Associated First National franchise (Nov 1921-Apr 1922)

16 First National Franchise Semi-Monthly mMiiiiiiiiiiiimiiiiiiiimiiiiiiiiiiuiiniuiiiiiiuiiiiniiiiiiiiiiniiiiiiiiiiiiiiiiiiiiuiiiiiiuiiiniiiii iimiitiiimimiiiimiumiimiiiiiiiiiiiiiiiiiitiimiiiimiiiiiiiiimmiiMiiiimiiiiiiiiiiiiiiiiiimtiiiiiiiii Franchise's First Aid on Income Tax — No. 2 The importance of Legal Organization as it pertains to Taxation and other features of the Tax Law that are of primary interest to readers of Franchise Editor’s Note: For the benefit of its Franchise holders and exhibitors in general, Associated First National has arranged with the firm of Mattingly & Nutt, specialists on certified public accounting and taxation, to write a series of articles on the tax problems for FRANCHISE, as they affect motion picture theatres and individuals. Article III will be of extreme importance to Exhibitors, as it will deal with the administrative features of the Revenue Law, such as time of filing returns, penalties, interest, forms, etc. Mattingly & Nutt will also answer such tax questions as are submitted through FRANCHISE. This firm maintains o ffices in New York, Washington, Chicago and Los Angeles and is rated among authoritative counsellors on income tax. iiHiiiiiiiiiiiiimiiiiiiiiiiiiiiiuiiiiiiiiiiiiiniiiiiiiiiiiiiiimiiiiiiiiii ARTICLE II IT is a common practice for purposes of better organization for corporations to reorganize at various times and in former years it was of great importance, from a tax standpoint, as to the procedure of such reorganization. Under the old Act of 1918, where stock was paid in from one corporation for stock of another corporation, if there was any fair market value of the stock, the Government would assert a tax upon the profit. Should there be any gain by such transaction? In numerous instances there would be a fair market value of the recently issued stock, but it would often be a false value, and the Government assessed and collected millions of dollars upon such so-called taxable profit. Congress, under the new measure, has eliminated this old feature of the law and where there has been an issuance of stock of one corporation for that of another in any reorganization or merger, the new law holds that there is no profit upon such transaction, or, conversely, that there is no loss. By so doing, it will enable corporations to reorganize for the best interests of all stockholders, without exposing themselves to tax liability. , * * * ' IN line with this new section of the law, Congress has also eliminated taxing profits on the exchanges of property. Under the old Act of 1918, where two pieces of property were exchanged, there would be a profit or loss, provided the property exchanged had a fair market value. Now such a profit is not taxable unless the property secured in exchange has a cash market value — in other words, can be converted into cash. It is also stated in the law that even if such property can be without difficulty converted into cash, there would be no tax on the profits if the property that was secured was taken on the basis of an investment. This applies to purchasing of a dwelling or securities which are intended to be held for an investment and not purchased for the purpose of an immediate turnover. The intention in this case is what largely governs, but every case stands on its own merits. There is, perhaps, no exhibitor in this country who has not had the experience of paying a tax upon a false profit. Under the old act of 1918 and all prior acts, the Department of Internal Revenue held that in determining the basis of cost of any class of property the tax payer was to take either the actual cost, or the fair market value as at March 1, 1913. * * * N thousands of cases where the taxpayer was required to take March 1, 1913, for his cost, there was paid a tax upon a so-called taxable profit, when in many cases there was an actual loss. For example : Exhibitor A, in 1909, bought real estate for $100,000. On March 1, 1913, the fair market value of such property was $80,000. He sold it in 1919 for $95,000. It was required under the Law that he return the profit of this sale of $15,000, when as a matter of fact he had actually sustained a loss of $5,000. The Supreme Court last year held that the Commissioner of Internal Revenue could not interpret this as a profit, in view of the fact that there was an actual loss and this is also covered by the new law. The Bureau has consequently issued regulations covering other transactions affected by the decision which are illustrated in the following examples : Exhibitor A purchases property in 1909 for $100,000. On March 1, 1913, its market value is $90,000. He sells it in 1919 for $80,000. I.n this case there is loss in both instances — $20,000, if actual cost is permitted, and $10,000 if March 1, 1913, is taken. There is loss whether actual cost or market value is taken. The Bureau therefore requires that a loss only of $10,000 be permitted, for where there is a loss in both instances, the lesser is the one allowed. Exhibitor B purchases property in 1909 for $90,000. The market value of suck property was $80,000 on March 1, 1913. He sells it for $100,000. In this state of facts, before the Supreme Court ruling, the Government would have asserted a tax on $20,000, as the difference betvdeen the market value, March 1, 1913 and the sales price. However, the taxable profit is only $10,000, for where there are two gains, it is only required that the lesser of the two be returned as income. * * * IN the case first mentioned above, there would be a gain if the March 1st value was taken as the basis for cost and there would be a loss if the actual cost was taken. The Bureau has held that where there is both a gain and a loss, that the entire transaction shall be outside the purposes of the income tax provisions. | Answers to Income Tax Queries from Readers of Franchise | The following questions were received from motion picture exhibitors and answered by Mattingly & Nutt C. M. G. — I live in New York City, but my motion picture business is located in Newark, N. J. My entire income is from motion picture business. Where shall I file my return ? Answer — You have the option of filing it either with Frank K. Bowers, Collector of Internal Revenue, Custom House, New York City, or Frank C. Ferguson, Collector of Internal Revenue, Newark, N. J. G. H. T. — In 1920, I suffered a loss of $4,250.00. This last year, however, I made money. Can I take credit in my 1921 return for the loss in 1920? Answer — Unfortunately you cannot take credit for your loss in 1920. Under the new law if any taxable year beginning after December 31, 1920, shows a loss, that loss can be deducted from profits in succeeding years. R. B. — In order to borrow money which is needed in my corporation I had to take out an insurance policy on my life as security. Can I deduct from my income the premium ? Answer — Yes, as it is regarded as a legitimate business expense and not a personal expense. This is so only if the corporation is not the beneficiary. J. P. S. — I have a small motion picture business and devote all my time to the same. Wdl it be advantageous to pay myself a salary ? Answer — It is not clear whether your business is incorporated or not. From the viewpoint of the accountants the payment of a salary to yourself would be desirable, as the net income then would show the entire benefit you are securing from being in business for yourself. However, the Government will not permit you to deduct the salary to yourself, as it desires the entire amount of your income from all sources, such as services, business, dividends, etc. However, if you pay any salaries to your wife or children over age for service actually rendered, such amounts can be deducted. If your business is incorporated, it usually is advantageous to pay a salary, as the rate of tax on corpora tion income is 10 per cent., while on individuals it is 4 per cent, and 8 per cent. R. G. — I recently purchased $10,000.00 of \l/\ per cent. Fourth Liberty Loan Bonds. Is the interest on these bonds taxable ? Answer — Yes. 5. W. L. — I am interested in several corporations and have Ivad some difficulty with the Government over the question of bad debts. I understand that a reasonable reserve for bad debts can now be deducted from income. Does this apply to 1921 income and ivhat is a “ reasonable reserve ”? Answer — This provision in the new law applies to 1921 income. We cannot say what the Government will decide is a reasonable reserve. Probably the best plan is to use your past experience as your guide in determining the amount of the deduction. It should be noted that the law reads that a reasonable addition to a reserve for bad debts, in the discretion of the Commissioner, may be charged off. How are you going to keep lip business during Lent?