8. Amount received by way of dividends upon stock of other corporations, joint stock companies, associations and insurance companies subject to this tax.

Total Deductions

9. Net Income

10. Specific deduction from net income allowed by law.

11. Amount on which tax at one per centum is to be calcu

$5,000 00

lated...

(Verification as in section 48.)

(This form, properly filled out and executed, must be in the hands of the collector of internal revenue for the district in which is located the principal office of the corporation making the return on or before March 1.) ́

CHAPTER VI.

FUNDAMENTAL BASIS OF THE FEDERAL CORPORATION ACT.

Sec. 55. What Is the Fundamental Basis of the Federal Corporation Tax. The fundamental and controlling principle to be observed in the practical operation of the federal corporation tax is that which treats the whole act as embodying an excise tax, the amount of which is measured by the income of the corporation, company or association subject to its terms.

In the words of the United States Supreme Court in Flint v. Stone Tracey & Company, 220 U. S. 107, "it is apparent that the tax is imposed not upon the franchises of the corporation, irrespective of their use in business, nor upon the property of the corporation, but upon the doing of corporate or insurance business with respect to the carrying on thereof in a sum equivalent to 1 per centum upon the entire net income over and above $5,000 received from all sources during the year; that is, when imposed in this manner it is a tax upon the doing of business with the advantages which inhere to the peculiarities of corporate or joint stock organizations of the character described. As the latter organizations share many benefits of corporate organization, it may be described generally as a tax upon the doing of business in a corporate capacity."

Bearing this in mind, it next becomes proper to determine how the taxable income of such corporations, companies or associations is to be calculated. Before doing this it will be proper to lay a firm foundation for what is to follow, by defining the terms employed in the act, in pointing out the successive steps to be followed in order to ascertain the "net income " upon which the tax itself is levied.

First, let us obtain a legal definition of the term "income as used in the act under discussion.

Sec. 56. Definition of Income. The Federal Corporation Tax Law (paragraph 2, lines 1 to 28) provides that the net income upon which the excise tax itself is measured, shall be ascertained by making certain deductions (as enumerated in the act) from the gross amount of the income of the corporation, joint stock company or association, or insurance company against which the tax is assessed as the same may have been received within the tax year (January 1 to December 31), from all sources.

It will be seen that it is a matter of primary importance to obtain at the start an accurate and comprehensive definition of the word "income as used in the act.

Income is the revenue received by the company from any source which originates through investment of its funds, or the utilization and exploitation of its capital in carrying on the particular business for which such company was organized or formed. The fair test to be employed in any case in determining whether certain funds received by the company are to be treated as income, within the meaning of the act is to ascertain whether such funds proceed from the investment or utilization of the capital of the company from whatsoever source derived.

Sec. 57. Meaning of the Phrase "Income Received" In Paragraph 2 of the Act. There is no particular significance in the use of the word "received" as found therein. It simply serves to distinguish moneys which are due the company but not collected, from those which have been actually paid in. The regulations of the treasury department (No. 31, T. D. 1571, December 3, 1909, see Appendix C.) present certain definitions and rules for determining the gross income of the various classes of corporations. These briefly stated are as follows:

1A. Banks and other financial institutions. Gross income consists of the gross revenue derived from the operation and management of the business and property of the corporation making the return, together with all amounts of income (including dividends received on stock of other corporations, subject to this tax) derived from all other sources, as shown by the entries on its books from January 1 to December 31 of the year for which return is made.

IB. Insurance companies. - Gross income consists of the gross revenue derived from the operation and management of the business and property of

the corporation making the return, together with all amounts of income (including dividends received on stock of other corporations, joint-stock companies, associations and insurance companies subject to this tax) derived from all other sources, as shown by the entries on its books from January 1 to December 31 of the year for which return is made.

2. Transportation companies. — Gross income consists of the gross revenue derived from the operation and management of the business and property of the corporation making the return, together with all amounts of income (including dividends received on stock of other corporations, joint stock com panies, associations and insurance companies subject to this tax) derived from all other sources, as shown by the entries on its books from January 1 to December 31 of the year for which return is made.

3. Manufacturing companies. - Gross income received during the year from all sources will consist of the total amount, ascertained through an accounting, that shows the difference between the price received for the goods as sold and the cost of such goods as manufactured. The cost of goods manufactured shall be ascertained by an addition of a charge to the account of the cost of goods as manufactured during the year of the sum of the inventory at beginning of the year and a credit to the account of the sum of the inventory at beginning of the year and a credit to the account of the sum of the inventory at the end of the year. To this amount should be added all items of income received during the year from other sources, including dividends re ceived on stock of other corporations, joint stock companies, associations and insurance companies subject to this tax. In the determination of the cost of goods manufactured and sold as above, such cost shall comprehend all charges for maintenance and operation of manufacturing plant, but shall not embrace allowances for depreciation of property, nor for losses sustained which are to be taken account of in ascertaining the net income subject to tax under the proper heading in the authorized deductions.

4. Mercantile companies. — Gross amount of income received during the year from all sources consists of the total amount ascertained through in ventory, or its equivalent, which shows the difference between the price received for goods sold and the costs of goods purchased during the year, with an addition of a charge to the account of the sum of the inventory at beginning of the year and a credit to the account of the sum of the inventory at the end of the year. To this amount should be added all items of income received during the year from other sources, inclusive of dividends received on stock of other corporations, joint stock companies, associations and insurance companies subject to this tax. In determining this amount no account shall be taken of allowances for depreciation of property, nor for losses sustained, which are to be taken account of in ascertaining the net income, sub ject to tax under the proper heading in the authorized deductions.

5. Miscellaneous. - Gross income consists of the gross revenue derived from the operation and management of the business and property of the corporation making the return, together with all amounts of income (including dividends received on stock of other corporations, joint stock companies, asso ciations and insurance companies subject to this tax) derived from all other sources as shown by the entries on the books from January 1 to December 31 of the year for which return is made.

It will be noted from these definitions that gross income is practically the Same as gross profits, the only difference being that gross income is more inclusive, embracing as it does not only gross profits of the corporation, joint stock company and association itself, but also all amounts of income received from other sources. It is immaterial whether any item of gross income is evidenced by cash receipts during the year or in such other manner as to entitle it to proper entry on the books of the corporation from January 1 to December 31 of the year for which return is made.

66

"Found

Sec. 58. Meaning of the Phrase "From All Sources In Paragraph 2 of the Act. The purpose of adding the words from all sources 66 to the term gross income is to include therein not only such income as is derived from the ordinary and routine business of the company, but serves to include therein the income derived from investments, sale of capital assets and income received from property which in itself would be exempt from federal taxation.

On this general subject the United States Supreme Court in Flint v. Stone Tracey & Company, 220 U. S. 107, spoke as follows:

This tax, it is expressly stated, is to be equivalent to 1 per centum of the entire net income over and above $5,000 received from all sources during the year. This is the measure of the tax explicitly adopted by the statute. The income is not limited to such as is received from property used in the business, strictly speaking, but is expressly declared to be upon the entire net income above $5,000 from all sources, excluding the amounts received as dividends on stock in other corporations, joint stock companies, or associa tions, or insurance companies also subject to the tax. In other words, the tax is imposed upon the doing of business of the character described, and the measure of the tax is to be the income, with the deduction stated, received not only from property used in business, but from every source. This view of the measure of the tax is strengthened when we note that as to organiza tions under the laws of foreign countries the amount of net income over and above $5,000 includes that received from business transacted and capital invested in the United States, the Territories, Alaska and the District of Columbia.

It is further strengthened when the subsequent sections are considered as to deductions in ascertaining net income and requiring returns from those subject to the deductions from the gross amount of income received within the year "from all sources;" and the return to be made to the collector of internal revenue under the third section is required to show the gross amount of the income received during the year "from all sources." The evident purpose is to secure a return of the entire income, with certain allowances, and deductions, which do not suggest a restriction to income derived from property actively engaged in the business. This interpretation of the act, as resting