Corporation Income Tax Section 230— 38 There shall be levied, collected and paid for each taxable year upon the net income of every corporation (not exempt) -including insurance companies according to the provisions of sections 243 to 246-tax at the following rates: 39 (a) 40 (b) For the calendar year 1921, 10 per centum of the amount of the net income in excess of the credits provided in section 236; and For each calendar year thereafter 122 per centum of such excess amount. 41 The income tax for 1921 is in addition to the excess profits tax. After December 31, 1921, only income tax applies to the income of corporations. (See table V on page 95.) Corporations-Excess Profits and War Profits Tax Section 301 42 In addition to the other taxes imposed by this Act, there shall be levied, collected and paid for the calendar year 1921 upon the net income of every corporation (except corporations having a net income for 1921 of more than $10,000 from a Government contract or contracts made between July 6, 1917, and November 11, 1918, and corporations with incomes of $3,000 and under, which latter are not liable to excess profits tax) a tax equal to the sum of the following: 43 First Bracket 20 per centum of the amount of the net income in excess of the excess profits credit (determined under section 312) and not in excess of 20 per centum of the invested capital; 44 Second Bracket 40 per centum of the amount of the net income in excess of 20 per centum of the invested capital. 45 Government contract income in 1921 is subject to an excess profits tax at 30% in the first bracket and 65% in the second bracket, or to a war excess profits tax of 80% of the amount of the net income in excess of the war profits credit, whichever of the two war taxes is the higher. For war excess profits tax, it is necessary to refer to the Revenue Act of 1918 and Regulations thereunder. 46 Section 302 of the Act provides a maximum tax for corporations. This tax most often applies to corporations with capitals from $25,000 to $100,000 and net incomes ranging in excess of 28% to 19% of these capitals. Difference in Rates of Tax 47 No change has been made in the rate of normal tax on the income of individuals. This remains at 8% flat, with a provision that in the case of citizens and resident aliens, the rates shall be reduced to 4 per centum on the first $4,000 above specific exemptions and credits. 48 There was no change as between the surtax for 1918 and subsequent years under the Revenue Act of 1918. Under the Revenue Act of 1921, a slight change is made in the surtax; for 1921, the surtax rates are the same as under the Act of 1918, being graded up to $1,000,000. For 1922 and thereafter, the surtax is slightly changed in gradations and rates and becomes a flat tax of 50% at $200,000. The rate at $200,000 under the Act of 1918, and for 1921 under the Act of 1921, was and is 56%. What Is Taxed 49 The thing that is taxed is income. Not all income is of a taxable class. Income which is of a taxable class is to be reported gross. The statute specifies certain expenditures or disbursements which may be used as a set off against gross income. These set-offs are termed "deductions." The difference between total gross income of a taxable class and total allowable deductions, is termed "net income." The tax is applied to net income. Definition of Income 50 Income is the flow of capital's service; what one's capital does for him; and is not necessarily synonymous with receipt. Receipt basis is the general rule for Income Tax purposes, however. Except where the books of account are con sistently kept in a manner so as to make a different showing and a showing which will adequately and correctly reflect income, receipt basis is to be used, particularly for the purpose of ascertaining basic value measure in determining gain or profit. For the purpose of ascertaining gain or profit, there must be a realization of value through some form of receipt or completed and closed transaction, in which gain or profit will be measured. 51 Basic value is a question of fact, and neither the Government nor the taxpayer is bound by book entries where the entries on the books do not correctly state the facts. 52 One's service may be his capital, but in such event there is no subtraction of capital from receipt for the purpose of ascertaining "gain or profit." In such case, the entire receipt has the characteristic of compensation or price of service, and is therefore to be included, gross, in the return of income. 53 Disservice is a negative service. A flow of disservice or negative income is called outgo. The difference between service and disservice is, therefore, to be designated net income, but net income for the purpose of the Income Tax is not necessarily the true net income either of an individual or an enterprise. 54 Gross income as defined by the Act of 1921 includes: Section 213 (a) Gains, profits and income derived from salaries, wages or compensation for personal service,* of *Note-The Federal Constitution provides that the compensation paid to the President of the United States, the Judges of the Supreme Court of the United States, etc., shall not be increased or diminished during the term for which they were elected or appointed. The Supreme Court of the United States has held that an income tax law beginning during the pendency of such a term would serve to reduce the compensation fixed as at the beginning of the term, and was therefore unconstitutional. An income tax in effect at the beginning of such a term would apply to such compensation. With the exception of those officials of the United States specified in the Constitution as being exempt as herein before stated, the income of all officers and employees of the United States is subject to income tax. The Act of 1921 provides for the taxation of income of its officials and employees as follows: "Gross income includes income derived from salaries, wages or compensation for personal service, of the President of the United States, the Judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such.' whatever kind and in whatever form paid, (b) From professions, vocations, trades, businesses, commerce, or (c) Sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; (d) Also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or (e) Gains, or profits, and income derived from any source whatever. 55 The amount of all such items [except as provided in subdivision (e) of Section 201] shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period. 56 Subdivision (e) of section 201 provides that dividends shall be included in returns of income of stockholders for the taxable period in which the "cash or other property is unqualifiedly made subject to their demands." It might be possible, therefore, that dividends would have been accounted for in some year other than that in which received. Income Not Taxable 57 Gross income does not include the following items, which shall be exempt from taxation under this title: 58 (1) The proceeds of life insurance policies paid upon the death of the insured; 59 (2) The amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; 60 (3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income); 61 (4) Interest upon (a) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (b) securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916; or (c) the obligations of the United States or its possessions; or (d) bonds issued by the War Finance Corporation. In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), and in the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income, war-profits and excess-profits taxes; 62 (5) The income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments, or from any other source within the United States; 63 64 (6) Amounts received, through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness; (7) Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof. Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State |