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Income Tax on Corporations.-An income tax is imposed upon the net income, after deducting credits, of all corporations, not expressly exempt under Section 231 of the law, at the rate of 10 per centum for the calendar year 1919 and subsequent years. The tax is imposed notwithstanding the fact that a domestic corporation has received no income from sources within the United States. On the other hand, a foreign corporation is taxed only on its net income from sources within the United States. Personal service corporations within the meaning of Section 200 of the law are not subject to taxation, but the individual stockholders thereof are taxed in the same manner as the members of partnerships and all the provisions of the law relating to partnerships and the members thereof, as far as practicable, apply to personal service corporations and the stockholders thereof. For definition of a personal service corporation, see page 22.

CREDITS
Individuals

For the purpose of imposing the normal tax, net income, as determined by deducting from gross income the allowable deductions, is first reduced by the sum of the allowable credits. These include:

(1) Dividends received from a corporation taxable upon its net income, or dividends from a personal service corporation paid out of earnings upon which income tax has been imposed;

(2) Interest not wholly exempt from tax received upon obligations of the United States and bonds of the War Finance Corporation;

(3) Personal exemption

(a) In the case of single person, or married person not living with husband or wife, $1,000;

(b) In the case of married person living with husband or wife, or head of a family, $2,000;

(4) Exemption of $200 for each dependent person, other than husband or wife, under eighteen years of age or incapable of self-support because mentally or physically defective, receiving his chief support from the taxpayer.

Personal Exemption of Married Person. In the case of a married man or a married woman the joint exemption replaces the individual exemption only if the man lives with his wife or the woman lives with her husband. In the absence of continuous actual residence together, whether or not a man or woman has a wife or husband living with him or her within the meaning of the

statute must depend on the character of the separation. If the absence of either is only temporary, the additional exemption applies. The unavoidable absence of a wife or husband at a sanatorium or asylum on account of illness does not preclude claiming the exemption. If, however, the husband voluntarily and continuously makes his home at one place and the wife hers at another, they are not living together within the meaning of the statute, irrespective of their personal relations. The personal exemption may be divided between husband and wife in any proportion agreed upon by them. A resident alien with a wife residing abroad is not entitled to the joint exemption.

"Head of Family" Defined.-A "head of a family" is a person who actually supports and maintains in one household 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 these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the statute must depend on the character of the separation. If a father or a child or other dependent is temporarily away, the common home being still maintained, the additional exemption applies. Also, if a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not the head of a family.

Credit for Dependents.-A credit of $200 is also allowed for each person (other than husband or wife), whether related to the the taxpayer or not and whether living with him or not, dependent upon and receiving his chief support from the taxpayer, provided the dependent is either (a) under eighteen or (b) incapable of self-support because mentally or physically defective. The credit is based upon actual financial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a family. But a father whose children receive half or more of their support from a trust fund or other separate source is not entitled to the credit.

Date Determining Exemption.-The status of the taxpayer on the last day of his taxable year determines the amount of his credit for personal exemption and exemption for dependents. If an individual dies during the taxable year, his executor or administrator in making a return for him is entitled to claim his full personal exemption according to his status at the time of his death. If a husband or wife so dies and the joint personal exemption is used by the executor or administrator in making a return for the decedent, an undiminished personal exemption according to the status of the survivor at the end of the taxable year may be claimed in the survivor's return.

Credits to Trust or Beneficiary.-An estate or trust, where income is taxed to the fiduciary, is allowed the same credits against net income as a single person, including a personal exemption of $1,000, but no credit for dependents. In the case of an estate or trust taxed to the beneficiaries each beneficiary is allowed for the purpose of the normal tax, in addition to his individual credits, his proportionate share of such dividends from domestic and resident foreign corporations and of such interest not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation as are received by the estate or trust. Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income.

Credits Allowed Partners and Stockholders of Personal Service Corporation. In addition to the credits ordinarily allowed an individual*, a partner or stockholder of a personal service corporation is entitled to a credit against net income, for the purpose of the normal tax only, of his proportionate share of such dividends from corporations subject to tax and of such interest not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation as are received by the partnership or personal service corporation.

A stockholder of a personal service corporation is also entitled to credit, for the purpose of the normal tax, for amounts received in distribution of earnings of the corporation accumulated since February 28, 1913, and prior to January 1, 1918.

For allowance of credits to nonresident alien individuals and foreign corporations, see pages 8, 19 and 20.

*Sec page 5

Corporations

The net income of a corporation, other than a personal service corporation, determined by subtracting from gross income the amount of the deductions defined in the law, is the net income upon which the excess profits tax is computed, but before the application of the income tax the following credits against net income are allowed:

(a) A specific credit of $2,000 (not allowed a foreign corporation); (b) The amount of any war profits and excess profits tax assessed or to be assessed by the United States for the same taxable year; (c) The amount of interest received upon obligations of the United States and bonds of the War Finance Corporation, which is subject to war profits and excess profits taxes.

For the purpose of the excess profits tax a corporation is not entitled to the foregoing credits.

Return for Period Less Than a Year.-Where a return is made for a period less than a year, as in the case of a corporation making its first return of income on the basis of a fiscal year, or as in the case of a corporation changing its accounting period, whether from calendar year to fiscal year, from fiscal year year to calendar year, or from one fiscal year to another fiscal year, the specific credit of $2,000 shall be reduced to such a proportion of the full credit as the number of months in the period for which the return is made bears to twelve months.

CORPORATIONS EXEMPT FROM TAX

The following organizations are exempt from tax under Section 231 of the Law:

(1) Labor, agricultural, or horticultural organizations;

(2) Mutual savings banks not having a capital stock represented by shares;

(3) Fraternal beneficiary societies, orders, or associations (a) operaing under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents;

(4) Domestic building and loan associations and cooperative banks without capital stock organized and operated for mutual purposes and without profit;

(5) Cemetery companies owned and operated exclusively for the benefit' of their members;

(6) Corporations organized and operated exclusively for religious,
charitable, scientific, or educational purposes, or for the preven-
tion of cruelty to children or animals, no part of the net earnings of
which inures to the benefit of any private stockholder or individual;
(7) Business leagues, chambers of commerce, or boards of trade,
not organized for profit and no part of the net earnings of which
inures to the benefit of any private stockholder or indidivual;
(8) Civic leagues or organizations not organized for profit but
operated exclusively for the promotion of social welfare;

(9) Clubs organized and operated exclusively for pleasure, recrea-
tion, and other nonprofitable purposes, no part of the net earn-
ings of which inures to the benefit of any private stockholder or
member;

(10) Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses;

(11) Farmers', fruit growers', or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them;

(12) Corporations organized for the exclusive purpose of holding
title to the property, collecting income therefrom, and turning over
the entire amount thereof, less expenses, to an organization which
itself is exempt from the tax imposed by this title;

(13) Federal land banks and national farm-loan associations as
provided in Section 26 of the Act approved July 17, 1916, entitled
"An act to provide capital for agricultural development, to create
standard forms of investment based upon farm mortgage, to
equalize rates of interest upon farm loans, to furnish a market
for United States bonds, to create Government depositaries and
financial agents for the United States, and for other purposes";
(14) Personal service corporations.

Establishing Exemption.-In order to establish its exemption and be relieved of the necessity of filing returns of income and paying a tax, every organization claiming exemption, except personal service corporations, must file an affidavit with the collector of the district in which it is located, showing the character of the organization, the purpose for which it is organized, the sources of its income, and its disposition, whether or not any of its income is credited to surplus or may inure to the benefit of any private stockholder or individual, and, in general, all facts relating to its operation which affect its right to exemption. A copy of the charter or articles of incorporation and by-laws of the organization should

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