"Personal Service Corporations" example, if a partnership's fiscal year ends April 30, 1918, eight months would lie within the calendar year 1917, and four months within the calendar year 1918. Thus, twothirds of the partnership profits would be assumed to have been earned in 1917, and one third in 1918. Under the statute, apparently, the partner receiving such income would pay income tax on that proportion of his partner. ship income which had accrued during the calendar year at the rates prevailing during that year. He would pay income taxes at the rates prevailing for the calendar year 1918 on that proportion of his partnership profits which had accrued during the calendar year 1918. 69. A new feature of the Revenue Act of 1918 is that it provides for "personal service corporations." Such a corporation is defined as one whose income is ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in actively conducting the affairs of the corporation, and in which the capital of the corporation, whether invested or borrowed, is not a material income-producing factor. Foreign corporations and those where fifty per cent. or more of the gross income is derived (1) from trading as a principal, or (2) from Government contracts, are not included in this exemption. 70. The personal service corporations are not subject to the normal tax or surtax nor to the profits taxes but the individual stockholders are to be taxed in the same way as partners. So far as practicable all provisions of the Act relating to partnerships shall apply to personal service corporations and their stockholders. Such a corporation is required to make a return. Dividends of Personal Corporations 71. The law states that the term "dividend", in connection with personal service corporations, means any distribution (whether in cash, other property or stock), Service of the corporation made out of its earnings or profits accumulated since February 28, 1913 and prior to January 1, 1918. Dividends distributed in 1918 or thereafter, are deemed to have been made by a personal service corporation from the most recently accumulated earnings or profits. Corporations Organized to Escape Tax 72. The statute contemplates a corporation formed or availed of to prevent the imposition of the surtax upon its stockholders or members, by permitting the profits of such a corporation to accumulate instead of being divided or distributed. This is a similar provision to those which have appeared heretofore and Congress has evidently kept in mind the growing popularity of incorporating estates, individuals, etc. 73. It is provided that the corporation is not liable for the tax, but the stockholders or members shall be liable in the same manner as provided for the stockholder of a personal service corporation. Deduction of the war and excess profits tax from the net income of the corporation shall be allowed before determining the proportionate share of net income accruing to each shareholder. 74. The fact that any corporation is a holding company or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business and become surplus, is stated to be prima facie evidence of a purpose to escape the surtax. The proviso is added, however, that the mere fact of the gains and profits accumulating and becoming surplus shall not be construed as evidence of a purpose to escape the tax in such case, unless the Commissioner certifies that he believes such accumulation to be unreasonable for the purposes of the business. Upon request by the Commissioner or any collector, every corporation shall file with the official requesting the same, a statement of such gains or profits and the names and addresses of the individuals or shareholders entitled thereto and the amounts payable to each. Non-Resident Alien Individuals 75. The basis of taxing individuals who are non-resident aliens as to the United States has undergone frequent and substantial change since the enactment of the 1913 Law. Each statute has differed in this respect. Under the 1913 law it was generally understood that interest on corporate obligations of the United States was not taxable in the hands of non-resident aliens, and foreign corporations and partnerships. It appears quite unfortunate, especially from the viewpoint of the American railroads and other corporations, that this scheme of things was ever changed. The fact is, however, that in March, 1916, the Treasury Department ruled that the income of a non-resident alien in the form of domestic corporation interest, along with other income, was taxable, beginning with the year 1916. This was stated to be by virtue of the 1913 Law. The Department announced that it had made this ruling under the authority of the Brushaber decision, although it is hardly clear from that decision that the Supreme Court had such a point in mind. Without tracing these various steps, however, the case of the non-resident alien individual under the present law will be generally stated. 76. As has been referred to previously, one point of Normal Tax difference between the case of the non-resident alien and the citizen or resident of the United States, is the fact that the former is subject to a normal tax of twelve per cent. on all his taxable income, and does not have the benefit of the six per cent. rate on the first $4,000 above credits. After 1919, the non-resident alien's normal tax rate will be eight per cent. He is subject to all the surtax. of Non-Resident Aliens 77. The gross income of a non-resident alien indi- Gross Income vidual is declared to include the gross income from sources within the United States, including interest on bonds and other obligations of residents either corporate or otherwise, and dividends from corporations; he is also taxed on amounts (although paid under a contract for the sale of goods, etc.) which represent profits on the manufacture and disposition of goods within the United States. This gross income less the allowable deductions would yield his net income. 78. The Revenue Act of 1918 does not provide a sepa- Deductions rate list of deduction for the non-resident alien in the calculation of his net income subject to tax. In some cases he is allowed deductions under slightly different conditions from those imposed on a citizen or resident. In general, his allowable deductions are identical with those of the resident or citizen except that the nonresident alien's deductions are only in connection with income arising from a source within the United States; and they are arrived at through the "apportionment and allocation" of the deductions in connection with income Must File Return sources within and without the United States in accordance with the regulations of the Commissioner. 79. A non-resident alien individual is allowed to deduct taxes paid or accrued during the taxable year, such as are imposed by the authority of any foreign country (except income, war profits and excess profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property) to the extent that they are connected with income coming from a source within the United States; this, however, to be under a proper apportionment and allocation of deductions with respect to sources of income within and without the United States. (See also Section 55, above). 80. He may deduct gifts or contributions made to domestic charitable, educational or similar corporations or the Vocational Rehabilitation Fund. 81. A non-resident alien, who is the citizen or subject of a country imposing an income tax, is allowed credits for personal exemption, only if his country allows a similar credit to citizens of the United States now residing in such country. 82. The Law of 1918 requires the non-resident alien to make a return the same as any other individual having an income of either $1,000 or $2,000 as the case may be. In order to receive the benefit of the credits and deductions he must file a return containing such information about his income as the Commissioner deems necessary for the calculation of the deductions and credits; to receive the benefit of the personal exemption he must file a claim therefor with the withholding agent. |