article, or preparation by whatsoever name known or distinguished, any of the above which are used or applied or intended to be used or applied for toilet purposes; (2) Pills, tablets, powders, tinctures, troches or lozenges, sirups, medicinal cordials or bitters, anodynes, tonics, plasters, liniments, salves, ointments, pastes, drops, waters (except those taxed under section 628 of this Act), essences, spirits, oils, and other medicinal préparations, compounds, or compositions (not including serums and antitoxins), upon the amount paid for any of the above as to which the manufacturer or producer claims to have any private formula, secret, or occult art for making or preparing the same, or has or claims to have any exclusive right or title to the making or preparing the same, or which are prepared, uttered, vended, or exposed for sale under any letters patent, or trade-mark, or which (if prepared by any formula, published or unpublished) are held out or recommended to the public by the makers, vendors or proprietors thereof as proprietary medicines or medicinal proprietary articles or preparations, or as remedies or specifics for any disease, diseases or affection whatever affecting the human or animal body; Provided, That the provisions of this section shall not apply to the sale of vaccines and bacterines which are not advertised to the general lay public, nor to the sale by a physician in personal attendance upon a patient of medicinal preparations not so advertised." Title VI of the same Revenue Act imposes a tax on all beveragesboth alcoholic and non-alcoholic-and Title VII imposes a similar tax on cigars, tobacco and manufactures thereof. Title XI of the same Act relates to the Stamp Taxes, and requires the placing of a stamp of appropriate denomination upon various articles, as, for example, sales or transfers of capital stock, various conveyances or transfers of real estate, powers of attorney, playing cards, etc. SPECIAL TAXES. All corporations, including those corporations manufacturing or selling or otherwise dealing in patented or trade-marked or copyrighted articles, must, under Title X of the Revenue Act now in force, pay “a special excise tax with respect to carrying on or doing business equivalent to $1.00 for each $1,000.00 of so much of the fair average value of its capital stock for the preceding year ending June 30 as is in excess of $5,000.00.” This exemption of $5,000.00 applies only to domestic corporations -every foreign corporation is required to pay a special tax of $1.00 for each $1,000.00 of the average amount of capital employed in the transaction of its business in the United States during the preceding year ending June 30. In estimating the value of capital stock for the purpose of these special taxes, the surplus and undivided profits must be included. Chapter VII. ROYALTIES. When the average man thinks of finances in connection with patents or copyrights, his first thought is of royalties. To receive a regular income from royalty payments is the ambition of every inventor and author, and to many, who might be termed "professional" inventors or writers, their royalty receipts correspond to the commissions received by certain classes of salesmen, or pensions earned through past service. Naturally, the Income Tax Law was framed to cover royalty receipts as a recognized source of income. Section. 213 of the law of February 24, 1919, specifies that everyone must include in his statement of Gross Income: "dealings in property, real or personal, growing out of the ownership or use or interest in such property" and also "or gains or profits or income derived from any source whatever." The Regulations of the Internal Revenue Bureau are more specific, for Art. 48 of Reg. 45 distinctly states: "Royalties on patents are income." (Art. 48, Reg. 45, Rev.), supplementing the former Regulation contained in Reg. 33. "Royalties received by a corporation in accordance with a contract by which it has assigned the patent rights to manufacture machines, etc., are income and should be so accounted for." (Art. 113, Reg. 33, Rev.) Not only is it clear that royalties received must be entered in the tax return as income, but also it has been decided that royalties paid to an inventor or author may be deducted by the one making the payment as necessary business expenses. "A royalty paid by a corporation * * for use of a patent upon an article manufactured and sold by the corporation is deductible as a business expense, provided the amount so paid is reasonable, considering the value of the invention and its salability in the open market." (O. D. 440. 14-20-835.) "The entire royalty, if not unreasonable, may be taken as a deduction by the American corporation." (T. B. R. 29-17-303.) Further, royalties received by a resident of this country from manufacture or sale of his patented or copyrighted device in a foreign country or countries must also be included as income. It should be noted here, however, that in the case of American citizens, any tax payments made on such royalties to any foreign government should be credited against the taxes paid in this country, and not merely the residual amount taken as the amount on which U. S. taxes are figured. "SEC. 238. (a) That in the case of a domestic corporation the total taxes imposed for the taxable year by this title and by Title 3 SHALL BE CREDITED with the amount of net income, war profits, or excess profits taxes PAID during the taxable year TO ANY FOREIGN COUNTRY, upon income derived from sources therein, or to any possession of the United States." Section 222 relates to credits granted to individuals: "SEC 222. (a) That the tax computed under part 2 of this title shall be credited with (1) In the case of a citizen of the United States, the amount of net income, war profits and excess profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States." The difference between entering the residual amount received from abroad as income and crediting foreign taxes paid against the U. S. tax is not generally understood. An example of the saving effected by the latter method is cited for illustration: Suppose British royalties of $20,000 are payable to a U. S. corporation and are taxed in England at 30%, or $6,000. If the residue-$14,000— actually received by the U. S. company is entered as "income" and the U. S. Income Tax of 10% and the War and Excess Profit Tax of 40% figured thereon, the tax would be: War and Excess Profit Tax.. U. S. Tax Paid .40% of $14,000 $5,600 .10% of $14,000 less $5,600 840 .$6,440 Under the correct way of figuring-by crediting the foreign tax Tax Payable to U. S. Government.. A possible saving to the taxpayer of $3,240 in that year alone. $3,200 In many cases an American company is operating, or may desire to operate, under a patent or copyright owned by an alien inventor or author, necessitating the sending of royalties abroad, and to these attention is called to the clauses of the Law relating to payment of the tax at source, which require that a resident of this country who holds funds for or makes periodical payments to a non-resident alien must: "deduct or withhold from such annual or periodical gains, profits and income a tax equal to eight per cent thereof" in the case of an individual. The Act is specific on this point. Note "SEC. 221. (a) That all individuals, corporations and partnerships in whatever capacity acting * * having the control, receipt, custody, displacement, or payment of interest, rent, salary, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed or determinable annual or periodical gains, profits and income of any nonresident alien individual * * * shall * * * deduct and withhold from such annual or periodical gains, profits and income a tax equal to 8 per centum thereof." The tax return for corporations being 10 per cent in place of 8 for individuals, it will be necessary, if the foreign owner of the patent or copyright is a corporation, to withhold 10 per cent of the amount due. "SEC. 237. That in the case of foreign corporations subject to taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 221, a tax equal to 10 per cent thereof. * * *"" “The tax should be withheld on payments by an American corporation to a non-resident foreign corporation having no office or place of business within the United States representing royalties for the use of a patent, regardless of whether the amount paid is an agreed sum or is contingent on profits earned." (T. B. R. 29, 7-19-303.) The owners of patents receiving royalties, whether from domestic or foreign sources, are entitled to all the benefits of the depreciation. clauses of the Income Tax Law. The inventor or author should familiarize himself with these provisions and arrange his tax return so that the amount rendered as net income is the gross amount of the royalties received less the pro rata depreciation allowance of the cost value of the patent. (Note Chapter X on Depreciation of Patents, Copyrights, Trademarks, and the like.) Chapter VIII. PROFITS FROM SALES OF PATENTS, COPYRIGHTS, AND THE LIKE. The dominating thought that induces the great majority of inventors and authors to obtain patents or copyrights is the hope and expectation of selling their rights at a substantial profit. Fully ninety per cent. of all patents issued are offered for sale at one time or another. Naturally, the profit derived from any sale of patents or copyrights must be figured as income and included in the tax return of the year of the sale. Very few inventors, however, know how to correctly estimate their actual profits, though the problem is apparently a simple one-merely to ascertain the difference between the cost of the patent to them and the amount received for it. The difficulty, of course, lies in the proper method of computing the actual cost. To aid the owners of patents, copyrights, and the like to correctly compute their costs of acquisition, the Internal Revenue Bureau has formulated definite rules to be followed in figuring their tax returns. These rules are: 1. If the patent or copyright is acquired from the Government, the cost thereof is the amount actually expended in developing and securing the patent, including the various Government fees, attorney's fees, costs of drawings, experimental models, wages paid mechanics, etc. "If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, costs of drawings, experimental models, attorney's fees, etc., actually paid." (Art. 167, Reg. 45, Rev.) "Where the patent has been secured from the Government by a corporation, its cost will be represented by the various Government fees, costs of drawings, experimental models, attorney's fees, etc." (Art. 137, Reg. 33, Rev.) "Amounts expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital." (Art. 293, Reg. 45, Rev.) 2. If the patent or copyright is purchased from another, the cost thereof is the amount actually paid over. This amount may be in cash or in some other commodity, such as stocks or bonds, in which case the cost price is the fair market value of such stocks or other securities at the time of the purchase. "In the case of property acquired on or after March 1, 1913, the cost thereof." (Sec. 202.) |