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TREASURY DEPARTMENT
UNITED STATES INTERNAL REVENUE SERVICE
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INCOME TAX
PRIMER
Revised January 1, 1921 |
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PREPARED BY THE BUREAU OF INTERNAL REVENUE
FOR
THE INFORMATION AND ASSISTANCE
OF TAXPAYERS -
WASHINGTON
GOVERNMENT PRINTING OFFICE
1921

INCOME TAX PRIMER.
Revised January 1, 1921.
RETURNS.
I. Am I required to render a personal income tax return for 1920 P
Yes; if unmarried or if married and not living with husband or
wife, and your net income for that year equals or exceeds $1,000, or
if you were married and living with husband or wife and your net
income equals or exceeds $2,000 for that year.
If you act as the guardian of a minor or incompetent person, or as
the administrator, executor, or trustee of an estate or trust, a return
will be required of you for and in behalf of your ward, or the estate
or trust for which you act, if the conditions outlined under the head
of “Fiduciaries,” as requiring a return, are present in your case.
2. What is meant by the taxable year 1920 P
The taxable year 1920 means the calendar year 1920 or any fiscal
year ending during the calendar year 1920.
3. What goes the term “fiscal year ” mean?
* § t
The term “fiscal year’ means an accounting period of 12 months
ending on the last day of any month other than December.
4. Upon what period of time shall my 1920 income tax return be based?
Your 1920 return should be rendered upon the basis of your annual
accounting period (fiscal year or calendar year, as the case may be).
If your annual accounting period is other than a fiscal year as defined
above, or if you have no annual accounting period or do not keep .
books, you should render your return upon the basis of the calendar
year.
5. May I change my accounting period for the purpose of rendering my
income tax return ?
Yes; if permission is secured from the Commissioner in accord-
ance with Treasury Decision 3032 amending article 26 of Regula-
tions 45. If a taxpayer, who has been rendering his return upon the
basis of his accounting period, changes that accounting period, and
wishes to change the basis of rendering his return to accord with
his new accounting period, he shall as soon as possible give to the
collector for transmission to the Commissioner written notice of such
change and of his reasons therefor. The Commissioner will not
approve a change of the basis of computing net income unless such
notice is given at a time which is both (a) at least thirty days before
the due date of the taxpayer's return on the basis of his existing
taxable year and (b) at least thirty days before the due date of his
separate return for the period between the close of the existing tax-
able year and the date designated as the close of the proposed tax-
3
4 IN COME TAX PRIMER.
able year. The due date of the separate return for such period is
the fifteenth day of the third month following the close of that
period. If the change in the basis of computing the net income of
the taxpayer is approved by the Commissioner, the taxpayer shall
thereafter make his returns upon the basis of the new accounting
period in accordance with the requirements of section 226 of the
statute and his net income shall be computed as therein provided.
The separate return referred to above is required under section
226 of the Revenue Act of 1918, which provides that if a taxpayer,
with the approval of the Commissioner, changes the basis of comput-
ing net income from fiscal year to calendar year a separate return
shall be made for the period between the close of the last fiscal year
for which return was made and the following December 31. If the
change is from calendar year to fiscal year, a separate return
shall be made for the period between the close of the last calendar
year for which return was made and the date designated as the
close of the fiscal year. If the change is from one fiscal year to
another fiscal year a separate return shall be made for the period
between the close of the former fiscal year and the date designated
as the close of the new fiscal year. If a taxpayer making his first
return for income tax keeps his accounts on the basis of a fiscal year
he shall make a separate return for the period between the beginnin
of the calendar year in which such fiscal year ends and the end o
such fiscal year.
In all of the above cases the net income shall be computed on the
basis of such period for which separate return is made, and the tax

shall be paid thereon at the rate for the calendar year in which such
period is included; and the credits provided in subdivisions (c) and
(d) of section 216 shall be reduced, respectively, to amounts which
bear the same ratio to the full credits provided in such subdivisions
as the number of months in such period bears to twelve months.
6. Where should my personal return for the year 1920 be filed?
Section 227 (b) of the Revenue Act of 1918 provides that your
return shall be filed with the collector of internal revenue for the
district in which you have your legal residence or principal place
of business. If your legal residence is located in one collection dis-
trict and your principal place of business in another, it is optional
with which collector your return shall be filed; but for administra-
tive reasons the Commissioner of Internal Revenue desires that it be
filed with the collector of the district in which your legal residence
is located.
7. When may my 1920 return be filed with the collector of internal
revenue P
If you make return on a calendar year basis, on any day after
December 31, 1920, but not later than March 15, 1921. If you
make your return on a fiscal year basis it must be filed not later
than the 15th day of the third month following the close of the
fiscal year.
8. May an extension of time beyond March 15, 1921, be obtained for the
filing of my 1920 return? -
Yes; if, on account of sickness or absence from home, you are un-
able to render your return within the time prescribed by law, you
IN COME TAX PRIMER. - 5
may obtain an extension of thirty days if a request therefor is filed
with the collector of your district. In this request you must state
the reason why the return can not be filed within the time pre-
scribed by law. -
9. Would a personal return rendered by an agent, for and in my behalf,
be accepted?
If by reason of illness, absence, or nonresidence a taxpayer is un-
able personally to render his return he may appoint an agent to act
for him and the return executed by the agent will be accepted if he
makes affidavit that he has sufficient knowledge to make a complete
and accurate return for his principal. Such agent assumes responsi-
bility for making the return, and incurs liability to the specific penal-
ties provided for erroneous, false, or fraudulent returns.
Io. May a husband and wife living together make separate returns?
Yes; they should in every case make separate returns where the
wife has a separate income and the aggregate net income of both hus-
band and wife is $5,000 or over. Where the combined net income in
excess of credits (see question 89)—that is, the combined net income
subject to normal tax, is in excess of $4,000 separate returns should
be made in order that there will not be an overassessment of tax.
Husband and wife living together are entitled to a personal ex-
emption of not to exceed $2,000 against their aggregate net income.
If separate returns are made the personal exemption of $2,000 may
be taken by either or divided between them. -
II. Is a married man who is entitled to a personal exemption of $2,000
and $4 oo additional exemption ori account of two dependent children, and
whose total net income does not exceed $2,400, but does equal or exceed
$2,000, required to make a return? a. -
Yes; although he is not required to pay an income tax, he is re-
quired to make a return. -
12. Where can I get a blank form upon which to make my return?
From the collector of internal revenue for your district. The col-
lector will endeavor to have such form sent to you, but failure to re-
ceive one will not excuse you from making a return. If you do not
receive one, it is your duty to request one of the collector. º
EXEMPTION.
#% What amount of personal exemption is allowed by the Revenue Act of
1918
Section 216 (c) of the Act allows a personal exemption of $1,000,
plus $1,000 if the person making the return is the head of a family
(see art. 302, Regulations 45) or a married man living with his
wife. This additional exemption of $1,000 is allowed if the person
making the return is a married woman living with her husband,
but in no event shall the combined personal exemption of a husband
§ wife living together, exclusive of credit for dependents, exceed
2,000.
In addition, a further exemption of $200 is allowed for each per-
son (other than husband or wife) dependent upon and receiving his
chief support from the taxpayer, if such dependent person is under
18 years of age or is incapable of self-support because mentally or
physically defective. (Sec. 216 (d).) -
6 IN COME TAX PRIMER.
14. A widower has a child over 18 years of age, whom he supports, who
is away from home attending school. What personal exemption may be
claimed by the widower who maintains the home?
He is entitled to claim a personal exemption of $2,000 as head of
a family, under section 216(c) of the Revenue Act of 1918.
15. What personal exemption may be claimed by a son who actually stºp=
ports and maintains his dependent mother elsewhere than in his own home
by reason of the fact that he is unable to earn enough to suppert both in
the mother’s place of abode or to defray their joint expenses in his place
of employment?
The son is properly classifiable for income tax purposes as the
head of a family and as such is entitled to claim a personal exemption
of $2,000.
16. I was not actually living with my wife on December 31, 1920, due to
her mental incompetency at that time and consequent confinement in an
institution for treatment. What personal exemption may I claim in my
1920 return?
The separation of a husband and wife due to the fact that either
has been declared mentally incompetent and confined in an institu-
tion for treatment is held to be temporary in character and conse-
quently without effect in so far as the joint personal exemption of
$2,000 is concerned.
17. In case both a husband and wife contribute to the support of a de=
pendent, how is the credit of $200 for dependents to be treated?
The credit of $200 must be taken by the one contributing the chief
support and may not be divided between them.
EXEMPT IN COME.
18. What income, if any, is exempt?
(a) The proceeds of life insurance policies paid upon the death
Of º insured to individual beneficiaries or to the estate of the in-
SUII’eOI.
(b) The amount received by the insured as a return of premium
or premiums paid by him under life insurance, endowment, or annu-
ity contracts, either during the term or at the maturity of the term
mentioned in the contract or upon surrender of the contract.
(c) The value of property acquired by gift, bequest, devise, or
descent (but the income from such property shall be included in
gross income).
(d) Interest upon (1) the obligations of a State, Territory, or any
political subdivision thereof, or the District of Columbia; or (2)
Securities issued under the provisions of the Federal Farm Loan Act
of July 17, 1916; or (3) the obligations of the United States or its
possessions; or (4) bonds issued by the War Finance Corporation;
except as follows: In the case of obligations of the United States
issued after º 1, 1917, and in the case of bonds issued by the
War Finance Corporation the interest shall be exempt only if and to
the extent provided in the respective Acts authorizing the issuance
thereof as amended and supplemented and shall be excluded from
gross income only if and to the extent it is wholly exempt from taxa-
tion to the taxpayer.
(e) Amounts received, through accident or health insurance or
under workmen's compensation acts, as compensation for personal
IN COME TAX PRIMER. 7
injuries or sickness, plus the amount of any damages received,
whether by suit or agreement, on account of such injuries or sickness.
(f) So much of the amount received during the present war by a
person in the military or naval forces of the United States as salary
or compensation in any form from the United States for active
services in such forces as does not exceed $3,500.
(g) Compensation paid its officers and employees by a State or
political subdivision thereof, including fees received by notaries
public commissioned by States and the commissions of receivers
appointed by State courts. Employees of universities receiving
salaries paid in part or in whole from funds available under the
Smith-Lever Act of May 8, 1914, who are officers or employees of a
State, are not required to return as taxable income the salaries so
received. This is also true with respect to the Act of August 30,
1890, relating to colleges for the benefit of agriculture and the
mechanic arts, and to the Act of March 2, 1887, relating to agri-
cultural experiment stations in such colleges.
19. To what extent is interest received in 1919 and subsequent years on
Liberty bonds, Victory notes, United States Certificates of Indebtedness,
and War Savings Certificates exempt from income tax?
All Liberty bonds, Victory notes, United States Certificates of
Indebtedness, and War Savings Certificates are exempt both as to
principal and interest from all Federal, State, and local taxation
except (a) estate or inheritance taxes and (b) Federal income sur-
taxes, excess profits, and war profits taxes.
Interest on 34 per cent Liberty bonds, 3% per cent Victory notes,
and United States Certificates of Indebtedness issued before Septem-
ber 1, 1917, is wholly exempt from normal tax, surtax, excess profits,
and war profits taxes.
Interest on 4% per cent Victory notes is wholly exempt from normal
tax, but is subject to surtax, excess profits, and war profits taxes.
Liberty bonds, other than 3% per cent Liberty bonds, United States
Certificates of Indebtedness issued after September 1, 1917, and War
Savings Certificates are entitled to certain limited exemptions from
Surtax, excess profits and war profits taxes in respect to the interest
on principal amounts thereof as stated in the summary below.
Summary of Easemptions against Holdings of Liberty Bonds, United States
Certificates of Indebtedness and War Savings Certificates, issued after Sep-
tember 1, 1917.
KEY TO SYMBOLS USED IN SUMMARY OF EXEMPTIONS ON TAXABLE LIBERTY BONDS.
1—First Liberty bond issue.
2—Second Liberty bond issue.
3–Third Liberty bond issue.
4—Fourth Liberty issue.
1–2—First Liberty bonds converted into Second Liberty bonds.
1–3–First Liberty bonds converted into Third Liberty bonds.
1–4—First Liberty bonds converted into Fourth Liberty bonds.
2–3—Second Liberty bonds converted into Third Liberty bonds.
8 IN COME TAX PRIMER.
Applicable to 1917 and subsequent years during life of bonds and certificates.
*A $5,000 | This exemption may be claimed once against any taxable
Liberty bonds (not including Victory notes), converted or
unconverted, United States Certificates of . Indebtedness
issued after Sept. 1, 1917, or War Saving Certificates or may
be divided among them.
Applvcable to 1918 and two years after the close of the war as fixed by proclamation of the
President.
B $30,000 || Allowed to owner against 4, no matter how obtained.
**C | $45,000 This exemption (maximum $45,000) is limited to 1% times
** * amount of 4 originally subscribed for by the taxpayer and
still held by him at the time of filing the return and may be
claimed against any one of 2, 3, 1–2, 1–3, or 2–3 or may be
divided among them.
D $30,000 || Allowed against 1–4, no matter how obtained.
Applicable to 1919 and five years after close of war as fixed by proclamation of the Presváent.
E $30,000 This exemption may be claimed against any one of 2, 3, 4, 1–2,
1–3, 1–4, or 2–3 (regardless of any holdings of Victory notes)
or may be divided among them.
Applicable to 1919 and during the life of the Jºctory notes (4 years).
***F $20,000 | This exemption (maximum $20,000) is limited to three times
the amount of Victory notes (either 3% or 4} originally sub-
scribed for by the taxpayer and still held by him at the date
of filing the return and may be claimed against any one of
2, 3, 4, 1–2, 1–3, 1–4, or 2–3) or may be divided among them.
$160,000 maximum total exemption allowed for 1920 on taxable Liberty bonds.
EXPLANATIONS.
* Interest upon bonds issued by the War Finance Corporation,
principal of which does not exceed $5,000 in aggregate, is exempt from
taxation under section 16, Act approved April 5, 1918, and is in addi-
tion to this exemption.
If books are kept on accrual basis, report amount of interest actu-
ally accrued whether received or not.
If books are kept on the basis of receipts and disbursements, report
amount of interest actually received within the year, which will in-
clude amount of coupons falling due within the year (whether cashed
or not) plus the amount of interest accrued upon bonds which are sold
or otherwise disposed of during the year.
INCOME TAX PRIMER. - 9
All interest on indebtedness incurred to purchase or carry obliga-
tions of the United States issued after September 1, 1917, may be
claimed as a deduction under sections 214 (a) (2) and 234(a) (2) of
the Revenue Act of 1918 by a taxpayer rendering a return of income.
** The partners of a partnership and the stockholders of a personal
service corporation are considered the original subscribers to any
obligations of the United States subscribed for by the partnership or
the personal service corporation.
*** “The date of filing the return '' is held to be the actual date
upon which the return is filed with the collector of internal revenue.
In the case of a trust, the income from which is taxable to the bene-
ficiaries, each beneficiary is regarded as the owner of his proportion-
ate part of the bonds, notes, and certificates held in trust and as the
original subscriber of his proportionate part of fourth Liberty bonds
and Victory notes subscribed for by such trust, and is entitled to the
exemptions allowed on account of such ownership and subscription.
If, on the other hand, the income from the trust is taxable to the
trustee, the trustee should claim the allowable exemptions as owner
of the bonds, notes, and certificates, or subscriber to the fourth Liberty
bonds and Victory notes.
Interest received on and after March 3, 1919, on bonds, notes, cer-
tificates of indebtedness of the United States, and bonds of the War
Finance Corporation, while beneficially owned by a nonresident alien
individual or a foreign corporation, partnership, or association, not
engaged in business in the United States, is exempt from income,
excess profits, and war profits taxes.
Attention is invited to the use of Form 1125 for 1919 and subse-
quent years. Copies of this form may be secured from the collector.
INCOME, NET AND GROSS.
20. What is meant by the term “Net income"?
Net income means your total gross income, not including income
wholly exempt by law from the tax, less the general deductions allowed
by law. -
21. In rendering a return, what items of income must I report as gross
income?
Under gross income should be reported every item of income de-
rived from any source whatever (except those specified in the answers
to questions 18 and 19 as wholly exempt) received during the taxable
year for which the return is rendered, whether received in cash or the
equivalent of cash, including: -
(a) All amounts of salary, wages, commissions, or compensation of
whatever kind received for personal service (however, the salary of
the President of the United States and the salaries of Federal judges
elected or appointed prior to the enactment of the Revenue Act of
1918 are not subject to tax).
(b) All amounts of gain, profit, or income derived from any busi-
mess or trade in which you are engaged or in which you have an inter-
est and from any sale of property—real, personal, or mixed.
(e) Rents, interest on notes, mortgages, deeds of trust, or other se-
curities issued by individuals, partnerships, etc., interest on bonds,
mortgages, deeds of trust, or other similar obligations of corporations,
27014°–21 2
10 - IN COME TAX PRIMER.
joint-stock companies, associations, or insurance companies, and inter-
est on bank deposits.
(d) All income received from fiduciaries, that is, all amounts re-
ceived from incomes of estates, trusts, etc., through trustees, adminis-
trators, or executors, unless the tax on such income was paid by the
fiduciary prior to distribution. (It is to be understood that in cases
where under the terms of the will or trust income of the estate is to
be distributed regularly or annually the beneficiaries are required to
return their distributive interests in such income whether actually
distributed to them or not.) •
(e) If you have an interest in a partnership you should report your
distributive share of the earnings or profits of the partnership ascer-
tained during the taxable year for which the return is rendered,
whether distributed or not. If your net income for such taxable year
is computed upon the basis of a period different from that upon the
basis for which the net income of the partnership is computed, then
your share of the net income of the partnership for any accounting
period of the partnership ending within the fiscal or calendar year
upon the basis of which your net income is computed is to be reported
in your income tax return. -
(f) All items of foreign income, including interest upon bonds and
mortgages or deeds of trust or other similar obligations issued by in-
dividuals who are citizens or residents of foreign countries, foreign
corporations, joint-stock companies, etc., and dividends from foreign
corporations.
g) Cash dividends on stock or from the net earnings of domestic
corporations, joint-stock companies, associations, or insurance com-
panies, whether paid in cash, property, or scrip. As the net earnings
of corporations, joint-stock companies, etc., are subject to the tax im-
posed upon the net income of corporations, dividends from such net
earnings are not subject to the normal income tax in the hands of the
shareholders receiving them, but they are to be returned for Sur-
tax purposes, since they are subject to that tax.
(h) Tf you own stock in a personal service corporation (see art.
328, Regulations 45), you should report your distributive share of
the net income of such corporation for 1920 in the same manner as
outlined in paragraph (e) above.
22. If my salary for December, 1920, is not paid to me until some day in
January, 1921, or later, is the amount to be reported in my 1920 return?
No; unless as a matter of settled practice your books were kept
on an accrual basis, in which event it should be returned by you
for the year 1920. If credited and made available to you on Decem-
ber 31, 1920, without any substantial limitation or restriction as to
the time or manner of payment or condition upon which payment is
to be made, although not actually drawn until later, it should also
be reported as 1920 income. Otherwise it should be reported in your
return for 1921.
23. If an employer agrees to pay an employee a certain stipulated salary
and furnish him with room and board, are the latter items to be considered
in computing income tax liability?
Yes; a fair rental value is to be placed upon the room and a fair
value upon the meals furnished, and these amounts reported as in-
come by the employee; however, if the room and board are fur-
INCOME TAx PRIMER. 11)
nished purely for the convenience of the employer, the fair value
thereof need not be included in the income of the employee.
24. An employee receives a per diem allowance for expenses in addition
to his regular salary. Is this amount to be included as income in his return?
If an individual receives a salary and also an allowance for meals
and lodging, as, for example, a per diem allowance in lieu of sub-
sistence, any excess of the cost of such meals and lodging over the
allowance, plus the ordinary expenditures required for such purposes
when at home, is deductible, but any excess of the allowance over
such expenses minus such ordinary expenditures is taxable income.
25. If a person entered into a contract in 1920 which will not be com=
pleted until a later year, and which requires him to make expenditures for
material and labor, provide for possible losses, etc., must he include the,
advance payments he received in 1920 in his return for that year?
Persons engaged in contracting operations who have uncompleted
contracts, in some cases, perhaps, running for periods of several
years, will be allowed to prepare their returns so that the gross in-
come will be arrived at on the basis of completed work; that is, on
jobs which have been finally completed any and all moneys received
in payment will be returned as income for the year in which the
work was completed. If the gross income is arrived at by this
method, the deduction from gross income should be limited to the
expenditures made on account of such completed contracts. Or the
percentage of profit from the contract may be estimated on the basis
of percentage of completion, in which case the income to be returned
each year during the performance of the contract will be computed
upon the basis of the expenses incurred on such contract during the
year; that is to say, if one-half of the estimated expenses necessary
to the full performance of the contract are incurred during one year,
one-half of the gross contract price should be returned as income for
that year. Upon the completion of a contract if it is found that, as
a result of such estimate or apportionment, the income of any year
or years has been overstated or understated, the taxpayer should file
amended returns for such year or years.
26. A tenant, under the terms of a lease, is required to pay a certain cash
rental and in addition make certain improvements. Is the cost of these
improvements held to be taxable income to the property owner?
When buildings are erected or improvements are made by a lessee
in pursuance of an agreement with the lessor, and such buildings
or improvements are not subject to removal by the lessee, the lessor
receives income at the time when such buildings or improvements
are completed to the extent of the fair market price or value of such
buildings or improvements subject to the lease. This amount would
ordinarily be the difference between the value of the land free from
the lease without such improvements and the value of the land
subject to the lease with such improvements. If, for any other rea-
son than a bona fide purchase from the lessee by the lessor, the lease
is terminated, So that the lessor comes into possession and control
of the property prior to the time originally fixed for the termination
of the lease, the lessor receives additional income for the year in
which the lease is so terminated to the extent that the value of such
buildings or improvements when he became entitled to such posses-
sion exceeds the fair market price or value thereof to him as deter-
12 IN COME TAX PRIMER.
mined when the same completed became part of the realty. No ap-
preciation in value due to causes other than the premature termina-
tion of the lease shall be included. Conversely, if the buildings or
improvements are destroyed prior to the termination of the lease the
lessor is entitled to deduct as a loss of the year when such destruction
takes place the fair market price or value of such buildings or im-
provements subject to the lease as determined when the same com-
pleted became a part of the realty, or the value thereof subject to
the lease on March 1, 1913, less any Salvage value subject to the lease,
to the extent that such loss was not compensated by insurance.
27. Special payments, designated as “Bonuses,” are often made to officers
and employees of corporations, firms, and individuals. Are such items of
income subject to tax in the hands of recipients?
Any bonus or other item of compensation paid to an employee in
addition to his regular salary or wage under a contract, express or
implied, as additional compensation for services rendered, as a re-
ward for past endeavors, or as a stimulus to further zeal and en-
thusiasm in the discharge of his duties, is held to constitute taxable
income, which should be reported as such in the employee's return
rendered for the year during which received. -
28. Should an individual who conducts a grocery, dry-goods, clothing, or
farm implement business, or any other business which requires that a stock
be carried, take an inventory at the close of each taxable year and take such
inventories into consideration in arriving at his net income from business?
Yes; section 203 of the Revenue Act of 1918 provides that whenever
in the opinion of the Commissioner the use of inventories is neces-
sary in order clearly to determine the income of any taxpayer, in-
ventories shall be taken by the taxpayer upon such basis as the
Commissioner, with the approval of the Secretary, may approve or
prescribe as conforming as nearly as may be to the best accounting
practice in the trade or business and as most clearly reflecting the
income of the taxpayer. *
29. How am I to determine the amount of gain or profit derived from a
sale of property which is returnable for income tax purposes?
If you acquired the property prior to March 1, 1913, you should
take its fair market price or value as of that date, add thereto all
amounts subsequently expended and not deducted as business ex-
penses in making permanent improvements, then deduct the depre-
ciation sustained, and the difference between the result thus obtained
and the selling price is the amount to be reported.
If you purchased the property on or after March 1, 1913, the
difference between its cost, plus all amounts subsequently expended
for permanent improvements and not deducted as business expenses,
less depreciation sustained, and its selling price is to be returned.
In computing the gain from the sale of a taxpayer's dwelling, with
respect to which no depreciation deduction has been allowed, no
adjustment need be made for depreciation sustained.
In the case of property acquired by gift, bequest, devise, or descent
the basis for computing gain or loss on a sale is the fair market
price or value of the property at the date of acquisition or as of
March 1, 1913, if acquired prior thereto. For the purpose of de-
termining the profit or loss from the sale of property acquired by
bequest, devise, or descent since February 28, 1913, its value as
IN COMIE TAX PRIMIER. 13
appraised for the purpose of the Federal estate tax, or in the case
of estates not subject to that tax its value as appraised in the State
court for the purpose of State inheritance taxes, should be deemed
to be its fair market value when acquired.
3o. How is the value as of March 1, 1913, of property sold determined?
No method of determining such value can be stated which will
adequately meet all circumstances. What that value was is a ques-
tion of fact to be established by any appropriate evidence which is
available in the particular case.
31. I owned property which I traded for other property during. I 92 o.
How am I to determine what amount of gain or profit derived from the
transaction is to be reported for income tax purposes? w
The profit is to be determined in the same manner as if the prop-
erty was sold for cash. The property received in exchange should
be treated as the equivalent of cash to the amount of its fair market
value at the time of the exchange. -
32. Are commissions on renewal premiums on insurance policies subject
to income tax?
Yes; such commissions received by insurance agents on account of
business written are taxable income for the year in which received.
33. I purchased a 6 per cent $100 coupon bond at its face value, plus
$1.5o; that is, three months’ accrued interest. Three months later I de=
tached a coupon therefrom and collected $3 interest. Must the entire
amount of interest received be returned as income?
No; report only so much interest as accrued after the date of your
purchase. It is the seller's duty to report the balance.
34. Do the pensions and retired pay of ex=officers and men of the United
States military and naval forces not on active duty constitute items of
taxable income?
Pensions and retired pay of ex-officers and men of the United States
Army, Navy, or Marine Corps, not on active duty, constitute items
of taxable income; however, allotments, family allowances, compen-
sation, insurance, etc., paid under the provisions of the War Risk In-
surance Act of September 2, 1917, as amended, are exempt from
taxation. -
35. I own stock in a bank which, under a State law, is required to pay
the taxes assessed against such stock. How is this matter to be handled
for income tax purposes?
The proportionate part of the entire amount of taxes so paid by the
bank, which is properly chargeable against the number of shares held
by you, should be reported, for Surtax purposes, in your personal
return, as a dividend, and may then be deducted from gross income as
a tax.
36. I purchased Io shares of the preferred stock of a corporation and
received Io shares of common stock as a bonus. Has the value of this
bonus a taxable status?
No; but the total purchase price is to be fairly apportioned between
the preferred stock and the common stock received as a bonus, for the
purpose of determining the proportion of the consideration attribut-
able to each class of stock. The cost of each class so determined will
be the basis for determining profit or loss upon the subsequent sale of
such stock. r
14 IN COME TAX PRIMER.
37. Are amounts placed to the credit of a shareholder in a building and
loan association subject to income tax?
Any amount credited to a shareholder subsequent to March 1, 1913,
when such credit passes to him without restriction, has a taxable
status to him and should be included in his return rendered for the
year during which the credit is made.
Where the amount of accumulations credited does not become
available to the shareholder until the maturity of a share, it need not
be reported as income until maturity of the share, at which time the
amount received in excess of the total amount actually paid in by the
- shareholder is to be returned.
38. I hold stock in a corporation which in 1920 increased its capital stock
and gave me the right to subscribe for additional stock at par. If I sell this
“ right,” are the proceeds to be returned for tax purposes?
Yes; the entire proceeds from the sale of a “right ° to purchase
additional stock should be included in the return as income.
39. Are payments of alimony to be returned for tax purposes by the re=
cipient?
Sums representing alimony are not taxable income to the recipient,
nor allowable deductions to the person paying them.
40. Where services are rendered and paid for with something other than
money, shall consideration be given the transaction for income tax purposes?
Yes; where services are paid for with something other than money
the fair market value of the thing taken in payment is the amount to
be included as income. If the services were rendered at a stipulated
price, in the absence of evidence to the contrary, such price will be
presumed to be the fair value of the compensation received.
DIVIDENDS.
41. In. 1920 I received a dividend of $1 o, ooo from company “A,” which
was paid in stock of company “B.” Is this $10,000 to be considered a
stock dividend within the meaning of the income tax law?
No; a stock dividend is a distribution by a corporation to its stock-
holders of capital stock of the distributing corporation. A distribu-
tion of stock other than that of the distributing corporation is not
a stock dividend but is to be regarded as a dividend paid in property.
The fair market value of the stock at the time of receipt should be
reported as income.
42. In 1920 I owned stock in a corporation which declared and paid a
stock dividend. Is this stock dividend taxable? *
No; in the case of Eisner v. Macomber (T. D. 3010) the Supreme
Court of the United States decided that stock dividends do not con-
stitute taxable income.
43. I own Io shares of common stock of a corporation on which I received
a stock dividend of 5 shares of common stock which I intend to sell. How
will my profit or loss on the sale of the 5 shares be determined?
For the purpose of ascertaining the gain or loss derived from the
Sale of such stock the “cost " of each share is the quotient of the cost
of the old stock (or its fair market value as of March 1, 1913, if ac-
quired prior to that date) divided by the number of the old and new
shares added together. The difference between the selling price and
the cost of the stock so determined is the amount of the gain or loss,
as the case may be. -
IN COME TAX PRIMER. 15
44. Are dividends on paid-up life insurance policies subject to income tax?
Dividends on paid-up life insurance policies are not subject to
normal tax but are subject to surtax for the year in which received.
DEDUCTIONS.
45. What items may a taxpayer deduct in ascertaining his net income
from all sources?
In arriving at his net income from all sources he is entitled to
deduct from gross income the following items: ;
(a) All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, includ-
ing reasonable allowance for salaries or other compensation for per-
Sonal services actually rendered, and rentals or other payments re-
quired to be made as a condition to the continued use or possession,
for purposes of the trade or business, of property to which the tax-
payer has not taken or is not taking title or in which he has no
equity. tº
(b) All interest paid or accrued within the taxable year on in-
debtedness, except on indebtedness incurred or continued to pur-
chase or carry obligations or securities (other than obligations of
the United States issued after Sept. 24, 1917), the interest upon
which is wholly exempt from income tax.
(c) Taxes paid or accrued within the taxable year imposed by the
authority of the United States, except income, war profits, and ex-
cess profits taxes; or by the authority of any of its possessions, ex-
cept the amount of income, war profits, and excess profits taxes
allowed as a credit under section 222 of the Act; or by the authority
of any State or Territory, or any county, school district, municipal-
ity, or other taxing subdivision of any State or Territory, not in-
cluding those assessed against local benefits of a kind tending to
increase the value of the property assessed; and by the authority of
any foreign country, except the amount of income, war profits, and
excess profits taxes allowed as a credit under section 222 of the Act.
(d) Losses sustained during the taxable year and not compensated
for by insurance or otherwise, if incurred in trade or business.
(e) Losses sustained during the taxable year and not compensated
for by insurance or otherwise, if incurred in any transaction entered
into for profit, though not connected with one's trade or business.
(f) Losses sustained during the taxable year of property not con-
nected with the trade or business, if arising from fires, storms, ship-
wreck, or other casualty or from theft, and if not compensated for
by insurance or otherwise. sº
(g). Debts ascertained to be worthless and charged off during the
taxable year. -
(h) A reasonable allowance for the exhaustion, wear, and tear of
property used in trade or business, including a reasonable allowance
for obsolescence.
(7) A reasonable allowance for depletion in the case of mines, oil
and gas wells, other natural deposits, and timber. e
(j), Contributions or gifts made within the taxable year to cor-
porations organized and operated exclusively for religious, chari-
table, scientific, or educational purposes, or for the prevention of
16 IN COME TAX PRIMER.
cruelty to children or animals, no part of the net earnings of which
inures to the benefit of any private stockholder or individual, or to
the special fund for vocational rehabilitation authorized by section 7
of the Vocational Rehabilitation Act, to an amount not in excess of
15 per cent of the taxpayer's net income from all sources as com-
puted without the benefit of this paragraph.
46. What constitutes an item allowable as a deduction as a business
expense? -
All amounts of ordinary and necessary expenses paid or incurred
during the taxable year in the conduct of a business, trade, or pro-
fession. -
This includes all amounts paid by a farmer for labor in preparing
his land for a crop and the cultivation, harvesting, and marketing of
the crops, the cost of the seed and fertilizer used; the amounts ex-
pended for labor used in caring for live stock and the cost of the feed.
The amounts actually paid in making repairs to farm buildings, but
not the dwelling house; repairs to fences, farm machinery, etc.; the
cost of materials for immediate use and farm tools which are used
up in the course of a year or two, such as binding twine, stock pow-
ders, pitchforks, spades, etc.; and the amount of rent paid for a farm
may also be claimed.
A merchant may claim as deductions the amounts paid for adver-
tising, hire of clerks and other employees; the cost of the light, fuel,
water, telephones, etc., used in or at his place of business; drayage
and freight bills; the cost of operating delivery wagons, trucks, and
the repairs to same.
A physician may claim as deductions the cost of medicines and
medical supplies used by him in the practice of his profession, ex-
penses paid in the operation and repair of an automobile used in mak-
ing professional calls, dues to medical societies and subscriptions to
medical journals, the expenses of attending medical conventions, the
rent paid for office rooms and the hire of office assistants, the cost of
the fuel, light, water, telephone, etc., used in such office rooms.
Amounts expended for books, medical supplies, and surgical instru-
ments of a permanent character are not allowable as deductions.
This in a general way outlines the ordinary and usual expenses
incurred by a farmer, a merchant, or a professional man, which may
be claimed as deductions, and the principles underlying these allow-
ances are equally applicable in the case of anyone engaged in a busi-
ness, trade, or profession. In short, all expenses connected directly
and solely with the conduct of an income-producing business, trade,
profession, or vocation are allowable.
Items of personal expense or items connected in any way with the
support, maintenance, and well-being of a family are not allowed;
neither are the amounts paid for tools, implements, vehicles, ma-
chinery, or surgical instruments which are more or less permanent in
character, nor the cost of medical, law, or other professional books,
nor amounts expended in making permanent improvements or better-
ments of any kind whatsoever, allowable as deductions. These latter
items are held to be investments of capital upon which depreciation
may be claimed. -
No expenses or depreciation in connection with a taxpayer's per-
sonal residence, or automobiles or other property used exclusively for
IN COME TAX PRIMER. 17
pleasure can be properly deducted under the provisions of the income
tax law, as such expenses and depreciation represent “personal living
or family expenses.”
47. If I employ a minor son or daughter to assist me in my business or
trade and I pay a reasonable salary or wage for such assistance, may I claim
the amount as a deduction?
No; if, however, the son or daughter has attained his or her ma-
jority, or has been emancipated, the amount of compensation paid
for his or her services may be so claimed.
48. May a taxpayer claim a deduction for his own remuneration?
Wages or salary drawn by a taxpayer from his own business are
more in the nature of a charge out of profits than a charge against
profits. If such could be deducted they would merely be added to
his income, the effect of which would be to take money out of one
pocket and put it in another. Therefore no deduction may be claimed
for income tax purposes.
49. May the amounts expended by a business man in entertaining out-of-
town customers, or prospective customers, be claimed as deductions?
Yes; if the sole purpose of the business man in making such ex-
penditures is to cultivate the good will of his customers and secure
an increase in trade they may be so claimed.
5.o. A, who is employed in a city, has his home in a suburb. He pays car
fare between his home and place of employment and takes his noon lunch in
the city. May the amounts expended for car fare and lunch be claimed as
a business expense? - -
No ; such amounts are held to be items of personal expense.
5 I. I ain a traveling salesman and desire to know how my income and
traveling expenses should be handled in my personal return.
Traveling expenses, as ordinarily understood, include , railroad
fares and meals and lodging. If the trip is undertaken for other
than business purposes, such railroad fares are personal expenses and
such meals and lodging are living expenses. If the trip is on busi-
ness, the reasonable and necessary traveling expenses, including
railroad fares, and meals and lodging in an amount in excess of any
expenditures ordinarily required for such purposes when at home,
become business instead of personal expenses. (a) If, then, an In-
dividual whose business requires him to travel receives a salary as
full compensation for his service, without reimbursement for trav-
eling expenses, or is employed on a commission basis with no ex-
pense allowance, his expenses for railroad fares, and expenses for
meals and lodging in an amount in excess of any expenditures ordi-
narily required for such purposes when at home, are deductible from
gross income. (b) If an individual receives a salary and is also
repaid his actual traveling expenses, he shall include in gross in-
come an amount thereof equal to the ordinary expenditures required
for meals and lodging when at home, as such amount is held to be
additional compensation to the taxpayer. (c) If an individual re-
ceives a salary and also an allowance for meals and lodging, as, for
example, a per diem allowance in lieu of subsistence, any excess of
the cost of such meals and lodging over the allowance plus the ordi-
nary expenditures required for such purposes when at home, is
27.014°–21 3
18 INCOME TAX EPRIMER,
deductible, but any excess of the allowance over such expenses minus
such ordinary expenditures is taxable income. Congressmen and
others who receive a mileage allowance for railroad fares should
return as income any excess of such allowance over their actual
expenses for such fares. A payment for the use of a sample room
at a hotel for the display of goods is a business expense. This con-
templates that only such expenses as are reasonable and necessary
in the conduct of the business and directly attributable to it may be
deducted. A taxpayer claiming the benefit of the deductions re-
ferred to herein must attach to his return a statement showing (1)
the nature of the business in which engaged; (2) number of days
away from home during the calendar year on account of business;
(3) number of members in taxpayer's family dependent upon him
for support; (4) average monthly expense incident to meals and
lodging for entire family, including taxpayer himself when at
home; (5) average monthly expense incident to meals and lodging
when at home if taxpayer has no family; (6) total amount of ex-
penses incident to meals and lodging while absent from home on
business during taxable year; (7) total amount of excess expendi-
tures incident to meals and lodging while traveling on business and
claimed as a deduction; (8) total amount of other expenses incident
to travel and claimed as a deduction.
Claim for the deductions referred to herein must be substantiated,
when required by the Commissioner, by records showing in detail
the amount and nature of the expenses incurred.
52. Are the items of expense incurred and paid by me during the taxable
year in connection with a farm which I lease to another on a cash or crop-
share rental basis, such as repairs to fences, farm buildings, etc., allowable
as deductions? -
Yes.
* 53. May the amount of life insurance premiums and premiums paid for
insurance on my residence be claimed as deductions?
No; these are held to be items of personal expense. If, however,
a farmer pays premiums on insurance policies covering farm build-
ings, other than his dwelling house, or on any property used for
business purposes, these premiums are allowable as deductions.
54. An individual or a partnership insures the life of one or more em=
ployees or members. May the premiums paid for such insurance be con-
sidered a business expense and claimed as a deduction?
Section 215 of the Revenue Act of 1918 specifically provides that no
deduction shall be allowed for premiums paid on any life insurance
policy covering the life of any officer or employee, or of any person
financially interested in any trade or business carried on by the
taxpayer, when the taxpayer is directly or indirectly a beneficiary
under such policy.
55. A tenant, under the terms of a lease, is obligated to pay a certain
cash rental on property used for business purposes and all taxes assessed
against the property and to keep it insured. May he claim as a business
expense the aggregate amount of rental, taxes, and insurance premiums
paid?
Yes; if the property is used by the tenant for business or trade
purposes and not as a home. Y-
INCOME TAX PRIMER. 19
56. I own stock in a corporation which, in 1920, assessed each of its
stockholders $50 on each share held. May the amount paid by me be
claimed as a deduction? - *
No; assessments made by a corporation on its capital stock are re-
garded as further investments of capital and do not constitute an
allowable deduction. The amount so paid should be added to the
original cost of the shares of stock in computing gain or loss from the
Subsequent sale thereof.
57. In California and other States fruit growers, ranchers, and farmers
are shareholders in irrigation companies which are mutual in character, and
they are often assessed in proportion to their holdings of stock, for sufficient
amounts to make repairs to the irrigation system, cleaning out of pipes,
laterals, etc. May such assessments be claimed as deductions under the
head of business expenses?
Yes; where the purpose of the assessment is merely to raise funds
to keep the irrigation system in usable condition and not to make
extensions or betterments, the amount assessed against each share-
holder may be so claimed if the payment of such amount is necessary
to the conduct of his business.
58. If a physician or other professional or business man rents a home and
uses a portion of it for professional or business purposes, may any portion
of the rent paid for that home be claimed as a business expense? -
Yes; the proportion of the rent paid which is properly chargeable
to the number of rooms used for professional or business purpose
may be claimed as a deduction. -
59. In 1920 I purchased a property, the title to which proved defective,
and in order to straighten the matter out I employed an attorney and re=
sorted to court proceedings. May I claim a deduction to cover the fee paid
the attorney and the court costs?
No; such items are held to be a part of the cost of the property and
therefore not allowable as deductions. -
6o. If I employ an architect to prepare pians for a building to be used for
business purposes, may the fee paid to the architect be claimed as a business
expense?
No ; amounts expended for an architect's services are held to be a
part of the cost of the building and not such items as may be claimed
as deductions.
61. May a business or professional man who keeps a set of books and
enters thereon as income sales of goods on credit, or fees earned but not
paid, and charges to expense account items which have been incurred but
have not been paid by him, report his net income for the year as shown by
his books when they are balanced at the end of the taxable year?
Yes; section 212 of the Revenue Act of 1918 provides that net
income shall be computed in accordance with the method of account-
ing regularly employed in keeping the taxpayer's books. The method
employed must, of course, clearly reflect the taxpayer's net income.
62. If I have a certain sum of money invested in a farm or business, may
I claim as a deduction, under the head of interest, an estimated amount of
interest which might have accrued to me had that money been deposited in
a bank or invested in interest-paying securities?
No.
63. What forms of taxes are not deductible on account of being taxes
assessed against local benefits?' -
Taxes assessed against an individual on property owned by him to
pay for the paving of a street contiguous to his property, the con-
20 INCOME TAX PRIMER.
struction of a sewer, sidewalk, etc., or the construction of ditches to
drain property owned by him, can not be claimed as deductions. In
short, taxes that are not general in nature and are levied on account
of some work or privilege the benefit of which accrues to a limited
number of property owners, of which the taxpayer is one, are not
allowable deductions. -
64. If I pay any amount of Federal personal income tax for the year 1919,
may I claim that amount as a deduction for the year 1920 P
No; the income tax law states that income taxes are not allowable
as deductions. Under this provision income tax paid in 1920 on
income received in 1919 or any previous year can not be deducted.
State income taxes are deductible.
65. . In 1917 I bought certain stocks and bonds for $5,000, and in 1920
the value of these securities dropped to $4,000. May I claim the difference
of $1,000 as a loss in computing my income tax liability?
No; under the provisions of section 214 (a) 4, 5, 6 of the Revenue
Act of 1918 only such losses as have been sustained during the tax-
able year can be claimed; that is, the loss must have resulted from
a completed and closed transaction. In your case you still own the
seeurities. They may go up in value during 1921, and until they are
sold or otherwise disposed of you are unable to determine whether
you will suffer a loss or derive a gain from the investment. In other
words, no account is to be taken for income tax purposes, of fluctua-
tions in the market value, or arbitrary changes in the book value of
securities or other property. (See art. 1585 of Regulations 45 as to
“dealers in securities.”)
66. John Doe, while driving an automobile for pleasure, ran down and
injured another person. He either paid over a certain sum or paid a judg-
ment rendered against him in settlement of the injury done. May he claim
the amount so paid as a loss?
No ; it was not a loss which was incurred in the conduct of his busi-
ness or trade, or which resulted from a transaction entered into for
profit.
67. How am I to determine what amount of loss, resulting from a sale of
property, is allowable as a deduction ?
The same method of computation should be followed as is out-
lined in the answer to the twenty-ninth question. A loss sustained
by an individual from the sale of residential property is deductible
in determining net income for purposes of the Revenue Act of 1918
only when the property was purchased or constructed by him with
a view to its subsequent sale for pecuniary profit. The intent in
purchasing or constructing the property is a question of fact deter-
minable in each case by evidence which should be submitted with the
return. -
68. A professional man or a merchant owns and operates a fancy stock
farm for recreation or pleasure. The expenses of operation exceed the gross
º May the difference be claimed as a deduction under the head of
No; it is held that where a farm is operated for purposes of rec-
reation or pleasure and not for gain or profit and the expenses of
operation exceed the gross receipts, that farm is not to be classed as
a commercial enterprise, and it does not form a part of its owner's
IN COME TAX PRIMER. 21
business or trade. The gross receipts are not to be reported under
gross income and the expenses are not to be claimed as a deduction.
This ruling, of course, precludes the claiming of the difference be-
tween the two amounts as a loss.
69. Supposing I buy a farm which is much run down with the intention of
making it a profit-paying property; that is, I intend to operate it for profit
and not for recreation or pleasure. To do this I am obliged to expend large
amounts for labor in plowing and cultivating the land, for fertilizer, lime,
etc., and for several years the expenses will greatly exceed the gross re-
ceipts. May the excess of expenses over receipts for each year be claimed
as a loss?
It is held that all the ordinary and necessary expenses of cultivat-
ing, operating, or managing a farm on a basis embodying the recog-
nized principles of commercial farming, for the purpose of gain or
profit and not for recreation or pleasure, except amounts which are
regarded under article 110 of Regulations 45 as investments of capi-
tal, may be claimed as deductions in returns of income, even though
these expenses exceed the income from the farm and the result is a
continual loss, provided the farm is continued to be operated on a
strictly commercial basis.
7o. I own a tract of timber which was partially destroyed by fire during
1920. Is this loss allowable as a deduction?
The actual amount of capital invested in standing timber, if ac-
quired on or after March 1, 1913, and later destroyed by fire, may be
claimed as a deduction if not reimbursed by insurance or otherwise.
If the timber was acquired prior to March 1, 1913, its fair market
price or value as of that date may be claimed. To illustrate the
method to be employed in computing the amount of loss allowable as
a deduction, the following is submitted: A tract of land was acquired
prior to March 1, 1913, and the estimated amount of timber standing
on that tract on that date was 1,000,000 feet, board measure, the fair
market price or value per 1,000 feet established by the current prices
prevailing in the locality of the tract in question as of March 1, 1913,
being $4. During the year 1920, 400,000 feet of this timber was de-
stroyed by fire. In this case $1,600 is the amount which may be
claimed as a deduction.
71. If a crop which is ready to be harvested, but has not been gathered,
or a crop which has been harvested, but has not been sold, is destroyed by
storm, flood, or fire, may the value of that crop be claimed as a deduction?
No; unless the crop has been taken into the taxpayer's inventory
and used in computing his taxable net income for a specific year. It
is understood, of course, that the actual cost of producing or har-
vesting a crop which has been so destroyed may be deducted as a
business expense.
72. What conditions are necessary in order that a debt may be claimed
as a deduction? -
. (a) It must be a bona fide debt; (b) surrounding and attendant
circumstances must indicate that the debt is worthless and uncollecti-
ble and that legal action to enforce payment would in all probability
not result in the satisfaction of execution on a judgment; and (c) if
books are kept it must be charged off within the year for which the
deduction is claimed and no longer considered an asset or carried
as such on the books.
22 INCOME TAX PRIMER.
73. In 1920 a corporation or a firm to which I had loaned money since
March 1, 1913, became bankrupt. May this debt be considered absolutely
worthless and claimed as a deduction for 1920 P .
Yes; if it is definitely known that nothing can be collected from
the debtor itself or any person, connected with it.
74. Is it absolutely necessary that the debtor corporation or firm men=
tioned in the preceding inquiry be declared a bankrupt and its receiver dis-
charged before I may claim a deduction on account of the debt in question?
No; if the debtor corporation has no assets whatsoever available for
application to the debt in question, and it is definitely known that
nothing whatsoever, can be collected from the debtor, itself or any
person connected with it, a creditor need not go to the expense of
instituting bankruptcy proceedings in order to establish his right to
claim the worthless debt as a deduction.
75. A indorses a note for B. The latter has since departed for parts
unknown. The note became due in 1920, and A was required to make good
his indorsement. May he now claim as a deduction the amount paid by
him to the creditor?
Yes.
76. If, on account of friendship or relationship, I advanced a certain
surn to assist a needy friend or relative, and at the time such advance was
made I had little or no reason to expect that the amount so advanced would
ever be returned, may I now clairn a deduction to cover such advance?
No ; such an advance is regarded as a gift and is not held to con-
stitute a bona fide debt.
77. In rendering my 1915 return I claimed a deduction to cover a debt
I then believed to be absolutely worthless. In 1920 the debtor has dis=
charged a part of his obligations. How should I treat this payment for
income tax purposes?
Consider it as an item of income and include the amount in your
return.
78. A professional man earned a fee in 1917. As he keeps no books,
he reports his income for tax purposes on a cash-receipts basis. As this
fee has never been reported as income, may it be claimed as a deduction
if collection can not be made?
No ; since it has not been returned as income, it can not be claimed
as a deduction.
DEPRECIATION,
ti #, At what rates may depreciation be claimed and under what condi-
IOIl S
The deduction for depreciation in income tax returns is a means
whereby exemption from the tax may be secured upon the amount
of capital invested in physical property (or in case of property ac-
quired by gift or bequest the value of such property) which is sub-
ject to exhaustion through wear and tear arising out of its use or
employment in business or trade or on account of obsolescence.
Therefore, the annual allowance for depreciation should be based
upon the life of the property; that is, the cost of the property or
the value of the same where acquired by gift or bequest, or its fair
market price or value as of March 1, 1913, if acquired prior thereto,
should be ratably spread over its life. For instance, the rate of
depreciation to be deducted on buildings used for business purposes,
INCOME TAX PRIMER. 23
the probable life of which is 50 years, would be 2 per cent. The
probable life, means, of course, the number of years the property
would be usable in business from the date of acquisition or in case
of property acquired prior to March 1, 1913, the number of years the
property would be usable from March 1, 1913. In the case of
property acquired by gift or bequest, the “cost” of such property
for depreciation purposes is the appraised value at the time the
property was acquired. If property in respect of which deprecia-
tion is claimed was acquired prior to March 1, 1913, the fair market
value as of that date will be assumed in the absence of proof to the
ºnry to be the cost of the property less depreciation up to that
date.
In claiming depreciation the following fundamental principles
must be taken into consideration : :
(a) Only such depreciation as results from exhaustion, wear and
tear of property, arising out of its use or employment in business
or trade, or on account of obsolescence, may be claimed. Deprecia-
tion in the value of a home or any article of property, such as auto-
mobiles used exclusively for personal pleasure or convenience, may
not be claimed ; the property must be used for the purpose of pro-
ducing income. - -
Depreciation in the value of land, whether improved or unim-
proved, due to ordinary erosion, exhaustion, or any other cause, may
not be claimed. -
Where, in the course of years, the owner of property has claimed
its full cost or its fair market value as of March 1, 1913, as deprecia-
tion in his income tax returns no further claim will be allowed.
(NOTE.-For information relative to deduction for obsolescence see Regula-
tions 45 and Bulletin. F.)
so. Am I entitled to a deduction for depreciation of my personal resi-
dence, furniture and fixtures therein, and an automobile which I use only
for pleasure and recreation?
No; depreciation sustained on such property is considered a personal
expense and not deductible for income tax purposes.
81. In 1920 I bought a patent for $5,000 which, under the patent laws
of the United States, has five years yet to run. As the value of this
patent depreciates each year on account of the exhaustion of the patent
period, may a deduction be claimed?
Yes; the cost of the patent divided by the number of years, it yet
has to run is the amount which may be claimed each year as de-
preciation. In your case this amount is $1,000.
82. Members of the theatrical profession are frequently required to
furnish their own costumes. Are they entitled to a deduction for deprecia=
tion of such property?
If costumes purchased by members of the theatrical profession are
used exclusively for 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 depreciation in their value as occurs dur-
ing the year on account of wear and tear, arising from their use
in the production of the play or from their becoming obsolete at the
close of the production. In such case the cost of the costumes in the
first instance must not have been claimed as an expense.
24 IN COME TAX PRIMER.
DEPLETION.
83. Under what conditions and at what rates may depletion due to the
removal of a natural product from oil or gas wells, mines, quarries, etc.,
be claimed?
Section 214, paragraph 10, of the Revenue Act of 1918, states how
the amount of depletion allowable as a deduction is to be ascertained,
but as so many factors are to be considered in computing depletion,
an answer which will be applicable in all cases where depletion oc-
curs can not here be given. Such factors are covered in considerable
detail by Regulations 45, copies of which may be obtained from the
collector of internal revenue for your district, and where these regu-
lations do not afford all the information necessary in your particular
case a detailed statement covering all the facts and figures in your case
should be forwarded to the collector with a request for a ruling.
CONTRIBUTIONS AND GIFTS TO RELIGIOUS, CHARI-
TABLE, AND SCIENTIFIC ORGANIZATIONS, ETC.
84. With reference to the eleventh paragraph of section 214 of the Act,
how am I to determine to what extent contributions or gifts made to
corporations, organized and operated exclusively for religious, charitable,
scientific, or educationai purposes or for the prevention of cruelty to
children or animals or to the special fund for vocational rehabilitation, may
be ciaimed as a deduction? . . . . .
You should first ascertain what your taxable net income would be
were you not entitled to a deduction on account of such contribu-
tions or gifts, and then if the aggregate of your contributions and
gifts made during the year to such organizations does not exceed 15
per cent of your taxable net income so computed, their aggregate
amount may be entered in the place provided therefor under “Con-
tributions ° on a personal return form. If such aggregate amount
exceeds 15 per cent of your taxable net income so computed, the excess
can not be claimed.
For example: Your total taxable net income amounts to $20,000.
During the year you have contributed to the American Red Cross
$1,000, to the Young Men's Christian Association $1,000, toward the
construction of a new church $1,000, and to the Associated Charities
of your home city $500, a total of $3,500. Fifteen per cent of your
total net income amounts to $3,000. Therefore this latter amount
may be, claimed as a deduction and the balance of your contributions
and gifts may not be claimed.
In claiming a deduction on account of such contributions or gifts
there should be shown on the return of income (a) the name and
address of each organization to which a contribution or gift was
º and (b) the date and amount of each such contribution or
gift. - - - -
Where a gift is other than money the basis for calculation of the
amount of the gift shall be the cost of the property, if acquired
after February 28, 1913, or its fair market value as of March 1,
1913, if acquired prior thereto, after deducting from such cost or
value the amount, if any, which has been or which should have been
Set aside and deducted in the current year and previous years from
gross income on account of depreciation, and which has not been
paid out in making good the depreciation sustained.
INCOME TAX PRIMER. 25
85. During 1920 I contributed $1 oo toward the support of a needy
family. May this contribution be claimed as a deduction?
Contributions or gifts made to individuals do not constitute
allowable deductions.
86. Am I entitled to any deduction by reason of contributions or gifts
made in 1920 by a partnership of which I am a member to the organiza-
tions mentioned in question 84?
Yes; since the partnership may not deduct the amount of such
contributions or gifts in computing its met income, you may deduct"
your proportionate share of the contributions or gifts, but your total
deduction for contributions or gifts may not exceed 15 per cent of
your net income.
RATE OF TAx.
87. Upon what is the surtax based ?
The surtax imposed by section 211 of the Act is based upon the
total amount of net income from all sources in excess of $5,000.
88. A prospector discovers a mine, which he sells at a large profit. Is
the entire profit derived from the sale of the mine subject to the surtax
imposed by section 211?
Section 211 of the Act provides that in the case of a bona fide sale
of mines, oil or gas wells, or any interest therein, where the principal
value of the property has been demonstrated by prospecting or ex-
ploration and discovery work done by the taxpayer, the portion of
the surtax attributable to such sale shall not exceed 20 per cent of the
selling price of such property. -
89. In computing my income subject to normal tax, to what credits
against my net income from all sources am I entitled?
For the purpose of the normal tax only you are entitled to the fol-
lowing credits: -
(a) The amount received as dividends from corporations which
are taxable upon their net income and amounts received as dividends
from personal service corporations out of earnings or profits upon
which income tax has been imposed. (See secs. 200 and 201 of the
Revenue Act of 1918.)
(b) The amount received as interest upon obligations of the
United States and bonds issued by the War Finance Corporation
which has been included in gross income.
(c) The amount of personal exemption specified in the answer to
question 13.
90. Am I entitled to any credits against the total tax computed on my
income from all sources?
If any income tax has been withheld from any of your income and
paid at the source, you are required to include the amount of the tax
withheld in your gross income and may then credit such tax against
your total income tax liability.
Under certain conditions you may also be entitled to a credit for in-
come and excess profits taxes paid to foreign countries upon income
from sources therein. Where credit for income and profits taxes
paid to foreign countries upon income from sources therein is
claimed, Form 1116 must be properly filled out and executed. See
section 222 of the statute and articles 381–385 of Regulations 45 for
further information. -
26 IN COME TAX PRIMER.
9 I. What is the rate of normal tax imposed for the taxable year 1920 P
Section 210 of the Act provides that there shall be levied, collected,
and paid upon the net income of each individual for each calendar
year after 1918, a normal tax of 8 per cent of the amount of the net
income in excess of the credits specified in the answer to question 89,
except that in the case of a citizen or resident of the United States
the rate upon the first $4,000 of such excess amount is 4 per cent.
PARTNERSHIPS.
92. Are partnerships subject as such to the Federal income tax and re-
quired to render annual income tax returns?
Section 224 of the Act provides that every partnership shall make
a return for each taxable year, stating specifically the items of its
gross income and the deductions allowed by this title, and shall in-
clude in the return the names and addresses of the individuals who
would be entitled to share in the net income if distributed and the
amount of the distributive share of each individual. The return
shall be sworn to by any one of the partners.
Section 218 of the Act provides that individuals carrying on busi-
ness in partnership shall be liable for income tax only in their in-
dividual capacity; therefore no tax is assessed on the basis of the
return filed by the partnership. There shall be included in com-
puting the net income of each partner his distributive share, whether
distributed or not, of the net income of the partnership for the tax-
able year, or, if his net income for such taxable year is computed
upon the basis of a period different from that upon the basis of
which the net income of the partnership is computed, then his dis-
tributive share of the net income of the partnership for any account-
ing period of the partnership ending within the fiscal or calendar
year upon the basis of which the partner's net income is computed.
This section of the law also provides that a partner shall, for the
purpose of the normal tax, be allowed as credits, in addition to the
credits specified in the answer to question 89, his proportionate share
of such amounts specified in paragraphs (a) and (b) of that answer
as are received by the partnership.
The net income of the partnership is to be computed in the same
manner and upon the same basis as provided for individuals except
the deduction referred to in paragraph (j) of the answer to question
45 is not allowable. ~.
FIDUCIARIES.
93. Who are classed as fiduciaries?
The term “fiduciary "is one that applies to all persons or corpora-
tions 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 corporation that holds in trust
an estate of another person or persons or receives and controls income
of another. -
There may be a fiduciary relationship between an agent and the
principal, but the word “agent” does not denote a “fiduciary’”
within the meaning of the income tax law.
A fiduciary relationship for the purposes of the income tax can not
be created by a power of attorney. An agent having entire charge
- ***------. ... • –
INCOME TAX PRIMER. 27
of property, without authority to effect and execute leases with
tenants entirely on his own responsibility, and without consulting
his principal, paying taxes and expenses, and all other charges in con-
nection with the property out of funds in his hands from collections
of rents, merely turning over the net profits from the property
periodically to his principal by virtue of authority conferred upon
him by power of attorney, is not a “fiduciary’ within the meaning
of the income tax law. In all cases where no legal trust has been
created in the estate controlled by the agent and attorney the liability
under the law rests with the principal.
94. Is the duly appointed guardian of a minor or the conservator of an
estate of an incompetent person required to render personal returns for
and in behalf of his ward?
Yes; under the same conditions as would the ward if competent
to act for himself, and in so doing the personal exemption to which
the ward is entitled may be claimed.
95. Is the duly appointed administrator of an estate of a deceased
person who died during the tax year required to render a personal return
for and in behalf of the deceased, and also his estate?
If the net income of the deceased from January 1 of the year dur-
ing which he died to the date of his death equaled or exceeded $1,000
in the case of an unmarried person or $2,000 in the case of a married
person, the administrator should file a personal return, executed on
Form 1040, for and in behalf of the deceased, and a return executed
on the same form will also be required of him for and in behalf of
the estate, if it remains in process of administration and its net in-
come from the date of the decedent's death to December 31, not
properly paid or credited to any beneficiary, equals or exceeds $1,000.
The administrator will be required to pay and will be held liable
for any amount of tax which may be assessed on the basis of any
such return rendered by him.
If the amount of net income properly paid or credited to any bene-
ficiary equals or exceeds $1,000, a separate return on Form 1041
should be made for the estate or trust.
96. What returns are required from a fiduciary in the United States
where the beneficiaries of the trust are nonresident alien individuals?
Where a fiduciary in the United States is the recipient of trust
income for which there is but one beneficiary, and that beneficiary
a nonresident alien, the fiduciary will be required to make full and
complete return on income tax Form 1040 or Form 1040–A for this
trust income, on behalf of the nonresident alien, and pay any and
all tax shown by such return to be due. The fiduciary should also
make a return on Form 1041 for the estate or trust. Where there are
two or more beneficiaries, one or all of whom are nonresident aliens,
the fiduciary shall render a return on Form 1041 for and in behalf
of the estate or trust and a personal return on Form 1040 or Form
1040–A for each nonresident alien beneficiary.
97. In what case is a fiduciary liable to render a return?
Every fiduciary, or at least one of joint fiduciaries, must make a
return (a) for the individual whose income is in his charge, if the
net income of such individual is $2,000 or over, if married and living
with husband or wife, or is $1,000 or over in other cases, or (b) for
the estate or trust for which he acts, if the net income of such estate
28 IN COME TAX PRIMER.
or trust is $1,000 or over, or if any beneficiary of such estate or trust
is a nonresident alien. The return in case (a) and also in case (b)
if the tax is payable by the fiduciary shall be on Form 1040, revised,
except that it may be on short Form 1040–A, revised, where the net
income does not exceed $5,000. The return shall be on Form 1041,
revised, in case (b) if the tax is payable by the beneficiaries. If the
net income of a decedent from the beginning of the taxable year to
the date of his death was $1,000, if unmarried, or $2,000, if married,
the executor or administrator shall make a return for such decedent.
98. For the purpose of the normal tax, what credits are allowed estates
in the process of administration and estates held in trust for the accumula=
tion of income? .
In such cases the estate or trust is allowed the same credits as are
allowed to single persons. (See answer to the 89th question.)
99. How is the net income of estates and trusts to be computed?
The net income of estates and trusts is to be computed in the same
manner and on the same basis as provided for individuals, except
that in lieu of the deduction for “contributions ° specified in para-
graph (j) of the answer to the 45th question, there is to be allowed as
a deduction any part of the gross income which, pursuant to the
terms of the will or deed creating the trust, is during the taxable
year paid to or permanently set aside for the United States, any
State, Territory, or any political subdivision thereof, or the District
of Columbia, or any corporation organized and operated exclusively
for religious, charitable, scientific, or educational purposes, or for
the prevention of cruelty to children or animals, no part of the net
earnings of which inures to the benefit of any private stockholder,
and in cases of income which is to be distributed to the beneficiaries
periodically and in cases of income collected by a guardian of an in-
fant to be held or distributed as the court may direct, the fiduciary
should include in the return a statement of each beneficiary’s dis-
tributive share of such net income, whether or not distributed before
the close of the taxable year for which the return is made.
Ioo. In a case where an estate is in process of administration and the
fiduciary renders returns covering the income and deductions of the estate,
and pays the amount of normal and additional tax assessed thereon, will
the net income be subject to tax in the hands of the beneficiaries when
received by them?
No; the taxes having once been paid, such income is exempt from
tax in the hands of the beneficiaries who receive the same.
IoI. Is any other than a return of income required of a fiduciary P
Yes; fiduciaries come within the provisions of section 256 of the
Revenue Act of 1918, and will be required to render to the Commis-
sioner of Internal Revenue a return of information, if, during the
taxable year, any income has been paid to an individual, partner-
ship, personal Service corporation, joint-stock company, etc., equal to,
or in excess of $1,000. A return of information is required showing
the distributive share of each beneficiary, irrespective of amount.
Io2. Is a fiduciary required to deduct and withhold at the source any
amount of normal income tax?
Yes; if any payment of fixed or determinable annual or periodical
gains, profits, or income other than dividends or interest on tax-free
bonds is made to nonresident alien individuals or nonresident foreign
INCOME TAX PRIMER. 29
corporations, 8 per cent and 10 per cent, respectively, is to be deducted
and withheld and return thereof is to be made on Form 1042 accom
panied by Form 1098.
ro2. Is an ancillary administrator required to render income tax returns
covering income received by him?
An ancillary administrator is held to be merely the agent of the
domiciliary administrator. The former should transmit to the latter
all information as to income received by him in order that the
domiciliary administrator may make a return covering the entire
income of the estate. An ancillary administrator need make no
separate return if the domiciliary administrator includes in his return
the entire income of the estate. -
Io.4. Have the beneficiaries of an estate or trust a right to inspect
income tax returns rendered by a fiduciary covering the income of the
estate or trust in which they are interested?
Beneficiaries are not entitled, as such, to an inspection of returns
of income filed by such a fiduciary. -
ros. Who is liable for payment of the tax assessed against the net
income of an estate or trust? -
Liability for payment of the income tax attaches to the person of
the fiduciary up to and including the date of his discharge.
Io 6. May an executor or administrator render his fiduciary returns prior
to the close of the calendar year in a case where the estate is finally dis-
tributed and he is discharged from and relieved of his trust during that year?
An administrator or executor may, immediately after his dis-
tharge upon final accounting, file with the proper collector of inter-
nal revenue a return covering the income and deductions of the
estate for the period January 1 to the date of his discharge. To such
a return there should be attached a certificate, under seal, setting
forth the fact of the final accounting and discharge of the adminis-
trator or executor, and the tax assessed against that return may be
paid immediately after receipt from the collector of a notice of the
amount assessed and a demand therefor.
1 oz. Where, in the case of more than one trust, the creator in each
instance is the same person, and the trustee in each instance is the same,
how will the trustee account for the income of the several trusts?
The trustee should make a single return on Form 1041 for all the
trusts in his hands, notwithstanding the fact that they arise from
different instruments. When a trustee holds trusts created by dif-
ferent persons for the benefit of the same beneficiary he should make
return for each trust separately on Form 1041. This ruling is based
on the identity of the creator of the various trusts and not upon the
identity of the beneficiary. -
sº IoS. May the expenses of administration of an estate be claimed by the
ºnistrator as deductions in computing the estate’s liability for income
à X
No; expenses of administration of an estate are not allowable as
deductions.
WITHHOLDING OF TAX.
Io9. At what rates and from what income is the normal tax to be
deducted and withheld at the source?
All individuals, corporations, and partnerships, in whatever ca-
pacity acting, including lessees or mortgagors of real or personal
30 IN COME TAX PRIMER.
property, fidicuaries, employers, and all officers and employees of the
United States, making payment of fixed or determinable annual or
periodical gains, profits, and income to any nonresident alien indi-
vidual (other than dividends received from a corporation which is
taxable on its net income and interest on bonds containing a tax-free
Covenant clause), are required to deduct and withhold normal tax
at the rate of 8 per cent from such income. When such income is
paid to foreign corporations not engaged in trade or business in the
United States and not having an office or place of business therein,
the rate of withholding is 10 per cent.
When interest upon bonds, mortgages, or deeds of trust or similar
obligations of a domestic or resident corporation which contain a
so-called tax-free covenant clause is paid to nonresident alien indi-
viduals, partnerships, or foreign corporations having no office or
place of business in the United States, tax at the rate of 2 per cent
should be withheld by the debtor corporation.
The tax is not to be withheld from income paid to a citizen or resi-
dent of the United States or to a partnership or personal service cor-
poration, except when derived from interest on bonds or similar
obligations of domestic or resident corporations containing a tax-free
covenant clause. In such case the corporation issuing the bonds
should withhold a tax of 2 per cent from interest payments thereon,
unless the citizen or resident claims personal exemption by filing
ownership certificate, Form 1001, revised, when collecting such inter-
est. Where the owner of tax-free covenant bonds is unknown, with-
holding must also be made at the rate of 2 per cent. The income of
domestic and resident foreign corporations is free from withholding.
IIo. What is the distinction between resident and nonresident aliens?
Any alien living in this country who is not a mere transient is a
resident for the purposes of the income tax. A typical transient is
one who in the course of a trip through the United States stops at
various places, sometimes performing labor, sometimes not, or one
who enters the United States intending only to stop long enough to
carry out Some purpose, object, or plan not involving an extended
stay. If an alien lives in the United States and has no definite
intention as to his stay, he is to be regarded as a resident. A non-
resident foreign corporation is a foreign corporation which is not
engaged in trade or business within the United States and does not
have an office or place of business therein.
III. May a nonresident alien obtain the "benefit of personal exemption
and #dit for dependents by filing a claim therefor with the withholding
agen
A nonresident alien may, if entitled under the provisions of section
216 of the Act, claim exemption from withholding by filing a claim
with the withholding agent for the benefit of personal exemption or
credit for dependents, or both, in two instances. First, a nonresident
alien employee may file Form 1115, revised, with his employer, which
Will prevent the tax from being withheld from his salary or wages.
Second, if any part of a nonresident alien's income from sources
Within the United States is from interest on bonds containing a tax-
free covenant clause, and his gross income does not exceed his per-
Sonal exemption, he may file a claim for personal exemption with
the withholding agent at the end of the calendar year, or not later
IN COME TAX PRIMER. 31
than February 1 of the succeeding year, on Form 1001-B. In all
other cases the tax must be withheld at the prescribed rates, and the
taxpayer left to his remedy by filing a claim for credit or refund
in event he is entitled to credits for personal exemption and de-
pendents.
I 12. How may a nonresident alien obtain credit or refund of tax with=
held at the source?
Credit or refund may be obtained only by filing a complete return
of income from sources within the United States. Where upon filing
a complete return it appears that a nonresident alien is entitled to
personal exemption or credit for dependents, or both, as provided in
Section 216 of the Act, and tax in excess of the amount properly due
has been withheld at the source, claim for credit for such excess
should be made on Form 47—A or claim for refund on Form 46,
revised. Nonresident foreign corporations obtain credit for tax
withheld at the source in the same manner as individuals, but are
not entitled to the credit of $2,000 against net income allowed
domestic corporations. r -
II.3. How may a citizen or resident of the United States obtain credit
for tax withheld at the source in his behalf?
Tax withheld at the source on income of citizens or residents must
be included in the taxpayer's gross income, but he may credit the
amount of tax withheld against his total tax liability as disclosed
by his return. Such credit may be taken although the taxpayer may
be liable to surtax only,
II.4. How may a citizen or resident secure the benefit of personal ex=
emption when receiving payment of interest on bonds containing a tax=
free covenant clause? g
By attaching to the interest coupons an ownership certificate, Form
1001, revised. If exemption is not claimed, Form 1000, revised,
should be used.
II5. Is a corporation required to actually deduct and withhold the tax
from amounts of interest it pays on bonds which contain a tax=free covenant
clause; or may it pay that interest in full and hold itself liable for payment
of the tax from its own funds?
The stipulation in the bonds of a corporation whereby the tax
which may be assessed against them, or the income therefrom, is
guaranteed, is held not to release any party otherwise liable for the
tax. The debtor corporation will be held liable for the amount of
tax due whether that tax is actually, deducted and withheld, or the
interest paid in full and responsibility for payment of the tax as-
sumed by the corporation.
RETURN AND PAYMENT OF TAX WITHHELD AT THE
SOURCE.
II6. How is tax withheld at the source to be returned and paid?
Tax withheld from income other than interest on corporate obliga-
tions should be reported to the collector for your district on Form
1042, revised, accompanied by certificate 1098, revised, covering each
item in the return, on or before March 1 of the year next succeeding
the year during which the withholding occurred. Tax withheld from
interest on corporate obligations should be reported to the collector
on Form 1012, revised, within 20 days after the close of the month
32 ... INCOME TAX PRIMER.
during which the withholding occurred, and summary of such
monthly returns shall be made to the collector on or before March
1 of each year on Form 1013, revised. -
Payment of tax assessed against a withholding return should be
made to the collector in whose district the withholding agent is
located and with whom the withholding return is filed. Such pay-
ment is to be made on or before June 15 of the year in which the
withholding return is required to be filed.
II 7. If a withholding agent fails to make and file return or pay any tax
due, is he subject to any penalties? -
Failure to make and file withholding returns on or before the
prescribed due dates renders a withholding agent liable to an ad
Valorem penalty of 25 per cent of the amount of the tax required to
be withheld and a specific penalty not exceeding $1,000; except that
if the tax required to be withheld is paid by the recipient of the in-
come, no penalty shall be imposed upon the withholding agent un-
less his delinquency was fraudulent and for the purpose of evading
payment. Any withholding agent willfully attempting to defeat
or evade the tax, or who willfully refuses to withhold or pay the
tax or make a return, will be liable to a penalty of 50 per cent of
the amount of the tax evaded and a fine not exceeding $10,000, or
imprisonment for not more than one year, or both, together with the
costs of prosecution. º
RETURNS OF INFORMATION.
I 18. From whom are returns of information required?
All individuals, corporations, and partnerships, in whatever ca-
pacity acting, including lessees or mortgagors of real or personal
property, fiduciaries, and employers, making payment to another
individual, partnership, personal service corporation, or fiduciary, of
fixed or determinable income (other than payments described in
sections 254 and 255 of the Act) of $1,000 or more in any taxable year,
shall render an annual return, under oath, setting forth the amount
of such income and the name and address of the recipient. A return
of information is required to be filed by a fiduciary showing the dis-
tributive share of each beneficiary, and by partnerships and per-
Sonal service corporations showing the distributive shares of their
members, irrespective of amount and whether or not actually dis-
tributed. In the case of payments of interest upon bonds and
similar obligations of domestic or resident foreign corporations and
in the case of interest upon bonds of foreign countries or nonresi-
dent foreign corporations or dividends upon stock of nonresident
foreign corporations the original ownership certificates, when duly
filed, shall constitute and be treated as returns of information.
Where a foreign corporation or foreign government issues bonds and
has no paying agent in the United States, the last bank or collecting
agent undertaking the collection of interest on such obligations
should render the return of information, and in the case of dividends
the first bank or collecting agent is the source of information.
Where the tax has been withheld from interest payments on
corporate bonds and from fixed or determinable income paid to
nonresident aliens, a return of information is not required, as the
IN COME TAX PRIMER.. 33 .
withholding agent's return of tax withheld at the source is treated
as a return of information. -
I 19. Upon what forms are returns of information required to be ren-
dered, and with whom are such returns to be filed?
Returns of information as to payments of $1,000 or more in any
taxable year should be made on Form 1099, revised, and filed with
the Commissioner of Internal Revenue on or before March 15 of
each year, accompanied by a letter of transmittal, under oath, on
Form 1096, revised. A monthly return of payments of interest on
bonds of domestic and foreign corporations and countries and divi-
dends on Stock of foreign corporations should be made on Form
1096–A and filed with the Commissioner on or before the 20th day
of the month succeeding that for which made. An annual return
giving a summarization of such monthly returns is required to be
filed with the Commissioner on Form 1096–B, revised, on or before
March 15 of the year following that for which the return is made.
I2O. Where a person receives a cash compensation for services ren-
dered, and in addition thereto commissions, living expenses, or other
allowances, is the aggregate amount of cash plus the value to such person
of the allowance to be returned?
Yes; a return is required in each case where the cash compensation
plus the value of the allowances equals or exceeds $1,000 for the tax-
able year. .
PAYMENT, ABATEMENT, AND REFUND OF TAX
ASSESSED.
12 1. To whom is an assessment of income tax to be paid?
To the collector of internal revenue with whom your return is
filed.
I22. When does payment of income tax assessed on individuals become
due and payable?
The tax may be paid in full at the time of filing the return or on
or before the date upon which it is required to be filed or in four in-
stallments, each consisting of one-fourth of the total amount of the
tax. The first installment should be paid at the time fixed by law
for filing the return, the second installment on the 15th day of the
third month, the third installment on the 15th day of the sixth month,
and the fourth installment on the 15th day of the ninth month, after
the time fixed by law for filing the return. Where an extension of
time for filing a return is granted, the time for payment of the first
installment is to be postponed until the date of the expiration of the
period of the extension, but the time for payment of the other install-
ments is not to be postponed unless the Commissioner so provides
in granting the extension. However, in any case in which the time
for the payment of any installment is, at the request of the taxpayer,
postponed because of an extension of time for filing the return, there
is to be added as part of such installment, interest thereon at the rate
of one-half of 1 per cent per month from the time it would have
been due had no extension been granted until paid. If any install-
ment is not paid when due, the whole amount of the tax unpaid be-
comes due and payable upon notice and demand by the collector.
34 INCOME TAX PRIMER.
123. What recourse has a taxpayer under the Revenue Act of 1918
when he feels that he has been assessed income tax in excess of his true
tax liability? -
He may exercise his right to file with the collector for his district
a claim for abatement executed on Form 47, revised, copies of which
may be obtained from the collector. The filing of such a claim prior
to the expiration of 10 days from date of notice and demand by the
collector acts as a stay to the collection of the tax. However, in case
of rejection, interest at the rate of one-half of 1 per cent per month
will run from the time the amount was due until the claim is decided.
The filing of a claim for abatement of tax alleged to have been er-
roneously assessed does not necessarily operate as a suspension of
the collection of the tax. If the collector feels that the suspension
of collection will jeopardize the interests of the Government, he may
collect the tax and leave the taxpayer to his remedy by a claim for
refund. - -
124. On my 1919 return I was assessed income tax in excess of my
true tax liability and same was paid. How may I secure a refund?
By filing with the collector a properly executed claim for refund
on Form 46, revised, copies of which may be obtained from the col-
lector for your district.
125. How may a taxpayer secure credit for taxes erroneously collected?
A taxpayer desiring to obtain credit against unpaid assessments,
for taxes erroneously collected, should file with the collector for the
district in which his original return was filed a claim on Form 47—A,
which claim will act as a stay to the collection of the unpaid assess-
ment. (See art. 1034, Regulations 45.) - -
PENALTIES.
126. Will failure to file my return within the time prescribed by law
render me liable to any penalty? * -
Yes; if filed on a calendar year basis and you fail to file your 1920
return in the office of the collector for your district before the close
of business on March 15, 1921 (provided, of course, that an exten-
sion has not been secured), you will be liable to an ad valorem pen-
alty of 25 per cent of the amount of the tax and a specific penalty of
not more than $1,000. When your return is made on a fiscal year
basis, it should be filed on or before the 15th day of the third month
following the close of the fiscal year.
127. If I fail to pay my tax or any installment thereof on or before the
prescribed due date, what penalties will I be liable to?
If any tax or installment thereof remains unpaid after the date
when it is due, and for ten days after notice and demand, there will
be added a penalty of 5 per cent of the amount of the tax due, plus
interest at the rate of 1 per cent per month from the original due
date, and the offender will also be liable to a specific penalty of not
more than $1,000. The instructions on the return serve as notice
and demand for payment of the first installment, and if any install-
ment is not paid when due, the whole amount of the tax becomes
due and payable upon motice and demand. Estates of insane, de-
ceased, or insolvent persons are not liable to penalties for delay in
payment of tax.
IN COME TAX PRIMER. 35
128. If I am negligent in making my return and understate the amount
of tax due, what penalties will I be liable to?
Where an understatement of tax is found to be due to negligence
on the part of the taxpayer, but without intent to defraud, there will
be added a penalty of 5 per cent of the total amount of the deficiency
and interest at the rate of 1 per cent per month on the amount of
the deficiency of each installment from the time it was due.
129. What would happen should a taxpayer render a false or fraudulent
return with intent to evade payment of a proper amount of tax?
He would be liable to a penalty of 50 per cent of the amount of the
total understatement and a fine of not more than $10,000 or one
year's imprisonment, or both, and the costs of the prosecution.
ACCOUNTING : Question. Page.
Change of period------------------------------------------ 5 3
Receipts and disbursements--------------------------------- 78 22
Returns on basis of ––––––––––––––––––––––––––––––––––––––– 61 19
ADMINISTRATOR, RETURNS BY---------------------------------- 103, 106 29
ADVANCE PAYMENTS ON CoNTRActs-------------------___________ 25 11
AGENT, RETURN FILED BY--------------------------------------- 9 5
ALIENS :
Fiduciary making returns for------------------------------- 96 27
Nonresident, definition ------------------------------------- 110 30
ALIMONY, PAYMENTS OF * - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 39 14
ALLOWANCES, COMMUTATION of QUARTERs_____ '• *-* * * * * - - - - m sº- *-* * *-* - - - * * I20 33
ASSESSMENTS :
For shares of stock---------------------------------------- 56 19 -
Mutual improvement associations, etc.--__ - - - - 57 19
Of income tax____ - - - - - –––– 121 33
BANK STOCK, TAXES ON----------------------------------------- 35 13
BLANK FORMS FoR RETURNS------------------------------------- 12 5
BONUSES :
Inclusion in gross income- - 27 12
Stock received as------------------------------------------ 36 13
BUILDING AND LOAN ASSOCIATIONS, INCOME FROM__________________ 37 14
CERTIFICATES OF INDEBTEDNESS, ExEMPTION__ - - - - 19 7
CHILDREN, MINOR, WAGES PAID TO------------------------------- 47 17
CLAIMS FOR REFUND OF TAX_______________ - –––– 124 34
COMMISSIONS, ACCOUNTING FOR ––– sm- - - - - - - arºs mºs - - - - - - - - - * - - - - - - 32 13
COMMUTATION OF QUARTERS------------------------------------- 120 30
COMPENSATION:
In lieu of cash--------------------------------------------- 23, 40 10, 14
Per diem allowances––––––––––––––––––––––––––––––––––––––– 24 11
CONTRACTS, ADVANCE PAYMENTS ON------------------------------ 25 11
CONTRIBUTIONS TO CHARITABLE ORGANIZATIONS.--------------------- 84 24
CREDITS :
Against total tax liability-––––––––––––––––––––––––––––––––– 90 25
For tax Withheld at Source--------------------------------- 113 31
Income Subject to normal tax------ 89 25
DAMAGES, SUMS PAID FOR--------------------------------------- 66 20
DEBTS :
Bad---------------------------------------------- 72, 73, 74, 75, 76 21, 22
Charged off, Subsequently collected--------- 77 22
Payment by Surety-------------------------------- * — — — — — — — — 75 22
DEDUCTIONS :
Bad debts. (See Debts.)
Business expenses--------------------------------------- 46, 52, 55 16, 18
Cost of perfecting title_--- * * *- - - - - 59 19
From gross income •- - - - * *-* * * * - - * * 45 15
Gifts to charitable Organizations 84 24
DEPLETION, OIL AND GAs WELLS, MINES, ETC–––––––––––––––––––––– S3 24
DEPRECIATION:
Automobile used for pleasure------ ––––––– 80 23
Basis of computing - *- - - - - 79 22
Costumes Of actors and actresses 82 23
Patent rights---------------------------------------------- 81 23
Personal residence----------------------- . & 80 23
I)IVIDENDS :
Cash ------------------------------------------------- 44 15
"In stock of another Corporation----------------------------- 41. 14
On paid-up life insurance policies--- 44 15
Stock dividends ------------------- — — — — — — — — — — — — — — — — — — — — — — — 42, 43 14
(37)
38 - INDEX.
ExCHANGES OF PROPERTY
Question. Page.
31 13
EXPENSES, SUMS PAID FOR DAMAGES_____ 66 20
ESTATES :
Credits allowed_____ 98 28
Expenses of administration___ 108 29
Net income - - 99, 100 28
Return by administrator-------------------------- - - - - - - - - - 95, 106 27, 29
Trust, return for 97 27
ExEMPTION :
Dependent Son attending boarding School-------------------- 14 6
Dependent mother residing apart from son- 15 6 :
Husband and wife contributing to dependent 17 6
Income exempt -------------------------------------------- 18 6
Interest On Liberty bonds - - - 19 7
PerSOnal - * *- 13, 89 5, 25
Salaries of State Officers, etc - * * * - - - - - * - - - - -e ºm mºv - wºº -> * * * *- - - -, * 18 6
Wife Confined in Sanatorium___ 16 6
EXPEN SES :
Business — 46, 49 16, 17
Cost of perfecting title 59 19
Of administrating estate +(38 29
PerSonal - * * - - - 50 17
Traveling 51 17
EXTENSION OF TIME FOR FILING RETURN_ 8 4
FEES, ARCHITECTURAL------------------------------------------- 60 19
FIDUCIARIES :
Defined____ - - - 93 26
Liability of - 105 29
Returns required of - - - - 101 28
Returns for nonresident aliens___________ 96 27
Withholding by---—--------------------------------------- 102 28
FISCAL YEAR, DEFINED_ - 3 3
GIFTS : .
Individuals— - - * * * * - - - - - - - - - - -s as-- - - - - - - - - - - - - 85 25
Partnerships –––––––––––––– - - 86 25
Receipt of 18 6
To charitable organizations______________ ------------------- 84 24
GROSS TNCOME :
Items to be included in-- 21, 27 9, 12
Deductions from - - - - 46 16
IMPROVEMENTS MADE UNDER TERMS OF LEASE----- 26 11
INCOME:
Credits allowable ______ 89 25
Exchange of property_ 31 13
T]xempt from tax ----- 18 6
Gross, items included in 21 9
Net income defined 20 9
Other than money------------------------------------------ 120 33
Pay of retired Army officers 34 13
INSTALLMENT PAYMENTS OF TAX 122 33
INSURANCE: -
Dividends on paid-up life 44 15
Life, on member of partnership––––––––––––––––––––––––––––– 54 18
Premiums paid on property--------------- 53 18
INTEREST:
Corporation bonds ------- 33 13
Nominterest-bearing investments 62 19
On Liberty bonds 19 7
Tax-free bonds * - - - - - - - - - - - * - - - - - - - - - - - -s sº - - - - - * * - - - - - 114 31
INVENTORY, TO BE TAKEN.------------------------------- -------- 28 12
LEASE :
Rentals and improvements under 26 11.
Taxes paid as part of rental-------------------------------- 55 - 18
LIBERTY BONDS, INTEREST ON - - 18, 19 6, 7
lilili
RSITY OF MICHIGAN
|
INDEX. 3 got 5 O78589671
LOSSES : Question.
By fire, flood, storm, etc.------------ ------------------------ 70, 71
Decrease in Stock valuation___________ - - - - - 65
Determination of, from sale of property--------------------- 29, 67
Farms Operated for pleasure or profit----------------------- 68, 69
Loans----------------------------------------------------- 76
On notes -------------------------------------------------- 75
MINOB CHILD, RETURN FOR-------------------------------------- 94
MINOR CHILDREN, WAGES EARNED BY----------------------------- 47
NET INCOME, DEFINED–––––––––––––––––––––––––––––––––––––––––– 20
NONRESIDENT ALIEN INDIVIDUAL :
Definition ––––––––––––––––––––––––––––––– 110
Exemption from Withholding––––––––––––––––––––––––––––––– 111
Fiduciary's return for-------------------------------------- 96
Refund of tax Withheld–––––––––––––––––––––––––––––––––––– 112
NORMAT TAX : -
Credits against -------------------------------------------- 89
Rates Of______ -— — — — — — — — — — — - - - - - - - - - - - - - 91
NOTES, WoRTHLESS --------------------------------------------- 75
OFFICERS, STATE, COUNTY, ETC., ExEMPT COMPENSATION____________ 18
PARTNERSHIPS, TAXABILITY OF–––––––––––––––––––––––––––––––––– 92
PATENTS, DEPRECIATION OF_______________ 81
PAYMENT OF INCOME TAX 122, 123, 124, 125
PAYMENT, TAX WITH HELD AT SOURCE---------------------------- 116
Page.
21
20
12, 20
20, 21
22
22
27
17
9
30
30
7-y
à
31
PENALTIES :
Delinquency in payment of tax -* - - - - - - - - - - - - sº - - - - 127
Failure to file return_____ - - –––– 126
Failure to Withhold tax_ * — — — — — — — — — — — — — — — — — — — — — — — 117
False or fraudulent return----------------------------------. 129
Negligence in making return-------------------------------- 128
PENSIONS__ - - - - 34
PROPERTY, DETERMINATION OF VALUE----------------------------- 30
RENTS, DEDUCTIBLE, PRO RATA---------------------------------- 58
RETURNS :
Accounting period changed–––––––––––––––––––––––––––––––––– 5
Blank forms for-------------------------------------------- 12
Extension of time for filing––––––––––––––––––––––––––––––––– 8
Failure to file - - - - - - - - - - -ss - - - - - - - - - - - - - * - - - - 126
False or fraudulent---------------------------------------- 129
Filed by agent--------------------------------------------- 9
Inspection of return by beneficiary-----_____________________ 104
Of husband and Wife--------------------------------------- 10, 11
Of information - - - - - - - - - - - - * * - - - 118, 119
Period to be covered-–––––––––––––––––––––––––––––––––––––– 4
Place for filing_ - - * - - - - * * - - - - - - - - - - - 6
Tax Withheld at SOur Ce - - - - - - - - - - - - - - - - - - - - - - - 116
Time for filing--------------------------------------------- - 7
When required--------------------------------------------- 1.
SALARIES :
Bonuses, etc.----------------------------------------------- 27
Compensation other than Cash------------------------------ 23, 40
Earned in preceding year---------------------------------- 22
Paid to minor children - - - 47
Paid to Self * * * * * * * * * * *-* - - - - - - - - - - - - - - - - - - 48
Per diem allowanceS - - - 24
State and county officials----------------------------------- 18
SALES : *
Of mines, oil, or gas WellS------- * * * * * * * - - -ºº º sº ºne sº- ºn -e emº. e- amº ºme - - - S8
Of property - - - - - - - - - - - - - - - - - = - - - - - - - - 29, 67, 69
Of rights to Subscribe to Capital stock_______________________ 38
Stock received as dividend---------------------------------- 43
SALESMEN, TRAVELING EXPENSES OF----------------------_______ 51
STOCKS :
Assessments on -------------------------------------------- 56
Bank Stock * * * * * * * * * = ** - - - - - - - - * * * * * - - - - - - - - - - - - - - - ame 35
Dividends --------------------------------- - - 42, 43
25
26
22
32, 33
10, 14
-: , – " ... . . . . Tº *.
.* - - - - - -
40 INDEX.
SURTAx: Question. Page.
On individuals 87 25
Profits from sale of mine 88 25
TAx WITH HELD AT SourcF. 116 31:
TAXABLE YEAR, DEFINED * * * *- 2 3
TAXES :
ASSessed for local improvements---------------------------- 63 19
Federal income, State income * * = - w = * * * * * * * * * = ** * * sm ms 64 20
Liability of fiduciary for 105 29
TRUST ESTATES :
Credits allowed-------------------------------------------- 98 28
Net income of * 99 28
Return by trustee - - - - 95 27
TWO or more------------------------ 107 29
VICTORY NOTEs, ExEMPTION____ 7
WAR SAVINGS CERTIFICATES, EXEMPTION-------------------------- # 7
WITH HOLDING : • , t
At source ------------------------------------------------- 116 31
By fiduciaries --------------------------------------------- 102 28
On tax-free bonds 115 31
Rates to be applied 109 29