BUSINESS INCOME TAX

AN ACT PROVIDING FOR THE LEVYING, COLLECTING AND PAYING OF A TAX OR EXCISE WITH RESPECT TO THE CARRYING ON OR DOING BUSINESS, BY INDIVIDUALS, PARTNERSHIPS AND CORPORATIONS, BASED UPON NET INCOME

Be it Enacted by the Legislature of the State of

ARTICLE I

SHORT TITLE AND DEFINITIONS

Section 1. Short title. This Act shall be known and may be cited as The Business Income Tax Act of 192-.

Sec. 2. Definitions. For the purposes of this act and unless otherwise required by the context:

1. The words "tax commission" mean the state tax commission.

2. The word taxpayer" means any individual, fiduciary, partnership or corporation subject to the tax imposed by this act.

3. The word "fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, or any person, whether individual or corporate, acting in any fiduciary capacity for any person, estate or trust.

4. The word "person" includes individuals, fiduciaries, partnerships and corporations.

5. The word "corporation" includes joint-stock companies or associations and insurance companies.

6. The word "business" includes trade, profession, occupation or employment. 7. The words "tangible property" mean real property and corporeal personal property and do not mean money, bank deposits, shares of stock, bonds, notes, credits, evidences of debt, choses in action or evidences of an interest in property.

8. The words "intangible property" mean all property other than tangible property.

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9. The words "income year mean the calendar year or the fiscal year, upon the basis of which the net income is computed under this act; if no fiscal year has been established they mean the calendar year.

10. The words "fiscal year " mean an income year or portion thereof, ending on the last day of any month other than December.

11. The word "paid" for the purposes of the deductions under this act, means "paid or accrued " or paid or incurred", and the words "paid or accrued", "paid or incurred" and "incurred" shall be construed according to the method of accounting upon the basis of which the net income is computed under this act. The word "received" for the purpose of the computation of the net income under this act means "received or accrued", and the words "received and accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under this act.

12. The words "foreign country" mean any jurisdiction other than one embraced within the United States. The words "United States", when used in a geographical sense, include the states, the territories of Alaska and Hawaii, the District of Columbia and the possessions of the United States.

-ARTICLE II
IMPOSITION OF TAX

Sec. 200. Tax with respect to carrying on or doing business. 1. Every individual, partnership or corporation shall pay annually a tax or excise, with respect to carrying on or doing business, equivalent to two per cent of the entire net income as herein defined, over and above $1000, received by such individual, partnership or corporation from business transacted within the state during the income year; Provided, however, that in no case shall the tax be less than five dollars.

2. Such tax shall first be computed upon the net income of the individual, partnership or corporation received during the calendar year ending December 31, 192-, or during any income year ending during said year, and shall be collected and paid at the times and in the manner herein provided.

Sec. 201. Conditional and other exemptions. The following organizations shall be exempt from taxation under this act:

(1) Labor, agricultural, or horticultural organizations;

(2) Fraternal beneficiary societies, orders or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (b) providing for the payment of life, sick, accident or other benefits to the members of such society, order, or association or their dependents;

(3) Building and loan associations and cooperative banks without capital stock, organized and operated for mutual purposes and without profit;

(4) Cemetery corporations and corporations organized for religious, charitable, scientific or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual;

(5) Business leagues, chambers of commerce or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual;

(6) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare;

(7) Clubs organized and operated exclusively for pleasure, recreation and other non-profitable purposes, no part of the net earnings of which inures to the benefit of and private stockholder or member;

(8) Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses;

(9) Farmers' fruit growers', or like organizations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them;

(10) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this act; (11) Banks, savings banks, institutions for savings, insurance companies, trust companies, corporations wholly engaged in the purchase and sale of and holding title to real estate as principals and corporations whose sole business consists of holding the stocks of other corporations for the purpose of controlling the management and affairs of such other corporations, except such as are specifically subject to make return under the provisions of section 401 of this act;

(12) Railroad, street railway, express, telegraph, telephone, electric light, heat and power companies, water, gas, freight line and equipment companies, oil and mining companies and other companies which, under existing laws, are subject to taxation with respect to the value of their franchises, good-will, or intangible property as a going concern, the earnings or income of which are taken into consideration in determining such value, and companies which are subject to taxation with reference to gross receipts or earnings in lieu of such taxation.

[Note. It is assumed that various kinds of business which are being taxed under existing laws, would not be brought under this act. Such business would seem in general to be such as is being satisfactorily and adequately taxed under special laws and

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not under the general property tax. Doubtless it would greatly disturb and disarrange the existing system in any state if it were attempted to bring all business under this act and this is not necessary.

A suggestive list of excepted business is contained in subdivisions (11) and (12), which list may be increased or diminished according to the situation in a given state.

The need of these exceptions is recognized in the Wisconsin and New York laws and is referred to in the report of the Model Tax Committee. See Wisc. Stat., Sec. 1087 m-5 (3); Laws N. Y. 1920, Ch. 640; Proceedings Nat. Tax Assoc'n, Vol. XII, pp. 447-450.]

ARTICLE III

COMPUTATION OF TAX

Sec. 300. Net income defined. The words "net income" means the gross income of a taxpayer less the deductions allowed by this act.

Sec. 301. Gross income defined. 1. The words "gross income" includes gains, profits and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends and securities, to the extent that any of such items form a part of income received in connection with any business, trade, profession or occupation carried on for gain or profit, subject to taxation under this act, or gains or profits and income derived from any business whatever. The amounts of all such items shall be included in the gross income of the income year in which received by the taxpayer, unless, under the methods of accounting permitted under this act, any such amounts are to be properly accounted for as of a different period.

2. The words "gross income" does not include the following items, which shall be exempt from taxation under this act:

(a) The proceeds of life insurance policies and contracts paid to the taxpayer upon the death of the insured;

(b) The amount received by a taxpayer as a return of premium or premiums paid by him under life insurance, endowment or annuity contracts, either during the term or at the maturity of the term mentioned in the contract, or upon surrender of the contract;

(c) Interest upon the obligations of the United States or its possessions; (d) Salaries, wages and other compensation received from the United States by officials or employees thereof, including persons in the military or naval forces of the United States;

(e) Any amounts received through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received, whether by suit or agreement, on account of such injuries or sickness.

Sec. 302. Basis of return of net income. 1. Taxpayers who customarily estimate their income on a basis other than that of actual cash receipts and disbursements may, with the approval of the tax commission, return their net income under this act upon a similar basis. Taxpayers who customarily estimate their income on the basis of an established fiscal year instead of on that of the calendar year, may, with the approval of the tax commission, and subject to such rules and regulations as it may establish, return their net income under this act on the basis of such fiscal year, in lieu of that of the calendar year.

2. A taxpayer may, with the approval of the tax commission and under such regulations as it may prescribe, change his income year from fiscal to calendar year or otherwise, in which case his net income shall be computed upon the basis of such new income year.

Sec. 303. Determination of gain or loss. For the purpose of ascertaining the gain or loss from the sale or other disposition of property, real, personal or mixed, the basis shall be, in the case of property acquired before January 1,

the fair

market price or value of such property as of that date, if such price or value exceeds the original cost, and in all other cases, the cost thereof; Provided, that in the case of property which was included in the last preceding annual inventory used in determining net income in a return under this act, such inventory value shall be taken in lieu of cost or market value. The final distribution to the taxpayer of the assets of a corporation shall be treated as a sale of the stock or securities of the corporation owned by him and the gain or loss shall be computed accordingly.

Sec. 304. Exchanges of property. 1. When property is exchanged for other property, the property received in exchange shall, for the purpose of determining gain or loss, be treated as the equivalent of cash to the amount of its fair market value, provided a market exists in which all the property so received can be disposed of at the time of exchange, for a reasonably certain and definite price in cash; otherwise such exchange shall be considered as a conversion of assets from one form to another, from which no gain or loss shall be deemed to arise.

2. In the case of the organization of a corporation, the stock or securities received shall be considered to take the place of property transferred therefor and no gain or loss shall be deemed to arise therefrom.

3. When, in connection with the reorganization, merger or consolidation of a corporation, a taxpayer receives, in place of stock or securities owned by him, new stock or securities, the basis of computing the gain or loss if any shall be, in case the stock or securities owned were acquired before January 1, —, the fair market price or value thereof as of that date, if such price or value exceeds the original cost, and in all other cases the cost thereof.

Sec. 305. Inventory. Whenever in the opinion of the tax commission the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer, upon such basis as the tax commission may prescribe, conforming as nearly as may be to the best accounting practice in the trade or business and most clearly reflecting the income, and conforming so far as may be, to the forms and methods prescribed by the United States Commissioner of Internal Revenue, under the acts of Congress then providing for the taxation of incomes.

Sec. 306. Deductions. In computing net income there shall be allowed as deductions:

(a) All the ordinary and necessary expenses paid during the income 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 the 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;

(b) All interest paid during the income year on indebtedness incurred in connection with the trade or business;

(c) Taxes paid or accrued within the income year, in respect to the income from the trade or business or in respect to the trade or business or the property used therein or which may be made the condition of carrying on the trade or business, imposed by the authority of the United States or of any of its possessions or of any state, territory or the District of Columbia or of any foreign country; except taxes, imposed by this act, and taxes assessed for local benefits, of a kind tending to increase the value of the property assessed;

(d) Losses sustained during the income year and not compensated for by insurance or otherwise, if incurred in connection with the trade or business;

(e) Debts ascertained to be worthless and charged off within the income year, if the amount has previously been included in gross income in a return under this act;

(f) A reasonable allowance for the depreciation and obsolescence of property used in the trade or business; and, in the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion; Provided, That in computing the deductions allowed under this paragraph, the basis shall be the cost (including in the case of mines, oil and gas wells and other natural deposits, the cost of development, not otherwise deducted), and in the case of property acquired prior

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to January 1, -, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date. The reasonable allowances under this paragraph shall be made under rules and regulations to be prescribed by the tax commission. In the case of leases the deductions allowed may be equitably apportioned between the lessor and lessee;

(g) In the case of taxpayers who keep regular books of account, upon an accrual basis and in accordance with standard accounting practice, reserves for bad debts and for contingent liabilities, under such rules and restrictions as the tax commission may impose. If the tax commission shall at any time deem the reserve excessive in amount, it may restore such excess to income, either in a subsequent year or as a part of the income of the income year and assess it accordingly;

(h) For each taxpayer, the sum of $1000.

Sec. 307. Items not deductible. In computing net income no deduction shall

in any case be allowed in respect of:

(a) Personal, living or family expenses;

(b) Any amount paid out for new buildings or for permanent improvements or betterments, made to increase the value of any property used in the trade or business; (c) Any amount expended in restoring property used in the trade or business for which an allowance is or has been made;

(d) Premiums paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in the trade or business, when the taxpayer is directly or indirectly a beneficiary under such policy.

Sec. 308. Allocation of net income of a resident taxpayer. 1. If the entire trade or business of a resident taxpayer is carried on in the state, the tax imposed by this act shall be computed upon the entire net income from such trade or business..

2. If the entire trade or business of a resident taxpayer is not carried on in the state, the tax imposed by this act shall be computed upon a proportion of the entire net income, to be determined in accordance with the following rules:

(a) Gains and income (less expenses, if any, attributable thereto) received from the sale or lease of real estate and tangible personal property situated in the state and of intangible property, other than such as is manufactured or bought by the taxpayer for sale in the regular course of business, shall be allocated to the state; gains al d income from the sale or lease of such real estate and tangible personal property situated outside the state, shall be allocated outside the state;

(b) Interest and dividends (less expenses, if any, attributable thereto), shall be allocated to the state, to the extent that they are received in connection with the transaction of the trade or business in the state; other interest and dividends shall be allocated outside the state;

(c) Net income of the foregoing classes having thus been allocated, the remainder of the net income shall be allocated as follows: Said remainder shall be divided into two parts; of one part, amounting to two-thirds of said remainder, such portion shall be attributed to trade or business carried on in the state as shall be found by multiplying said part by a fraction the numerator of which is the value of the taxpayer's real estate and tangible personal property situated in the state and used in trade or business, and the denominator of which is the value of the taxpayer's real estate and tangible personal property used in trade or business, wherever situated. Of the other part, amounting to one-third of said remainder, such portion shall be attributed to trade or business carried on in the state as shall be found by multiplying the said part by a fraction the numerator of which is the amount of the taxpayer's gross receipts from trade or business assignable to the state, as hereinafter in this subdivision provided, and the denominator of which is the amount of the taxpayer's entire gross receipts from trade or business. For the purposes of this subdivision, the following rules shall apply: In a case where there is no real estate or tangible personal property, the proportion of the net income received from trade or business carried on in the state shall be determined solely by the above fraction based on receipts. The value of the taxpayer's real estate and tangible personal property shall be the average value of such property during the income year. The amount of the taxpayer's