PROBLEM 72 Illustrating Gross Income-Interest Received on Liberty Bonds, Victory Notes, and Bonds of the War Finance Corporation FACTS: John Jones in 1921, receives interest on the following Government securities, which constitute his entire holdings: What part, if any, of the $245 interest received is subject to the income tax, and what part is subject to surtax? ANSWER: None of it is subject to income tax. Only the $47.50 interest on the 434% Victory Note is subject to surtax. Taxable interest on Liberty bonds should be included in gross income, but is a credit against net income for the normal or income tax. REFERENCES: Sec. 213: "... the term 'gross income'. . . (b) does not include (4) Interest upon . . . (c) the obligations of the United States or its possessions; or (d) bonds issued by the War Finance Corporation. In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), and in the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income, war-profits and excessprofits taxes. Sec. 1328: "That the various Acts authorizing the issues of Liberty bonds are amended and supplemented as follows: "(a) On and after January 1, 1921, 4 per centum and 44 per centum Liberty bonds shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess-profits and warprofits taxes, now or hereafter imposed by the United States upon the income or profits of individuals, partnerships, corporations, or associations, in respect to the interest on aggregate principal amounts thereof as follows: "Until the expiration of two years after, the date of the termination of the war between the United States and the German Government, as fixed by proclamation of the President, on $125,000 aggregate principal amount; and for three years more on $50,000 aggregate principal amount. "(b) The exemptions provided in subdivision (a) shall be in addition to the exemptions provided in section 7 of the Second Liberty Bond Act, and in addition to the exemption provided in subdivision (3) of section 1 of the Supplement to the Second Liberty Bond Act in respect to bonds issued upon conversion of 32 per centum bonds, but shall be in lieu of the exemptions provided and free from the conditions and limitations imposed in subdivisions (1) and (2) of section 1 of the Supplement to Second Liberty Bond Act and in section 2 of the Victory Liberty Loan Act." Section 1. [Act of April 24, 1917 (40 Stat., 35)]. (First Liberty Bond Act.) "The bonds herein authorized shall be in such form and subject to such terms and conditions of issue, conversion, redemption, maturities, payment, and rate and time of payment of interest, not exceeding three and one-half per centum per annum, as the Secretary of the Treasury may prescribe. The principal and interest thereof shall be payable in United States gold coin of the present standard of value and shall be exempt, both as to principal and interest, from all taxation, except estate or inheritance taxes, imposed by authority of the United States, or its possessions, or by any State or local taxing authority; but such bonds shall not bear the circulation privilege." Section 7. [Act of Sept. 24, 1917 (40 Stat., 288)]. (Second Liberty Bond Act.) "That none of the bonds authorized by section one, nor of the certificates authorized by section five, or by section six, of this Act, shall bear the circulation privilege. All such bonds and certificates shall be exempt, both as to principal and interest from all taxation now or hereafter imposed by the United States, any State, or any of the United States, or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the in come or profits of individuals, partnerships, associations, or corporations. The interest on an amount of such bonds and certificates the principal of which does not exceed in the aggregate $5,000 owned by any individual, partnership, association, or corporation, shall be exempt from the taxes provided for in subdivision (b) of this section." Section 1. [Act of Sept. 24, 1918, (40 Stat., 965)]. (Supplement to the Second Liberty Bond Act.) "That until the expiration of two years after the date of the termination of the war between the United States and the Imperial German Government, as fixed by proclamation of the President ... (3) The interest on an amount of bonds, the principal of which does not exceed $30,000, owned by any individual, partnership, association or corporation, issued upon conversion of 32 per centum bonds of the first Liberty Loan in the exercise of any privilege arising as a consequence of the issue of bonds of the fourth Liberty Loan, shall be exempt from such taxes." NOTE: The proclamation by the President of the United States dated Nov. 14, 1921 fixed the date of the termination of the war against the German Government as July 2, 1921. The following schedule is appended to show in condensed form the exemptions that apply in the cases both of corporations and individuals. The exemptions here shown refer to the principal sums, the income from which is exempt from surtaxes (in case of individuals), and excess-profits and warprofits taxes (in case of corporations) only; the securities are all fully exempt from normal or income tax. 32% Liberty Bonds and 334% Victory Notes-entirely exempt for life of obligation. Exemptions to July 2, 1923 4% and 44% Liberty Bonds, original or converted, Treasury Certificates of In Life of debtedness and Savings Certificates.... $ 5,000 obligation 1st-2nd converted 44% Liberty Bonds (issue of October 24, 1918 only) 30,000 July 2, 1923 4% and 44% Liberty Bonds, all issues... 125,000 July 2, 1923 Maximum exemption to July 2, 1923 ....$160,000 Exemptions July 2, 1923 to July 2, 1926 4% and 44% Liberty Bonds, original or converted, Certificates of Indebtedness and Savings Certificates (as above).... $ 5,000 4% and 44% Liberty Bonds-all issues. 50,000 Maximum exemption July 2, 1923 to Life of obligation. July 2, 1923 to July 2, 1926 $55,000 It will be noted that no such qualifications as to original subscriptions to bonds still held at the time of filing the return, as in the case of the 1918 Act, are to be found in the 1921 Act. There is no exemption in the case of 434% Victory Notes. Bonds of the War Finance Corporation are exempt from normal tax and have a principal exemption of $5,000 (for the life of the obligation) from surtaxes, excess-profits and warprofits taxes. Sec. 16 [Act of April 5, 1918 (40 Stat., 506)]: "That any and all bonds issued by the Corporation shall be exempt, both as to principal and interest, from all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, corporations, or associations. The interest on an amount of such bonds the principal of which does not exceed in the aggregate $5,000 owned by any individual partnership corporation, or association, shall be exempt from the taxes referred to in clause (b) Corporations The same Liberty Bond, Victory Note and War Finance Bond exemptions apply to corporations as to individuals. See Sec. 233 for law reference. PROBLEM 73 Illustrating Gross Income-Income of Foreign Governments FACTS: A certain foreign government has investments in stocks and bonds in the United States from which it receives income; it also has deposits of government funds in banks in the United States from which it receives interest. QUESTION: Are the various items of income of this foreign government above mentioned to be reported for United States Federal tax purposes? ANSWER: REFERENCE: 66 Sec. 213: ... the term 'gross income'. . . (b) does not include (5) the income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments, or from any other source within the United States; . . . PROBLEM 74 Illustrating Gross Income-Health Insurance Received FACTS: G. G. Green in 1921 on account of sickness received $500, health insurance. QUESTION: Is this amount subject to Federal income tax? ANSWER: No. REFERENCE: Sec. 213: ". . . . the term 'gross income'. . . (b) does not in |