Dividends include foreign and domestic dividends, but exclude those received through partnerships and fiduciaries and, in adjusted gross income classes under $5,000, dividends not exceeding $100 per return reported as other income on the optional return, Form 1040A.

Interest includes interest on notes, mortgages, bank deposits, corporation bonds, savings accounts, and taxable and partially tax-exempt interest on Government obligations, as well as partially tax-exempt Government interest received through partnerships and fiduciaries, but, in adjusted gross income classes under $5,000 excludes interest not exceeding $100 per return reported as other income on the optional return, Form 1040A.

Annuities and pensions include only the portion of amounts received during the year, which are required to be reported in gross income. An amount equal to 3 percent of the total cost of the annuity is reported as income annually, until the aggregate of amounts received and excluded from gross income in this year and prior years equals the cost. Thereafter, the entire amount received is taxable and must be included in gross income for the year in which it is received. Pensions are generally regarded as deferred compensation for services rendered and the entire amount received is subject to income tax unless expressly exempt by law. Annuities, pensions, and retirement pay are sometimes reported in the schedule for salaries and wages, particularly if they are subject to withholding of income

tax.

Rents and royalties net profit is the profit reported on returns that show a combined net profit in the schedule for these two sources of income. The net amount resulting from the operation of either source is not available. A net loss from one source offsets net profit of the other. Rents include the fair market value of crops received as rent from farm property. Royalties include revenue received from copyrights, patents, trademarks, formulas, mineral rights, and the like. Deductions against the gross income received from these sources are allowed for repairs, interest, taxes, depreciation, depletion, amortization, and other expenses pertaining to the respective incomes.

Rents and royalties net loss is that reported on returns showing a net loss from these sources. Rents and royalties are reported in the same schedule, and the net amount from either is not available. A net profit from either source offsets net loss of the other. Rents include the fair market value of crops received as rent from farm property; and royalties include income from copyrights, patents, trade-marks, formulas, mineral rights, and the like. Deductions are allowed against gross receipts for repairs, interest, taxes, depreciation, depletion, amortization, and other expenses attributable to the rent and royalty income.

Business net profit is reported by individuals, including farmers, who are sole proprietors of a business or profession. Business profit is the net result of all business activities carried on by the sole proprietor, the

combined result of which is a net profit. A net loss from one business activity offsets the net profit of another.

Expenses deductible from total receipts from business activities include cost of goods sold, salaries and wages paid to employees, interest on business debts, taxes on business and business property, losses arising from business operations, bad debts arising from sales or service, depreciation, obsolescence and depletion, rent, repairs, cost of supplies, advertising, selling expenses, premiums for business insurance, and other expenses of running the business. Compensation to the sole proprietor is not allowable. For 1951, the net operating loss deduction is not a business deduction; it is now a component part of adjusted gross income or deficit.

Business net loss is the net result of all business or professional activities, including farming, carried on by the taxpayer, the combined result of which is a net loss. A net profit from one business activity offsets the net loss of another. Allowable expenses against gross receipts from business are mentioned in the preceding paragraph.

Partnership net profit is reported by taxpayers who are members of a partnership, syndicate, joint venture, or the like. Each member must report as income his proportionate share of the distributable net profit or loss. Partnership profit reported by the taxpayer is a combination of all such shares if he is a member of more than one partnership. However, the taxpayer is required to exclude from the partnership profit the amount of partially tax-exempt Government interest and the net gain or loss from sales of capital assets, these items being reported in the respective sources.

Partnership net loss is reported by persons who are members of a partnership, syndicate, joint venture, or the like; and each member must report his share of the distributable profit or loss. Partnership loss reported is the combined result of all such shares distributable to the taxpayer, the aggregate of which is a net loss. However, the taxpayer is required to exclude partially tax-exempt Government interest and the net gain or loss from sales of capital assets from the partnership loss and to report them in the specific sources.

Net operating loss deduction is reported on the 1951 return as a component of adjusted gross income; formerly this deduction was reported as a business deduction in the business schedule. The amount of net operating loss deduction for the current year is only that portion of the net operating loss, sustained after December 31, 1947, which is not absorbed by the required carrybacks and the carryovers into subsequent years prior to 1951. Net operating losses apply only to business, professional, or partnership losses that are net. economic losses to the taxpayer.

Net gain from sales or exchanges of capital assets is the excess of capital gains (short- and long-term, the latter reduced 50 percent) over the sum of capital losses (short- and long-term, the latter reduced 50 percent)

and the net capital loss carryover from the years 194650. Further discussion of gain from sales of capital assets will be found on pages 16-17.

Net loss from sales or exchanges of capital assets is the statutory capital loss allowed for the computation of adjusted gross income. Net loss from sales of capital assets is the excess of the sum of capital losses (shortand long-term, the latter reduced 50 percent) and the net capital loss carryover from years 1946-50 over the capital gains (short- and long-term, the latter reduced 50 percent); however, deduction for the loss is limited. to the amount of the loss, or to net income (adjusted gross income, if tax is determined from the tax table) computed without regard to gains and losses from sales of capital assets, or to $1,000, whichever is smallest. The returns are not edited to ascertain whether or not the deduction conforms to the specified limitation and there may be instances, particularly among returns with no adjusted gross income, where the amount deducted exceeds the limitation. For other pertinent facts on capital losses, see pages 16-17.

Net gain from sales of property other than capital assets is the net gain resulting from sales or exchanges of depreciable property and real property used in trade or business, certain copyrights and artistic compositions, and obligations of the United States or any of its possessions, a State or Territory or any political subdivision thereof, or the District of Columbia, issued on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from date of issue. Net loss from sales of property other than capital assets is the net loss realized from sales of property listed in the preceding paragraph. A net loss from this type of property is deductible in full.

Income from estates and trusts is the taxpayer's share (whether actually received or not) of distributable income of an estate or trust under which the taxpayer is a beneficiary. Such income, however, excludes partially tax-exempt Government interest which is reported in interest income.

Miscellaneous income includes alimony received, prizes, rewards, sweepstakes winnings, gambling profits, recovery of bad debts deducted in a prior year, insurance received as reimbursement for medical expenses previously deducted, and all other taxable income not separately tabulated. Also, in adjusted gross income classes under $5,000, there are included $27,094,000 of wages not subject to withholding tax, dividends, and interest, not exceeding a total of $100 per return, reported as other income on 581,354 optional returns, Form 1040A.

TOTAL DEDUCTIONS

Itemized deductions are not available for 1951; however, the total amount of nonbusiness deductions, taken against adjusted gross income by taxpayers, is shown in Part II of table 2. Total deductions include contribu

fire, storm, or other casualty, or from theft, deduction for medical and dental expenses, and other authorized deductions against adjusted gross income. The optional standard deduction is not included.

PATTERNS OF INCOME

Tables 3, 4, and 5 are prepared to show frequency distributions of individual returns by selected patterns of income. The selected patterns embrace 5 sources or items which, in total, constitute the adjusted gross income or deficit. These sources are salaries and wages, dividends, interest, other income, and other loss, resulting in 23 patterns when tabulated singly and in various combinations. The first three items, salaries and wages, dividends, and interest are the same as those used elsewhere in this report; the remaining two items, other income and other loss, as such, do not appear in this report. These items are, in fact, the residue of adjusted gross income or deficit other than salaries and wages, dividends, and interest.

Other income comprises, for returns Form 1040A, wages not subject to withholding, dividends, and interest, reported in one sum but not exceeding in total $100 per return; and for returns Form 1040, other income is the amount of income resulting from the combination of profit or loss from rents and royalties, from business, from sales of property, and from partnerships, together with the net operating loss deduction and income from annuities, estates and trusts, and miscellaneous sources. Other loss, occurring only on returns Form 1040, is the amount of loss resulting from the combination of the profit- or loss-sources and income items just listed for the definition of other income.

The 23 patterns of income are arranged, in table 3, to show the number of returns with 1, 2, 3, and 4 sources, by adjusted gross income classes.

Table 4 shows the number of returns in the various patterns of income by size of a specific source. Returns in the 12 patterns containing salaries and wages are distributed by size of the salaries and wages; returns in the 12 patterns containing dividends, the 12 patterns which have interest, the 8 patterns with other income, and the 8 patterns with other loss are distributed by size of dividends, interest, other income, and other loss, respectively. Frequencies in this table are not footnoted for sampling variability, the reason for which is explained in the description of the sample and limitation of data, page 21.

Table 5 contains frequency distributions of returns in those patterns of income which have salaries and wages as one of several elements composing the pattern. These frequencies are tabulated by adjusted gross income classes cross classified by size of a specific source. All returns in 6 patterns containing the 2 elements, salaries and wages and dividends, are cross classified by size of dividends; all returns in 6 patterns

terest, are cross classified by size of interest; and all returns in 4 patterns containing the 2 elements, salaries and wages and other income, are cross classified by size of other income.

The size classes for the specific sources salaries and wages, dividends, and interest-are based on the respective amounts of income as used throughout this report and described under sources comprising adjusted gross income, pages 10-11. Size classes for other income and for other loss are based on the concept defined above. The class intervals are narrow in the lower levels to provide adequate classification; salaries and wages classes begin at $100, whereas, the dividends, interest, other income, and other loss classes begin at $10.

TYPES OF TAX LIABILITY

The total tax liability for 1951 includes the income tax and the self-employment tax. Income tax liability is composed of normal tax and surtax, optional tax provided under supplement T of the 1939 Code, and alternative tax on income which includes gain from sales of capital assets held more than 6 months, provided under section 117 (c) (2). Self-employment tax is imposed on net earnings from self-employment regardless of the amount of income subject to income tax; and since it is independently levied, it may occur singly or concurrently with the income tax. These taxes are described below.

Total tax liability is tabulated by adjusted gross income classes in table 1; in table la, total tax is aggregated from the highest adjusted gross income class; and in table 1b, it is aggregated from the lowest adjusted gross income class. Total tax liability is again shown in table 8 by adjusted gross income classes and by marital status of taxpayer.

The separate amounts of income tax and of selfemployment tax are shown in table 2, by adjusted gross income classes; also the separate amounts are tabulated by types of tax in table 6 and by States and Territories in table 12. In table 6, three types of tax are recognized the combined normal tax and surtax with or without self-employment tax, the alternative tax with or without self-employment tax, and the self-employment tax occurring without the income tax. This classification maintains the categories-returns with normal tax and surtax, and returns with alternative tax-as they were constituted in former years.

The income tax liability is presented in table 13 by States and Territories and by adjusted gross income classes, the intervals of which are established especially for this table.

Income tax liability includes the normal tax and surtax, the optional tax, and the alternative tax and is after the tax credits for income tax paid at source on interest from tax-free covenant bonds and for income tax paid to a foreign country or possession of the

payers who itemize deductions. The amount of tax credits is not available.

Normal tax and surtax are separate entities; however, instructions accompanying the return for computation of tax furnish a tax rate schedule wherein the normal tax rate of 3 percent and the surtax rates are integrated for a joint computation of the two taxes, and the combined tax is reported. If the net income includes partially tax-exempt interest and dividends, the combined tax is reduced by an amount equal to 3 percent of such partially tax-exempt income. Although the partially tax-exempt income is a credit against net income for normal tax only, this procedure eliminates from the combined tax the 3 percent normal tax thereon. In the case of a joint return of husband and wife, the combined normal tax and surtax is twice the combined normal tax and surtax that would be determined if the net income and applicable credits against net income were reduced by one-half.

Optional tax is in fact the combined normal tax and surtax and is classified and tabulated as such without distinction. The optional tax is provided in the form of a tax table stating the income tax liability for the various adjusted gross income brackets and numbers of exemptions, and may be used at the election of the taxpayer whose adjusted gross income from whatever source is less than $5,000. The optional tax automatically allows for the standard deduction which is 10 percent of the amount of the midpoint of the adjusted gross income bracket, and for the allowable exemptions, after which the optional tax is computed (to the nearest dollar) in the same manner and at the same rates as those used in computing the tax in detail.

Alternative tax on income containing a net longterm capital gain or an excess of net long-term capital gain over net short-term capital loss is imposed if, and only if, the alternative tax is less than the regular normal tax and surtax computed on net income which includes all gain from sales of capital assets. Alternative tax is the sum of a partial tax (computed at the regular rates on net income reduced for this purpose by the amount of such long-term capital gain) and 50 percent of the excess long-term capital gain. Alternative tax occurs only among long-form returns, Form 1040, and is not effective on separate returns with surtax net income under $16,000, nor on joint returns with surtax net income under $32,000 because of the split-income provision.

Self-employment tax is levied on the statutory net earnings from self-employment at the rate of 21⁄4 percent. Net earnings from self-employment are a combination of the gross income derived by an individual from his trade or business, reduced by business deductions, plus his distributive share of ordinary net income or loss from partnerships of which he is a member. However, certain kinds of business and profession are excluded from the statutory definition of self-em

deductions are excluded, such as rents (other than those received by a real estate dealer), dividends, interest, property gains and losses, and the net operating loss deduction. The self-employment tax is not applicable if the total net earnings from self-employment are under $400; likewise, there is no self-employment tax if $3,600 of wages subject to withholding for old-age and survivors insurance have been received by the taxpayer. The self-employment tax rate of 24 percent is applicable to that portion of net earnings from selfemployment which is equal to the difference between $3,600 and the amount of wages under $3,600 subject to withholding for old-age and survivors insurance, except that the taxable portion cannot exceed the net earnings from self-employment. This tax is payable whether or not there is an income tax liability.

TAXPAYMENT STATUS

In table 7, individual returns are classified by taxpayment status for 1951, namely, returns with neither tax overpayment nor tax due at time of filing, returns with tax overpayment, and returns with tax due at time of filing. The first two groups are nonassessable; the third is assessable. These three classifications are described below. Returns, Form 1040A, are classified after the tax liability has been determined by the collector but, in the description below, the tax is considered as reported by the taxpayer.

Although the three types of taxpayment appear to be the same as those used in former years, the classification of 1951 returns is affected by the introduction of self-employment tax as part of the total tax liability and by the fact that social security tax withheld in excess of the maximum tax of $54 is reported in the amount of income tax withheld. Self-employment tax does not require current payment as does the income tax. However, taxpayments made by way of tax withheld from wages (including the over withholding of social security tax) and taxpayments made by means of a declaration (including credit for overpayment of tax for prior year) are applied against the total tax liability which includes the self-employment tax, to determine the balance of tax due at time of filing. The presence of these two new features on the 1951 return results in a considerable degree of variation in the taxpayment status as compared with that of former years.

Returns with neither tax overpayment nor tax due at time of filing are returns on which the taxpayer reports that the sum of tax withheld from wages (including any over withholding of social security tax) and of payments on 1951 declaration of estimated tax (including credit for overpayment of tax for prior year) equals his total tax liability (including the self-employment tax) for 1951. The number of these returns, sometimes called breakevens, is tabulated by adjusted gross income classes in table 7, but segregation of re

Returns with tax overpayment are those on which the taxpayer reports that the sum of tax withheld from wages (including any over withholding of social security tax) and of payments on 1951 declaration of estimated tax (including credit for overpayment of tax for prior year) exceeds the total tax liability (including self-employment tax) for 1951. In table 7, returns with tax overpayment are tabulated by adjusted gross income classes and by types of taxpayment: tax withheld and payments on 1951 declaration, singly and in combination. Under each type of taxpayment, the number of returns and amount of overpayment are subdivided to show returns with refund and returns with credit on 1952 estimated tax.

Returns with tax due at time of filing are those on which the taxpayer reports that the sum of tax withheld from wages (including any over withholding of social security tax) and of payments on 1951 declaration of estimated tax (including credit for overpayment of tax for prior year) is insufficient to cover the total tax liability (including self-employment tax) for 1951. These returns with tax due at time of filing are distributed in table 7, by adjusted gross income classes, according to types of taxpayment: tax withheld and payments on 1951 declaration, singly and in combination, and neither tax withheld nor payment on 1951 declaration. The number of returns and amount of tax due at time of filing are shown for each type of taxpayment.

TAXPAYMENTS AND TAX OVERPAYMENT

The tax liability for the majority of individuals is paid, in whole or in part, on a current basis through the tax withheld on wages and the payments made on declaration of estimated tax by persons who are not subject to the withholding on wages or whose tax withheld is not sufficient to cover the income tax liability. Both the tax withheld and the payments on declaration are reported as payments toward the discharge of the total tax liability on the income tax return, filed after the close of the income year. If these payments do not cover the total tax liability, the balance due is paid when the return is filed, except that, in the case of the employee's optional return (Form 1040A), the tax is determined by the collector and paid upon notice of assessment. If the tax withheld and the payments on declaration exceed the total tax liability, the overpayment of tax is refundable to the taxpayer unless he signifies on a return, Form 1040, that he wishes the overpayment to be credited on his 1952 estimated tax.

Tax withheld from wages as current collection of income tax is determined by the employer either by use of wage bracket withholding tables provided in section 1622 of the 1939 Code or by application of the percentage rate, prescribed therein, to the amount of wages in excess of the withholding exemption. The tax to be withheld, as shown in the withholding tables, is based

holding exemption. Wages paid on or after November 1, 1951, are subject to the increased withholding of tax under the new rates and tables of the 1951 act which amends the 1939 Code. Tax withheld on wages is treated as a payment on total tax liability. This year for the first time, the amount of tax withheld, as reported by the taxpayer on his income tax return, also includes the over withholding of social security tax (old-age and survivors insurance), that is, the excess over the maximum tax of $54. The amount of excess social security withholding is not available; it is reported with and treated in the same manner as the income tax withheld from wages. The amount of tax withheld and the number of returns on which withholding is reported are presented in table 2. The number of returns includes returns showing either an income tax withheld or an excess withholding of social security tax and returns showing both.

Payments on 1951 declaration of estimated tax, reported by the taxpayer on return Form 1040, as a payment on the 1951 total tax liability, are a combination of amounts paid on the 1951 Declaration of Estimated Tax, Form 1040-ES, and any credit applied against the 1951 estimated tax on account of an overpayment of tax for the prior year. Payments on 1951 declaration of estimated tax (including credit for overpayment of tax for prior year) and the number of returns on which this item occurs are tabulated in table 2. The number of returns does not signify the number of taxable declarations filed, but is rather a frequency of the income tax returns which show payments on 1951 declaration as a payment on the 1951 total tax liability; such frequency is without regard to whether the payments are only a credit claimed on account of the overpayment of 1950 tax, only cash payments on 1951 declaration, or a combination of cash payments on 1951 declaration and the credit for overpayment of 1950 tax. A declaration of estimated tax does not necessarily result in actual cash payment because the estimated tax may be nil or, in the case of an estimated tax, the sum of the tax to be withheld (also estimated) and the credit for the 1950 overpayment may leave no balance to be paid on the declaration.

Tax due at time of filing is the excess of the 1951 total tax liability (including the self-employment tax) over the sum of the tax withheld (including any over withholding of social security tax) and payments on 1951 declaration of estimated tax (including credit for overpayment of tax for prior year). The amount of tax due is paid with the filing of the income tax return after the close of the income year, except that, in the case of the optional return, the balance due is paid upon assessment notice from the collector. The amount of tax due at time of filing and the frequency of this item are shown in table 2, by adjusted gross income classes; and these data are also shown by types of taxpayment

Overpayment of tax occurs when the sum of the tax withheld (including any over withholding of social security tax) and payments on 1951 declaration of estimated tax (including credit for overpayment of tax for prior year) exceeds the 1951 total tax liability (including self-employment tax). The tax overpayment is refundable or, at the request of the taxpayer using Form 1040, is credited against his 1952 estimated tax. The amount of tax overpayment and the number of returns with overpayment are tabulated in table 2. In table 7, the amount of tax overpayment is segregated to show the amount of refund and the amount of credit on 1952 estimated tax as well as the number of returns on which each occurs, and the segregated data are shown by types of taxpayment.

MARITAL STATUS OF TAXPAYER

The classification of individual returns by marital status is determined from the marital status of each taxpayer on the last day of the income year, or on the date of the death of a spouse. On this basis, three classifications are used: joint returns of husbands and wives, separate returns of husbands and wives, and returns of single persons.

Data are tabulated by marital status of the taxpayer in tables 8, 9, and 10. Table 8 contains the number of returns and amounts of adjusted gross income, exemption, and total tax liability; these data are separately tabulated for returns of men and returns of women, except for the joint returns. Table 9 shows the number of exemptions claimed as well as a distribution of returns by per capita exemptions. Table 10, limited to returns with itemized deductions, shows the number of returns and amount of surtax net income by size of surtax net income. In this table, returns of single persons and separate returns of husbands and wives are combined inasmuch as such individuals have the same surtax rates, while joint returns of husbands and wives are tabulated apart on account of the split-income provision. The surtax net income classes correspond to the surtax brackets, the surtax net income classes for joint returns being twice as broad as those for single persons and married persons filing separately.

Joint returns of husbands and wives are those on which a married couple report their combined income or returns of married persons whose spouse has no income but who, nevertheless, are entitled to claim the exemption for their spouse. This group includes joint returns filed on Form 1040A even though the collector determined the minimum tax on the basis of separate incomes of husband and wife.

Separate returns of husbands and wives are returns of married persons who file a return independently from their spouse, each reporting his or her respective income and claiming his own exemption. Since the introduction of the split-income provision, the popularity of dividing community income between spouses has dimin