12. Apportionment of the Income of a Fiscal Year with Reference to the Increased Rate for 1917 Income. A corporation with a fiscal year ending June 30, 1917, has, of course, received some part of its income during 1916, when the tax was 2%, and some part in 1917, when the tax was 6%. The income must be divided in the same proportion as the fiscal year is divided by the calendar year. That is, where, as in the illustration, there is one half of the fiscal year in 1917, and the other half in 1916, one half of the year's income, no matter when earned, shall be taxed 6%. So, if the fiscal year ended March 31, 1917, one-quarter of the income for the fiscal year would be taxed 6%.

13. Place of Filing. The Return of an individual should be filed in the office of the collector of internal revenue for the district in which such person resides or has his principal place of business. The Return of a corporation should be filed in the office of the collector of internal revenue for the district in which is located the principal office of the corporation, where are kept its books of account and other data from which the Return is prepared.

14. Return Made by Agent. Where the person required to make a Return is unable to do so because of illness, minority, insanity, absence, or non-residence, it must be done by an agent having sufficient knowledge of the affairs and property of the taxpayer to enable him to make a complete and true Return. A person acting under a power of attorney in the management of property is not obligated to make a Return, nor will a Return by an agent, or by any agent, in the absence of one of the specified grounds of inability on the part of the principal, discharge the legal liability of the principal.

15. Extension of Time. If the last day for filing the Return falls upon a Sunday or legal holiday, the Return is in time if it is filed on the next day. In case of sickness or absence of the person who is required to execute the Return, the collector of internal revenue may grant one extension of not to exceed thirty days, upon written application therefor, made before the Return is due. The Commissioner may allow an extension of time in meritorious cases to persons residing or traveling abroad who are unable to file the Returns at the proper time.

16. Filing by Mail. The Return may be mailed to the collector, and will be considered as on time if it is placed in the mails, properly addressed and postage paid, early enough so that it would, in due course of mail, reach the collector within the required time. The Return is not filed in time merely because it is deposited in the mails on the day that it should be filed.

17. Penalties. Where an individual refuses or neglects to file his Return within the required time, the amount of the tax is increased by a penalty of 50%, and there is a further penalty of not less than $20 nor more than $1,000. In the case of corporations, the 50% penalty is added to the tax, and there is a further penalty not to exceed $10,000. The 50% will not be added where the return is later filed, voluntarily and before notice from the collector, and it appears that the delay was not wilful, but was due to a reasonable cause.

18. If a Return is falsely or fraudulently made, with intent to defeat or evade the tax, the person making such Return is guilty of a misdemeanor and is subject to a fine of not to exceed $2,000, or imprisonment for one year, or both. Where a false or fraudulent Return is wilfully made, the tax is to be increased by 100% of its amount. Where a corporation renders a false or fraudulent Return, whether wilfully or not, it is subject to a penalty not to exceed $10,000.

19. The Corporation Return. While this discussion follows the sequence of the individual Return, the principles applicable to the Return of a corporation are fully covered and all the items of gross income and deductions of individuals explained herein are applicable to corporations. The corporation Return, however, includes a Supplementary Statement which explains the entries in the Return itself and calls for information in greater detail. It is not intended, however, to require corporations to change their accounting methods or to incur undue trouble or expense in ascertaining the amounts required by this statement. Where the nature of the business is such that the form of the Return is not adapted to the accounts, the Supplementary Statement may be replaced with any reasonably complete explanation of the method of arriving at the items of gross income or deductions.

20. Computing Income. The law in general requires individuals to determine their incomes on the basis of actual cash received and expended, but as to certain items, the accrual basis, as determined by the books of account, is permitted and sometimes required. Throughout this Guide it is assumed that income is determined on the cash basis, except in those cases where the Government requires the use of the accrual basis.

III. THE FUNDAMENTALS OF THE RETURN.

21. Gross Income and Net Income. The first three lines of the Individual Return as shown on Form 1040 are the totals, carried over from the detailed statements on the inner pages. All that a person receives in

the way of gains or profits makes up his "gross income."

The law speci

fies certain deductions" which are allowed, and the balance is called the "net income."'

22. The reader is urged to secure a copy of Form 1040 and follow each item therein as he reads and studies this Guide. A considerable portion of this book is outlined on the basis of this Form, and its possession will enable a more ready understanding of the law, the Treasury Department Decisions, and the court decisions explained herein. Form 1040 is "The Return of Annual Net Income of Individuals.'' For a corporation the reader should secure Form 1031; for partnerships, Form 1065. The general principles explained herein, except where qualifications are 'made, are applicable to all persons, including corporations and partnerships.

23. The Exemptions. In computing income subject to the normal tax, dividends and the personal exemption are deducted from the net income. The personal exemption is a sum upon which no normal tax is paid, allowed to every individual. This has been briefly explained under "Income Tax Schedules."

24. Head of a Family. Where one person supports one or more other persons either in whole or in part, as a legal or moral obligation, and provides for such persons, he is for tax purposes the head of a family, and has an exemption of $4,000 from the ordinary normal tax and $2,000 from the war normal tax. For each child dependent upon him for support, if under 18 years of age, or if incapable of self-support because mentally or physically defective, the head of a family has an additional exemption of $200 in each case. For example: Harley Cotton, a widower, has a son 16 years old and two daughters 19 and 13 years old, respectively, whom he is supporting. His net income is $4,500, so his income tax will be $44, 2% upon $2,100 and 2% upon $100.

25. Combined Incomes of Married Persons. A Return by the husband is required if the combined income of husband and wife exceeds $2,000. If a man earns $1,100 and his wife earns $600, no Return is due, but a Return must be filed if he has a net income of $1,800 and she has a net income of $600. If the combined net income exceeds $4,000, it is taxed at the 4% rate, even though neither the husband nor wife has a separate net income of $3,000. If the net income of the wife is less than $1,000, she is under no liability to make a Return or to subscribe to the husband's Return, but the husband's Return must include the wife's income. The husband's Return should also include the income of minor children. If the wife has a separate net income of $1,000, a Return by her is required; this may be a separate Return or she may subscribe to

the joint Return made by both the husband and wife. The Return should show separately the amount of the income of each.

26. Husband and wife are entitled to only one exemption, to be deducted from their combined incomes. If the husband deducts the $2,000 and $4,000 exemptions and the allowance for dependent children from his separate Return, in computing his normal tax, then his wife who files a separate Return is not entitled to any exemption from normal tax. Therefore, the Treasury Department requires that where a husband and wife file separate Returns, they be fastened together. Where one Return includes the income of both husband and wife, the exemption should be deducted from their combined incomes. This personal exemption is designed to cover the essential living expenses, and for this reason is allowed only once in a single family. Where a husband and wife are not living together they are to be treated as single persons, and each is entitled to the $1,000 and $3,000 exemption of a single person.

27. A married woman may make a separate Return of her own income, and should do so if the net income of her husband or herself exceeds $5,000, as the additional tax is imposed upon the separate incomes and the assessment is much more convenient upon separate than upon combined Returns. If the net income of the husband is $6,000 and that of the wire is $2,000, the tax is as follows: from the combined income, $8,000, take the 1917 law exemption, $2,000, and the 1917 law normal tax is 2% of the $6,000, or $120; the 1916 law exemption is $4,000, which is taken from the combined income, and the 1916 law normal tax is 2% of $4,000, or $80; the additional tax is figured upon the income of the husband alone, and is 1% of $1,000, or $10; the total tax is $210.

28. Exemptions to a Deceased and Surviving Spouse. A married man dies in 1917. His executor must make a Return of the income he received during 1917 up to the date of his death, and may deduct therefrom the exemption of $4,000 and $2,000. The surviving wife must make a Return of the income' she has received during the calendar year, and may deduct therefrom the exemption of $3,000 and $1,000.

29. Status at the End of the Year. The status of the taxpayer, for the purpose of the exemption, is determined as of December 31, of the year for which the Return is made. A man who marries on December 30 is entitled to deduct the full amount of the exemption applicable to the head of family.

30. Exemptions to Estates. Where estates are treated as entities or individuals and subjected to the normal and additional tax, they are also allowed an exemption of $3,000 and $1,000.

31. The Normal Tax and the Additional Tax. The face of the Return shows separately the normal tax and the additional tax; these terms have already been explained. The additional tax which is imposed by the law of 1916 affects only incomes in excess of $20,000, but the 1917 law imposes an additional tax which affects all net incomes in excess of $5,000.

32. Page two of the Return for individuals is a detailed statement of the different kind of income received. The directions at the top of the page point out that but for a few exceptions the entire amount of income from all sources should be shown.

33. Income from Government Securities. Gross income does not include interest from bonds or other obligations of the states or political subdivisions of a state. The law also exempts the interest upon bonds of the United States issued before September 1, 1917, and upon those issued after that date, if and to the extent provided in the act authorizing the issue. For example, the interest upon the 4% Liberty Loan Bonds is exempt from the normal taxes and corporation income taxes imposed by both the laws, but is subject to the additional taxes and the excess profits tax, except where the total amount held by the particular individual or corporation does not exceed $5,000. No mention need be made of such exempt interest in the Return (except that all corporations must list their holdings of such bonds in the Supplemental Statement), and no certificates of ownership are required when interest coupons are deposited from such state, municipal, or United States bonds. The Federal Farm Loan Act, as well as the Income Tax Act, provides that the securities issued under that act shall be exempt from the Income Tax, and a Return of income from such securities is not necessary. The same is true of dividends received from Federal Reserve Bank Stock.

34. The provision of the law favoring incomes received from governmental sources applies in favor of corporation incomes as well as those of individuals.

35. Interest from bonds of foreign governments is not exempt. Therefore, coupons from Canadian, Argentine, Chinese, or other foreign government bonds must be included in gross income.

36. Bonds of Public Utility Corporations. The above exemption extends only to income derived from obligations of political subdivisions of