QUESTION:

Is the amount of this pension to be included in the income of Mr. Wagner subject to the Federal income tax?

ANSWER:
No.

REFERENCES:

Sec. 213 (a) (Quoted under Problem 61)

Bul. 14-20-826; O. D. 434: "Pensions received from a State or a political subdivision thereof by its retired employees are exempt from tax."

Art. 71, Regulations 62: "Gross income excludes the items of income specifically exempted by the statute and also certain other kinds of income by statute or fundamental law free from tax."

31 Opinion Attorney General, 441 (rendered by A. Mitchell Palmer, May 6, 1919.) The substance of this opinion was that the Federal Government was constitutionally unable to tax the wages and salaries of the employees and officers of a State, and that the Act of 1918 was not to be construed to include in taxable income such wages and salaries. That portion of section 213 (a) of the 1918 Act which pertains to salaries received is repeated verbatim in the 1921 Act.

FACTS:

PROBLEM 65

Illustrating Gross Income-Jury Fees

J. J. Jones in 1921, received an amount of Y dollars covering fees and compensation for serving on the jury of a municipal court.

QUESTION:

Is this amount subject to the Federal income tax?

ANSWER:
No.

REFERENCES:

Sec. 213 (a) (Quoted under Problem 61)

Bul. 14-20-826; 0. D. 434: "Persons serving on the jury of a State, county, or municipal court are held to be employees of a State

or a political subdivision thereof, and fees and compensation received by them are accordingly exempt from tax."

See also references under Problem 64.

PROBLEM 66

Illustrating Gross Income-Refunded Federal Income Tax

FACTS:

G. O. Gordon receives in 1921, a refund of $60, Federal income tax paid in 1917.

QUESTION:

Is this refund to be reported by Mr. Gordon in his Federal income tax returns as taxable income?

ANSWER:

This would probably not be taxable. This amount was not deductible when paid, and would therefore seem not to be taxable when repaid.

REFERENCES:

Bul. 13-19-418; O. D. 240: "Income taxes assessed under the Revenue Act of 1916 are deductible only if paid prior to January 1, 1917."

See Sec. 214 (a) (3) (Quoted under Problem 101)

NOTE:

While the above problem as prepared relates to an individual the same answer would apply in the case of a corporation.

PROBLEM 67

Illustrating Gross Income-Amount Received as Beneficiary of a Life Insurance Policy

FACTS:

Mr. H. Adams in 1921, received as a beneficiary of a deceased friend's life insurance policy, $10,000.

QUESTION:

Is this amount to be reported as taxable income?

ANSWER:

No.

REFERENCE:
Sec. 213:

"... the term 'gross income'. . . (b) does not include (1) the proceeds of life insurance policies paid upon the death of the insured."

PROBLEM 68

Illustrating Gross Income-Proceeds of Surrendered Life Insurance Policy

FACTS:

Andrew Allen in 1921, surrendered his life insurance policy taken out in 1901, receiving therefor $2,850. Of this amount $2,800 represented premiums repaid, and $50 represented interest. The cash surrender value of the policy March 1, 1913 was $2,200.

QUESTION:

What part, if any, of the $2,850, is to be included in gross income subject to Federal income taxes?

ANSWER:

The $50 is taxable; the $2,800 is non-taxable.

REFERENCES:

...

Sec. 213 (a): (Quoted under Problem 61.) Sec. 213: "... The term 'gross income' (b) does not include (2) the amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; . . ." Bul. 4-20-701; O. D. 379: "The basis for ascertaining the taxable income resulting from the disposition of a life insurance policy acquired prior to March 1, 1913, where the insured transfers the policy to some one other than the insurance company which wrote the

policy, is the cash surrender value of the policy as at March 1, 1913. However, if the insured surrenders his policy and all his rights thereunder to the insurance company, which wrote the policy, the aggregate amount of the premiums paid during the period the policy was held, or the cash surrender value of the policy as at March 1, 1913, whichever is greater in amount, is to be taken as the basis in computing the taxable income derived by the insured."

PROBLEM 69

Illustrating Gross Income-Legacy Received by Taxpayer with Interest on Same

FACTS:

J. E. Jordon in December, 1921, received as legatee under the will of a relative who had died in March, 1921, $10,300. Of this amount $10,000 was the amount of the legacy itself, and the $300 represented interest accrued from March to December.

QUESTION:

What part, if any, of the $10,300 is to be reported as taxable income?

ANSWER:

The $300.00 is taxable but the $10,000 is non-taxable.

REFERENCE:

Sec. 213: "... The term 'gross income' . . . (b) does not include . . . (3) ... (3) the value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income)."

PROBLEM 70

Illustrating Gross Income-Income from Municipal Bonds

FACTS:

J. E. Joseph in 1922, received $4,500 interest on 42% bonds of the City of New York.

QUESTION:

Is this amount to be reported in Mr. Joseph's income subject to Federal taxes?

ANSWER:
No.

REFERENCE:

Sec. 213: "... The term 'gross income' . . . (b) does not include (4) interest upon (a) the obligations of a State, Territory or any political subdivision thereof, or the District of Columbia;

...

NOTE:

.

This exemption applies to corporations as well as to individuals.

PROBLEM 71

Illustrating Gross Income-Interest Received on Federal Farm Loan Bonds

FACTS:

John Jarmuth in 1921, received $600 interest on Federal Farm Loan Bonds.

QUESTION:

Is this interest subject to the Federal income taxes?

ANSWER:
No.

REFERENCES:

Sec. 213: 66 The term 'gross income' . . . (b) does not include... (4) Interest upon . . .(b) securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916. . ."

Art. 75; Regulations 62: “... The Federal Farm Loan Act of July 17, 1916, provides that. farm loan bonds, with the income therefrom, shall be exempt from taxation."

NOTE:

This exemption applies to corporations the same as to individuals.