If the property was acquired prior to March 1, 1913, the owner is entitled to the full actual value at that time, before the proceeds must be considered entirely income. Other Sources Not Enumerated Above. 92. Under this description of the Return the taxpayer should include income of various kinds and from different sources, not specifically covered by the above items. The following are illustrations: 93. Alimony. Alimony and separate maintenance must be returned by the recipient as income, although the payor is not allowed to deduct either as expense; they are considered as personal expenses. 94. Proceeds of Accident Insurance. Where an accident insurance policy provides for the payment of death benefits, such payments are treated like life insurance policies, and are exempt from the income tax when received by individual beneficiaries. But when the insured is injured and receives the accident benefits, such payments above cost must be returned as income, except in so far as they are a reimbursement for expenses incurred or property lost by the accident. 95. Damages Recovered for Injuries. Where damages, recovered for personal injuries, or for injuries to property, are in their nature purely a compensation for money lost or a reimbursement for money expended, as for doctors' bills, such payments are not income, but when damages are recovered for "pain and suffering'' or for personal indignity, or for interference with rights not causing actual pecuniary deprivation, such damages must be treated as income. 96. Gambling Gains. Large sums are often gained in gambling and the taxable income should include such gain. Dividends from Stock of Domestic Corporation. 97. The amount received as dividends from the stock of domestic corporations subject to the income tax is separately totaled after all the other items of gross income have been added together, because such dividends are taxed at the rate in effect when the profits were earned by the corporation, not when they were received by the owner of the stock, and also because such dividends are credited to the individual and deducted from net income in computing the normal tax, both the ordinary normal tax and the war normal tax. The theory of this provision is that dividends are a distribution of the corporation income, and the corporation has already paid tax upon this income; therefore, the individual stock holders are not taxed upon these earnings when they are paid to them. But this provision is with respect to the normal tax only; it does not apply with respect to the additional tax, and all corporation dividends must be included as income in determining the amount of the additional tax in the individual Return. Dividends from taxable corporations, received by other corporations, are subject to the ordinary 2% tax, but not to the 4% war tax; that is, on income received as dividends from other taxable corporations, a corporation pays only the 2% tax. 98. If an individual receives, as his only income, $10,000 in dividends from taxable corporations, representing profits earned in 1917, he pays no normal tax, but pays an additional tax of $75. If a corporation receives the same amount of dividends from the same stocks, which is in addition to its other net income, it must pay the ordinary 2% upon the full amount of its net income with no deduction for the amount of dividends, but its net income subject to the 4% war tax is credited with the amount received as dividends. 99. Dividends upon stock must be distinguished from interest on bonds, which is subject to the normal tax. Bond interest is regarded as an expense of the corporation and not as a distribution of its profits. Also, dividends must be distinguished from gains derived from the sale of stock at a price greater than the cost; these gains must be returned for both the normal and additional tax. 100. Credit for dividends should not include dividends from a foreign corporation which does not pay an income tax to the United States upon its income, which is then distributed in the form of dividends. Such dividends to individuals are subject to the normal tax, and are to be shown in a different item of the Return. 101. Dividends include all distribution of the earnings or profits of a corporation. The ordinary form of dividend is the periodical cash distribution, quarterly or annual, of the current profits. There may also be cash distributions of profits which have been accumulated over a long period and held as surplus. There are also stock dividends and special forms of dividends, all of which are taxable to the individual with respect to his additional tax. 102. A distribution of the capital of a corporation is not a dividend and is not taxable. For example, a corporation may reduce its capital, returning to every shareholder $50 for every $100 originally invested. Such payment is not taxable, because it is merely a change in form and not a change in ownership or in wealth. 103. If a corporation in the process of dissolution sells its property for more than it cost and distributes to its shareholders more than they originally paid in, there has been a profit actually realized and converted into money which is taxable income. 104. Accumulated Earnings. Dividends are taxable only when they are a distribution of earnings or profits, accrued or earned by the corporation since March 1, 1913. This applies to dividends received by corporations as well as by individuals. 105. Dividends are conclusively presumed to be paid out of the most recently accumulated undivided profits or surplus of the corporation, and the recipient is taxed at the schedule of rates in effect for the years in which the profits were earned by the corporation. But the dividends constitute a part of the income of the recipient for the year in which received and the amount of his income for that year determines which particular rate in the applicable schedule shall be used. 106. Suppose the Gila Land Corporation has a surplus of $2,000,000 on March 1, 1913; it adds $500,000 to the surplus in the years 1914 and 1915 and $500,000 in 1916. The corporation, of course, has paid its tax upon each year's current earnings, when earned, regardless of whether they have been retained or declared as dividends. The directors in 1917 declare a dividend amounting to $2,000,000 to be paid from the surplus of the company. The dividend will be considered a distribution of the surplus last earned, including the $500,000 earned in 1916, the $500,000 earned in 1914 and 1915, and $1,000,000 of the surplus on hand in 1913. It will be presumed, in other words, that the $1,000,000 of surplus which is retained is part of the surplus which has been carried since prior to March 1, 1913. The stockholders, therefore, will not be taxed as to onehalf of the dividends received, but the other one-half is subject to the additional tax, at the rate applicable to the particular stockholder's income. 107. Harley Davis, for example, owns 100 shares of the stock of the Gila Land Corporation, and receives $200 a share, or $20,000, from the dividend taken from the surplus as mentioned. The balance of his net income for 1917 was $45,000. As to one-half of the $20,000 he is not taxed; one-quarter, or $5,000, is added to his net income for 1917, and is subject to an additional tax at the rate applicable for 1914 and 1915 to an income between $20,000 and $50,000, or 1%; the remaining one-quarter is taxed at the 1916 rate of 2%. The law does not indicate how the various sums received as dividends shall be located among the various blocks of income subject to the different tax rates, but it is to the interest of the taxpayer to allocate the dividends taxable at the lowest scale to income subject to the highest rate. For example, Davis might have contended that all of his $10,000 was income under $20,000, in which case it would be subject to no tax whatever under the 1916 and 1914 scale of rates applicable. But then, as Davis has a net income of $55,000 he would be taxed at the 1917 rate of 12% upon the last $10,000 of his income. 108. To assist in computing the tax applicable to dividends in such cases, the following table is given, showing the rates applicable prior to 1917: Rates Applicable from March 1, 1913, to December 31, 1915. Rates Applicable from January 1, 1916, to December 31, 1916. 109. Suppose, again, that 100 shares of the Gila Land Corporation were owned by the Land Development Investment Company, a corporation. This company receives dividends of $20,000, of which $5,000 is taxed at 2%, the 1916 rate, $5,000 is taxed at 1%, the rate during 1913, 1914, and 1915, and the balance of $10,000 is not taxed. 110. An exception to the above rule of computation is made for a distribution made prior to August 6, 1917 (when the amended income tax law was reported in the Senate), out of profits accrued prior to March 1, 1913. Under the law and regulations in force at that time, the corporation could designate its surplus, or accumulated profits accrued prior to March 1, 1913, as the source of a dividend, and it was then exempt from taxation to the shareholders. Where this was done, the exemption is preserved under the new law, but since that date such a result can no longer be obtained. For example, if the directors of the Gila Land Corporation had provided by resolution that the $2,000,000 dividend was to be paid from the $2,000,000 surplus earned prior to March 1, 1913, and if the dividend had been declared and paid prior to August 6, 1917, then the dividends received by Harley Davis and the Land Development Investment Company would not have been subject to any income tax whatever. 111. A dividend is income of the year in which it is received by the individual, regardless of when it was declared. When a dividend is declared it is commonly made payable on a fixed date. It may occur that the dividend is declared in December of one year and payable in January of the next year. In this event, the dividend is income for 1917, and will be regarded as a distribution of the earnings of the corporation for 1916, and is subject to the rates of additional tax imposed by the 1916 law, as applicable to the amount of income received by the shareholder in 1917. 112. Special Forms of Dividends. Life insurance policies commonly have a so-called dividend or earning feature. The dividend is, in fact, a part of the premium which is returned to the policy holder because it was found that the expense, losses, etc., of the company were not in fact as heavy as had been anticipated, so that its year's income provided some excess over its expense and reserve requirements. The dividend is not, therefore, a gain or profit, but merely a discount or refund from a price paid. A life insurance policy dividend is not income when premiums are being paid on the policy, but if the policy is paid up the dividend thereafter is income. 113. Private banks, limited partnerships, and other associations not incorporated but operating under the corporate form, are taxed as corporations, and therefore the earnings received from such organizations are treated as dividends and are exempt from normal tax when received by an individual. 114. In many states, shares of bank stock are taxed and the bank is required to pay the tax. This is in fact actually a tax upon the owner of the share. Therefore, the amount paid for him by the bank, having been used to discharge his obligation, is in fact income received by him and such amounts should be included in the stockholder's Return as dividends received. A scrip or note dividend is regarded as cash to the face value of the scrip. Dividends payable in Liberty Bonds are not exempt. Stock dividends constitute income to the amount of the earnings or profits |