(This includes information returns.)

144 Returns which are made on the basis of the fiscal year must be made after the close of such fiscal year, and not later than the 15th day of the third month next following the close of the fiscal year.

145 Returns of income must be filed with the Collector of Internal Revenue for the district in which the taxpayer resides, or has his principal place of business, and if these are not within the United States, then with the Collector of Internal Revenue at Baltimore, Maryland. Returns of information are to be filed with the Commissioner of Internal Revenue Sorting Division-Washington, D. C., not later than March 15th.

146

Withholding returns must be filed not later than March 1st and are to be filed with the Collector of Internal Revenue for the district in which the withholding agent makes his return.

147

Sections of the Law controlling are: 227 for individuals, partnerships and fiduciaries; section 241 for corporations; section 221 (c) for withholding returns; section 256 and regulations for information returns.

148 Reference is made to the actual forms of return for method of statement of income and computation of tax.

UNDERSTATEMENT OF INCOME

149 Section 228 of the Law provides for action of the Collector of Internal Revenue when he suspects the income reported to be less than it should be.

TAXATION OF INDIVIDUAL OR PARTNERSHIP INCOME, AS CORPORATE INCOME

150 Section 229 of the Law provides that if any individual or partnership business in which capital is a materialincome-producing factor, and the net income of which for the taxable year 1921 was not less than 20% of its invested capital for such year, the business may be incorporated at any time before or on March 23, 1922, and in such case have its net income for 1921 taxed as corporate income. It is also provided that if this provision is availed of, the Capital Stock Tax shall be paid by such taxpayer as though the corporation had been in existence from and after January 1, 1921. It

would seem that unless this provision of Law is taken advantage of before March 15, 1922, it will be necessary to apprise the Commissioner of Internal Revenue of intention, and secure from him proper action to obviate penalty for failure to file return in time. Also that within a reasonable time after incorporation, the capital stock tax return for 1921 should be filed and that tax paid.

TAX ON INCOME OF INSURANCE COMPANIES

151 Sections 242 to 247 inclusive provide specially for computation of net income and tax on income of insurance companies.

CREDIT FOR INCOME TAX (INCOME EXEMPT FROM TAX)

Section 216-Law:

153 Individuals-For Normal Tax Only-(The income exempt from surtax is $5,000 for 1921 and $6,000 for 1922 and thereafter.) For the purpose of computation of normal income tax, there shall be allowed to citizens, resident aliens and estates or trusts, as a credit, an amount to be deducted from the net income otherwise subject to the normal income tax, the following:

154

155

(a) The amount received as dividend from domestic corporations.

(1) Foreign corporations are for this purpose to be considered domestic corporations, when more than fifty (50) per cent of their net income for the three year period ending with the close of the taxable year preceding the declaration of such dividend (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of Section 217 of the law. This showing must be made in accordance with regulations prescribed by the Commissioner of Internal Revenue.

(2) Domestic corporations are for this purpose to be considered foreign corporations, if

eighty (80) per cent or more of their gross income from all sources for the three-year period immediately preceding the close of the fiscal year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States (not including the Virgin Islands); and if also fifty (50) per cent of the said gross income for such period or such part of such period was derived from the active conduct of a trade or business within a possession of the United States either on their own account or as employee or agent of another. Dividends from this class of corporations are not deductible as a credit in computing normal income tax.

156 (b) Amounts received as interest on obligations of the United States and bonds of the war finance corporation, in excess of allowable exemptions and which is included in taxable gross income in the return of in

come.

157 (c) (1) In the case of a single person, a personal exemption of $1,000.

(2) In the case of head of a family (an individual

who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals, is based upon some moral or legal obligation), or a married person living with husband or wife, a personal exemption of $2,500, unless the net income is in excess of $5,020.83, in which event the personal exemption shall be $2,000. A husband and wife living together shall receive but one personal exemption of $2,500 or $2,000, as the case may be, and if they make separate returns of income, such exemption may be taken by either or divided be

tween them in such proportion as they may elect. 158 (d) $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer, if such dependent person is under eighteen years of age or is incapable of self support because mentally or physically defective.

159 (e) In the case of a non-resident alien individual or an individual a citizen of the United States who is entitled to the benefits of Section 262 of the law because of income from within a possession of the United States, the personal exemption shall be only $1,000, and he shall not be entitled to the credit for dependents.

160 (f) The status of the taxpayer on the last day of the period for which return is made, determines the amount of exemption allowable to such taxpayer under (c), (d) and (e) herein. An individual who dies during a taxable year takes exemption according to his status on the day of his death. In such case, full credit is allowed the surviving spouse, if any, according to his or her status at the close of the period for which survivor makes return of income.

Estates or trusts required to make returns of income and pay tax, have the same personal exemption as a single individual.

CREDITS ALLOWED TO CORPORATIONS (FOR THE PURPOSE ONLY OF COMPUTING INCOME TAX)

161 Section 236: In ascertaining the amount of total net income to be subjected to corporation income tax, there shall be allowed as credits against net income

162 (a) The amount received as interest from obligations of the United States and bonds issued by the War Finance Corporation, in excess of allowable exemptions and which is included in gross income.

163 (b) In the case of a domestic corporation, the net income of which is $25,000 or less, a specific credit of $2,000, but if the net income is more than $25,000, the tax imposed by Section 230 of the law shall not exceed the tax which would be payable if the $2,000 credit were allowed, plus the amount of net income in excess of $25,000.

164 The language of the Statute indicates that there is some amount in excess of $25,000 the income tax on which at the rate for corporate income and without exemption, will produce an amount of tax equal to the sum of corporation income tax on $25,000 with exemption of $2,000 plus the difference between the unknown sum and $25,000. By equation, we find this sum for 1921 to be $25,222.22 @ 10% =

$2,522.22

165 For 1922 and subsequent years, we find the unknown

166 For 1921, corporations are required to pay an excess profits tax (possibly in some cases, a war profits tax). A question then arises whether determination of applicability of the $2,000 exemption depends on the amount of net income to be taxed for both income and excess profits tax, or on the amount of net income after credit for excess profits tax and other credits not subject to income tax.

The latter consideration determines the question. 167 It will be noted that paragraph (b) of Section 236 deals