Federal Income Tax Problems --1922

PROBLEM 276

Illustrating Taxability of Citizens of Possessions of the
United States

FACTS:

Lois Cortez, a citizen of the Hawaiian Islands (but not otherwise a citizen of the United States) operates several sugar plantations on these islands. He disposes of his raw sugar to certain factors located on the Hawaiian Islands and to certain sugar refineries in California.

QUESTION:

How should he report his income?

ANSWER:

His income from sources within the United States should be reported, and the tax thereon paid under the same conditions as for a nonresident alien individual. (See Problems 159, and 161 to 166, inclusive, for illustrations.)

REFERENCE:

Sec. 260: "That any individual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States, shall be subject to taxation under this title only as to income derived from sources within the United States, and in such case the tax shall be computed and paid in the same manner and subject to the same conditions as in the case of other persons who are taxable only as to income derived from such sources.

"Nothing in this section shall be construed to alter or amend the provisions of the Act entitled, 'An Act making appropriations for the naval service for the fiscal year ending June 30, 1922, and for other purposes,' approved July 12, 1921, relating to the imposition of income taxes in the Virgin Islands of the United States."

PROBLEM 277

Illustrating the Assessment of the Income Tax in Porto
Rico and in the Philippine Islands

FACTS:

Mr. Almedio Lorenz, a resident citizen of Porto Rico, is prof

itably engaged in several business ventures there. He derives all his income from sources within Porto Rico.

QUESTION:

What effect will the passage of the Revenue Act of 1921 have upon Mr. Lorenz' income-tax return for the calendar year 1921?

ANSWER:

Unless action is taken by the Porto Rican Legislature modifying the income-tax law which was in effect there at the time the 1921 Act was passed (November 23, 1921), Mr. Lorenz will make his return exactly as he would have made it if the 1921 Act had not been passed. Porto Rico has its own revenue system and laws (the income-tax law became effective June 26, 1919), and the 1921 Act specifically states that in Porto Rico the income tax shall continue to be levied, assessed, collected and paid as provided by the law prior to the passage of that Act. The Act, however, permits the Porto Rican or Philippine Legislature to amend, alter, modify, or repeal the income-tax laws in force in Porto Rico or the Philippine Islands, respectively.

REFERENCE:

Sec. 261: "That in Porto Rico and the Philippine Islands the income tax shall be levied, assessed, collected, and paid as provided by law prior to the passage of this Act.

"The Porto Rican or Philippine Legislature shall have power by due enactment to amend, alter, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively."

PROBLEM 278

Illustrating the Taxability of the Income of a Citizen of the United States Residing in and Employed in a

FACTS:

Possession of the United States

R. Richman is a citizen of the United States, residing in Porto Rico. He is single and has no dependents. Mr. Richman is

employed by the Porto Rican Fruit Distributing Company, and for each of the three years 1919, 1920 and 1921, had an annual net income of $18,000, as follows: $15,000 salary from the Porto Rican Company, for legal services; $2,000 interest on mortgages held in the United States; and $1,000 interest on bank deposits in the United States. Mr. Richman has no office or place of business in the United States. His salary is paid in Porto Rico.

QUESTION:

What is the income subject to tax in the United States in the calendar year 1921?

ANSWER:

$2,000. The total net income received from sources within the United States is $3,000, of which $1,000 is not taxable, as

"interest on deposits with persons carrying on the banking business, paid to persons not engaged in business within the United States and not having an office or place of business therein"

shall not be included as gross income from sources within the United States. [Sec. 217 (a) (1) (a)]. In other words, citizens coming within the provisions of Sec. 262 must compute their income from sources within the United States in the same manner as nonresident aliens. The $15,000 salary received by Mr. Richman is not subject to the United States income tax as over 80% of Mr. Richman's gross income is derived from sources within a possession of the United States, and over 50% of his gross income is derived from the active conduct of a business within a possession of the United States.

REFERENCE:

Sec. 262: (a) That in the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States

"(1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section) for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the

close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and

"(3) If, in the case of such citizen, 50 per centum or more of his gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an employee or agent of another."

PROBLEM 279

Illustrating the Computation of the War-Profits and Excess-
Profits Taxes for the Calendar Year 1921 of a Domestic
Corporation Which Derives a Net Income of More
than $10,000 from Government Contracts
Made Between April 6, 1917, and Novem-

FACTS:

ber 11, 1918, Both Dates Inclusive

The Non Plus Ultra Raincoat Corporation entered into a contract with the United States Government May 1, 1917, to manufacture raincoats. During the calendar year 1921 the company derived a profit of $20,000 from this Government contract. The total net income for the year was $60,000, and the average invested capital for the taxable year $400,000. Its net income and invested capital during the years 1911, 1912 and 1913, is given in the following: