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principal and of paying both the normal tax and the surtax.29

Husband and Wife. In so far as possible the family is treated as a unit for purposes of the income tax, and the husband and wife may make joint returns. 30 Unless the wife files a separate return of income or joins with her husband in a return which shall set forth her income separately, her husband should include in his return the income accruing to the wife from services rendered by her or the sale of products of her labor.31 The personal exemption is in such cases deducted from the joint income, but the normal tax and the surtax is in all cases imposed upon the separate incomes.32

Minors. Under the 1916 and 1917 Laws, minors were not required to make returns for themselves, their returns being required to be made by their guardians.33 This rule is now changed, and minors are required to make returns unless their income is included in the return of the parent or reported by a fiduciary.34

Incompetents. Incompetents or insane persons are unable to make their own returns, and their returns are required to be made by the guardian or other person charged with the care of the person or property of such incompetent or insane person.

Agents. The return may be made by an agent when hy reason of illness, absence, or nonresidence the person

29 Revenue Act of 1918, $ 223; Reg. 45, Art. 403.
30 Revenue Act of 1918, $ 223.
31 Reg. 45, Art. 401.
32 Reg. 45, Art. 2; T. D. 2090.

33 Reg. 33, Art. 17; Letter from Treasury Department dated April 11, 1918; I. T. S. 1918, 13295.

34 Revenue Act of 1918, $ 223; Reg. 45, Art. 402. This change was accomplished by the omission of the words “of lawful age" from the section requiring returns of individuals. Compare Revenue Act of 1916, $ 8 (b) with Revenue Act of 1918, $ 223. Obviously, minors not sui juris are still unable to make their own returns, and the returns of such minors will necessarily continue to be made by the guardian or other persons charged with the care of their persons or property.

35 Revenue Act of 1918, $ 223; Reg. 45, Art. 422.

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liable for the return is unable to make it, the agent assuming the responsibility for making the return and incurring liability to the specific penalties provided for erroneous, false, or fraudulent returns. 36 Responsible representatives of non-resident aliens having charge of the property of non-resident aliens may be charged with the duty of making a return and paying the tax on the income passing through their hands.37

Fiduciaries. Guardians, trustees, executors, administrators, receivers, conservators or any persons acting in a fiduciary capacity are charged with special duties under the law. These duties are fully discussed in another chapter 38

Persons Dying During the Year. When a person dies during any calendar year it is the duty of the executor or administrator or person taking charge of his property to make a return for the deceased from the beginning of the year to the date of death.39 In this return should be reported all of the income received up to the time of death and all the allowable deductions and credits up to that time. The personal exemption may be claimed in full according to the status of the decedent and regardless of the length of time during the year in which he lived.40 In case the decedent dies after the close of the calendar year, but before March 15th of the following year, and has not made a return for the preceding calendar year, a return should be made for the full year preceding and in addition a return from January 1 of the current year to the date of death. If during the period in which the decedent lived he was not in receipt of $1,000 of net income, if unmarried, or $2,000, if married or the head of the family, no return need be filed, 41 unless he was a non-resident alien, in which case a return should be filed, whether married or single, regardless of amount. The fact that a person may have died before the passage of the law does not relieve his estate from liability for tax, if he lived during any part of the time after the incidence of the tax. Thus a person dying after January 1, 1918, but before February 25, 1919, the date on which the 1918 Law went into effect, will be held to be taxable thereunder. The effect of making the act retroactive is to apply it to him exactly as if it had been enacted on January 1, 1918.43

36 Revenue Act of 1918, § 223; Reg. 45, Art. 401. 37 Revenue Act of 1918, $ 223; Reg. 45, Art. 403. 38 Revenue Act of 1918, § 225. See Chapter 8 on Fiduciaries.

39 Reg. 45, Art. 421. Mandell v. Pierce, 3 Cliff 134, 16 Fed. Cas. No. 9008.

40 T. D. 2090, T. D. 2135. 41 Reg. 45, Art. 421.

42 Reg. 33, Rev., Arts. 4 and 14; Reg. 45, Art. 403.

43 Brady v. Anderson, 240 Fed. 665, writ of certiorari denied, 244 U. S. 654.

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CHAPTER 4

CITIZENS AND RESIDENTS OF THE UNITED STATES

All citizens of this country, residing here and elsewhere, and all residents of this country, whether citizens or not, are classed together for the purpose of the income tax.1 The scope of the terms “citizens” and “residents” is discussed in a previous chapter. The taxable year is the time unit for the purpose of the tax.3 The term is used in this chapter in the sense defined in the Revenue Act of 1918 and means the calendar year or the fiscal year ending during such calendar year upon the basis of which net income is computed. The first taxable year is called the taxable year 1918, and is the calendar year 1918 or any fiscal year ending therein. The term “personal-service corporation” is used in this chapter as defined in the chapter on that subject and other terms are defined as used.

Extent to which Taxable. Citizens and residents are taxable for the purpose of the surtax upon their entire net income received in each year from all sources and for the purpose of the normal tax upon net income less statutory credits.5 Exempt income is not included in gross income, which is the foundation for the computation of net income. On dividends of corporations taxable upon their net income and dividends of personalservice corporations, out of earnings or profits upon which income tax has been imposed, they are liable only for surtaxes; and so also with respect to interest on bonds of the United States issued after September 1, 1917, and bonds of the War Finance Corporation. The regulations and rulings respecting taxable and non-taxable income are, as a rule, applicable both to individuals and corporations, and are discussed in detail in the later chapters on income.7

1 Reg. 45, Art. 3. 2 See Chapter 3 on Individuals to Whom the Law is Applicable. 3 Reg. 45, Art. 1533. 4 Revenue Act of 1918, $ 200. 5 Reg. 45, Arts. 3 and 21. 6 Revenue Act of 1918, $ 212; Reg. 45, Art. 21.

Deductions Allowed. Citizens and residents are allowed the following deductions in computing net income for the purpose of the tax. Many of the deductions are the same as those permitted to corporations and in such cases they are fully discussed in subsequent chapters.8 In this chapter only the special provisions applicable to individuals are discussed at length.

Business Expenses. Citizens and residents may deduct from their gross income all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries, or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

BUILDINGS USED FOR RENTAL PURPOSES. A landlord may claim as an expense any amounts expended for maintenance of the property or its use for rental purposes, including amounts paid for repairs, insurance, fuel, light

7 See Chapter 16 et seq. 8 See Chapter 26 et seq.

9 Revenue Act of 1918, $ 214 (a); Reg. 45, Arts. 101-112. The Revenue Act of 1918 further qualifies the expenses deductible as stated in the text above by stipulating that they all be "ordinaryas well as “necessary,” allows their deduction if “incurred” as well as “paid,” omitting the adverb “ actually" in connection with the word “paid.”

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