XXVI INDIVIDUALS SUBJECT TO TAX-FARMERS Individuals liable to tax. Joint and separate returns of husband and wife. Income of minors. Farmers. Returns of executors and administrators. Taxability of trusts. Incidence of tax on trusts and estates and their beneficiaries. THE following individuals must render tax returns: (a) Single individuals, or married individuals not living with husband or wife, whose net income is $1,500 or more; (b) Married individuals living with husband or wife whose net income is $3,500 or more; and (c) Individuals or husband and wife whose gross income is $5,000 or more. Where the combined income of husband and wife living together equals or exceeds the above sums, each may make a separate return, splitting the exemption of $3,500 in any way, or a combined return may be rendered (Sec. 223; Art. 401). The 1926 law requires returns where there may be no net income but gross income (combined in the case of husband and wife) exceeding $5,000. Form 1040 should be used where the net income of a single individual or the combined net income of husband and wife exceed $5,000, and where net income is less than $5,000 but consists in part of profits or losses from a business or from sales of assets. Form 1040A is for net incomes of less than $5,000 derived chiefly from salary, interest, and dividends. Minors must render separate returns if they are emancipated and their net income is more than $1,000 or their gross income is more than $5,000. If not emancipated, any income they may earn which is appropriable by the parent must be included in the parent's return. Earnings from property which they own or which is held for them is not ordinarily appropriable by the parent. Emancipation is a question of fact in each case and no set rule can be laid down (Art. 403; S. M. 2045). If the minor cannot prepare the return, his guardian or other responsible person must prepare one for him. The same rule applies to income of insane persons or other incompetents (Art. 422). Income from community property in Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington may be divided equally between husband and wife. No amended returns reporting income on the community basis prior to January 1, 1925, may now be filed; returns in these states before that date prepared on a community basis will stand, however (Sec. 1212). Whether community income for 1925 and 1926 may be divided is a question now pending before the Attorney-General. The Supreme Court has stated in U. S. v. Robbins (269 U. S., 315) "Even if we are wrong as to the law in California, it does not follow that Congress could not tax the husband for the whole." This decision held that the wife had a mere expectancy in community property in California. Amended joint returns of husband and wife may be filed where separate returns were first reported (O. D. 881), but separate returns cannot be filed following a joint return (I. T. 1956). A divorced wife who had previously paid a lower tax than would have been due if separate returns had been filed could not file a separate return now, husband and wife being held individually responsible for the tax due (I. T. 1575); joint returns may be filed one year and separate returns the next, or vice versa, without permission of the Commissioner (Sol. Op. 90), no matter whether they or the Government are benefited (O. D. 968). The same return blank may serve for the return of both husband and wife, providing the separate computation is clearly indicated (O. D. 960). But a husband keeping his books on a calendar year basis cannot deduct the losses of his wife whose books are on a fiscal year basis (I. T. 1514). If a joint return is filed husband and wife are to be regarded as one in applying the wash sales provision (I. T. 1997). Husband and wife may render a separate return in connection with community income acquired. Community income has been held to include all income of either spouse in Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington (T. D. 3138), but not income accrued before marriage (I. T. 1576); in Texas, income from land is not community income unless jointly owned (T. D. 3071); in Louisiana, paraphernalia of a wife, administered by the husband, is community income (I. T. 2003); in the Virgin Islands the wife's interest is a mere expectancy (I. T. 1763). Earnings of the wife may be reported separately by her in California (4 B. T. A. 679, 915). Separate return blanks are not required, although the Department prefers (I. T. 1530). Full Liberty bond exemptions may be taken by either spouse (I. T. 1624). Husband and wife holding property in the state of Michigan as tenants by the entirety may not split the ordinary income therefrom but may divide equally the profit derived from its sale (I. T. 1574). Profits from the sale of property owned on the same basis in New York could also be divided (I. T. 1555). American citizens living in foreign countries and deriving their entire income therefrom are subject to income tax as ordinary citizens (Cook v. Tait, 265 U. S., 47; T. D. 3436, 3594). An opinion of the Attorney-General holds that income of members of the Five Civilized Tribes of Indians from tax-exempt lands allotted in severalty by the United States is not subject to income tax (T. D. 3570). But when exempt land is leased to a corporation, earnings therefrom are not exempt to the corporation (S. R. 8498; 248 U. S., 399). FARMERS Farmers may follow the receipts or the accrual basis of reporting income. If the receipts basis is used, gross income will include cash received from the sale of crops, stock or merchandise raised in the present or prior years and the gross profit (selling price less cost) of stock or other property purchased. Work, breeding, and dairy animals purchased may be regarded as capital assets, and depreciation taken thereon, or they may be inventoried and the loss through age, and so forth, thus accounted for through gross 1 See, however, page 145. profits. Farm buildings, equipment, and machinery are always capital assets subject to depreciation. Developmental expense prior to the productive stage may be capitalized or not, but a consistent practice should be followed. The market value of all items received in exchanges is income. Costs incurred in connection with growing crops may be carried forward and deducted in the year the crops are sold. But if a farm is operated for pleasure rather than for profit, the excess of expenses over income will be regarded as a personal expense and not deductible for tax purposes (Art. 38, III). Losses should include only actual costs not previously deducted as expenses, and where raised crops and stock have been destroyed, only the actual cost carried forward, if any, can be deducted. Compensation for damages, as from insurance, is gross income in the year received. A net loss from farming operations is deductible from other profits, unless the farm is run for pleasure. Depreciation may be taken only on items which have been regarded as capital assets and not on items inventoried each year, and may be taken also on automobiles to the extent they are used for farming purposes (Art. 145, 171). The receipts basis in the case of farmers does not necessitate inventories. A switch to the inventory basis may be made in any year, providing an opening inventory is set up. Inventories may be taken on the "farm-price" basis; that is, expected market price less the cost of marketing. As such method is likely to result in a higher inventory valuation, its adoption in any one year will have the possible effect of unduly increasing the profits for the year; in that event the opening inventory may be revised to the same basis and the profits of the prior year recomputed. The same process may be followed if in any year it is found that the opening inventory is incomplete (Art. 1616). Allowable deductions under the 1913 act were limited in the case of farm expenses to those incurred in running a farm for profit; in the instance cited, the expenses were over $16,000 for each of two years and the income $1,100 and $1,600, respectively. The evidence was held insufficient to establish the business character of the expenses (Thacher v. Lowe, 288 Fed., 994; T. D. 3444). Development expenses preceding the productive state may be capitalized at the option of the taxpayer (I. T. 1610), but the option having been exercised cannot now be reversed (I. T. 1952). The inventory basis cannot be used unless supported by adequate records (I. T. 1673). ESTATES AND TRUSTS When an individual dies, his executor or administrator is responsible for the rendering of a return up to and including (I. T. 1577) the date of his death, which will take in all income due or accrued according to whether the paid or accrual method is followed. Thereafter, returns must be rendered by the executor, administrator, or trustee on that portion of income not distributable, and by the beneficiary on the distributable income. Allowances to the widow out of corpus is not a deduction which the estate may make, but it may deduct amounts paid to beneficiaries out of income. Delivery of property to legatees gives rise to neither gain nor loss. The incidence of the income tax on an estate or trust depends on the availability of the income. Thus, in some estates, income is held for future beneficiaries and is therefore taxable to the fiduciary. In others, the income beneficiary is taxed if the income is made available to him at intervals, no matter whether actually distributed or not; in this instance, the theory is similar to that applicable to income of partnerships and personal service corporations. Again, a portion of the income may be distributable in part and the remainder retained. In estates this condition obtains frequently, in most cases being dependent on the instrument or court order; the distinction is often made between the income applicable to the present income beneficiary and the income representing increases in corpus or principal. Should the income be distributed only in part |