day of the period for which the return of income is made; . . ." Art. 305, Regulations 62: "Date determining exemption.—The status of the taxpayer on the last day of his taxable year determines his right to an additional exemption and to a credit for dependents an unmarried individual or a married individual not living with husband or wife, who during the taxable year has ceased to be the head of a family or to have dependents, is entitled only to the personal exemption of $1,000 allowed a single person. PROBLEM 159 Illustrating Taxability of Interest Received by Nonresident Alien Individual not Engaged in Business in the United States FACTS: F. Froner, a subject of Holland residing in that country and having no office or place of business in the United States, receives the following income from his investments in the United States: 1. Interest on railroad bonds .... 4. Interest from obligations of a resident $15,000 2,000 2,000 $20,000 QUESTION: What portion of this total is subject to United States income taxes? ANSWER: $18,000. Items 1, 2, and 4 are taxable; item 3 is exempt from tax. REFERENCES: Sec. 213 (c): "In the case of a nonresident alien individual, gross income means only the gross income from sources within the United States, determined under the provisions of section 217. Sec. 217 (a): "That in the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States: 1. Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including (a) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein, or (b) Interest received from a resident alien individual or a resident foreign corporation when it is shown to the satisfaction of the Commissioner that less than 20 per centum of the gross income of such resident payor has been derived from sources within the United States, as determined under the provisions of this section for the three-year period ending with the close of the taxable year of such payor, or for such part of such period immediately preceding the close of such taxable year as may be applicable; ..." NOTE: The taxability of interest in the case of a foreign corporation (other than an insurance company) would be the same as in the case of a nonresident alien individual as shown above. Reference: Sec. 233 (b) (Quoted in full under Problem 216). PROBLEM 160 Illustrating Case in Which a Citizen of the United States is Not Subject to Tax on Income within the United States FACTS: H. R. Gould, a citizen of the United States, has for the last five years resided and carried on business in the Philippines. He derived over 80 per cent of his total gross income from all sources in this period from within the Philippines, as the result of the active conduct of his business therein. During the calendar year 1921 (his accounting period is the calendar year) he received in addition to his income from his business $2,000, interest on bank deposits in the National City Bank in New York City. He also receives $4,000 interest on money loaned to the Roumanian Metal Company, a foreign corporation doing busi ness in the United States (less than 20% of whose gross income during each of the last five years was derived from sources within the United States). Mr. Gould has no office or place of business in the United States. QUESTION: Is the interest received by Mr. Gould from the National City Bank and from the Roumanian Metal Company subject to United States income taxes? ANSWER: No. Mr. Gould comes within the provisions of section 262 and as such must report his income from within the United States on the same basis as a nonresident alien. Therefore the interest received is not subject to tax in accordance with section 217 (a) (1). REFERENCE: Sec. 217 (a) (1): (Quoted under Problem 159.) PROBLEM 161 Illustrating the Taxability of Dividends Received by a Nonresident Alien Individual FACTS: J. J. Lloyd, a subject of Great Britain residing in Canada, in 1921 receives dividends on stocks in the following corporations, in the amounts indicated: 1. The Imperial Corporation, a foreign cor- 6,000 3. The Porto Rico Pineapple Co., a domestic 4. Pennsylvania Railroad Co., (not entitled to Total dividends received 7,000 8,000 $26,000 QUESTION: What portion of the above income is subject to the United States income taxes? ANSWER: The taxable portion is $14,000, the total of items 2 and 4. Item 2 is taxable since dividends received from a foreign corporation deriving 50 per cent or more of its gross income from sources within the United States are treated as income from sources within the United States. Item 3 is not taxable as it was received from a corporation which comes within the provisions of section 262, and therefor is exempted by Sec. 217 (a) (2). REFERENCES: Sec. 213 (c): (Quoted in full under Problem 159.) Sec. 217 (a): "That in the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States: . . (2) The amount received as dividends (a) from a domestic corporation other than a corporation entitled to the benefits of section 262, or (b) from a foreign corporation unless less 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 this section;" NOTE: The taxability of dividends in the case of a foreign corporation (other than an insurance company) would be the same as in the case of the nonresident alien individual shown above. REFERENCE: Sec. 233 (b): "In the case of a foreign corporation, gross income means only gross income from sources within the United States, determined (except in the case of insurance companies subject to the tax imposed by section 243 or 246) in the manner provided in section 217." PROBLEM 162 Illustrating the Deductibility of Losses and Expenses from Gains Derived Within the United States with Respect to Returns of Nonresident Aliens FACTS: William Hoffstaber, a German subject living in Hamburg, in the calendar year 1921 derives income from sources within the United States as follows: He pays to his agents in Berlin $5,000 per year for looking after the investments in the United States. Other charges which were paid to persons living in the United States were: What is the net income subject to tax in the United States? |