Obligations 124. Interest upon so-called Municipal bonds, including obligations of States and their political subTax Exempt divisions, and upon the obligations of the possessions of the United States, is exempt from tax in the hands of all organizations, foreign and domestic, as well as in the hands of individuals. Likewise, this exemption extends to interest upon the obligations of the Federal Government, including Liberty Bonds; this statement, of course, has application to the Corporation income tax. Public Utility Income 125. Corporations may also have the benefit of other exemptions provided by the statute, in so far as they may be appropriate to a corporation, as, for instance, interest upon any securities issued under the provisions of the Federal Farm Loan Act. 126. The law of 1918, requires tax exempt securities to be reported as to number, amount and income by the corporation, in its returns. 127. No tax hereunder shall be levied on income derived from any public utility or from the exercise of any essential governmental function which accrues to the District of Columbia or to any State or Territory, to the Philippine Islands or Porto Rico, or to any political sub division of the foregoing. This exemption is made broad enough to apply to that portion of the income of public utilities to which any of the above-named governmental agencies may be entitled under any contract, entered into in good faith on or before September 8, 1916, for the acquisition, construction, operation or maintenance of such public utility. It seems that this would cover New York City's interest in the subway operation. Obviously, this exemption does not extend to the income of the person or corporation making such a contract with the governmental agency. Computing Loss on Sales 128. Profits accruing to a corporation from the sale or other disposition of any kind of property acquired before Profit or March 1, 1913, shall be calculated on the basis of the fair market value of such property as of that date. If acquired after that date, basis of determining profit is the cost, or the inventory value if the inventory is made in accordance with the regulations. Losses resulting from similar transactions shall be calculated on the same basis. For a more detailed discussion of the computation of gain or loss and of the taking of inventory, reference is made to the appropriate sections in the Analysis relating to individuals. 129. The "gross income" of a corporation, with certain exceptions, is stated to be the same as that term is defined for individuals (see Section 14 above). Exception is made as to certain insurance companies to which reference is made elsewhere in this Analysis; and the gross income of a foreign corporation, as in the case of a non-resident alien individual, includes only gross income from sources within the United States, including interest on bonds and other obligations of residents, corporate or otherwise, dividends from resident corporations, and all amounts received (whether under a contract for the sale of goods or otherwise) as profits on the manufacture and disposition of goods within the United States. 130. The items not deductible by a corporation in computing its net income are the same as are not allowed to be deducted by an individual. The permissible deductions are very similar to those allowed individuals, partnerships, etc. and include; Gross Income Net Income and Deductions All necessary and ordinary expenses paid or incurred in carrying on a business or trade, specifically including salaries for personal services actually rendered, also rentals or payments for continued use of the business premises or possession of property to which the corporation has not taken or is not taking title or to which it has no equity; All interest paid or accrued on indebtedness except that no deductions may be made for interest on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is declared by law to be tax exempt. In the case of a foreign corporation it is the proportion of such interest which its gross income within the United States bears to gross income from all sources; Taxes paid or accrued, such as are imposed by the authority of the United States except income and profits taxes; (as to profits taxes, however, see Section 132 hereinafter); or taxes paid by a domestic corporation to one of the possessions of the United States except income or profits taxes (for which satisfactory evidence must be shown); taxes imposed by authority of any State or Territory, municipality or other taxing subdivision. Assessments against local benefits of a kind tending to increase the value of the property are not allowable as deductions. Section 238 also stipulates certain other miscellaneous and general deductions allowed on account of taxes paid; Losses sustained in the taxable year and not compensated for by insurance or otherwise; Debts ascertained to be worthless and charged off within the taxable year; A reasonable allowance for exhaustion, wear and tear, of property used in trade or business and for obsolescence; In the case of buildings, machinery, equipment installed or acquired on or after April 6, 1917, and vessels constructed or acquired on or after that date for the transportation of men or articles contributing to the prosecution of the war there shall be allowed a reasonable deduction for amortization as to cost borne by the corporation, not including any other amount allowed by this law or by Act of Congress as a deduction. At any time within three years after the end of the war, there may be a redetermination, and at the request of the corporation, there shall be a redetermination of the tax due; In the case of mines, oil and gas wells, other natural deposits and timber, reasonable allowance for depletion and depreciation according to the "peculiar conditions in each case" based upon cost and cost of development not otherwise deducted. In the case of properties acquired prior to March 1, 1913, the fair market value on that date would govern; as to mines and wells discovered by the taxpayer after March 1, 1913, and not acquired as result of a proven tract where the fair market value is materially disproportionate to the cost, depletion allowance would be based on fair market value of property at date of discovery or within thirty days thereafter; all this to be governed by regulations of the Commissioner; in the case of leases, allowances are to be equitably proportioned between lessor and lessee. 131. No provision is made for the deduction of charitable contributions by a corporation. 132. The following credits are allowed in computing the corporation's income tax: Amounts received as interesɩ upon obligations of the United States and bonds issued by the War Finance Corporation; For a domestic corporation, amounts of any war profits and excess profits taxes imposed for the taxable year. Where a corporation makes a return for a fiscal year ending in 1918, in computing the tax on that basis, the tax computed for the entire period under the excess profits tax provisions of the 1917 Law shall be credited against the net income computed under the Income Tax Law of 1916 as amended, and of 1917; and the war profits and excess profits tax of the law of 1918 at the rates for the calendar year 1918 shall be credited against the net income computed for the entire period under the income tax law of 1918; For a domestic corporation, $2,000. Salary Paid in Army 133. By informal ruling, October 4, 1917, the Treasury to Employee Department has held that in case a corporation continued to pay an employee his salary or a part thereof during his service in the "United States Army," this amount may be considered a necessary expense of the business and as such will be allowed as a deduction in computing the corporation's net income subject to tax. Companies 134. In respect particularly to the deduction of interest in computing corporate net income, the statute provides that preferred stock shall not be considered interest-bearing indebtedness. 135. The law does not allow any deduction to a corporation for any tax paid pursuant to a guarantee that the interest on bonds or other indebtedness shall be free from taxation, as, for instance, under the so-called taxfree covenant in corporate mortgages. 136. Insurance companies in addition to the deductions already stated are allowed to deduct their net addition to reserve funds required by law, and "sums other than dividends paid within the year on policy and annuity contracts." Corporations issuing life, health and accident insurance combined in one policy and issued on the weekly premium payment plan, continuing for life and not subject to cancellation, may deduct such further portion of the net addition to the reserve funds (not required by law) made within the taxable year as the Commissioner holds to be necessary for the protection of the policy holders only. The statute recites a number of provisions which apply especially to mutual fire, mutual employers' liability, mutual workmen's compensation, mutual casualty, mutual marine insurance companies and other insurance companies. Such as are |