revenue is so great that the law permits no taxpayer to interpose a hindrance to the orderly assessment of the tax. He must allow the tax to be collected and may thereafter claim abatement or refund.64

64 See Chapter 38 for procedure as to abatement and refund.

CHAPTER 2

THE INCOME TAX RATES

As indicated in the foregoing chapter, the income tax is now assessed and collected under one law, instead of two, as was the case in 1917.1 The tax is imposed at two progressive rates (called the normal tax) on a part of the net income, and at a series of progressive rates on all the net income over $5,000 (called the surtax). In the case of corporations no surtax is imposed, the income tax rate being uniform on all amounts of net income.

Normal Tax. Under the Revenue Act of 1918 a normal tax of 6% is imposed upon the first $4,000 of taxable net income of citizens and residents for the calendar year 1918, and a normal tax of 12% upon the remainder of such taxable net income. For each calendar year after 1918, these rates are 4% and 8% respectively. In the case of non-resident alien individuals the rates are 12% on the taxable net income for the calendar year 1918 and 8% upon such taxable net income for each calendar year thereafter.

In assessing the normal tax of citizens

1 In 1917 the income tax was assessed and collected under two laws (Revenue Act of 1916 and Revenue Act of 1917).

2 Revenue Act of 1918, § 210 (a); Reg. 45, Art. 2. The subject of income is treated fully in Chapter 16 et seq.

3 Revenue Act of 1918, § 210 (b); Reg. 45, Art. 2.

4 In the case of non-resident alien individuals only income from sources within the United States, including interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise, and including dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture of goods within the United States, is taxable (Revenue Act of 1918, § 213 (c)).

or residents the following items are deducted from net income to determine taxable net income: (a) the amount received as dividends from a corporation which is taxable for income tax purposes on its net income, and amounts received as dividends from a personal-service corporation out of earnings or profits subject to income tax; (b) the amount received as interest upon obligations of the United States issued after September 1, 1917, and bonds issued by the War Finance Corporation, which is included in gross income; (c) the personal exemption.5 In assessing the normal tax of non-resident alien individuals, the above items are deducted only on the condition that he files a return of his total income received from all sources, corporate or otherwise, in the United States including therein all information which the Commissioner may deem necessary for the calculation of his credits and deductions 6; and in the case of non-resident alien individuals who are citizens or subjects of a foreign country imposing an income tax, the personal exemption is allowed only if such country allows a similar credit to citizens of the United States not residing in such country. On all the net income in excess of the above items and the personal exemption, the normal rate applies.8

COMPARATIVE STATEMENT OF NORMAL TAX RATES. The rates of normal tax under the various laws since March 1, 1913, are as follows:

1913-1%; 1916-2%; 1917-2%; 1918-6% and 12% for the year 1918 and 4% and 8% for subsequent years. The corporation tax for each of the years up to 1917 was the same as the normal tax. In 1917 the normal tax rates imposed by the 1916 and 1917 Laws were applied to incomes of citizens and residents, but only the 1916 rate to non-resident aliens, while the corporation tax was 6%.

5 Revenue Act of 1918, §§ 210 and 216; Reg. 45, Art. 2. 6 Revenue Act of 1918, § 217.

7 Revenue Act of 1918, § 216 (e).

8 Revenue Act of 1918, § 211 (a).

Surtax. In addition to the normal tax a surtax is imposed at various and graduated rates under the present law. For the purpose of assessing the surtax the items deductible from net income for normal tax purposes and the personal exemption are not deducted.9

LIMITATION IN CASE OF SALES OF MINES, OIL OR GAS WELLS. In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer the surtax attributable to such sale cannot exceed 20% of the selling price.10 Exploration work alone without discovery is not sufficient to bring a case within this provision. Shares of stock in a corporation owning mines, oil or gas wells do not constitute an interest in such property. To determine the application of this provision to a particular case, the taxpayer should first compute the surtax in the ordinary way upon his net income, including his net income from any such sale. The proportion of the surtax indicated by the ratio which the taxpayer's profit from the sale of the property bears to the sum of his total income plus the general deductions not chargeable against any particular item of gross income is the portion of the surtax attributable to such sale, and if it exceeds 20 per cent of the selling price of the property such portion of the surtax shall be reduced to that amount.11

COMPARATIVE STATEMENT OF SURTAX RATES. The rates of surtax under the various laws since March 1, 1913, are as follows:

9 Revenue Act of 1918, § 211 (a); Reg. 45, Art. 11. The surtax was called the additional tax" in the 1916 Law and the 1917 Law. 10 Revenue Act of 1918, § 211 (b).

11 Reg. 45, Art. 13.