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Q. My partnership received dividends from a domestic corporation and interest on government bonds. Is a credit for these items allowed in my individual return?

A. Yes; a credit is allowed for your proportionate share of such dividends and interest.

Q. How should partnership profits be computed?

A. In the same manner and on the same basis as the income of individuals, except that deduction of contributions or gifts to charitable, religious, etc., organizations is not allowed.

Q. May a partner deduct in his personal return his proportionate share of contributions made by the partnership to charitable, religious, etc., organizations?

A. A proportionate share of contributions or gifts made by a partnership may be deducted in the personal return of a partner, provided that this share and other contributions made by the partner individually, do not together exceed 15 per cent of his net income as computed before these deductions are made.

CORPORATIONS

Q. What corporations must file returns?

A. Every corporation except those listed in Section 231 of the Law must report. (See page 81.) The return must be filed on or before March 15, unless it is made on the basis of a fiscal year, in which case it must be filed on or before the 15th day of the third month following the close of the fiscal year. The form on which to make the return may be obtained from the office of any Collector of Internal Revenue. It must be filed with the Collector for the district in which the principal office of the corporation is located.

Q. What is the rate of tax on corporations?

A. The income tax on corporations for 1922 and later years. is at a flat rate of 121⁄2 per cent. There is no excess profits tax, since it was repealed as of January 1, 1922.

Q. Are personal service corporations subject to income tax? A. Yes. Beginning January 1, 1922, these corporations are taxed the same as other corporations.

Q. What constitutes the gross income of a corporation?

A. The gross income includes the same items as the gross incomes of individuals and is calculated in the same manner, except that mutual marine insurance companies include the

gross premiums received by them, less such amounts as are paid for reinsurance.

Q. Our corporation has invested part of its surplus funds in Liberty Bonds and United States 4 per cent Treasury Bonds of 1947-52. Is any of the interest from these securities taxable?

A. No. Since the excess profits tax was repealed as of January 1, 1922, a corporation pays only normal tax for 1922 and later years, and income on all United States Government obligations is exempt from normal income tax. This permits a corporation to invest as much of its surplus funds in Government obligations as it wishes, and it has no tax to pay on the income.

Q. Are the proceeds from the sale of its capital stock by a corporation taxable income?

A. No; even though the stock is sold at a premium. Conversely, if it is sold at a discount, the discount is not deductible.

Q. What deductions from gross income are allowed corporations? A. In general, they are the same as are allowed to individuals, except that charitable contributions may not be deducted.

Q. A bank examiner going over the books of the X National Bank, ordered the bank to charge off 50 per cent of a loan made to a corporation which was on the verge of bankruptcy. May the bank use this charge-off as a deduction in its tax return?

A. According to the Regulations of the Treasury Department, banks and other corporations which are subject to supervision by Federal authorities, or by State authorities maintaining substantially equivalent standards, may claim as deductions debts which have been charged off in whole or in part, in obedience to the specific orders or in accordance with the general policy of the Federal or State authorities.

Q. The life of the president of our corporation is insured by the corporation in its own favor. May the premiums be deducted as a business expense?

A. No. Premiums paid on an insurance policy covering the life of any officer or employee, or of any person financially interested in the business of the corporation, when the corporation is directly or indirectly the beneficiary, are not deductible.

Q. What credits may a corporation claim?

A. A specific credit of $2,000 is granted in the case of a domestic corporation with a net income of $25,000 or less. such credit is allowed to a corporation with a net income of more

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than $25,000. It is provided, however, that when the net income is more than $25,000 the tax is not to exceed the amount that would be payable if the $2,000 credit were allowed, plus the amount of net income over $25,000.

COLLECTION AT SOURCE

Q. When must tax be withheld at the source? What are the Erates of taxes so withheld?

A. Withholding of tax at the source is limited in application to payments of fixed or determinable, annual or periodic income to non-resident alien individuals, non-resident foreign partnerships and non-resident foreign corporations, payments of interest on securities, the owners of which are unknown to the withholding agent, and payments of interest on securities which contain a tax-free covenant clause. Such payments include interest, rent, salaries, wages, premiums, annuities, compensations, remunerations, etc., but do not include dividends allowed as a credit by Section 216 (a) of the Act (page 72) or interest on bank deposits, where the foreign depositor is not engaged in business within the United States and has no office or place of business therein. The rates of withholding are:

Non-resident alien individuals, non-resident foreign
partnerships, and where owner is unknown.
Non-resident foreign corporations..
Interest upon corporate obligations containing a
tax-free covenant clause paid to individuals or
partnerships, whether resident or non-resident,
to a foreign corporation having no office or place
of business in the United States, and where the
owner is unknown...

8% 122%

2%

Q. Is a resident partnership having one or more non-resident alien members subject to withholding?

A. No; except when interest is received on bonds containing a tax-free covenant clause.

Q. When must withholding agents file returns?

A. Returns must be filed on or before March 1 of each year and any tax withheld must be paid to the Collector on or before June 15. Where tax is withheld from interest on corporate obligations, withholding agents also must make monthly reports under regulations prescribed by the Commissioner.

INFORMATION AT SOURCE

Q. When are information reports required?

A. In all cases where interest, rent, salaries or any income of a fixed or determinable nature amounts to $1,000 or more in any calendar year. Also, in all cases of corporate interest payments and in the collection of items not payable in the United States, such as interest on bonds of foreign countries and interest on bonds of and dividends from foreign corporations, regardless of amount. This provision does not apply to interest payments on obligations of the United States or any State or subdivision thereof (see Section 256 of the Act, page 95).

Q. When must reports be filed?

A. On or before March 15 of each year, or at any other time prescribed by Treasury regulations.

OWNERSHIP CERTIFICATES

Q. What are ownership certificates?

A. They are returns of information required by the Commissioner of Internal Revenue when interest payments are made on bonds and other obligations issued by domestic and resident corporations and when dividends on stock of foreign corporations, or interest on bonds of foreign countries and foreign corporations, are collected.

Q. Who must file ownership certificates?

A. Citizens of the United States wherever residing; resident and non-resident aliens; partnerships, domestic or foreign, and foreign corporations which do not have an office or place of business in the United States must use ownership certificates when they present for payment interest coupons from bonds and other similar obligations of domestic and resident corporations. Citizens and residents of the United States, individual or fiduciary, and domestic or resident partnerships also must use them in collecting dividends on stock of foreign corporations and interest on bonds of foreign countries and foreign corporations.

Q. How do I determine which certificate to use?

A. Three ownership certificates are provided, which are easily distinguishable by form number and color.

Form 1000, the white certificate, is to be used with coupons from tax-free covenant bonds. Citizens, resident aliens and domestic and resident partnerships generally use this form with

coupons from tax-free covenant bonds. Should their taxable net income for the year, including bond interest, be less than the amount of the personal exemption to which they are entitled, they should use the yellow certificate, form 1001, thereby relieving the debtor corporation from payment of a tax not due the Government. Non-resid nt aliens, individual or fiduciary, and I partnerships and foreign corporations which do not have an office or place of business within the United States, must use this form in collecting interest from bonds of domestic and resident corporations, regardless of whether the bond contains a tax-free covenant clause.

Form 1001, the yellow certificate, is to be used only by citizens and resident aliens, individual or fiduciary, and by resident and domestic partnerships in collecting interest on bonds and similar obligations of domestic and resident corporations where the bonds do not contain a tax-free covenant clause. As indicated in the preceding paragraph, an individual or fiduciary citizen or resident of the United States whose income, including the bond interest, is less than his personal exemption, also should use this form in collecting interest from bonds which contain the taxfree covenant clause. The use of this certificate shows that no tax is to be withheld at the source.

Form 1001A, the green certificate, is to be used by citizens and resident aliens, individual or fiduciary, and by domestic and resident partnerships, in collecting dividends on stock of foreign corporations and interest on bonds of foreign countries and foreign corporations regardless of whether payment is made in the United States or in some other country.

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Q. What is meant by tax-free covenant clause?

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A. The term tax-free covenant" refers to an agreement or provision in the bond, mortgage or other similar obligation of many corporations whereby the corporation agrees to pay the holder the full amount of interest without deduction for any tax which the corporation may have to pay or retain under the law. The tax which the corporation may be required to pay or retain is limited to 2 per cent of the amount of the coupon.

Q. Are domestic and resident foreign corporations required to file ownership certificates in collecting interest on bonds owned by them?

A. No. To facilitate payment in such cases, the first bank to receive coupons from corporate owners should place all

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