Daily Kennebec journal. [microfilm reel] (Augusta, Me.) 1870-1975, 1913-10-09

Income Tax as It
Affects Securities,

nold L per cent. OF the total amount (
ana pay it over to the collector of in +,
ternal revenue. This is the so-called
collection at the source" provision,
and t applies to incomes up to $4,000
The income above that amount shall be
taxed by what is known as the sur
tax, assessed and collected by govern
mental officials upon personal return
as ordinary taxes are collected
This would mean, first, that income |
from securities held are taxable; and |
secondly, that gains or profits from
market transactions are taxable, |
where income or the profits, as the |
case may he exceed $4,000.
Under these provisions income from |
eli bonds must pay tax and presum-
ably income from all stocks is tax ex-
eTnpt.
Ronds; Ordinary bond issues. prior
t. this year. contain a clause in their
indentares stating that the corpo ration
shall not make any deduction from the
interest payable on the bond because
of taxes. The government under this
rev law holds the corporation. liable
for the tax or bond interest which il
pays to hondholders, and accordingly
the corporation in the USUAL bond is
restrained from Withholding that tax
| from the bondholder by terms of its
own indenture. Therefore, in actual
practice the bondholder pays no tax
| on income derived from the ordinary
guaranteed bond but his corporation
mest bay it fer him.
| In the case of plain bonds which do
net carry such guarantee. like the
| now Interboro Rapid Transit bond. the
| individual bondholder receiving the in
| come must pay to the corporation the
| amount which the corporation is com
PEELED to pay to the government be-
| fore paying over annual interest
charges to the bondholder. The pro-
ceeds would be that the corporation
would deduct the amount of the taxes
from the interest payment and pay it
to the government
| Another distinction arises between
registered bond and coupon bonds In
the case of a registered bond, the Ger
paration plainly is under penalty to
pay over the tax with respect to each
person receiving the income and in tae
case of the coupon bond the corpor-
alton, or its fiscal agent which re-
deems the coupon, must make the de-
duction when the coupon is redeemed
a difficulty arises here with respect
to these bondholders whose income
does not equal $4,000 per year. The law
says that such persons are exempt
from taxation. Practically, a corpor-
alton does not know whether its regis
tered boEdhoders have an income of
less or of more than $4,000, and the
bank or trust company which redeems
coupons does ont know whether the
coupon holders have an income which
is exempt. It is, accordingly, provid |
ed that in the case of registered
bondhelder the corporation shall de-
duet the tax and then the bondholder
shall by proper affidavit declare his
exemption and recover the amount of
the tax hack from the government. In
the case of coupon bonds the bondhold- |
er would simply have to make state |
ment, fled with the bank or trust com |
pany. when the coupon is being col |
lected. stating that his income is less |
than $4,000 and it is provided that in |
case any misrepresentation is discov- |
cred. the person will be fined $500 for |
each offense.
Stock-Income from stock dividends |
is exempt from taxation under the pro-
vision that the amount received as |
dividends upon the stock of any cor |
pora ton = which is taxable on |
it's net income. as hereinafter proNid- |
ed. shall be deducted" Very plainly |
dividends received on common stock |
are exempt from taxation as practi- |
callv every corporation pays tax up |
on its net income.
Preferred stock. we believe, is also |
excmnt from taxation, but may be de-
clared taxable. This is on the theory |
that the preferred stockholders are not |
really the owners of the corporation, |
ana. therefore, do not pay the tax on
such net income, which, in theory Is |
horne by the common stockholders up
on whom, for instance, in the case OF
r1Iarq nteed bonds. the burden of pay
ING n tax upon the corporations in
come ultimately falls, since that
amount is deducted from the earnings |
available for dividends. 1t may be con-
tended that the preferred stockhoider
is in a somewhat similar position to |
the creditor. and, therefore. as In the
ease of the bondholder, his income is |
taxable. III THIS fulillS Sipuiu eNSi -
made, the preferred stakeholder wouid
he taxable since ii is not usual 1or
to guarantee that the
dividends on a preferred stock shall
be paid without any deductions for
taxes. etc We should say, therefore,
that while preferred stock dividends
are tax exempt. they may be declared
and We understand that
court decision will be necessary to de-
termine this point, but, at any rate,
until a decision is made investors
would he safe in deducting from their
total income upon which they must
pay a tax, the full amount OF diVi-
lenda received from preferred stocks
rs we'll as the full amount oil dividends
rec eiHed from common stocks.
Tax schedulc-The tax in actual op-
,ration will he collected as follows:
A normal tax of | per cent. on the
whole income of any person above
1900, and a sur-tax that begins with
m additional tax of l per cent. on eV-
nv income above $4,000, and is grad
ated as follows:
one per cent. on incomes exceeding
20 900 up to $4,000 I
Two Der cent. on incomes exceeding f