(c) A general affidavit must be filed before admission to practice stating that contingent fees will not be accepted without notification to the Department. The Department states that contingent fees will not generally be looked upon with favor. (d) Powers of attorney must still be filed by attorneys or agents in cases involving payments to be made by the United States, and in other cases where asked for. Any one contemplating a request for admission to practice should study Department Circular Number 230 carefully. No registration fee is required. The Board of Tax Appeals has published its requirements for rules of practice; these are, briefly: 1. Application to practice may be made only by (a) attorneys admitted to practice before the Federal Supreme Court or the highest court of any state or territory or of the District of Columbia, or (b) certified public accountants who have qualified under the laws of any state or territory or the District of Columbia. 2. Suspension or disbarment may be caused by the absence of "requisite qualifications to represent others," or by the lack of "character, integrity, or proper professional conduct."1 3. The Board may require information relating to the terms of employment of an attorney or accountant. FORMS IN COMMON USE There are many forms of returns the use of which the Treasury Department has prescribed. Only those forms which will be of interest in connection with this book are listed on the next page. Copies may be obtained from local collectors. 1 Rules of Practice of the Board, as revised to April 1, 1926. 1040 Individual return (Income more than $5,000) 1 1040A Individual return (Income less than $5,000) 1040E Schedule of citizens entitled to benefits of section 262 1040F Schedule of farm income and expenses 1120 Corporation income tax return2 1065 Partnership informational return 1041 Fiduciary informational return 1126 Certificate of inventory 1097 Dividend informational return 1122 Information return of subsidiary or affiliated corporation 1128 Application for change in accounting period 843 Claim for refund, abatement, or credit 1000 Ownership Certificate-Tax to be paid at source 1059 Substitute Certificate-Tax to be paid at source 1012 Monthly return of tax withheld at source-Bond interest (supported by Forms 1000 and 1059) 1013 Annual return of tax withheld at source-Bond interest (summary of 1012's rendered during year) 1001 Ownership Certificate-Tax not to be paid at source (domestic interest) 1001A Ownership Certificate Tax not to be paid at source (foreign dividends and interest) 1058 Substitute Certificate-Tax not to be paid at source 1096A Monthly information return-Tax not to be paid at source (supported by Forms 1001, 1001A, and 1058 and followed by annual return on Form 1096B) Annual return of tax withheld at source-Income paid to non-resident foreign individuals and corporations (supported by individual Form 1098) 1042 1116 1096 Annual information return-Income paid during year of $1,000 or more (supported by individual Form 1099) Claim for credit-Foreign taxes paid by individual 1117 Bond for foreign taxes accrued (attached to Form 1116) 1118 Claim for credit-Foreign taxes paid by corporation 1119 Bond for foreign taxes accrued (attached to Form 1118) 1 See pages 281-282 2 See pages 288-291 3 See pages 283 and 293 SUGGESTED METHOD OF STUDYING FEDERAL INCOME TAXES In the chapters which follow it will be observed that under the topic heading appears a summary of the present law and regulations, followed by a digest of the principal related decisions and opinions. Each digest is intended to bring out the ruling, sometimes the reasoning, but rarely the full facts of the case. Necessarily, this method requires that the reader avoid making too general an application of any ruling, and before considering it in connection with a problem arising in his practice, the complete facts as originally published in the cumulative or weekly bulletins should be carefully reviewed. The source of rulings is therefore indicated in each instance. Only those rulings are herein set forth which are believed to be of general interest and application. Where the practice of the Department has varied considerably and new rulings have been made retroactive it has seemed best to avoid discussion of the now out-of-date rulings unless their consideration throws light on the procedure now in force. Many points cannot be understood through the application of ordinary legal and accounting principles and an effort has therefore been made to indicate the fundamental reason, if any, for apparently less logical rules in order that the reader may more easily remember them. A working knowledge of Federal taxes includes an intelligent understanding of all of its principles and an instant application thereof to any given case. This book is, therefore, intended as a guide for those who wish to begin or renew their acquaintance with the existing Federal income tax law. As a text-book it is suggested that the chapters be followed in order and that Regulations 69 be read in connection with each chapter according to the references. The Cumulative Bulletins may also be referred to from time to time, as a better understanding of cases having particular interest to the reader may be desired. II GENERAL APPLICATION; RATES OF TAX Who pays income taxes. Definitions. Tax on individuals. Individual normal tax credits. Individual normal tax. Individual surtax. Surtax on sales of mineral deposits. Capital net gains and losses. Earned income. Estates and trusts. Partnerships. Corporate normal tax credits. Corporate normal tax. BEFORE proceeding with a detailed discussion of income and deductions, one should be familiar with the general application of the law and the rates of tax. Income taxes are paid in the United States by (a) individuals, (b) estates and trusts, and (c) corporations. In 1917, and in that year only, partnerships were taxed as separate entities. With certain exceptions-which is explained below under "Withholding"-the tax is paid direct. In England and a number of European countries the tax is often "withheld at the source," especially the tax on personal incomes. DEFINITIONS Perhaps no exact definition of "income" or "taxable income" exists as yet, owing to the fact that "income" is a composite resulting from the working out of a large number of economic laws. "All wealth which flows in to the taxpayer other than as a mere return of capital" is the definition contained in Article 21 of Regulations 65, but this is hardly inclusive enough; nor does it indicate that portion which is taxable. A definition deserving commendation is that of Robert M. Haig: "Income is the money value of the net accretion to economic power between two points of time." 1 "Gross income" is income from all sources, paid or accrued, and includes "distributive" income, i. e., income of a part 1 The Federal Income Tax. New York, Columbia University Press, 1921. nership, estate, or personal service corporation which has been credited to the individual's account but not necessarily distributed as a whole. "Net income," as the term is used in the law and regulations, is not the individual's actual net or residual income but his net income for tax purposes. The difference between gross and net income consists of "deductions," that is, amounts such as business expenses, by which gross income may be reduced. As compared with "income," "deductions" are much more restricted and are confined to specific items described in the law and regulations. "Income" from all sources, on the other hand, is taxable unless specifically exempted. "Deductions" should not be confused with "credits," which are certain portions of net income not subject to tax, nor with "credits against taxes," which are subtractions from the tax payable (Art. 21; 31; 35; 531; 541). "Taxpayer" is any person, trust, estate, association, or corporation subject to tax. The word is used generally throughout the regulations. (Sec. 2(a)(9); Art. 1501).1 "Returns" are forms calling for details having to do directly or indirectly with income. They are of two kinds -tax returns and informational returns. Partnerships for the year 1917 filed tax returns; in other years they filed informational returns, i.e., a schedule showing the computation of partnership income and the amount credited to each partner's account. "Invested capital" 2 is, roughly, the net worth of the business and between 1917 and 1921, inclusive, was a factor in computing the tax payable in the case of corporations: the larger the invested capital, the smaller the tax. "Personal Service Corporations" were, as the name may imply, a class of corporations where actual invested capital was likely to be very small in comparison with the profits earned because of capital in the way of personal services 1 Section 2(a) (9) of the Revenue Act of 1926; Article 1501 of Regulations 69. 2 See Chapters XXI-XXIV. |