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Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, construct, operate, or maintain a public utility

(A) If by the terms of such contract the tax imposed by this title is to be paid out of the proceeds from the operation of such public utility, prior to any division of such proceeds between the person and the State, Territory, political subdivision, or the District of Columbia, and if, but for the imposition of the tax imposed by this title, a part of such proceeds for the taxable year would accrue directly to or for the use of such State, Territory, political subdivision, or the District of Columbia, then a tax upon the net income from the operation of such public utility shall be levied, assessed, collected, and paid in the manner and at the rates perscribed in this title, but there shall be refunded to such State, Territory, political subdivision, or the District of Columbia (under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary) an amount which bears the same relation to the amount of the tax as the amount which (but for the imposition of the tax imposed by this title) would have accrued directly to or for the use of such State, Territory, political subdivision, or the District of Columbia, bears to the amount of the net income from the operation of such public utility for such taxable year.

(B) If by the terms of such contract no part of the proceeds from the operation of the public utility for the taxable year would, irrespective of the tax imposed by this title, accrue directly to or for the use of such State, Territory, political subdivision, or the District of Columbia, then the tax upon the net income of such person from the operation of such public utility shall be levied, assessed, collected, and paid in the manner and at the rates prescribed in this title;

(8) The income of a nonresident alien or foreign corporation which consists exclusively of earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States;

(9) Amounts received as compensation, family allotments and allowances under the provisions of the War Risk Insurance and the Vocational Rehabilitation Acts or the World War Veterans' Act, 1924, or as pensions from the United States for service of the beneficiary or another in the military or naval forces of the United States in time of war, or as a State pension for services rendered by the beneficiary or another for which the State is paying a pension;

(10) The amount received by an individual before January 1, 1927, as dividends or interest from domestic building and loan associations, substantially all the business of which is confined to making loans to members, but the amount excluded from gross income under this paragraph in any taxable year shall not exceed $300;

(11). The rental value of a dwelling house and appurtenances thereof furnished to a minister of the gospel as part of his compensation;

(12) The. receipts of shipowners' mutual protection and indemnity associations, not organized for profit, and no part of the net earnings of which inures to the benefit of any private shareholder; but such corporations shall be subject as other persons to the tax upon their net income from interest, dividends, and rents;

(13) In the case of an individual, amounts distributed as_dividends to or for his benefit by a corporation organized under the China Trade Act, 1922, if, at the time of such distribution, he is a citizen of China, resident therein, and the equitable right to the income of the shares of stock of the corporation is in good faith vested in him.

(Section 213—1924 Act) Insurance. The entire proceeds of life insurance policies are exempt from taxation if paid upon the death of the insured. This is true whether the proceeds are paid to the estate or any beneficiary whether individual, partnership or corporation. Proceeds of life insurance policies paid during the life of the insured are exempt to the extent that they represent a return of premiums. Any amount received in excess of the premiums paid would constitute taxable income. Income received through accident or health insurance or workmen's compensation acts as compensation for personal injuries or sickness or any damages recovered by suit or agreement on account of such injuries or sickness are exempt from taxation whether received by the insured while still living or by his estate or other beneficiary following his death.

Gifts and Bequests. Property of all kinds, whether real or personal, when received as a gift or received under a will or statute of descent and distribution is exempt from the income tax. This includes an amount received under a marriage settlement, an allowance based upon a separation agreement and alimony. While the principal amount received from these sources is exempt from the income tax, this does not mean that any income derived from the investment or sale of the property received is exempt from the income tax. Such income is taxable and should be included in gross income.

Income Received from Any State or Political Subdivision Thereof. Interest upon the obligations of a state, territory or any political subdivision thereof or the District of Columbia, or income received as compensation by the officers and employees (whether elected or appointed) of a state or political subdivision thereof, is exempt from the income tax. This includes fees received by notaries public commissioned by the States and the commissions of receivers appointed by the State courts.

An officer, within the meaning of the Law, is a person who occupies a position in the service of the State or political subdivision, the tenure of which is continuous and not temporary and the duties of which are established by Law or Regulations and not by agreement. An employee is one whose duties consist in the rendition of prescribed services and not the accomplishment of specific objects, and whose services are continuous, not occasional or temporary. Officers or employees of universities receiving salaries paid in part or in whole from funds made available under the Smith-Lever Act of May 8, 1914 who are employed by a state or subdivision of a state are not required to include salaries so received in gross income for such compensation is exempt from the income tax. This is also true with respect to officers and employees receiving salaries made avail

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able under the Act of August 30, 1890, relating to colleges for the benefit of agriculture and mechanic arts and to the Act of March 2, 1887, relating to agricultural experiment stations in such colleges.

Although the Law does not specifically mention the income of such classes as being exempt, the Commissioner of Internal Revenue has so ruled, and their income need not be reported in so far as it may be derived from such sources. This includes the salaries of all municipal employees and all teachers receiving their salaries from public funds. It does not exempt the salaries of teachers in private schools. The income of such employees received from other sources is, of course, subject to the tax. While compensation received by officers and employees of a state or any subdivision of a state is exempt from taxation, such person to be entitled to this benefit must occupy permanent or continuous positions rather than temporary positions and the duties of such positions must be established by Law or Regulations. Thus, a contractor who earns an income on a contract entered into with a city or other subdivision of a state must include such income in his gross income and pay a tax on it. An attorney who is engaged by a municipality as special counsel to assist or act in connection with the regular city attorney in handling a certain piece of litigation must include the amount of his compensation in gross income for it is not exempt from the income tax.

A case known as the "Chicago Experts" case will be cited as an illustration. The City of Chicago employed a committee of experts to make an appraisal of certain real estate. On September 29, 1922 an opinion was handed down by the Solicitor of Internal Revenue which held that the fees received by these experts for their services were not subject to the Federal Income Tax. The opinion apparently was based upon the theory that these experts came under the classification of employees of a subdivision of a state. However, the Solicitor subsequently ordered that the case be reopened in order that additional facts and evidence in the question involved might be presented. Based upon the new and additional facts secured by the representatives of the Bureau, the former opinion was overruled and it was held that the fees received by these experts from the City of Chicago did not constitute compensation of an officer or an employee of a state or political subdivision thereof and consequently were subject to the income tax. The opinion was subsequently referred to the Attorney General who confirmed it.

The term "political subdivision" includes any special assessment district or division created by the proper authority of a state acting within its constitutional powers for the purpose of carrying out some public work. This includes drainage districts, school districts, highway districts, etc.

Income derived from any public utility or the exercise of any essential governmental function and accruing to any State or Territory of the United States, or to any political subdivision thereof, or to the District of Columbia, or income accruing to the Government of any possession of the United States, or any political subdivision thereof, is exempt from the income tax.

Interest Upon United States Obligations. The interest upon the obligations of the United States and its possessions is generally exempt from the income tax. There is no exception to this provision so far as obligations issued previous to September I, 1917 are concerned. However, in the case of obligations of the United States issued after September 1, 1917 the interest is exempt only if and to the extent provided in the acts authorizing the issue thereof. When such interest is exempt from taxation, it need not be included in the gross income of the taxpayer. When the interest on these obligations is subject to either the normal or surtax, it is necessary to include it in gross income. In this discussion, we are concerned with exempt income.

The following schedules are designed to show the amount of holdings of the various issues of Liberty Bonds which are exempt from all taxation.

Liberty Bond Exemptions For the period from July 3, 1923 to July 2, 1926, holdings of Liberty Bonds aggregating $55,000.00 are exempt from taxation as follows: $ 5,000.00 in the aggregate of first 45, first 4245, first second 4745, second 4s

and 4/4s, third 474s, fourth 4745, Treasury bonds, Treasury

certificates of indebtedness, and Treasury (war) savings certificates. 50,000.00 in the aggregate of first 45, first 4945, first second 4/4s, second

45 and 4745, third 474s, and fourth 4745.

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First Liberty Loan 32% Bonds

of 1932-1947

Dated

6-15-1917 Due

6-15-1947 Redeemable

6-15-1932 Interest Payable

June and December 15

Total Issue

$2,000,000,000

Taxability

Interest received from this issue of bonds is exempt from all state and local taxes and from the Federal normal and surtaxes.

First Liberty Loan Converted 4% Bonds of 1932-1947

First Liberty Loan Converted 444% Bonds of

1932-1947

First Liberty

Loan Second Converted 474% Bonds of 1932-1947

Dated

II-15-1917 Due

6-15-1947 Redeemable

6-15-1932 Interest Payable

June and December 15

Dated

5-9-1918 Due

6-15-1947 Redeemable

6-15-1932 Interest Payable

June and Decem

Dated

10-24-1918 Due

6-15-1947 Redeemable

6-15-1932 Interest Payable

June and Decem

ber 15

ber 15

Converted from 3%2% Bonds as a consequence of issuing Second Liberty Loan 48

Converted from 372% and 4% Bonds as a consequence of issuing Third Liberty Loan 4/45

Converted from 32% Bonds as a consequence of issuing Fourth Liberty Loan 4748

Taxability

Interest received from this issue of bonds is exempt from all state and local taxes and from the Federal normal tax. However, such interest is subject to the surtax when holdings exceed the amount specified in Schedule A.

Taxability

Interest received from this issue of bonds is exempt from all state and local taxes and from the Federal normal tax. However, such interest is subject to the surtax when holdings exceed the amount specified in Schedule A.

Taxability

Interest received from this issue of bonds is exempt from all state and local taxes and from the Federal normal tax. However, such interest is subject to the surtax when holdings exceed the amount specified in Schedule A.

(Schedule B)

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