A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. On the other hand, appreciation in value of property is not an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property.

The Treasury Department recognizes that no uniform method of accounting can be prescribed for all taxpayers, and the Law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his business. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Among the essentials are the following:

(1) In all cases in which the production, purchase, or sale of merchandise of any kind is an income-producing factor inventories of the merchandise on hand (including finished goods, work in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year;

(2) Expenditures made during the year should be properly classified as between capital and revenue, that is to say, that expenditures for items of plant, equipment, etc., which have a useful life extending substantially beyond the year should be charged to a capital account and not to an expense account; and

(3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion, or obsolescence any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve and not to current expenses.

Time and Place for Filing Returns. (a) Returns (except in the case of nonresident aliens) shall be made on or before the fifteenth day of the third month following the close of the fiscal year, or, if the return is made on the basis of the calendar year, then the return shall be made on or before the 15th day of March. In the case of a nonresident alien individual returns shall be made on or before the fifteenth day of the sixth month following the close of the fiscal year, or, if the return is made on the basis of the calendar year, then the return shall be made on or before the 15th day of June. The Commissioner may grant a reasonable extension of time for filing returns, if application therefor is made before the date prescribed by law for filing the return; whenever in his judgment good cause exists, and shall keep a record of every such extension and the reason therefor. Except in the case of taxpayers who are abroad, no such extension shall be for more than six months.

(b) Returns shall be made to the collector for the district in which is located the legal residence or principal place of business of the person making the return, or, if he has no legal residence or principal place of business in the United States, then to the collector at Baltimore, Maryland. (Section 227-1924 Act)

When returns are filed on a basis of the calendar year, they must be filed with the Collector for the district in which the taxpayer resides or in which he maintains his principal place of business on or before March 15 of the year following the period for which the return is being made. If a return is being filed on the basis of a fiscal year, the taxpayer may file his return any time on or before the fifteenth day of the third month following the close of the period for which his return is being made. This applies to all taxpayers who are required to file returns excepting nonresident aliens who are allowed a longer period of time in which to file the return. Nonresident aliens may file their returns any time on or before the fifteenth day of the sixth month following the close of the period for which their returns are made regardless of whether the return is made on a basis of a calendar or fiscal year. Of course, if the return is made on a basis of a calendar year, the return must be filed on or before the fifteenth day of June of the year following the close of the fiscal period.

When the last due date for filing returns falls on Sunday or a legal holiday, the last day for filing returns will be the day following such Sunday or legal holiday. When returns are mailed to the Collector of the district in which the taxpayer resides, they must be placed in the mail in ample time to reach the Collector's office under ordinary handling of the mails on or before the date on which the return is required to be filed. The date appearing in the postmark on the envelope is used as a basis of determining whether or not the return was mailed in ample time to reach the Collector's office on or before the due date.

Penalties for Failure to Make Returns and for False Returns. If any person, corporation, company or association fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner of Internal Revenue may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes.

"If the failure to file a return (other than a return under Title II of the Revenue Act of 1924) or a list is due to sickness or absence, the collector may allow such further time, not exceeding thirty days, for making and filing the return or list as he deems proper.

"The Commissioner of Internal Revenue shall determine and assess all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section. In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to wilful neglect, no such addition shall be made

to the tax. In case a false or fraudulent return or list is willfully made, the Commissioner shall add to the tax 50 per centum of its amount.

"The amount so added to any tax shall be collected at the same time and in the same manner and as a part of the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner as the tax."

(Section 1003-1924 Act)

In case of failure to file a return on time, a penalty of 25% of the amount of the tax is assessed against the taxpayer unless the return is later filed and failure to file it within the prescribed time is satisfactorily shown to the Commissioner to be due to a reasonable cause and not to willful neglect. Two classes of delinquents are liable to penalty: (a) Those who do not file returns and for whom returns are made by the collector or Commissioner; and (b) those who file tardy returns and are unable to show reasonable cause for the delay. A taxpayer who files a tardy return and wishes to avoid the penalty must make a statement of all the facts alleged as a reasonable cause for failure to file the return on time in the form of an affidavit, which should be attached to the return. If such an affidavit is furnished with the return or upon the collector's demand, the collector, unless otherwise directed by the Commissioner, will forward the affidavit with the return, and if the Commissioner determines that the delinquency was due to a reasonable cause and not to willful neglect, the 25% penalty will not be assessed. If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return in the prescribed time, then the delay is due to "reasonable cause".

Specific Penalties. (a) Any person required under this Act to pay any tax, or required by law or regulations made under authority thereof to make a return, keep any records, or supply any information, for the purpose of the computation, assessment, or collection of any tax imposed by this Act, who willfully fails to pay such tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than one year, or both, together with the costs of prosecution.

(b) Any person required under this Act to collect, account for and pay over any tax imposed by this Act, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this Act or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution.

(c) Any person who willfully (1) aids or assists in the preparation or presentation of a false or fraudulent return, affidavit, claim, or document, authorized or required by the internal-revenue laws, or (2) procures, counsels, or advises the preparation or presentation of such return, affidavit, claim, or document, shall (whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document) be guilty of a felony and, upon conviction thereof, be ·fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution.

(e) The term "person" as used in this section includes an officer or employee of a corporation or a member or employee of a partnership, who

as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.

(Section 1017-1924 Act)

Under the 1921 Revenue Act, a penalty of not more than $1,000.00 might be imposed for failure to make a return on time or to pay or collect the required tax, but this penalty has been eliminated in the 1924 Act. However, the provision with reference to the penalty for willful failure to file a return, or an attempt to defeat or evade the tax, is retained in the present Law. The penalty may be a fine of not more than $10,000.00 or imprisonment for not more than one year, or both, together with the costs of prosecution.

INCOME TAX QUESTIONS AND PROBLEMS

I. What is the official title of our present Income Tax Law?

2. Under what conditions are individuals required to file Income Tax Returns?

3. Is it necessary for a taxpayer to use the official form in filing his return?

4. If a taxpayer fails to receive, from the Collector, the official form furnished for filing returns, will he be excused from filing a return?

5. Under the present Law, is any provision made for filing a return of income in the event a taxpayer finds it impossible to secure an official form within the time provided for filing returns?

6. What provision is made for filing returns when a taxpayer is ill or absent during the period for filing returns? 7. Is it essential that a taxpayer retain a copy of his return? Give your reason.

8. (a) John Jones, a single man, has a gross income of $4,000.00 and a net income of $1,800.00 for the taxable year. Should he file a return?

(b) If his net income amounts to only $800.00, will it be necessary for him to file a return?

9. (a) Assuming that Mr. Jones is a married man, living with his wife, and has a net income of $1,800.00 for the taxable year, should he file a return?

(b) If his net income amounts to $2,700.00, will it be necessary for him to file a return?

(c) If, in the latter case, the amount of his allowable deductions and credits were such as to make it unnecessary for him to pay a tax, should he file a return?

IO. Fred Smith, a married man, living with his wife, has a net income of $1,800.00 for the taxable year. The wife has a separate income of $900.00. Will it be necessary for each to file a separate return or may they join in filing a combined return?

II.

If a joint return may be filed by Fred Smith and his wife, what amount of income should be reported?

12. If the husband files a return as head of the family and the wife does not file a separate return, should the husband include the separate income of the wife in his return?

13. (a) Harold Pond is a widower but has three children who are dependent upon him for their support and who are maintained in his own household. He has a gross income of $3,800.00 and a net income of $1,750.00 for the current year. Should he file a return?

(b) Provided that John, his oldest son, but still a minor, has a separate income of $400.00, should Mr. Pond include this income in his return or should the son file a separate return?

(c) If the net income of the son, which is derived entirely from his earnings, amounted to $1,200.00, should he file a separate return or should his earnings be included in the return of the father? If the son had been emancipated by the parent, should he file a separate return or should the father include the income in his return?

14. (a) Are partnerships required to file returns? If so, why?

(b) Does the amount of income of a partnership determine whether or not it shall file a return?

15. Under what conditions are fiduciaries required to file returns?

16. In the event the beneficiary of an estate is a nonresident alien, would the amount of the gross or net income be a deciding factor in determining whether or not the fiduciary should file a return?

17. (a) What is a calendar year? (b) A fiscal year? (c) A taxable year?

18. Name three conditions under which it is necessary for a taxpayer to file a return for a period of less than twelve months.

19. (a) What is meant by the "cash method" of reporting income? (b) "Accrual method"?

20. (a) When and where should individuals file their Income Tax Returns provided that the returns are made upon the basis of a calendar year? A fiscal year?

(b) What is the penalty for failure to file a return on time provided the delay is due to reasonable cause? Provided the delay is due to willful neglect?

(c) What is the penalty for filing a false or fraudulent return? What additional penalty may be imposed if a person who files a false or fraudulent return is found guilty of a misdemeanor and convicted?