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Receipt of Rent in Kind. Where rent is received in the form of produce, as for instance, a share of the crops of a farm, the amount realized on the sale of such share must be included as income in the year in which the share is disposed of or reduced to money or its equivalent. Where board or lodging is given as the equivalent of rent, the value of such board or lodging is required to be included.4

4 See Chapter 16 for statement on receipt of income in kind or in the equivalent of cash.

CHAPTER 22

INCOME FROM INTEREST

Income derived in the form of interest is taxable in the hands of citizens and residents and domestic corporations, whether received from debtors in this country or debtors in foreign countries. Interest is taxable in the hands of non-resident aliens and foreign corporations when derived from interest bearing-obligations of residents, corporate or otherwise.1

Interest Exempt from Tax. The Act expressly provides that interest upon the obligations of a state, or any political subdivision thereof, or upon the obligations of the United States (with certain exceptions noted below), or its possessions, or securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916, shall be exempt.

INTEREST ON OBLIGATIONS OF THE UNITED STATES. The interest received on obligations of the United States is exempt in the case of all obligations issued on or before September 1, 1917. In the case of obligations issued after that date the interest is exempt only if and to the extent provided in the Act authorizing the issue thereof.

1 Act of September 8, 1916, $ 1 (a).

2 Under earlier income tax laws interest upon the obligations of the United States was expressly included as taxable income. (See Act of March 2, 1867). Under the 1909 Law the Attorney SECOND LIBERTY LOAN BONDS. The Act authorizing the issue of the Second Liberty Loan Bonds provides 3 that the bonds and certificates issued thereunder “shall be exempt, both as to principal and interest, from all taxation now or hereafter imposed by the United States, or any State, or any of the possessions of the United States, or by any local taxing authority, except (a) state or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations. The interest on an amount of such bonds and certificates, the principal of which does not exceed in the aggregate $5,000, owned by any individual, partnership, association, or corporation, shall be exempt from the taxes provided for in Subdivision (b) of this section.” It will be noted that bonds of this issue are not subject to the normal tax nor to the income tax of 6% if held by corporations. Where a husband and wife each own in his or her own right bonds of this issue not exceeding $5,000, each is entitled to exclude the income therefrom in computing the tax on their joint incomes. Minor children having separate estates are also each entitled to the same exemption.4 A taxpayer holding bonds and certificates of indebtedness issued under this Act is en

General held that interest on National Bonds should be included as income of corporations, since the tax was not a tax on property, but a tax on the privilege of carrying on business. (28 Op. Atty. Gen. 138).

3 Act of September 24, 1917 (Public No. 43), $ 7.

4 Letter from Treasury Department dated October 8, 1917; I T. 8. 1917, s 2439.

titled to the exemption on $5,000 of his aggregate holdings, not on $5,000 of each class of obligations. 4a

OBLIGATIONS OF THE POSSESSIONS OF THE UNITED STATES. Interest paid on the obligations of possessions of the United States is exempt. Interest on the obligations of the territories, or political subdivisions thereof, can be considered as exempt only on the ground that the territories are possessions of the United States, since the law does not expressly include territories in the exemption provision.

INTEREST ON THE OBLIGATIONS OF A STATE.

The same principle which denies to a state power to raise revenue by taxation on federal property, or sources of revenue, or means of carrying on its duties, forbids taxation of state revenue for federal purposes.5 Therefore the United States has no power under the Constitution to tax either the instrumentalities or the property of a state. A municipal corporation is a portion of a sovereign power of a state and is not subject to taxation by Congress upon its municipal revenue. But the exemption of state agencies does not extend to those used by the state in carrying on an ordinary private business. Interest on the obligations of a state is, therefore, expressly exempt. The 1909 Law, however, being an excise tax and not an income tax, was valid although measured by income which included interest from state securities."

4a T.D. 2585. 5 Collector v. Day, 11 Wall. 113; Ambrosini v. U. S. 187 U. S. 1. 6 Pollock v. Trust Company, 157 U. S. 429, 584. 7 U. S. v. Railroad Company, 17 Wall. 322. 8 South Carolina v. U. S. 199, U. S. 437. 9 Flint v. Stone Tracy Co., 220 U. S. 107.

F.I. Tax.-17

POLITICAL SUBDIVISION OF A STATE. Difficulty is sometimes encountered in determining whether bonds issued by districts or divisions of a state are exempt under this phrase. The Attorney General has held that special assessment districts created for a public purpose, such as the improvement of streets and public highways, the provision of sewage, gas and light and the reclamation, drainage, or irrigation of land are districts for public use, and consequently political subdivisions of the state, within the meaning of the law.10 Levee and school districts lawfully created and authorized by the state to levy a tax to meet the obligations of such district are also held to be political subdivisions of the state. In general the term “political subdivision” includes special assessment districts or divisions created by proper authority of the state acting within its constitutional powers and under its general laws, for the purpose of carrying out a portion of those functions of the state which by long usuage and inherent necessities of government have always been regarded as public.

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MORTAGE ASSUMED BY MUNICIPALITY. Although interest on municipal bonds are exempt from the tax, yet where a municipality has purchased a public utility sub

10 Opinion of Attorney General dated January 30, 1914. In the course of his opinion the Attorney General said: “ where the power to levy a tax is given a district by the state, presumptively that district is created for a public use, and is exercising a public function.

Nor does it make any difference that the tax is measured by the benefit conferred.” But he refrained from expressing any opinion whether assessment districts might not be created for a purely private purpose so as to bring them within the principles laid down in the South Carolina Dispensary case, 199 U. S. 437, rather than within those which governed U. S. v. Railroad Company, 17 Wall. 322.

11 T. D. 1946.

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