Information Obtained from Audit of Books

Household Expenses. Among these expenses were found luxury taxes amounting to $126.00.

Children. There are two children-James, 19, who is attending university, and Virginia, 16 attending boarding school. Virginia owns some corporation bonds in her own name. The interest received from these bonds during the current year amounted to $61.25.

Private Secretary. The duties of Mr. Spangler's private secretary included the handling of his correspondence, the keeping of his books, etc., all of which are regarded as business duties.

Automobile. The automobile owned by Mr. Spangler is used principally as a means of transportation between his residence and office. He claims no deduction for expenses thereon.

Personal Withdrawals. Among Mr. Spangler's personal withdrawals were found taxes on club dues amounting to $39.33. There was also included in his withdrawals payments to brokers —J. R. Hutton & Co.-totaling $5,000.00. The broker's monthly statements for the year were examined and none of the transactions recorded on their books had been recorded on Mr. Spangler's books, nor could the balance on December 31 be found among Mr. Spangler's accounts receivable or investments. A summarization of these monthly statements reveals the following:

Balance, January I (beginning of year)....
Cash Received During Year..

$ 5,733.60 5,000.00

Stocks Purchased.

$62,336.90

Stock Sold (cost $66,320.35)

71,940.85

Transfer Tax on Sales..

24.00

Commissions on Purchases and Sales.

424.75

Interest on Monthly Balances..

261.58

Trading Profits. These profits refer to transactions in corn, oats, rye, etc., on the board of trade. The gross profits on these transactions amounted to $1,725.00, from which has been deducted, according to the invoices from the commission house, taxes of $273.40, commissions of $341.19, and expenses of $42.85.

Sales of Stock. An inspection of the sales of stock shows that these had been correctly recorded with the exception of Cumberland Preferred, 100 shares of which were sold at 934 (par 50) during the year and profit taken on the basis of cost price which was 50 in 1908, whereas, on March 1, 1913, this stock, which is listed, had a "bid" and "asked" price of 601⁄2

612. The evidence would indicate that the exchange quotation represented the fair market value of the stock on that date. The total selling prices were $104,735.30; the total cost, $93,497.64.

Sales of Bonds. All bonds sold were acquired after March 1, 1913, the selling price being $11,739.50; the cost, $12,855.00.

Estate. Mr. Spangler and his brother, F. L. Spangler, are income beneficiaries of the estate of G. L. Spangler. The estate's assets consist exclusively of stocks and Mr. Spangler's portion consists of cash dividends, $7,250.00, less his portion of the trustee's current expenses amounting to $86.75.

Stock Dividends. The stock dividends were all declared and received during the current year.

Cash Dividends. Investigation revealed the fact that certain cash dividends which were declared and payable on December 30, but which were not received until January 5, following the close of the calendar year, were not included in the total of $41,733.75. These dividends amount to $1,235.00.

Partnership. The partnership of Spangler and Bowman is a trading business to which Mr. Spangler devotes about onehalf of his time. The fiscal year of the partnership ends October 31, and the amount credited as his distributive interest represents his share of the profits for the year ending on that date. The partnership owns stock in the Utah Copper Co., and Mr. Spangler's share of the dividends during the year were (a) cash dividends $1,725.00 and (b) stock dividends $3,000.00. The stock dividends were declared on October 1, and paid on November 12 of the preceding year. According to the statement of the corporation, $1,650.00 of these dividends represents earnings of the calendar year in which they were paid, while $1,350.00 represents a distribution of the earnings of the preceding calendar year.

Rentals. The amount stated is net and consists of the following:

Gross rentals from factory building occupied by American Steam Pipe Co., $3,750.00; depreciation, $1,050.00; taxes, $228.60; repairs and upkeep of property, $29.31.

Interest on Liberty Bonds. The interest on Liberty bonds consists of the income from $20,000.00 of the Second Liberty Loan 4% Bonds and $25,000.00 of the Fourth Liberty Loan 44% Bonds.

Adjustments. Certain adjustments are required to properly state Mr. Spangler's income owing to the fact that the audit reveals the books of account do not show Mr. Spangler's true income for income tax purposes. The following is an explanation of each of the adjustments appearing in the adjustments columns of the Working Sheet.

(a) Income of Minor Child. From the statement of the proposition, it will be noted that Virginia, a minor child,

2,420.00

39.33

5,171.75

261.58

22,967.45

590.29

290.55

550.00

500.00

$ 1,100.00

5,250.00 10,137.66

1,115.50

1,067.56

86.75

7,250.00

$156,828.08 $156,828.08 $9,149.58

$9,149.58 $86,893.67

$86,893.67 $158,622.69 | $158,622.69

owns corporation bonds in her own name from which interest amounting to $61.25 was received.

The Revenue Act provides that, in absence of proof to the contrary, a parent is assumed to have the legal right to the earnings of the minor and must include them in his return. The only exception to this is in the event the minor has been emancipated by the parent. In this event, the minor's earnings are his own income and such earnings, regardless of amount, are not required to be included in the return of the parent. Virginia's income from interest on the corporation bonds should be included in Spangler's taxable income.

(b) Broker's Account. The income resulting from dealings in stocks and bonds or grain, as evidenced by the broker's account with Spangler, should be included in Spangler's taxable income regardless of whether or not it has actually been received during the calendar year. The account is typical of what is known as margin accounts. The tax and commissions are computed on the sales price and have been deducted therefrom. Interest and dividends are allocated to their respective places in the return. Stockbrokers are required to furnish information regarding customers on a special form when called upon to do so by the Commissioner of Internal Revenue. This is known as a Return of Information. The amount to be credited to income in the adjustment column of the Working Sheet is computed as follows:

(c) Dividends. Dividends are considered as income of the year in which they are set apart for the stockholder and are taxable to the stockholder as of that year. For this reason, the cash dividends which were payable on December 30 but which were not received until January 5 should be included in the income for the calendar year ending December 31. These dividends amount to $1,235.00.

Exclusions. Under the provision of the Revenue Act and the Regulations, certain classes of expenditures are not to be treated as deductions, and, on the other hand, certain classes of income need not be reported. The following expenditures cannot be claimed as deductions:

Interest on Loans to carry tax-free Municipal Bonds..

109.04

Total....

$86,893.67

The following income need not be reported:

Difference between cost and market value of stocks at March

I, 1913......

$1,100.00

Stock Dividends.

1,100.00

Municipal Bond Interest.

1,687.13

Profits (in form of stock dividends from firm of Spangler and

All of these exclusions have been previously discussed and should be clearly understood. The amount of contributions to be excluded from the deductions is determined by computing the taxpayer's net income without the benefit of the deductions and then taking 15% of such net income and deducting it from the total contributions. This procedure is necessary because under the Law, a taxpayer is not entitled to deduct contributions in excess of 15% of the taxpayer's net income computed without the benefit of the deduction for such contributions. The Working Sheet shows that Spangler's net taxable income is $130,148.91. However, in computing this net income, the total contributions were deducted. Eliminating any deduction for contributions will result in a net income of $153,116.36. 15% of $153,116.36=$22,967.45, the gross amount which may be claimed as a deduction on account of contributions. $61,586.68$22,967.45=$38,619.23, the amount of contributions which cannot be claimed as a deduction and which must, therefore, be excluded.