It is probable that the regulations issued by the Department in respect to this provision will make clear its practical application, which, it may be remarked, may be of some little importance to taxpayers. Income 32. The Statute provides that certain so-called in- Exempt comes shall be exempt from the tax. This includes among other items more fully discussed later in this Analysis: not Proceeds of life insurance policies, paid upon the death of the insured, to individual beneficiaries or to the estate of the insured; Returned premium received by the insured under life insurance, endowment, or annuity contracts, during the term, at the maturity of the term, or upon surrender of the contract; Gifts, bequests, devises; income from these is not exempt. Income of foreign governments, derived from investments in the United States, in stocks, bonds or other domestic securities, owned by such foreign governments, or interest on bank deposits, or income from any other source within the United States; Amounts received through accident or health insurance or workmen's compensation Acts for personal injuries or sickness, plus damages received by suit or agreement on account of such injury or sickness; Income derived from any public utility or the exercise of any governmental function accruing to any state or political subdivision or to any possession of the United States, etc.; Amounts over $3,500 received during the present war by a person in the military or naval forces of the United States, as salary or compensation from the United States for active service in such forces. The Army and Navy Nurse Corps is included in this exemption. 33. The Law of 1918 does not provide an exemption in the case of the salary of the President of the United Officials Interest on "Political Subdivision" Defined States, Judges of the Supreme and other Courts of the United States, and all other federal officers and employees of the United States. Although it is not clearly expressed in the law, it is understood that the salaries of state, county and municipal employees may not be subject to income tax. It is expected that the Treasury Department will soon give a ruling on this subject. Municipal Bonds Exempt 34. Interest derived from so-called municipal bonds, including obligations of states and their subdivisions and of the possessions of the United States, is exempt from all income tax, surtax as well as normal. It is assumed that Congress has allowed this exemption primarily for constitutional reasons, there being many decisions which indicate, if indeed they do not hold, that the taxation of municipal bonds is a burden on the municipality itself and thus repugnant to the provisions of the Constitution. The practically unanimous opinion of counsel eminent in matters of constitutional law who have expressed their view on the point is to this effect. Congress may also have deemed it unwise to put a tax upon the obligations of states, etc., as they in turn cannot similarly tax the obligations of the United States. 35. It is noted in this connection that, according to Treasury ruling, "political subdivision" includes special assessment districts or divisions of a state created by proper state authority for a purpose of a public nature such as street improvements, public highways, sewerage, gas and light, and the reclamation, drainage or irrigation of public lands. In this view, interest on the obligations of the above public districts are not subject to income tax. Taxpayer Make Bonds 36. The Conference Committee of the Senate and House of Representatives inserted a provision in the Shall Revenue Act of 1918, not included in the previous in- Return of come tax laws, which requires every taxpayer to in- Non-Taxable clude in his return a statement of his holdings of municipal bonds of the classes mentioned, including United States Government issues, also Federal Farm Loan Act securities, and bonds issued by the War Finance Corporation. This statement shall include the number and amount of such obligations and the income received therefrom, "in such form and with such information as the Commissioner may require." States 37. Until the war, and in fact until after the first United Liberty Loan was issued, interest upon the obligations Government of the United States was declared to be exempt from Obligations tax. By new provision, however, the exemption in the case of such obligations issued after September 1, 1917, was allowed only if, and to the extent, provided by the law authorizing each particular issue and supplemental Acts. This provision is embodied in the new Act. It relates to bonds of the War Finance Corporation, as well as to obligations of the United States. Loan 38. All Liberty Bond interest is exempt from the nor- Liberty mal tax and the Liberty 32s (the First Loan) are Bonds exempt from the surtax as well. If, however, the bonds of this first non-taxable issue have been converted into the second, third or fourth issues, they come within the present statutory provision as to exemption applying only if and to the extent especially provided in the acts relating to such issues and supplemental acts. What these exemption provisions are, is referred to in some detail in the following paragraphs. $5,000 Exemption, 2nd, 3rd and 4th Loans $30,000 Exemption, 4th Loan $45,000 Exemption, 2nd and 3rd Loans $30,000 Exemption, 1st Converted to 4th Loan 39. Interest derived from the converted 31⁄2 per cent. bonds and the bonds of the second, third and fourth Liberty Loans, either original or converted, is free from the entire normal tax in every case and may be free from surtax under certain statutory provisions. The first of these provisions is that interest on an amount not to exceed a total of $5,000 par value of the bonds of the second, third and fourth issues, and also bonds converted into them (including converted 32s) is exempt from the surtax for the entire life of the obligations. In other words, if a taxpayer owns bonds of the 44 per cent. issues aggregating $5,000 par value, he will receive $212.50 interest (44 per cent. on $5,000) which is entirely free of the income tax. 40. The second of these special statutory exemptions is that the interest on an amount of bonds of the Fourth Liberty Loan, the par value or principal amount of which does not exceed $30,000, is exempt from surtax until the expiration of two years after the official termination of the war; also, the interest received for this period, beginning January 1, 1918, on an amount not exceeding $45,000 par value of bonds of the second and third loans, and those converted into them, may be exempt from the surtax. No owner, however, of such bonds is entitled to such exemption on an amount exceeding one and one-half times the principal of bonds of the Fourth Liberty Loan originally subscribed for by him and still held at the date of his tax return. For example, if a person owned but $10,000 of the Fourth Loan, he could thus obtain exemption from the surtax on only $15,000 of the third loan. 41. The third of these special exemptions from the surtax, for the limited period described above, is through the conversion of an amount not exceeding $30,000 of the First Loan, the 32s, into the Fourth Loan 4/4s. 42. For the limited period (until two years after the official termination of the war) it is therefore possible to exempt from all surtax, as well as normal tax, $110,000 of bonds, as follows (this, of course, is in addition to the First 32s): $5,000, aggregate of the original or converted bonds of the first, second, third and fourth issues. (This $45,000, aggregate of the original or converted bonds of $30,000, of the original bonds of the Fourth Liberty Loan. $110,000 Total. 43. It is stipulated in the law that the "information at the source" provisions, under which ownership certificates might be required in connection with the payment of interest shall not apply in the case of United States Government issues. Loan 44. The Federal Farm Loan Act, approved July 17, Federal 1916, "to provide capital for agricultural development," Farm etc., authorized and made provision for Federal Land Bonds Banks, joint-stock Land Banks, and other allied agencies, and also for the issuance of Federal Farm Loan bonds. These bonds, although not the obligation of the Federal Government, are exempt from all income tax. Net Income The law of 1918 defines the net income of an individual as the gross income less all the allowable deductions. |