THE TAX

ARTICLE 1. Scope of the law. The statute imposes an income tax on individuals and on certain estates and trusts. (Tax Law, section 351.) The tax is upon net income, as defined in the statute, after deducting from gross income, as defined in the statute, the allowable deductions. (Tax Law, sections 357, 358, 359, 360 and 361.) In certain cases exemptions are allowed against net income and in certain other cases credits against the amount of the tax. (Tax Law, sections 362 and 363.) Special provisions of the statute deal with the effect of the tax on nonresident individuals, partnerships, estates and trusts. (Tax Law, sections 351, 364 and 365.) The tax is payable upon the basis of returns rendered by the taxpayers liable thereto, except that in some instances it is to be paid at the source of the income. (Tax Law, sections 366, 367, 368, 369, 370 and 371.)

ART. 2. Tax rate. For the calendar year 1919, or for any fiscal year ending during the year 1919 and for each taxable year thereafter, an income tax is imposed at the rate of one per centum (1%) upon the first $10,000 of taxable income (net income after subtracting exemptions); two per centum (2%) upon the amount of taxable income in excess of $10,000 and not in excess of $50,000; three per centum (3%) upon the amount of taxable income in excess of $50,000.

ART. 3. Who are taxpayers. The word " taxpayer" includes (1) Every resident of the State of New York, (2) Every estate and trust resident of the State of New York, whose income is in whole or in part subject to the State income tax and

(3) Individuals and estates and trusts, nonresident of the State of New York, receiving taxable income from property owned or from business, trade, profession or occupation carried on or followed within the State of New York.

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NET INCOME DEFINED

ART. 11. Meaning of net income. The tax imposed by the statute is upon income. In the computation of the tax various classes of income must be considered: (a) Income (in the broad sense), meaning all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale, exchange or other disposition of capital assets. It is not limited to cash alone, for the statute recognizes as incomedetermining factors other items, among which are inventories, accounts receivable, property exhaustion and accounts payable for expenses incurred. (Tax Law, sections 353, 354, 355 and 356.). (b) Gross income, meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by the statute. (Tax Law, section 359.) (c) Net income, meaning gross income less statutory deductions. The statutory deductions are in general, though not exclusively, expenditures, other than capital expenditures, connected with the production of income. (Tax Law, sections 360 and 361.) (d) Net income less exemptions. Though taxable net income is wholly a statutory conception, it follows, subject to certain modifications as to exemptions and as to some of the deductions and as to nonresidents, the lines of commercial usage. Subject to these modifications statutory "net income" is commercial "net income." This appears from the fact that ordinarily it is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. As to net income of nonresidents, see Tax Law, section 359.

Net income must be Usually that period is

ART. 12. Computation of net income. computed with respect to a fixed period. twelve months and is known as the taxable year. Items of income and expenditure which as gross income and deductions are elements in the computation of net income need not be in the form of cash. It is sufficient that such items, if otherwise properly included in the computation, can be valued in terms of money. The time as of which any item of gross income or any deduction

is to be accounted for must be determined in the light of the fundamental rule that the computation shall be made in such a manner as clearly reflects the taxpayer's income. If the method of accounting regularly employed by him in keeping his books clearly reflects his income, it is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting which clearly reflects his income, the computation shall be made in such manner as in the opinion of the Comptroller clearly reflects it.

ART. 13. Bases of computation.-Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. See section 350 of the Tax Law for definitions of "paid," "paid or accrued" and "paid or incurred." All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer, and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. For instance, in any case in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income except an accrual method. (Tax Law, section 359.) A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. (Article 44.) On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through conversion or other disposition of the property. A taxpayer who changes the method of accounting employed in keeping his books for the taxable year 1920 or thereafter, shall before computing his income upon such new basis for purposes of taxation secure the consent of the Comptroller. Application for permission to change the basis of the return shall be made at least 30 days in advance of the date of filing return and shall be accompanied by a statement specifying the classes of items differently treated under the two systems and all amounts which would be duplicated or entirely omitted as a

result of the proposed change. A taxpayer subject to Federal tax shall file with his application a copy of the consent of the Commissioner of Internal Revenue, to change the basis of the return for Federal tax purposes. The requirement of notice to the Comptroller will be modified in such cases with respect to time, and where a change is authorized, it will be made effective at the same date as that authorized by the Commissioner of Internal Revenue.

ART. 14. Methods of accounting. It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Among the essentials are the following:

(1) In all cases in which the production, purchase or sale of merchandise of any kind is an income-producing factor, inventories of the merchandise on hand (including finished goods, work in process, raw materials and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year;

(2) Expenditures made during the year should be properly classified as between capital and income, that is to say, that expenditures for items of plant, equipment, etc., which have a useful life extending substantially beyond the year should be charged to a capital account and not to an expense account;

(3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion or obsolescence any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be charged against the property account or the appropriate reserve and not against current expenses.

A taxpayer must make his return on the basis on which his books are kept; so that in making his State return, as in making his Federal return, he must use the basis on which his books are kept, if that basis reflects his true income.

GROSS INCOME DEFINED: INCLUSIONS

Gross income in

ART. 21. What included in gross income. cludes in general compensation for personal and professional services, business income, profits from sales of and dealings in property, interest, rent, dividends, and gains, profits and income derived from any source whatever, unless exempt from tax by law. Profits derived from sales in foreign commerce are taxable. Income may be in the form of cash or of property. The amount of Federal or State income tax paid for or to a bondholder by an obligor pursuant to a tax-free covenant in its bonds is in the nature of additional interest paid the bondholder and must be included in his gross income. He is not, however, entitled to deduct such income tax paid on his behalf. As to the basis for determining gain or loss from sales and exchanges see Tax Law, sections 353, 354 and 355 and article 91.

ART. 22. Income from Federal, State and Municipal contracts.Any profit received from the United States, a State or political subdivision thereof by an independent contractor is taxable income.

ART. 23. Compensation for personal services. Where no determination of compensation is had until the completion of the services, the amount received is income for the taxable year of its determination. Commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, retired pay, pensions and retiring allowances paid by States and political subdivisions or private persons, are income to the recipients; as are also marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other gifts and contributions received by a clergyman, evangelist or religious worker for services rendered. The salaries, wages and other compensation received from the United States by officials and employees are not subject to tax. See articles 41 and 210. (Tax Law, section 359.)

ART. 24. Compensation of State officers.- Compensation paid its officers and employees by the State of New York or any other state, or any political subdivision thereof, including fees re