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Article 1. Income tax is levied upon income received by:
(a) Individuals-

Citizens and resident aliens, nonresident aliens.
(0) Fiduciaries for-

Estates

In process of administration or

In trust for accumulation of income. Individuals, as beneficiaries. (c) Corporations, joint-stock companies or associations, or insurance com

panies. Article 2. After the net income shall have been ascertained as here. inafter provided, in assessing income tax the net income embraced in the return shall be credited with the amount of any excess-profits tax (Title II, act of Oct. 3, 1917) assessed for the same calendar or fiscal year upon the taxpayer, and, in the case of a member of a partnership, with his proportionate share of the excess-profits tax imposed upon the partnership.

Article 3. The income tax is of two kinds-normal and additional ažiū is levied by the acts of September 8, 1916, and October 3, 1917.

(a) Individuals.-(1) The normal tax is levied upon the net income in excess of allowable deductions, credits, and exemptions. Subject to these allowances, this tax is 2 per cent under each act on the total net income from all sources received by a citizen or resident alien in the preceding calendar year and 2 per cent on the net income of nonresident aliens (under the act of Sept. 8, 1916, as amended, only) received by them in the preceding calendar year from all sources in the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.

(2) The additional tax is the tax levied, at graduated rates, upon the net income in excess of $5,000.

(3) Under the act of 1916 the additional tax is levied upon the amount of net income in excess of $20,000. Under the act of 1917 the additional tax is levied upon the amount of net income in excess of $5,000, so that above $20,000 the combined rates of the acts of 1916 and 1917 apply to the same income.

(6) Estates.--The income of estates, in process of administration or in trust for accumulation of income, is taxed as for an unmarried person.

(c) Corporations or associations.-(1) The normal tax under act of 1916 is 2 per cent on net income from all sources.

(2) The normal tax under the act of 1917 is 4 per cent on net income from all sources, except dividends from corporations whose income is subject to income tax. So that except as to dividends (which as income to corporations are subject to income tax at the rate of 2 per cent only), the combined normal tax on income of corporations is 6 per cent.

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(3) The net income of corporations remaining undistributed for 10 six months after the close of a calendar year may be subject to an additional tax, as will be more fully explained in the part of the regulations dealing with corporations. (See art. 238.)

(d) Partnerships.—Partnerships, as such, are exempt from income 11 tax on their net income. The partners are required to include their respective shares of partnership income (whether distributed or not) in the returns required of each partner. Section 8 (e) prescribes the method of computation for both partnerships and partners, for the purpose of the income tax. (See art. 30.)

INCOME.

Art. 4. Gross income includes gains or profits and income derived 12 from any source whatever except such as is specifically exempted from income tax under provisions of section 4, act of September 8, 1916, as amended by act of October 3, 1917. (Sec. 2 (a) act of Sept. 8, 1916, as amended. See arts. 106 and 107.)

RULINGS UNDER ARTICLE 4 AS TO INCOME. Alimony.--Alimony or allowance based on separation agreement is 13 not income to the recipient thereof, nor is it an allowable deduction for the person paying same.

Bad debts.--Bad debts which have been claimed and allowed as a 14 deduction in prior returns are considered income if subsequently collected.

Bonds purchased between interest dates. Interest accrued to the 15 time of purchase (advanced by purchaser) is not to be accounted for as income by the purchaser. Only the amount of interest assignable to the portion of the interest period subsequent to the purchase has a status of income for the purposes of return and tax by purchaser.

The amount of accrued interest so advanced by the purchaser is 16 taxable income to be accounted for in the return of the vendor.

Bonds.--Coupons from bonds for interest thereon, exchanged for 17 other bonds, are held to be the equivalent of payment of the interest coupons and purchase of the new bonds with the cash. The amount of the coupons is to be accounted for as income for the calendar year in which the exchange is made.

Building and loan associations.—Amount credited to shareholders of 18 building and loan associations, when title to such credit passes to the shareholder at the time of the credit, has a taxable status for the normal and additional tax as for the year of the credit. Where the amount of such accumulations does not become available to the shareholder until the maturity of a share, the amount of a share in excess of the aggregate amount paid in by the shareholder is income to

.

be accounted for as for the year of the maturity of the share for both

the normal and additional tax. 19 Commissions paid salesmen.--Are income to the salesmen as well as expense to the payer.

Compensation. For service paid for on a percentage of net profits is income to the employee, and to be accounted for as such. 21 Compensation not paid in money.-Where service is rendered for a

stipulated price, wage, or salary and paid with something other than money, the stipulated value of service in terms of money is the value at which the thing taken in payment is to be considered for the pur

pose of the income tax. 22 Where there is no stipulation as to the value of service and pay

ment for service is made with something other than money, the market or reasonable value of the thing taken in payment is the

amount to be included as income for the purposes of the income tax. 23 Executors and administrators.--If the net income of a decedent from

January 1 to the date of his death within that year was $1,000 or over, if unmarried, or $2,000 or over if married, a return for such decedent must be made by the executor or administrator, and such executor or administrator may claim all deductions and exemptions

to which the decedent would have been entitled under the law. 24 Executors and administrators whose duty consists of administer

ing on an estate for the purposes of its distribution to heirs or legatees are, during the period of such administration, held to stand in the stead of their principal, and under the provisions of section 2 (6), act of September 8, 1916, are required to make returns of income for

the estate and to pay the tax shown by such return to be due. 25 Damages.--Amount received as the result of a suit or compromise

for personal injury, being similar to the proceeds of accident in

surance, is to be accounted for as income. 26 Dividend from depletion reserve.—A reserve set up out of gross re

ceipts and maintained by a corporation for the purpose of making good any loss or wasting of capital assets on account of depletion is not to be considered a part of the earned surplus of the company, but a reserve for the return or liquidation of capital. A dividend paid from such reserve will be considered a liquidating dividend and will not constitute taxable income to the stockholder except to the extent that the amount so received is in excess of the capital actually invested by the stockholder in the shares of stock held by, him, and with respect to which the distribution was made. No divi. dend will, however, be deemed to have been paid from such reserve except to the extent that such dividend exceeds the surplus and undivided profits of the corporation at the time of such payment, and unless the books, records, published statements, etc., of the corporation clearly indicate a corresponding reduction of capital assets resulting from such payment.

Dividends paid with securities.--Dividends declared by a corpora- 27 tion and paid with securities in which the surplus of the corporation has been invested, regardless of the character of such securities, is to be accounted for as a dividend for income-tax purposes by the recipients of same to the extent that it represents a distribution of surplus accrued to the corporation since March 1, 1913.

Stock dividends.-Stock dividends declared from a surplus created 28 from the revaluation of capital assets or a value placed upon trademark, good will, etc., do not represent a distribution of earnings or profits subject to tax in the hands of the recipient shareholder. The entire proceeds derived by a shareholder from the sale of such stock is income subject to both the normal and additional tax and shall be accounted for in the shareholder's return rendered for the year in which sold.

Farm.-The term “farm” as herein used embraces the farm in the 29 ordinarily accepted sense, plantations, ranches, stock farms, dairy farms, poultry farms, fruit farms, truck farms, and all lands used for similar purposes; and for the purposes of this decision all persons who cultivate, operate, or manage farms for gain or profit, either as owners or tenants, are designated as “farmers.”

All gains, profits, and income derived from the sale or exchange 30 of farm products, whether produced on the farm or purchased and resold by a farmer, shall be included in the return of income for the year in which the products were actually marketed and sold; and all allowable deductions, including the legitimate expenses incident to the production of that year or future years, may be claimed in the return of income for the tax year in which the right to such deductions shall arise, although the products to which such expenses and deductions are incidental may not have been sold or exchanged for money, or a money cquivalent, during the year for which the return is rendered.

Rents received in crop shares shall likewise be returned as of 31 the year in which the crop shares are reduced to money or a money equivalent, and allowable deductions likewise shall be claimed in the return of income for the tax year to which they apply, although expenses and deductions may be incident to products which remained unsold at the end of the year for which the deductions are claimed. When farın products are held for favorable market prices, no deduction on account of shrinkage in weight or physical value or losses by reason of such shrinkage or deterioration in storage shall be allowed.

Cost of stock purchased for resale is an allowable deduction under 32 the item of expense, but money expended for stock for breeding purposes is regarded as capital invested, and amounts so expended do not constitute allowable deductions, except as hereinafter stated.

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