THE CHICAGO 'BAJVK.E'R
Founded in 1898
Volume xxvii_CHICAGO, DECEMBER 25, 1909	Number 26
Regulations for Rank and Other Corporations Showing Allowable Deductions and Credits
this return for taxation to be made, and not taking into consideration the standpoint of the debtor.
What “Payments” Are
"It is clear that to hold that the phrase ‘actually paid within the year’ requires evidence of actual disbursement in cash during the year would prohibit anything like accurate returns being made by any corporation, and would render it impossible to carry out what is the main purpose of the law, because to subtract from the gross income the deductions, specified in the statute, calculated on a cash basis, would give net income, on which the tax is to be measured, only when the entire business transacted by the corporation is done in cash and the transactions are completed every day. It is not believed that there is any such corporation in existence. The return, predicated on gross income received in cash and deductions represented by cash transactions, will vary from the real net income somewhat in proportion as the business transacted by the corporation varies from the absolutely cash basis. This is viewing the matter in its simplest aspect.
“When we contemplate the complications and intricacies of the business affairs of a great corporation, with its many dealings with other corporations and individuals, which are never settled in cash, but are settled on somewhat the clearing house plan ; its many advances of funds and long-deferred statements of accounts, purchases of supplies and materials at one time, which are mixed with supplies and materials already on hand and those purchased at other times, and which are used and disbursed without any relation to their time of purchase, any attempt to follow each of these transactions out into the cash book and to settle the accounts of such complicated actions of a corporation on the cash book instead of on the ledger, would result in extricable confusion, uncertainty, and inaccuracy, and the friction occasioned the business world by such an attempt would be a very serious proposition.”
Secretary MacVeagh continues here with the definition of gross income as applied to the six classes of corporations in the same words as used in the instructions to collectors printed herewith.
Deductions Allowable
“Relating to statutory deductions, the regulation is to the effect that the deductions authorized shall include all expense items under the various heads acknowledged as liabilities by the corporation making the return and entered as such on its books from January 1st to December 31st of the year for which return is made. It will appear, therefore, that the return is to be made up from the ledger and not the cash book, and that entry on the ledger from January 1st to December 31st of the year for which return is made is the evidence which will determine whether or not an item is to be taken account of in making the return.
“It is believed that this interpretation furnishes a practical working method by which the amount of income subject to the tax can
come’ was not ‘net profits,’ it meant ‘net receipts.’ An examination of the law, however, will show that if gross income meant gross receipts the statutory deductions therefrom would not leave net receipts, but would leave merely an arbitrary sum. It also appeared from calculations that if these interpretations were given to the law from mercantile and manufacturing companies alone, the amount of tax received would be many times the sum which was estimated to be collected from all corporations, joint stock companies, and associations of whatever nature.
“It is clear, therefore, that the purpose of the law was not to put a tax on receipts, but a tax on profits and that the terms ’gross income’ and ‘net income’ are used because, while they are practically identical with ‘gross profits’ and ‘net profits,’ they are yet more em-bracive and consequently permit a more comprehensive administration of the law.
“The law requires that the return from every corporation, joint stock company, and association liable to the tax shall show the ‘gross amount of the income ... received during the year from all sources,’ and authorizes certain deductions such as ‘ordinary and necessary expenses actually paid out of earnings in the business and property of such corporations .	.	. within the year ; all
losses sustained during the year; amount of interest actually paid within the year; amount paid by it within the year for taxes ; amount received within the year as dividends upon stock of other corporations liable to this tax, &c.’
How Income is Ascertained
“Very careful consideration has been given to these expressions in order to determine what evidence shall be required in order to determine what items are to be considered as ‘income’ in calculating ‘gross income,” and what items should be allowed as deductions under the language of the law. An impression has obtained in some quarters that no items should be considered in making up the account of the corporation, either as income or a deduction, unless its receipt or disbursement was evidenced by an actual cash transaction. It was. owing to this interpretation placed on the law that a great number of accountants throughout the country declared that the law was impossible of administration, and if their interpretation of the law had been correct, there would indeed have been the most serious difficulty.
“Upon first reading the law and studying the authorities relating to the language used, it would appear that the words admit of no interpretation other than that an item must have been evidenced by the actual disbursement of cash, or something of equal value, before it could be considered in making up the account of a corporation. It is interesting to note, however, that all definitions and decisions regarding the expression ‘actually paid,’ consider the matter from the standpoint of debtor and creditor, and not from the standpoint of the individual himself, or in this case, from within a corporation concerned solely with its own accounts from which alone the law requires
Washington, D. C., December 22.—Secretary of the Treasury Franklin MacVeagh early in the week made public a statement outlining the policies of the treasury department in the carrying out of the corporation tax sections of the customs law, and sent to internal revenue collectors pamphlets containing the law and the department’s regulations concerning it, with the blanks necessary for corporations to use in making their reports. Corporations are divided into six classes, and there are some differences between them in making reports. The details are plainly set forth. In his statement Secretary MacVeagh says:
"In the preparation of blanks and regulations for the administration of the corporation excise tax, provided for in Section 38 of the tariff act on August 5, 1909, the first question was to ascertain the real intent of the law. After ascertaining the real intent of the law the problem was then to so prepare the forms and regulations as to carry out that intent and at the same time avoid, as far as consistent, unnecessary and unreasonable interference with ordinary practices of business. The standard adopted in making the regulations was that they should be fair, just, and reasonable to the taxpaying corporations as well as to the government.
“A study of the act discloses clearly that the intent of the law is as follows:
“ T. That the law is a revenue measure and should be construed liberally for the purpose of producing revenue for the Government.
“ ‘2. That the real intent of the law is to collect a tax of 1 per cent on the net income, less $5,000 of the individual corporation, joint stock company, or association liable to the tax.’
“In order to clearly understand the intent of the law a few primary definitions are essential: Net Income
“The term ‘net income,’ as used in this law, means not only net profits arising from the operation of the principal business of the corporation, but all items of income received from other sources, such as investments, holdings in other companies, and businesses, &c. The expression ‘net income’ is used because there can be no question as to its embracing amounts of income received from these outside sources, whereas there might be some question as to whether or not such items would be included in the expressions ‘net profits’ or ‘net earnings.’
Gross Income
“In the same manner the term ‘gross income’ includes gross profits, the expression being used because there can be no question but what it embraces all items of income received by any corporation from any source, while there might be some question as to whether ‘gross profits’ or ‘gross earnings’ would embrace such items.
“A great amount of adverse criticism of this law is due to misapprehension of the proper definitions of these terms. The opinion was advanced that because ‘gross income’ was not ‘gross profits’ it must be ‘gross receipts,’ and that, in the same way, because ‘net in-