QUESTION:

How should these dividends be treated on the Investment Securities Company's return for 1921?

ANSWER:

(1), (2) and (3) should be deducted from gross income; (4) is not deductible.

REFERENCE:

Sec. 234 (a): "That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: .. (6) The amount received as dividends (a) from a domestic corporation other than a corporation entitled to the benefits of section 262, or (b) from any 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 divdends (or for such part of such period as the foreign corporation has been in existence) was derived from sources within the United States as determined under section 217;

Illustrating Credits Against Net Income for Normal TaxTaxable Interest on U. S. Obligations and War

FACTS:

Finance Corporation Bonds

In Problem 72 there was illustrated the method of computing the amount of interest received on obligations of the United States and bonds of the War Finance Corporation required to be included in "Gross Income."

QUESTION:

How should this income be treated for normal tax purposes? ANSWER:

The interest stated above should be added to the personal exemption and other credits allowed under section 216 (if any) and that total deducted from net income before computing the normal tax.

REFERENCE:

Sec. 216: "That for the purpose of the normal tax only there shall be allowed the following credits: . .

(b) The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation which is included in gross income under section 213; . . ."

CORPORATIONS:

A corporation subject to income tax is permitted to include as a credit against net income the amount received as interest on obligations of the United States and War Finance Corporation bonds which is required to be included in gross income.

REFERENCE:

Sec. 236: "That for the purpose only of the tax imposed by section 230 there shall be allowed the following credits: ... (a) The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is included in gross income under section 233; ..."

PROBLEM 219

Illustrating the Adjustment of Credit Against Net Income for the Purpose of Computing Income Tax in Case a Domestic Corporation Files a Return for Less Than Twelve

Months

FACTS:

The Pulchra Candy Company of New York, a domestic corporation, was organized July 1, 1922. Its net income for the six months ending December 31, 1922 (the close of its established fiscal year) was $11,000.

QUESTION:

What is the credit allowable against the corporation's net income in computing the income tax?

ANSWER:

The credit allowable is 12 of the specific credit of $2,000, or $1,000. Art. 626, Reg. 62 provides that ". . . . this prorated

credit shall be applied to the net income before such net income is placed on an annual basis." [See Sec. 226 (c) quoted under Problem 196.]

REFERENCE:

Sec. 236: "That for the purpose only of the tax imposed by section 2301 there shall be allowed the following credits:... (b) in the case of a domestic corporation the net income of which is $25,000 or less, a specific credit of $2,000; ..."

Sec. 239 (b): "Returns made under this section shall be subject to the provisions of sections 226 and 228. When return is made under section 2262 the credit provided in subdivision (b) of section 236 shall be reduced to an amount which bears the same ratio to the full credit therein provided as the number of months in the period for which such return is made bears to twelve months."

PROBLEM 220

Illustrating Income Tax Credit in Case of Corporation Whose Income Subject to Normal Tax is Slightly More Than

$25,000

FACTS:

The X Y Z Corporation has a net income in 1921, of $25,100. The corporation has no excess-profits tax.

1 Sec. 230 imposes the income tax.

2 Sec. 226 relates to returns for a period of less than twelve months.

REFERENCE:

Sec. 236 (b): "In the case of a domestic corporation the net income of which is $25,000 or less, a specific credit (shall be allowed) of $2,000; but if the net income is more than $25,000 the tax imposed by section 230 shall not exceed the tax which would be payable if the $2,000 credit were allowed, plus the amount of the net income in excess of $25,000. . . ."

NOTE:

No benefit will arise from this limitation except in the case of a corporation the amount of whose income to which the 10% is to be applied is in excess of $25,000 but less than $25,200. In 1922 and succeeding years, when the income tax rate is 122%, the amount would have to be in excess of $25,000 but less than $25,250 in order that the limitation referred to in Sec. 236 (b) shall apply.

PROBLEM 221

Illustrating Withholding of Taxes in the Case of Nonresident Foreign Corporations

FACTS:

The British-American Trading Company organized under the laws of the United Kingdom of Great Britain and Ireland maintains no office in the United States but keeps a substantial bank balance in a New York bank on which it draws for the payment of goods purchased in the United States. The company also has several bonds (none of which contain a tax free covenant clause) of American corporations in the custody of the New York bank which acts as its agent collecting the coupons as they mature, crediting the account of the company with the proceeds. Interest is credited by the bank on the current balances on deposit.

QUESTION:

Will any part of such income be withheld at the source, and if so, at what rates in 1921 and 1922?

ANSWER:

Since the foreign corporation does not have a place of business in the United States the interest it receives on its bank deposits is not taxable. In the case of the interest on the bonds of the American corporations, the payor companies are required to withhold 10% of the amount paid in 1921 and 122% of the amount paid in 1922 when such coupons are collected by the the New York bank as agents for the British-American Trading Company.

REFERENCE:

Sec. 237: "That in the case of foreign corporations subject to taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 221 a tax equal to 122 per centum thereof (but during the calendar year 1921 only 10 per centum), and such tax shall be returned and paid in the same manner and subject to the same condition as provided in that section: Provided, That in the case of interest described in subdivision (b) of that section the deduction and withholding shall be at the rate of 2 per centum."

NOTE:

See Problem 175 for illustration of section 221.

PROBLEM 222

Illustrating Filing of Income-Tax Return by Personal Service

FACTS:

Corporation

The Alexander Mechanical Engineering Society, according to the regulations laid down by the Bureau of Internal Revenue, is a personal service corporation.

QUESTION:

What is the procedure for this society to follow in respect to filing a return of net income for the calendar year 1921 (its accounting period)?