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CLASSIFICATION OF EXPENDITURES

Items

Deduc-
tible

Nondeductible

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Alimony.
Assessment for oiling street in front of residence
Automobile license fees....
Breach of promise damages.
Contributions by citizens of a city to a fund raised

for the purpose of inducing an industrial plant

to locate in the city
Contributions to Anti-Saloon League
Contributions made for the purpose of purchasing

land to be used as a public park
Cost of installing accounting system in business.
Cost of installing radio set in home
Damages paid as a result of personal injury in automo-

bile accident.
Dentist fees..
Depreciation on automobile not used in business by a

taxpayer....
Depreciation on dwelling leased to a tenant.
Depreciation on dwelling used as a residence.
Donations to Church..
Donations to Community Chest.
Donations to political campaign fund.
Donations to Red Cross..
Dues in Chambers of Commerce.
Dues in Country Clubs..
Dues in Labor Union..
Expenses in operating automobile to and from office..
Expenses of teachers attending summer school.
Fine for liquor law violation.
Fine for violating Anti-Trust Act.
Fire insurance on residence.....
Health and accident insurance premiums
Income Taxes......
Interest on mortgage on residence.
Life insurance premiums..
Living expenses of single taxpayer who has no home..
Losses resulting from dealing in stocks and bonds....
Losses resulting from theft of automobile on which no

insurance was carried by a taxpayer.....
Losses resulting from theft of jewelry from residence

of taxpayer-no insurance...
Personal property taxes.
Picnic given employees.
Premiums for insurance covering fire, liability and

property damage on automobile used in busi

ness conducted by taxpayer
Railroad fare of commuters..
Repairs to residence.
State bar examination fees and traveling expenses

incurred and paid by a lawyer in securing ad

mission to practice his profession
Street improvement assessment....
Taxes on real property used as a residence by the tax-

payer ...
Throat specialist's services to singer.
Traveling expenses on business trip.
Traveling expenses while taxpayer is on vacation.

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INCOME TAX QUESTIONS AND PROBLEMS

1. John Wagner secured a life insurance policy for $20,000.00 in December, 1922. The annual premiums of $650.00 were paid by his employer who is the beneficiary. Wagner died on June 10 of the current year.

(a) Is the employer entitled to deduct the premiums in computing his taxable income? Is it necessary that he report the proceeds of the policy as taxable income?

(b) If Wagner's estate were the beneficiary under the policy, would the employer be entitled to deduct the premiums in computing his taxable income? In this case, would the proceeds of the policy be taxable income to the estate?

2. Rev. E. A. Nolte is minister in the Congregational Church at Leavenworth, Kansas. He receives, in addition to his salary, which amounts to $3,500.00 per year, the use of a parsonage which is fully equipped for himself and family. The rental value of the property is estimated to be $2,000.00 per year. What amount should he report as taxable income?

3. Robert Birch, was married December 10, 1923 and received as a wedding gift, from his father, John Birch, a residence valued at $12,000.00 but which cost him only $8,000.00 in 1921. During July of the current year, Robert Birch sells this property for $15,500.00. Does this gift represent taxable income to Robert Birch for the year 1923? May his father claim the value of the gift as a deduction on his return? Is the gain realized through the sale of the property taxable? If so, what amount should Robert Birch report as taxable income?

4. The books of J. A. Wall, a retail merchant in the City of Columbus, during the current year show the following: Sales..

$10,000.00 Expenses..

2,500.00 Interest on Bank Balances.

100.00 Cost of Sales..

6,250.00 What amount should Wall report as income from this business in filing his return for the year?

5. Dr. F. E. Adams is the owner of a building at the Northwest corner of Bruce and Haight Avenues. He and his family make their home on the second floor of this building while the entire first floor is devoted to office space which is used entirely by Dr. Adams. He has an automobile which he uses in making professional calls as well as for pleasure. Is he entitled to any deduction on account of depreciation of the house, furniture or automobile?

6. · Dan Sevill, during the current year, brought suit against Newton Denham, claiming title to the property located at 1540 Park Avenue which Mr. Denham purchased as an investment. The rentals collected during the year from this property amounted to $7,500.00. The amount expended in contesting the claim amounted to $3,000.00. Can Mr. Denham claim this $3,000.00 as a deduction in filing his Income Tax Return?

7. In June 1922, Jack Grieme purchased a dwelling for the sum of $15,000.00. He resided in the dwelling until December 1, of the current year, when he sold the property at a loss. During the year, he paid out for taxes $186.00, for insurance $60.00, for repairs $130.00, for interest on mortgage $250.00. His net loss on the sale was $1,200.00.

In preparing Mr. Grieme's Income Tax Return for the current year, how would you treat the items specified ?

8. Stanley Taylor, who conducts a wholesale business, sustained a net loss of $33,000.00 in one year, but the following year he made a net profit of $58,000.00. In making up his return, he deducted, from his net profit, the amount of the net loss sustained during the previous year, paying a tax on the difference. Was this procedure correct?

9. Four years previous to January 1 of the current year, W. J. Casey completed the construction of a bungalow in Price Hill at a cost of $12,000.00 which he rented to a friend for $200.00 per month. The rate of depreciation was estimated at 5% per year. He carries fire insurance, paying an annual premium of $140.00, payment being made on January 1 of each year. On July 1 the house burned and Mr. Casey recovered $8,000.00 from the International Fire Insurance Company. What amount of net income should Mr. Casey report from rent? Is he entitled to a deduction on account of the loss sustained through the destruction of the house by fire? If so, compute the amount of the loss.

10. George Collins, during the year 1920, borrowed $7,500.00 from James Flavin. Mr. Collins was later adjudged a bankrupt and Mr. Flavin, therefore, charged off the amount as a bad debt in 1923 claiming it as a deduction on his return. During the current year, Mr. Collins pays Mr. Flavin in full. Should Mr. Flavin report the amount collected as income in his return for the current year?

II. Louis Lampe is the owner of a house on Hamilton Avenue in Springfield, Ohio which he rents to Elmer Grant for $250.00 per month. During the current year Mr. Lampe builds a garage for Mr. Grant's use at a cost of $800.00. He also makes repairs during the year which amount to $1,500.00 and charges off $400.00 per year as depreciation. What is the amount of Mr. Lampe's taxable income for the year?

Edward Glaser is separated from his wife Gladys. The wife receives an allowance of $150.00 per month during the current year until September when she secures a divorce. The husband is required to pay her a sum of $200.00 per month as alimony, in addition to a legacy of $4,000.00 in cash. What amount should Gladys report as taxable income for the current year?

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Unit Four

COMPUTATION OF TAXES

Having previously discussed the filing of returns, gross income, exempt income and deductions, a discussion of the computation of the tax is now in order. The net income is the difference between the taxable gross income and the allowable deductions. It should be remembered that exempt income need not be included in the return, but all taxable income must be listed in the return. From the sum of the taxable income should be subtracted all allowable deductions. The balance represents the net income which is subject to a normal tax and a surtax.

The Normal Tax. (a) There shall be levied, collected, and paid for each taxable year upon the net income of every individual (except as provided in subdivision (b) of this section) a normal tax of 6 per centum of the amount of the net income in excess of the credits provided in section 216, except that in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be a 2 per centum, and upon the next $4,000 of such excess amount shall be 4 per centum;

(b) In lieu of the tax imposed by subdivision (a), there shall be levied, collected, and paid for each taxable year upon the net income of every nonresident alien individual, a resident of a contiguous country, a normal tax equal to the sum of the following:

(1) 2 per centum of the amount by which the part of the net income attributable to wages, salaries, professional fees, or other amounts received as compensation for personal services actually performed in the United States, exceeds the credits provided in subdivisions (d) and (e) of section 216; but the amount taxable at such 2 per centum rate shall not exceed $4,000;

(2) 4 per centum of the amount by which such part of the net income exceeds the sum of (A) the credits provided in subdivisions (d) and (e) of section 216, plus (B) $4,000; but the amount taxable at such 4 per centum rate shall not exceed $4,000; and

(3) 6 per centum of the amount of the net income in excess of the sum of (A) the amount taxed under paragraphs (1) and (2), plus (B) the credits provided in section 216.

(Section 210--1924 Act) A study of this section of the Law will reveal that the normal tax is assessed upon the net income after deducting the credits. The rates are as follows:

2% on the first $4,000.00.
4% on the next $4,000.00.

6% on the remaining net income. The credits should not be confused with deductions. Allowable deductions are listed on the return and subtracted from gross income in arriving at the net income. The credits provided by Law are then subtracted from net income before computing the normal tax. However, these credits are not to be considered in the computation of the surtax.

Copyright 1925, South-Western Publishing Co.

Credits Allowed Individuals. For the purpose of the normal tax only there shall be allowed the following credits:

(a) The amount received as dividends (1) from a domestic corporation other than a corporation entitled to the benefits of section 262, and other than a corporation organized under the China Trade Act, 1922, or (2) from a foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of section 217;

(b) The amount received as interest upon obligations of the United States which is included in gross income under section 213;

(c) In the case of a single person, a personal exemption of $1,000; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,500. A husband and wife living together shall receive but one personal exemption. The amount of such personal exemption shall be $2,500. If such husband and wife make separate returns, the personal exemption may be taken by either or divided between them.

(d) $400 for each person (other than husband or wife) dependent upon and receving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective.

(e) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the personal exemption shall be only $1,000. The credit provided in subdivision (d) shall not be allowed in the case of a nonresident alien individual unless he is a resident of a contiguous country, nor in the case of a citizen entitled to the benefits of section 262.

(f) (1) The credits allowed by subdivisions (d) and (e) of this section shall be determined by the status of the taxpayer on the last day of his taxable year.

(2) The credit allowed by subdivision (c) of this section shall, in case the status of the taxpayer changes during his taxable year, be the sum of (A) an amount which bears the same ratio to $1,000 as the number of months during which the taxpayer was single bears to 12 months, plus (B) an amount which bears the same ratio to $2,500 as the number of months during which the taxpayer was a married person living with husband or wife or was the head of a family bears to 12 months. For the purposes of this paragraph a fractional part of a month shall be disregarded unless it amounts to more than half a month, in which case it shall be considered as a month.

(3) In the case of an individual who dies during the taxable year, the credits allowed by subdivisions (c), (d), and (e) shall be determined by his status at the time of his death, and in such case full credits shall be allowed to the surviving spouse, if any, according to his or her status at the close of the taxable year.

(Section 210—1924 Act) The credits allowed by Law may be divided into four groups: I. Dividends 2. Taxable interest upon obligations of the United States 3. A personal exemption 4. Exemption for dependents.

Dividends. All dividends received from domestic corporations--that is, corporations organized in the United States or under the laws of the United States, or of any State or Territory-are exempt from the normal tax. The reason for this is that such corporations are themselves subject to the income tax and the tax will be paid by the corporation earning the income.

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