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What You Should Know
About the
Federal Income Tax Law
By R. W. MacNAUGHTON, C.P.A.
of Hill, Bieth & Company
Accountants and Auditors, New York, N. Y.
The third of a series of pertinent discussions on the Federal Tax Law rulings writ-
ten exclusively for THE REVIEW
R. W. MacNAUGHTON, C.P.A.
A
S there seems to be but little doubt
that the present tax law will be
amended so as to produce larger
revenue through increased taxation,
I am submitting to the members of the music
trade an outline of the various changes pro-
posed, with some comments about several of
them.
Secretary of the Treasury Mellon, in his
report to Congress on December 9, 1931,
recommended that the following changes be
adopted to produce sufficient revenue to bal-
ance the budget:
1. Normal tax on individuals be increased
from V/ 2 per cent, 3 per cent and 5 per
cent to 2 per cent, 4 per cent and 6 per
cent.
2. Personal exemptions of individuals be de-
creased from $1,500 if single and $3,500
if married to $1,000 if single and $2,500,
respectively.
3. Surtax rates (which apply to incomes over
$10,000) be increased to a maximum of 40
per cent instead of 20 per cent.
4. Corporate tax rate be increased from 12
per cent to \2 l / 2 per cent.
5. No exemption be allowed a corporation
whose income is less than $25,000. The
Revenue Act in force allows $3,000.
6. The imposition of a Supertax on Estates
in addition to the present Estate Tax.
7. Various changes in excise tax rates includ-
ing such new taxes as a levy of 5 per cent
on the manufacture of radio and phono-
graph accessories and a 2-cent stamp on
each check or draft.
The Democratic Party immediately coun-
tered with its proposal, which in substance is
as follows:
1. Increase in surtax rates.
2. Repeal of Capital Gains and Losses pro-
vision of the present Revenue Act.
3. A gift and inheritance tax.
4. No additional sales or luxury taxes other
than those now in force.
5. No changes to apply to incomes of less
than $5,000.
6. All changes to be retroactive so as to
apply to 1931 incomes.
The retroactive measure proposed by the
Democratic Party is causing the most adverse
criticism, and not unjustly, for a retroactive
measure is, to say the least, vicious. The
American business man likes to know what
earnings he may expect from his investment
and labors after taking into consideration the
cost of doing business, including taxes, and
at the end of a fiscal period he wants to con-
sider the results closed. He can hardly be
expected to accept with a cheery smile a tax
that will upset all his calculations. Nine-
teen-thirty-one has of itself been a sufficiently
troublesome year. The proposed measure
would shatter his confidence, which is a vital
factor in the recovery of American business,
for he would always have before him the
possibility that Congress might pass another
retroactive measure affecting 1932.
The proposal to abolish the Capital Gains
and Losses provisions has caused no little con-
fusion in the minds of Congress and the gen-
eral public, as these provisions of the law and
those governing the right to take straight losses
are not differentiated. To make the proposal
somewhat clearer, I will endeavor to explain
the features of the Capital Gains and Losses
provisions as set forth in the Revenue Act.
The provision was created in the Revenue
Act of 1921 and under the terms thereof
could be applied to sales of capital assets
consummated after Pecember 31, 1921, only.
Except for a few nroor changes, the law in
force today is the same as it was in 1922.
It does not apply to corporations.
First, let us get clearly in our minds the
meaning of the various terms pertinent to this
section of the law. The Revenue Act of 1928
defines a "capital gain" as a "taxable gain
from the sale or exchange of capital assets"
and a "capital loss" as a ". . . . deductible
loss resulting from the sale or exchange of
capital assets."
"Capital assets" means property held by
the taxpayer for more than two years
(whether or not connected with his trade or
business). It does not include property held
primarily for sale in the course of the tax-
payer's trade or business, or property which
would properly be included in inventory at
the end of a fiscal period.
In calculating the two-year period, the law
permits the taxpayer to include the period
during which he held the property if no gain
or loss was recognized at the time of the
exchange of the other property for the prop-
erty sold. This has reference to a non-
taxable exchange (referred to in a previous
article) or an exchange in connection with a
corporate reorganization. There is also in-
cluded the period during which the donor, if
the property sold was a gift, held same. The
period during which stock rights and stock
dividends are considered held is based upon
the date on which the stock with respect to
which issued was acquired, and not the date
of the receipt of the rights, etc., by the tax-
payer.
If the taxpayer has a capital gain, as de-
fined above, the law offers the privilege of
election to taxation at 12^2 per cent on this
capital gain, in lieu of the rates on ordinary
income, and the total tax payable is the tax
computed on ordinary income exclusive of the
capital gain, plus the tax on the capital gain.
If a capital loss, the total tax is the amount
determined on ordinary income less \2 l /i per
cent of the capital loss.
There are certain limitations to computing
the tax under this method, however. For
instance, a taxpayer certainly would not elect
to pay 12^4 per cent on a gain where the
normal and surtax rates on all his income,
including the capital gain, did not amount
to that sum. On the other hand, the law
(Please turn to page 16)
Have your Federal Tax Problems answered by Mr. MacNaughton through THE REVIEW—con-
fidentially and without charge. With the many business readjustments, timely information in tax
matters is most important just now. Send us your questions.
THE
M U S I C
T R A D E
R E V I E W ,
February,
1932