partment ruled to the same effect under the old Law, although there appeared to be some difference of opinion as to whether this exemption could not be availed of in respect to the additional as well as the normal tax. Assuming a taxable net income of $100,000 and a specific exemption of $4,000, the tax hereunder would be computed as follows: Normal Tax: 2% on $96,000 (i. e., net income of $100,000, Additional Tax: .$1,920 1% on $20,000 (i. e., amount exceeding 2% on $20,000 (i. e., amount exceeding Additional Tax: 3% on $20,000 (i. e., amount exceeding Additional Tax: 4% on $20,000 (i. e., amount exceeding TOTAL TAX 400 600 800 $3,920 At the beginning of this analysis is given a table which indicates the amount of tax imposed upon net incomes by the revised Statute as compared with the previous Law. Disregarding for the moment the exemptions and deductions allowed by the Statute, the net income of individuals is stated to include gains, Example Income Defined Calculating "Accrued Interest" Keeping profits, and income derived from every source whatsoever, and specifically from: (a) Salaries, wages or compensation for personal service of every kind and in whatever form paid; (b) Professions, vocations, businesses, trade or commerce; (c) Sales or dealings in property, real or personal, as well as income growing out of the ownership, use or interest in such property: and, (d) Interest, rent and dividends. In ascertaining the gain derived from the sale or other disposition of securities, real estate, or other property acquired before March 1, 1913 (the date from which the tax applied to income under the previous Law), the fair market price or value of such property as of that date shall be the basis for determining the amount of the gain. It seems of practical value to note herein in respect to "accrued interest" on bonds, that according to Treasury ruling under the previous Law, the owner of bonds at the time the interest becomes due and payable should only account in his return for the interest which accrued after the bonds were purchased by him. The former owner should account in his return for the interest which accrued during his ownership of the bonds. The new Law grants considerable latitude to an individual in the keeping of his accounts. It is provided that he may do this upon some other basis than that of actual receipts and disbursements. Subject to regulations to be later prescribed, he may make his return on the basis of his accounts as thus kept if they clearly reflect his income. Individual income in the form of dividends or net earnings of corporations and associations is treated according to whether the corporation or association is taxable under the corporation sections of this Law; and in general such organizations are taxable when organized in the United States, no matter where operating, and when organized in other countries but operating in or deriving income from the United States. Inasmuch as a corporation pays out of its net earnings a two per cent. tax on the amount of dividends distributed by it, this form of income is not subject to the normal tax in the hands of individuals, but is liable to any additional taxes hereunder. Dividends from non-resident organizations which are not subject to the corporate provisions of the Act are liable to both normal and additional taxes in the hands of citizens and residents of the United States, but obviously are not taxable in the hands of non-resident aliens. The Act defines dividends as including any distribution made or ordered to be made by a corporation or association out of its earnings or profits which have accrued since March 1, Dividends When Taxable Dividends Defined Corporations 1913, and conversely it may be assumed that dividends are not taxable if paid out of earnings which accrued before March 1, 1913; this is a departure from the rule in effect heretofore which required the payment of any taxes due on dividends, regardless of the time of accrual to the corporation of the profits or earnings from which such dividends were paid. The revised Statute further provides that stock dividends shall be considered as income and, although the old Law contained no such provision, the tax was nevertheless imposed thereon by virtue of Treasury Decisions which seemed to rest upon the Act's broad definition of income. The Statute contemplates a corporation or association formed or fraudulently availed of to escape tax hereunder by permitting the profits of such a corporation to accumulate instead of being divided or distributed. This is the same provision which appeared in the previous Law and Congress has evidently kept in mind the growing popularity of incorporating estates, individuals, etc. The fact that such a corporation or association is a mere holding company or that its gains and profits are permitted to accumulate beyond the reasonable needs of the business shall be prima facie evidence of a fraudulent purpose to escape the tax, but the proviso is added that the mere fact of the gains and profits accumulating and becoming surplus shall not be construed as evidence of a purpose to escape the tax unless the Secretary of the Treasury shall consider such accumulation unreasonable for the purposes of the corporation. Upon request by the Commissioner or any Collector of Internal Revenue such a corporation or association shall file with the official requesting the same a statement of its profits, and the names and addresses of the individuals entitled thereto. To the extent of any individual's share therein, the profits of such a corporation whether distributed or not are declared to be income subject to the additional tax. The estate of a deceased person is treated as an entirety and is so taxed for the period of its administration or settlement. The income of estates or any kind of property held in trust appears to be likewise taxable, including income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests; also income held for future distribution under the terms of a will or trust. In many instances the practical effect of taxing an estate or trust in its entirety, rather than according to the several or individual shares therein, will be to increase materially the income taxes on the estate because of the rapid progression of the additional tax; however, income distributed to beneficiaries an Estates and Trusts |