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(c) Profits of citizens derived from sales in foreign commerce.
(d) Amounts received as benefits by unemployed members of an organized labor union.
(e) Benefits received from a labor union by an individual member while on strike.
(f) Retiring allowances received by teachers or widows of teachers from the Carnegie Foundation for the Advancement of Teaching
(g) Fees received by witnesses in court proceedings.
(h) Amount received in the employ of the American Red Cross as a maintenance allowance in excess of the actual living expenses.
Gross Income of Nonresident Aliens. (c) In the case of a nonresident alien individual, gross income means only the gross income from sources within the United States.
(Section 213—1924 Act) The income of nonresident alien individuals may be divided into three classes: (1) Income which is derived in full from sources within
the United States. (2) Income which is derived in full from sources without
the United States. (3) Income which is derived partly from sources within
and partly from sources without the United States. The taxable income includes that derived in full from sources within the United States and that portion of income which is derived partly from sources within and partly from sources without the United States which is allocated or apportioned to sources within the United States. In general, the income derived from sources within the United States is computed on the same basis as the income of other individuals who are residents of the United States. For detailed information in regard to the taxable income of nonresident alien individuals, see Section 217 of the 1924 Revenue Act.
INCOME TAX QUESTIONS AND PROBLEMS
Outline briefly what constitutes "gross income" under the present Income Tax Law.
2. The Acme Machine Tool Company earned a net profit for the calendar year ending December 31. In January following the determination of the net profits for the preceding year, it was decided to give Nathan Stevens, an employee, a bonus of 1% of the profits, or $350.00, which is in addition to his salary. Mr. Stevens files his return on March 15. Does this bonus constitute taxable income to Mr. Stevens? If so, should he include the bonus in his return for the taxable year in which the bonus was earned, or in the taxable year during which the bonus was received ?
3. C. B. Zobel keeps his books on a cash basis. During the current year he receives, in payment of services rendered Ralph Duhme, a noninterest bearing promissory note for $5,000.00 which is payable in 60 days. Zobel ascertains that the note can be discounted at his bank at 6% but decides to hold it until maturity. What amount should Zobel report as income from this transaction?
4. J. W. Winters is indebted to B. A. Leonard to the extent of $450.00. He paints Leonard's residence whereupon Leonard agrees to cancel his debt. Does this result in taxable income to Winters?
5. Ralph Trapp, a single man, is employed on a farm receiving a salary of $900.00 a year and, in addition, he is furnished with living quarters and board. In the locality in which he is employed, living quarters are estimated to be worth $12.00 per month and board $20.00 per month.
If Trapp's gross income constitutes his net income, will it be necessary for him to file a return? If so, what is the amount of his gross income?
6. C. B. Touse, who is a contractor, constructed a subway for the city of Cincinnati, completing his contract in September of the current year. The total time required in the completion of this contract was three years. His net profit amounted to $75,000.00. Should this profit be reported in gross income for the current year or should Mr. Touse have reported the proportionate part of the net profit earned in each year? Explain the Law fully in its application to long-term contracts.
7. W. E. Reber keeps a personal set of books on a cash basis. He has a savings account in the Security Bank and Trust Company on which he receives interest at the rate of 4%. On December 31 of the current year the bank credits his account with interest amounting to $110.00. Should this interest be
$ reported as income in Reber's return for the current year?
8. The Blank Corporation sells $40,000.00 of its bonds to Arthur Jacobs at a discount of 10%. Jacobs holds them until maturity in the current year, when the corporation redeems them at par. Ignoring the interest, and assuming that Mr. Jacobs keeps his books on a cash basis, what income, if any, does he derive from the transaction?
Allen Westover purchased bonds from the State of New York in 1914 at 90, paying $81,000.00. These bonds mature during the current year and are redeemed by the State at par value. What amount should Mr. Westover report as taxable income?
10. R. L. Bueg leases a plot of ground to F. J. Kuehne at an annual rental of $4,000.00 plus all taxes assessed against the property. During the past year the taxes amounted to $1,250.00. What amount should Bueg include as income from the rent in preparing his Income Tax Return?
M. B. Wills is the author of a copyrighted book. The company which published the book has agreed to pay him a royalty of 10% of the amount of the gross sales. The book sells at $2.00 and during the current calendar year 24,150 copies were sold. The author receives a communication from the publishing company on January 15 advising him of the sales for the preceding year together with a check to cover the amount of his royalty.
Should Mr. Wills include the amount of this royalty in his gross income and if so, should it be reported in the year in which it was earned or in the year in which it was received?
12. J. T. Chase sells Thos. Babb, for $50,000.00, certain property which Chase purchased in 1914 for $30,000.00. Babb agrees to pay Chase, in addition to the purchase price, the income taxes which Chase may be required to pay on the profit of $20,000.00.
Does this reimbursement by Babb of the taxes paid by Chase constitute additional income which Chase will be required to report in his return? 13.
E. D. McIntire purchased, in the year 1912, 100 shares of stock in a local manufacturing corporation at a cost of $100.00 per share. On March 1, 1913, the market value of the stock amounted to $150.00 per share. In the year 1917, its market value amounted to $500.00 per share and he donated the stock to his wife. There has been no change in market value and the wife sells the stock during the current year, for $500.00 per share, which constitutes all her income.
(a) What was the taxable income of the wife?
(b) If the stock were donated to the wife after December 31, 1920, what effect would it have on the taxable income of the wife? 14. Frank Kohl bought Southern Railway Stock as follows:
25 50 shares
100 shares May 10, 1921.
32 Oct. 12, 1921.
28 100 shares Feb. 15, 1922.
25 150 shares May 10, 1922.
100 shares Sept. 20, 1922.
35 March 2, 1923.
100 shares On July 5, of the current year, he sells 250 shares at 62 and on September 15 he sells 250 shares at 65. Compute Mr. Kohl's profit resulting from these sales for income tax purposes.
15. During the year 1922, A. L. Bunker secured a patent on a pipeless furnace. The development of the patent, including costs of experimentation and fees was $30,500.00. In May of the current year he sells the patent to the City Manufacturing Company for $90,000.00. What amount, if any, should Mr. Bunker report as income from the sale?
16. Harry Clark is engaged in business as a dealer in pianos. He sells pianos on an installment basis. On January 2 he sold a piano to Paul Miller for $750.00, to be paid for on a basis of $50.00 cash and the balance in quarterly installments of $50.00 each.
Title to the instrument remains with the dealer until the final payment is made, when the purchaser is given a bill of sale. The piano cost the dealer $450.00. The four installments were received during the year, the last one having been received on December 31.
If Mr. Clark wishes to take advantage of the provision in the Law which permits him to report his income on a basis of the actual installments received during the taxable year, what amount of income should he report from this transaction in his return for the current year?
17. C. H. Rickels, who has been engaged in a manufacturing business sells his business during the current year for $350,000.00. The main asset to be considered in this transaction is Good Will which was developed principally by advertising at a cost of $175,000.00. The cost of the remaining assests, which were all acquired since February 28, 1913, was $60,000.00. Assuming that Mr. Rickels deducted the advertising expenses as current expenses, what amount should he report as gross income resulting from the sale?
18. F. R. Bruce, being the owner of 100 shares of the capital stock of the Bowser and Dalton Company, which he purchased in 1914 for $10,000.00, exchanges his stock, during the current year, for a plot of real estate in the city of New York. Is this transaction to be considered for income tax purposes. If so, how would Mr. Bruce's profit be computed.
19. The Davis Co., a domestic corporation, during the current year declares a dividend from its 1911 surplus, having previously distributed all earnings accumulated since March 1, 1913. Should G. A. Ross, who is a stockholder in the corporation, include this dividend in gross income when preparing his Income Tax Return?
20. If the dividend distributed by the Davis Co. had represented a distribution of profits for the current year and payment had been made in Liberty bonds, should G. A. Ross include his share in gross income? If so, should par value or fair market value of the Liberty bonds be used?
EXEMPT INCOME AND DEDUCTIONS
The purpose of this Unit is to outline what constitutes exempt income or income free from taxation and what constitutes allowable deductions from income. Any income which is specifically exempted by statute should be excluded from gross income in filing the return, that is, tax-free income need not be mentioned in the return.
Exempt Income. (b) The term "gross income" does not include the following items, which shall be exempt from taxation under this title:
(1) The proceeds of life insurance policies paid upon the death of the insured;
(2) The amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract;
(3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income);
(4) Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (B) securities issued under the provisions of the Federal Farm Loan Act, or under the provisions of such Act as amended; or (C) the obligations of the United States or its possessions. Every person owning any of the obligations or securities enumerated in clause (A), (B), or (C) shall, in the return required by this title, submit a statement showing the number and amount of such obligations and securities owned by him and the income received therefrom, in such form and with such information as the Commissioner may require. In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income taxes;
(5) The income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments, or from any other source within the United States;
(6) Amounts received, through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness;
(7) Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof.
Copyright 1925, South Western Publishing Co.