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normal tax) on the income above $3,000, if unmarried, and above $4,000 if married (158). Every individual whose net income exceeds $3,000 in any calendar year must make a return of his income to the collector of his district before March 1 of the succeeding year. The normal tax of 1 per centum is on the income above the $3,000 or $4,000 and up to $20,000. On the income from $20,000 to $50,000 the tax is 2 per centum. Between $50,000 and $75,000 it is 3 per centum. From $75,000 to $100,000 it is 4 per centum. Be tween $100,000 and $250,000 it is 5 per centum. From $250,000 and $500,000 it is 6 per centum and 7 per centum on the excess above $500,000. To apply the tax on an income of a million dollars will serve to make the requirement plain. On the first $20,000 the tax is 1 per centum above $4,000, or $160. On the next $30,000 it is 2 per centum, or $600. On the next $25,000 it is 3 per centum, or $750. On the next $25,000 it is 4 per centum, or $1,000. On the next $150,000 it is 5 per centum, or $7,500. On the next $250,000 it is 6 per centum or $15,000. On the next $500,000 it is 7 per centum, or $35,000. This makes the total income tax on a net income of a million dollars amount to $60,010. See first and second paragraphs of the Statute. T. R. 1 and 2. (17. Who Must Make Returns of Income.

Income. Every corporation conducted for private gain must report the income regardless of the amount. (s15.) Every individual who is as much as 21 years of age and whose net income is more than $3,000, must make the return. (T. R. 15-18.) Every fiduciary, guardian, trustee, etc., who is entrusted with the management of the funds of another whose income amounts to more than $3,000 must make the return of the income. (s33.) In this income is not to be included any income from dividends of corporations which also pay the tax. (f49.) In no case is any return required from an individual where the net income does not exceed $3,000. (St. D.) Time and place for making returns, 137. There are five different forms for income returns, these being for individuals, fiduciaries, withholding agents, corporations other than insurance companies, and insurance companies. See individual and corporation forms herein. Corporations, s15. Insurance Companies, [43. Returns generally, (53. Fiduciaries, [33. Withholding agents, 132. Mutual Telephone Companies, etc., T. D. 1933. Exempt corporations, T. R. 87, and T. D. 2090 "exempt.”

(18. Gross Income Defined. The tax is based on net income, but every person who makes a return of his income must list his gross income, and gross income includes all income, gains and profits from all sources whatever in the calendar year for which the return is made (T. R. 4), except as mentioned in the succeeding paragraph, and does specifically include all of the following: salaries and wages (131), compensation for personal services in whatever form paid, professions (147), vocations, business (whether the profits are actually divided or not, as in partnerships) (136), trade, commerce, sales, dealings in personal or real property (150), interest, rents (948), dividends (949), or from any business op transaction for gain, including the income from, but not the value of the property obtained by gift, bequest, devise or descent (929). Insurance companies' gross income, T. R. 97102. Manufacturing company, T. R. 104. Mercantile corporation, T. R. 105. Miscellaneous corporations, T. R. 106. Mutual fire insurance company, T. R. 108. General definition gross income, T. R. 107.

(19. Nontaxable Gross Income. The following are not to be considered as a part of the gross income and need not be listed in making the return of the Income: proceeds from life insurance policies of any kind except interest payments made to beneficiaries (130); income from United States bonds or of any of its possessions, or from bonds of a State or of any of the political subdivisions thereof (128); income from salaries paid to officers of a State or any subdivision thereof, including public school teachers, unless such salaries are paid by the United States (131); the value of property acquired by gift, bequest, devise or descent (129). The salaries of the President of the United States for the present term and of United States judges who were in office when the law was enacted are not subject to the tax, because of the constitutional provision that these salaries shall not be changed during the term of office. (St. B.) See Article 5 of the Treasury Regulations herein, and succeeding paragraphs, to 30 inclusive.

(20. Net Income Defined. Net income alone is taxable, and under the provisions of the Income Tax law net income is the gross income as defined in the two preceding paragraphs, less the deductions as noted in the following paragraphs. Gross income in realty is all income, but gross income for purposes of taxation under this act is the income less the nontaxable items mentioned in paragraph 19. From this taxable gross income the net income is obtained by deducting the expense of conducting business, interest paid on debts, taxes paid, losses sustained and not otherwise compensated, debts due to individual taxpayer and found to be worthless, and a reasonable allowance for wear and tear. These six items, discussed in paragraphs 21 to 26 inclusive, deducted from gross income, leave the legal definition of net income. Even of the net income, however, there are three items which are not taxable, to wit, the amount represented by income of an individual from stock in a corporation which has paid tax on its income (149), the amount of income the normal tax on which has been withheld or paid at the source (132), and the individual exemption of $3,000 for an unmarried person or $4,000 for a married person (1158). See Insurance Companies, [43, “Accrued income" defined, 146. Treasury Regulations 1 to 6. For Corporation deductions, see T. R. 113.

121. Expenses of Conducting Business. This is the first deduction allowed from taxable gross income for the purpose of determining the net income. This deduction is meant to include the necessary and usual expenses of conducting the business. This item includes the actual expenditures during the year for conducting the business and making necessary repairs, but not for permanent improvements or increase of capital or resources. It includes the cost of labor, fuel, lights, rent, taxes, and insurance, except for life insurance for the benefit of a personal beneficiary. The expenses for supplies for office use should include only the amount used and not the total purchased. The cost of repairs necessary for ope rating the business, but which do not add to the value of the business, is allowable as a deduction. "Ordinary and necessary” are the terms which fix the expenses allowed to be de ducted. For fuller details, see the Treasury Regulations herein, Articles 14, 114, 116, 120. This deductible allowance cannot include personal, living or family expenses," such as medical attendance, family supplies, wages of domestic servants, cost of board, room-rent, house-rent, repairs on residence, etc. Farming, 151.

22. Interest Paid on Debts. This is the second deduction allowed from the gross income in fixing the net income, and is fully covered by subsection B of the Statute and the Treasury Regulations. The rules for individuals and for corporations are different. An individual is allowed to deduct all interest actually paid by him on outstanding debts during the year, provided that interest accrued during that year, and was not past-due interest, and it cannot include any payment made on the principal of the indebtedness. For corporations the same rule applies, except that the amount of the exemption is limited. The amount of corporation indebtedness for which interest deduction is allowable cannot exceed one-half of the amount of the interest-bearing indebtedness plus the paid-up capital stock outstanding at the close of the year. (T. D. 1960.) If the association or company has no capital stock then the amount of indebtedness on which the deductible interest is allowable cannot exceed the amount of capital actually employed in the business at the close of the year. Corporation indebtedness, secured wholly by collateral, which is the subject of sale in the ordinary business of the corporation, does not come within the limitation, but if the interest incoming from such collateral is returned as part of the in

come, then all the interest paid on the collaterally secured debt is deductible. Treasury Regulations 148 and 150, and T. D. 1993. Withheld at source, 32 and T. R. 37.

23. Taxes Deductible. This third deduction is allowable to the amount of taxes actually paid out during the year, but not for taxes that became due but were not paid during the year. (St. B.) Taxes for this deduction include National, State, county, municipal and school, but not those for local benefits, such as special district taxes for irrigation, drainage, reclamation, sidewalks, streets, paving, etc. (T. D. 2090, page 11.) Taxes paid abroad are not deductible. Foreign corporations doing business in the United States are taxed only on their income from business in the United States, and only taxes in the United States are deductible. (134.) A corporation cannot deduct taxes assessed against its shareholders under a State statute, but the individuals deduct the amount from their own returns. Import duties are not deductible as taxes, but may be included as expense of carrying on business when they actually are so.

(T. R. 155.) A corporation paying a certain tax on a contract that certain bonds, etc., shall not be taxed cannot deduct the amount of such tax. (T. R. 153, T. D. 1948.)

124. Losses Deductible. Fourth among the six deductions, according to the wording of the statute (B), is "losses actually sustained during the year, incurred in trade or arising from fires, storms or shipwreck, and not compensated for by insurance or otherwise.” (T. D. 1989 and 2005.) Concerning this provision, the draftsman of the bill, Representative Cordell Hull, said in the House, April 26, 1913: “These provisions primarily contemplate allowance for losses growing out of the trade or business from which the taxable income is derived, and generally termed trade losses, as distinguished from losses of capital or principal or losses incurred entirely apart from business transactions from which income is derived. A similar rule governs deductions for expenses." The losses deductible are those occurring directly as a part of the business and as a result of the operations in connection

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