[Former Procedure-Continued]

on stock of domestic corporations, but where they were only record owners, actual ownership could be disclosed by filing form 1087.

The 1917 law imposed an additional normal tax of 2 per cent on citizens and residents but not upon non-resident alien individuals, who remained liable only for the normal tax of 2 per cent imposed by the act of 1916, plus the surtaxes under both acts on net income in excess of $5,000. The specific exemption was, however, eliminated as to nonresident alien individuals, and they were taxable for normal tax on the amount of net income after deductions, which were allowed only if a return was filed.

The normal tax was to be withheld on all fixed and determinable income subject to the tax, except that derived from dividends of domestic corporations or from interest on obligations of the United States. In the case of corporations, bank deposits were not subject to withholding, and withholding was required only in the case of interest on bonds and similar obligations of domestic corporations and dividends on the stock of domestic corporations.

Foreign corporations were allowed a credit for dividends of domestic corporations for the purpose of the additional 4 per cent tax, and thus withholding was only to the extent of 2 per cent. In the case of interest on bonds, however, a tax of 6 per cent had to be withheld from foreign corporations and 2 per cent from non-resident alien individuals. Foreign partnerships were subject to excess profits tax, but were not subject to income tax, although every foreign partnership deriving a net income of $3,000 or over from sources within the United States was required to make a return. Other provisions of the law applicable to citizens and residents were also applicable to all non-resident aliens. Under the Revenue Act of 1918 withholding is not required on dividends, and amounts withheld on such payments during 1918 were released and paid over to those from whom they were withheld.

FIDUCIARIES

The sections of the 1918 law relating to fiduciaries have clarified rather than changed the provisions of the 1916 and 1917 laws. No doubt need now exist as to what income of the estate must be returned by the beneficiary; and a new provision requires all income collected for an infant to be included in the return that the guardian must make for him. The provision permitting returns to be made on the basis of an accounting period other than a calendar year will be appreciated by many fiduciaries.1

A fiduciary is one who occupies a position of peculiar confidence toward others. As a general rule, a fiduciary has legal title to the property and those for whom he acts enjoy the beneficial title. The law defines a fiduciary as follows:

Fiduciary defined.—

LAW. Section 200. . . . . The term "fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate,2

REGULATION. "Fiduciary" is a term which applies to all persons that occupy positions of peculiar confidence toward others, such as trustees, executors and administrators, and a fiduciary for income tax purposes is a person who holds in trust an estate to which another has the beneficial title or in which another has a beneficial interest,

[Former Procedure] Under former laws all fiduciary returns had to be made on the basis of a calendar year, except that returns could be made immediately upon the settlement of an estate.

[Former Procedure] The act of 1913 included agents in the definition of fiduciaries, but as this clearly did not mean the ordinary agent or attorney, and the Treasury so held, the word was omitted from the 1916 law.

Under former acts fiduciaries were considered the agents having the receipt, custody, control and disposal of non-resident alien beneficiaries' income, and as such were required to make return for such beneficiaries, and to pay any and all tax found by such return to be due. This is not required under the new law.

or receives and controls income of another as in the case of receivers. A committee of the property of an incompetent person is a fiduciary. (Art. 1521.)

FIDUCIARY DISTINGUISHED FROM AGENT.—

REGULATION. There may be a fiduciary relationship between an agent and a principal, but the word "agent" does not denote a fiduciary. A fiduciary relationship can not be created by a power of attorney. An agent having entire charge of property, with authority to effect and execute leases with tenants entirely on his own responsibility and without consulting his principal, merely turning over the net profits from the property periodically to his principal by virtue of authority conferred upon him by a power of attorney, is not a fiduciary within the meaning of the statute. In cases where no legal trust has been created in the estate controlled by the agent and attorney the liability to make a return rests with the principal. 1522.)

ASSOCIATION DISTINGUISHED FROM TRUST.

(Art.

REGULATION. Where trustees hold real estate subject to a lease and collect the rents, doing no business other than distributing the income less taxes and similar expenses to the holders of their receipt certificates, who have no control except the right of filling a vacancy among the trustees and of consenting to a modification of the terms of the trust, no association exists and the cestuis que trust are liable to tax as beneficiaries of a trust the income of which is to be distributed periodically, whether or not at regular intervals. But in such a trust if the trustees pursuant to the terms thereof have the right to hold the income for future distribution, the net income is taxed to the trustees instead of to the beneficiaries. . . . . If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute.3 (Art. 1504.)

How Estates and Trusts Are Taxed

Rates of tax.

LAW. Section 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including

"As to Massachusetts trusts, see page 93, footnote 32.

"The tax referred to is the normal tax and surtax imposed in the case of individuals. (See Chapter VI.)

Income subject to tax.

(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;

(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;

(3) Income held for future distribution under the terms of the will or trust; and

(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.

Returns of income to be made by fiduciaries.—

(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212,5 . . .

REGULATION. The "period of administration or settlement of the estate" is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates. Where an executor, who is also named as trustee, fails to obtain his discharge as executor, the period of administration continues up to the time when the duties of administration are complete and he actually assumes his duties as trustee, whether pursuant to an order of the court or not. . . . . (Art. 343.)

....

Return to show beneficiary's distributive share of net income.—

LAW. Section 219. (b) . . . . and in cases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary's distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.

REGULATIONS. In the case of (a) estates of decedents before final settlement and of (b) trusts, whether created by will or deed, for accumulation of income, whether for unascertained persons or persons with contingent interests or otherwise, the income is taxed to the fiduciary as to any single individual, except that from the income of a decedent's estate there may first be deducted any amount

Section 212 relates to net income of individuals.

of income properly paid or credited to a beneficiary. . . . Where under the terms of the will or deed the trustee may in his discretion distribute the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not affected by the fact that an ultimate beneficiary may be a person exempt from tax. A statutory allowance paid a widow out of the corpus of the estate is not deductible from gross income. As an intestate's real estate does not pass to his administrator, upon a sale by the heirs, whether before or after settlement of the estate, each heir is taxed individually on any profit derived. (Art. 342.)

While certain estates and trusts are subject to tax as such and others are not, the fiduciary in every case is required to make a return of income. (Art. 341.)

Grantor taxable on income of revocable trust.—

REGULATION. The income of a revocable trust must be included in the gross income of the grantor. (Art. 341.)

The foregoing regulation is of interest to taxpayers who have created revocable trusts on the assumption that the tax on the income from the trust will be imposed upon the beneficiary.

The theory of the regulation is that it is a gift. If the grantor in such cases were permitted to exclude such income from his gross income, it would result in "wholesale" evasions of taxes, especially where taxpayers are subject to high sur

tax.

When tax is payable by the fiduciary.—

LAW. Section 219. (c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary."

Payments to beneficiaries during period of administration not taxable to fiduciary.

in determining the net income of the estate of any deceased person during the period of administration or settlement there may

Fiduciaries are classed as individuals, so that payments of the tax must be made as provided in the case of individuals. (See page 176.)