fiscal year ending in 1919 the tax is first to be computed at the 1918 rates on the entire net income for the fiscal year and second at the 1919 rates on the same income. The tax for the fiscal year will be a proportion of each of the amounts so determined as the portions of the fiscal year falling within the calendar year 1918 and within the calendar year 1919 are respectively to the full fiscal year.23 The rules applicable to partnerships, personal-service corporations and corporations generally are treated elsewhere.24

23 Id., Art. 1625.

24 Chapter 10 contains the rules applying to partnerships and personal-service corporations; Chapter 12, corporations.

CHAPTER 3

INDIVIDUALS TO WHOM THE LAW IS APPLICABLE

The theory upon which the income tax is imposed seems to be two-fold. The law imposes the tax upon the net income of all persons within its jurisdiction, regardless of the source of such income, and upon all income arising from all sources within the United States, regardless of whether or not the United States has jurisdiction of the recipient. The tax has been defined as a tax on the person, measured by his ability to pay, that is, his net income, and as a tax on the income itself. As a matter of fact, it is both. The Government claims personal jurisdiction over all of its citizens wherever they reside and over all aliens who reside within its borders. Hence, as to citizens and resident aliens, the tax is imposed on income from all sources whether arising in this country or in a foreign country. No jurisdiction can be claimed over the persons of nonresident aliens, but insofar as their income is received from sources within this country, it is taxed on the theory that the Government has jurisdiction over the income, grants protection to the creation of such income, and is, therefore, entitled to a share thereof to defray the expenses of government.3 The fact that a person is taxable in foreign

1 In Brady v. Anderson, 240 Fed. 665, writ of certiorari denied, 244 U. S. 564, the court said: "In our opinion the tax is against the citizens and residents of the United States personally. They are chargeable in respect to income received by them.

2 In a case decided by the Supreme Judicial Court of Massachusetts, Suter v. Jordan-Marsh Company, 113 N. E. 580, it was held that the tax was levied upon the rent paid by the defendant to the plaintiff. See also Catawessa R. R. v. Phila. & Reading Co., 255 Pa. St. 269. 3 Reg. 45, Art. 3.

countries on all or part of his income does not relieve him from tax liability on the same income in this country, although he is entitled under the Revenue Act of 1918 to a credit in certain cases against his tax liability in this country by reason of the payment of taxes to foreign countries.5

Persons Exempt from the Tax. Individuals may enjoy exemption from the tax by reason of the amount or character of their income.

EXEMPTION BASED ON AMOUNT OF INCOME. Citizens and residents receiving less than $1,000 of net income during the year, if single, or less than $2,000, if the head of a family or a married person living with husband or wife, are exempt from the tax. Such persons are not required to file returns of annual income, but on demand of the Commissioner a statement sufficient to satisfy him that they are not liable. Non-resident aliens are allowed the same personal exemptions on income received from sources within the United States of $1,000 and $2,000 if they file the required returns, and provided the country of which they are citizens or subjects, if it imposes an income tax, allows similar credits to citizens of the United States not residing in such foreign country.8 Citizens of possessions of the United States (but not otherwise citizens of the United States), who are not residents of the United States, are subject to taxation by the United States under the Revenue Act of 1918 only as to income derived from sources within this country.9

7

EXEMPTION BASED ON CHARACTER OF INCOME. Individuals may also enjoy an exemption from the tax because of the character of their income, since the law expressly pro

4 T. D. 2152.

5 Revenue Act of 1918, §§ 222, 238. This credit against a person's tax should not be confused with the deduction of taxes in order to determine net income.

6 Revenue Act of 1918, §§ 223, 1305.

7 Reg. 45, Art. 315.

8 Revenue Act of 1918, §§ 216 (e), 217.

9 Revenue Act of 1918, § 260.

F. T.-3

vides that certain kinds of income shall not be included in gross income and are exempt from the tax. Among the items of income so exempt 10 are: (a) the proceeds of life insurance policies paid upon the death of the insured, to individual beneficiaries, or to the estate of the insured, (b) the amount received by the insured as return of premiums paid by him under life insurance, endowment or annuity contracts, (c) property acquired by gift, bequest, devise or descent (but the income from such property is taxable), (d) amounts received through accident or health insurance or under Workmen's Compensation Acts as compensation for personal injuries or sickness and the amount of any damages received whether by suit or agreement, on account of such injuries or sickness, (e) so much of the amount received during the war with Germany by a person in the military or naval forces, as salary or compensation in any form from the United States, for active services in such forces, as does not exceed $3,500.11 Income derived from the operation of a public utility acquired, constructed, operated or maintained under a contract made with a State, Territory, District of Columbia, or any political subdivision of the State or Territory, prior to September 8, 1916, is not taxed to the extent that the tax will impose a loss or burden on such State, Territory, District or political subdivision. Interest upon (1) the obligations of a State, Territory or any political subdivision thereof, the District of Columbia, or any possession of the United States, (2) securities issued under the provisions of the Federal Farm Loan Act, (3) the obligations of the United States, issued prior to September 1, 1917, is exempt. But every person owning any such obligations, securities or bonds, is required to submit a statement in his return, showing the

10 Revenue Act of 1918, § 213.

11 The term "active services" is probably used in the sense of services in all military and naval branches at home or abroad, as contradistinguished from the retired list. The term "military or naval forces' includes the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, and the Navy Nurse Corps, Female.

number and amount of such obligations, securities or bonds, and the interest received therefrom in such form and with such information as the Commissioner may require. In the case of obligations of the United States issued after September 1, 1917, and in the case of bonds issued by the War Finance Corporation, the interest is exempt only if and to the extent provided in the Acts authorizing the issue thereof, as amended and supplemented, and will be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under the income and war-profits and excessprofits taxes.12 The 1916 Law expressly exempted the compensation of the present President of the United States, during the term for which he has been elected, and the compensation of the Judges of the Supreme Court and inferior courts of the United States, in office at the time the Act was passed, but the Revenue Act of 1918 expressly taxes the compensation received as such of the President of the United States, the Judges of the Supreme Court and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia.13 The Revenue Act of 1918 does not expressly exempt "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, as did the 1916 Law. Officers and employees of a State, City or County, including public school teachers, etc., were exempt under the 1916 Law to the extent that their income was derived from salaries paid by the State, County or City. They enjoyed, however, no exemption from tax on income from taxable sources merely because of their position as employees of a

14

12 Revenue Act of 1918, §§ 213 (b) 4, 233.

13 Revenue Act of 1918, § 213 (a). The constitutional question involved in taxing such salaries is discussed in Chapter 17 on Income from Personal Services.

14 Revenue Act of 1916, § 4.