NOTE: Under the Revenue Act of 1918, a taxpayer was entitled to a credit against net income for dividends received from foreign corporations where such corporations were taxable on income from sources within the United States, no matter how small the taxable income, (Bul. 5-19-252, T. B. M. 21) nor how large the dividends (Bul. 4-20-706; O. D. 383). PROBLEM 154 Illustrating Credits Against Net Income for Normal TaxPersonal Exemption-Head of Family with Net Income Less than $5,000 FACTS: James Dare, a citizen of the United States, has a widowed mother, a sister 19 who attends college, and a brother 16. The family lived during the entire calendar year 1921 in the house left by the father. The mother receives $125 annually from investments and has no other income except $250 which James Dare contributes monthly to the support of the family, out of his annual salary of $3,600, his sole income. The sister and the younger brother are entirely dependent upon their older brother and their mother. Mr. Dare's return is filed on the calendaryear basis. QUESTION: On what amount would he be subject to normal tax? ANSWER: $300. As he contributes 24/25 of the income of his dependents -mother, sister, and brother-and on the last day of his taxable year they are living in the one house which he maintains, he is considered the "head of a family," and, as such, is entitled to a personal exemption of $2,500 (his net income being less than $5,000). As the sister is over 18, and is not mentally or physically incapable of self-support, he is not entitled to credit for her dependency. He is entitled, however, to claim the credit of $400 for each of the other two dependents-mother and brother under 18-giving him a total exemption of $3,300, leaving $300 subject to normal tax. REFERENCES: ... Sec. 216 "That for the purpose of the normal tax only there shall be allowed the folowing credits: (c) In the case of a single person, a personal exemption of $1,000; or in the case of the head of the family or a married person living with husband or wife, a personal exemption of $2,500, unless the net income is in excess of $5,000, in which case the personal exemption shall be $2,000. . (d) $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective; . . ." Art. 302, Regulations 62: "A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. . . .” Art. 304, Regulations 62: "A taxpayer receives a credit of $400 for each person (other than husband or wife), whether related to him or not and whether living with him or not, dependent upon and receiving his chief support from the taxpayer, provided the dependent is either (a) under eighteen or (b) incapable of self-support because defective. The credit is based upon actual financial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a family. . . ." Bul. 3-21-1397; O. D. 775, held in part that "In order to meet the test of actual support and maintenance within the purview of Art. 302, the benefactor must furnish more than one-half of the support and maintenance." PROBLEM 155 Illustrating Credits Against Net Income for Normal TaxPersonal Exemption-Head of Family with Net Income FACTS: Over $5,000.00 Frank Reed is in business as a hardware merchant. He is not married. His net income for his fiscal year ending November 30, 1921, was $105,000. Upon the death of his brother-in-law on September 3, 1921, who died without any provision for the support of his wife and their three children, aged 9, 12, and 14, respectively, Mr. Reed brought his sister and family to live with him, and provided their entire support thereafter. QUESTION: What would be his personal exemption on his return for the fiscal year ending Nov. 30, 1921? ANSWER: $3,200. He is the "head of a family" on the last day of his established fiscal year-November 30, 1921,-because he maintains in the one household these individuals who are closely related to him and their support is based on a moral obligation. As his net income is considerably more than $5,000, the exemption of but $2,000 applies. As in addition he contributes the entire support and maintenance of the sister and of her three children, all of which children are under eighteen, he is entitled to a further credit for each of them of $400, making a total exemption of $3,200. REFERENCES: ... an Sec. 216. See Problem 154 for quotations from law and Reg. 62. Bul. 26-21-1707, A. R. R. 551: "... Recommended that . . additional exemption on account of a nephew and nieces, all under eighteen years of age, who resided in his own home and were dependent upon him for support and maintenance . . . be allowed in full. . . .” PROBLEM 156 Illustrating Credits Against Net Income for Normal TaxPersonal Exemption-Credit for Dependent Other than Relative FACTS: Henry Dodd, an American citizen and a bachelor with an income of over $5,000, has provided the entire support of an old family servant of his mother for the past taxable year, including the last day of such taxable year. The old servant was incapable of self support. QUESTION: Would his personal exemption of $1,000 be increased $400 because of his support of this old servant? ANSWER: Yes. The credit for dependents is based upon the dependent receiving his chief support from a taxpayer who is an American citizen or resident, if such dependent is under 18 or incapable of self-support. It is not necessary for the dependent to reside with the benefactor or be related, if the other two conditions are fulfilled. REFERENCES: Sec. 216: See Problem 154 for quotations from law and Regs. 62. Bul. 4-19-220; O. D. 139: "An American citizen may claim the credit for dependents irrespective of the nationality or place of residence of the dependents." PROBLEM 157 Illustrating Credit Against Net Income for Normal TaxPersonal Exemption-Nonresident Alien FACTS: Henry Cook is a nonresident alien. On the last day of his taxable year he was living abroad with his wife and their two minor children. He receives an income of over $5,000 from investments in property within the United States. QUESTION: What personal exemption is he entitled to claim as a credit against net income for normal tax purposes? ANSWER: As he is a nonresident alien as to the United States, he is entitled to a personal exemption of but $1,000.00 and receives no credit for dependents. REFERENCE: Sec. 216: "That for the purpose of the normal tax only there shall be allowed the following credits: . . . (d) $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent is under eighteen years of age or is incapable of self-support because mentally or physically defective; (e) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the personal exemption shall be only $1,000 and he shall not be entitled to the credit provided in subdivision (d). . . . 99 PROBLEM 158 Illustrating Credits Against Net Income for Normal TaxPersonal Exemption-Status on Last Day of Taxable Year FACTS: Richard Kellog, a citizen of the United States, is a widower with no dependents on Dec. 31, 1921, his wife and only child having been killed in an automobile accident on December 30, 1921. Mr. Kellog files his income tax return on the calendaryear basis. QUESTION: What personal exemption is he entitled to claim as a credit against net income for normal tax purposes for the year 1921? ANSWER: $1,000.00. Although he was married (and presumably living with his family) for the greater part of the year, his status on December 31, 1921,-the last day of the taxable year-was that of a single man, not the head of a family. REFERENCE: Sec. 216: "That for the purpose of the normal tax only there shall be allowed the following credits: . . . (c) In the case of a single person, a personal exemption of $1,000; (f) The credits allowed by subdivisions (c) . . . of this section shall be determined by the status of the taxpayer on the last |