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power since the passage of the sixteenth amendment. The idea of abandoning this doctrine has therefore found considerable support. If the war had continued, it is probable that the employees formerly specifically exempted would have been specifically taxed. The 1918 bill as it passed the House of Representatives so provided. Senator Simmons, in reporting to the Senate the law as it now stands, said: “The Committee amended section 213 (a) so as to require that any .... salaries paid be subject to the income tax, leaving the Constitutional question as to the authority of Congress to tax certain salaries to be settled by the courts in any case in which the question may be raised."'9

The attitude of the Treasury, which is based on an opinion of the Attorney-General, is expressed in the following regulation and decision :

RULING..... In accordance with an opinion of the AttorneyGeneral, dated May 6, 1919, and based on the well-settled rule that governmental agencies of the states are not subject to taxation by the federal government, it is held that salaries of state officials and salaries and wages of employees of a state are not subject to the income tax imposed by the said Revenue Act of 1918. (T. D. 2843, dated May 17, 1919.)

REGULATION. Compensation paid its officers and employees by a state or political subdivision thereof, including fees received by notaries public commissioned by states, and the commissions of receivers appointed by state courts, are not taxable. .... (Art. 85.)

The issue is essentially constitutional—not administrative —and the matter cannot be deemed to be definitely settled until the courts have passed upon it. In view of the Treasury's position, however, it is difficult to see how the question will be litigated.

District of Columbia, territories, etc., are not "states.”— The 1917 law (section 23) declares that “nothing in this title shall be held to exclude from the computation of net income the compensation paid any official by the governments of

"Report of Finance Committee to Senate, December 6, 1918, page 6.

the District of Columbia, Porto Rico, and the Philippine Islands, or the political subdivisions thereof." No definite ruling appears to have been made regarding the status of territories, but apparently the former exemption extended to state employees did not extend to the employees of territories.

Pay of soldiers and sailors only partly exempt.

Law. Section 213. .... "gross income"-.... (b) Does not include the following items, which shall be exempt .....

(8) So much of the amount received during the present war by a person in the military or naval forces of the United States as salary or compensation in any form from the United States for active services in such forces, as does not exceed $3,500.

Supplementing the above section of the law, the regulations provide:

REGULATION. .... this exemption does not apply to compensation received either before or after the present war. The date of the termination of the war for the purpose of the statute will be fixed by proclamation of the President. The military and naval forces of the United States include, among others, army contract surgeons and the individuals named in section 1 of the statute. A person is in active service if he is actually serving in such forces, not necessarily in the field or in the theatre of war, and is not merely on the retired or reserve list. Accordingly, if such a person receives compensation from the United States of $3,500 or less and has no other income of an amount sufficient in itself to require him to render a return of income, he need make no return. Members of draft boards are not as such entitled to this exemption. (Art. 86.)

Compensation received in the form of United States pensions and retiring allowances.

REGULATION. .... pensions or retiring allowances paid by the United States .... are income to the recipients; .... (Art. 32.)

This covers the cases of pensions and retired pay of exofficers and men of the United States military and naval forces.

Contractor for public work not a public employee.

REGULATION. Any profit received from a State or political subdivision thereof by an independent contractor is taxable income. Where warrants are issued by a city, town or other political subdivision of a state, and are accepted by the contractor in payment for public work done, the face value of such warrants must be returned as income. If for any reason the contractor upon conversion of the warrants into cash does not receive and can not recover the full face value of the warrants so returned, he may allowably deduct from gross income for the year in which the warrants are converted into cash any loss sustained. (Art. 37.)

If a contractor accepts payment in warrants which are selling in the market at less than par he need not account for the amount received at any value above the market. It is wellsettled law and practice that “income” does not depend on par or face value. If the contractor collects the warrants at par he will be accountable for the excess when received. If sold for more or less than their market value when received, adjustment would have to be made at time of sale.

Special counsel to city is not an officer or employee.

RULING. A counsellor at law is engaged by a municipality as special counsel, to act in connection with the regular city attorney in handling a certain piece of litigation. Is he regarded as an officer or employee of a political subdivision of a state, so that his compensation for his services is not taxable under article 71 of Regulations 45, sentence 2 [now Art. 85] ?

(Answer.) In reply to the first question, you are advised that under the ruling of this office, the compensation paid by a state to "special counsel,” such as described above, is taxable income, and not exempt from income tax. (Part of letter from Collins & Corbin, Jersey City, N. J., and the answer thereto, signed by J. H. Callan, Assistant to the Commissioner, and dated April 15, 1919.)

Income from jury fees.-Fees paid to jurors serving in United States courts are taxable income. Fees paid by states are not taxable.

Mileage paid to jurors should be applied against expenses paid. If there is a surplus it is taxable, if a deficit it should be deducted from the fees as a necessary expense incident to the earning of the income.

Salaries in "land-grant" colleges.—Through acts passed in 1862, 1890 and 1914, the last known as the Smith-Lever act, Congress deeded certain lands and granted certain funds to the states for the support of colleges. The taxability of the salaries of the professors in such colleges turns upon the point as to whether or not these teachers are employees of the state. If they are, their salaries are not taxable' even though they are received in whole or in part from Smith-Lever funds, for such funds “lose their identity as funds of the United States by being paid to the states."11

REGULATION. .... Employees of universities receiving salaries paid in part or in whole from funds available under the Smith-Lever Act of May 8, 1914, who are officers or employees of a state, are not required to return as taxable incomes the salaries so received. This is also true with respect to the Act of August 30, 1890, relating to colleges for the benefit of agriculture and the mechanic arts, and to the Act of March 2, 1887, relating to agricultural experiment stations in such colleges. (Art. 85.)

Accounting Procedure Receipt or accrual method.—Salaries and wages need not be accounted for in the return until payment is made and received.12 Unquestionably this is the most convenient method of dealing with salaries and wages, because comparatively few recipients of incomes of this nature keep books, and it would require some adjustments of accounts to report the salary earned within a calendar year but partly paid prior or subsequent thereto. But anyone desiring to keep books on an accrual basis (that is, entering all income as earned and all expenses as incurred) is permitted and encouraged to do so. For a full discussion of the accrual method, see page 260. If any part of the accrued income so reported becomes uncollectible, the regulations permit credit to be taken therefor as an allowable deduction.

"With regard to their possible tax liability under the 1918 law, see page 269.

iT. D. 2668, March 9, 1918.

"See Chapter XXIV as to deductions of compensation for personal services in carrying on a trade or business.

The so-called receipt method cannot be used if it serves to obscure the taxpayer's actual net income for the taxable period. Section 212 (b) defines "net income" and states that “if the method [of accounting] employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income.”

If the taxpayer prefers to prepare his income tax return from his cheque book or cash book, no fault will be found, if the result clearly reflects his actual net income. In such cases it is suggested that if the taxpayer's income arises from fees, etc., a cash book with several columns will be most useful. On the receipt side all items of receipts from fees, etc., should be entered in a column reserved for the particular purpose, so that at the end of the year the aggregate of such column will be the proper amount to include in the return. If at all feasible, however, the accrual system should be adopted. No other method accurately reflects net income, except in the case of wage-earners who have no investments.

REGULATION. Where no determination of compensation is had until the completion of the services, the amount received is income for the calendar year of its determination. .... (Art. 32.)

This regulation does not give recognition to the "accrual" basis. Many professional men, when closing their books for their taxable years, enter as accrued income an estimate of what has been earned to such date, and report such estimate as taxable income. This they have a right to do under the law.

Compensation for services rendered before March 1, 1913– How far taxable.

REGULATION. .... Where services were rendered prior to March 1, 1913, but paid for thereafter, the amount received is taxable income to the extent of the excess of such amount over the fair market value on March 1, 1913, of the principal of the claim and any interest which had then accrued. A claim for the purpose of this article means a right existing unconditionally on March 1, 1913, and then assignable, .... (Art. 87.)

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