INTRODUCTION

To those acquainted with the Revenue Act of 1918, a book on the subject of the Revenue Act of 1921, would not be complete without a comparison of the Revenue Act of 1921 with the Revenue Act of 1918.

Accordingly the following are pointed out as the more important and interesting changes made in the 1921 Revenue Act from the 1918 Act with respect to the income tax and the excessprofits tax. These changes were made by the 67th Congress in an effort to alleviate the burdens of abnormal taxation and at the same time provide sufficient revenue to meet the requirements of the Government. The Revenue Act of 1921 was therefore captioned "An Act to Reduce and Equalize Taxation, to Provide Revenue, and for Other Purposes." To what extent Congress has succeeded in its first object, namely, to reduce and to equalize taxation, may be noted by following the changes in the new law; to what extent Congress has succeeded in accomplishing its second object, namely, to provide revenue, will be seen only when all the returns are filed and the taxes due thereon are collected.

In referring to the more important and interesting changes effected by the Revenue Act of 1921, these changes may be classified under the following:

1. Changes to reduce taxation.

2. Changes to remove certain inequities existing in the Revenue Act of 1918.

3. Changes to prevent the evasion of taxation.

4. Miscellaneous changes.

1. CHANGES TO REDUCE TAXATION.

The normal-tax rates and the surtax rates applying to individuals up to and including December 31, 1921, remain unchanged, that is, these rates are the same as provided for in

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the Revenue Act of 1918. Beginning, however, with January 1, 1922, the surtax rates are somewhat reduced, particularly for those whose incomes are in excess of $100,000.

In the case of individuals for the purpose of computing the normal tax the personal exemption for a married person living with husband or wife has been increased to $2,500, except where the net income is in excess of $5,000, in which case the personal exemption is $2,000 (the same as in the Revenue Act of 1918). In no case, however, is the reduction of the exemption from $2,500 to $2,000 permitted to increase the tax above an amount equal to the tax which would be payable if computed with a $2,500 exemption, plus the excess of the net income over $5,000.

The exemptions allowed individuals because of dependents have been increased from $200 to $400 on account of each dependent.

The excess-profits tax prevailing under the Revenue Act of 1918 and applying to corporations, is continued and effective to and including December 31, 1921, at the same rates as prevailed during 1919 and 1920. However, beginning with January 1, 1922, there is no excess-profits tax. The ordinary income tax of 10% applying to corporations under the Revenue Act of 1918, is increased to 122% effective January 1, 1922.

2. CHANGES TO REMOVE CERTAIN INEQUITIES EXISTING IN THE REVENUE ACT OF 1918.

A provision of the Revenue Act of 1921 of considerable interest and benefit to taxpayers is covered by section 206, which provides for a limited tax on profits resulting from the sale of capital assets. A capital asset is defined as property acquired and held by the taxpayer for profit or investment for more than two years. Section 206 provides that where a taxpayer has capital net gain as the result of the sale of capital. assets after December 31, 1921, he may compute the tax on such capital net gain by taking 12% thereof (in lieu of the tax computed by the usual method), provided, however, that the total tax on the taxpayer's net income is not less than

122% of his total net income. This option should be effective in encouraging the sale of capital assets held by individuals who would otherwise be subject to excessive taxation on any profits realized by such sale.

Another provision of particular interest and benefit to taxpayers, both individuals and corporations, is that contained in section 204, with reference to net losses. The "net loss" under the statute is not what would perhaps ordinarily be regarded as a net loss, but consists of a loss arising out of the operations of the trade or business regularly carried on by the taxpayer and is computed by deducting certain specified items from certain other specified items. The statute provides that net losses for any taxable year beginning after December 31, 1920, or for such portion of a taxable year beginning in 1920 and ending in 1921 as is applicable to 1921, are deductible from net income for the succeeding taxable year to the extent of such net income. The excess, if any, of such net loss over such net income of the succeeding taxable year is deductible from the net income of the next succeeding taxable year up to the extent of the net income of such next succeeding year. This provision is a real approach towards equity in income taxation.

Another provision of considerable interest and benefit to taxpayers, both individuals and corporations, is that contained in section 202, with respect to the computation of the gain or loss sustained from the sale or other disposition of property. Of particular interest are those provisions which follow the decision laid down by the Supreme Court in the Goodrich case applying to the sale of property acquired prior to March 1, 1913, in accordance with which, in the event of profit, such profit is taxable only to the extent that it accrued since February 28, 1913, and in the event of a loss such loss is deductible only to the extent that it accrued since February 28, 1913. Another provision of this section of the law does away with "paper" profits or losses arising out of the exchange of one form of property for another. Thus, in an exchange of one form of property for another no gain or loss is recognized unless the property received in exchange has a readily realizable

market value, and even if the property received in exchange has a readily realizable market value, no gain or loss is recognized if any such property held for investment or for productive use in the trade or business is exchanged for property of like kind or use, or if, in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation, a party to or resulting from such reorganization. This provision will permit corporations to enter into reorganizations, consolidations or mergers, without fear of such transactions resulting in unjust taxation of "paper" profits.

Of interest and benefit to probably only a relatively small class of taxpayers are the provisions contained in section 262. This section applies to citizens of the United States or domestic corporations 80% or more of whose gross income for the threeyear period immediately preceding the close of the taxable year, was derived from sources within a possession of the United States, and 50% or more of whose gross income for such period was derived from the active conduct of business within a possession of the United States. Such citizens or domestic corporations are taxable only on their gross income from sources within the United States unless income derived from sources within a possession of the United States or from sources within a foreign country is actually received by such citizens or corporations within the United States, in which case such income is also taxable. This provision is intended to relieve taxpayers conducting business within a possession of the United States from double taxation, and to permit them to compete on fair terms with the citizens of other countries doing business within such possessions.

Of some interest and benefit is the provision contained in section 214, permitting the deduction from gross income of traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business. The practice of the Bureau of Internal Revenue under the Revenue Act of 1918 was to allow as a deduction only that part of traveling expenses which represented

the increase in cost as a result of traveling over the cost of subsistence at home.

Of very considerable interest and advantage is the provision contained in the new law (and it applies both to corporations and to individuals) with respect to the deductibility of bad debts. Debts ascertained to be worthless and charged off within a taxable year are deductible from gross income as in previous income-tax acts. However, under the 1921 Act the Commissioner is authorized to permit the deduction from gross income of a bad debt charged off in part where the Commissioner is satisfied that such debt is recoverable only in part. The Commissioner is also authorized, in his discretion, to permit a deduction from gross income on the basis of the creation of a reserve for bad debts. However, under Treasury Decision 3262, recently issued, such reserve for bad debts may be set up only in a reasonable amount and after a taxpayer has elected this method of providing for bad debts he is required to continue that method unless permission to change is granted by the Commissioner. Under Art. 155, Regulations 62, more recently issued, a taxpayer is permitted, if choosing to take his deduction on the basis of the reserve set up, to deduct also that part of the total charge to the reserve account in any taxable year which applies to debts outstanding December 31, 1920. The provision of the Revenue Act of 1921 permitting the charging off of bad debts in part or the setting up of a reserve for bad debts and the deduction from taxable income of the amount so charged off or reserved brings the income-tax procedure more into conformity with sound business and accounting practice.

Authority to take deductions from gross income on account of contributions is extended to include contributions or gifts made for the use of the United States, any State, Territory or subdivision thereof, or the District of Columbia, for exclusively public purposes. The total amount of contributions allowable as a deduction from gross income is, however, as heretofore, not to exceed 15% of the net income arrived at before taking contributions or gifts as a deduction.