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THE INCOME TAX ON CORPORATIONS
The preceding Units have been devoted to a discussion of the Income Tax Law as applied to individuals. The Law in its application to corporations will now be discussed.
The 1924 Revenue Act retains practically all the provisions of the 1921 Act, so far as it applies to corporations. The most important change is the elimination of the personal service corporation.
Under the 1918 and 1921 Acts (until January 1, 1922) corporations, in which the income was derived from a profession or business and which resulted principally from the rendering of personal service, were classified as personal service corporations and were treated as partnerships. The stockholders were required to include in their individual returns the proportionate part of the earnings of such corporations, whether received as dividends or not, according to the respective stockholdings. Since January 1, 1922 personal service corporations have been taxed on the same basis as other corporations. This policy is continued in the present Law which contains no reference to such corporations. They must, therefore, file returns and pay taxes on the same basis as other corporations.
Definition. (a) (2) The term “corporation" includes associations, joint-stock companies, and insurance companies.
(3) The term "domestic" when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State or Territory.
(4) The term “foreign" when applied to a corporation or partnership means a corporation or partnership which is not domestic.
(Section 2—1924 Act) The term "corporation” refers not only to the ordinary statutory corporations, but also to business trust associations called “Massachusetts Trust,” joint stock companies, limited partnerships, mutual savings banks and insurance companies, and all analagous business associations, the net income of which is distributed among the members on the basis of the shares which each holds, or the proportion of capital which each has invested.
Returns. (a) Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice-president, or other principal officer and by the
Copyright 1925. South Western Publishing Co.
treasurer or assistant treasurer. If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return shall be made by the agent. In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.
(Section 239—1924 Act) Every corporation not expressly exempt from tax must make a return of income regardless of the amount of its net income. Corporations in existence only part of a year must file a return for that portion of the year. Such a case may arise where the corporation is organized within the year or where a corporation previously organized is dissolved within the year. Corporations fully organized must file a return whether they are doing buisness or not, and this applies equally to newly organized corporations which have not commenced business, and to corporations which have formerly done business and have ceased to do so. A corporation which has received a charter, but has never perfected its organization, and which has transacted no business and had no income from any source may, upon presentation of the facts to the Collector, be relieved from the necessity of making a return so long as it remains in an unorganized condition. Corporations engaged in agricultural pursuits for profit must file a return the same as those engaged in mercantile and industrial pursuits. Corporations which lease part of their property to others, with the agreement that the rentals are to be paid directly to the stockholders, must consider the amount so paid as income and report it in their returns.
Private banks having the corporate form of organization and which under the Income Tax Law are held to be associations should make returns of annual net income and pay any income tax thereby shown to be due. However, private banks conducted like a corporation but in which the interests of the members cannot be transferred without the consent of the other members, are considered partnership banks and need not file returns as corporations. Of course, the partnership would file a partnership return but no tax would be assessed on this return. Each member of a partnership bank would be taxed on his distributive share of the profits.
Receivers, trustees in dissolution, trustees in bankruptcy and assignees operating the property or business of corporations must make returns for such corporations for each year or part of a year during which they are in control of the company. The theory is that the receiver, trustee or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control.
Insurance companies engaged in the business of issuing life insurance or combined life, health, and accident insurance, organized as corporations and transacting business in the United States or deriving an income from sources within the United States are required to file returns of income. The rate of income tax for life insurance companies is the same as other corporations, but the net income upon which the tax is imposed differs from the net income of other corporations. Their net income consists of the gross income received from interest, dividends and rents less the deductions allowed by Law. Special forms are furnished for these returns. As an aid in auditing the returns, a copy of the report to the State Insurance Department should be submitted with the return wherever possible. For detailed information regarding computation of taxes on insurance companies, see sections 242-247, inclusive, of the Revenue Act of 1924.
Returns for a period of Less than Twelve Months. If a corporation changes its taxable year from a fiscal year to a calendar year or from a calendar year' to a fiscal year or from one fiscal year to another fiscal year, it becomes necessary to file a return for a period of less than twelve months. This provision is the same in its application to corporations as the provision which requires individuals to file returns for a period of less than twelve months. Thus, if a corporation changes its taxable
year from a calendar year ending on December 31 to a fiscal year ending on June 30, it is necessary to file a return 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 new fiscal year. In this case, it will be necessary to file a return for a period of six months—that is, from December 31 to June 30.
Consolidated Returns. (a) Corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.
(b) In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. There shall be allowed in computing the income tax only one specific credit computed as provided in subdivision (b) of section 236.
(Section 240—1924 Act) Consolidated returns are based upon the principle of levying the tax according to the true net income and invested capital of a single enterprise, even though the business is operated through more than one corporation. Where one corporation owns or controls the capital stock of another corporation or other corporations, or where the stock of two or more corporations is owned by the same interests, a situation results which closely resembles that of a business maintaining one or more branch establishments. In the latter case, because of the direct ownership of the property, the invested capital and net income of the branch form a part of the invested capital and net income of the entire organization.
(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. A corporation organized under the China Trade Act, 1922, shall not be deemed to be affiliated with any other corporation within the meaning of this section.
(d) In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.
(Section 240—1924 Act) Corporations are deemed to be affiliated under the Income Tax Law when the following conditions exist:
(1) When one domestic corporation owns at least 95% of the voting stock of one or more subsidiary corporations.
(2) When at least 95% of the voting stock of two or more domestic corporations is owned or controlled by the same interests.
The Revenue Act of 1921 did not specify any particular percentage but used the term “substantially all the stock". The Treasury Department, however, ruled that the owning or controlling of 95% or more of the outstanding voting capital stock (not including stock held in the treasury) at the beginning of and during the taxable year constituted an affiliation within the meaning of the statute. From this, it will be seen that while the present Law specifies a particular percentage, there is no change in the application of the Law.
As evidence of affiliation, the parent or principal corporation filing a consolidated return for the first time shall include in such return a statement setting forth:
(a) the name and address of each of the subsidiary or affiliated corporations included in such return;
(b) the par value of the total outstanding capital stock of each of such corporations at the beginning of the taxable year;
(c) the par value of such capital stock held by the parent corporation or by the same interests at the beginning of the taxable year;
(d) in the case of affiliated corporations, the stock of which is owned or controlled by the same interests, a list of the individuals, partnerships, or corporations constituting such interests, with the percentage of the total outstanding stock of each affiliated corporation held by each of such individuals, partnerships, or corporations during all or any part of the taxable year; and
(e) a schedule showing the proportionate amount of the total tax which it is agreed among them is to be assessed upon each affiliated corporation. In the absence of an agreement among the affiliated corporations as to the proportionate amount of the tax to be assessed upon each, the tax will be assessed upon the basis of the net income properly assignable to each of the affiliated companies.
Under this provision of the Law affiliated corporations have the option of filing either separate returns or a consolidated return. In the 1918 Revenue Act, it was compulsory for affiliated corporations to file a consolidated return but this provision was changed in the 1921 Act and the filing of a consolidated return was made optional. This optional provision is retained in the
Corporations Exempt from Tax. The following organizations shall be exempt from taxation under this title
(1) Labor, agricultural, or horticultural organizations;
(2) Mutual savings banks not having a capital stock represented by shares;
(3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system; and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents;
(4) Domestic building and loan associations substantially all the business of which is confined to making loans to members; and cooperative banks without capital stock organized and operated for mutual purposes and without profit;
(5) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual;
(6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, 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 shareholder or individual;
(7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual;
(8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes;