297.-INFORMATION AS TO EXEMPT INCOME.

The Supplementary Statement, while a part of the return of income, is not the basis of assessment of tax. It is essentially a statement of information. In it will be found a space requiring that holdings of United States, State and municipal bonds be listed. This requirement should be complied with although the income from such bonds does not enter into the computation of tax liability.

298.-WHEN NO RETURN IS FILED.

If a corporation's return is not received within the time presc ibed by law, or within the period covered by an extension of time, the Collector issues a notice of delinquency in filing and demand for a return. If a return is not filed within ten days from the date of this notice, it becomes the duty of the Collector to examine the books of the corporation and prepare a return, which can be taken as a legal basis of assessment, even without the signatures of officers of the corporation. It therefore, behooves a corporation to give immediate attention to such a notice, for the Collector has full authority of law to back it up with action.

Similar action can be taken by the Collector with respect to individuals who fail to file their returns according to law.

299.-CORRECTION OF A RETURN.

In this respect a corporation has the same rights as an individual. It is therefore suggested that the similar paragraph in instructions given individuals be consulted.

300. PENALTY FOR NEGLECT TO FILE.

Punishment for neglect or refusal to file a return of income within the time prescribed by law, or covered by an extension, takes two forms-one a specific penalty of not to exceed $10,000, and the other an increase of the amount of tax found to be due by 50 per cent.

301. PENALTY FOR FALSE RETURN.

In the case of the filing of a false return the specific penalty would remain the same, but the increase of tax found to be due would be to the extent of 100 per cent. Moreover, with respect to a false return, the officers of the corporation signing it could be prosecuted for perjury, or could be prosecuted under the amendment carried by the War Revenue Act, providing a fine not exceeding $2,000, a year in prison, or both.

302.-ON BASIS OTHER THAN RECEIPTS.

Ordinarily a corporation's return is to be based upon income received and deductions actually paid out during the year for which it is made. However, the law provides that a corporation keeping accounts upon any basis other than that of actual receipts and disbursements may make its return upon the basis upon which its accounts are kept, provided such basis clearly reflects its income and comes within regulations prescribed by the Commissioner of Internal Revenue.

The same provision is carried in the law with respect to the return of an individual whose system of accounting is not strictly according to actual receipts and disbursements.

[See paragraph on this subject in chapter on "Miscellaneous Provisions, Income Tax."]

CHAPTER XX

THE INCOME TAX

MISCELLANEOUS PROVISIONS

INCOME TAX

In this chapter special attention is given certain subjects which may be covered in other chapters. The reason for repetition and explanation in greater detail with respect to certain questions and problems that must arise is based upon an experience which has shown that they require emphasis.

303.-FIXING LIABILITY OF HUSBAND

AND WIFE TO MAKE RETURN.

The law provides that only one specific exemption shall be claimed by husband and wife living together. This may be claimed in a joint return, or in whole by one in the case of separate returns, or may be divided between the two in the case of separate returns.

When husband and wife are living together and have separate estates they may make a joint return, but in such return the income of each must be separately stated and the names of both must be given. If a joint return is made it need be signed only by the husband.

If a wife, living with her husband, makes a separate return, her return should be attached to that filed by her husband.

If either husband or wife separately has a net income equal to or in excess of the specific exemption [under the Act of October 3, 1917, (War Income Tax), $2,000,] a return must be filed and such return must include the income of both.

If the aggregate net income of both exceeds the specific exemption (as stated in brackets in the preceding paragraph), a return of their combined incomes must be filed, although neither one separately may have a net income equal to the specific exemption.

If either a husband or a wife has separate income, or if both have separate incomes, sufficient in amount, considered separately, to be subject to the additional tax, it is suggested that they make separate returns. For, while the normal tax is levied upon combined income, the additional tax is assessed upon the income of each, alone.

In the case of the death of either husband or wife during the year, if the deceased had a net income for that part of the year prior to death equal to the amount of the specific exemption, a return of income must be made by the administrator or executor for the period beginning with January 1 and ending with the date of death, and in such return the administrator or executor can claim for the deceased a full year's exemption. The survivor (widow or widower) would, then, at the end of the calendar year have the status of a single person and would have to make separate return and be allowed specific exemption accordingly, unless the survivor be able to qualify as "head of a family," or have been married again prior to the end of the year on December 31. [Under the Act of October 3, 1917 (War Income Tax) every single person, citizen or resident of the United States, who is not the head of a family, is allowed a specific exemption of $1,000, and must make return if in receipt of net income of that amount or more.]

304.-TAX-FREE GUARANTY IN

CORPORATION BONDS.

The holder of corporation bonds containing a clause to the effect that the interest shall be paid without deduction for any tax that may be assessed, must not conclude that by such clause income-tax liability with respect to the interest is transferred to the corporation which has issued the bonds. On the contrary income-tax liability remains with the holder of the bonds. To the holder of the bonds this interest is income, the same as any other kind of interest or other form of gain. The Treasury Department holds that the guaranty clause in the bond is a contract wholly between the corporation and the bondholder. The interest received on such bonds must be accounted for by the bondholders in their returns, either as income which has been taxed at the source or as income which has not been taxed at the source, according to the form of ownership certificate used in presenting the interest coupons for payment. Such income is not always taxed at the source. (See particularly and read carefully instructions on this point in chapter on "Deduction of Tax and Information at the Source."

If a domestic corporation owns such bonds, its income not being subject to tax at the source under the law, it must include the amount of such interest in full in its return, regardless of the guaranty in the bonds. It must pay the tax due on its total net income, including such interest, and can look for reimbursement only to the corporation which has issued the bonds.

305.-SPECIFIC EXEMPTION NOT ALLOWABLE

FOR ADDITIONAL TAX.

The specific exemption is not allowable as a credit against net income in the computation of the additional tax. It applies only to the computation of the normal tax.

306.-DIVIDENDS NOT A CREDIT

FOR ADDITIONAL TAX.

That part of an individual's income received in the form of dividends on the stock of corporations subject to tax, while deductible from net income as a credit in the computation of the normal tax, is not allowable as a credit in the computation of the additional tax.

307.-INCOME TAXED AT SOURCE NOT

A CREDIT FOR ADDITIONAL TAX.

That part of an individual's income, if any, on which the normal tax has been deducted and withheld at the source, enters into the computation of the normal tax due directly from the individual, as a credit according to the amount of the deduction at the source. However, as no more than a normal tax can be deducted at the source in any circumstances, the income subjected to such deduction does not offer a credit in the computation of the additional tax.

308. WHEN EARNINGS OF CORPORATION ARE

HELD TO EVADE TAX.

The Act of September 8, 1916 provides against the accumulation of the earnings of a corporation without declaration of dividends in order that the individual stockholders may not have to include the amount of dividend payments in their respective returns. The taxabl income of the individuals can be increased for the assessment of the additional tax by the shares of the corporation's earnings to which they are entitled, whether the earnings have been distributed or not, when it can be shown that the corporation has deferred distribution. and allowed earnings to accumulate purposely to enable individual stockholders to evade payment of tax.