sary expenses of the business, including rentals, the lessee may deduct royalties paid as such necessary expenses, and in the event that he paid a lump sum for his lease, such sum may be considered as rent paid in advance and, together with the cost of development not deducted as expenses on his returns, may be divided by the estimated number of units in the mine as of the date of acquisition in order to determine the expense per unit for the purpose of deduction. The lessee is then entitled to deduct as expense the product of the per unit expense multiplied by the number of units produced within the year. If the lessee is unable to determine the proper amount based upon investment in accordance with the method outlined above, he may deduct in his return the pro rata portion of the amount expended for the lease and for development based upon the life of the lease.62 62 Id. CHAPTER 33 CREDIT FOR TAXES The 1918 Law is the first American income tax law to recognize and provide against the double taxation of income of an individual or corporation deriving income from sources in two countries. Heretofore a citizen of the United States doing business in Canada has been taxed upon the net income arising from that business by the Canadian Government and upon the same net income by the United States. Under the present law the taxpayer in such position will be allowed to deduct from the total tax found to be due on his entire net income the amount of tax paid to Canada on the income arising in that country. The privilege is extended to the following classes of taxpayers and to the extent indicated. Citizens of the United States. In the case of citizens of the United States the credit for taxes is the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country upon income derived from sources therein, or to any possession of the United States.1 Resident Aliens. In the case of an alien resident of the United States who is a citizen or subject of a foreign country, the amount of income, war-profits and excessprofits taxes paid during the taxable year to such country, upon income derived from sources therein, may be credited against his tax payable to the United States if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country.2 1 Revenue Act of 1918, § 222 (a) 1. 2 Id. § 222 (a) 3. Non-Resident Aliens. No credit for taxes is allowed to a non-resident alien.3 Domestic Corporations. In the case of a domestic corporation (one created or organized in the United States) the credit for taxes is the amount of any income, warprofits and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States. Foreign Corporations. No credit for taxes is allowed to a foreign corporation notwithstanding that it may have established its principal business in this country.5 Domestic Corporations Owning Stock of Foreign Corporations. A domestic corporation which owns a majority of the voting stock of a foreign corporation is entitled to credit for taxes in respect of any income, war-profits or excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States in an amount equal to the proportion which the amount of any dividends (not deductible under Section 234 of the Law) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid. But in no case may the amount of the credit for such taxes exceed the amount of the dividends on the stock of the foreign corporation received by the domestic corporation during the taxable year and not deductible under Section 234 of the Law.7 Members of Partnerships. If an individual is a member of a partnership he is entitled to his proportionate share of any income, war-profits and excess-profits taxes paid 3 See Revenue Act of 1918, § 222. 4 Revenue Act of 1918, § 238; Reg. 45, Art. 611. 5 See Revenue Act of 1918, § 238. 6 See p. 379. 7 Revenue Act of 1918, § 240 (c); Reg. 45, Art. 636. during the taxable year by the partnership to any foreign country or to any possession of the United States. The law does not appear to make any distinction between domestic or foreign partnerships, but it seems that if the member of a partnership is a resident alien he is entitled to the credit only "if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country."8 Beneficiaries of Beneficiaries of Estates or Trusts. estates or trusts are entitled to their proportionate share of such taxes of the estate or trust paid during the taxable year to a foreign country or to any possession of the United States. It seems if the beneficiary is a resident alien he is limited in the same manner as though he received the income direct.9 * * Taxes Paid During the Taxable Year. "Amount of taxes paid during the taxable year" means taxes proper (no credit being given for amounts representing interest or penalties) paid or accrued during the taxable year on behalf of the taxpayer claiming credit. "Foreign country" means any governmental authority, not that of the United States or any part or possession thereof, having power to impose such taxes, and it therefore includes a self-governing colony, such as the Dominion of Canada. "Any possession of the United States" includes, among others, Porto Rico, the Philippines, and the. Virgin Islands.1 10 Conditions of Allowance of Credit. (a) When credit is sought for income, war-profits or excess-profits taxes paid other than to the United States, the income tax return of the taxpayer must be accompanied by a form,11 carefully filled out with all the information there called for and with the calculations of credits there indicated, and duly signed and sworn to or affirmed. When credit is 8 Id. § 222 (b); Reg. 45, Art. 381. 9 Id. 10 Reg. 45, Art. 382. 11 Form 1116 for individuals or Form 1118 for corporations. sought for taxes already paid the form must have attached to it the receipt for each such tax payment. When credit is sought for taxes accrued the form must have attached to it the return on which each such accrued tax was based. This receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original or a duly certified or authenticated copy. (b) In the case of a credit sought for a tax accrued but not paid, the Commissioner may require as a condition precedent to the allowance of credit a bond from the taxpayer in addition to the above form. If such a bond is required, the prescribed form 12 shall be used for it. It shall be in such penal sum as the Commissioner may prescribe, and shall be conditioned for the payment by the taxpayer of any amount of tax found due upon any redetermination of tax made necessary by such credit proving incorrect, with such further conditions as the Commissioner may require. This bond shall be executed by the taxpayer, his agent or representative, as principal, and by sureties satisfactory to and approved by the Commissioner. 13 Redetermination of Tax When Credit Froves Incorrect. In case credit has been given for taxes accrued, or a proportionate share thereof, and the amount that is actually paid on account of such taxes, or a proportionate share thereof, is not the same as the amount of such credit, or in case any tax payment credited is refunded in whole or in part, the taxpayer shall immediately notify the Commissioner. The Commissioner will thereupon redetermine 12 Form 1117 for individuals or Form 1119 for corporations. 13 Reg. 45, Art. 383; see also Art. 611 as to corporations. Domestic corporations claiming credit for taxes with respect to taxes paid by a foreign subsidiary are permitted to avail themselves of subdivision (a) of this ruling, but not (b) as credit may be claimed only with respect to taxes paid (not those accrued) by foreign subsidiaries. F. T.-34 |