in the United States; as for example, the nonresident alien may deduct such taxes as were imposed by authority of the United States or sub-division thereof, but not those imposed by any foreign government. Such differences as these have not been detailed. Exceptions, more or less, to the general basis of differences in allowing deductions as above mentioned are: A non-resident alien individual is allowed to deduct actual losses sustained in transactions entered into for profit and not connected with his business or trade up to the amount of "profits accruing therefrom in the United States;" and, He may deduct that proportion of all the interest paid on his indebtedness which his gross income in the United States bears to his gross income from all sources, within and without the United States; this allowance for interest, however, is made only if his annual return of income include "all the information necessary for its calculation." Partnerships as such are not taxed, but the members thereof are liable individually for their share of the firm's profits for the year, whether divided or undivided, and are required to include such income in their individual returns; the present rule of the Treasury Department will be followed undoubtedly in allowing partners to exclude from their return of income any of the firm's profits distributed to them in the current year and on which, in the form of undistributed profits, they have already paid a tax. The Statute provides that from the net distributive interests of the indi Partnerships Only Members Taxable Deductions Previous What vidual partners in the firm's profits there shall be excluded their proportionate shares of the following: (a) Interest on obligations of the United States and its possessions, or of a State or any political or taxing subdivision thereof; (b) Taxes paid to the United States or its possessions, or to any State or taxing subdivision thereof; (c) In respect to the normal tax, profits derived from dividends of corporations subject to the terms of the Act. The subject of partnerships has been somewhat of a maze since the enactment of the previous Statute and while many changes have been made it does not appear certain that all of the old ambiguities have been removed. The last expression of the Treasury Department under the previous Statute was that individual members of partnerships should not deduct their proportionate shares of income received from interest on municipal bonds or from dividends received by the partnership itself; that is, the members as individuals were held to be taxable thereon. In accordance with (a) and (b) above, the revised Law allows to partners the exemption of both classes of income; but it appears disconcerting to have the Statute authorize specifically the deduction of such taxes as are levied and paid within the United States when individuals in general are allowed de ductions for taxes wherever paid, and also to have the Statute silent at this juncture about other similar and apparently proper deductions allowed individuals such as expense of carrying on business, interest paid on indebtedness, losses sustained, etc. It is probably true, however, that the Statute is broad enough and will be so construed by the Treasury Department as to generally allow the partnership those deductions which are granted to individuals. Upon request by the proper Federal authorities a partnership shall render a return of its gross income, deductions and credits allowed, and the names, addresses, and respective interests of the several partners. This would seem to be the provision furnishing the most likely indication that partnerships are intended to be subject to the same regulations hereunder regarding income, deductions and the like, as would apply to the business of an individual. Nothing is definitely stated on the point, but it appears logical that in accordance with the present view of the Department, deduction at the source will not be applied to income paid to partnerships. The method of assessment and payment of the tax, as well as the making of returns, are substantially the same as in the old Law, and in many respects these provisions are identical. Persons, firms, companies, co-partnerships, corporations and associations in any way entrusted with the fixed or determinable annual Partnership Deduction at the Source Tax Deducted from Bond Interest Tax Free or periodical income of another person exceeding $3,000 for any taxable year, other than income derived from dividends of taxable corporations hereunder, are authorized and required to deduct the normal tax from such income. In addition to the general provision above stated the duty of withholding is specifically placed upon lessees or mortgagors of real or personal property, trustees, executors, receivers and employers. The withholding agent is made personally liable in case of failure to withhold the tax; and he is required to make a return of the tax withheld and shall state the name and address of the person if known and shall pay the tax to the Federal Government. Both Statutes, old and revised, have provided that the normal tax shall be deducted and withheld from interest upon bonds and mortgages or similar obligations of corporations, joint stock companies, associations and insurance companies, even though such interest does not amount to $3,000. A large proportion of the outstanding mortgages or other indentures of American corporations contain a provision in substance that the principal and interest of the bonds or other obligations secured thereby shall be paid without deduction for any tax or taxes which the company may be required to pay or deduct therefrom under any present or future law of the United States. The weight of published opinion has been that this makes the corporation liable for the normal tax as imposed under the provisions of both the revised and previous Laws and for whatever reasons, legal or practical, corporations generally have been paying the normal tax on presentation of proper certificates. As a practical point, it may be noted here that in respect to the income tax it appears to be generally agreed that the essence of the average "tax free" covenant is that the corporation assumes no liability beyond the payment of such tax as is deducted at the source; and in this view, the corporations operating under agreements of this precise character would pay no more than the one per cent. tax deducted during the calendar year 1916. Prior to the passage of the previous Income Tax Law in 1913, there was some discussion of this matter of tax free covenants in corporate mortgages. The view prevailed in some quarters that corporations should be prohibited by law from making any new agreements of this sort. As then passed, the Law contained the provision of somewhat uncertain scope that "no contract entered into after this Act takes effect (shall) be valid in regard to any Federal income tax imposed upon a person liable to such payment." There has been some diversity of opinion as to whether the quoted provision of the old Law prevented corporations from including the tax free covenant in any new mort As to Under Previous |