XXVI INDIVIDUALS SUBJECT TO TAX-FARMERS -ESTATES AND TRUSTS Individuals liable to tax. Joint and separate returns of husband and wife. Farmers. Income of minors. Returns of executors and administrators. Taxability of trusts. Incidence of tax on trusts and estates and their beneficiaries. THE following individuals are required to render tax returns for 1921 and subsequent years: (a) Single individuals, or married individuals not living with husband or wife whose net income is $1,000 or more; (b) Married individuals living with husband or wife whose net income is $2,000 or more; and (c) Individuals whose gross income is $5,000 or more. Where the combined income of husband and wife living together equals or exceeds the above sums, each may make a separate return, splitting the exemption in any way, or a combined return may be rendered (Sec. 223). The 1921 law requires returns where there may be no net income but gross income (combined in the case of husband and wife) exceeding $5,000 (Sec. 223, Art. 401). Form 1040 should be used where the net income of a single individual or the combined net income of husband and wife exceed $5,000, and where net income is less than $5,000 but consists in part of profits or losses from a business or from sales of assets. Form 1040A is for net incomes of less than $5,000 derived chiefly from salary, interest, and dividends. Minors must render separate returns if they are emancipated and their net income is more than $1,000 or their gross income is more than $5,000. If not emancipated, any income they may earn which is appropriable by the parent must be included in the parent's return. Emancipation is a question of fact in each case and no set rule can be laid down (Art. 403). If the minor cannot prepare the return, his guardian or other responsible person must prepare one for him. The same rule applies to income of insane persons or other incompetents (Art. 422). Amended joint returns of husband and wife may be filed where separate returns were first reported (O. D. 881), but a divorced wife who had previously paid a lower tax than would have been due if separate returns had been filed could not file a separate return now, husband and wife being held individually responsible for the tax due (I. T. 1575); joint returns may be filed one year and separate returns the next, or vice versa, without permission of the Commissioner (Sol. Op. 90), no matter whether they or the Government are benefited (O. D. 968). The same return blank may serve for the return of both husband and wife, providing the separate computation is clearly indicated (O. D. 960). But a husband keeping his books on a calendar year basis cannot deduct the losses of his wife whose books are on a fiscal year basis (I. T. 1514). Husband and wife may render a separate return in connection with community income acquired. Community income has been held to include all income of either spouse in Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington (T. D. 3138), but not income accrued before marriage (I. T. 1576); in Texas, income from land is not community income unless jointly owned (T. D. 3071); in California community income is apparently limited to that derived from sources other than property (T. D. 3138; O. D. 1128); in the Virgin Islands the wife's interest is a mere expectancy (I. T. 1763), in New Mexico no community proper basis is recognized (I. T. 1646). Separate return blanks are not required, although the Department prefers (I. T. 1530). Full Liberty bond exemptions may be taken by either spouse (I. T. 1624). Husband and wife holding property in the state of Michigan as tenants by the entirety may not split the ordinary income therefrom but may divide equally the profit derived from its sale (I. T. 1574). Profits from the sale of property owned on the same basis in New York could also be divided (I. T. 1555). American citizens living in foreign countries and deriving their entire income therefrom are subject to income tax as ordinary citizens (T. D. 3436). FARMERS Farmers may follow the receipts or the accrual basis of reporting income. If the receipts basis is used, gross income will include cash received from the sale of crops, stock or merchandise raised in the present or prior years and the gross profit (selling price less cost) of stock or other property purchased. Work, breeding, and dairy animals purchased may be regarded as capital assets, and depreciation taken thereon, or they may be inventoried and the loss through age, and so forth, thus accounted for through gross profits. Farm buildings, equipment and machinery are always capital assets subject to depreciation. Developmental expense prior to the productive stage may be capitalized or not, but a consistent practice should be followed. The market value of all items received in exchanges is income. Costs incurred in connection with growing crops may be carried forward and deducted in the year the crops are sold. But if a farm is operated for pleasure, rather than for profit, the excess of expenses over income will be regarded as a personal expense and not deductible for tax purposes (Art. 38, 110). Losses should include only actual costs not previously deducted as expenses, and where raised crops and stock have been destroyed, only the actual cost carried forward, if any, can be deducted. Compensation for damages, as from insurance, is gross income in the year received. A net loss from farming operations is deductible from other profits, unless the farm is run for pleasure. Depreciation may be taken only on items which have been regarded as capital assets and not on items inventoried each year, and may be taken also on automobiles to the extent they are used for farming purposes (Art. 145, 171). The receipts basis in the case of farmers does not necessitate inventories. A switch to the inventory basis may be |