year were the calendar year 1918, and then taking the proportion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. The stocknolder is also liable to tax on dividends received out of earnings or profits accumulated since February 28, 1913, and before January 1, 1918.21 Application of Different Tax Rates in the Case of Fiscal Year of Personal Service Corporation Ending in 1919. Any deductions, exemptions or credits to which the stockholder of a personal service corporation with a fiscal year ending in 1919 is entitled should first be applied against his income subject to the rates for the calendar year 1919, unless of a kind plainly and properly chargeable against income taxable at the rates for the calendar year 1918. In determining the rates of tax applicable to the amounts of the distributive shares of the stockholders attributable to the calendar years 1918 and 1919, respectively, the amounts subject to the rates for the calendar year 1919 should be placed in the lower brackets of the rate schedule provided in the statute and the amounts attributable to the calendar year 1918 in the next higher brackets of the rate schedule applicable to that year.22 Corporations Formed to Evade the Surtaxes. If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of permitting its gains and profits to accumulate, instead of being divided or distributed, the stockholders of such corporation will be subject to income tax in the same manner as the stockholders of a personal service corporation.23 21 Reg. 45, Art. 334. For the rule in the case of personal service corporatons with fiscal years ending in 1918 and the taxation of the stockholders of such personal service corporations, see Reg. 45, Arts. 329, 332. 22 Reg. 45, Art. 335. For the rule in the case of personal service corporations with fiscal years ending in 1918 and the application of the different tax rates in such cases, see Reg. 45, Arts. 329, 333. 23 Revenue Act of 1918, § 220. For a full discussion of this subject see Chapter 2. CHAPTER 10 CORPORATIONS 5 upon their net This tax is in Corporations are taxed as separate entities apart from their stockholders. They are subject to a tax of 10% income for the year 1919 and subsequent years. lieu of the taxes imposed by the 1916 Law 2 as amended by the 1917 Law.3 Corporations are not subject to the surtaxes. They are entitled to deduct from their gross income, which (except in the case of insurance companies) is computed in the same manner as the gross income of individuals, the deductions and credits specified in the law, which differ to some extent from the deductions and credits allowed to individuals. Corporations, like individuals, make returns for the calendar or their fiscal year, according to the annual accounting period employed in keeping their books. The mere existence of a corporation during any part of the year is sufficient to require it to make a return. Prior to the present law, the mere receipt of net income from any source made it liable for the tax, but it may now be in receipt of net income without being liable for the tax if the credits to which it is entitled equal or exceed such net income. Thus, a corporation may be in receipt of net income not in excess of $2,000 and be entitled to a credit of $2,000 against such net income for the purpose of the income tax, as a result of which it will be in receipt 1 Revenue Act of 1918, § 230. This rate was 12% for the calendar year 1918. Transportation systems are taxable as to part of this rate by amendment of the 1917 Law. See paragraph on Transportation Systems, post. 2 Revenue Act of 1916, § 10. The total tax to which corporations were subject under both the 1916 and the 1917 Laws was 6%. 3 Revenue Act of 1917, § 4. 4 See Reg. 33, Art. 185. The excess-profits tax is in effect a corporate surtax. 5 Revenue Act of 1918, § 233. 6 Revenue Act of 1918, §§ 234 and 236. of net income without being liable for the tax. Since the tax is an income tax and not an excise tax,10 doing business is not a necessary element of taxability.11 Certain special provisions of the law applicable only to insurance companies are discussed in another chapter.12 Definition. The tax is imposed on every corporation, domestic or foreign. The word "corporation" is used in this chapter as defined in the present law,13 and includes associations, joint-stock companies, and insurance companies. JOINT-STOCK COMPANIES AND ASSOCIATIONS.1 14 There seems to be no constitutional or legal objection to including joint-stock com 10 The tax assessed on corporations for the months of January and February, 1913, under the 1913 Law, was an excise tax and not an income tax and, therefore, applied only to corporations "doing business," but the exemptions and deductions to which a corporation was entitled were those allowed by the 1913 Law, which law did not permit the deduction of dividends. (Butterick Company v. U. S., 240 Fed. 539.) 11 The numerous cases under the 1909 Law holding certain corporations not to be taxable on the ground that they were not "doing business" have no application to the income tax laws. 12 See Chapter 11. 13 Revenue Act of 1918, § 1. As used in the regulations issued under the 1916 Law, the term "corporation" was construed to include all corporations, joint-stock companies and associations, and all insurance companies coming within the terms of the law as well as all business trusts organized or created for the purpose of engaging in commercial or industrial enterprises, the capital of which was evidenced by certificates or shares of interest issued or issuable to members on the basis of which profits were distributed or distributable. (Reg. 33 Rev., Art. 57.) 14 The 1909 Law taxed "Every corporation, joint-stock company or association, organized for profit and having a capital stock represented by shares, and every insurance company, now or hereafter organized under the laws of the United States or of any State or Territory of the United States or under the Acts of Congress applicable to Alaska or the District of Columbia, or now or hereafter organized under the laws of any foreign country and engaged in business in any State or Territory of the United States or in Alaska or in the District of Columbia." (Act of August 5, 1909, § 38.) The 1913 Law taxed "Every corporation, joint-stock company or association, and every insurance company, organized in the United States, no matter how created or organized, not including partnerships.' (Act of October 3, 1913, §G (a). The 1916 Law taxed''Every corporation, joint-stock company or association, or insurance company organized in the United States, no matter how created or organized but not including partnerships." (Revenue Act of 1916, § 10 (a)). The 1918 Law taxes every corporation and defines the term "corporation" to include "associations, joint-stock companies, and insurance companies.'' panies in the same category with corporations.15 A joint-stock company organized pursuant to the New York Joint-Stock Association Law was held, under the 1909 Law, to be practically a "corporation," despite the absence of the important corporate attribute of limited liability, and was held taxable as such.16 It was held under the 1913 Law that an association, formed as a partnership under the laws of Hawaii and having as its members a number of corporations, was not a corporation. In the association involved in this case there were no special partners nor was there limited liability. The partnership arrangement lacked the element of changeability of membership or transferability of shares, an element often used as a determining criterion as between ordinary partnerships and joint-stock companies. In a joint-stock company the members have no right to decide what new members shall be admitted to the firm; on the other hand, such a right is an inherent quality of the ordinary partnership.17 By regulation issued under the 1918 Law, it is provided that the terms "joint-stock companies" and "associations" include associations, common-law trusts, or organizations by whatever name known which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the members or shareholders (Revenue Act of 1918, § 1, 230.) It will be noted that the phrase "no matter how created or organized" used in both the 1913 and 1916 Laws is omitted from the definition of corporation contained in the 1918 Law. On the other hand, the phrase "joint-stock company or association" (between commas) has been changed to "associations, joint-stock companies." The purpose of this transposition is to separate the word "associations" from any limitation imposed by conjunction with the word "joint-stock" and to use it to cover organizations which cannot be included within the terms "corporations,' "joint-stock companies," or "insurance companies." The phrase "no matter how created or organized” seems to have been aimed to include organizations not "organized under the laws of the United States or of any state which were held not liable to tax under the 1909 Law, in view of the language of that Act. See Crocker v. Malley, 249 U. S. 223; Eliot v. Freeman, 220 U. S. 178; T. D. 2418; Reg. 38 Rev., Art. 2, General Instructions 3; see also Chapter 44 on Capital Stock Tax. 15 See Spreckels Sugar Refining Co. v. McClain, 192 U. S. 397; Flint v. Stone Tracy Co., 220 U. S. 107. 16 Roberts v. Anderson, 226 Fed. 7. 17 Haiku Sugar Co. v. Johnstone, 249 Fed. 103; Reg. 45, Art. 1503. on the basis of the capital stock which each holds, or where there is no capital stock, on the basis of the proportionate share or capital which each has, or has invested, in the business or property of the organization.1 18 "SYNDICATES" ARE NOT CORPORATIONS. Where a block of securities is purchased in joint account by several corporations, partnerships or individuals for the purpose of disposing of them to the public through the syndicate managers, the only obligation of the members of the syndicate being to take and pay for the portion of the securities not disposed of, such temporary combinations of business interests are neither corporations, joint-stock companies or associations, nor partnerships, within the meaning of the income tax law and the profits of the syndicate are not taxable in the hands of the syndicate. The several members pay the tax on their respective shares of the profit of the transaction.19 TRUSTS NOT TAXABLE AS ASSOCIATIONS. In a case arising under the 1913 Law a Maine corporation with eight shareholders had its mills in Massachusetts and owned outlying land. The Maine corporation conveyed to a Massachusetts corporation formed in 1912 seven mills and let to it an eighth that was in the process of construction, together with the outlying lands and tenements, on a long lease, receiving the stock of the Massachusetts corporation in return. The Maine corporation then transferred to the plaintiffs as trustees the fee of the property subject to the lease, left the Massachusetts stock in their hands, and was dissolved. By the declaration of trust the plaintiffs declared that they held the real estate and all other property at any time received by them thereunder, subject to the provisions thereof, "for the benefit of the cestui que trusts (who shall be trust beneficiaries only, without partnership, associate, or other relations whatever inter sese)" upon trust to convert the same into money and distribute the net proceeds to the persons then holding the trustees' receipt certificates the time of distribution being left to the discretion of the trustees, but not to be postponed beyond the end of twenty years after the death of the specified persons then living. In the meantime the trustees were to have the powers of owners, were to distribute what they determined to be fairly distributable net 18 Reg. 45, Art. 1502; Reg. 33 Rev., Art. 58. See also Reg. 33, Art. 79. 19 Letter from Treasury Department dated February 25, 1914. |