having "tax-free covenants" and it seems to be within his discretion; (4) in the case of payments of interest on bonds and similar obligations of domestic corporations which contain a so-called tax-free covenant the rate to be withheld in all cases is to be limited to 2% whether the owner be a citizen or resident or a non-resident alien or a foreign corporation or a domestic or foreign partnership. The only bondholders to which this provision does not apply are domestic and resident corporations. The Commissioner may authorize the tax of 2% to be withheld on interest on "tax-free covenant" bonds where the owner is not known.56 It is to be noted that the only case in which withholding against citizens or residents of this country takes place is (4) above. In such cases the law is made to operate in order that the debtor corporation issuing such tax-free covenant bonds may be compelled to assume a part of the tax of the bondholder, since withholding does not actually take place.57 Information at the Source. For the purpose of checking up the returns of taxpayers the law provides for a system of information at the source, whereby every corporation may be required to report to the Commissioner of Internal Revenue the names and addresses of its stockholders and the amount of dividends paid to each; 58 stockbrokers may also be required, when called upon, to report the names and addresses of customers and information as to the profits and losses of each,59 and all persons, corporations or partnerships may be required to report the names and addresses of any persons to whom they pay fixed or determinable gains, profits or income of $1,000 or more in any taxable year. In the case of payments of interest to the bondholders of corporations the names and addresses of such bondholders are required to be reported regardless of the amount paid during the year, as is also 56 Rev. Act of 1918, § 221 and § 237. 57 For further discussion of this subject see Chapter 40. 58 Rev. Act of 1918, § 254. 59 Id. § 255. the rule in the case of collection of foreign items of interest and dividends.60 Payment of Tax. The income tax is due and payable. in four installments, each consisting of one-fourth of the total tax. The first installment is payable at the time when the return is due to be filed, unless an extension of time for filing the return is granted in which case the first installment is due at the expiration of such extended period with interest at the rate of one half of one per cent from the date on which the return was originally due to be filed. The return is required to be filed on the 15th day of March (or the 15th day of the third month following the close of the fiscal year) and the second, third and fourth installments are due on the 15th day of the sixth, ninth and twelfth months respectively after the close of the taxable year.6 61 In the case of a taxpayer filing a return for the calendar year the first installment will be due on March 15, the second on June 15, the third on September 15 and the last on December 15. In the event of default in the payment of any installment the whole amount of tax still unpaid becomes due and payable upon notice and demand by the collector. The above provisions do not apply to taxes collected at the source. The tax may be paid in a single payment instead of in installments. It is then due or payable, when the return is filed either at the date set by law or to which time to file the return has been extended.62 No discount is allowed where such an advance payment is made. Receipts are no longer given for taxes paid, except upon the request of the taxpayer.63 Abatement and Refund. The collection of the income tax cannot be restrained by injunction, but if taxes have been erroneously or illegally collected, the Commissioner of Internal Revenue is authorized to remit and pay back the amount to the taxpayer. The importance of collecting 60 Revenue Act of 1918, § 256. 61 Id. § 250. 62 Id. § 250 (a). 63 Id. § 251. revenue is so great that the law permits no taxpayer to interpose a hindrance to the orderly assessment of the tax. He must allow the tax to be collected and may thereafter claim abatement or refund.64 64 See Chapter 38.for procedure as to abatement and refund. 江 CHAPTER 2 THE INCOME TAX RATES As indicated in the foregoing chapter, the income tax is now assessed and collected under one law, instead of two, as was the case in 1917.1 The tax is imposed at two progressive rates (called the normal tax) on a part of the net income, and at a series of progressive rates on all the net income over $5,000 (called the surtax). In the case of corporations no surtax is imposed, the income tax rate being uniform on all amounts of net income. Normal Tax. Under the Revenue Act of 1918 a normal tax of 6% is imposed upon the first $4,000 of taxable net income of citizens and residents for the calendar year 1918, and a normal tax of 12% upon the remainder of such taxable net income. For each calendar year after 1918, these rates are 4% and 8% respectively. In the case of non-resident alien individuals the rates are 12% on the taxable net income for the calendar year 1918 and 8% upon such taxable net income for each calendar year thereafter. In assessing the normal tax of citizens 1 In 1917 the income tax was assessed and collected under two laws (Revenue Act of 1916 and Revenue Act of 1917). 2 Revenue Act of 1918, § 210 (a); Reg. 45, Art. 2. The subject of income is treated fully in Chapter 16 et seq. 3 Revenue Act of 1918, § 210 (b); Reg. 45, Art. 2. 4 In the case of non-resident alien individuals only income from sources within the United States, including interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise, and including 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 of goods within the United States, is taxable (Revenue Act of 1918, § 213 (c)). or residents the following items are deducted from net income to determine taxable net income: (a) the amount received as dividends from a corporation which is taxable for income tax purposes on its net income, and amounts received as dividends from a personal-service corporation out of earnings or profits subject to income tax; (b) the amount received as interest upon obligations of the United States issued after September 1, 1917, and bonds issued by the War Finance Corporation, which is included in gross income; (c) the personal exemption.5 In assessing the normal tax of non-resident alien individuals, the above items are deducted only on the condition that he files a return of his total income received from all sources, corporate or otherwise, in the United States including therein all information which the Commissioner may deem necessary for the calculation of his credits and deductions 6; and in the case of non-resident alien individuals who are citizens or subjects of a foreign country imposing an income tax, the personal exemption is allowed only if such country allows a similar credit to citizens of the United States not residing in such country. On all the net income in excess of the above items and the personal exemption, the normal rate applies.8 COMPARATIVE STATEMENT OF NORMAL TAX RATES. The rates of normal tax under the various laws since March 1, 1913, are as follows: 1913-1%; 1916-2%; 1917-2%; 1918-6% and 12% for the year 1918 and 4% and 8% for subsequent years. The corporation tax for each of the years up to 1917 was the same as the normal tax. In 1917 the normal tax rates imposed by the 1916 and 1917 Laws were applied to incomes of citizens and residents, but only the 1916 rate to non-resident aliens, while the corporation tax was 6%. 5 Revenue Act of 1918, §§ 210 and 216; Reg. 45, Art. 2. 6 Revenue Act of 1918, § 217. 7 Revenue Act of 1918, § 216 (e). 8 Revenue Act of 1918, § 211 (a). |