New-York tribune., 1913-11-09
INCOME TAX EXPLAINED
Troublesome Provisions Cleared
Up by Expert.
EXEMPTION CLAUSE TANGLE
Difference Between Intent and
Letter of Law-How to Claim
Exemption and Pay Taxes.

ton of the new income tax law mas just
been completed by Stuart II. Patterson
the expert employed by the trust coih-
nanies' committee, Of which Alexander
J Hemphill. president OF the Guaranty
Trust Comnany. Is chairman. This COM
nittee was formed while the law was IN
the process of moulding, and orereo Vdlu-
able advice TO the trainers before the
tariff amendments final enactment. MI
Patterson's Is the first exhaustive STUDY
of the law in its bearings upon the BANKS
and their customers that has been at
TAINTED by the trust companies OF any
large city. Several features Of his report
follow:
Exemption Provision Troublesome
Take. first, an unmarried individual
with an income of 5000 entirely from
bond interest Under the law, the In
come of this Individual is not taxable
vet. IL some plan OF identification was not
adopted, tax of $50 would be held out
on his coupons, and he would be placed 10
the trouble and expense of applying for
refunds, and only after filing a statement
of his income, which is not contemplated
under the law, unless an individuals In
come Is more than 5000 In paragraph
2 Of the law there is a provision that no
tax shall be held out against person
who files a written statement clalrl'he
the benefit Of deductions and exemptions
allowed in paragraph the paragraph
referring to the exemptions allowed Oh
5000 or $4,000. according TO status OF
single or married). 1t is TO cover this
phase Of the matter, and not improperH
hold out a tax against INDIVIDUALS win
small incomes, and cause them uouole
and expense in securing refunds from the
government, and possibly only after iohs
delay, that exemptions or deductions can
be claimed on these certificates VI
course, the exemptions are not limited 10
neople of small means, as any indiVidual
can claim the benefit of the exemptions
Op 10 the 5000 or $4,000, IL he so desires.
If an unmarried man has salary ol
$4,000 and bond interest of a,WV. he can
ale his claim for the beneht OF MS eA-
emption $4,000 with his employer ana
the employer will then hold out only $40
tax. and $40 tax will be held out on the
rounons. On the other hand, II this man
elects TO claim the benefits Of his exemp-
tions on his coupons, then only slo TAX
will be withheld on his coupons ana sfV
tax by his employer.
II will therefore be seen that II Is en-
tirely optional with the individual as 10
where he claims the benefit Of having MS
income paid without deduction for tax
10 the extent of the exemption he can
claim. If the individual has salary, and
lii ha covenant.
will naturally claim the benefit of his ex-
emption from his employer as the COT
poration with the tax-free covenant VIII
nav his tax for him on the bond interest.
While this is hardly fair TO the corpora
ton. there does not appear at present
any way to avoid ii under the law as 1t
now stands Under existing circuni-
stances, an individual whose total IN
come consists Of 5000 from bonds, with
the tax-free covenant, may say: 'Why
should claim any exemption as long as
the corporation (whose mortgage contains
this covenanO will pay my coupons in
full. even If I don't claim any exemp-
uon?"
The answer to this is. that all certh-
Gates become government records. and II
government will infer that exemptions
have been claimed in other directions, and
that such person therefore has taxable
income, and sooner or later he may have
q call from an inspector TO find out why
he has not filed return.
In another case an individual might
claim the benefit of his exemption from
several sources; part on his salary. part
on rents due and part on coupons. Again
he may deposit 500 of coupons. but have
only 800 of exemption left. in which case
he would claim only 500 exemption, ana
II the bonds did not have the tax-free
covenant the paying agent would deduct
and withhold a tax Of 81, representing
per cent Of 800. The corporation or its
paying agent pays the coupons In fun
or withholds the tax, ia accordance with
the information on the certificate FLED
by the bondholder, and consequently the
bondholder must place on each certificate
the exact amount OF exemption he claims
on that particular certificate, providing
of course, that he wants 10 claim any
exemption at such time. The government
places on the bondholder the responsible
aty Of not claiming more exemption than
he Is entitled TO, and he would do well
TO keep a record of the amounts he has
claimed from time TO time. so he will not
claim more than he is entitled to. He
should also remember that for the ten
months of 1913 he is only entitled to five-
sixths of the amount allowed per annum.
Another matter which is causing con-
fusion is the tax free covenant to which
freouent mention is made above. Many
mortgages contain a covenant agreeing TO
nay the interest TO a bondholder, without
any deduction for federal income tax and
as under the law the tax on bond in
terest must be deducted at the source II
naturally throws the burden Of this tax
on the corporation, where exemptions are
not claimed
While such corporations probably have
the right TO secure from the bondholder
some statement that his income is taxable
before assuming the payment OF this tax,
many of the corporations have agreed to
require only the certificates prescribed In
the regulations of the Treasury Depart
nent. and the examples given above are
based on this understanding. One OF the
unfortunate features OF this part OF the
plan is that many bondholders do not
know which of their bonds contain the
tax covenant clause. and the labor OF
preparing a complete list OF the mortgages
that have the covenant Is so great that
no complete list has yet been published.