Income and War and Excess Profits Tax Law of Oct. 3, 1917 .. .269-298 Table of Average Percentages of Prewar Income to Pre- A. R. M. O. D. .Committee on Appeals and Review Memorandum. A. B. C., etc.. . . . .Represent Names of Individuals. M. N. X. Y. Z., etc., Represent Names of Corporations, Places, or Busi- X. ness, according to context. Is used to represent a certain number, and when The notations such as 2-20-629 mean that the ruling appeared first Chapter I. INTRODUCTORY. The Federal Tax Laws herein discussed have no relation to the Government fees paid by inventors and authors as a requisite toward securing their grant from the Government. These laws, practically all of which were enacted within the last few years, relate to federal tax payments that must be made to the Government because of one's ownership or other property interest in patents, trade-marks, copyrights, and the like. Economic developments have wrought many changes in the financial status of such intangible property, and this Government, like practically all other civilized governments, has come to recognize that a taxable interest exists therein that should be included in calculating the source of Government revenue. That financial returns derived from patents or copyrights are just as liable to taxation as returns from stocks, bonds, or real estate, was the theory on which the various forms of financial returns from patents, copyrights and the like were included under the Federal Income Tax Act. Similarly, if a corporation manufacturing or selling patented or copyrighted articles makes more than a certain percentage of profits on its capital invested, it automatically groups itself within the class of corporations taxable under the War and Excess Profits Tax Act. These two acts the Income Tax Act and the War and Excess Profits Tax Act-are the principal ones to be considered. The approved methods of computing taxes thereunder, the various credits or deductions allowed to owners or licensees of patents, copyrights, etc., the determination of the particular tax period in which certain returns or deductions should be scheduled, and the time for and method of appraising values of patents, trade-marks, or good will are problems concerning which the great majority of inventors, authors, manufacturers and publishers are surprisingly uninformed. With the percentage of taxation varying from year to year the proper time for scheduling certain forms of income return becomes of vital moment. No phase of the Federal Tax Laws is less understood than that touching upon patents, trade-marks, and the other intangible assets. that are grouped under the appellation-Intangibles. Corporations that have modestly carried valuable patents and other intangible rights at a nominal valuation or a figure that was too conservative are at a loss as to how to proceed to place themselves on an equal footing with those who have carried their patents, trade-marks and good will at their real valuation. Others have secured all the benefits afforded them by the various provisions of the Income Tax Law. In the case of one corporation, a revaluation was made as of March 1, 1913, and the figure on the books was changed from less than $500,000 to $7,000,000. For the next few years the greater annual depreciation reduction thus afforded very materially reduced the net income figure in their tax returns, and in consequence the amount of taxes paid. Their application of the provisions of the Income Tax Law afforded them substantial savings. In another instance, the author recently revised the system of tax payments on a royalty contract under which a British manufacturer had paid several thousands of dollars in royalties to an American owner of a British patent. The British manufacturer was required by the law of Great Britain to deduct the British income tax before remitting, and the American owner had regularly paid the full U. S. Income and Excess Profits Taxes on the net amounts received by him, in entire ignorance of a special provision in the Income Tax law which permitted him a credit in this country for the taxes paid in England. The discovery of this error brought about a saving of several thousand dollars annually to the patent owner and a refund of the excess taxes already paid into the United States Treasury. The following chapters are intended to touch upon the development of these tax laws in their relation to patents, trade-marks, copyrights, and the like, and to point out the way for a more thorough examination of such points as anyone desires to further investigate. The other Federal Tax Laws only incidentally affect patents, copyrights, etc., and are mainly taxes on the estate value of such assets, taxes based on the sales prices of certain patented or trade-marked articles, and taxes of the Stamp Tax type, as, for example, the law prescribing the placing of revenue stamps of specified denominations. upon powers of attorney and upon articles such as "patent medicines." Chapter II. FEDERAL INCOME TAX. Practically every person holding a property interest in a patent, trade-mark, or copyright is affected in some manner by the Federal Income Tax Law, the most important of the Federal Tax laws. The Income Tax Law now in effect is that contained in the Revenue Act approved by Congress, February 24, 1919, which either supersedes or amends the several prior income tax laws contained in the Revenue Acts of October 3, 1913, September 8, 1916, and October 3, 1917. The portions thereof needed for a clear understanding of the effect of the law on patents, trade-marks and copyrights and the owners thereof or those who derive any income therefrom are set out here, while the entire text of the Revenue Acts referred to above is printed in the Appendix. The excerpted portions are divided for convenience of reference into two parts: A. Individuals and partnerships, and B. Corporations. A. INDIVIDUALS AND PARTNERSHIPS. TITLE I.—GENERAL DEFINITIONS. SECTION 1. That when used in this Act The term "person" includes partnerships and corporations, as well as individuals; The term "corporation" includes associations, joint-stock companies, and insurance companies; The term "domestic" when applied to a corporation or partnership means created or organized in the United States; The term "foreign" when applied to a corporation or partnership means created or organized outside the United States; The term "United States" when used in a geographical sense includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia; The term "Secretary" means the Secretary of the Treasury; The term "Commissioner" means the Commissioner of Internal Revenue; The term "collector" means collector of internal revenue; The term "Revenue Act of 1916" means the Act entitled "An Act to increase the revenue, and for other purposes," approved September 8, 1916; The term "Revenue Act of 1917" means the Act entitled "An Act to provide revenue to defray war expenses, and for other purposes, approved October 3, 1917; The term "taxpayer" includes any person, trust or estate subject to a tax imposed by this Act; The term "present war" means the war in which the United States is now engaged against the German Government. For the purposes of this Act the date of the termination of the present war shall be fixed by proclamation of the President. TITLE II.-INCOME TAX. PART I.-GENERAL PROVISIONS. DEFINITIONS. SEC. 200. That when used in this title The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year upon the basis of which the net income is computed under section 212 or section 232. The term "fiscal year" means an accounting period of twelve months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1918, shall be the calendar year 1918 or any fiscal year ending during the calendar year 1918; The term "fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate; The term "withholding agent" means any person required to deduct and withhold any tax under the provisions of section 221 or section 237; The term "personal service corporation" means means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading as a principal, or (2) of gains, profits, commissions, or other |