from furnishing information in accordance with the provisions of the Act5

While under the law only such corporations as are subject to the tax imposed are specifically required to make an annual return of net income, the Treasury under the 1918 law may require such returns. It would not be an unreasonable requirement.

Salaries paid by an exempt corporation are, of course, taxable to the recipient."

59

60

Holding companies now exempt on dividends received.— The provisions of the 1918 law permitting corporations to deduct dividends received from other corporations [section 234 (a-6)] operate to exempt the income of the "not doing business" type of holding company from this source. This, of course, is not an express exemption of that type of corporation. Practically it amounts to this, however, in the case of a holding company which receives no income except dividends from other companies. Even though it has no taxable income a holding company must make a return.

Territorial Exemptions

The 1918 income tax applies first to individual citizens and residents of the United States and to domestic corporations (those created or organized within the United States) and, second, to non-resident alien individuals and to foreign corporations so far as their income arises from sources within the United States. A person whose stay in the United States is only temporary is not considered a resident.

The law states that "the term 'United States' when used in a geographical sense includes only the States, the Territories

60

See Chapter IX.

Section 213.

[Former Procedure] Under the 1909 law most holding companies were held to be exempt (Butterick Co. v. U. S., 240 Fed. 539). Under the 1913, 1916 and 1917 laws, holding companies are held to be taxable. (Boston Terminal Co. v. Gill, 246 Fed. 664.)

of Alaska and Hawaii, and the District of Columbia" (section 1). This definition, it will be noted, does not include Porto Rico or the Philippine Islands," where the 1916 revenue law is still in force (1918 law, section 261). Income which falls outside the geographical limitations thus established, is, of course, exempt from the tax.

61

[Former Procedure] The 1916 law states "that the word 'state' or 'United States' when used in this title shall be construed to include any territory, the District of Columbia, Porto Rico, and the Philippine Islands, when such construction is necessary to carry out its provisions" (section 15). The 1917 law imposing the war income tax did not extend to Porto Rico and the Philippines, as is shown by the following section: "That the provisions of this title shall not extend to Porto Rico or the Philippine Islands, and the Porto Rican or Philippine Legislature shall have power by due enactment to amend, alter, modify or repeal the income tax laws in force in Porto Rico or the Philippine Islands respectively."

RETURNS-WHEN AND HOW TO MAKE THEM

General

Who shall make returns.-A "return" is a statement of taxable income or of information. Every individual having a net income of $1,000 (unless married and living with husband or wife, when the amount is $2,000),' and every partnership and every corporation (not specifically exempt)3 no matter how small its net income, is required to file an annual income tax return. Partnerships and personal service corporations are not themselves taxable upon the net income so reported, but the returns must nevertheless be made." Partners and shareholders are taxable upon their distributive shares. In addition to these statements of total net income received, there are various other returns to be made under the income tax law which give to the Treasury information considered essential to proper administration. The more important of the various types of returns are considered individually later.

'For cases of changes in marital status, see page 32. Fiduciaries must make returns for individuals, trusts or estates for which they act. (See page 83. For returns of non-resident aliens, see Chapter XXXIII.

"The term "corporation" includes associations, joint-stock companies and insurance companies (section 1). Corporations must, of course, file excess profits tax returns. Both income and profits tax returns are now made on one return. (See Excess Profits Tax Procedure.)

'The law (section 239) states the requirement positively rather than negatively. Exempt corporations must establish their right to exemption. (See page 57.)

For a definition of personal service corporation, see page 57. [Former Procedure] Before 1918 the return was required from partnerships only upon call from the Commissioner.

"In the Appendix will be found detailed illustrations of returns, as follows:

Individual:

Married man (citizen), I child (under 18), no surtax. Calendar year-cash basis.

Unmarried (citizen), subject to surtax. Calendar year-cash basis.

Commissioner may require any returns "necessary."-In addition to making specific provisions for certain returns, the law grants to the Commissioner the broad and inclusive power to require any returns which he may consider necessary. The authority is given in the following sections:

LAW. Section 1305. That . . . . every person liable to any tax imposed by this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall comply with such regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe.

Whenever in the judgment of the Commissioner necessary he may require any person, by notice served upon him, to make a return or such statements as he deems sufficient to show whether or not such person is liable to tax.

LAW. Section 1309. That the Commissioner, with the approval of the Secretary, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act.

The Treasury may and does require various special returns giving details regarding complicated calculations, such

Retired manufacturer (citizen), married, no normal tax, subject to surtax. Stock dividends received direct.

Merchant (citizen), married, subject to surtax. Liberty bond inter

est.

Married man (citizen), 2 children (under 18 years), subject to surtax, having one-half interest in partnership. Income from stock dividends taxable at 1913-1915, 1916, 1917, 1919 rates. Income from partnership taxable at 1918-1919 rates (fiscal year ending September 30, 1919).

Married (citizen), no children, subject to surtax. Cash dividends received from domestic and foreign corporations. Tax paid to foreign country. Fiscal year ended October 31, 1919.

Married (citizen), I child under 18 years, normal tax only. All income from "tax-free" bond interest.

Illustration showing income from Liberty bond interest received through partnership and calculation of exemptions-partner with one-fourth interest in profits.

Corporation:

Schedule A, Form 1120. Taxable net income. Calendar year 1919. Schedule A, Form 1120. Taxable net income, three companies, consolidated. Calendar year 1919.

Schedule B, Form 1120. Reconciliation of taxable income with books of account. Calendar year 1919.

Schedule B, Form 1120. Reconciliation of taxable net income with books of account, three companies, consolidated. Calendar year

Calculation of income tax for fiscal year ended March 31, 1919.

as those involved in ascertaining depletion allowances' and income from the appreciation of property values.

Time for filing returns."-Returns are due two months and fifteen days after the close of the taxable year. The following section of the law applies to the annual returns of both individuals and corporations.

10

LAW. Section 227. (a) That returns shall be made on or before the fifteenth day of the third month following the close of the fiscal year, or, if the return is made on the basis of the calendar year, then the return shall be made on or before the fifteenth day of March.11

"LAST DUE DATE.".

REGULATION. The last due date is the last day upon which a return is required to be filed in accordance with the provisions of the statute or the last day of the period covered by an extension of time granted by the collector or Commissioner. When the last due date falls on Sunday or a legal holiday, the last due date for filing returns will be the day following such Sunday or legal holiday. . . . . (Art. 447.)

FILING DATE IN CASES OF LIQUIDATION.-A concern which goes into liquidation may file a return before the expiration of its taxable year.

REGULATION. A corporation going into liquidation during any taxable year may upon the completion of such liquidation prepare a return covering its income for the fractional part of the year during which it was engaged in business and may immediately file such return with the collector. (Art. 651.)

Although a liquidating corporation may be a subsidiary of a holding company, the regulations permit the filing of a

'Form A revised, issued by the Oil, Gas and Mining section. Form T issued by the Natural Resources subdivision.

'For extension of time, see next page.

10 For corporations, see section 241 (a).

"[Former Procedure] The earlier laws made March 1 the date for filing returns, except for taxpayers reporting on the basis of fiscal years. In such cases the return was due sixty days after the close of the fiscal year [1913 law, section G (c); 1916 and 1917 laws, section 13 (b)]. To cover the case of individuals who desired to change from a calendar to a fiscal year under the power granted by the 1918 law, the regulations (Art. 441) provided that returns for fiscal years ending during 1918 might be made "on or before the fifteenth day of March, 1919."