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8. Organization incomplete. Where it is established that the organization of a corporation, joint-stock company or association, or insurance company was not completed until after the expiration of the period for which the return should have been filed.

9. Death. Where by reason of the death of an individual his return for the year or portion of the year prior to his death is not filed within the time prescribed. The death of a delinquent abates liability to specific penalty. An administrator or executor is charged with the duty of rendering a return for the decedent, and if he is appointed in ample time to make the return prior to March i and fails to do so, he should be charged as delinquent and the specific penalty should be asserted against him. The administrator or executor will not be relieved from specific penalty unless the return is made within a reasonable time after his appointment.

10. Severe illness or unavoidable absence. Where it is clearly established that the delinquency in the filing of a return of an individual or of a corporation within the time prescribed was due to severe illness of the individual or of an officer of a corporation whose duty it was to prepare or sign the return, or to unavoidable absence from place of business or place of abode.

11. Absence from the United States. Where it appears that the filing of a return within the time prescribed was rendered impossible by reason of absence from the United States. Delinquency beyond the period of extension which may be granted by the Commissioner of Internal Revenue will not be excused under this heading.

12. Military or naval service of United States. Where the delinquency of an individual was occasioned by service in the military or naval forces of the United States.

13. Not organized for profit. Comprehends numerous small corporations not organized primarily for profit, such as local telephone companies, co-operative purchasing societies, etc., concerning whose liability under the law to make a return there may have been a reasonable doubt.

14. Inactive corporations. Those which transacted no business and had no income during the return year.

15. Fiscal year. Corporations which have established a fiscal year in the manner prescribed by law which file a return on or before the first day of the third month following the close of the fiscal year.

16. Assigned. Where corporations have made an assignment on account of insolvency and do not intend again to engage in business.

17. Insolvent. Where the assets of a corporation are insufficient for the payment of its debts and the corporation has ceased to do business.

18. Charter forfeited. Where, prior to the date when the return was due, the charter of a corporation is forfeited on account of non

compliance with state laws. It must be clear, however, that business in the name of the corporation was suspended at the time of such forfeiture. If business was continued under the same name, the concern will be held to be an association and the same liabilities will attach as if the charter had not been forfeited.

19. Defunct. Where corporations are out of business, have no assets, maintain no organization, and the purpose for which organized has been abandoned.

20. Dissolved. Where all the assets of a corporation have been distributed.

21. Sale. Where corporations have disposed of all their assets and property by sale to other corporations, firms, or individuals and business is no longer carried on under their charters.

22. Consolidated, merged or succeeded. Where corporations have terminated their existence as represented by these terms and it appears that no assets or property remain in the name of the retiring corporation.

23. No assets. Includes all corporations having no assets from which to submit an offer in compromise.

In cases not included in any of the above classes, the specific penalty will be asserted, and if the delinquency was not due to an intention to delay the administration of the law the minimum amount which will be accepted in compromise is as follows:

$5 in the case of an individual or withholding agent.
$10 in the case of a corporation, joint-stock company or asso-

ciation, or insurance company. These amounts will be considered insufficient and will not be accepted in any case where it appears that a taxpayer was intentionally violating the provisions of law, and purposely delaying the filing of the returns. In all cases where revenue agents or other examining officers discover that any individual has an appreciable taxable income and the examining officer is of the opinion that the individual knew or should have known that he was required to make a return, he should make a recommendation as to the minimum amount which should be accepted as an offer in compromise, and where the intent to evade tax is plain he should recommend prosecution. Special attention should be called to cases of individuals having a taxable income who have failed to file returns for a number of years.

In the case of delinquent returns filed pursuant to the provisions of Section 2 of the act of October 3, 1913, specific penalty will not be asserted if the case comes under any of the above designations, nor against taxpayers or withholding agents specifically relieved from specific penalty by the proviso contained in Section 18 of the income tax law of September 8, 1916, as amended by Section 1209 of the act of October 3, 1917, which reads as follows:

“PROVIDED, That where any tax heretofore due and payable has

been duly paid by the taxpayer, it shall not be re-collected from any withholding agent required to retain it at its source, nor shall any penalty be imposed or collected in such cases from the taxpayer, or such withholding agent whose duty it was to retain it, for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment."

Furthermore, specific penalty will not be asserted against taxpayers delinquent in filing returns for 1913, nor against corporations, joint-stock companies or associations or insurance companies delinquent in filing returns for prior years, unless it appears beyond a reasonable doubt that there was an intent on the part of the delinquent to violate the provisions of law. The specific penalty cannot in any case be asserted after five years from date of delinquency, and no recommendation with respect to penalty in such cases need be made. The minimum amounts mentioned above will be accepted in compromise of liability to specific penalty for each of the years 1914 and 1915, as well as for 1916, except where there was an apparent intent to violate the taxing act, in which case the offer must be increased in a substantial amount.

In the case of every delinquent return, the collector should secure a statement from the delinquent of the cause of delinquency, which should be attached to and made a part of the return, together with delinquent card. If the delinquent is not relieved from specific penalty by clearly falling within one of the classes enumerated in this mimeograph letter, or if he fails, upon request, to file a statement of the reason for delinquency, the specific penalty should be promptly asserted and the delinquent advised of his privilege to submit an offer in compromise. If the collector is of the opinion that the delinquent should be relieved from the specific penalty under the provisions of this mimeograph letter, he should note on the delinquent card "Relieved under Mim. No. 1675.".

In all cases of delinquency discovered by revenue agents and other examining officers, if the delinquency falls within a period for which the penalty can be asserted, such officers should secure from the delinquent a sworn statement setting forth the reason for delinquency. This statement should be attached to the return forwarded to the collector. The examining officer should state in his report the alleged reason for delinquency and if he is of the opinion that the minimum amount should not be accepted as an offer in compromise of liability to specific penalty, he should make a recommendation as to the minimum amount which should be accepted. Consideration will be given such recommendation by this office in accepting an offer in compromise. In forwarding offers in compromise on form 656 collectors should call attention to revenue agents' reports, if any, in which the non-acceptance of the minimum amount as an offer in compromise is recommended. The statement or affidavit attached to the return setting forth the reason for delinquency is not in lieu of the affidavit required to be attached to form 656. (Mimeograph Letter to Collectors No. 1675, November 3, 1917.)

CHAPTER VI

RATES AND COMPUTATION OF TAX

Rates

The 1918 law swept away the complex and confusing rates which were in force in 1917 and substituted a single normal rate and a single set of surtaxes for the double sets which formerly existed. In addition to the income tax rates here given, corporations are, of course, subject to the excess profits and (in some cases) to the war profits tax rates.?

Rates applicable to individuals.—The total rate applying to the income of individuals consists of two parts, the normal tax and the surtax. For the calendar year 1919 and subsequent years, the normal tax is a flat rate of 8 per cent (reduced to 4 per cent upon the small incomes). The surtaxes begin to apply when the net income exceeds $5,000 and are highly progressive.

The rates are applied to "net income” which is ascertained by subtracting specified deductions from “gross income,” the latter being defined in the law to include the distributive shares of the profits of partnerships and personal service corporations. These terms are fully explained in Chapter II, page 25, et seq. For the purposes of the normal tax only, further deductions are permitted under the title of “credits." These credits consist of dividends, interest on certain securities and the personal exemptions of $1,000 and $2,000, together with $200 for each dependent.

* If the split normal rate does not invalidate this statement.
See Excess Profits Tax Procedure.

The split normal rate was devised to secure a high normal rate without imposing an inordinately heavy burden upon the smaller incomes. The high normal rate was desired as a method of improving the market value of the Liberty bonds the interest on which was exempt from normal taxes. See pages 29, 37, 39.

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