War Finance Corporation. The surtaxes are a series of graduated rates the first of which is imposed on that part of the net income which exceeds $5,000 and does not exceed $6,000. Each additional $2,000 of net income is subject to a higher rate of tax than the preceding one up to and including $100,000 and thereafter the surtax is increased at less frequent intervals on income up to $1,000,000, the final rate being 65% on the amount by which the net income exceeds $1,000,000.48

Corporation Tax. For the year 1918 the income tax imposed on corporations will be at the rate of 12%, and for each calendar year thereafter at the rate of 10%. This rate might be said to measure the normal tax imposed on corporations in contradistinction to the graduated warprofits and excess-profits tax which is also imposed on corporations. For the purpose of the income tax the net income which is subject to the war-profits and excess-profits taxes is reduced by deducting therefrom certain credits consisting of (a) the amount received as interest on the bonds and obligations of the United States issued after September 1, 1917, and bonds issued by the War Finance Corporation; (b) the amount of any war-profits or excessprofits tax imposed on the net income for the same taxable year and (c) in the case of a domestic corporation the sum of $2,000.49 Certain kinds of corporations not organized for profit, both domestic and foreign, are exempt from this tax.50

Personal-Service Corporations. The 1918 Law recognizes a new class of corporations being those whose income. is due primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which the capital invested is not a material income producing factor. Such corporations are recognized as being

48 Id. § 211. See Chapter 2 for schedule of rates of this tax. 49 Id. § 230 and § 236. This subject is more fully stated in Chapter 12.

50 See Chapter 15 for list of exempt corporations.

taxable in the same manner as partnerships. That is, the corporation is required to pay no tax but the stockholders are required to include in their personal returns their distributive shares of all the profits of such corporations whether distributed or not. Such corporations are those composed for instance of professional men or agents who have adopted the corporate form merely as an incidental convenience. The law expressly provides that no foreign corporation shall be considered to be a personal-service corporation, nor shall any corporation be so considered 50% of whose gross income consists either of gains, profits or income derived from trading as a principal or of gains, profits, commissions or other income derived from Government contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.51

Partnerships. A partnership itself is not taxable but the members of the partnership are required to report their distributive shares of the partnership income whether such income is actually distributed or not. The present law expressly states that where the fiscal year of a partnership ends within a calendar year the partner shall be taxed at the rates for the preceding calendar year on such proportion of his share of the partnership's net income equal to the proportion which the part of the fiscal year falling within such calendar year bears to the full fiscal year; and the rates for the calendar year during which such fiscal year ends shall apply to the remainder. For instance, if the partnership fiscal year ends June 30, 1918, the partner will be taxed at the 1917 rates on one half of his net income from the partnership and at the 1918 rates on the other half.52 In making out his return for 1918 he will first report all his income to which the 1918 rates apply and then add to that amount the income to which the 1917 rates apply, taking the total for the purpose of determining the particular surtax rates of 1917 to be applied to that

51 Rev. Act of 1918, $ 200. For further discussion of this subject see Chapter 10 and as to excess-profits tax see Chapter 45. 52 Rev. Act of 1918, § 205 and $ 218.

part of the income which is taxable at the 1917 rates.53 All partnerships will be required to file annual returns of income for the purpose of showing the amount of net income distributable to each partner.54

Collection at the

Collection of the Tax at the Source. source, deduction at the source, withholding at the source and stoppage at the source, are synonymous terms meaning that the one paying income to another deducts or withholds an amount equal to the tax on the sum so paid and turns it over to the Government to the credit of the one against whom it was withheld. This method is used in order to facilitate the collection and to prevent evasion of the tax. Under the 1913 Law, and the 1916 Law during the year 1916, the tax was withheld on all payments of normal tax to individuals whether citizens, residents or non-resident aliens. Under the 1916 Law as amended by the 1917 Law the tax was not withheld on payments of income to citizens and residents (except in the case of bonds containing tax-free covenants).55 Collection at the source applies at the present time only to (1) payments of fixed and determinable annual or periodical income to non-resident aliens in which case the tax is to be withheld at the rate of 8% (and if the Commissioner so rules the non-resident alien may claim exemption from withholding to the extent of his personal exemption); (2) payments of the same kind of income to non-resident foreign corporations not engaged in trade or business within the United States and not having an office or place of business therein, at the rate of 10% and (3) the Commissioner may authorize deduction at the source in the case of payments of any interest upon any securities the owners of which are not known to the withholding agent. The law is not clear whether the Commissioner may authorize deduction at the rate of 8% or 10% in the case of bonds not

53 Id. § 206.

54 Id. § 224.

55 Act of September 8, 1916, § 9 (c) as amended by Act of October 3, 1917.

F. T.-2

having "tax-free covenants" and it seems to be within his discretion; (4) in the case of payments of interest on bonds and similar obligations of domestic corporations which contain a so-called tax-free covenant the rate to be withheld in all cases is to be limited to 2% whether the owner be a citizen or resident or a non-resident alien or a foreign corporation or a domestic or foreign partnership. The only bondholders to which this provision does not apply are domestic and resident corporations. The Commissioner may authorize the tax of 2% to be withheld on interest on "tax-free covenant" bonds where the owner is not known.56 It is to be noted that the only case in which withholding against citizens or residents of this country takes place is (4) above. In such cases the law is made to operate in order that the debtor corporation issuing such tax-free covenant bonds may be compelled to assume a part of the tax of the bondholder, since withholding does not actually take place.57

58

Information at the Source. For the purpose of checking up the returns of taxpayers the law provides for a system of information at the source, whereby every corporation may be required to report to the Commissioner of Internal Revenue the names and addresses of its stockholders and the amount of dividends paid to each; stockbrokers may also be required, when called upon, to report the names and addresses of customers and information as to the profits and losses of each,59 and all persons, corporations or partnerships may be required to report the names and addresses of any persons to whom they pay fixed or determinable gains, profits or income of $1,000 or more in any taxable year. In the case of payments of interest to the bondholders of corporations the names and addresses of such bondholders are required to be reported regardless of the amount paid during the year, as is also

56 Rev. Act of 1918, § 221 and § 237.

57 For further discussion of this subject see Chapter 40. 58 Rev. Act of 1918, § 254.

59 Id. § 255.

the rule in the case of collection of foreign items of interest and dividends.60

Payment of Tax. The income tax is due and payable in four installments, each consisting of one-fourth of the total tax. The first installment is payable at the time when the return is due to be filed, unless an extension of time for filing the return is granted in which case the first installment is due at the expiration of such extended period with interest at the rate of one half of one per cent from the date on which the return was originally due to be filed. The return is required to be filed on the 15th day of March (or the 15th day of the third month following the close of the fiscal year) and the second, third and fourth installments are due on the 15th day of the sixth, ninth and twelfth months respectively after the close of the taxable year.61 In the case of a taxpayer filing a return for the calendar year the first installment will be due on March 15, the second on June 15, the third on September 15 and the last on December 15. In the event of default in the payment of any installment the whole amount of tax still unpaid becomes due and payable upon notice and demand by the collector. The above provisions do not apply to taxes collected at the source. The tax may be paid in a single payment instead of in installments. It is then due or payable, when the return is filed either at the date set by law or to which time to file the return has been extended.62 No discount is allowed where such an advance payment is made. Receipts are no longer given for taxes paid, except upon the request of the taxpayer.63

Abatement and Refund. The collection of the income tax cannot be restrained by injunction, but if taxes have been erroneously or illegally collected, the Commissioner of Internal Revenue is authorized to remit and pay back the amount to the taxpayer. The importance of collecting

60 Revenue Act of 1918, § 256.

61 Id. § 250.

62 Id. § 250 (a).

63 Id. § 251.