amounting to $100,000, of which 60 per cent is ordinary net income and the balance is capital net gain. (3) Under the terms of a certain trust, a Mr. Hope receives 20% of all the income of said trust. In the calendar year 1922, the total taxable net income of the trust is $100,000, of which $40,000, was capital net gain and the balance was ordinary net income. QUESTION: What effect, if any, will the fact that 40 per cent of the income of each of the above is capital net gain, have on the tax liability of Messrs. Arthur, Martin and Hope, who receive 20 per cent of income of the partnership, estate, and trust, respectively? ANSWER: The fact that a portion of the net income in each case was capital net gain will (under regulations to be prescribed by the Commissioner) be taken into consideration in determining the tax liability of the individual recipients. If, for instance, Mr. Arthur had ordinary net income amounting to $30,000, in addition to his $20,000 share in the partnership profits, his tax liability will be based on a total net income of $50,000, of which it is probable that $8,000 (40% of the $20,000) will be considered capital net gain, and the option provided for in section 206 (b) allowed accordingly. Similar methods of computation will be applied in the cases of Mr. Arthur and Mr. Hope. REFERENCE: Sec. 206 (c): "In the case of a partnership or of an estate or trust, the proper part of each share of the net income which consists, respectively, of ordinary net income and capital net gain, shall be determined under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary, and shall be separately shown in the return of the partnership or estate or trust, and shall be taxed to the member or beneficiary or to the estate or trust as provided in sections 218 and 219, but at the rates and in the manner provided in subdivision (b) of this section." FACTS: PROBLEM 55 Illustrating Computation of Normal Tax L. E. Clear, a citizen of the United States, in the calendar year 1921 after applying all credits, including his personal exemption of $2,400, has a net income of $45,000. Sec. 210: "That in lieu of the tax imposed by section 210 of the Revenue Act of 1918, there shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax of 8 per centum of the amount of the net income in excess of the credits provided in section 216: Provided, That in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 4 per centum." NOTE: It should be observed that the above covers only the normal tax liability. For an illustration of the computation of the surtax, see the following problem. FACTS: PROBLEM 56 Illustrating Computation of Surtax L. E. Clear, a resident of Oak Park, Illinois, in the calendar year 1921, after applying all credits, has ordinary net income of $51,400, subject to surtax. PROBLEM: 1. Compute the surtax liability for 1921. 2. Assuming that in the calendar year 1922, Mr. Clear's income subject to surtax will be $210,000, and that his income will all be derived from his ordinary business transactions, compute the surtax for that year. SOLUTION: 1. Reference to the table below shows that in 1921 for an income of $50,000, the total surtax is $5,510, and that the rate applying to the next $2,000, is 24%. That rate, 24%, must therefore be applied to so much of Mr. Clear's income as exceeds $50,000, or $1,400. Twenty-four per cent of $1,400, is $336, which added to the $5,510 shown above, results in a total surtax of $5,846. 2. For 1922 the table indicates a total surtax of $70,960, for an income of $200,000. The rate for all amounts above $200,000 is 50%. This rate applied to the remaining $10,000, in Mr. Clear's income results in a tax of $5,000, which added to the $70,960, shown above results in a total surtax for 1922 amounting to $75,960. REFERENCE: Sec. 211 (a) (1) and (2). NOTE: The following table shows the surtax on the net incomes of the amounts specified in the section of the statute above referred to. In each instance the first figure of net income in the net income column is to be excluded and the second figure included. The percentages given opposite apply to the excess of income over the first figure in the net income columns, and the sums in the columns following the percentage columns represent the tax on the entire difference between the first figure and the second figure in the net income columns. The "Total Surtax" $ 10 20,000 to 22,000 22,000 to 24,000 columns give the total surtax for 1921 and 1922, respectively, on a net income equal to the second figure in the net income columns. Net Income $ 5,000 to 6,000 6,000 to 8,000 8,000 to 10,000 10,000 to 12,000 12,000 to 14,000 14,000 to 16,000 16,000 to 18,000 18,000 to 20,000 1234567890 Per Total Surtax Surtax 40 The surtax for any amount of net income not shown in the above table is computed by adding to the total surtax for the largest amount shown which is less than the income, the surtax upon the excess over that amount at the rate indicated in the table. For example, if the amount of net income is $63,128, the surtax for 1921 is the sum of $8,690, (the surtax upon $62,000, as shown by the table) plus 30 per cent of $1,128 or $338.40, making a total surtax of $9,028.40. In 1922 the surtax on the same net income would be the sum of $8,020, (the surtax upon $62,000, as shown by the table) plus 29 per cent of $1,128, or $327.12, making a total surtax of $8,347.12. PROBLEM 57 Illustrating Computation of the Surtax In the Case of Profits Derived From the Sale of a Mine in 1922 FACTS: E. D. Colvin in 1922 sells for $600,000, an Arizona silver mine which he had acquired the previous year for $150,000. The increase in value of the mine was demonstrated by discovery work done by Mr. Colvin. In addition to the net profit of $450,000, on the sale of the mine, Mr. Colvin had other taxable net income of $3,600. QUESTION (A): What is the amount of surtax to be assessed against Mr. Colvin for the calendar year 1922? ANSWER: The surtax on the total net income of $453,600, if computed |