THE DOCTOR'S FEDERAL TAXES
Authors: Erwin N. Griswold
Journal: Annals of Internal Medicine (1943)

Article1 April 1943THE DOCTOR'S FEDERAL TAXESERWIN N. GRISWOLDERWIN N. GRISWOLDSearch for more papers by this authorAuthor, Article, and Disclosure Informationhttps://doi.org/10.7326/0003-4819-18-4-647 SectionsAboutPDF ToolsAdd to favoritesDownload CitationsTrack CitationsPermissions ShareFacebookTwitterLinkedInRedditEmail ExcerptDuring the period of the first world war, the maximum amount which was raised by taxes in any one year was $5,400,000, 000. Our present tax laws are yielding more than five times that amount, and the President's budget message for 1943 asks for additional taxes which will greatly increase the present total. Tax rates have necessarily gone steadily higher while exemptions have gone lower, and there are very few in the community now who do not feel directly the burden of federal tax collection.The modern income tax dates from 1913, in which year the Sixteenth Amendment to the...1 The Sixteenth Amendment provides: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." This was made necessary by the unfortunate decision of the Supreme Court in 1895 in Pollock v. Farmer's Loan & Trust Co., 158 U. S. 601. Google Scholar2 Helvering v. Clifford, 309 U. S. 331, 334 (1940). Google Scholar3 Section 22(b)(3). A receipt is not a gift unless it is purely gratuitous. It does not have to be paid pursuant to a strict contract or after sending a bill, to be income. Thus, if a doctor renders professional services, and the patient thereafter sends in a check without any agreement or bill, the entire amount is income, even though it is more than the bill which the doctor would have sent for the services. Google Scholar4 Section 22(b)(1). The exemption applies even where the proceeds of the insurance are payable in installments, as in the form of an annuity payable to the decedent's widow for her life. In such a case a portion of each payment to the widow is (from the insurance company's point of view) income on the money left with the company. But several cases have held that the entire amount of such payments is exempt from income tax. Commissioner v. Winslow, 113 F.(2d) 418 (C.C.A. 1st, 1940); Commissioner v. Bartlett, 113 F.(2d) 766 (C.C.A. 2d, 1940); Allis v. LaBudde, 128 F.(2d) 838 (C.C.A. 7th, 1942); Kaufman v. United States, 131 F.(2d) 854 (C.C.A. 4th, 1942). The Treasury has now accepted this view, T. D. 5231, issued February 22, 1943. Google Scholar5 Section 22(b)(5). Google Scholar6 The proceeds from the sale of property are not income to the extent that they represent a return of capital or investment. Thus if property costing $800 is sold for $1,000, $1,000 is received, but only $200 is income. The amount to be included in "gross income" may be reduced by the provisions of the statute dealing with capital gains. Section 117. Google Scholar7 Sec. 19.22(a)-3 of Regulations of 103 provides: "If services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income." Google Scholar8 Avery v. Commissioner, 292 U. S. 210 (1934). Google Scholar9 Although either method may be chosen, a taxpayer who has adopted one method may not change to the other unless he obtains the permission of the Commissioner of Internal Revenue. Thus, persons who have heretofore used the cash method must continue on that basis unless they seek and obtain the required permission. Google Scholar10 Sec. 23(k) of the Code. Until recently the bad debt deduction was very technical, and required that the debt be both "ascertained to be worthless" and "charged off" during the taxable year. This was changed by the Revenue Act of 1942 to allow the deduction simply of "Debts which become worthless within the taxable year." Google Scholar11 Sec. 23(b). Google Scholar12 Sec. 23(c). But federal income taxes are not deductible (state income taxes paid may be deducted in computing the federal tax); nor may any deduction be taken for inheritance, estate or gift taxes. Assessments made for special benefits, such as improving a street, are not deductible; they are treated as an addition to the cost of the property benefited. Taxes may be deducted only by the person on whom they are imposed as taxes. It is not enough that the economic burden is borne by the person claiming the deduction. Thus a tax imposed on a manufacturer cannot be deducted by the purchaser even though the amount of the tax is included in the purchase price. For this reason, the federal tax on gasoline is not deductible by the consumer. Nor may the federal taxes on liquor or tobacco or on retail sales (such as the tax on silver and jewelry) be deducted by the purchaser. Sec. 23(c)(3) was added to the Code by the 1942 Act to provide that state retail sales taxes may be deducted by the purchaser regardless of whether he actually pays it as tax or as an addition to the purchase price. The taxes which may be deducted include those on admissions, club dues, safe deposit boxes, telephone bills and telegraph messages, state income taxes, state or local taxes on land and personal property (other than benefit assessments as indicated above), taxes on railroad tickets, poll tax, automobile taxes, stamp taxes on transfers of stocks, bonds and real estate, and any tax which a doctor may have to pay in order to dispense narcotics. Google Scholar13 Sec. 23(e). Google Scholar14 Sec. 23(k). Google Scholar15 Sec. 23(o). The amount deductible for charitable gifts is limited to 15 per cent of the net income (computed without taking charitable contributions into account). Google Scholar16 Sec. 23(a)(1)(A). Google Scholar17 Sec. 19.23(a)-5 of Regulations 103: "Professional expenses.—A professional man may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operation and repair of an automobile used in making professional calls, dues to professional societies and subscriptions to professional journals, the rent paid for office rooms, the cost of the fuel, light, water, telephone, etc., used in such offices, and the hire of office assistants. Amounts currently expended for books, furniture, and professional instruments and equipment, the useful life of which is short, may be deducted." Google Scholar18 It has been held in several cases that amounts expended by a physician for railroad fare, hotel accommodations and meals in connection with attending meetings and conventions of medical societies is deductible as an ordinary and necessary expense. Cecil M. Jake, 13 B.T.A. 726 (1928); J. Bentley Squier, 13 B.T.A. 1223 (1928); Roy Upham, 16 B.T.A. 950 (1929); Robert C. Coffey, 21 B.T.A. 1242 (1931); Wolfe v. McCaughn, 17 A.F.T.R. 1007 (E.D. Pa. 1933). The Bureau of Internal Revenue now follows this view. I.T. 2602, X-2 Cum. Bull. 130 (1931). Google Scholar19 Of course, the expenses deductible are those of the physician himself. They do not include the expenses of his wife and family who may accompany him. Nor do they include purely recreational expenses, such as the cost of a side trip made on the way to or from the convention. Google Scholar20 O.D. 984, 5 Cum. Bull. 171 (1921). Google Scholar21 Sec. 23(a)(1) of the Code. Google Scholar22 Compare the decision in Waters F. Burrows, 38 B.T.A. 236 (1938), where it was held that expenses of practicing medicine in previous years but paid in the current year by a doctor on the cash basis were deductible, even though he had retired from active practice before the expenses were actually paid. Google Scholar23 Sec. 23(a)(2) of the Code, added by § of the Revenue Act of 1942. Google Scholar24 But only if the box is used for the protection of income producing property. Thus no deduction is allowed for the cost of a safe deposit box used for jewelry, silverware, or for fire insurance policies or the deeds to the taxpayer's own residence. See § 19.23(a)-15 of Regulations 103, added by T.D. 5196, Internal Revenue Bulletin, December 14, 1942, p. 39, 42. Google Scholar25 Sec. 24(a)(1) of the Code. Google Scholar26 Sec. 19.23(a)-15 of Regulations 103, added by T.D. 5196, Internal Revenue Bulletin, December 14, 1942, pp. 39, 41-42. Google Scholar27 I.T. 1488, I-2 Cum. Bull. 145 (1922). Google Scholar28 See G.C.M. 19662, 1938-1 Cum. Bull. 168, and G.C.M. 19790, 1938-1 Cum. Bull. 118, where it was held that the cost of uniforms worn by jockeys and baseball players can be deducted. If doctors can bring themselves within this class they would seem to be entitled to the deduction; and there would seem to be no reason for a distinction—as far as this question is concerned. Google Scholar29 Sec. 19.24-1 of Regulations 103: ". . . In the case of a professional man who rents a property for residential purposes, but incidentally receives clients, patients, or callers there in connection with his professional work (his place of business being elsewhere), no part of the rent is deductible as a business expense. If, however, he uses part of the house for his office, such portion of the rent as is properly attributable to such office is deductible." Google Scholar30 The Treasury has published a pamphlet known as Bulletin F (1942 edition) which deals with depreciation allowances in some detail. The following appears at page 60: "Professional and Scientific Equipment. Under this heading will come libraries and equipment used in professional activities. The life usually applied to professional libraries is 30 years while the life for scientific equipment used by dentists, doctors, etc., is usually 10 years." Google Scholar31 Sec. 112(b)(1) of the Code provides: "No gain or loss shall be recognized if property held for productive use in trade or business . . . is exchanged solely for property of a like kind to be held for productive use in trade or business . . ." Google Scholar32 Sec. 25(b) of the Code. Google Scholar33 Sec. 25(a) of the Code. Google Scholar34 Sec. 19.25-2 of Regulations 103: "The entire amount received as professional fees may be treated as earned income if the taxpayer is engaged in a professional occupation, such as a doctor or a lawyer, even though he employs assistants to perform part or all of the services, provided the clients or patients are those of the taxpayer and look to the taxpayer as the person responsible for the services performed." The same rule applies to income received through a professional partnership provided the patients are those of some active member of the partnership and look to him as responsible for the services performed. Mim. 3802, IX-1 Cum. Bull. 121 (1930). See also G.C.M. 9716, X-2 Cum. Bull. 304 (1931). The income of a physician from his practice was held to be income from a trade or business under the 1917 excess profits tax which was applicable to individuals. A.R.M. 40, 2 Cum. Bull. 266 (1920). Google Scholar35 Such a transfer is unnecessary in the eight community property states (Washington, Idaho, California, Nevada, Arizona, New Mexico, Texas, and Louisiana; and optionally in Oklahoma). In those states the income of a doctor from his profession is community property, and is taxable half to him and half to his wife. This results in a substantial discrimination in favor of taxpayers in these states, which would not be tolerated by the residents of other states, if they were fully aware of it. But to date determined efforts to eliminate this unfair arrangement have always fallen before the solid phalanx of sixteen Senators from the community property states. Google Scholar36 Sec. 42(a) of the Revenue Act of 1934, continued into § 42(a) of the Internal Revenue Code. Google Scholar37 Helvering v. Estate of Enright, 312 U. S. 636 (1941). Google Scholar38 Sec. 126. The previous provision in § 42(a) was eliminated. Google Scholar39 Sec. 19.22(a)-3 of Regulations 103: ". . . The value of quarters furnished to the commissioned officers, chief warrant officers, warrant officers, and enlisted personnel of the Army, Navy, Coast Guard, Coast and Geodetic Survey, and Public Health Service, or amounts received by them as commutation of quarters, are to be excluded from gross income." Google Scholar40 Sec. 513 of the Soldiers' and Sailors' Civil Relief Act of 1940, 54 Stat. 1178, 1190. Google Scholar41 Sec. 3804 of the Internal Revenue Code, added by the Revenue Act of 1942. Google Scholar42 Reginald Denny, 33 B.T.A. 738 (1935). The Commissioner of Internal Revenue has refused to acquiesce in this decision. XV-1 Cum. Bull. 30 (1936). Google Scholar43 O.D. 1032, 5 Cum. Bull. 172 (1921). Google Scholar44 Madge Evans, Memo. B.T.A. decision, March 8, 1939. Google Scholar45 Sparkman v. Commissioner, 112 F. (2d) 774 (C.C.A. 9th, 1940). Google Scholar46 Bourne v. Commissioner, 23 B.T.A. 1288 (1931), aff'd, 62 F. (2d) 648 (C.C.A. 4th, 1933), certiorari denied, 290 U.S. 650 (1933). Google Scholar47 Sec. 23(x) of the Code, added by § 127(a) of the Revenue Act of 1942. Google Scholar48 Sec. 48 of the Code. But the taxpayer cannot change from one accounting period to another without the approval of the Commissioner of Internal Revenue. Secs. 46 and 47 of the Code. Google Scholar49 Sec. 51 of the Code. Google Scholar50 A discount for advance payment may in effect be obtained through the purchase of Treasury Tax Savings Notes. These may be bought at any time, by reserving a portion of current earnings, for instance, and may then be used for the payment of subsequent income tax. They return interest of 16 cents a month on each $100, or 1.92 per cent a year, on amounts up to $5,000 a year. They may be purchased direct from any Federal Reserve Bank, or through the taxpayer's own local bank. Google Scholar51 Sec. 147 of the Code. Google Scholar52 Sec. 19.147-1 of Regulations 103: ". . . Fees for professional service paid to attorneys, physicians, and members of other professions come within the meaning of the term 'fixed or determinable income' [in § 147 of the Code] and are required to be reported in returns of information as required by this section." Google Scholar53 Sec. 322 of the Code. Google Scholar54 Sec. 3772(a)(2) of the Code. Google Scholar55 In the ordinary case, this notice must be sent within three years from the due date of the return. But if there is an omission of items amounting to 25 per cent of the gross income, then the notice may be sent within five years. And if the return is false and fraudulent, there is no time limitation on the determination and collection of the tax. Secs. 275 and 276 of the Code. Google Scholar56 Sec. 3690 of the Code. Google Scholar57 The exemptions allowed by § 3691(a) include arms for personal use, one cow, two hogs, five sheep and wool thereof, household furniture to an amount of $300, and the "books, tools, or implements of a trade or profession, to an amount not greater than $100." Google Scholar58 Sec. 291(a) of the Code. The Commissioner has power to relieve against this penalty where "it is shown that such failure is due to reasonable cause and is not due to willful neglect." This takes care of the situation where the failure to file the return is due to the taxpayer's illness or other disability. The penalty is of course not due where the failure to file return is during a period of military service or while the taxpayer is "outside the Americas," as indicated in notes 40 and 41 above. Google Scholar59 Sec. 293(a) of the Code. Google Scholar60 Sec. 293(b) of the Code. Google Scholar61 Helvering v. Mitchell, 303 U. S. 391 (1938). Google Scholar62 Sec. 145(a) of the Code. See Spies v. United States, decided by the Supreme Court on January 11, 1943, where it was held that a willful failure to file a return, without more, must be prosecuted as a misdemeanor under this clause, and not as a felony under § 145(b), referred to below. Google Scholar63 Sec. 145(b) of the Code. Google Scholar64 Sec. 145(c) of the Code. Google Scholar65 See for example the case of Capone v. United States, 51 F.(2d) 609 (C.C.A. 7th, 1931), certiorari denied, 284 U.S. 669 (1931). Google Scholar66 64 F.(2d) 950 (C.C.A. 9th, 1933), certiorari denied, 290 U.S. 657 (1933). Google Scholar67 If the doctor's wife has independent means, estate tax may be saved under the law as it stands at present if she takes out the insurance on his life and pays all the premiums and takes all the incidents of ownership in the policy with no rights given to him in any event. In such a case, the proceeds payable on his death will not be taxable in his estate, nor will they be taxable as income to the wife. If the wife should die first, however, the value of the policy would be an asset of her estate and subject to tax there if her estate exceeded the allowable exemptions and deductions. The premium payments must be paid wholly from the wife's own separate property. It will not do for the husband to give the wife the money to pay the premiums, for then they would be paid "indirectly" by him. It is probably sufficient, however, if the husband gives the wife property freely and with no strings attached, and she then uses the income from the property to pay the insurance premiums. This is most likely to be true when the gift to the wife is made wholly independently of any plan to use the income to pay insurance premiums. Google Scholar68 This includes the reasonable charges of a physician who may have attended the decedent. The bill for such services is a "claim against the estate" of the decedent and is thus deductible. See Lucius N. Littauer, 25 B.T.A. 21, 28 (1931). Google Scholar This content is PDF only. To continue reading please click on the PDF icon. Author, Article, and Disclosure InformationAffiliations: Cambridge, Massachusetts*Received for publication January 28, 1943.†Professor of Law, Harvard Law School. 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