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descent (but the income from such property shall be included in gross income);1

REGULATION. The value of property acquired by gift is not subject to income tax, but all gains, profits, or income derived therefrom are subject to tax, and if the property so acquired is subsequently sold at a price greater than the appraised value at the time the property was acquired by gift, the gain in value is held to be income and subject to tax under the provisions of the federal income tax law. (T. D. 2090, December 14, 1914.)

It is apparent that in many cases the proper course of action for the recipient of a gift which might seem to be somewhat in the nature of compensation for services rendered is determined by the action of the person who made the payment. If the giver desires to deduct the item as an expense, the recipient can scarcely object to reporting any payment of this nature actually received as taxable income. Here, as in so many cases, good faith and a disposition to yield on really doubtful points are essential to the successful administration of the income tax law.

Interest which is exempt from both normal and surtaxes.

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LAW. Section 213. That . . . the term "gross income"(b) Does not include the following items, which shall be exempt from taxation under this title: . .

(4) Interest upon (a) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia;2 or (b) securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916; or (c) the obligations of the United States or its possessions; or (d) bonds issued by the War Finance Corporation:* . . . . In the case of obligations of the United States issued

[Former Procedure] The 1913 law covered this point in a different fashion, declaring that net income should include "the income from but not the value of property acquired by gift, bequest, devise, or descent."

[Former Procedure] The words "Territory" and "District of Columbia" were specifically included for the first time in the 1918 law. Under the 1916 law the word "state" was defined to "include any Territory, the District of Columbia," etc. "when such construction is necessary to carry out its provisions." (1916 law, Section 15.)

[Former Procedure] This clause was introduced by the 1916 law (Section 4).

[Former Procedure] This clause is found for the first time in the 1918 law.

after September 1, 1917, and in the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under this title and under Title III;' [Excess war profits tax].

The precise degree to which the interest on the various issues of United States bonds is exempt from taxation is fully treated in Chapter XIII, "Income from. Interest." Suffice it here to say that the only totally exempt securities are state and municipal bonds of any date and United States securities2 issued prior to September 1, 1917. Totally tax-exempt interest need not be included in "gross income" at all. The 1918 law, however, for the first time requires a statement concerning the taxpayer's holdings of such securities.3

Compensation for active war service exempt.

LAW. Section 213. That . . . . the term "gross income”

(b) Does not include the following items, which shall be exempt from taxation under this title:

(8) So much of the amount received during the present war by a person in the military or naval forces of the United States as salary or compensation in any form from the United States for active services in such forces, as does not exceed $3,500.

This means that such compensation need not be included. in the return at all. It is a new section and is inspired, of course, by a desire to pay honor to those who, paid none too generously, have been active in winning the war. An earlier draft of the 1918 revenue bill limited this exemption. to "services abroad or at sea," but this was finally changed to "active services." This phrase is interpreted to exclude the

[Former Procedure] The predecessor of this clause, which first appears in the 1917 law (Section 4), reads as follows: "but in the case of obligations of the United States, issued after September first, nineteen hundred and seventeen, only if and to the extent provided in the Act authorizing the issue thereof."

Including farm loan bonds. 'Section 213 (b-4), (d).

compensation of persons on the retired list or reserve list when not actively engaged in military service.

LAW. Section 1. . . . The term "military or naval forces of the United States" includes the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, and the Navy Nurse Corps, Female, but this shall not be deemed to exclude other units otherwise included within such term;

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Income of states, etc., from public utilities, etc., exempt.LAW. Section 213. That . . . . the term "gross income"(b) Does not include the following items which shall be exempt from taxation under this title: . . . .

(7) Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the government of any possession of the United States, or any political subdivision thereof.

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, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, District of Columbia, or political subdivision; but this provision is not intended to confer upon such person any financial gain or exemption or to relieve such person from the payment of a tax as provided for in this title upon the part or portion of such income to which such person is entitled under such contract;

The special cases in which this exemption would apply are so few as scarcely to need any comment in a work of this character. The intent of the act, so far as corporations are concerned, is apparently to permit a corporation in which a state or local government has a part interest to deduct the amount of income paid to the state or local government, and to require the tax to be paid only upon the portion accruing to the corporation or its stockholders or to private persons.

Income of foreign governments exempt.-The law exempts:

LAW.

Section 213.

(b) . . . . (5) The income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments, or from any other source within the United States;1

This exemption was first permitted in 1917, and was established to meet an entirely new situation arising out of the war. The Treasury interpreted the exemption as it stood in the 1917 law in a strict manner.

REGULATION. . . . . This does not, however, exempt from the tax any income collected by foreign governments from investments in the United States in stocks, bonds, or other domestic securities, which are not bona fide owned by but are loaned to such foreign governments. The exemption here provided for is predicated upon the fact that the securities or moneys from which income is derived are actually owned by such foreign governments. (Reg. No. 33, 1918, ¶ 348.)

Compensation of the President, judges, and state employees no longer exempt.-The exemptions specifically provided in the law are all covered by the foregoing sections. It should be particularly noted, however, that the exemption formerly extended to the compensation of the President of the United States, judges and state employees is no longer contained in the law. On the contrary, the salaries of the President and United States judges are definitely declared to be taxable. Other federal employees continue to be taxable as formerly. Employees of states and their political subdivisions are for the first time subject to tax, the specific exemption which formerly excused them from reporting being eliminated from the law. The constitutionality of this tax upon state employees will undoubtedly be questioned. It has been stated that state and municipal employees will not be

[Former Procedure] This provision first appeared in the 1917 law (Section 30), but in a less general form, the phrase "or from any other source within the United States" not being a part of the law.

"For a detailed discussion of the former procedure on this point, see Chapter IX.

taxed, but as the specific exemption was deliberately withdrawn. by Congress, it is not clear under what authority the exemption will be extended.

Alimony not taxable.-Although not one of the specified exemptions it is important to note here that a person receiving alimony need not take it into account at all in making an income tax return. Reversing former procedure1 the Supreme Court of the United States in 1917 held that alimony is not to be considered income to the recipient or an item of deductible expense to the payer. This, of course, is the final word on the subject and those who paid the tax on alimony receipts between 1913 and 1917 may, therefore, apply for refunds.

1913/19

Exempt Corporations

As observed above, no individual is exempt from the income tax because of his status or character as an individual. Certain corporations on the other hand are expressly exempt from the provisions of the law.

Types of corporations exempt.-The law groups the exempt corporations under fourteen heads:

LABOR AND AGRICULTURAL ORGANIZATIONS.

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which are exempt under this title, do not include those corporations engaged in growing agricultural or horticultural products, raising live stock or similar products for profit, but will include only those organizations which, having no net income inuring to the benefit of their members, are educational or instructive in character, and which have for their purpose the betterment of the conditions of those

[Former Procedure] T. D. 2090 (December 14, 1914) held that alimony was a personal expense, deductible by the person paying and taxable to the person receiving, the tax being subject to withholding at the source.

'Gould v. Gould, November 19, 1917, No. 41, October Term, 1917, (Reg. No. 33, 1918, ¶ 13.)

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