payer's net income (computed without deduction for any income, war-profits and excess-profits taxes imposed by any foreign country or possession of the United States) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year.' "This limitation is made despite the fact that part of the income of Mr. Wheeler was derived in 1920 and part in 1921, because of the specific requirements to this effect set forth in paragraph (d) of section 222 which is quoted below in reference. If it were not for this specific provision of said paragraph (d) it might be logical to expect that that portion of the full income taxes paid to the Dominion of Canada applicable to 1920, would be credited in full against United States income taxes due for 1920, in accordance with the provisions of the Revenue Act of 1918. REFERENCE: Sec. 222, (d): "If the taxpayer makes a return for a fiscal year beginning in 1920 and ending in 1921, the credit for the entire fiscal year shall, notwithstanding any provision of this Act, be determined under the provisions of this section; and the Commissioner is authorized to disallow, in whole or part, any such credit which he finds has already been taken by the taxpayer." NOTE: The credit referred to in the quotation above given is the credit on account of income, war-profits and excess-profits taxes paid during the taxable year to any foreign country or to any possession of the United States more fully set forth in paragraph (a) of section 222. If the taxpayer is a corporation the following reference applies: Sec. 238 (d): "If a domestic corporation makes a return for a fiscal year beginning in 1920 and ending in 1921, the credit for the entire fiscal year shall, notwithstanding any provision of this Act, be determined under the provisions of this section; and the Commissioner is authorized to disallow, in whole or in part, any such credit which he finds has already been taken by the taxpayer." PROBLEM 188 Illustrating Case in Which Individual is Required to File a Return-Net Income more than $1,000 FACTS: Stephen H. Brown, a real estate broker made $1,800 net in come in the real estate business during the taxable year 1921. He had been living with his wife and child in an apartment up to the time of the death of his wife on December 26, 1921, but shortly thereafter (December 29, 1921,) he gave up the apartment, placed the child in an orphan asylum and rented a room in a boarding house. He had always filed his returns on the the calendar year 1921. QUESTION: Will Mr. Brown be required to file an income tax return for the calendar year 1921? ANSWER: Yes. As Mr. Brown's wife died prior to the close of his taxable year, his status at December 31, 1921 is that of a single man. As his income was in excess of $1,000, he must file a return. REFERENCE: Sec. 223 (a): "That the following individuals shall each make under oath a return stating specifically the items of his gross income and the deductions and credits allowed under this title (1) Every individual having a net income for the taxable year of $1,000 or over, if single, or if married and not living with husband or wife; . . ." PROBLEM 189 Illustrating Case in which Individual is not Required to File a Return FACTS: Mr. Harold A. Barton, a bachelor, was employed as a bookkeeper at a salary of two thousand dollars during the year 1921. In addition to his salary his income consisted of forty dollars interest from Liberty Bonds and $1,200 rent from two dwelling houses which he owns. One of the dwelling houses burned down during 1921 resulting in a loss of $2,000, not compensated by insurance. His expenses for taxes, repairs to dwellings, etc., amounted to $340 for the taxable year. QUESTION: Will Mr. Barton be required to file an income tax return for the taxable year 1921? ANSWER: Mr. Barton will not be required to file a return for the taxable year 1921, as his gross income is less than $5,000 and his net income is less than $1,000. Loss on dwelling destroyed by fire.... $2,000 Net income NOTE: 340 2,340 $860 The Liberty Bond interest is exempt from taxation. REFERENCE: Section 223 (a): "That the following individuals shall each make under oath a return stating specifically the items of his gross income and the deductions and credits allowed under this title (1) Every individual having a net income for the taxable year of $1,000 or over, if single, or if married and not living with husband or wife; . (3) Every individual having a gross income for the taxable year of $5,000 or over, regardless of the amount of his net income." PROBLEM 190 Illustrating a Case in Which Individual is Required to File an Income Tax Return, even though there is no Tax FACTS: Due thereon-Individual Having Net Income of Husband or Wife Mr. Howard A. Jerome is married and was living with his wife on December 31, 1921, the last day of his taxable year. He has a ten year old son entirely dependent upon him. Mr. Jerome received a salary of $2,800 for the taxable year 1921. Mrs. Jerome received no income whatsoever during the year 1921. QUESTION: Will Mr. Jerome be required to file an income tax return for the taxable year 1921? ANSWER: Yes, Mr. Jerome will be required to file an income tax return for the taxable year 1921, as his net income was in excess of $2,000, for the above period. However, he will not be required to pay any tax as he is entitled to a personal exemption of $2,500 due to the fact that his net income together with his wife's net income is less than $5,000 and he is entitled to a credit of $400 for his dependent child, making a total exemption of $2,900, which is in excess of his total taxable income. REFERENCES: Section 223 (a): "That the following individuals shall each make under oath a return stating specifically the items of his gross income and the deductions and credits allowed under this title. . . . (2) Every individual having a net income for the taxable year of $2,000 or over, if married and living with husband or wife. . . Section 216: "That for the purpose of the normal tax only there shall be allowed . . . (c) In the case of a single person, a personal exemption of $1,000; or in the case of the head of a 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. A husband and wife living together shall receive but one personal exemption. The amount of such personal exemption shall be $2,500, unless the aggregate net income of such husband and wife is in excess of $5,000, in which case the amount of such personal exemption shall be $2,000. If such husband and wife make separate returns the personal exemption may be taken by either or divided between them. In no case shall the reduction of the personal exemption from $2,500 to $2,000 operate to increase the tax, which would be payable if the exemption were $2.500, by more than the amount of the net income in excess of $5,000; (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." PROBLEM 191 Illustrating Case in Which Husband and Wife File Joint Return Although Aggregate Net Income is Less Than FACTS: Exemption Walter S. Cooper operated a grocery store and during the calendar year 1921 made a gross profit of $10,000 and a net profit of $6,000. His wife, Mary A. Cooper, who was living with her husband, received no income during the calendar year 1921, but sustained a loss of $5,000 as the result of the theft of all her jewelry which was not covered by insurance. Mr. Cooper in previous years has filed a single return on a calendar-year basis, including therein his wife's income. QUESTION: Will Mr. Cooper be required to file a return for the calendar year 1921? ANSWER: Mr. Cooper will be required to file either a return including merely his own income therein or a joint return including the aggregate income and deductions of his wife and himself as in either case the gross income to be reported is in excess of $5,000. It would be more advantageous for Mr. Cooper to file a joint return with his wife rather than a separate return as the aggregate net income under a joint return is less than the $2,000 exemption allowed under section 216 (c) of the Revenue Act of 1921, and no tax would be due; whereas, if Mr. Cooper files a separate return, he will have $6,000 taxable income. REFERENCE: Sec. 223: "(a) That the following individuals shall each make under oath a return stating specifically the items of his gross income |