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a license or to comply with the regulations is punishable by a fine not exceeding $5,000 or imprisonment not exceeding one year, or both. See Statute, section E, Treasury Regulations 54 to 62, and T. D. 2023, amending T. R. 58. See also T. D. 2090, "Income.”
156. Patents and Patent Rights. The income from the use of a patented article or from the rentals from rights therein is a part of the gross income, and is taxable. The allowance for depreciation (126) of the value of a patent is one-seventeenth of its cost for each year, as the term is seventeen years. (T. R. 137.) If the patent was purchased from the originator, then the cost represented is the amount of the purchase. If it remains in the hands of the original owner the cost is the amount of the fees, expenses, etc., in securing the patent from the Government. Each year one-seventeenth of its value as capital is gone, and that part is allowed as a deduction.
157. Corporation Bookkeeping. By Treasury Regulations 161, 182, and 183, it is provided that corporations, in order to estimate their income, must necessarily take an annual inventory or its equivalent. A complete physical inventory is desired, but where it is not possible an equivalent inventory will be accepted. An equivalent inventory is an inventory of materials, supplies, and merchandise on hand, taken from the books of the corporation. No particular system of bookkeeping is required, but some system is necessary by which the return of income can be verified. The annual balance sheet or report to stockholders should show the same amount of net profits as that reported as net income in the return of the income. The books of a corporation shall be open to inspection on order of the Commissioner of Internal Revenue. (T. R. 186.) The books are assumed to show the facts as to income. (T. R. 183.) Corporations, (15. Powers of Collectors, 142.
158. Individual Exemption. Section C of the Statute prescribes the “specific" exemption for individuals. This specific exemption is $3,000 for an unmarried person, or $4,000 for a married person. The $4,000 exemption applies to a married person only while living with husband or wife; and if both have incomes, only one exemption is allowed. (152.) This specific exemption applies only to persons.
A corporation must pay the tax on all of its net income. The exemption is from the “net” income. ([20.) This means that after determining the net income this part of it is not subject to tax. The allowance of this exemption is supposedly for necessary living expenses, and, consequently, there is no other allowance for personal or family expenses, but the cost of such is to be included as part of the income. (121.) No person is required to make a return of his income unless the “net” income exceeds $3,000. (Statute, section D.) The individual is left to determine whether or not his net income does amount to that much, but in case of doubt the Collector may require him to make the return. Even when the return is made, the person, if married, does not pay any tax unless the net income amounts to $4,000. See Treas ury Regulations, Articles 9 and 10. When a person's tax is paid by a fiduciary (133) or withholding agent (1932), written demand for the specific exemption must be made thirty days before March 1, to either the agent or the Collector. An American woman who marries a foreigner takes the nationality of her husband and cannot claim the exemption. (T. D. 2090, “Citizenship.”)
The Statute, when referred to in cross references, is abbreviated as “St.” It is given in the following pages without accompanying comment, as the reader, for explanation of any part of it, is expected to refer to the Index or Analysis. Practically every sentence in the Statute is covered in the 58 paragraphs of the Analysis, and for convenience the lettered sections of the Statute with reference to the parallel paragraph of the Analysis (abbreviated as A) are here given:
St. A. Levying tax, A 16.