No notable differences exist in the two laws as to income received in kind. If such income is capable of being measured in money it is taxable (in England, of course, only if it is annual, or income of a trade). It should be observed that no effort is made in the United States to tax as income the value of farm products consumed by the farmer or his family. Indeed, it has been ruled by the Treasury Department that the value of such products need not be included in the farmer's income. Such produce is, of course, income properly taxable, but the difficulties of subjecting it to tax are too great to make the attempt worth while. In England, if a farmer elects to be taxed under Schedule D, he must conform to the rules of that Schedule and report as income the value of produce consumed. The United States might well give careful consideration to the British plan of taxing the farmer on an arbitrary basis. The adoption of the British system, however, would involve the necessity for the ascertainment of still more annual values, and, in addition, such a change is unlikely to be seriously entertained while the farmers' vote is as influential as it is. The problem in dealing with the kinds of income discussed in this chapter is largely one of administrative expediency. The kinds of income as to which some reasons may be adduced for making them subject to the tax range from receipts in cash, or its readily valued equivalent, to those intangible or psychic satisfactions which are incapable of valuation in terms of money. The part of wisdom is to draw the line where the problem of valuation becomes too burdensome. Only those receipts which have a definitely ascertainable and readily realizable money value should be made subject to the income tax. Treasury Decision 2665. No. 36 of the rules applicable to Cases I and II of Schedule D. L CHAPTER XII EXEMPT INCOME-CONTRIBUTIONS TO CHARITIES -PERSONS EXEMPT FROM THE TAX In addition to the exemptions depending on the taxpayer's marital status, or on the number of children or others dependent on him, the income tax laws of both Great Britain and the United States exempt certain kinds of income. Akin to these exemptions are certain expenditures which a taxpayer may apply against his gross income to reduce his taxable income. They are unlike the ordinary deductions in that they cannot in any sense be said to be expenses which reduce profits. They consist of contributions to charities. Moreover, both countries exempt certain persons from the tax. The above exemptions and allowable deductions have no relation to any theories of taxation except that they are to some extent bound up with the faculty theory. They are rather to be placed on benevolent grounds and on grounds of public policy. It is obvious that they will differ in the two countries, for they represent no more than the views of the respective Governments on questions of social expediency. This being the case, these exemptions, if open to criticism, are to be criticized on social grounds by the people of each country rather than by the student of the theory of taxation. The subject does not lend itself to any very logical scheme of arrangement. The following is a brief statement of such exemptions and deductions allowed by the United States law, and a note in each case as to the British practice in regard to such items. Items or persons exempted, or deductions allowed, by the British law and not by the United States law will then be listed. EXEMPT INCOME. I. Amounts received under a life insurance contract paid by reason of the death of the insured are exempt in the United States. In any event, the amount of the policy which represented premiums paid would be a return of capital and not subject to tax, so that the exemption really only covers the excess of the proceeds of the policy over the amount of premiums paid. The British law is naturally silent on this point, since the amount by which such proceeds exceeded the premiums paid would be a casual profit in Great Britain and not subject to tax. 2. In the United States the amount received by the insured as a return of premiums paid under life or endowment insurance or under annuity contracts is exempt.2 In Great Britain such amounts are not regarded as income, but are treated as capital and not taxable. 3. The value of property acquired by gift, bequest, devise, or inheritance (the income from such property is taxable) is exempt in the United States.3 The receipt of such items does not give rise to taxable income in Great Britain. In both countries an annuity so received is taxable in its entirety. 4. The income of foreign Governments from United States sources is exempt under the United States law.4 Apparently income from British sources is not taxed to foreign Governments by Great Britain. 5. Amounts received, through accident or health insurance or under workmen's compensation Acts, as compensation for personal injuries or sickness, plus the amount of any damages received, by suit or agreement, on account of such injuries or sickness are exempt in the United States.5 These are casual profits in Great Britain, and so not subject to income tax. 6. The United States law exempts pensions and similar I Revenue Act of 1926, Section 213 (b) (1). 2 Ibid., Section 213 (b) (2). 4 Ibid., Section 213 (b) (5). 3 Ibid., Section 213 (b) (3). 2 payments for war services. In Great Britain, wounds and disability pensions and war gratuities are exempt, as are also allowances granted by the Minister of Pensions to widows in respect of their children.3 7. Dividends or interest (not exceeding $300 in any taxable year) from domestic building and loan associations, substantially all the business of which is confined to making loans to members, are exempt to individuals in the United States.4 There is no counterpart to this exemption in the British law. 8. The rental value of a dwelling-house and appurtenances furnished to a clergyman as part of his compensation is free from tax in the United States.5 The British practice in this regard depends on whether or not the clergyman can let the house to a third party." 9. Receipts of shipowners' mutual protection and indemnity associations not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder are exempt by the United States law. Such corporations are taxable on their net income from interest, dividends and rents. There is no corresponding exemption in Great Britain. 10. The United States law exempts to certain corporations, organized to trade in China, a part of their income depending in amount on the amount of dividends paid to citizens of the United States or China, resident in China.8 Amounts distributed as dividends by such corporations to persons resident in China are also exempt.9 These are exemptions peculiar to the United States. II. The United States law exempts from income tax the income of a non-resident alien or foreign corporation which consists exclusively of earnings derived from the operation of ships documented under the laws of a foreign country which grants equivalent exemption to citizens of the United Revenue Act of 1926, Section 213 (b) (9). 2 Finance Act, 1919, Sections 16 and 17. 7 Revenue Act of 1926, Section 213 (b) (12). 3 Ibid., 1922, Section 27. 6 See Chapter XI. 9 Ibid., Section 213 (b) (13). States and to corporations organized in the United States.1 The British law also makes provision for the reciprocal exemption of income from the business of shipping." CHARITABLE CONTRIBUTIONS AND LIFE INSURANCE PREMIUMS. Under the United States law a taxpayer is entitled (subject to the limitation stated below) to deduct from his gross income contributions or gifts made within the taxable year to or for the use of : 1. The United States, any State, Territory or political subdivision thereof, or the District of Columbia, for exclusively public purposes; 2. Any corporation, or trust, or community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual; 3. Certain funds for the vocational rehabilitation of veterans of the war and other veteran funds; 4. A fraternal society, order or association, operating under the lodge system, but only if such contributions are to be used exclusively for the purposes stated in 2 above. The above deduction is limited to an amount which in all the above cases combined does not exceed 15% of the taxpayer's net income as computed without the benefit of this deduction, except that if in the taxable year and in each of the ten preceding taxable years the amount in all the above cases combined exceeds 90 % of the taxpayer's net income for each such year, as computed without the benefit of the deduction, deduction is permitted to the full amount of such contributions and gifts made within the taxable year. Prior to 1924 the 15% limitation was imposed in every case.3 No similar allowances are made by the British law for charitable contributions. Revenue Act of 1926, Section 213 (b) (8). See Chapter IV. 2 Finance Act, 1923, Section 18. See Chapter IV. 3 Revenue Act of 1926, Section 214 (a) (10). |