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ject to a mortgage, and the mortgage retains its original character, even though the municipality assumes the mortgage indebtedness and pays the interest thereon, the mortgage does not become an obligation of the municipality within the meaning of the law and the interest thereon is not exempt.12

Interest on Bonds of Exempt Organizations. Although a corporation may under Sec. 11 of the 1916 Law be exempt from a tax on its income, yet interest on the bonds of such an organization is taxable income to the bondholder. 13

Accrued Interest on Obligations at Time of Purchase. Where a purchaser pays the price of the security purchased and an additional sum representing accrued interest, the amount of interest received on the next interest date should not be reported in full. The amount of accrued interest at the time of purchase represents the return of capital to the purchaser and he should deduct such amount from the interest received, and report the remainder only. The seller of the security should account in his return for the accrued interest received at the time of sale, since to him that amount is income. 14

12 T. D. 2090.

13 Letter from Treasury Department dated July 30, 1914; I. T. S. 1917, | 1222.

14 Letter from Treasury Department dated February 5, 1915; I T. S. 1917, 1 232. In a later ruling the Treasury Department declined to permit the taxpayer in such a case to report all of the interest received as income and to deduct the amount of accrued interest paid at the time of purchase as an expense or as interest paid by the purchaser. Letter dated March 8, 1915, 1. T. S. 1917, 15 Reg. 33, Art. 67; Letter from Treasury Department dated February 18, 1915; I. T. S. 1917, T 240.

Interest on Bank Deposits. Interest on bank deposits or on certificates of deposit, credited to the account of the depositor by the bank, is income for the year in which the credit is made.15

Interest Received and Paid by Brokers. Where the customers of a brokerage house buy securities, paying only a part of the purchase price and paying interest on the balance, and the brokerage house buys such securities from others, paying only a part of the purchase price and paying interest on the balance, the brokerage house must include in its return as gross income the interest received from the customers and may deduct as interest the amount of interest it pays on such purchases limited, in the case of corporations, to the amount of interest which may be deducted under the law.16

Interest Accruing Prior to March 1, 1913. Where interest became due prior to March 1, 1913, and funds have been on hand to pay the same since the due date the amount is not taxable, since it represents income that was due and payable and could have been reduced to possession on demand prior to the incidence of the income tax. Even where interest has been in default since a time prior to March 1, 1913, and funds to pay the same have accrued since that date, it has been held that the interest represents income accrued to the owners of the bonds prior to the incidence of the tax, and hence

16 Altheimer and Rawlings Investment Co. V. Allen, T. D. 2441. This case was decided under the 1909 Law but the principle seems to apply to the language of the present law. Interest would be deducted in full if paid on collateral the subject of sale in the ordinary course of business.

does not constitute taxable income when received thereafter 17

17 Letter from Collector at Cincinnati dated March 16, 1915, embodying decision of the Treasury Department; I. T. S. 1917, 1 332.



The law expressly states that the net income of a taxpayer shall include gains, profits and income derived from dividends. 1

Definition. The term “dividends” as used in the law is defined therein to mean any distribution made or ordered to be made by a corporation, joint stock company, association, or insurance company, out of its earnings or profits accrued since March 1st, 1913, and payable to its shareholders, whether in cash or in stock of the corporation. It is to be noted that under this definition any distribution which is made or ordered to be made by a corporation is a dividend. It need not necessarily be called a dividend or be made in the ordinary course of business. A distribution of assets at the time of liquidation of a corporation would be a dividend to the extent that the assets so distributed included earnings or profits accrued since March 1st, 1913. On the other hand, if the distribution is not out of its earnings or profits accrued since March 1st, 1913, it does not become a dividend within the meaning of the law by reason of the fact that it is called a dividend by the corporation making the distribution.

1 Act of September 8, 1916, § 2 (a).

2 Act of September 8, 1916, as amended by Act of October 3, 1917, $ 31.

DIVIDENDS ON LIFE INSURANCE POLICIES. It is a custom of insurance companies to return each year a portion of the premium paid by the insured. The amount so returned is usually designated as a "dividend" and is either received in cash by the insured or applied by him to the reduction of the next annual premium. Such “dividends” are not considered taxable income under the law and should not be included in the annual return. Where, however, dividends are received on a paid-up policy the amount must be included and should be considered the same as dividends from corporations, unless, of course, the dividend was not paid by the insurance company out of earnings or profits accrued since the incidence of the tax.

DIVIDENDS FROM ASSOCIATIONS. Since limited partnerships, associations, joint stock companies and insurance companies (whether incorporated or not) are treated as corporations, the net earnings of such organizations should be considered as dividends. Thus private banks, which have the form of corporate organization, are required to make returns as corporations, and the owners of the bank are authorized to treat as dividends the earnings which they receive therefrom. The recipient of profits of associations or limited partnerships should, therefore, ascertain whether the association or partnership is reporting its income as an entity,

, and in such event should treat the net profits of the association as dividends.

3 T. D. 2137.

4 T. D. 2152. See Chapter 12 for definition of the term "corporations."

5 T. D. 2137.

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