POLITICAL SUBDIVISION OF A STATE. Difficulty is sometimes encountered in determining whether bonds issued by districts or divisions of a state are exempt under this phrase. The Attorney General has held that special assessment districts created for a public purpose, such as the improvement of streets and public highways, the provision of sewage, gas and light and the reclamation, drainage, or irrigation of land are districts for public use, and consequently political subdivisions of the state, within the meaning of the law.10 Levee and school districts lawfully created and authorized by the state to levy a tax to meet the obligations of such district are also held to be political subdivisions of the state. In general the term "political subdivision" includes special assessment districts or divisions created by proper authority of the state acting within its constitutional powers and under its general laws, for the purpose of carrying out a portion of those functions of the state which by long usuage and inherent necessities of government have always been regarded as public.11

MORTAGE ASSUMED BY MUNICIPALITY. Although interest on municipal bonds are exempt from the tax, yet where a municipality has purchased a public utility sub

10 Opinion of Attorney General dated January 30, 1914. the course of his opinion the Attorney General said: "

In

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where the power to levy a tax is given a district by the state, presumptively that district is created for a public use, and is exercising a public function. Nor does it make any difference that the tax is measured by the benefit conferred." But he refrained from expressing any opinion whether assessment districts might not be created for a purely private purpose so as to bring them within the principles laid down in the South Carolina Dispensary case, 199 U. S. 437, rather than within those which governed U. S. v. Railroad Company, 17 Wall. 322.

11 T. D. 1946.

ject to a mortgage, and the mortgage retains its original character, even though the municipality assumes the mortgage indebtedness and pays the interest thereon, the mortgage does not become an obligation of the municipality within the meaning of the law and the interest thereon is not exempt.12

Al

Interest on Bonds of Exempt Organizations. though a corporation may under Sec. 11 of the 1916 Law be exempt from a tax on its income, yet interest on the bonds of such an organization is taxable income to the bondholder.13

Accrued Interest on Obligations at Time of Purchase. Where a purchaser pays the price of the security purchased and an additional sum representing accrued interest, the amount of interest received on the next interest date should not be reported in full. The amount of accrued interest at the time of purchase represents the return of capital to the purchaser and he should deduct such amount from the interest received, and report the remainder only. The seller of the security should account in his return for the accrued interest received at the time of sale, since to him that amount is income.14

12 T. D. 2090.

13 Letter from Treasury Department dated July 30, 1914; I. T. S. 1917, ¶ 1222.

14 Letter from Treasury Department dated February 5, 1915; I T. S. 1917, 1232. In a later ruling the Treasury Department declined to permit the taxpayer in such a case to report all of the interest received as income and to deduct the amount of accrued interest paid at the time of purchase as an expense or as interest paid by the purchaser. Letter dated March 8, 1915, I. T. S. 1917,

Interest on Bank Deposits. Interest on bank deposits or on certificates of deposit, credited to the account of the depositor by the bank, is income for the year in which the credit is made.15

Interest Received and Paid by Brokers. Where the customers of a brokerage house buy securities, paying only a part of the purchase price and paying interest on the balance, and the brokerage house buys such securities from others, paying only a part of the purchase price and paying interest on the balance, the brokerage house must include in its return as gross income the interest received from the customers and may deduct as interest the amount of interest it pays on such purchases limited, in the case of corporations, to the amount of interest which may be deducted under the law.16

Interest Accruing Prior to March 1, 1913. Where interest became due prior to March 1, 1913, and funds have been on hand to pay the same since the due date the amount is not taxable, since it represents income that was due and payable and could have been reduced to possession on demand prior to the incidence of the income tax. Even where interest has been in default since a time prior to March 1, 1913, and funds to pay the same have accrued since that date, it has been held that the interest represents income accrued to the owners of the bonds prior to the incidence of the tax, and hence

15 Reg. 33, Art. 67; Letter from Treasury Department dated February 18, 1915; I. T. S. 1917, ¶ 240.

16 Altheimer and Rawlings Investment Co. v. Allen, T. D. 2441. This case was decided under the 1909 Law but the principle seems to apply to the language of the present law. Interest would be deducted in full if paid on collateral the subject of sale in the ordinary course of business,

does not constitute taxable income when received thereafter.17

17 Letter from Collector at Cincinnati dated March 16, 1915, embodying decision of the Treasury Department; I. T. S. 1917, ¶ 332.

CHAPTER 23

INCOME FROM DIVIDENDS

The law expressly states that the net income of a taxpayer shall include gains, profits and income derived from dividends.1

Definition. The term "dividends" as used in the law is defined therein to mean any distribution made or ordered to be made by a corporation, joint stock company, association, or insurance company, out of its earnings or profits accrued since March 1st, 1913, and payable to its shareholders, whether in cash or in stock of the corporation.2 It is to be noted that under this definition any distribution which is made or ordered to be made by a corporation is a dividend. It need not necessarily be called a dividend or be made in the ordinary course of business. A distribution of assets at the time of liquidation of a corporation would be a dividend to the extent that the assets so distributed included earnings or profits accrued since March 1st, 1913. On the other hand, if the distribution is not out of its earnings or profits accrued since March 1st, 1913, it does not become a dividend within the meaning of the law by reason of the fact that it is called a dividend by the corporation making the distribution.

1 Act of September 8, 1916, § 2 (a).

2 Act of September 8, 1916, as amended by Act of October 3, 1917, § 31.