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poration is a mere holding company, or the gains and profits are permitted to accumulate beyond the reasonable needs of the business, that fact is prima facie evidence of a fraudulent purpose on the part of the stockholders to escape the supertax. Neither the collectors nor the Commissioner of Internal Revenue, however, have any authority to decide when the surplus or undivided profits of a corporation are accumulated beyond the reasonable needs of the business, and therefore taxable under this provision as though distributed. The Secretary of the Treasury must first certify that in his opinion the accumulation is unreasonable. When he has so certified the stockholders are notified thereof and called upon to add the amount of their respective shares in the undistributed gains and profits of the corporation for the year to their income from other sources and to pay the su pertax accordingly.3

3 Act of September 8, 1916, 83.

CHAPTER 3

INDIVIDUALS TO WHOM THE LAW IS APPLICABLE

The theory upon which the tax is imposed seems to be two-fold. The law imposes the tax upon the entire net income of all persons within its jurisdiction, regardless of where the income arises, and on all income arising in the United States, regardless of whether or not the United States has jurisdiction of the person who receives it. The tax has been defined as a tax on the person, measured by his ability to pay, that is, his net income, and as a tax on the income itself.? As a matter of fact, it is both. The Government claims personal jurisdiction over all of its citizens wherever they reside and over all aliens who reside within its borders. Hence, as to citizens and resident aliens, the tax is imposed on income from all sources whether arising in this country or in a foreign country. No jurisdiction can be claimed over the persons of non-resident aliens, but so far as their income is received from sources in this country it is taxed on the theory that the Government has jurisdiction over the income, grants protection to the creation of such income, and is, therefore, entitled to a share thereof to defray the expenses of government. The fact that a person is taxable in foreign countries on all or part of his income does not relieve him for that reason from tax liability on the same ineome in this country.3

1 In Brady v. Anderson, 240 Fed. 665, the court said: “In our opinion the tax is against citizens and residents of the United States personally. They are chargeable in respect to income received by them.”

2 In a case decided by the Supreme Judicial Court of Massachusetts, Suter v. Jordan-Marsh Company, 113 N. E. 580, it was held that the tax was levied upon the rent paid by the defendant to the plaintiff.

Persons Exempt from the Tax. The only citizens or residents who are exempt from all requirements of the law are those receiving less than $1,000 of income during the year, if unmarried, or less than $2,000, if married. Non-resident aliens are not exempt no matter how small the income, provided it is received from sources within this country. Individuals may, however, enjoy an exemption from the tax because of the character of the income they receive, since the law expressly provides that certain kinds of income shall not be subject to the tax. Among the items of income so exempt are the proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured; the amount received by the insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, property acquired by gift, bequest, devise, or descent (but the income from such property is taxable), interest on the obligations of a State or any political subdivision thereof or upon the obligations of the United States (to the extent provided in the Act authorizing the issue, if the bonds are issued after September 1, 1917), or its possessions or securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916; and the compensation of all officers and employees of a state, or any political subdivision thereof, except when such compensation is paid by the United States Government. Under these provisions officers and employees of a state, city or county, including public school teachers, etc., are exempt from the tax to the extent that their income is derived from salaries paid by the state, county or city. They enjoy, however, no exemption from tax on income from taxable sources merely because of their position as employees of a state. The Act also exempts from tax the compensation of the present President of the United States during the term for which he has been elected and the judges of the Supreme Court and inferior courts of the United States in office at the time the Act was passed. Exempt income is omitted from the returns of annual net income of individuals but is required to be reported by corporations.

8 T. D. 2152.

Citizens of the United States. For the purpose of the income tax law no distinction is made between native and naturalized citizens. They are taxable upon their entire net income from all sources whether they reside within this country or not. Married women are considered to have the same citizenship as their husbands. An American woman who marries a foreigner consequently loses her status as an American citizen and is thereafter treated as an alien.4 But determination by the State Department of the status of an individual is not conclusive upon the Treasury Department in fixing citizenship for income tax purposes."

RESIDING IN THE UNITED STATES. Citizens residing in the United States report and pay the tax in the district in which they reside or have their principal place of business, regardless of where the income may arise.

4 T. D. 2092. 5 T. D. 2135.

RESIDING ABROAD. If a citizen residing abroad has no office or place of business in this country he files his return and pays his tax to the Collector of Internal Revenue at Baltimore, Maryland. He is, of course, required to report his income from all sources whether within or without the United States. Although the question as to the liability of a non-resident citizen is not determined by the State Department but by the Treasury Department, still, in the case of a naturalized citizen against whom the presumption of expatriation has arisen, the fact that he has paid the income tax will receive due consideration by the State Department in connection with other evidence submitted to overcome such presumption in connection with applications for passports or for registration in a consulate or for actual protection in a foreign country. The payment of the income tax will also be duly considered by the State Department in passing upon rights to the continued protection of this Government in cases of native American citizens who have resided abroad for a period so long that the natural presumption may be held to have arisen that they have abandoned citizenship in this country.

Aliens Residing in the United States. The question of whether or not an alien resides in this country is sometimes difficult to determine. The Treasury Department has held that where for business purposes or otherwise an alien is permanently located in the United States, has there his principal business establishment and is there permanently occupied or employed, even though his domicile may be without the United States,

6 Letter from Secretary of State to American Diplomatic and Consular Officers, dated March 18, 1914.

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