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so definite in this respect as to make it ill advised for the Attorney General of the State or the Comptroller to do other than require the inclusion of such income as subject to the tax.
Net income is gross income less allowable deductions.
The deductions allowed in computing net income are much the same as those allowed by the Federal Law. They include business expenses, interest, taxes, losses in business, losses in transactions entered into for profit
, losses from fire, etc., bad debts actually charged off, wear and tear, obsolescence, depletion and contributions.
Taxes paid to the Federal Government or any of its possessions or to any territory, state or political subdivisions thereof or to any foreign government constitute an allowable deduction. Income taxes and taxes assessed against local benefits which tend to increase the value of the property assessed are not, however, permitted to be included as a deduction. Non-residents under certain conditions may deduct income taxes. This subject is treated later on under the heading "Non-Residents.”
Contributions are an allowable deduction to the extent of 15% of the net income of the taxpayer. They are limited, however, to those made to corporations or asso ciations organized under the Laws of the State and oper ated exclusively for religious, charitable, scientifico educational purposes, or for the prevention of cruelty t: children or animals. Also, contributions made to the special fund for Vocational Rehabilitation authorized b Congress may be included but not beyond the 15% limi
Interest paid during the year is a deduction under th: statute. But in determining the precise amount of inter
est which is deductible, a rather complicated and even unsatisfactory situation arises. The law permits in the case of a resident that only such proportion of the total interest may be deducted as the net income of the taxpayer bears to his total income from all sources. The use of the words “total income from all sources” appears to include "gross income” as defined in the law, plus exempt income.
The Federal Law permits the deduction of interest upon all indebtedness, except only as to indebtedness incurred or continued to purchase or carry exempt obligations other than certain obligations of the United States. It may have been the idea of the New York State Legislature to restrict the deduction of interest on indebtedness in somewhat the same way, but, in its practical operation, the New York State measure seems clearly to discriminate against exempt holdings; to illustrate:
Should a resident have a total income of $60,000, $50,000 from obligations of the United States which are tax exempt and $10,000 from taxable securities; and should he have outstanding indebtedness the interest on which amounted to $6,000 (a portion of the indebtedness being a mortgage upon his home and a portion for the purpose of carrying taxable securities) he would be privileged to use as
as a deduction, computing the amount in round figures, but $1,000, that is one-sixth of the $6,000. The same individual, with a like income and similar indebtedness, but receiving his total income of $60,000 from taxable sources, would be privileged to deduct practically the entire $6,000 of interest.
Interest deduction is often a very large and important tem to the taxpayer and its benefits may be reduced to almost nothing by this provision. Such an arrangement, moreover, if administered along the lines indicated by the statute, would seem to be tantamount to an indirect tax upon exempt income.
The Comptroller in interpreting this provision of the law has held that if the taxpayer has no income from exempt sources the entire amount of interest may be deducted. Where, however, non-taxable income is received the amount of interest which may be treated as a deduction is that proportion which the gross income bears to gross income plus income received from exempt
In view of the wording of the law it is not readily understandable how such an interpretation is possible, but it must be recognized that the practical result of this interpretation is much more equitable than the method of computation specified in the law. Even accepting the broad and liberal ruling which the Comptroller has made in connection with this provision the required apportionment will, in many instances, work unfairly.
In addition to the foregoing deductions, a resident taxpayer is allowed the following exemptions: $1,000 personal exemption in the case of a single person
or married person not living with husband or wife $2,000 personal exemption in the case of a “head of a
family," or a married person living with husban:
or wife. $200 for each person (other than husband or wife) de
pendent upon and receiving his chief support fros the taxpayer if such dependent person is unde eighteen years of age or incapable of self-suppor.
because mentally or physically defective. Following the Federal Law, a husband and wife ar allowed, when living together, but one personal exems
of U. S. Officials
tion of $2,000 against their aggregate net income. In the event that they file separate returns, the personal ex: emption of $2,000 may be taken by either or divided between them.
Salary, wages and other compensation paid by the United States to officials and employees is exempt. This Exemptions exemption, however, reduces and limits the personal exemption of such officials or employees by the amount of such salary, wages or compensation. For example, a resident of the State who received $5,000 salary as an official of the United States Government and $5,000 other income from taxable sources apparently would not be allowed any credit in the form of personal exemption but would be obliged to pay the tax on the entire $5,000 of income received from taxable sources; another resident of the State, however, receiving a like income in amount but made up of $5000 from exempt bonds and $5,000 from taxable sources could receive credit for the personal exemption. In effect this seems to be an indirect tax upon the salaries, wages, etc., paid by the United States.
In this connection the Attorney-General of the State has rendered an opinion substantially to the effect that officials or employees of the United States—if their “net income" from taxable sources is less than $1,000 if single or $2,000 if married—need make no return even though they are not entitled to receive credit for the personal exemption against that part of their income. While this ruling would not apparently alter the conditions outlined in the illustration just given it would create a very greatly changed condition where the "net income" (incorne from taxable sources) did not exceed $1,000 or $2,000 as the case might be.
Income of Non Residents
Non-residents of New York are taxed at the same rate as residents but the levy is made only upon the income received from sources within the State. It does not include, however, annuities, interest on bank deposits, interest on bonds, notes or other interest bearing obligations or dividends from corporations, except to the extent to which such income shall be a part of income from any business, trade, profession or occupation carried on in the State and subject to taxation under the Personal Income Tax Law of the State.
Deductions of NonResidents
In determining the amount of net income of a nonresident, deductions may be made from gross income as enumerated on pages 18 and 19. All deductions of non-residents, however, shall be allowed only to the extent that they are connected with income arising from sources within the State. In the case of interest paid on indebtedness a non-resident may deduct only that portion of the interest paid within the taxable year which the amount of his gross income bears to the total amount of his income received from all sources, both within and without the State.
The exemptions of $1,000 and $2,000 and $200 for each dependent as described on page 20 are not allowed to non-residents, according to the wording of the law, and thus, taxes are to be levied upon the full amount of net income. This provision has been featured in the general question as to whether the State of New York has the power to so tax a resident of another State. Judge Knox of the United States District Court (Southern District of New York) in a case brought by the