Evening star. [volume] (Washington, D.C.) 1854-1972, 1909-12-13

/ the act, MIR. MaCNedSn SdSs, IL WoS oC-
termined that the law Is revenue meas
ure and should be construed literally for
the purpose of producing revenue for the
| government; that the real intent OF the
| law is to collect tax of 1 per cent on
! the net income less 5000, of the lndl-
yIdual corporation. joint-stock company
or association liable to the tax.
Meaning of "Net Income"
Some of the interpretations of the de-
| partment as to the meaning ana intent Oh
the law are as follows:
| The term net income used in this
law means not only net profits arising
| from the operation of the principal bust
| ness of the corporation, but all items OF
| income received from other sources, such
| as investments, holdings in other compa-
MES and businesses, etc. The expression
| net income is used because there can De
| no ouestiop as to it's embracing amounts
! of income received from these outSlue
| sources whereas there might ne some
| question as to whether or not such items
| would be included in the expressions hee
| profits or net earnings
| "Ip the same manner the term gross
! income includes gross prohts. the eA-
| preston being used because tifere ca
he no question but what 1t embraces ali
| items of income received by any corpora
| ton from any source. while there might
| he come question as to whether gross
nrofts' or gross earnings would en-
| brace such items.
| "a great amount of adverse criticism
of this law is due to misrepresentation OF
| the proper definition of these terms. Inc
opinion was advanced that because gross
| Income was not gross profits it must
be gross receipts and that, in the same
way because net income was not net
profits it meant net receipts. An eX-
animation of the law, however, Will she"
that if gross income meant gross re-
CENTS the statutory deductions there
from would not leave net receipts, but
would leave merely an arbitrary sum-
1t also appeared from calculations that
if these interpretations were given TO
the law from mercantile and manufac-
turing companies alone the amount OF
tax received would be many times the
sum- which was estimated to be col
| lected from all corpora tons, joint-stock
| companies, and associations, of what
ever nature.
Tax on Profits.
at is clear. therefore. that the pur
pose of the law was not to put 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 embrasive. and consequently per-
nit a more comprehensive adElln1Stra-
ton OF the law.
THE law requires that the return from
every corporation. toint-stock company
and association liable to the tax shall
show the gross amount of income
received during the year from all sources
and authorizes certain deductions, such
as Ordinary and necessary expenses ac-
tually paid out of earnings in the bust
ness and property of such corporations
- within the year; all losses sustained
during the year: amount of interest ac-
tually 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, etc
VERY careful consideration has been
given to these expressions in order to de-
terlnine 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 item should be
considered in making up the account of
the corporation, either as income de-
duction, unless it's receipt or disbursement
was evidenced by an actual cash trans
action. 1t was owing to this interpreted
ton placed on the law that a great num-
Der of accountants throughout the coun-
try declared that the law was impossible
| of administration, and IL their interpreta-
| ton of the law had been correct there
| would. indeed, have been the most seri-
| Gus difficulty.
No Other Interpretation.
Upon first reading the law and study
| ing the authorities relating to the lam
guage used IL would appear that the
| words admit of no Interpretation other
| than that All item must have been evil
denced by the actual disbursement of
| cash, or something of equal value, before
| il could be considered in making up the
account of a corporation.
1t 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 this return for
| taxation to be made, and not taking into
| consideration the standpoint Of the debtor.
1T is clear that to hold the phrase 'ac-
| tually paid within the year requires evil
dence of actual disbursement in cash dur
| ing the year would prohibit anything
| like accurate returns being made by any
| corporation, and would render 1t impossi-
BILE to carry out what is the main purpose
i
| gross income the deductions speclhed In
the statute. calculated on a cash basis,
would give net income. on Whlch 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. II Is not believed
! that there is any such corporation IL
| exist ence.
| The return. predicated on gross In
come 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 abso-
lutely cash basis. This is viewing the
matter In its simplest aspect.
Divided Into Glasses.
when We contemplate the complica-
| tions and intricacies of the business at
] fairs of a great corporation, with its many
dealings with other corporations and in
dividusls, 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 with
| cut any relation to their time of pur-
chase. any attempt to follow each OF
these transactions out into the cash book
and to settle the accounts OF such COM
plicated actions of a corporation on the
| cash book instead of on the ledger would