1487. income of, what to be included in return of, § 37, p. 159 net income of, defined, § 37, p. 159. normal tax on entire net income of, § 37, p. 159. not allowed exemption under paragraph C, § 37, p. 159. not entitled to exemption under paragraph C, § 34, p. 152; § 35, p. 153. subject to. additional tax, § 37, p. 159. taxable on entire net income in United States, § 34, p. 152; § 35, p. 153. tax on coupons or registered interest payable in United States to be withheld unless certificate of exemption (Form 1004) filed, § 103, pp. 448, 449. tax on incomes of property within the country, § 36, p. 155. resident — all income taxable, § 36, p. 155. certificate of ownership of bond, when and how to be used, and to specify what, § 103, p. 445. income of, from coupon or registered interest, tax on to be deducted and withheld except to extent exemption claimed, § 103, p. 446. taxable on net income less exemption and deductions, § 103, p. 445. Allowance, where suits on can be brought, § 122, p. 506. may be revoked, § 122, p. 506. on appeal to Commissioner, § 122, p. 504. conclusiveness of, § 122, p. 504. suits may be brought on, § 122, p. 504. Amendment of attachment proceedings against taxpayer, § 87, p. 380. Amortization : depreciation for, corporation allowed, when, how, § 64, p. 232. Amount used for construction, § 69, p. 253. paid shareholders, § 69, p. 253. IKDEX. 1491 Annual return: form 1013, to show what, and to be filed on or before Mar. 1 each year, § 81, p. 332. of coupons or interest orders not accompanied by certificate of owner- ship (form of), what to show when filed, totals only of monthly return, § 81, p. 332. of licensee for collection of foreign items (form of) what to show, with whom filed, when, § 81, p. 349. Annuity : money paid for (returned) not to be included in gross income, § 81, pp. 349,350. taxable, how treated, § 81, p. 350. Answer : of guardian, etc., to notice for failure to make return, may show what, p. 1366. from collector, procedure on, § 88, p. 381. from collector, subject matter of, § 88, p. 381. to commissioner, § 122, p. 503. his action upon, independent, § 122, p. 503. nature of, § 122, p. 504. condition of bringing suit, § 122, p. 501. may be lodged with collector, § 122, p. 503. to commissioner for return of taxes, § 122, p. 500. Application : for license — for collection, foreign items, § 104, p. 456. to collect foreign items to be made through principal office to col- lector of district in which located principal office, § 104, p. 457. for writs of mandamus, certiorari, prohibition, § 116, p. 491. Applied surrender values and consideration: for supplementary contracts — to be both added and deducted in return life insurance company, § 70, p. 260. Arrangement and packing: certificates, reports, returns, for forwarding by collector, § 89, p. 400. Assessment : insurance company, reserve of, definition, § 70, p. 261. list to be forwarded to commissioner, § 89, p. 383, of tax not to be restrained, § 115, p. 489. hearing upon, § 91, p. 406. re-assessment in case of erroneous, § 90, p. 406. of penalty, appeal from, § 90, p. 401. necessary in order to create lien, § 90, p. 404. notice of, to taxpayer not a part of, § 90, p. 405. error in, § 126, p. 519. 1492 INDEX. Assessment — cont'd. of penalties, § 87, p. 380. list, regulations as to, § 89, p. 383. not necessary to suits for taxes, § 111, p. 485. for local benefits, § 59, p. 220. of tax to be by commissioner of Internal Eevenue, § 89, p. 383. against income withheld at source, where to be made, § 103, p. 437. what it includes, § 90, p. 401. effect of, § 90, p. 402. not necessary to fix the tax, § 90, p. 402. legality of, may be questioned without appeal, § 90, p. 403. qiMsi judicial in character, § 90, p. 403. not conclusive upon those not parties to it, § 90, p. 404. form, and notice of, § 105, pp. 462-465. basis of calendar year or fiscal year, time to be made, § 90, pp. 401, 402. failure to pay, extra tax on, § 90, p. 402. limitation on time of making, § 90, p. 402. when to be paid, § 90, p. 402. Assets divided among shareholders, § 69, p. 253. Assets, capital: corporation — change in book value by annual adjustment on books, that value to be used in making annual returns, net income, § 50, p. 199; § 59, p. 217. change in book value by reappraisal, gain or loss, how computed, § 50, p. 199; § 59, p. 217. profit or loss on sale of, how determined, § 59, p. 217. loss from sale of, how ascertained, § 64, p. 228 ; § 68, p. 248. sale of corporation, net income from, how determined, § 59, pp. 216, 217. sale of, by corporation, income from, how determined, § 59, p. 216. shrinkage in book value of corporation, how treated, § 64, p. 231. Association : charitable, exemption, when, § 41, pp. 168, 169, 172. making false return, penalty for, § 87, p. 378. mutual, domestic building, etc., § 41, pp. 164, 173, 176. neglecting to make jreturn, penalty for, § 87, p. 379. net income of, preceding calendar year, normal tax on, § 39, p. 162. operating under "Lodge system," defined, § 41, p. 164. refusing to make return, penalty for, § 87, p. 379. religious, exemption, § 41, pp. 168, 172, 174. return of, when available, § 41, p. 173. scientific, exemption, when, § 41, p. 173. taxes to be assessed by Commissioner of Internal Revenue, when, sec- tion 3176, § 87, p. 379. to make list or return of taxes, how, when, section 3173, § 87, p. 380. INDEX. 1493 Attachment : on refusal to obey summons, § 87, p. 379. against taxpayer, amendment of proceedings in, § 87, p. 380. against taxpayer, constitutionality of, § 87, p. 380. Attorneys, § 54, pp. 206, 207; § 79, p. 307. Autliora : earnings of, indefinite or irregular, not subject to withholding at source, § 97, p. 414; p. 1370. B. Bad debts: corporation, deductible, when, § 68, p. 250. collected, are income, § 68, p. 250. Balances : outstanding tax, how treated, § 105, p. 465. Banks : allowing interest on deposits, not to withhold tax from, § 103, p. 435. deductible status of taxes assessed against stockholder, paid by, § 68, p. 247. interest paid on deposits allowable deduction, § 66, p. 239. taking coupons for collection, originated or payable in the United States, duty of, § 103, p. 438. mutual savings — having capital stock represented by shares, exempt from tax, § 41, p. 163. Beneficiaries : exemption from tax may be claimed by, from fiduciaries, § 80, p. 309. interest received by, from insurance companies on insurance contract, part of gross income, § 57, pp. 210, 211. Bequest : of property — income from part of gross income, § 57, p. 211. value of, not income, § 57, p. 11. Betterments, § 59, p. 220. Bill of particulars not granted to taxpayer, § 111, p. 485. Boards of trade: exempt, when, § 41, p. 164. Bonds : of the District of Columbia, § 27, p. 93. of a state or municipality, § 27, p. 94. of the United States, § 27, pp. 80, 81, 90. may be required of licensee for collection of foreign items, § 104, p. 457. 1494 INDEX. Bonds, etc.! of corporations, etc. — income from, subject to withholding at source, regardless of amount, § 103, p. 435. interest of foreign, subject to deduction and withholding, when, § 104, p. 452. sjiond and mortgages : interest on, subject to deduction, when, § 66, p. 240, Boolclceeping : requisites of, for verifying return, § 82, p. 362. Boolcmal^er : profits of, § 58, p. 214. Books : of corporation subject to examination, by whom, for what result, § 86, p. 377. Book value: capital assets — change in, by reappraisal, gain or loss, how computed, § 50, p. 199. shrinlfage in, how treated, § 64, p. 231. Building: removal of, corporation, not deductible loss, why, § 64, p. 228; § 68, p. 248; § 69, p. 254. Building and loan association : domestic, defined; what necessary to exempt from tax, § 41, p. 176. Business : carrying on in the United States, § 38, p. 160; § 39, p. 161; § 40, p. 163; pp. 563-566, 694-704. income from unlawful, § 58, p. 214. Calendar year: to govern when notice of corporation fiscal year not given in tim«» § 77, p. 281. Capital : increase of, not income, § 46, pp. 188, 189. invested in business, § 63, p. 226. stock, increase of, § 69, p. 253. Capital assets: book value of corporation, shrinlcage in, how treated, § 64, p. 231. corporation — change in value of, by annual adjustment on books, that value used in making return annual nat income, § 50, p. 199; § 59, p. 217. , change in boolc value by reappraisal; gain or loss, how computed, ■ § 50, p. 199; § 59, p. 217. INDEX. 1495 Capital assets — cont'd. loss from sale of, how ascertained, § 64, p. 228. profit or loss on sale of, how determined, § 59, p. 217. net income from sale of, how determined, § 59, pp. 216, 217. sale of, hy corporation, income from, how determined, § 59, p. 216. Capital investment: corporation, increased by additions and betterments, not deductible expense, § 63, p. 227. Carrying on a trade: what is, § 38, p. 160. Cash dividends, § 53, p. 204. Cemetery company: taxable status depends on what, § 41, p. 164. Certificate : accompanying foreign items, disposition of, by licensee, § 104, pp. 459, 460. claiming deductions account partnership expense, what and how, § 97, pp. 436, 1378. But see pp. 1432, 1434. claiming exemption and deductions to accompany annual return of withholding agents, § 81, p. 343. claiming exemption — as nonresident alien must be filed or tax withheld from payment coupon or registered interest, § 103, pp. 448, 449. from tax on registered interest to be filed at least five days before due date of interest, § 103, p. 446. of withholding, by foreign organization, Form 1018, § 103, pp. 448, 449. for nonresident alien, may be executed by whom, § 103, pp. 448, 449. exemption or deduction, disposition of, § 89, p. 400. form of, for foreign partnership composed of nonresident aliens, resident aliens, and citizens of United States, § 75, p. 274. of deposit, interest on, part of gross income, § 75, p. 274. of probable cause, § 127, p. 521. of probable cause, statute as to constitutional, § 127, p. 521. of probable cause, by whom to be granted, § 127, p. 521. of sale under distraint, § 108, p. 477. of service of notice, § 88, p. 381. of ownership accompanying coupons or registered orders, duty of collecting agency, § 103, p. 438. of ownership — by corporations organized in United States claiming exemption, form of, and how executed, § 103, p. 447. disposition of, by collecting agent, § 103, pp. 442, 443. 1496 INDEX. Certificate — cont'd. of persons not subject to having tax withheld, disposition of, by debtors and withholding agent, § 81, p. 341. not accompanying coupons or interest orders, tax to be withheld by first collecting agent, disposition of certificate, § 81, p. 346. of bonds — by citizen or resident of United States, when and how to be used and to specify what, § 103, p. 445. by corporations organized in the United States and certain exempt, must be filed to prevent withholding, § 103, p. 447. may be signed by authorized agents, § 103, p. 446. of corporations, etc., organized or doing business in the United States, form of, for foreign partnership, § 75, p. 273. signed by agent, when verified by first withholding agent, etc. good in all. other hands, § 103, p. 446. who to make and for what, § 103, p. 438. size of and paper for, § 103, p. 451. substitute by collecting agent, how to be treated by debtors or with- holding agent, § 81, p. 341. that of collecting agent substituted when, § 103, p. 442. Certificates, reports, returns: arrangement and packing of, for forwarding by collector, § 89, p. 400. Certiorari against Commissioner of Internal Revenue, § 118, p. 494. application for writ of, § 116, p. 491. Chambers of Commerce: exempt, when, § 41, p. 164. Change in book value: capital assets, corporation, reappraisal, gain or loss, how computed, § 59, p. 217. Change of investment, not income, § 46, p. 188. Charitable societies exempt, § 41, pp. 164, 168, 169, 172. purposes, what are, § 41, p. 169. Choate, Joseph H. : in Pollock Case, § 19, pp. 28, 29, 34, 35. Citizens : income of, from coupon or registered interest, tax to be withheld on except to extent exemption claimed, § 103, p. 446. of United States, certificate of ownership of bond, when and how to be used and to specify what, § 103, p. 445. resident; all income taxable, § 36, p. 155. non-resident; all income taxable, § 36, p. 155. taxable on net income less exemption and deductions, § 37, p. 159. INDEX. 1497 Civic leagues: exempt, when, § 41, p. ]64. organizations — exempt, when, § 41, p. 164. Claim: for exemption — by whom, for what, who to file, § 103, p. 446. paragraph C, in connection with foreign item, allowed to per- son entitled to, § 104, p. 459. penalty for false, § 103, p. 447. what must show and how executed, § 103, p. 445. when, and when to be filed, § 103, p. 447. insurance company, amount actually paid under policy contract, con- stitute deduction, § 70, p. 261. Clubs, § 41, pp. 173, 721. Collecting agency: first receiving coupons or interest orders not accompanied by certifi- cates of ownership should withhold tax and attach its certificate. Form 1002, that tax withheld, § 103, p. 441. agent — • in foreign countries to have privilege of substituting certificates for original ownership, § 103, p. 442. record to be kept by, what, § 103, p. 442. should require person presenting coupon or interest orders to es- tablish identity, § 103, p. 446. Collection : districts, § 78, p. 288. of judgments against collectors, § 127, p. 520. of tax from withholding agent, § 103, p. 442. of tax not to be restrained, § 115, p. 488. Collector : actions for trespass or conversion against, § 124, p. 515. advanced preparation notice of assessment by, particulars, § 105, p. 465. application for writs of mandamus against, § 116, p. 491. arrangement and packing certificates, reports, returns, § 89, p. 400. authority of, in any district, section 3173, § 85, p. 373. authorized to summon taxpayer, § 85, p. 372. claim for deductions may be filed with, when, § 103, p. 445. clerk not authorized to make entry, § 86, p. 378. collection of judgment against, § 127, p. 520. depositions on appeal to be taken before, § 88, p. 381. dispatch of business in offices of, § 89, p. 400. duty of^ as to returns withholding agents, § 89, p. 400. if persons refuse or neglect to render return, § 85, p. 372. in absence from home or place of business, § 85, p. 372. 1498 INDEX, Collector — cont'd. in case of refusal or neglect of liable individual to make return, § 85, p. 372. in case of undervaluation or understatement, § 85, p. 372. in forwarding — annual individual return to commissioner, § 89, p. 383. return and assessment list and investigation of return, § 89, p. 399. in making returns for persons failing to do so, § 85, p. 372. upon receiving notice of fiscal year of corporation, § 77, p. 281. failure to find person at home, duty of, section 3173, § 85, p. 373. interest on judgment against, § 127, p. 521. legality of returns made by, section 3176, § 85, p. 372. make return for individual, when, § 85, p. 373. may enter any collection district to examine witnesses, when, section 3173, § 85, p. 373. may receive appeal to commissioner, § 122, p. 503. method of handling and accounting for outstanding tax balances, § 105, p. 465. must require returns to be verified by oath or afliirmation, § 84, p. 363. not satisfied with responsibility, applicant for license to collect foreign items, may require bond, § 104, p. 457. of what district. Form 1008 to be filed, § 81, p. 327. order of arrangement, names in list made by, § 89, pp. 383, 391, 399. shall make report of false or fraudulent returns, how, section 3176, § 76, p. 278; § 85, p. 372. shall require deputies to ascertain persons liable to tax, section 3172, § 85, p. 373. sickness or absence, may extend time for making returns, section 3176, § 77, p. 283. tax statement rendered monthly, particulars of, § 105, p. 465. tax withheld to be paid to, § 97, p. 421. to adjust in assessment in case of withholding, when, § 81, p. 331. to furnish withholding agent with statement of claim for deductions filed with collector, § 81, p. 331. to obtain testimony, may summon whom, section 3173, § 85, p. 373. to report tax due, how, forms for, § 89, p. 383. to send notice of what, form of and time to serve, § 105, pp. 462, 465. to send notice to delinquent and file return, § 89, pp. 400, 401. to receive payment of judgment in suits by U. S., § 109, p. 484. to which, application of principal oiSce made for license for branch office, to serve collector in district of branch with what, § 104, pp. 457, 458. when claim for deductions, paragraph B, to be filed with, § 81, p. 327. INDEX. 1499 Collectors' officea, § 78, pp. 289-296. vCommissioner of Internal Revenue: annual return of individual to be forwarded to, how, § 89, p. 383. appeal to, for return of taxes, § 122, p. 500. appeals to, may be lodged with collector, § 122, p. 503. assessments niide by, § 90, p. 401. certiorari against, § 118, p. 494. facsimile of signature on licenses for collecting foreign items fur- nished collectors, § 104, p. 456. mandamus against, § 117, p. 492. prohibition against, § 119, p. 498. personal liability of, § 120, p. 500. shall add 50 per cent or 100 per cent to tax, when, § 85, p. 375. shall assess taxes, when, section 3176, § 85, p. 375. to impose additional tax, when, § 85, p. 375. to issue licenses for collection of foreign items through collectors, § 104, p. 456. to make assessment of taxes; give notice of, when; duty of in case neglect or refusal to make return or of false or fraudulent re- turn, § 90, pp. 401, 402. Commissions : paid to salesmen in stock of corporation, deductible expense, when, § 61, p. 223. Communications, privileged, § 85, p. 372. Company : foreign, normal tax on business transacted in United States, § 39, p. 162. joint-stock, etc., withholding normal tax on behalf of others, § 97, p. 414. mutual cemetery, exempt when, § 41, p. 164. taxes to be assessed by commissioner, when, section 3176, § 85, p. 375. Compensation : for personal service, part of gross income, § 57, p. 212. officers and employees of state or political subdivision of, not to be included in gross income, § 56, p. 210. paid to employees of corporation on basis of stockholdings not de- ductible, why, § 61, p. 223. present president and judges of court exempt from tax, what, § 56, p. 210. public school teachers of state or political subdivision of, not part of gross income, § 56, p. 210. Compromise, meaning of, § 113, p. 487. Compromises, § 113, p. 487. Confiscation, § 23, p. 56. 1500 INDEX. Consideration for supplementary contracts and applied surrender values: to be both added and deducted in return life insurance companies, § 70, p. 260. Construction; profits used for, § 68, p. 247. Construction of law: as to withholding at source, liberal, § 97, p. 417. Constitutional questions, §§ 18, 32, pp. 27, 151. Constitutionality of attachment against taxpayer, § 30, p. 147. Contents of returns, §§ 81, 82, pp. 326, 362w. Contract: affecting liability of a, taxable person as such, to be invalid, § 103, pp. 436, 437, 1368. Conversion against collector and deputy collector, § 124, p. 515. Copies of returns : how obtained, for what purpose, § 84, p. 365. Corporation : additions and betterments constituting increase in capital investment not deductible, § 61, p. 223; § 64, p. 228. all organized in United States subject to tax (certain exceptions), §i 45, p. 186. amount allowed for depreciation of property, § 64, p. 228. amounts paid employees — as compensation on basis of stockholdings not deductible, why^ § 61, p. 223. for pension or on account injuries, deductible expense, § 61, p.. 223. assessment — insurance company, reserve, definition, § 70, p. 261. to be paid when, § 90, p. 401. bad debts deductible, when, § 68, p. 250. banks, etc. — interest paid on deposits, etc., allowable deduction, § 66, p. 242. paying taxes assessed against their stockholders, deductible- status of, § 67, p. 247. books of, subject to examination, by whom, for what, result, § 86, p.. 377. cemetery, taxable status depends on what, § 41, p. 164. certificates of ownership by claiming exemption, form of and how executed, § 103, p. 447. change in book value of capital assessed by annual adjustment on books that value to be carried into return, § 50, p. 199. change in book value of capital assets by reappraisal, gain or loss, how computed, § 50, p. 199. charitable, exempt, when, § 41, pp. 164, 168, 169, 172. classes, enumeration of, § 82, p. 358. collector to furnish blanks for return of, § 82, p. 359. INDEX. 1501 Corporation — cont'd. collecting foreign income, to have license, § 104, p. 453. commissions to salesmen paid in stock, deductible expense when, § 61, p. 223. complete return to be made by or will not be accepted, § 82, p. 360. contract with by State, etc., prior to passage income-tax act, income from accruing to individual, subject to tax, § 41, pp. 164, 165. contract with by State, etc., prior to passage income-tax act, income from accruing to State, etc., exempt from tax when, § 41, p. 165. cost of buildings on leased ground, deductible as rent, when, § 64, p. 227. dairies, co-operative, not subject to tax, what, § 41, p. 163. deductible loss deiined, § 69, p. 254. deduction account interest on indebtedness limited to what, when, § 59, p. 220. deduction — account materials and supplies on hand, what, § 61, p. 224. for depletion of mines regulation and rate of, limit of, § 64, p. 234. for depreciation of natural deposits, basis and limit of, § 64, p. 234. for depreciation on patent, what, how determined, § 64, p. 233. for depreciation on timberlands, limit of, excess of, is income, § 64, p. 234. for interest paid at different rates, rule of application, § 66, p. 240. for obsolescence of patents, what, how determined, § 64, p. 233. defined, § 59, p. 215. depreciation timberland from removal of timber, amount, how deter- mined, § 64, p. 234. depreciation — deductible, amount, how treated, § 64, p. 229. defined, § 82, p. 360. for amortization allowed, when, how, § 64, p. 232. how determined, § 82, p. 360. reserve, use of, disposition excess of, § 64, p. 231. division of depreciation of reserve, correction, § 64, p. 231. donation for charitable purposes, deductible when, § 61, p. 223. duties not deductible as tax but item of cost, § 68, p. 247. educational, exempt, when, § 41, p. 164. engaged in more than one class of business, gross income ascertained in accordance with applicable definitions of such income, § 59, p. 217. every, not specifically exempt, required to make return of income, § 41, p. 173. evidence requisite for allowance of deduction, § 64, p. 229. excise and income tax for 1913 in one return, § 64, p. 229. 1502 INDEX. Corporation' — cont'd. excise tax on, for what period, how computed, § 64, p. 229. exempt from tax, what are, § 41, p. 163. expense of operation and maintenance to be shown in return, § 76,. p. 277. includes what, § 61, p. 223. failure to receive blanks will not excuse from making returns, or from penalties for such failure, § 82, p. 359. firms, etc., withholding normal tax on behalf of others, § 97, p. 422. fiscal year of, how established, what to do, § 77, p. 280. illustration of and what to do, § 77, p. 280. foreign, normal tax on business in United States, § 104, p. 454. . coupons, checks, bills of exchange, etc., normal tax deducted from, when, § 104, p. 452. dividends on stocks of, normal tax deducted when, § 104, p. 452. having more than one branch office in United States to designate- principal office and person to make return, § 59, p. 220. interest on indebtedness to be deducted, what, § 45, p. 185. to give amount of bonded and other indebtedness, § 45, p. 186. to set forth paid-up capital stock, § 45, p. 186. form of return prescribed for, § 82, p. 359. general expense foreign steamship companies, how treated, § 61, p. 223. gifts or gratuities to employees not deductible, § 61, p. 223. good will, depreciation not allowed in connection with, § 64, p. 233, gross income — definition of, § 59, p. 215. general definition, § 59, p. 216. gross value of the mines, definition of, § 64, p. 234. in addition to deduction for depletion of mines, etc., deduction for depreciation of plant, what, basis of, § 64, p. 235. income — excepted during the year, § 78, p. 287. from sale of capital assets, how determined, § 59, p. 216. how ascertained, § 59, p. 217. losses from, § 59, p. 217. insurance company — "deductible net addition to reserve," definition; what basis of computation of; what not to be included in, § 70, p. 261. deduction, claims actually paid under policy contract, § 70, p. 261. depreciation loss by shrinkage in property value, what and when deductible, § 70, p. 261. gross income of, definition of, §§ 70, 71, pp. 259, 260, 264. losses, deductions for, what, § 70, p. 261. reserve to meet losses, how treated, § 70, p. 261. salvage, how to be treated in return of, § 70, p. 261. INDEX. 1503 Corporation^comt'd. interest paid— as rental, how treated, § 66, p. 240. by, on mortgage on property in which corporation has equity or is purchasing, § 66, p. 240. deduction, what, when, § 66, p. 239. on debts secured by collateral subject to sale, deductible, when, why, § 66, pp. 240, 241, 242, 243. on deposits, etc., deductible, when, § 66, p. 242. inventory, purpose and use of; kinds of, § 82, p. 360. leased, to make its own return, § 59, p. 220. leasing oil or gas territory, deductions for depletion, basis of, § 64, p. 235. lessee, property of, assuming indebtedness of lessor, return by lessee, what, § 59, p. 220. lessee, not to include capital stock or debts of lessor in return, except, § 59, p. 220. life insurance company — applied surrender values and consideration for supplementary contracts both added and deducted in return, § 70, p. 260. deductions from gross income, what, § 70, p. 258. gross income, definition of, § 70, pp. 259, 260. supplementary statement attached to return of, showing what, § 70, p. 260. liquidation of, make final return of what; filed when and where, § 76, p. 277. "lodge system," defined, § 41, p. 164. loss — actual, sustained, § 69, p. 253. sustained during year, § 69, p. 253. from removal of buildings, not deductible, why, § 68, p. 248. from sale of capital assets, how ascertained, § 64, p. 228. securities below par, how treated, § 64, p. 232. making false return, penalty for, § 87, p. 379. may designate day to pay tax, § 42, p. 177. manufacturing company, gross income, definition, § 59, p. 216. mercantile company, gross income, definition, § 59, p. 216. miscellaneous, gross income, definition, § 59, p. 216. mutual companies making return, definition of net income, § 41, p. 173. mutual fire insurance company — gross income, definition, § 70, p. 258. supplementary statement attached to return, showing, what, § 70, p. 260. mutual marine insurance company — deductions from gross income, what, § 70, p. 259. 1504 INDEX. Corporation — cont'd. supplementary statement attached to return of, showing what, § 70, p. 260. will deduct, what, § 70, p. 259. neglecting to make return, penalty for, § 87, p. 379. net income — annual, normal tax on, § 42, p. 177. engaged in more than one class business, how ascertained, § 66, p. 242. for 1913, how ascertained, § 42, p. 177; § 64, p. 229. preceding calendar year, normal tax on, § 42, p. 177. of, should be what, § 69, p. 253. of, which is distributable to owners thereof; subject to tax, § 59, p. 215. from all sources, § 44, p. 182. from sale of capital assets, how determined, § 50, p. 199. to be shown on return, § 82, p. 357. no specific exemption from tax, § 41, p. 165. notes for a period of one year or less, p. 1461. notice — given of assessments made, § 89, pp. 383, 385. of fiscal year, not retroactive, § 77, p. 282. not receiving blank for making return, should make application for, to whom, when, § 82, p. 359. not to include taxes paid in foreign countries in income; see seventh deduction, § 104, p. 452. obligations of, p. 1461. officers of, making false return, penalty, § 87, p. 379. only one return and assessment for 1913, § 77, pp. 279-284. on what taxed; what, and amount of, § 41, pp. 163, 164. operating mines, oil or gas wells, on royalty basis, not allowed, deduc- tion for depletion of deposits, § 64, p. 235. operations of, etc., unlawful to divulge, section 3167, § 84, pp. 364, 542. organized — during the year, to make return of what, § 76, p. 277. elsewhere than in United States, subject to tax on what, § 39, p. 161; § 40, p. 162. in United States and certain exempt, interest on bonds payable to, tax not to be withheld if certificate of ownership filed, § 103, p. 447. paid-up capital stock, definition of, § 59, p. 215. partnership — limited, is, and subject to corporation tax, § 59, p. 215. ordinary, not subject to tax as, § 57, p. 212. INDEX. 1505 •Corporation — cont'd. payments on account of tax from covenant in bonds, not deductible in ascertaining net income, § 66, p. 242. penalty for — failure to — make return, § 82, p. 359. pay tax by June 30, § 87, p. 380. refusal to make return, § 87, p. 379. principal place of business of, § 82, pp. 354, 1461. profit or loss on sale, capital assets, how determined, § 59, p. 217. property purchased by, subject to mortgage, p. 1462. public utility, governmental function, income accruing through, to state, exempt from tax, § 41, pp. 164, 165. quasi-public, § 41, p. 167. railroad whose income paid by its lessee direct to stockholders must make return of income, § 82, p. 357. religious, exempt, § 41, pp. 164, 168. repairs may be deducted, what, § 61, p. 224. reserve for — insurance of own property not deductible, § 61, p. 224. losses, not deductible, § 61, p. 224. taxes, not deductible, § 68, p. 247. residence of, p. 1462. jeturn — for 1913 must be on new form and not on excise form heretofore used, § 77, p. 281. to be made, when, § 77, p. 283. when available, § 77, p. 283. when state oflBcers may have access to, § 84, pp. 364, 365. when to be made. Section 3173, § 77, p. 284. shrinkage in value, capital assets, how treated, § 64, p. 231. special excise tax, how computed, § 42, p. 177; § 64, p. 229. status for taxation purposes to be established, how, § 41, p. 16S. subject to tax — classes enumerated, § 45, pp. 184-186. normal only, but on entire net income, § 79, p. 298. special excise, under act August 5, 1909, § 42, p. 177 ; § 64, p. 229. taxable status in doubt, must make return and attach thereto state- ment showing what, § 41, p. 165. tax — computed on net income of, § 45, p. 184. deduct amount paid for, § 67, p. 247. paid by — constitute deduction, when, § 67, p. 247. when not deductible, § 67, p. 247. to be assessed by Commissioner of Internal Revenue, when. Sec- tion 3176, § 90, p. 401. Foster's Income Tax. — 95 150^ INDEX. Corporation — cont'd. ,; to give notice, day designated for return, § 77, p. 279. make list or return, how, when. Section 3173, § 77, pp. 284, 543. unconstitutional discrimination against, § 24, p. 69. unearned increment, not value for depreciation purposes, § 64, p. 235. United States, filing certificates of ownership, exempt from withhold- ing of foreign items, § 104, p. 459. when to make return, § 77, p. 279. Cost: of buildings on leased ground, deductible as rent of corporation, when, § 61, p. 223; § 64, p. 227. of suit, § 60, p. 221. Costumes. See Actors and Actresses, p. 1462. Counties in the territories, § 41, pp. 165, 167. tax on incoipe of unconstitutional, § 34, p. 152. constitutionality of Federal tax on income of, § 27, p. 93. Court of Clajms, suit on allowance may be maintained in, § 122, p. 505. D. Dairies : co-operative, not subject to tax, what, § 41, p. 163. Damages : for causing death, § 58, p. 212. in actions of tort, § 58, p. 214. Death, damages .for causing, § 58, pp. 212, 558. Debt, worthless, § 68, pp. 250, 609, 610, 1462. Debtor : annual — list return by, when and what, § 81, p. 332. return by, to show totals only of monthly list return, § 81, p. 341. debts, in the hands Of the, tax on, § 68, p. 250. definition of, § 103, pp. 437, 438. how to treat substitute certificate of collecting agent and certificate of owner not subject to having tax withheld, § 81, p. 341. interest on bonds due, corporations organized in United States and certain exempt, not to withhold tax if certificate filed, § 103, p. 447. maker of note given in payment of interest held responsible for tax on, § 97, p. 420. may appoint withholding and paying agent to act for it, § 103, pp. 437, 438. note given in payment of income, maker of note is, § 97, p. 420. not to withhold against nonresident alien or foreign organization doing busjniess in United States, when, § 103, pp. 448, 449. IKDEX. 1507 Debtor — cont'd. not to withhold when receiving certificate of eolleeting agent that tax withheld by same, disposition of certificate;, § 103, p. 441. return of withholding by, where to be filed, § 103, pp. 437, 438. in United States (or its withholding agent) charged with dnty of withholding from coupons or registered interest, § 103, p. 438. in United States, duty of, before payment of registered interest, § 103, p. 445. when source for withholding purposes, § 102, p. 432. Decision of collector to be final, § 88, p. 382. Decedent, return of a. See Executors and Administrators, § 80, pp. 311, 1462. Decedent's estate, § 42, p. 178; pp. 630, 631. "Deductible net addition to reserve:" insurance company; definition; what basis of computation of; what not to be included in, § 70, p. 261. Deduction at the source, generally, § 97, p. 414; pp. 654-667- administrators, by, § 101, p. 430; § 102, p. 431, agents, by, § 102, p. 431. alimony, from, § 97, p. 421; p. 660. applies to normal tax only, § 97, p. 414. coupons, from, § 103, p. 435. dividends upon preferred stock, from, § 103, p. 436. employers, by, § 99, p. 428. executors, by, § 101, p. 430; § 102, p. 431. fees of lawyers, physicians and others, from, § 97, pp. 420, 421. fiduciaries, by, § 102, pp. 431, 432. insolvents' estates, § 101, p. 430. interest, from, § 97, p. 422; pp. 659, 661, 667, 739. irregular payments, not from, § 97, p. 420; § 100, p. 429. masters, by, § 101, p. 430; p. 659. mortgagors, by, § 103, pp. 434, 435, 659, 660. obligations of corporations, from, § 103, p. 435. public oflScers, by, § 100, p. 429. receivers, by, § 101, p. 430. referees in bankruptcy, by, § 101, p. 430. rent collectors, by, § 97, pp. 419, 420. rent, from, § 97, pp. 419, 420. salaries of actors, § 99, p. 428, note. of public ofiicers, from, § 100, p. 429. of employees of individuals and corporations, from, § 100, p. 429. trusts, in bankruptcy, by, § 101, p. 430. Deduction: account partnership expense, account of and form for claiming, § 75, p. 273. additions and betterments constituting inerease in capital investment, not, § 64, p. 227. 1508 INDEXi Deduction — cont'd. allowance for in aom^uting, what, when, § 97, p. 414. amount of; to ascertain net income, § 97, p. 414. and exemptions in certain cases, § 104, p. 452. bad debts of corporation, when, § 68, p. 250. basis, for depletion leased oil or gas territory, § 64, p. 235. by guardian, § 73, p. 266. claims for — filed with collector, withholding agent to be furnished statement of, § 97, p. 425. may be filed with withholding agent, when, § 97, p. 425. not allowed unless made, when, § 97, p. 424. commission to salesmen paid in stock of corporation is, when, § 61, p. 223. compensation, officers and employees of State, etc., except, when; judges Federal courts now in office; present President for present term, § 100, p. 429. compensation paid employees of corporation based on stockholding, not, why, § 61, p. 223. corporation — account interest paid oH debt, limited to what, when, § 59, p. 220. materials and supplies on hand, what, § 61, p. 224. depreciation, amount, how treated, § 64, p. 229. donations for charitable purpose, when, § 61, p. 223. evidence requisite for, allowance of, § 69, p. 254. ■for interest paid at different rates, rule of application, § 66, p. 240. gifts or gratuities to employees, not, § 61, p. 223. pensions and damages for injuries to employees, are, § 61, p. 223. reserve — for insurance its own property, not, § 61, p. 224. to meet losses insurance companies, not, § 70, p. 261. status of tax for, to bank, assessed against stockholder, paid by banic, § 67, p. 247. debts due taxpayer, ascertained worthless and charged off in year, § 68, p. 250; § 69, p. 254. depletion of mines, regulation of rate of, limit of, § 6,4, p. 234. depreciation — defined, § 82, p. 360. for amortization, allowed when, how, § 64, p. 232. how determined, § 82, p. 360. loss by shrinkage in property value, insurance company, what and when, § 70, p 261. reserve, how, disposition, excess of, § 64, p. 231. of good will not allowable, § 64, p. 233. of natural deposits, basis and limit of, § 64, p. 234. INDEX. 1509 Deduction — confd. of plant (in addition to deduction for depletion of mine), what, and basis of, § 64, p. 235. on patent, what, how determined, § 64, p. 233. unearned increment, not value for purpose of, § 64, p. 235. timber land — limit of, excess of, is income, § 64, p. 234. removal of timber, amount, how determined, § 64, p. 234. dividends on stock, what, when, § 97, p. 420. exemption under paragraph C, not allowed nonresident alien, § 37, p. 159. false statement in regard to, penalty, § 87, p. 379. from income of husband and wife, § 72, p. 264. from gross income — mutual marine insurance companies, what, § 70, p. 259. of nonresident alien, what, § 37, p. 159. to ascertain net income, for normal tax paragraph B, what, § 97, p. 424. from net income to ascertain taxable, exemption, paragraph C, § 97, p. 422. from premiums, etc., by whom made, when, § 97, p. 420. for ascertaining net income, what, § 97, p. 414. for fire, storm, shipwreck, § 68, p. 247. foreign corporation, to ascertain net income, § 104, p. 452. for expense of business, partnership may claim, when and how, § 75, pp. 272, 273. for restoring property, etc., none, § 60, p. 221. increase value of property, none, § 59, p. 218. insurance company — claims actually paid under policy contract, are, § 70, p. 261. losses, what, § 70, p. 261. interest on obligations, State or political subdivision of, and of United. States or possession, § 41, pp. 165, 167; § 43, p. 180. interest paid by — bank, etc., on deposits, etc., is, § 66, p. 242. corporation — as rental, not allowable, § 66, p. 240. is, what, when, § 66, p. 240. on indebtedness secured by collateral subject to sale, when, why, § 66, p. 241. on mortgage on property in which a corporation has equity, is and amount of, § 66, p. 240. joint-stock company, § 66, p. 238; § 69, p. 253. 1510 INDEX. Deduction — cont'd. ' life inauran,ce company — from gross income, applied surrendered values and consideration for supplementary contracts, § 70, p. 260. from gross income, what, § 70, p. 258. loss — during year, § 68, p. 247: § 69, p. 254. which corporation may make, defined, § 69, p. 254. from removal of building not deductible, why, § 68, p. 248. from sale — capital assets, now ascertained, § 64, p. 228. corporation securities below par, how treated, § 64, p. 232. may be claimed account tax on note given in payment of income, § 97, p. 420. mutual marine insurance company, what, § 70, p. 261. not compensated by insurance or otherwise, § 68, p. 247. notice to be filed for, § 97, pp. 424, 425. obsolescence of patents, what, how determined, § 64, p. 233. only, claim for, may be filed with collector, when, § 97, p. 425. paid for new buildings, none, § 68, p. 248. paragraph B, under — may be claimed in case of fixed, determinable annual income, § 81, p. 327. not claimed of withholding agent in time, only remedy, applica- tion for refund, § 97, p. 425. when claim for (Form 1008), to be filed with withholding agent of collector, § 81, p. 327. permanent improvements or betterments, none, § 68, p. 248. property owned, business carried on in United States, person residing elsewhere, what, § 43, p. 180. repairs, when, § 61, p. 224. reserve for losses, not, § 61, p. 224. single person, amount allowed, § 97, p. 421. subsections 7 and 8 not deducted when computing additional tax, § 44, pp. 183, 1462. tax withheld, when, § 97, p. 420. taxes paid by corporation — are, when, § 67, p. 247. when not, § 67, p. 247. to ascertain net income corporation engaged in more than one class of bXisiness, § 45, pp. 184, 385. Deed prima facie evidence, § 108, p. 477. Deeds of trust, etc.: , corporation, income from, subject to withholding at source regardless of amount, when, § 103, p. 437. Default in payment, penalties for, § 106, p. 471. INDEX. 1511 Delay in payment, § 93, p. 409. Delinquent : tax becomes, if not paid by June 30, § 90, p. 401. Demand for tax, § 105, p. 461. for payment necessary to create lien, § 105, p. 462. to create lien, should be in writing, § 107, p. 474. Depletion : deduction for, mines, oil or gas wells operated on royalty basis, not allowed operating corporation, § 64, p. 235. leased oil or gas territory, basis for deduction for, § 64, p. 235. of mines, etc., regulation of rate of deduction for, limit of, § 64, p. 234. Deposit: certificate of, interest on, part of gross income, § 103, p. 435. interest on, not subject to withholding; must be included in personal return whether paid or not, § 103, p. 435. interest on, part of gross income, § 103, p. 435. Depositions on appeal to be taken before collector, § 88, pp. 381, 382. Depreciation : corporation, defined, § 82, p. 360. deductible, amount how treated, § 64, p. 229; § 82, p. 361. deduction for— of natural deposits, basis and limit of, § 64, p. 234. of plant (in addition to deduction for depletion of mine), what, and basis of, § 64, p. 235. on patent, what, how determined, § 64, p. 233. of theatrical costumes, p. 1456. diversion reserve for, correction, § 64, p. 231. for amortization, allowed, when, how, § 64, p. 232. gross value at the mine, defined, § 64, p. 234. how established in case of mines, § 64, p. 234. loss by shrinliage in property value, insurance company, what, and when deductible, § 70, p. 261. of good will not allowable deduction, § 64, p. 233. of property, § 64, p. 227; pp. 610, 613, 728, 736. timber land — from removal timber, amount, how determined, § 64, p. 234. deduction for, limit of, excess of is income, § 64, p. 234. unearned increment, not value for basis of deduction for, § 64, p. 235. Depreciation reserve: - use of, disposition excess of, § 64, p. 231. Deputy collector: actions for trespass or conversion against, § 124, p. 515. ascertain persons liable to tax and enumerate objects, section 3172, § 74, pp. 269, 543. depositions on appeal may be taken before, § 88, pp. 381, 382. , , 1512 INDEX. Deputy Collector — cont'd. legality of returns made by, section 3176, § 85, pp. 371, 372, 543. not authorized to summon taxpayer, § 85, p. 375. to make report, false or fraudulent return, how, section 3176, § 87^ pp. 379, 543. Descent : of property — income from, part of gross income, § 57, pp. 210, 211; § 58, p. 212. value of, not income, § 57, pp. 210, 211; § 58, p. 212. Devise of property: income, part of gross income; value of, not income, § 57, pp. 210, 211;. § 58, p. 212. Direct tax, income tax a, § 18, p. 27. Distraint, § 108, p. 474. exemption from, § 108, p. 474. certificates of sale under, § 108, p. 477. fees on, to be regulated, § 108, p. 482. notice' of sale of real estate to be published, § 108, p. 478. on real estate, § 108, p. 478. proceedings on, § 108, p. 475. Distress proceedings, constitutionality of, § 32, p. 150. District Court, suits on allowance may be maintained in, § 122, p. 506. District of Columbia, § 27, p. 93; § 41, p. 165. exemptions, proviso, § 41, p. 165. Supreme Court of, may issue writs of mandamus, § 116, p. 492. Diversion : depreciation reserve, correction, § 64, p. 231. Dividends, § 53, p. 203; pp. 579, 585. cash, § 53, p. 204. compensation paid employees of corporation based on stockholding are, when, § 61, p. 223. co-operative dairies, is purchase price of raw material, § 41, p. 163. deducted from net income, when, § 53, p. 204. in scrip, § 53, p. 205. of corporations subject to tax not subject to withholding, § 97, p. 420. of foreign corporations, § 53, pp. 204, 1463. payment of, § 53, p. 204. part of gross income, § 59, p. 216. stock foreign corporations, subject to withholding when, § 53, pp. 204, 205. stock subject to tax — individual owning, how treated, § 53, pp. 204, 205. tax on, § 53, p. 203. upon insurance policies, § 53, p. 205; § 70, p. 257; § 71, p. 263. what are, § 53, p. 204. Division of assets, § 53, p. 204, INDEX. 1513 Doctors : fees of, indefinite or irregular not subject to withholding, § 54, p. 207. Domestic building and loan association: definition, what necessary to exempt from tax, § 41, p. 176. Domicile distinguished from residence, § 36, p. 155. Donations : by corporation for charitable purpose, deductible when, § 61, p. 223. Drainage, etc., p. 1463. Due date: return on Sunday or legal holiday, effect of, § 77, p. 284. Duties : not taxed and not deductible but are item of cost, § 68, p. 247. E. Educational corporations : exempt, when, § 41, pp. 164, 168. Embezzlement, loss by, § 69, p. 253. Employees : State or political subdivisions, compensation of officers and employees paid by, not part of gross income, § 41, p. 166. State officers or employees, compensation paid by United States a part of gross income, § 41, p. 166. foreign, of domestic corporations, p. 1463. Endowment : money paid for; returned, not to be included in gross income, § 57, p. 211. Enlargement of plant, § 68, p. 249. Entry of taxpayer's premises, § 86, p. 377. Enumeration of remedies of taxpayer, § 114, p. 488. Equipment trust notes, p. 1463. Estimated depreciation of personal property, § 68, pp. 247, 248. of real estate, § 68, pp. 247, 248. Estoppel, none as to lien, § 107, p. 474. Evidence : furnished by agent of authority to sign ownership certificate to be re- tained by verifying agent, § 103, p. 446. guardian, etc., served with notice for failure to make return, may fur- nish, what, § 80, p. 308. of nonliability to payment of tax, filed with withholding agent, may be forwarded to collector in lieu of tax, § 87, pp. 379, 380. requisite for allowance of deduction by corporation, § 69, pp. 253, 254. Examination of taxpayers, constitutionality of provisions concerning, § 30, p. 128. of books of taxpayers, constitutionality of provisions concerning, § 31, p. 148. 1514: INDEX. Excise and income; tax, corporation, 1913 in one return, § 42, p. 178. Excise tax: corporation, for what period, how computed, § 42, p. 177. Executor : and administrator, § 80, pp. 311, 1463. is fiduciary, when, § 102, p. 432. make return of income of deceased within taxable year, when and what, § 74, pp.' 268, 638. return by, § 74, p. 268; § 78, pp. 287, 638. (See Deductions at the Source.) Exempt : bonds of the United States, § 103, p. 435. corporations, § 41, p. 163, pp. 705-719, 1463. from tax — corporations, what, § 41, p. 176. co-operative dairies, what, § 41, p. 163. income from public utility, § 41, pp. 164, 168. Exemption : allowed in computing taxable income of deceased person, when, § 74, pp. 268, 638. amount allowed married person, § 72, p. 264. and deductions, § 104, p. 452. beneficiary may claim from fiduciary, § 80, p. 310. boards of trade, when, § 41, p. 164. cemetery company, depends on what, § 41, p. 164. certificate claiming by corporation organized in United States, form of and how executed, § 103, p. 447. certificate claiming, what must show and how executed, § 103, p. 445. chambers of commerce, when, § 41, p. 164. charitable associations, when, § 41, pp. 164, 168, 169. civic leagues or organizations, classes of, when, § 41, p. 164. claimed by fiduciary, forms 1015 or 1019, § 102, pp. 432, 433. claimed for — by whom, with whom and when to be filed, § 103, p. 445. how to be filed, § 103, p. 445. may be filed with withholding agent, when, § 97, p. 425. under paragraph C — allowed to person permitted to claim, § 104, p. 459. failure to claim, effect of, § 97, p. 422. corporation claiming — to establish rights to, how, § 41, p. 165. whose taxable status in doubt, must make return and attach statement showing what, § 41, p. 165. District of Columbia, provisions, § 41, p. 165. domestic building and loan associations, § 41, p. 176. INDEX. 1515 Exemption — cont'd. educational corporation, when, § 41, p. 174. false claim of statement as to, penalty for, § 81, p. 326. fraternal societies, § 41, p. 163. from distraint, § 108, p. 474. husband and wife — living together, citizen or resident alien, and incomes for pur- poses of, amount of, § 72, p. 265. separated and living permanently apart, citizen or resident alien, each entitled to $3,000, § 72, p. 265. individual — deduction of from net income to ascertain taxable, § 97, pp. 422, 423. amount of, for 1913, § 97, p. 420. single, or married but not living with husband or wife, may claim $3,000 each, § 72, p. 265. may be claimed, note given in payment of income, § 97, p. 420. mutual cemetery companies, § 41, p. 164. none for corporations, § 77, p. 282. paragraph C — not allowed nonresident alien, § 37, p. 159. not claimed of withholding agent in time, only remedy application for refund, § 97, p. 425. to be filed with witiiholding agent when, § 81, p. 331. Philippine Islands, § 41, p. 165. ' Porto Rico, § 41, p. 165. public utility, § 41, pp. 165, 168. religious associations and corporations, § 41, p. 168. scientific associations when, § 41, p. 164. state laws as to, not applicable, § 108, p. 475. status of person claiming determined as of time of claim, § 72, p. 265. to be deducted from net income to ascertain taxable under paragraph C, § 97, p. 425. Expense : deductible, pension or amounts paid employees account injuries are, § 61, p. 223. general, foreign steamship companies, how treated, § 61, p. 223. of operation and maintenance corporate business, what includes, § 61, p. 223. partnership may claim deduction for, when and how, § 75, pp. 272, 273. rental value of premises, § 60, p. 222. Expenses, personal, § 62, p. 225. of conveyance, § 62, p. 225. taxes unpaid are not, § 62, p. 225. 15 IG INDEX. Extension: time for filing return, when, what, how, § 77, p. 283. to make return, not exceed what, how and to whom made, § Tly p. 283. Extra-territoriality of tax on incorporeal property, § 26, pp. 75, 76. of tax on corporeal property, § 26, pp. 75, 76. Extra-territorial taxation, § 26, p. 74. F. Failure to make return, penalties for, § 87, pp. 378, 1464. False return: additional tax imposed, § 87, p. 379. or fraudulent, penalty, § 87, p. 379. Family supplies not deductible expenses, § 62, p. 225. Farm produce, § 52, p. 201. Father to make returns as guardian, § 74, p. 270. Federal ofKcera, suit by to recover tax, § 109, p. 483. salaries, § 56, p. 209. Fees on distraint to be regulated by commissioner, § 108, p. 482. of physicians and lawyers, § 54, p. 207. Fiduciary: annual return by, what to show and how executed, § 80, p. 309. capacity, what is, § 80, p. 309. definition of, § 102', pp. 431, 432. filing notice with other withholding agent (Form 1015), nothing to be- withheld, § 102, pp. 431, 432. having withheld and paid tax on undistributed annual net income not. to again withhold when distribution made, § 102, p. 434. income of beneficiary not distributed during the year; what to be- shown in return; tax to be withheld and paid when, § 80, p. 310. may be appointed agent or attorney, for the purpose of making per- sonal return of income (Form 1040) for beneficiary, § 80, p. 309. optional claim (Form 1015 or 1019), § 102, pp. 431, 432, 433. regulations as to, § 102, pp. 431, 432, 434. return by must he made when, § 80, p. 309. return by to include only matter within scope of authority, § 80, p. 309. return of, not to include income on which tax paid, § 80, p. 309. return, when to be made, § 77, p. 282. to make annual return (Form 1041) to collector of district when, to> show what, § 80, p. 309. Fines for violation of the excise law, § 42, p. 178. Firm: to make return, how, when, section 3173, § 77, pp. 284, 543. collecting foreign items, license required, § 104, p. 460. INDEX. 1517 Fiscal year: corporation — duty of collector upon receiving notice of, § 77, p. 281. how established, what to be done, § 77, p. 280. illustration of and what to do, § 77, pp. 280, 281. making return on basis of but not so designating, return not ac- cepted and must be made for calendar year, § 77, p. 282. notice of not retroactive, § 77, p. 281. notice to collector not given in prescribed time, calendar year to govern, § 77, p. 281. not properly established, return to be made for what calendar year and filed when, § 77, p. 282. Forcible attempt to rescue not sufBcient for indictment, § 86, p. 378. Foreign : corporation — dividends of, § 53, p. 204. doing business in United States — provision for, § 40, p. 162. return by, § 76, p. 277. particulars of, § 76, p. 277. where filed, § 76, p. 277; § 78, p. 288. subject to tax on what, § 40, p. 162. tax on net income; net income defined; deductions to ascertain, § 103, pp. 452, 453. items — too small for notation on, statement of facts may be attached to, § 104, p. 458. license required for collection of, when and from whom, § 104, p. 456. provisions for collection of tax on, apply wherever said items payable, if paid in United States, § 104, p. 459. income paid in United States, provisions for collection of tax on, § 104, p. 456; § 104, p. 460. organization doing business in United States subject to tax but exempt from withholding upon filing certificate claiming (Form 1018), § 103, pp. 448, 449, 3425. partnership owning bonds of corporations organized or doing business within United States, not subject to withholding on interest of, when, § 75, p. 273. payments of dividends, etc., provisions as to collection, license, penalty, § 104, p. 452. steamship company, general expense of, how treated, § 61, p. 223. Forms : by collecting agent, when accompanied by owner's certificate, form 1000 (revised), § 103, p. 438. by foreign citizens or subjects, form 1060, § 103, p. 450. 1518 INDEX. Forms — cont'd. by foreign organizations engaged in business in the United States, form 1018, p. 1425. by foreign organizations not engaged in business in the United States, form 1063, § 97, p. 424. by individual owner claiming exemption at the source, form 1007 (revised), § 97, p. 423. by organizations not subject to tax at source, form 1063, § 97, p, 424. by .partnership owners, form 1001 (revised) § 103, p. 448. by joint owners, forms 1000, lOOOB, § 103, pp. 439, 440. monthly by organization on taxes withheld at the source, form 1012, , § 81, p. 333. of application for deductions, form 1008, § 81, p. 328. of application for license, form 1017, § 104, p. 456. of certificate for repayment of tax, form 680, § 122, pp. 504, 505. of certificate to be attached to coupons, form 1058, § 103, p. 443; form 1059, § 103, p. 444. of claim for exemption at the source by fiduciary, form 1015 (re- vised) § 102, p. 432. by fiduciary when not claiming exemption, form 1019 (revised), § 102, p. 433. of license, form 1010, § 104, pp. 456, 457. of list returns — Annual, of tax withheld at the source, form 1013, § 81, p. 342; form 1042, § 81, p. 344. by fiduciaries, form 1041 (revised), § 80, p. 316. by first bank or collecting agency, form 1044A, § 81, p. 348. by licensed banks or collecting agencies, form 1043A, § 81, p. 352. Monthly, of tax withheld at the source, form 1012, § 81, p. 333. by first bank or collecting agency, form 1044, § 81, p. 347. by licensed banks or collecting agencies, form 1043, § 81, p. 350. summary of monthly list return of tax withheld at the source, form 1012D, § 81, p. 339. of oath by withholding agent when making return with application for deduction, form 1009, § 81, p. 330. of returns — by fiduciaries, form 1041 (revised), § 80, p. 316. by individuals, form 1040 (revised), § 79, p. 299. by insurance companies, form 1030 (revised), § 82, p. 362a. by corporations other than insurance companies, form 1031 (re- vised), § 82, p. 3621. INDEX. 1519 Forms — cont'd. by persons required to withhold and pay tax at the source, form 1006, § 81, p. 330. notice of assessing penalties, form 21, § 105, p. 464. notice of failure to render sworn, taxable under Internal Revenue Laws, form 1045, § 77, p. 285. of annual net income, form 1065, § 75, p. 274. when not accompanied by owner's certificate, form 1002 (revised), § 103, pp. 441, 442. notice of and demand for tax assessed, form 17, § 105, p. 463. second notice of and demand for tax assessed, form 21, § 105, p. 464. special excise and income tax assessment list, form 23A, § 89, p. 383. by individual and withholding agents, form 23B, § 89, p. 391. list of unassessable collections as to corporations, etc., form 58A, § 89, p. 390. as to individual and withholding agents, form 58B, § 89, p. 398. special, for nonpayment of taxes and penalties assessed on forms 23A and 23B, form 325, § 105, p. 466. notice of assessment of special excise a,nd income tax, form 647, § 105, p. 462. Fraudulent return: additional tax imposed; time limit for paying after notice, § 77, p. 283. G. Gains : for taxable purposes arising or accruing within calendar year, part of gross income, what, § 59, p. 216. Gas or oil territory leased: corporation, basis of deduction for depletion of, § 64, p. 235. Gas or oil wells and mines: operated on royalty basis, deduction for depletion of deposits not allowed operating corporation, § 64, p. 235. Gift: of property, income from part of gross income; value not income, § 57, p. 210. to employees of corporation not deductible, § 61, p. 223. Good-will: corporation, depreciation of, not allowable deduction, § 64, p. 233. purchase price of, is capital invested, § 64, p. 233. Governmental function: income accruing to state from exercise of, exempt, § 41, p. 165. Gratuities : to employees of corporation not deductible, § 61, p. 223. 1520 INDEX. Gross income: corporation — definition of, § 59, p. 215. engaged in more than one class business, ascertained in accordance with applicable definition each class, § 59, p. 217. general definition of gross income, § 59, p. 216. manufacturing company, definition of, § 59, p. 216. mercantile company, definition of, § 59, p. 216. miscellaneous corporation, definition of, § 59, p. 216. all sources to be specified, § 59, p. 216. definitions, § 59, pp. 215, 216. deductions from — by mutual marine insurance companies, what, § 70, p. 259. to ascertain net income for normal tax, paragraph B, § 64, p. 228. insurance company, definition of, § 70, p. 260. life insurance company — definition, § 70, p. 260. to include applied surrender values and consideration for supple- mentary contracts, § 70, p. 260. of nonresident alien, what constitutes, § 37, p. 159. what to be excluded in computing, § 41, p. 166. Gross value at the mine: defined, § 64, p. 234. corporation, definition, § 64, p. 234. Guardian : deductions by, § 73, p. 266. is fiduciary, when, § 102, p. 432. parent is natural, § 73, p. 267. return made by, when, regulation, § 74, p. 268; § 78, p. 287. Guthrie, William D., § 18, p. 28. Hawaii, § 34, p. 153. Holiday: due date of return falling on, effect of, § 77, p. 284. Horticultural organizations : exempt, § 41, p. 163. Hospitals not exempt as charitable, § 41, p. 172. Hotel bills, § 62, p. 225. Hundreds are municipalities, § 41, p. 167. Husband : assumed to have sufficient knowledge of income of wife to make return for, § 72, p. 265. ISTDEX. 1521 Husband — cont'd. having net income other than wife's income from separate estate so that aggregate income both more than $4,000, wife's return at- tached to husband's or his income included in her return for pur- pose of $4,000 exemption, § 72, p. 265. should make return of income for self and wife, § 72, p. 265. Husband and wife: combined net income of, exceeds $4,000, return of must be made, § 72, p. 265. both jointly and separately liable for return and payment of tax, § 72, p. 265. not living apart, having separate estates, income of both may be made on one return, but return must show income of each sep- arately stated with name and address of both, § 72, p. 265. living together, citizen or resident alien, entitled to $4,000 exemption from their aggregate net income, § 72, p. 265. separated and living permanently apart, citizen or resident alien, each entitled to $3,000 exemption from net income, § 72, p. 265. Husband or wife: either having net income of $3,000, return required, and must include incomes of both, § 72, p. 265. I. Identity : persons presenting coupons or interest orders should be required to establish, § 103, p. 443. Incidence of the tax with respect to corporations, § 39, p. 161. with respect to property, § 34, p. 152. with respect to persons, § 35, p. 153. with respect to time, § 41, p. 176. Income : additional tax on, referred to as additional tax, § 44, p. 181. amount from which withholding to be had, § 97, p. 422. hanks, interest paid on deposits by, to be deducted, § 97, p. 420. bonds or other indebtedness, § 66, pp. 240, 242, 243. but not value of property, acquired by gift, bequest, devise or descent, § 57, p. 210. change of investment not, § 46, p. 188. compensation of oflScers and employees of State or political subdivision of, paid by United States, part of gross income, § 41, p. 166. corporation — allowance for depreciation by wear and tear, § 64, p. 228. amount allowed for — depreciation, § 64, pp. 228, 229. taxes, § 68, p. 247. bad debts collected are, § 68, p. 250. Foster's Income Tax. — 96 1522 INDEX, Income — cont'd. how ascertained, § 45, p. 184. from sale of capital assets, how determined, § 59, p. 216. interest paid deductible, § 66, p. 245. losses sustained during tlie year, § 69, p. 253. may designate fiscal year, § 77, p. 279. ordinary expenses of operation deductible, § 61, p. 223. penalty for failure to — make return of, § 87, p. 379. pay tax on after June 30, § 87, p. 380. to give notice of fiscal year adopted, § 77, p. 281. deductions from gross, mutual marine insurance company, what, § 70, p. 259. defined, § 46, pp. 188, 189, 674-678. derived from all sources, § 75, p. 273. earned, § 3, p. 6. no discrimination in favor of, § 3, p. 6. fixed determinable annual — from what derived, § 97, p. 420. normal tax on bonds, etc., when deducted, § 103, p. 437. withholding from, when, § 97, p. 419. foreign corporation doing business in the United States, return of, particulars, § 82, p. 354. foreign, paid in United States, provisions for collection of tax on, § 104, pp. 456-460. for taxable purposes — is income for calendar year, § 77, p. 281. for 1913, how computed, § 77, p. 281. from all sources part of gross income, § 59, p. 216. from bonds, mortgages, deeds of trust, and similar obligations of corporations, etc., subject to withholding at source regardless of amount, § 103, p. 437. from capital invested in the United States, § 82, p. 354. from certain professions not subject to withholding at source, § 97, pp. 420, 421. from public utility or governmental function accruing to State, etc., exempt from tax, § 41, p. 165. from what, obligations not subject to tax and certificate of owner- ship not required, § 103, p. 437. gross, defined, § 59, pp. 215, 216. corporation — engaged in more than one class of business, ascertained in accordance with applicable definition for each class, § 59, p. 217. definition of, § 59, p. 215. general definition, 5 59, p 216. INDEX. 1523 Income — cont'd. insurance company, definition of gross income, § 70, pp. 259, 260. life insurance company, to include applied surrender values and consideration for supplementary contracts, § 70, p. 260. manufacturing company, definition, § 59, p. 216. mercantile corporation, definition, § 59, p. 216. miscellaneous corporation, definition, § 59, p. 216. mutual fire insurance company, definition, § 59, p. 21G. what to be included in computing, § 41, p. 166. husband and wife, what, § 72, p. 265. individual, not subject to withholding when, § 97, p. 422. insurance company, to be separately stated, § 45, p. 185. insurance reserve, how treated, § 70, pp. 201, 262. interest — accruing during year, § 47, p. 189. on deposits, § 66, p. 242. on obligations of State, etc., § 103, p. 435. joint-stock companies, how ascertained and stated, § 39, p. 161; § 40, p. 162; § 44, p. 184. life insurance companies, what included, deductions, § 70, p. 258. mutual fire insurance companies, § 70, p. 258. what taxable, § 70, pp. 258, 259. mutual marine insurance companies, § 70, p. 259. net — defined, § 46, p. 188. of corporation engaged in more than one class of business, how ascertained, § 70, p. 217. deductions allowed for ascertaining, § 45, pp. 184-187. shall include what, § 45, pp. 184-187. not subject to withholding at source, to be covered in personal return, § 79, p. 298. note given in payment of; malcer of note is debtor and source; required to withhold, except, when, § 97, p. 420. of corporations, verified how, § 82, p. 362. returns of, filed, are public records; inspection of, who may and for what purpose, § 84, p. 364. penalty for divulging information on, or exhibiting returns, sec- tion 3167, § 84, pp. 364, 542. tax paid at source, deducted in ascertaining taxable, § 97, p. 414. on, from coupon or registered interest to be deducted and with- held, except to extent exemption claimed, § 103, p. 446. 1524 INDEX. Income — cont'd. taxable — defined, § 46, p. 188. person subject to, § 43, p. 179. for normal tax, what, how ascertained, § 43, p. 179. taxation — America, origin of, in, § 15, p. 17. Austria and Hungary, in, § 9, p. 15. British Colonies and Dependencies, in, § 4, p. 9. Europe, history of, in, § 2, p. 3. France, in, § 5, p. 11. Germany and Luxembourg, in, § 8, p. 13. Great Britain, in, § 3, p. 4. Holland, Java, and Belgium, in, § 11, p. 16. Italy, in, § 6, p. 13. Japan, in, § 14, p. 17. Norway, Sweden and Denmark, in, § 10, p. 15. Russia and Finland, in, § 13, p. 17. Spain, in, § 7, p. 13. States, in the several, § 16, p. 19. Switzerland, in, § 12, p. 16. subject to additional tax, § 44, p. 181. what not liable to withholding at source, § 97, pp. 420, 421. withheld, what, when, by whom, § 97, p. 421. Incomes, miscellaneous, § 58, p. 212. Increase of return, appeal in case of, § 88, p. 381. of value by repairs, § 59, p. 218. of capital stoclc, § 62, p. 226. Indebitatus assumpsit, suits by U. S. in, § 111, p. 485. Individual : who may claim exemption paragraph C, § 72, p. 265. duty of, collection interest coupons originating in United States, § 103, p. 438. husband and wife living together, citizen or resident alien, exemption $4,000, § 72, p. 265. income accruing to, from contract with State, etc., prior to passage of act for construction, operation, or maintenance, public utility, taxable, § 41, pp. 164, 165. income less than $20,000 not required to make return, p. 13G6. income of, liable to withholding at source on and after November 1, 1913, § 80, p. 312. liable for income tax on share of net earnings of partnership, § 75, p. 272. married and not living with husband or wife, amount exemption, § 72, p. 265. normal tax, what, § 43, p. 179. INDEX. 1525 Individual — cont'd. partnership profits included in return of and tax paid, not reported as income again, § 75, pp. 272, 273. residing in foreign cou.:Uy, where to file return, § 78, p. 287. return — for calendar year, § 77, p. 279. required of guardian, etc., notice of failure to make, served when § 80, p. 308. when to be made, § 77, p. 282. share of earnings, partnership, property of, subject to tax chargeable to individual, § 57, p. 212. share of partnership profits to be included in personal return, § 75, p. 272. single, allowable exemption for, § 72, p. 265. status for claiming exemption, determined as of time of claim, § 72, p. 265. Information : from returns to officers of State, when, what, how, § 84, p. 365. Inheritance, § 57, pp. 210, 211. Injunctions, § 115, pp. 488, 644. against tax not allowable, § 115, p. 489. Insane : who make claim for deductions for, § 81, p. 327. Inspection : of returns, how, § 84, p. 365. Instalments of purchase money, § 47, p. 189. Insurance : life- paid to beneficiaries not to be included in gross income, when, § 70, p. 258. payment credited to insurance not to be included in gross in- come, when, § 70, p. 258. premiums, policies, losses on outstanding paid-up, § 70, p.. 256. received by insured not to be included in gross income, when, § 70, p. 258. Insurance company: alien, § 71, pp. 262, 699, 704. "deductible net addition to reserve;" definition; what basis of com- putation of; what not to be included in, § 70, p. 261. deduction, claims actually paid under policy contract, § 70, p. 261. depreciation loss by shrinkage in property value, what and when de- deductible, § 70, p. 261. domestic, § 70, pp. 256, 683, 693, 723-725, 736, 738. gross income, definition, § 70, p. 259; § 71, p. 264. income to be stated separately, § 70, p. 256. losses — actually sustained, § 45, p. 185; § 70, p. 261. 1526 INDEX. Insurance company — cont'd. deduction for what, § 70, pp. 259, 261. making false return, penalty, § 87, p. 379. mutual marine, deduct what, § 70, p. 262. neglecting to malce return, penalty, § 87, p. 379. net addition to reserve, § 70, p. 260. net income, source, time of accrual, return of, § 45, p. 184; § 76, p. 276; § 82, p. 354; § 97, p. 414. notice of assessments to, § 89, pp. 400, 401. penalty for failure to pay tax, § 106, p. 471. refusing to make return, penalty, § 87, p. 379. reserve — definitions, § 70, p. 261. fund, how treated, § 70, p. 261. to meet losses, how treated, § 70, p. 261. returns of, when available, § 76, pp. 276, 277. salvage, how treated in return of, § 70, p. 261. special excise tax, how computed, time, what, § 42, p. 177. to make return of others, when, § 97, p. 414. Interest, § 47, p. 189. after default in payment, § 106, p. 471. before default, pp. 752, 753. coupon or registered, originating or payable in the United States, who to withhold, § 103, p. 438. due as damages, § 47, p. 189. from what obligation not subject to tax and certificates of ownersl^ip not required, § 103, p. 437. how treated, § 97, p. 420. on deposits — part of gross income, § 66, pp. 241, 242. subject to withholding; must be included in personal return whether paid or not, § 103, p. 435. on obligations of State or political subdivision of. United States or possessions, not part of gross income, § 41, p. 166. on judgment against collector, § 128, p. 521. paid as rental by corporation, how treated, § 66, p. 240. paid by bank, etc., on deposits, etc., allowable deduction, § 97, p. 420. paid by corporation — deduction of what, when, § 66, p. 240. on indebtedness secured by collateral subject to sale, deductible when, why, § 66, p. 242. at different rates, rule for application of deduction of, § 66, p. 240. on mortgage on property in which corporation has equity or is purchasing, how treated, § 66, p. 240. part of gross income, § 66, pp. 241, 242, INDEX. 1527 Interest — cont'd. • ■■ • . payment of, to beneficiaries by insurance companies, p.irt of gross income, § 70, p. 260. registered, certificate claiming exemption to be filed at least five days before due-date of interest, § 103, p. 446. registered, duty of debtor before payment of, § 103, p. 445. tax on, § 47, p. 189. when taxable, § 47, pp. 189, 574, 578. when deducted, § 97, pp. 420, 599, 603. (See Deduction at the Source.) Intestate succession, § 57, p. 210. Inventors : earnings of, indefinite or Irregular not subject to withholding, § 58, pp. 213, 1370. (See Royalties.) Inventory : corporation, purpose and use of, kinds of, § 82, p. 360. Joint-stock company: assessment against, payable, § 93, p. 408. deductions allowable to, § 66, p. 239. income — how ascertained, § 45, p. 184. to be separately stated, § 45, pp. 184-187. losses actually sustained, § 45, p. 185; § 70, p. 261. neglecting to make return, penalty, § 87, p. 379. net income from all sources, § 77, p. 280. net income taxable for preceding calendar year, § 77, p. notice to be given of assessments, § 90, pp. 400, 401, penalty for failure — to make return, § 87, p. 379. to pay tax, § 106, p. 471. return — false, penalty for, § 87, p. 379. for others made by, § 97, p. 414. net income to be shown on, § 82, p. 357. refusing to make, penalty, § 87, p. 379. when available, § 76, pp. 276, 277. when to malce, § 77, p. 282. special excise tax and how computed, § 42, p. 177. Judges : constitutionality of tax on salary of Federal, § 28, p. 95.' constitutionality of tax on salary of state, § 27, p. 78. United States courts, salaries exempt, what, § 41, p. 166. 1528 IINDEX. Judgment; payment of, for tort, § 109, p. 484. against collectors, collection of, § 127, p. 520. Judicial definitions of income, § 46, p. 188. Jurisdiction : of courts, § 123, pp. 507-515. of suits by taxpayer after payment, § 123, p. 506. K. Kennan, Kossuth: on dividends upon policies of insurance, § 70, pp. 256-258. on history of income tax, § 1, p. 1. on income tax in foreign countries, §§ 4^14, pp. 10-17. on income tax in Panama, § 16, p. 20. Labor organizations: exempt, § 41, pp. 163, 168. Last due date: defined, § 77, p. 283. Laws: relating to assessment, remission, collection, refunding, § 90, p. 405. Lawyers : fees, indefinite or irregular, not subject to withholding, § 54, p. 207. (See Attorneys.) Lease, premiums on, § 70, pp. 258, 259. Lessees or mortgagors: make return for others, when, § 74, p. 269. Levy, resistance to, § 121, p. 500. Liability : to tax of a taxable person not to be released, § 58, p. 212. License : bond may be required on form furnished, § 104, p. 457. failure to obtain, penalty for, § 104, pp. 456, 457. for branch, to be made through principal oflBce, § ]04, pp. 457, 458. form of application for, to be made to collector of district, § 104, pp. 456, 457. form of; to be issued by collector, good until revoked, § 104, pp. 456, 457. required for collection of interest or other foreign items, when, by whom, where obtained, § 104, p. 456. Licensee : first, receiving foreign item for collection to withhold and be respon- sible for tax and to note fact of withholding on such item, effect of, § 104, p. 458. INDEX. 1529 Licensee — cont'd. for collection of foreign items — disposition of certificates accompanying, by, § 104, pp. 459, 460. to Iceep record showing what, § 85, p. 377; § 104, p. 460. to report to collector (Form 1043), what, when, § 104, pp. 458, 459. Liens, § 107, p. 473. foreclosure of, by action, § 110, p. 484. foreclosure of, parties to, § 110, p. 484. priority of, § 107, p. 473. no estoppel as to, § 107, p. 474. none until after assessment, § 107, p. 474. default in payment essential to, § 107, p. 474. Life insurance, proceeds of, § 57, pp. 210, 211. when to be excluded from gross income, § 70, p. 258. Life insurance company: applied surrender values and consideration for supplementary con- tracts both to be added and deducted in return, § 70, p. 260. deductions from gross income, what, § 70, p. 258. gross income, definition, § 70, pp. 259, 260. supplementary statement attached to return of, showing what, § 70, p. 260. Limitation, statute of: for income tax purposes, three years, § 76, p. 278. Lindner, Walter, on deduction at the source, § 97, p. 419. List, see Assessment, § 89, p. 383. Literary societies exempt, § 41, p. 172. Lodge system: corporation operating under, defined, § 41, p. 164. Loss: actually sustained, §§ 68, 69, pp. 247-256. by embezzlement, § 69, p. 253. by robbery, § 68, p. 249. corporation — • deductible, defined, § 69, p. 254. from sale capital assets, how ascertained, § 64, p. 228. from sale securities below par, how treated, § 64, p. 232. insurance company, deduction for, what, § 70, p. 261. removal of building not deductible, why, § 68, p. 248. reserve for, not deductible, § 61, p. 224. on sales of stocks, § 68, p. 251. on outstanding paid-up insurance policies, § 70, p. 256. deductible from income, § 68, pp. 247, 604-609, 726-728. 1530 INDEX. M. Maker : of note given in payment of interest held responsible for normal tax, § 97, p. 420. Mandamus, application for writ of, § 116, pp. 491, 749. against Commissioner of Internal Revenue, § 117, p. 492. Manufacturing company: gross income, definition, § 59, p. 216. Manufacturers : returns of, accessible how, penalty, sec. 3167, § 84, pp. 364, 542. Marine insurance company: deductions by, § 82, p. 355. Masters in chancery, § 101, pp. 430, 654. Materials and supplies on hand: deduction by corporation on account of, what, § 61, p. 224. Medical attendance, not expenses, § 54, p. 207. Mercantile corporation : gross income, definition, § 59, p. 216. Mileage of Federal officers, § 55, p. 208. Mine: gross value at — defined, § 64, p. 234. corporation, definition, § 64, p. 234. depreciation, § 45, p. 185; § 64, p. 228. operated on royalty basis, corporation, deduction for depletion of deposits not allowed operating corporation, § 64, p. 235. Mining companies, § 45, p. 185; § 64, pp. 228, 733, 736. Minor : returns by, § 74, p. 270; § 97, pp. 425, 636, 638. who makes claim for deductions for, § 81, p. 327. Miscellaneous : corporation — gross income of, definition, § 56, p. 216. incomes, §§ 58, 59, pp. 212-220. Money paid under protest, suits to recover, § 125, p. 515. Monthly list return: form of, what to contain, to be filed in duplicate, § 81, p. 332. of coupon or registered interest orders received with ownership cer- tificates, form of and what to show, § 81, p. 346. of licensee for collection of foreign item, form of, what to show, with whom filed, when, § 81, p. 349 ; § 104, pp. 458, 459. summary of, when to be filed and what to show, § 81, p. 332. totals only to be carried into annual return, § 81, p. 341. Morawetz, Victor, § 53, p. 204; § 103, p. 435. INDEX. 1531 Mortgages : interest on, when subject to withholding, § 103, p. 435. not payable in United States, when subject to withholding, § 104, p. 452. paid by corporation which has equity, how treated, § 66, p. 240. of corporation, income from, subject to withholding, regardless of amount, § 103, p. 437. Municipalities, tax on income of, § 43, pp. 165-167. in the territories, § 41, pp. 165, 167. what are, § 41, pp. 165, 167. (See Bonds.) Mutual benefit societies exempt, § 41, p. 168. Mutual companies: to make return of income; definition of net income, § 41, p. 173, § 59, p. 220. Mutual fire insurance company: gross income of, definition, § 70, p. 258. premium deposits returned, what, § 70, p. 258; § 82, pp. 355, 356. return of, § 45, pp. 185, 186; § 82, pp. 355, 356. supplementary statement attached to return of, showing what, § 70, p. 260. taxable income, what, § 70, p. 258. Mutual marine insurance company: deductions, what, § 70, pp. 259, 262; § 85, p. 356. gross income, § 45, pp. 185, 187; § 82, p. 355. supplementary statement attached to return of, showing what, § 70, p. 260. N. Uames : arrangement of, in list by collector, § 89, p. 399. -Natural deposits: deduction for depreciation of, basis and limit of, § 64, p. 234. Natural guardian; parent, § 73, pp. 266, 267. -Nature of the income tax, § 33, p. 152. Necessary expenses, §§ 60, 61, pp. 220-225, .Net income: defined, § 44, p. 183. corporation — engaged in more than one class of business, how ascertained, § 45, p. 185. for 1913, how ascertained, § 77, pp. 281, 282. from sale of capital assets, how determined, § 59, pp. 216, 217. should be what, § 82, p. 362. 1532 INDEX. Net income — cont'd. foreign corporation, defined, § 45, p. 186. mutual companies, defined, § 41, p. 173; § 59, p. 220. (See Income.) New York City, § 41, p. 168. Non-resident : aliens, tax on incomes of, § 35, p. 155. corporations not taxable as to extra-territorial property, § 26, p. 74. place of returns by, § 78, pp. 286, 287. Normal tax, § 43, p. 179. Note: given in payment of income; maker is debtor or source and must with- hold on entire amount of note if in excess $3,000, except allow- ance exemption or deduction claimed, § 97, p. 420. given in payment of interest; failure of purchaser to make allowance or deduction for tax, only remedy is against vendor, how, § 97, p. 420. Notice : answer of guardian, etc., may show what, § 80, p. 309. assessment, advance preparation of, by collector, § 105, p. 465. before assessing penalties, § 87, p. 380. claiming deduction account partnership expense, by whom filed, what and how, § 75, p. 273. collector to give withholding agent, when tax withheld is adjusted in assessment, § 97, p. 425. form ]015 filed by fiduciary with other withholding agent, nothing withheld, § 102, p. 432. of appeal, requirements of, § 87, p. 380. of assessment; failure to pay tax; make return; form of; time, § 105, pp. 462, 465. of claim for exemption by foreign partnership, when, what, how, § 75, p. 273. of failure of fiduciary to file return, served, § 80, p. 309. of failure to make return, when to be served on guardian, etc., § 80, p. 309. of sale of real estate to be published, § 108, p. 478. to delinquent, failure to file return in time, § 77, p. 284; § 89, p. 401. to file returns, § 77, p. 284. to pay, necessary to create lien, § 105, p. 462. to taxpayer, of amount for which liable as on or before June 1, § 90, p. 401. O. Oath or afl^rmation: required in verifying returns, § 84, p. 363. INDEX. 1533 Obligations; interest on, of State or political subdivision; United States or posses- sions not part of gross income, § 41, pp. 165-167; § 103, p. 436. Obligations of corporations,' etc. : similar to bonds, mortgages, and deeds of trust, income from, subject to withholding, regardless of amount, § 103, p. 437. Obsolesence: of patents, deduction for, what, how determined, § 64, p. 233. Officers : of state or political subdivision of, compensation, § 27, p. 86. of not part of gross income, § 27, p. 86. paid by "United States is part of gross income, § 27, p. 86. of the United States making returns for others, § 84, p. 369. Oil or gas territory leased: basis of deduction for depletion of, § 64, p. 235. Oil or gas wells and mines: operated on royalty basis, deduction for depletion of deposits not al- lowed operating corporation, § 64, p. 235. Omitted tax: may be assessed and with penalty, when, § 87, p. 379. Order to show cause before issuing attachments, § 85, p. 375. Organizations : civic, exemptions, § 41, p. 163. Paid-up capital stock: definition of, p. 1395. Parent as guardian, § 73, pp. 266, 267. Parishes are municipalities, § 41, p. 167. Parties to suits to foreclose liens, § 110, p. 484. Partners making returns, § 75, p. 272. cannot deduct from share of partnership income his proportionate amount of income from exempted securities, § 75, p. 273. Partnership : as such not subject to tax and not required to make return except on request of Commissioner or Secretary, § 75, p. 272. deduction at the source not made from income of, § 75, p. 273; § 103, p. 436. deductions by, § 75, p. 274. foreign — composed of nonresident aliens, resident aliens, and citizens of United States, either or both, requisites of ownership cer- tificate for, § 75, p. 274. owning bonds, etc., of corporations, etc., organized or doing busi- ness in the United States not subject to withholding on in- terest of, provided exemption claimed, (Form 1016), § 75, p. 273. 1534 INDEX. Partnership — cont'd. individual share of profits of, to be included in personal return, § 75, p. 272. limited, is corporation and subject to corporation tax, § 75, p. 276. liable only in individual capacity, § 57, p. 212. may claim deduction for expenses of business, when and how, § 75, pp. 272, 273. members of, liable in individual capacity for tax on their re- spective shares of earnings of, whether distributed or not, § 57, p. 212. profits of — once returned and tax paid, not again reported as income, § 75, pp. 272, 273. to be included by individuals entitled to, in their personal re- turn, § 75, p. 272. return of, when to be made, section 3173, § 74, pp. 271, 543. shall forward correct statement of profits and names, § 75, p. 272. share of profits to partners, § 75, p. 272. to file with withholding agent notice claiming deduction for expense of, what and how, § 75, p. 273. to make list or return, how and when, section 3173, § 74, pp. 271, 543. when required to make return must make complete and correct, § 75, p. 272. Patent rights, sale of, § 58, p. 213. Patents: deduction for — depreciation, what, and how determined, § 64, p. 233. obsolescence, what, how determined, § 64, p. 233. Payment : to officer authorized to receive, § 94, pp. 410, 411. Payment of dividends, § 53, pp. 203, 204. deductions at the source of, § 97, p. 414. to be made on or before June 30th, § 93, p. 408. by individual taxpayers, § 93, p. 408. penalty for delay in, § 93, pp. 409, 410. delay in, § 93, p. 410. under protest, § 95, p. 411. by deduction from salaries of Federal officers, § 100, p. 429. of tax by corporations, § 103, pp. 434, 435. penalties for default in, § 106, p. 471. Penalty: and interest for nonpayment when due and for 10 days after notice, when, § 106, p. 471. INDEX. 1535 Penalty — cont'd. delinquent tax — amount of, and how determined, not assessed against estates, in- sane, deceased, or insolvent persons, § 87, p. 380; § 106, pp. 471, 472. for divulging — information on return, what, § 85, p. 364. unlawfully, information on return, fine or imprisonment, or both, with costs, § 85, p. 364. failure to make return in prescribed time or for false or fraudulent, fine or imprisonment, or both, § 87, p. 379. failure to pay tax, 5 per cent to tax plus 1 per cent per month, § 87, p. 380. false claim or statement to secure exemption, § 81, p. 326. false or fraudulent return with intent to evade or defeat tax, what, § 87, p. 379. false or fraudulent return, 100 per cent to tax, § 87, p. 379. false statement in regard to deduction, § 81, p. 327. making false return, § 87, p. 378. neglect or refusal to make return, § 87, p. 378. person or officer of corporation required to make return, making false or fraudulent, with intent to defeat or evade assessment, § 87, p. 379. refusal or neglect to make return, liable person, corporation, etc., § 87, p. 378. refusal to make or for false return, to be assessed and collected, what, § 87, p. 380. return made and properly mailed in time but not received in time, none, § 77, p. 283. Penalties, § 87, p. 378. appeal from assessment of, § 87, p. 380. assessment of, § 87, p. 380. conditions of imposing, for delay in payment, § 87, pp. 380, 381. for default in payment, § 106, p. 471. for default in payment constitutional, § 106, p. 472. for failure to make return, § 87, p. 378. for making false return, § 87, p. 378. for making false return constitutional, § 87, p. 379. in^case of returns unintentionally false, § 87, p. 380. may be collected by separate suit, § 109, p. 483. notice before assessing, § 87, p. 380. only one prior to action for, § 87, p. 380. remission of, § 87, p. 381. remission of, cannot be reviewed, § 87, p. 381. suits for, may be separate, § 112, p. 486. suits to collect, § 112, p. 486. U. S. not liable for costs in suits for, § 112, p. 486. 1536 INDEX. Pensions : or payments on account of injuries to employees of corporations, de- ductible expense, § 61, p. 223. Period of tax, § 42, p. 176. Perjury in verification of returns, § 68, pp. 250, 635. Permanent improvements, § 43, p. 180; § 68, p. 248. Person : wliose income is not subject to withholding at source, make personal return, § 74, p. 268. Persons acting as guardians, § 74, p. 270. minors, § 74, p. 270. Persons subject to tax, § 43, p. 179. who must make returns, § 74, p. 268. non-residents may, § 43, p. 180. fiduciary, with incomes under $3,000, § 74, p. 268. administrators, § 74, p. 268. adults, § 74, p. 268. receivers, § 74, p. 268. trustees, § 74, p. 268. or corporations acting in fiduciary capacity, § 74, p. 268. Persons, firms, etc. : collecting foreign items, license required, § 104, p. 456. whatever capacity acting, withholding agent, when, what, § 74, p. 268. withholding none prior to November 1, 1913, § 79, p. 298. Philippine Islands, § 34, p. 152; § 41, pp. 165, 167. exemptions, § 41, pp. 165, 107, 168. Plant: corporation, deduction for depreciation (in addition to the deduction for depletion of mine), what and basis of, § 64, p. 235. Political subdivision of State: interest on obligations of, not part of gross income, § 41, pp. 165- 167; § 103, p. 436. officers and employees of, compensation not part of gross income, § 41, pp. 165-167 ; § 103, p. 436. Porto Eico, § 34, p. 152; § 41, pp. lf)5, 167. exemptions and provisions, § 34, p. 152; § 41, pp. 165, 167. Possessions: of United States, interest on obligations of, not part of gross income, § 41, pp. 165-167; § 103, p. 436. Preferred stock, deduction at the source from dividends, § 103, p. 435. Premiums : deductions from, by whom, when, § 97, p. 420. President of the United States: constitutionality of tax on salary of, § 28, p. 95. salary of, exempt, what, § 28, p. 95; § 56, p. 210. Privileged communications, § 84, p. 371. IITDEX. 1537 Procedure: in case of refusal or neglect, liable individual to make return or for false return made, § 77, pp. 283-ii85. Professional : fees, § 54, p. 207. persons whose income indefinite or irregular, not subject to withhold- ing, § 54, p. 207. societies exempt, § 41, p. 172. Profit or loss: corporation, on sale of capital assets, how determined, § 59, p. 217. Profits : by enhancement of value not realized, §§ 54-58, pp. 205-212. for taxable purposes of those arising or accruing within calendar year, § 59, p. 215. from any source, part of gross income, § 59, p. 215. from sales, §§ 50-52, pp. 197-202; § 58, pp. 213, 571-574. of business, trade or profession, §§ 51-52, pp. 197-202; § 58, pp. 212, 569-574, 586, 587. partnership once return and tax paid, not reported as income, § 75, pp. 272, 273. partnership, individual entitled to include in his personal return, § 75, p. 272. share of, in partnership to be included in return of individual, § 75, p. 272. used for construction, § 58, p. 213. Prohibition against Commissioner of Internal Eevenue, § 117, p. 492. Proof of service of notice, § 88, p. 381. Property : acquired by inheritance, § 57, p. 210. in the U. S., income derived from, §§ 37, 38, pp. 157-161, 566, 593- 605. received by gift, bequest, devise, descent, income from but not value part of gross income, § 57, pp. 210, 211. subject to tax, § 34, p. 152. Protest need not be in writing, § 95, p. 412; § 125, p. 518. Provisions as to reassessment, § 90, p. 406. Public records: returns are, inspection of copies, how, § 84, p. 365. Public utility: income from, accruing to State, etc., exempt from tax, § 41, p. 164. Purchaser : of note given in payment of interest, failure to make allowances or deduction of tax in purchase or discount only remedy is against vendor, § 97, p. 420. Purchase money; annual instalments, § 46, p. 188. Foster Income Tax — 97./ (j 1538 INDEX. Q. Quasi-public corporations, § 41, p. 167. R. Railroad tickets, cost of, § 60, p. 222; § 62, p. 225. Rate: deduction for depletion of mines, etc., regulation and limit of, § 64, p. 234. Real estate, distraint on, § 108, p. 476. sale under distraint to be in parcels, § 108, p. 478. sold, redemption of, § 108, p. 481. Re-assessment, error in assessment necessary to, § 126, p. 519. in case of erroneous assessment, § 90, p. 406. none unless list contained understatement, § 108, p. 482. what it may include, § 90, p. 406. Receipts : for tax withheld, § 96, p. 413. separate to be issued, when, § 96, p. 413. taxpayers entitled to, § 96, p. 412. Record : of sales of real estate, § 108, p. 481. to be kept by — collecting agent, what, § 103, pp. 442, 443. licensee for collection of foreign items, what to show, § 86, p. 377; § 104, p. 460. Redemption of real estate, § 108, p. 481. Refund : failure to make claim for exemption or deductions with withholding agent in time; only remedy is by application for, § 97, p. 425. Registered interest: certificate claiming exemption from tax on, to be filed at least five days before due date of interest, § 103, p. 446. Regulations of the Treasury, pp. 1358-1455. Remedies of taxpayer, enumeration of, § 114, p. 488. Removal of buildings: not deductible loss, corporation, why, § 68, p. 248. Removal of suits against collector, § 123, p. 507. against collector, provisions as to, constitutional, § 123, p. 509. Rent: corporation, cost of buildings on leased ground deductible, when, § 64, p. 227. how treated, § 97, p. 420. interest paid by corporation as, how treated, § 66, p. 240. part of gross income, § 59, p. 216. INDEX. 1539 Rent — cont'd. premium on lease is not, § 60, p. 222. rental value of business property, § 60, p. 222. Repairs, § 60, p. 221; § 63, p. 227. deduction, when, § 61, p. 224. Res adjudicata, judgment in suit for taxes not, as to subsequent taxes, § 111, p. 486. Reserve : assessment insurance company, definition, § ^0, p. 262. for depreciation — diversion of, correction, § 64, p. 231. use of, disposition of excess of, § 64, p. 231. for insurance of corporate property not deductible, § 61, p. 224. for losses not deductible, § 61, p. 224. for taxes of corporation not deductible, § 67, p. 247. insurance company, deductible net addition to, definition; what basis computation; what not to be included in, § 70, p. 261. to meet loss, insurance company, how treated, § 70, p. 261. Residence, § 35, p. 153; § 36, p. 155; § 38, p. 160. Resident alien: certificates of ownership of bonds, when and how to be used and to specify what, § 103, p. 445. income of, from coupon or registered interest, subject to withholding except to extent exemption claimed, § 103, p. 446. Residing in the United States, § 36, pp. 155, 561, 563. Resistance to levy, § 121, p. 500. Returns : administrators to make for heirs, when, § 74, p. 268. agents to make for others, § 74, p. 268. annual individual and monthly list to be forwarded to Commissioner, how, § 89, p. 383. annual list (Form 1013), to show what, and to be filed on or before March 1, § 81, p. 332. annual, of coupon or registered interest orders not accompanied by certificates of ownership; form of, and what to show; to be filed when; to show totals only on monthly return, § 81, p. 346. annual, of debtors or withholding agents to show totals only on monthly list, § 81, p. 341. annual, fiduciary to collector of district when; show what, § 80, p. 309. annual, of withholding agent, form for, to be accompanied by wliat, when to be filed, § 81, p. 343. annual, of withholding agent (Form 1042), what to show and when to be filed, § 81, p. 343. approval of Secretary, § 76, p. 278. blanks for, furnished corporations by collector, § 82, p. 359. 1540 INDEX. Returns — cont'd. by collector in behalf of taxpayer, § 76, p. 278. by persons of lawful age, § 74, pp. 268, 270. certified copies of, when, why, delivered to whom, § 84, p. 365/ conservators to make for others, § 74, p. 268. contents of, §§ 80-82, pp. 308-362w. corporation — every, not specifically exempt, to make, § 41, p. 173. fiduciaries, withholding agents, when to be made, § 77, p. 282. going into liquidation to make final; filed when and where, § 76, p. 277. not receiving blank for, should make application for, to whom, when, § 82, p. 359. one only for 1913, § 42, p. 178. organized during year, to make, § 76, p. 277. to make complete or not accepted, § 82, p. 359. when income paid by lessee direct to stockholders, must neverthe- less make, § 41, p. 173; § 54, p. 205; § 82, p. 357. copy of, unlawful to exhibit, section 3167, § 84, pp. 364, 542. discovery as to contents of, § 85, p. 371. divulging — information from, penalty, § 84, p. 364. unlawfully, information on, penalty, § 84, p. 364. due date on Sunday or legal holiday, effect of, § 77, p. 284. duplicate, when, of whom required, disposition of, § 89, p. 399. duty of collector — on failure to find person at home, section 3173, § 85, pp. 372, 543. in forwarding and investigation of, § 89, p. 399. employees to make for others, § 74, p. 269. evidence by which to verify, what, § 82, p. 362. executors to make for others, § 74, p. 269; § 80, p. 311. extension of time — for filing, when, what, how, § 77, p. 283. to make, not to exceed what, how, to whom made, § 77, p. 283. failure of corporation to receive blank for, not excused from makirg return or penalties for failure, § 82, p. 359. failure — of fiduciary to file, notice of, served, § 80, p. 309. to make by guardian, agent, or other person acting in trust ca- pacity, notice to, served on, § 80, p. 308. to make in prescribed time, of a false or fraudulent, penalty, § 87, p. 379. to make — notice of, form and time to serve, § 105, pp. 462, 463. legal provisions as to, § 105, p. 462. INDEX. 1541 Returns — cont'd. false or fraudulent — penalty, § 87, p. 379. duty of collector in matter of, § 89, p. 399. with intent to defeat or evade tax, penalty, § 87, p. 379. fiduciary — having income not distributed; what to be shown; tax to be withheld and paid when, § 80, p. 309. must be paid when, § 80, p. 309. not to include income on which tax paid, § 80, p. 309. to include only matter within scope of authority, § 80, p. 309. what to show, and how executed, § 80, p. 309. for 1913, must be on new form and not on excise form heretofore used, § 77, p. 281. foreign corporation having more than one branch office in United States to designate principal ofBce and person to make return, § 59, p. 220. form of, for corporation prescribed, § 82, p. 359. for persons incapacitated, by whom made, § 80, p. 313; § 81, p. 327. for persons absent from the United States, by whom made, § 81, p 327. fraudulent — duty of collector, § 87, p. 380. extra tax because of, § 87, p. 380. time limitation for paying after notice, § 87, p. 380. husband and wife, net income both exceeds $4,000, of combined in- come required, § 72, p. 265. husband and wife, not living apart, separate income from separate estate may be made on one; separately stated and with names and addresses of both, § 72, p. 265. husband should make for himself and wife, § 72, p. 265. husband and wife, either having net income $3,000 or over, required, and must include income of both, § 72, p. 265. individual — to be made when, § 77, p. 282. for calendar year, § 77, pp. 281, 282. by collector when, § 81, p. 332. not required to make, when made by other for him, when, § 79, p. 298. to include share of partnership profits in, § 76, p. 272. information or copies from, to officers of State, when, what, how; orig- inal not removed except, § 84, p. 365. last due date defined, § 77, p. 283. leased corporations make their own, § 59, p. 220. legality of, made by collector of deputy, sec. 3176, § 76, p. 278. 1543 INDEX. Returns — cont'd. lessee corporation assuming debts of lessor to include in lessee return all receipts of lessor, § 59, p. 220. lessee corporation not to include in its own statement of capital stock, that of lessor; nor in its own statement of indebtedness, that of lessor except when said indebtedness is assumed by lessee, § 59, p. 220. life insurance company — applied surrender values and consideration for supplementary contracts both added and deducted, § 70, p. 260. supplementary statement attached to return of, showing what, § 70, p. -260. list in, § 77, p. 284; § 85, p. 371. made and properly mailed in time, no penalty if not received in ■time, § 77, p. 283. made by guardian or authorized agent, when, § 74, p. 268. made on basis of fiscal year but not so designated, not accepted, and must be made for calendar year, § 77, p. 282. made to collector, § 74, p. 269. monthly, by withholding agent, when to be filed; with whom, what to accompany, § 81, p. 343. monthly list and annual, by licensee for collection of foreign items, what, to whom, when, § 104, p. 458. monthly list, form of, what to contain, to be filed in duplicate, § 81, p. 332. monthly list of coupon or interest orders not accompanied by cer- tificates of ownership, form of, and what to show, § 81, p. 346. must be made, when, section 3173, § 77, pp. 284, 543. mutual companies to make; definition net income, § 41, p. 173. mutual fire insurance companies, supplementary statement attached to, showing what, § 70, p. 260. mutual marine insurance companies, supplementary statement at- tached to, showing what, § 70, p. 260. neglect or refusal of liable person, corporation, etc., to make, pen- alty, § 86, p. 378. neglect or refusal to make, 50 per cent additional tax, § 87, p. 379. neglect to make, penalty, § 87, p. 379. nonresident alien, agent or representative to make for, when, what to be incltided in, § 37, p. 159. not required, income not exceeding $3,000, § 74, p. 270. not filed in time, notice sent to delinquent, § 89, p. 400. officers and employees of the United States, having control salaries, rents, etc., to make when, § 84, pp. 365, 366. INDEX. 1543 Returns — cont'd. of income — when required, where filed, § 78, p 287. persons deceased within taxahle year, made by executor or ad- ministrator, § 80, p. 3]]. on basis of calendar year or fiscal year, lime of assessment and pay- ment of tax, § 93, pp. 408, 409. one deduction only of exemption, § 97, pp. 422, 423'. one to cover both special excise and income tax for 1913 for cor- poration, § 42, p. 177. open to inspection, when, § 84, p. 364. partnership profits included by individual and tax paid, not again reported as income, § 75, pp. 272, 273. partnership, requisite of, § 75, p. 272. penalty — against corporation for failure to make, § 82, p. 359. for failure to make at time specified, § 87, p. 379. for refusal to make, § 87, p. 379. personal, Form 1040; fiduciary may be appointed agent or attorney to make for beneficiary, § 80, p. 309. personal not required, when, § 37, p. 159. person or officer of corporation required to make, making false or fraudulent with intent to defeat or evade; penalty, § 87, p. 379. person residing in foreign country, provision for, § 78, p. 287. public records, inspection of, copies, how, § 84, p. 3G5. receivers to make for others, § 74, p. 269. refusal or neglect of liable individual, duty of collector, § 87, p. 380 refusal to make, extra tax, § 87, p. 379. requisite of bookkeeping for verifying, § 83, p. 362; § 86, p. 377. secrecy of, § 84, p. 363. state officer may have access to, § 84, pp. 364, 365. to be filed, when, § 77, p. 279. to be made on Form 1040 for individuals, § 79, p. 209. to be made to collector, § 77, p. 279. to include — personal income not subject to withholding, § 74, p. 269. share of profits in partnership whether divided or not, § 75, p. 272. to be verified, how, before whom, § 83, p. 363. trustees to make for others, § 74, p. 268. understatement of income, cause to be shown why amount not in- creased, § 85, p. 372. undervaluation or understatement, § 85, p. 372. unintentionally false, penalties in case of, § 87, p. 380. unlawful to exhibit or divulge information from, section 3167, § 84, pp. 364, 543. 1544 iNDisx. Returns — cont'd. wife having income of $3,000 from separate estate managed by her- self may make her own, § 72, p. 265. what must be shown on, § 79, p. 297. when to be made; where filed, section 3173, § 74, pp. 271, 543. withholding agent, what disposition of; should not be filed until ex- piration of time allowed for filing claims for exemption or de- ductions, § 97, p. 425. Revenue stamp, deduction at the source, § 103, p. 453. Revised statutes: amended sections of, providing duties and penalties, sections 3167, 3172, 3173, §§ 74, 77, 84, 85, pp. 271, 284, 364, 373, 543. Revocation of allowance, § 122, p. 506. Robbery, loss by, § 68, p. 249. Room rent, § 62, p. 225. Royalties : how treated, § 97, p. 420. Royalty basis: mines, oil or gas wells, operated on, deduction for depletion of deposits not allowed operating corporation, § 64, p. 235. Salaries : how treated, § 56, p. 209; § 97, p. 420. paid by states exempt, § 56, pp. 209, 210. Sale of capital assets: corporation — income from, how determined, § 59, pp. 216, 217. loss from, how ascertained, § 64, p. 228. profit or loss on, § 59, p. 217. Sale under distraint, § 108, pp. 475, 476. of real estate, price on, § 108, p. 478. of real estate, adjournment of, § 108, p. 479. of real estate, deed of, § ]08, p. 480. of patent rights, § 58, p. 213. of personal property, § 51, p. 200. of real estate, § 50, p. 197. of real estate, record of, § 108, p. 481. of real estate under distraint to be in parcels, § 108, p. 478. Salesmen : commission to, paid in stock, deductible expense when, § 61, p. 223. Salvage : how treated in return of insurance company, § 70, p. 261. Scientific association : exemptions, § 41, p. 164. INDEX. 1545 Scientific societies exempt, § 41, p. 164. Scrip dividends, § 54, p. 205. Secrecy of returns, § 84, pp. 363, 754-758. Secretary of Treasury has power to remit penalties, § 87, p. 381. Securities : income from; sale of, below par; loss, § 64, p. 232. Seligman, Edwin, R. A.. deduction at the source, § 97, pp. 416-419. earned income, § 3, p. 6. on history of income tax, §§ 1-16, pp. 2-20. on progressive taxation, § 20, pp. 47-52. Separation of husband and wife, § 72, p. 265. Service of summons on taxpayer by deputy collector, § 85, p. 373. Shrinkage : in book value capital assets, how treated, § 64, p. 231. in property value insurance company, depreciation loss by, what and when deductible, § 70, p. 201. Sinking fund, § 63, pp. 227, 595. Size: foreign items too small for notation on, statement may be attached to, § 104, p. 458. Society: operating under the "lodge system," defined; exemptions, § 41, p. 164. Source : deduction at the, § 97, pp. 414-426. defined, § 103, p. 437. example of where and where not withholding at, § 97, pp. 419, 420. fiduciary is, when, § 102, p. 432. note given in payment of income, maker of note is, § 97, p. 420. persons, firms, etc., acting as, designated "debtors" or "withholding agents," § 97, p. 422; § 103, p. 437. tax withheld at, to be paid to collector, § 97, p. 421. withholding at, applies only to normal tax imposed on individuals, § 97, p. 414. who required to act as; liable for tax withheld, § 97, p. 414. (See deduction at the source.) Special tax: see sections 3173, 3176, §§ 42, 74, 76, 77, pp. 177, 271, 278, 283, 284, 543. Speer, Luther F. : on deductions by individuals for interest, § 65, p. 238. on inclusion of increase in value of property as income defended by, § 59, p. 218. on income accrued but not received, § 54, p. 207. on income subject to additional tax, § 44, p. 184. on interest, § 47, p. 189. on losses deductible by individuals, § 68, p. 250. 1546 INDEX. stamp, deduction at the source, § 103, p. 453. State: information from return, when, how, § 84, p. 365. officers and employees, paid by United States; compensation part of gross income, § 41, p. 166; § 43, pp. 180, 181; § 100, p. 429. political subdivision of, compensation of ofBcers and employees not part of gross income; interest on obligations of, not part of gross income, § 41, p. 366; § 43, pp. 180, 181; § 100, p. 429. States : constitutionality of Federal tax on income of, § 27, p. 77. tax on income of unconstitutional, § 34, p. 152. State courts cannot issue writs of mandamus against Federal officers, § 116, p. 491. State courts have jurisdiction of suits against collector, § 123, p. 507. State or United States: construction; exemptions, distinction as to, for certain income from State, etc., §§ 24, 27, 41, pp. 79, 152, 153, 165, 166, 167. Status : for claiming exemption by individuals, § 72, p. 266. Statute of Elizabeth, as to charitable uses, § 41, p. 169. Statute of limitations : for income-tax purposes, three years, § 88, pp. 381, 382. suits for return of taxes, § 126, p. 519. Statute of Oct. 3, 1913, in full, pp. 523-549. annotated, pp. 551-769. Statutes : British, in full, pp. 919-1135. Hawaii, in full, p. 889. Massachusetts, in full, p. 894. North Carolina, in full, p. 895. Oklahoma, in full, p. 897. South Carolina, in full, p. 899. Tennessee, in full, p. 901. Virginia, in full, p. 902. Wisconsin, in full, p. 903. Statutory definition of income subject to tax, § 43, p. 179. Stock : paid-up capital, definition, p. 1395. Stock dividends, §§ 53, 58, pp. 205, 213. Stocks, sales of, §§ 58, 68, pp. 213, 251. loss on sales of, § 68, p. 251. Stoppage, at the source. (See deduction at the source.) Substitute certificates, § 103, p. 442. Suits by taxpayer against collector may be maintained in District Courts, § 123, p. 507. by U. S. in personam, assessment not necessary in, § 111, p. 485. to collect taxes, § 111, p. 485. INDEX. 1547 Suits — cont'd. directly against U. S. for re-payment of taxes, § 128, p. 521. for recovery of taxes to be authorized by commissioner, § 109, p. 483. to recover money paid under protest, § 125, p. 515. to collect penalties, § 112, p. 486. to foreclose liens, parties to, § 110, p. 484. in rem to enforce penalties, § 110, p. 484. by U. S. in personam, § 111, p. 485. by U. S. to foreclose liens, § 110, p. 484. Summary of monthly list return, § 81, p. 332. Summoning taxpayer, § 85, p. 372. Summons to taxpayer served by deputy collector, § 85, p. 373, requirements of, § 85, p. 373. attachment on refusal to obey, § 85, p. 376. proceedings on return of, § 85, p. 374. Sunday or legal holiday, § 77, p. 284. Super-tax, see Additional Tax. Supersedeas in proceedings for contempt, § 85, p. 376. Supplementary statement attached to return, § 70, p. 260. Supplies on hand, § 61, p. 224. Supreme Court of District of Columbia may issue writs of mandamus, § 116, p. 492. of territories may issue writs of mandamus, § 116, p. 492. of District of Columbia may perhaps issue prohibition against com- missioner, § 116, p. 492. of District of Columbia may perhaps issue certiorari against com- missioner, § 118, p. 495. T. Taft, Theodore M., on inheritance taxes, § 57, p. 211. Taking without due process of law, §§ 18, 21, 23, pp. 28, 53, 55. Tariffs, suits to recover taxes paid under, § 126, p. 519. Tax: additional, on individuals only, rates and classes, § 44, p. 181. America, origin of, in, § 15, p. 17. amounts added as penalty, section 3176, § 87, pp. 379, 543. assessment and collection, § 90, p. 401. from withholding agent, § 78, p. 288. assessment — against income withheld at source, § 103, pp. 437, 438. of, against withholding agent deferred, § 89, p. 399. Austria and Hungary, in, § 9, p. 15. British colonies and dependencies, in, § 4, p. 9. claim for abatement of, § 97, p. 425. co-operative dairies exempt, § 41, p. 163. constitutional objections to present income tax, § 18, p. 27. 1548 INDEX. Tax — cont'd. corporations — exempt, § 41, p. 163. on entire net income, § 39, p. 161. organized in United States, all (with certain exceptions) subject to, § 39, p. 161. delinquent if not paid by June 30, § 90, p. 401. deputy collectors, duties, section 3172, § 105, p. 461. domestic building and loan association, what necessary to exempt, § 41, p. 176. "duties" are not, but item of cost, § 67, p. 247. evidence of nonliability, received by withholding agent, disposition of, § 103, p. 436. evidence of payment of, by corporation for deduction purposes, p. 1411. excise on corporation, §§ 42, 64, pp. 177, 229. extra, § 87, p. 380. failure to pay, §§ 87, 105, pp. 380, 462. fixed determinable annual income, subject to withholding, § 97, pp. 4:14rA21; § 99, p. 429. France, in, § 5, p. 11. fraternal societies, exempt, § 41, p. 163. Germany and Luxembourg, in, § 8, p. 13. Great Britain, in, § 3, p. 4. history of, in Europe, § 2, p. 3. history of the Federal, § 17, p. 21. Holland, Java, and Belgium, § 11, p. 16. incidence of — with respect to persons, § 35, p. 153. with respect to property, § 34, p. 152. income of corporations organized elsewhere than in the United States, liability, § 43, p. 180 ; § 59, p. 215. individual — net income over $3,000 annually, liable to, § 72, p. 265. income from public utility taxable when, § 41, p. 165. in the several United States and territories, § 16, p. 19. Italy, in, § 6, p. 13. Japan, in, § 14, p. 17. judicial definitions of income subject to, § 46, p. 188. legislative history of the present, § 17, p. 21. nature of, § 33, p. 152. normal — computation of, § 43, p. 180. deductions in connection with, §§ 97, 103, pp. 414, 435, 445. agricultural, horticultural, and labor organizations, certain mu- tual savings banks, exempt, § 41, p. 163. not to be withheld against partnership profits, § 75, p. 272. INDEX. 1549 Tax — cont'd. not to be withheld on hank deposits, § 103, p. 435. Norway, Sweden and Denmark, in, § 10, p. 15. omitted, procedure upon discovery of, § 85, p. 372. once withheld, subsequent withholding agent, exempt on filing cer- tificate (Form 1006), § 97, p. 422. on excess of income over exemption, § 72, p. 265. on dividends, § 53, p. 203. on dividends due state, county and municipal corporations uncon- stitutional, § 41, pp. 166, 715. on dividends of non-resident aliens, constitutionality of, § 37, pp. 158, 159. on income — from bonds, etc., corporations, etc., § 103, p. 437. paid by note, § 97, p. 420. unconstitutional discrimination against corporations, § 24, p. 69 extra-territorial taxation, § 26, p. 74. of state officers, § 27, p. 77. on interest on bonds owned by corporations organized in United States, § 103, p. 447. on net income of corporation — computation of, § 43, p. 180. distributable to owners, § 59, p. 215. on net income of foreign corporation; definition; deduction, § 43, p. 180. receipts to be given by collector, § 97, p. 414. returns of, to be made, section 3173, § 74, pp. 271, 284. Russia, and Finland, in, § 13, p. 17. Spain, in, § 7, p. 13. special excise, § 64, p. 229. Switzerland, in, § 12, p. 16. taxable person not to be released from liability, § 97, p. 426. to be paid, §§ 92-97, pp. 408-414. to be withheld, § 97, p. 420, § 103, p. 446. withheld — at source, to be paid to, § 97, p. 414. by first licensee, fact of withhcjlding noted, § 104, p. 458. collector to adjust in assessment against withholding agent, § 97, p. 425. from what, § 97, p. 420; § 102, p. 434. to be paid to collector, § 97, pp. 421, 425. Taxable income: definition; liability, § 42, p. 176. Taxable year, § 42, pp. 177, 178. Taxation : constitutional requirement of uniformity of, § 22, p. 53. progressive, § 20, pp. 47-52. 1550 INDEX. Tax, collection of, by U. 8. by suit, § 109, p. 483. Tax due, § 89, p. 383. Taxes : paid by corporation constitute deduction, § 67, p. 247. received to be deposited in U. S. Treasury, § 108, p. 482. reserve for, by corporation not deductible, § 67, p. 247. return of, appeals to commissioner for, § 122, p. 500. unpaid, are not expenses, § 68, p. 249. Taxpayer : regulations designed to assist, § 93, p. 408. Tax statements, § 105, p. 465. Tax year 1913, § 42, p. 176. Teacher : public school, § 55, p. 208. Territories : counties and municipalities in, exempt, § 41, pp. 165, 167. Supreme Courts of, may issue writs of mandamus, § 116, p. 492. Timberland: deduction for depreciation — account removal of timber, § 64, p. 234. limit of, excess of, is income, § 64, p. 234. Time: extension of, for making and filing return, § 77, p. 283. income during which subject to tax, § 42, pp. 176-178, 630, 633. of returns, § 77, p. 279. of return may be extended, § 77, p. 283. Tools, § 60, p. 221. Tort, waiver of, § 128, p. 522. Towns are municipalities, exempt, § 41, p. — . Trespass against collector and deputy collector, § 124, p. 515. Trustee: as fiduciary, § 102, p. 432. duties of, § 97, p. 422. returns by, § 74, p. 268. Trustees of the New York and Brooklyn Bridge, § 41, p. 167. U. Ultra-vires, § 58, p. 214. Undivided profits, § 69, p. 253. Understatement, condition of reassessment, § 108, p. 482. Unearned increment: jot value for depreciation purposes, § 64, p. 235. Uniformity, constitutional requirement of, § 22, p. 53. discrimination against corporations, § 24, p. 69. INDEX. 1551 "United States" or "State:" construction, § 24, pp. 152, 153. interest upon obligations of, § 43, pp. 180, 621, 622. may maintain suits for taxes, § 111, p. 485. suits against, for repayment of taxes, § 128, p. 521. suits by, to be authorized by commissioner, § 109, p. 483. suits by, to be regulated by commissioner, § 109, p. 483. suits by, judgments to be paid to collector, § 109, p. 484. V. Value: book, capital assets, shrinkage in, § 64, p. 231. gross at the mine, definition, § 64, p. 234. of property, acquired by gift, etc., § 57, p. 210. shrinkage in property, deductible, § 70, p. 261. unearned increment, not as basis of deduction for depreciation, § 64, p. 235. W. Wages of domestic servants, not expenses, § 62, p. 225. Waiver of tort, § 128, p. 521. Walker, Albert H.— on contents of returns by corporations, etc., § 82, p. 361. on constitutional objection to the deduction at the source, § 25, p. 73. on deductions at the source, § 97, p. 426. on deductions by individiials for interest, § 65, p. 238. on income accrued but not received, § 48, p. 191. on income earned, § 54, p. 207. on increase in value of property as income, § 59, p. 218. on interest, § 47, p. 189. on losses deductible by individuals, § 68, p. 250. on unconstitutional character and illegal administration of income tax, § 66, p. 246. Wards, § 73, p. 266. War stamp, deduction at the source, § 103, p. 453. Whitney, Edward B. § 19, p. 32. Wife: liaving income of $3,000 from separate estate managed by herself may make return of her own income, § 72, p. 265. Wife and husband: combined net income of exceeds $4,000, return required, both jointly and separately liable for return and tax, § 72, p. 265. either having income $3,000 or over, return required and must include incomes of both, § 72, p. 265. 1552 INDEX. Withholding; at source, § 97, p. 414. example of where and where not, p. 1369. on and after November 1, 1913, § 80, p. 312. by first licensee; notation by; responsibility of, § 104, p. 459. from what, § 97, p. 419. Withholding agent: annual return by — by, when, to show what, § 81, pp. 332, 341. of (Form 1042), when to be filed, to be accompanied by what, § 81, p. 343. not to be filed until, § 97, p. 425. assessment of tax against, deferred until, § 89, p. 399. claim for exemption and deductions filed with (par. B and C), § 97, pp. 425, 426. definition of, as source, § 97, p. 422. disposition of returns of, § 89, p. 399. duty in matter of certificates of ownership, § 103, p. 446. duty of, in matter of claims for deduction (par. B), § 97, p. 425. duty of, in ease of foreign partnerslup, § 75, p. 273. evidence of nonliability to tax filed with, disposition of, § 103, p. 436. how to treat substitute certificate of collecting agent and certificates of owners not subject to having tax withheld, § 81, p. 341. may file claim for abatement of tax, § 97, p. 425. monthly return by, when to be made, with whom filed, to be accom- panied by what, § 81, p. 343. notice filed with, claim for deduction, account partnership expense, § 75, p. 273. not to withhold against nonresident alien or foreign organization doing business in United States, when, § 103, pp. 448, 449. return of, when to be made, § 77, p. 282. relieved from necessity of withholding, when, § 104, p. 458. to file monthly list return, form of, and what to contain, § 81, p. 332. to forward to collector tax withheld, when, § 97, p. 425. to furnish statement of claim for deductions filed with collector, § 97, p. 425. to pay to collector tax withheld, § 97, pp. 419, 422. to withhold from, what, amount of, § 97, p. 422. when claim for deductions, paragraph B, to be filed with, duty of, § 81, p. 327. when so authorized, may file return of withholding in district of his location, § 103, p. 437. who to be, in cases cited, § 97, pp. 419, 422. Withholding and paying agent: of debtor in United States, charged with duty of withholding, when, § 103, p. 438. INDEX. 1553 Witnesses : jurisdiction for compelling attendance, § 30, pp. 128-148; § 85, pp. 371-376, 546. Writs of mandamus, §§ 116, 117, pp. 491, 492. Y. Year: for taxable purposes for individual, is calendar year, § 42, pp. 176-178. (See fiscal year for corporation.)^ '^mm