Additional tax on net incomes in excess of $20,000-"surtax."

STOCK DIVIDENDS.

Stock dividends declared in 1914 from profits accrued before January 1, 1913, do not constitute taxable income to recipients under section 2 of the act of October 3, 1913. (Towne v. Eisner, 245 U. S. 418, 1918, reversing 242 Fed. 702.)

A dividend declared and paid by one corporation in the stock of another is not a "stock dividend" within the accepted meaning of that term. (Peabody v. Eisner, 247 U. S. 347.)

A dividend declared and paid by a going corporation, partly in cash and partly in assets of the corporation, is subject to the additional tax imposed by the act of October 3, 1913, when received by an individual stockholder, although declared from a surplus which was in part accumulated before March 1, 1913. Southern Pacific v. Lowe, 247 U. S. 330, distinguished; Lynch v. Hornby, 247 U. S. 339 followed. (Peabody v. Eisner, 247 U. S. 347.)

CASH DIVIDENDS.

An individual stockholder is subject to the additional tax under the 1913 act on all dividends declared and paid by a corporation in the ordinary course of business after the act became effective, whether from current earnings or from the accumulated surplus made up of past earnings or increase in value of corporate assets notwithstanding the surplus accrued to the corporation in whole or in part prior to March 1, 1913. (Lynch v. Turrish, 247 U. S. 221, and Southern Pacific Railway Co.v. Lowe, 247 U. S. 330, distinguished; Lynch v. Hornby, 247 U. S. 339, 1918.)

The act of September 8, 1916, and the act of October 3, 1917, in excluding dividends declared out of earnings or profits that accrued prior to March 1, 1913, are not intended to be declaratory of the term "dividends" in the 1913 act. (Id.)

DEDUCTION--EXEMPTION UNDER PARAGRAPH C.

The income tax law allows exemption of $3,000 or $4,000, depending on whether the one taxed is single or married, and provides for a tax of 1 per cent on all other income. Other provisions impose a tax of an additional 1 per cent upon the amount by which the total net income exceeds $20,000 and does not exceed $50,000. Held that, in assessing the additional tax on the excess of the net income over $20,000, the exemption of $3,000 or $4,000, which is to be deducted in assessing the normal income tax can not be made. (Cohen v. Lowe, 234 Fed. 474, 1916.)

PARAGRAPH B.

B. That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, business, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise, or descent: Provided, That the proceeds of life-insurance policies paid upon the death of the person insured or payments made by or credited to the insured, on life insurance, endowment, or annuity contracts, upon the return thereof to the insured at the maturity of the term mentioned in the contract, or upon surrender of contract, shall not be included as income.

That in computing net income for the purpose of the normal tax there shall be allowed as deductions: First, the necessary expenses actually paid in carrying on any business, not including personal, living, or family expenses; second, all interest paid within the year by a taxable person on indebtedness; third, all national, State, county, school, and municipal taxes paid within the year, not including those assessed against local benefits; fourth, losses actually sustained during the year, incurred in trade or arising from fires, storms, or shipwreck, and not compensated for by insurance or otherwise; fifth, debts due to the taxpayer actually ascertained to be worthless and charged off within the year; sixth, a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business, not to exceed, in the case of mines, 5 per centum of the gross value at the mine of the output for the year for which the computation is made, but no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made: Provided, That no deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate; seventh, the amount received as dividends upon the stock or from the net earnings of any corporation, joint stock company, association, or insurance company which is taxable upon its net income as hereinafter provided; eighth, the amount of income, the tax upon which has been paid or withheld for payment at the source of the income, under the provisions of this section, provided that whenever the tax upon the income of a person is required to be withheld and paid at the source as hereinafter required, if such annual income does not exceed the sum of $3,000 or is not fixed or certain, or is indefinite, or irregular as to amount or time of accrual, the same shall not be deducted in the personal return of such person.

The net income from property owned and business carried on in the United States by persons residing elsewhere shall be computed upon the basis prescribed in this paragraph and that part of paragraph G of this section relating to the computation of the net income of corporations, joint-stock and insurance companies, organized, created, or existing under the laws of foreign countries, in so far as applicable.

That in computing net income under this section there shall be excluded the interest upon the obligations of a State or any political subdivision thereof, and upon the obligations of the United States, or its possessions; also the compensation of the present President of the United States during the term for which he has been elected, and of the judges of the supreme and inferior courts of the United States now in office, and the compensation of all officers and employees of a State or any political subdivision thereof except when such compensation is paid by the United States Government.

Net income.

LIQUIDATION DIVIDENDS.

Where the capital assets of a corporation increased in value prior to March 1, 1913, and a single and final dividend was made in liquidation of the entire assets in 1914, without further appreciation or addition to the assets having occurred, no part of the dividend received by a stockholder is taxable under the act of October 3, 1913. Citing Collector v. Hubbard, 12 Wall. 1, and Bailey v. Railroad Co., 22 Wall. 604, and 106 U. S. 109, also Gray v. Darlington, 15 Wall. 63. (Lynch v. Turrish, 247 U. S. 221, 1918, affirming 236 Fed. 653.) For income liable to additional tax, see cases under paragraph A (2).

PARTNERSHIP INCOME.

A member of a partnership need not include as a part of his net income subject to normal tax such of his income derived from or through a partnership as has been received by the partnership in the shape of dividends on stocks owned by it in corporations taxable upon their net income. (U. S. v. Coulby, 251 Fed. 982, affirmed in 258 Fed. 27.)

STOCK DIVIDENDS.

Stock dividends declared in 1914 from profits accrued before January 1, 1913, do not constitute taxable income to recipients under section 2 of the act of October 3, 1913. (Towne v. Eisner, 245 U. S. 418, 1918. reversing 242 Fed. 702. See also Macomber v. Eisner, pending in United States Supreme Court.)

SERVICES PERFORMED IN PRIOR YEAR.

Where a life insurance agent holds a contract entitling him to certain specific percentages on first and renewal premium on policies secured through his solicitation when such premium shall be paid; these commissions, when paid on renewal premiums of policies issued before the act became effective but paid after such date, are taxable as "derived income" for the year in which they are received. (Edwards v. Keith, 224 Fed. 585, 231 Fed. 110, 243 U. S. 638. Also Woods v. Lewellyn, 252 Fed. 106.)

ALIMONY.

Alimony paid monthly to a divorced wife under a decree of court is not taxable as "income" under the income tax act of October 3. 1913. (Gould . Gould, 245 U. S. 151; 168 App. Div. 900 affirmed.)

EXPORT SALES.

The net income from the venture of exportation when completed that is to say, after the exportation and sale are fully consummated is subject to taxation under general laws. (Peck & Co. v. Lowe, 247 U. S. 165, affirming 234 Fed. 125.)

INCOME DEFINED.

"We must reject in this case, as we have rejected in cases arising under the corporation excise tax act of 1909 (Doyle v. Mitchell Bros. Co. and Hays v. Gauley Mountain Coal Co., decided May 20, 1918), the broad contention submitted in behalf of the Government that all receipts-everything that comes in-are income within the proper definition of the term "gross income," and that the entire proceeds of a conversion of capital assets, in whatever form and under whatever circumstances accomplished, should be treated as gross income. Certainly the term "income" has no broader meaning in the 1913 act than in that of 1909 (see Stratton's Independence v. Howbert, 231 U. S. 399), and for the present purpose we assume there is no difference in its meaning as used in the two acts." (So. Pac. v. Lowe, 247 U. S. 330, 1918.)

Net income-Deductions.

SUBDIVISION 3.-TAXES.

New York State transfer taxes held not deductible, as taxes paid, under this paragraph, as "* * * the tax can not properly be regarded as an imposition upon either the property or the right to receive a gross amount of the property of a decedent represented by a legacy, devise, or distributive share, but that the property and the right to receive it passed, reduced by the amount of the tax, measured by a percentage of the value of the gross share." (Opinion by Judge Hand in the case of Prentiss v. Eisner, U. S. D. C., So. Dist. of New York, Sept., 1919. T. D. 2933.)

SUBDIVISION 4.-LOSSES.

Loss of the value of corporate stock, acquired by numerous transfers of property to the corporation and payment of corporate debts, transactions carried on for a considerable period, complicated in character and involving large sums of money, so that they must have required much time and attention, is a loss incurred in trade, which can be deducted from gross income under this section. (Bryce v. Keith, 257 Fed. 133, 1919.)

PARAGRAPH C.

C. That there shall be deducted from the amount of the net income of each of said persons, ascertained as provided herein, the sum of $3,000 plus $1,000 additional if the person making the return be a married man with a wife living with him, or plus the sum of $1,000 additional if the person making the return be a married woman with a husband living with her; but in no event shall this additional exemption of $1,000 be deducted by both a husband and a wife: Provided, That only one deduction of $4,000 shall be made from the aggregate income of both husband and wife when living together.

The income tax law allows exemption of $3,000 or $4,000, depending on whether the one taxed is single or married, and provides for a tax of 1 per cent on all other income. Other provisions impose a tax of an additional 1 per cent upon the amount by which the total net income exceeds $20,000 and does not exceed $50,000. Held, That, in assessing the additional tax on the excess of the net income over $20,000, the exemption of $3,000 or $4,000, which is to be deducted in assessing the normal income tax can not be made. (Cohen v. Lowe, 234 Fed. 474, 1916.)

PARAGRAPH D.

D. The said tax shall be computed upon the remainder of said net income of each person subject thereto, accruing during each preceding calendar year ending December thirty-first: Provided, however, That for the year ending December thirty-first, nineteen hundred and thirteen, said tax shall be computed on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive, after deducting five-sixths only of the specific exemptions and deductions herein provided for. On or before the first day of March, nineteen hundred and fourteen, and the first day of March in each year thereafter, a true and accurate return, under oath or affirmation, shall be made by each person of lawful age, except as hereinafter provided, subject to the tax imposed by this section, and having a net income of $3,000 or over for the taxable year, to the collector of internal revenue for the district in which such person resides or has his principal place of business, or, in the case of a person residing in a foreign country, in the place where his principal business is carried on within the United States, in such form as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe, setting forth specifically the gross amount of income from all separate sources and from the total thereof, deducting the aggregate items or expenses and allowance herein authorized; guardians, trustees, executors, administrators, agents, receivers, conservators, and all persons, corporations, or associations acting in any fiduciary capacity, shall make and render a return of the net income of the person for whom they act, subject to this tax, coming into their custody or control and management, and be subject to all the provisions of this section which apply to individuals: Provided, That a return made by one of two or more joint guardians, trustees, executors, administrators, agents, receivers, and conservators, or other persons acting in a fiduciary capacity, filed in the district where such person resides, or in the district where the will or other instrument under which he acts is recorded, under such regulations as the Secretary of the Treasury may prescribe, shall be a sufficient compliance with the requirements of this paragraph; and also all persons, firms, companies, copartnerships, corporations, joint-stock companies or associations, and insurance companies, except as hereinafter provided, in whatever capacity acting, having the control, receipt, disposal, or payment of fixed or determinable annual or periodical gains, profits, and income of another person subject to tax, shall in behalf of such person deduct and withhold from the payment an amount equivalent to the normal income tax upon the same and make and render a return, as aforesaid, but separate and distinct, of the portion of the income of each person from which the normal tax has been thus withheld, and containing also the name and address of such person or stating that the name and address or the address, as the case may be, are unknown: Provided, That the provision requiring the normal tax of individuals to be withheld at the source of the income shall not be construed to require any of such tax to be withheld prior to the first day of November, nineteen hundred and thirteen: Provided further, That in either case above mentioned