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Fiscal Year. A citizen or resident is required to make returns and pay the tax on the basis of his annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping his books, unless (a) no such method of accounting has been employed, or (b) the method employed does not clearly reflect income. In the case of (a) and (b) the computation of net income is made on such basis and in such manner as in the opinion of the Commissioner does clearly reflect income. If the taxpayer's annual accounting period is other than a fiscal year or if the taxpayer has no accounting period or keeps no books his net income is computed on the basis of the calendar year. In the event of any change of the accounting period from fiscal year to calendar year or vice versa or from one fiscal year to another, net income is computed on the basis of such new accounting period. Reporting on the basis of a fiscal year was formerly a privilege accorded to corporations only. It is now a requirement applicable to all taxpayers if the accounting period of the taxpayer is a fiscal year. This subject is more fully treated in another chapter.63

Returns. For the purpose of assessing the tax a citizen or resident having a net income for the taxable year of $1,000 or more if single, or $2,000 or more, if the head of a family or married person living with husband or wife, is required to make a verified return stating specifically the items of his gross income and the deductions and credits to which he may be entitled.64 In addition citizens and residents having less than the above amount of income may be required to make returns or statements sufficient to satisfy the Commissioner that they are not liable to

The rules and regulations and general provisions

tax. 65

63 Revenue Act of 1918, § 212 (b); Reg. 45, Arts. 21-26. See Chapter 2.

64 Revenue Act of 1918, $ 223; Reg. 45, Art. 401-405. 65 Revenue Act of 1918, $ 1305.

relating to such returns are dealt with in another chapter.6

66

Special Returns. In addition to the above mentioned returns citizens and residents are required to file certain special returns annually or at such times as the Commissioner may request, as follows:

INFORMATION AT THE SOURCE. Persons, in whatever capacity acting including lessees or mortgagors of real or personal property, fiduciaries,67 and employers making payment to any individual, corporation or partnership of interest, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable gains, profits and income (other than payments described in the following paragraph) of more than $1,000 in any taxable year, are required to make returns in regard thereto under regulations of the Treasury Department, setting forth the amount of such payments and the names and addresses of the recipients.68 This return is for the purpose of supplying the Treasury Department with information to be used in auditing the returns of the taxpayers to whom the income is paid, and is more fully discussed in a later chapter. 69

REPORTS BY BROKERS. Those doing business as brokers 70 are required when called upon by the Commissioner of Internal Revenue to make a return showing the names of their customers with such details as to the profits, losses or other information which the Commissioner may

66 See Chapter 34 on Returns.

67 The term “fiduciary” means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate. The term “person” includes individuals, partnerships and corporations. The term “corporation” includes associations, joint-stock companies and insurance companies (Revenue Act of 1918, 88 1 and 200). See Chapter 8 on Fiduciaries.

68 Revenue Act of 1918, $ 256; Reg. 45, Arts. 1071-1079. 69 See Chapter 39 on Information at the Source.

70 The Revenue Act of 1916 applied only to “brokers on any exchange or board of trade or other similar place of business."

require as to each of such customers as will enable the Commissioner of Internal Revenue to determine whether all income tax due on the profits or gains of such customers has been paid.71 This report is for the purpose of information at the source and is more fully discussed in a 'later chapter.72

Payment of Tax. The rules in regard to the assessment and payment of taxes in the case of citizens or residents are discussed in another chapter.73

Examination of Books. The books, papers, records or memoranda of taxpayers are subject to examination by any revenue agents or inspectors designated by the Commissioner of Internal Revenue for the purpose of ascertaining the correctness of returns which have been made, or making a return where none has been made in accordance with and subject to rules which are discussed at length in another chapter 74

Penalties. Penalties for failing or refusing to make returns, supply information, pay or collect any tax, or for wilfully attempting in any manner to defeat or evade the income tax are discussed in another chapter.75

Tax Not Withheld at Source. The tax is not withheld at the source on payments to citizens and residents. A provision of the law requires withholding at the source in the case of corporate bonds and mortgages containing a so-called “tax-free covenant.” 76 This, however, is not intended as a provision requiring withholding, but is intended to require the corporation to assume the burden of a part of the tax for the bondholder. Consequently in such cases no tax is actually deducted, but the corporation assumes for the bondholder the payment of the normal tax to the extent of 2% of such interest, which

71 Revenue Act of 1918, $ 255; Reg. 45, Art. 1061. 72 See Chapter 39 on Information at the Source. 73 See Chapter 35.on Assessment and Payment of the Tax. 74 See Chapter 37 on Examination of Taxpayer's Books. 75 See Chapter 36 on Penalties and Compromises, 76 Revenue Act of 1918, $ 221 (b).

amount the bondholder reports as though the tax had been actually withheld, the remainder of the normal tax being reported as not having been withheld. A further discussion of collection at the source is contained in the chapter on that subject.77

Duty to Withhold Tax at Source. A citizen or resident paying fixed or determinable gains, profits or income (a) to non-resident alien individuals or (b) to foreign corporations not engaged in trade or business within the United States and not having any office or place of business in this country, is required to withhold 8% in the case of payments under (a) and 10% in case of payments under (b) as set forth in a subsequent chapter.78

Collection of Foreign Items. Citizens or residents undertaking as a matter of business or for profit, the collection of foreign items, are required to obtain a license from the Commissioner of Internal Revenue as indicated in a later chapter 79

77 See Chapter 40.
78 Revenue Act of 1918, $& 221 and 237. See Chapter 40.
79 See Chapter 39.

CHAPTER 5

NON-RESIDENT ALIENS

The law imposes a tax upon the net income received by non-resident alien individuals “from sources within the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, 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 and disposition of goods within the United States.'' The term "non-resident aliens," as used in several places in the 1916 Law, was not defined therein, but clearly referred to individuals only and not to partnerships, corporations, or associations. The Revenue Act of 1918, however, removes all doubt by using the expression “non-resident alien individuals.1 The expression “non-resident aliens" is used in this chapter to mean only non-resident alien individuals. Ordinarily it is a simple matter to determine whether an individual is or is not a non-resident alien; he falls into this class if he is neither a citizen nor a resident. Any individual who is a citizen of any possession of the United States (but not otherwise a citizen of United States) and who is not a resident of the United States is subject to taxation for income tax purposes, as to income derived from sources within the United States, and his tax is computed and paid in the same manner and subject to the same conditions as non-resident aliens who are citizens or subjects of foreign countries. The term "non

1 Revenue Act of 1918, 88 210 and 213 (c); Reg. 45, Art. 3.

2 Revenue Act of 1918, $ 260. Income of citizens and residents of Porto Rico or the Philippines is taxed in those jurisdictions in ac

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