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individual, to a corporation, or to any other person or entity. Thus income derived through the medium of corporate dividends, interest on corporate bonds, rents, dealings in securities, etc., were all alike subject to the basic tax. Originally this basic rate was one per cent., then later two per cent.


With the enactment of the War Income Tax Law of 1917, however, the term "normal" lost its original signifiIncome in the form of corporate dividends became subject to a six per cent. basic tax; (the corporation itself paid the six per cent. tax on its earnings) whereas other forms of income were in reality subject to only a two per cent. basic tax.

In the Law of 1918, the basic tax is six per cent. for 1918 income and four per cent. for 1919 income. It is true that for the 1918 income, the "normal" tax is six or twelve per cent., depending upon the range of income, and four or eight per cent. for 1919; but the fact is that the basic rate for 1918 is six per cent. and four per cent. for 1919. And yet a corporation pays on its earnings, twelve per cent. for 1918 and ten per cent. for 1919 inThe reference to this subject is included because this fundamental principle underlying the original statute seems worth restating.




Since the enactment of the 1913 law, the matter of Exemption a personal exemption being allowed a non-resident alien of has been in constant change. In 1917 the non-resident Alien alien was favored as compared with the resident or citizen inasmuch as he was not subject to the normal tax of two per cent. levied by the War Income Tax of 1917. The Act of 1918 makes him liable to the higher normal tax of twelve per cent., as well as all surtaxes, but allows



and Wife

"Head of a Family




him a personal exemption if the country of which he is a citizen or subject imposes an income tax and also allows a similar credit to citizens of the United States not residing in such country.

10. Until 1917, the personal exemptions allowed were in general, $3,000 to unmarried and $4,000 to married persons. The War Income Tax Law of 1917 reduced these amounts to $1,000 and $2,000 respectively. These same figures are retained in the new law, that is, the Revenue Act of 1918 allows a personal exemption of $1,000 to every individual who is unmarried or is married and is not living with husband or wife, or of $2,000 if married and living with husband or wife or is the head of a family. A husband and wife living together shall receive but one personal exemption of $2,000 against their aggregate net income. All of this exemption may be taken by either one or may be divided between them. A husband and wife not living together are entitled to the exemption allowed single persons.

11. The expression "head of a family," is not defined by statute, but the Treasury Department ruled in respect to the 1916 Law, that this means “a person who actually supports and maintains 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 those dependent individuals is based upon some moral or legal obligation."

12. In 1917 a further exemption of $200 was granted for each dependent child. The new Law of 1918 does not use the word "child" but the word "person", and the word "taxpayer" instead of "parent." It provides $200 exemp

tion for each person dependent upon and receiving chief support from the taxpayer if under 18 years of age or incapable of self support because mentally or physically defective. The Law, however, does not specifically state, although it is doubtless so meant, that this provision shall operate only in the case of one taxpayer in the same family. In 1917 the Treasury Department ruled that the dependent must not continually make his residence elsewhere than with the taxpayer.

13. It must be remembered that this personal exemption is considered in computing the normal tax only. The surtax is levied upon amounts of taxable income between certain ranges fixed by statute without regard to personal exemption.


14. Gross income is stated to include gains, profits, Gross income derived from every source whatsoever, and specifically from:

(a) Salaries, wages or compensation for personal service of
every kind and in whatever form paid;

(b) Professions, vocations, businesses, trade or commerce;
(c) Sales or dealings in property, real or personal, as well
as income growing out of the ownership, use or interest
in such property; and

(d) Interest, rent and dividends.

15. In ascertaining the gain derived or loss sustained from the sale or other disposition of securities, real estate or other property, acquired before March 1, 1913 (the date from which the tax applied to income under the 1913 Law), the fair market price or value of such property as of that date shall be the basis for determining the amount of gain or loss. When property has been acquired after that date, the loss or gain may be ascertained on the basis of the cost thereof or on the inven


Gain or



tory value providing the inventory has been taken in the manner most clearly reflecting the income and approved by the Commissioner. When property has been exchanged for other property, that taken in exchange shall be treated as cash to the equivalent of its fair market value, if there be any.

It is now provided for the first time that in the case of re-organization, merger or consolidation of a corporation, when new stock of no greater aggregate face or par value is received for the old stock or securities, no gain or loss shall be deemed to have occurred and the new stock or securities shall be treated as taking the place of the old. In case securities of a greater face or par value in the aggregate are received, the excess is to be treated as gain to the extent that the fair market value of the new stock or securities is greater than the cost (or if acquired prior to March 1, 1913, the fair market value as of that date) of the stocks or securities exchanged.

16. It seems of practicable value to note herein in respect to "accrued interest" on bonds that, according to Treasury ruling, the owner of bonds at the time the interest becomes due and payable, should account in his return only for interest which accrued after the bonds were purchased by him. The former owner should account in his return for the interest which accrued during his ownership of the bonds.


In December, 1917, the Commissioner ruled that a dealer in securities "who in his books of account regularly inventories unsold securities on hand either (a) at cost or (b) at cost or market price whichever is lower,"

may for purposes of the income, as well as excess profits taxes, make his return upon the basis upon which his accounts are kept. The Commissioner provided that detailed information would need to be submitted and that the method followed as to 1917 income, must be adhered to in subsequent years unless a different method were especially approved by him. In general, this same provision was extended to mercantile and manufacturing corporations.

So many questions arose as to the precise definition of "Dealer in a "dealer in securities," that the Commissioner ruled that Securities" he was a "merchant of securities, whether an individual, partnership, or corporation, with an established place of business; and whose principal business is the purchase of securities and their resale to customers, that is, one who, as a merchant, buys securities and sells them to customers, with a view to the gains and profits that may be derived therefrom." The Commissioner further ruled that taxpayers who buy and sell or hold securities for investment or speculation and not in the course of an established business, and officers of corporations or I members of partnerships who in their individual capacities buy and sell securities, are not considered to be dealers in securities and therefore inventories taken by them must be at cost.

Serious question arose as to whether the inventory ruling referred to above, was in accordance with the statute. The Attorney General of the United States held, however, upon presentation of the matter to him, that the Treasury ruling was proper.

18. The 1918 Law, for the first time, includes a spe- Inventories =cial inventory provision which is to the effect that when- 1918


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