for the purpose of permitting its members, all of whom are local automobile owners, to exchange contracts of insurance and indemnity without becoming jointly liable as subscribers on any risks. The only source of income was from assessments, dues and fees collected from members for the sole purpose of meeting expenses. QUESTION: Is the association exempt from taxation? ANSWER: REFERENCES: Sec. 231: "The following organizations shall be exempt from taxation under this title... (10) Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or co-operative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses;" Bul. 25-19-586; O. D. 312: "An insurance association incorporated under the laws of a certain State for the purpose of permitting automobile owners to exchange contracts of insurance and indemnity without becoming jointly liable as subscribers on any risks, confining its activities within the State and its only source of income being from assessments, dues, and fees collected from members for the sole purpose of meeting expenses, is a 'like organization' within the meaning of section 231 of the Revenue Act of 1918 and is exempt from income taxes." PROBLEM 212 Illustrating Corporations Exempt From Taxation- FACTS: The Alhambra Fruit Growers' Association was organized for the purpose of assisting its members to market their fruit. The charter provided for the return to the members of the proceeds from the sales less the necessary selling expenses on the basis of the quantity of fruit shipped by each member through the association. QUESTION: Is the association exempt from Federal income tax? ANSWER: Yes, as the corporation comes within the scope of Sec. 231 (11) referred to below: REFERENCE: Sec. 231: "The following organizations shall be exempt from taxation under this title. . . (11) Farmers', fruit growers', or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of quantity of produce furnished by them; or organized and operated as purchasing agents for the purpose of purchasing supplies and equipment for the use of members and turning over such supplies and equipment to such members at actual cost, plus necessary expenses;" PROBLEM 213 Illustrating Corporations Exempt from Taxation—Corporations Organized to Hold Title to Property, the Income Being Turned Over to an Organization Which is Exempt from Taxation FACTS: The Church Investment Corporation was organized to hold title to certain property, in accordance with the terms of the will of Alfred Wardman, deceased. Its charter provided that the annual net income after paying operating expenses is to be turned over to the trustees of the First Church of Wellsville (a corporation organized and operated exclusively for religious purposes and no part of the net income of which inures to the benefit of any of its members). QUESTION: Is the Church Investment Corporation subject to income tax? ANSWER: No, because it meets the test of Sec. 231 (12). REFERENCE: Sec. 231: "That the following organizations shall be exempt from taxation under this title. . . (12) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title;" See Problem 208 for reference to exemption of religious organiza tions. PROBLEM 214 Illustrating Corporations Exempt from Taxation-Federal Land Banks and National Farm Loan Associations FACTS: The Kansas City Bank, a joint-stock land bank created under the Federal Farm Loan Act of July 17, 1916, claims that it is exempt from the Federal income tax. QUESTION: Is this contention correct? ANSWER: No. Under the 1918 law no provision was made exempting joint-stock land banks, and the Revenue Act of 1921 also fails to say anything about such banks. Therefore they are liable to taxation and must file a return. REFERENCE: Sec. 231: "That the following organizations shall be exempt from taxation under this title . . . (13)—Federal land banks and national farm loan associations as provided in section 26 of the Act approved July 17, 1916, entitled 'An Act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes." " NOTE: This quotation is exactly the same as section 231 (13) of the Revenue Act of 1918, which formed the basis for the opinion of the Solicitor (Bul. 41-20-1235; Sol. Op. 68) from which the following is quoted: "... Joint-stock land banks created under the Federal Farm Loan Act of July 17, 1916, are not exempt from the tax imposed on the net income of corporations by Title II of the Revenue Act of 1918. . . ." PROBLEM 215 Illustrating Income to be Reported by Mutual Marine Insurance Companies FACTS: The L. M. N. Mutual Marine Insurance Company in 1921 collected and received gross premiums amounting to $300,000. In the same year the company paid $100,000 for reinsurance. QUESTION: How are the premiums received and the amounts paid for the reinsurance to be treated on the company's income-tax return? ANSWER: The premiums received are to be included in the gross income reported except that the amounts paid out for reinsurance should be eliminated-both from gross income and from deductions. REFERENCE: Sec. 233 (a): "... mutual marine insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance." FACTS: PROBLEM 216 Illustrating Gross Income of Foreign Corporations The Paris Post Corporation, a foreign corporation engaged in the mail order business, has income from sources within the United States as well as from European countries. QUESTION: In filing its United States income tax return is the Paris Post Corporation required to include in its taxable net income the income received from sources other than the United States? ANSWER: The foreign corporation must include in its gross income only the income from sources within the United States. 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." See Problems 159 to 166, inclusive. PROBLEM 217 Illustrating Deductions Allowed Corporations-Dividends FACTS: Received The Investment Securities Company, a domestic corporation, received the following dividends during its taxable year 1921, which it included in gross income under the provisions of section 233: (1) $35,000 common stock, Wakefield Foundry, Inc. (4) 75,325 (1) and (2) are domestic corporations doing business solely in the United States; (3) a foreign corporation which has derived more than 75% of its gross income for each of the past five years from sales in the United States; (4) a foreign corporation having no income from sources within the United States. |