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FINANCE CORPORATION) The obligations of the United States, interest upon which is subject to special treatment in tax returns, are so many and so large in amount that it is deemed advisable to devote an entire chapter to the income from such obligations.

At the outset it should be noted that there are two broad statements which can be made in reference to interest received by all taxpayers (except non-resident aliens and foreign corporations, partnerships and associations not engaged in business in the United States)' upon obligations of the United States and obligations issued under the Federal Farm Loan Act of July 17, 1916, and the War Finance Corporation Act, approved April 5, 1918.

I. No part of such interest is subject to normal income tax upon individuals or income tax upon corporations.

2. Such interest is subject to surtaxes and excess profits and war profits taxes only in the case of obligations issued after September 1, 1917, and as to these, only so far as such interest is not exempt under provisions of the several Liberty bond acts and other acts under which these obligations are issued.

By authority of one of these acts the 334 per cent Victory notes although issued after September 1, 1917, are not subject to any surtax, excess profits or war profits taxes.

Interest which is wholly exempt from tax is excluded from "gross income” as defined in the 1918 law. Such wholly ex

'See page 439.

empt interest is shown in the tax return only for information of the Treasury and not as part of taxable income.

If the income of a taxpayer is wholly from exempt sources or if his income from other sources is less than $1,000 (single) or $2,000 (married or head of a family) he need not make any income tax return at all. If a return is made all the totally exempt securities must be listed, even though no tax is payable thereon.

Law. Section 213. That for the purposes of this title .... the term "gross income”

(b) Does not include the following items, which shall be exempt from taxation under this title:

(4) .... (b) securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916; or (c) the obligations of the United States or its possessions; or (d) bonds issued by the War Finance Corporation: Provided, That every person owning any of the obligations, securities or bonds enumerated in clauses (a), (b), (c) and (d) shall, in the return required by this title, submit a statement showing the number and amount of such obligations, securities, and bonds owned by him and the income received therefrom, in such form and with such information, as the Commissioner may require. In the case of obligations of the United States issued after September 1, 1917, and in the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under this title and under Title III:

Interest wholly exempt.—The obligations, interest upon which is wholly exempt, for all taxpayers, from surtaxes and excess profits and war profits taxes are:

1. The following bonds, certificates and notes issued under the Liberty bond acts and all United States obligations issued before September 1, 1917:

(a) The 372 per cent First Liberty bonds, original issue, unconverted.?

(b) Certificates of indebtedness issued under the First

'Issued under the First Liberty Bond Act, approved April 24, 1917.

Liberty Bond Act, approved April 24, 1917 (not issued after 1917).

(c) The 374 per cent Victory Loan notes issued under the Victory Liberty Loan Act, approved March 3, 1919.

(d) Postal savings deposits made prior to September 1, 1917.

2. Obligations issued under the Federal Farm Loan Act of July 17, 1916.

Interest in no part exempt from surtax and excess profits tax.—Obligations, interest upon which is not exempt from surtaxes and excess and war profits taxes:

I. Postal savings deposits made after September 1, 1917.3 2. The 434 Victory Loan notes.

Interest subject to special exemption.—There remain to be considered obligations interest upon which is subject to special exemptions under the Liberty bond acts. It is with these obligations that the principal difficulty in determining exempt interest occurs, because the present exemptions are made up of a series of special and highly technical provisions in the several Liberty bond acts. Considerations influencing Congress at the times when the acts were passed led to variations with reference to the time the exemptions remain in force and

'Reg. 45, Art 77, provides in part as follows:

"Interest credited to postal savings accounts upon moneys deposited in postal savings banks on or before September 1, 1917, is exempt from income tax, while interest credited upon deposits made subsequently to September 1, 1917, is liable to tax."

'Under the provisions of the Victory Liberty Loan Act the Treasury made the following conditions applicable to issue of the Fifth Loan, in announcement made April 14, 1919.

"The Victory Liberty Loan, which will be offered for popular subscription on April 21, 1919, will take the form of 434 per cent three/four year convertible gold notes of the United States, exempt from state and local taxes, except estate and inheritance taxes, and from normal federal income taxes, The notes will be convertible, at the option of the holder, throughout their life into 334 per cent three/four year convertible gold notes of the United States, exempt from all federal, state and local taxes, except estate and inheritance taxes. In like manner the 334 per cent notes will be convertible into the 434 per cent notes."

the issues to which they apply which make it impossible satisfactorily to classify the exemptions. The only course open to the taxpayer is to consider the exemptions applicable to each issue. Tables for segregation of interest received, by issues and for calculation of taxable interest, are given on the following pages.

Interest which may or may not be exempt.-The several special exemptions, the issues to which they apply, and their duration follow. The interest on bonds falling within the exemptions below specified is subject to neither normal nor surtax.

The several exemptions apply to holdings up to the total amount exempt, whether made up of a combination of holdings of different issues or of holdings of a single issue.


(For list of exemptions, see page 6) General 1. If taxpayer is a PARTNER or stockholder in PERSONAL SERVICE CORPORATION,

include share of partnership. or personal service corporation, principal and interest. If taxpayer is a BENEFICIARY of annual or regular distributions of income, include share

of principal and interest on bonds' held by fiduciary 2. Taxpayers returning income for FISCAL YEARS ENDED IN 1919 should make separate

calculations for the part of the taxable year falling in 1918, as Exemption III and

Exemption V apply only to interest received on and after January 1, 1919. 3. I, through purchase or sale of bonds, interest (except in negligible amounts) was received

for less than the full term of six months, on any holdings, make calculations in the manner

prescribed in paragraph 14. Conditional Exemptions 4. Enter as Exemption III in Table I an amount which must not be greater than (1) three times

the Victory Notes originally subscribed for and still held at time of return, or (2) the maxi

mum of $20,000, whichever is less. 5. Enter as Exemption IV in Table I an amount which must not be greater than (1) one and

one-half times the 4th Loan Bonds originally subscribed for and still held at time of return,

or (2) the maximum of $45.000, whichever is less. Bring Figures Forward from Table II 6. Enter in Column (a) the amounts of principal of each issue held in the first period and in

Column (d) the amounts of interest received on each issue in the first period as figured in

Table II 7. Enter in Column (b) the ratio of interest received to principal as figured in Table II Selection of Exemptions &. Select the issue showing highest ratio in Column (b) Distribute the amount of principal

of that issue in the columns headed "Exemptions Applicable" beginning with Exemption I and continuing in numerical order until amount of principal is wholly distributed or exemp

tions are exhausted. 9. Select the issue showing next highest ratio in Column (b) and proceed as above. Proceed

in the same way with other issues until all available exemptions have been assigned 10. Enter in Column (c) the totais d exemptions assigned to each isque. Taxable Interest Determined 11. If the amount of principal (Coluinn (a)] of any issue is not breater than the total exempt

principal (Column (c) ), then the interest received (Column (d)) is entirely exempt and

should be entered in Column (e) 12. If for any issue the amount of principal (Column (a) ) is in excess of the total exempt prin

cipal (Cohamn (c)). the exempt interest is equal to (c) divided by (a) times (d) and should

bé enterod in Column (e). Enter in Column (1) the difference between (1) and (e). Process Repeated for Second Period 13. Proceed as above for the second period Enter in the summary on Page 3, the items called

for as calculated in Table I and Table II. Special Rule for Part Term Interest 14. If interest on any holding for less than the full term of six months was received, proceed

as follows:--Calculate separately in Table II for each issue the ratio of principal to interest for each holding on which less than full term interest was received Calculate for each istue the ratio of total principal to total interest of all holdings on which full term interest was received. Carry into Table I the amounts of principal and interest and the ratios calculated for both full term and part term holdings and proceed as directed in steps 8 to 13 incl., except that each item will be treated the sazne as the total holdings of each issue referred to in steps 8 to 13 ind. Calculations may be made for periods of less than a half year, if desired, when amounts of holdings have varied widely during year

for One


Date of Amount of


First Cespea Finn Ceapa Coupons
First Liberty Loan 3%'s.

June 15
Dec. 15

Dec. 15, 1917 $17 50 $17 50 $.0959 First Liberty Loan 4's (I). June 15

Dec. 15, 1917

17 50(m)

20.00 .1006 (First Loan converted into Second) 1 Dec. 15

17.01() First Liberty Loan 4%'s (y) June 15

Dec. 15, 1918 21.25 21.25 1164 (First Loan converted into Third) 1 Dec 15 First Second Liberty Lonn 4X's (2) June 15

Dec. 15, 1918 21.25 21.25 .1164 (First Loan converted into Fourth) (Dec. 15 Second Liberty Loan 4's (x).

May 15

20.00 May 15, 1918

20.00 .1096 Nov 15 Second Liberty Loan 4/4's (). May 15

Nov. 15, 1918 21.25 21.25 1164 (Second Loan converted into Third) Nov 15 Third Liberty Loan 4%'s

Mar 15

Sept. 15, 1918 14.90 21.25 .1164

Sept. 15 Fourth Liberty Loan 4x's..

Apr 15

Apr. 15, 1910 20.20 21.25 .1164

1 Oct. 15 Victory Liberty Loan 3/4's...

June 15

Dec. 15, 1919 21 43 18.75 .1027

Dec. 15 Victory Liberty Loan 488

June 15

27 14 Dec. 15, 1919

23.78 .1301 Dec. 15 (m) If converted Dec. 15, 1918. (a) If converted Nov 15, 1918. ( ) Privilege of conversion to 4%*s of Third Loan reopened Mar. 7, 1919, and still open. No adjust

ment of accrued interest required, as conversion is permitted only on interest dates. () Original conversion privilege expired Nov. 9, 1918. No interest adjustment required if con

version on or after July 1, 1918. Conversion privilege expired April 24, 1919. Adjustment of accrued interest was required

unless conversion was made as of Dec. 15, 1918.

(Page 2)

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