CHAPTER 11 - INCOME TAX

AN ACT TO AMEND AN ACT ENTITLED AN ACT TO PROVIDE REVENUE FOR SCHOOL PURPOSES," BEING CHAPTER 8, VOLUME 36, LAWS OF DELAWARE, AS AMENDED.

Be it enacted by the Senate and House of Representatives of the State of Delaware in General Assembly met:

Section 1. That Section 1 of Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (b) (4) and inserting in lieu thereof the following:

Section 1 (b) (4):--A Fiduciary, including a receiver, guardian, trustee, agent or representative of the taxable or the executor or the administrator of the estate of a decedent.

Section 1 (b) (5):--Any officer or employee of the State of Delaware or any political subdivision of Delaware.

Section 2. That Section 1 of Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (d) and inserting in lieu thereof the following:

Section 1 (d):--The phrase "net income" means gains or profits and income derived and actually received into possession of, or credited subject to withdrawal by, a taxable from any source whatever, and shall include the aggregate of all gains, capital gains, profits, salaries (including salaries or emoluments of State officers), wages and compensation for personal services of whatever kind and in whatever form paid (including bonuses, honorariums and fees);

Dividends and interest derived from maturity or cancellation of shares in Building and Loan Associations, and endowment contracts:

Income derived from professions, vocations, business, trade, commerce, sales, exchange or other disposition of or dealings in real or personal property growing out of the ownership or use of or interest in such property or otherwise;

Income derived from interest, dividends, securities or the transaction of any business carried on for gain or profit;

The share of the profits of any taxable in an unincorporated association of persons, syndicate, joint venture or co-partnership whether such profits have been divided or otherwise;

All amounts recovered during the income year from bad debts, overpayment of taxes, or capital losses that have been deducted from income in any return of income to this State;

Less the aggregate of the exemptions provided for in Section 3 (a), paragraphs 1 to 11, inclusive, and of the deductions provided for in Section 4.

Section 3. That Section 1 of Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraphs (g) and (h) and inserting in lieu thereof the following:

Section 1 (g):--(1) "Capital assets" means property held by the taxable whether or not connected with his trade or business, but does not include stock in trade of the taxable or other property of a kind which would properly be included in the inventory of the taxable, if on hand at the close of the taxable year, or property held by the taxable primarily for sale to customers in the ordinary course of his trade or business.

(2) For the purposes of this Act, stock in trade shall not include stocks, bonds, or other securities.

Section 1(h): - (1) "Capital gains or losses" means gains or losses resulting form the sale, exchange or other disposition other than by gift, donation, devise, or inheritance, of capital assets including real or personal property, stocks, bonds, notes or securities.

(2) Capital losses shall include all debts ascertained to be worthless during the income year, excepting accounts or bills receivable arising from professional fees, salaries or wages or from sales of merchandise or stock in trade appertaining to the business of the taxable, as provided for in Section 4, paragraph (9).

Section 1 (i):--The "Basis for determining the capital gain or loss" resulting from the sale, exchange or disposition other than by gift, donation, devise or inheritance, of capital assets including real or personal property, stocks, bonds, notes, or securities acquired before January 1, 1920, shall be as provided for in Section 7.

Section 4. That Section 2 of Chapter 8, Volume 36, Laws of Delaware,, as amended, be and the same is hereby amended by adding the following paragraphs:

Section 2 (h):--In the case of the death of a taxpayer, there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of death, if not otherwise properly includible in respect of such period or a prior period.

Section 2 (i):--The net income shall be computed upon the basis of the taxable's annual accounting period, fiscal year or calendar year as the case may be, in accordance with the method of accounting regularly employed in keeping the books of such taxable; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income.

If the taxable's annual accounting period is other than a fiscal year, or if the taxable has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.

Section 2 (j):--Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxable, inventories shall be taken by such taxpayer upon such basis as the Commissioner shall prescribe, and conforming as nearly as may be to the best accounting practice in the trade or business, and as most clearly reflecting the income.

Section 5. That Section 3 of Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by inserting after paragraph (a) (10) thereof the following:

Section 3 (a) (11):--Amounts received, through accident or health insurance as compensation for personal injuries or sickness, and the amount of any damages received whether by suit or agreement on account of personal injuries or sickness.

Section 6. That Section 4 of Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out Section 4 and inserting in lieu thereof the following:

Section 4. In computing net income, the following deductions shall be allowed:

(7) The ordinary and necessary expenses actually paid by or incurred by the taxable in carrying on any business or trade, not including expenses incurred pertaining to income exempt under this Act and not including personal, living or family expenses, and not including transportation costs between residence and usual place of business.

(8) Interest paid or accrued by the taxable within the income year on his indebtedness, except interest on indebtedness incurred or continued to purchase or carry securities, the interest on which is exempt from tax under this Act.

(9) Taxes imposed upon and accrued or paid by the taxable within the income year except taxes imposed by this Act and taxes assessed for local benefits of a kind tending to increase the value of the property assessed.

(4) A reasonable allowance for the exhaustion, wear and tear, obsolescence and depletion of property, arising out of its use or employment in the trade or business of the taxable, but not including such allowance on the residence of the taxable.

(5) Contributions or donations to the State of Delaware or to any political subdivision thereof or to any institution supported in whole or in part by the State or any contribution or donation, for use in the State of Delaware only, to a corporation, or church, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation; provided, that where such contribution or donation is made other than in cash, the fair market value of the property at the date contributed or donated shall be the basis for deduction; and further provided, that contributions or donations shall not exceed fifteen per centum of the taxpayer's net income, as computed without the benefit of this paragraph.

(6) Losses sustained during the income year if incurred in the operation of a trade, or business; provided, however, that any losses sustained in the sale, exchange or other disposition of capital assets, including stocks, bonds, or other securities, shall be allowed only to the extent of gains from such transactions.

(7) Losses sustained during the income year in the operation of farms or in other agricultural, horticultural, dairy or poultry pursuits or in the raising or preparation of animals, birds, poultry, vegetables, fruit, fish or seafood for the market. Depreciation of buildings or other property used in such operations may be included in losses incurred but no personal or household expenses of the owner or manager of the operation or of his family shall be included in such losses.

(8) Losses sustained during the income year through destruction of property by fire, flood, lightning, storm or collision, and losses caused by other casualty or by theft, provided that such losses are not compensated for by insurance or otherwise. Proper adjustment shall be made for exhaustion, wear and tear, obsolescence and depletion which have since the acquisition of the property been allowed as a deduction under this Act or under prior Acts.

In the case of property not used in trade or business, proper adjustment shall be made for exhaustion, wear and tear, obsolescence and depletion which have been sustained since the acquisition of the property.

(9) Debts ascertained during the income year to be worthless and represented by accounts or bills receivable arising from professional fees, salaries, wages or from sale of merchandise or stock in trade appertaining to the business of the taxable, provided that such accounts or bills receivable have previously and while uncollected been included as income in an income tax return to this State.

(10) Debts ascertained to be worthless within the income year represented by accounts or bills receivable that have not previously and while uncollected been included in gross income, in an income tax return to this State, but such debts shall be deductible as capital losses only and to the extent that capital losses are deductible as provided in paragraph (11) hereof. -This provision shall not apply if the income from a business, trade or profession is reported on the basis of cash receipts and disbursements, in which case such debt shall not be deductible.

(11) Losses sustained during the income year through endorsement or guaranty of notes or obligations of any kind or through liability on subscription to stocks, bonds and notes or through contingent liability, but such losses shall be deductible as capital losses only and to the extent that capital losses are deductible as provided in paragraph (13) hereof.

(12) Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

(13) Capital losses as defined in Section 1, paragraph (h), accrued after January 1, 1920, and that have been realized during the income year, but such losses shall be deductible from capital gains and to the extent thereof only.

(14) In the case of the death of a taxpayer, there shall be allowed as deductions and credits for the taxable period in which falls the date of his death, amounts accrued up to the date of death if not otherwise properly allowable in respect of such period or a prior period.

Section 7. That Section 5, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by adding the following paragraphs (f) and (g):

Section 5 (f):--Where any part of the income of a trust: (a) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payments of premiums upon policies of insurance on the life of the grantor except policies of insurance irrevocably payable for the purposes and in the manner specified in Section 4, paragraph (5), then such part of the income of the trust shall be included in computing the net income of the grantor.

Section 5 (g): --As used in this Section, the term in the discretion of the grantor" means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.

Section 8. That Section 7, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraphs (a) and (b) (1) and inserting in lieu thereof the following:

Section 7 (a):--Except as hereinafter provided in this Section, the gain derived from the sale, exchange or other disposition of capital assets including property, real or personal, shall be the excess of the amount realized therefrom over the basis determined in accordance with the provisions of this Section, and the loss sustained shall be the excess of such basis over the amount realized. As used in this Section: the term "amount realized" means the sum of any money plus the fair market value of the property, other than money, received from the sale, exchange or other disposition of property.

Section 7 (b) (1):--In the case of such property acquired by gift: the basis shall be the same as that which it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that for the purpose of determining loss the basis shall be the basis so determined, or the fair market value of the property at the time of the gift, whichever is lower. If the necessary facts are unknown to the donee, the commissioner shall obtain such facts from the donor, or from any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the fair market value of the property as found by the Commissioner as of the date or approximate date at which, according to the best information the Commissioner is able to obtain, the property was acquired by the donor or last preceding owner.

Section 9. That Section 7, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (c), and inserting in lieu thereof the following:

Section 7 (c). The basis for ascertaining the gain derived or loss sustained from the sale, exchange or other disposition of capital assets, including property, real or personal, acquired prior to January 1, 1920, shall be (1) the same as it would be if determined in accordance with the provisions of sub-division (b), or (2) the fair market value of such property as of January 1, 1920, whichever is higher, provided that in ascertaining the deductible loss under this paragraph, the loss to be deducted shall in no case exceed the actual loss sustained based upon the difference between amount received and the cost of such property.

Section 10. That Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by inserting after Section 7, paragraph (d) (II) and before Section 7, paragraph (e) thereof, the following:

Section 7 (d) (III). In the case of property not used in trade or business, proper adjustment shall be made for exhaustion, wear and tear, obsolescence and depletion which have been sustained since the acquisition of the property.

Section 11. That Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by inserting after Section 7 (g) (2) and before Section 7 (h) thereof, the following:

Section 7 (g) (3). In the case of stock carried on margin in a broker's account, sales shall be deemed to be made from the earliest purchase of such stock and stock dividends shall be deemed to have been received on such earliest purchases.

In the application of this Section to sales of stock purchased and held in marginal accounts, identification shall be deemed made where the taxpayer, prior to a sale, causes the broker to transfer from the account from which the sale is to be made, to another account, all shares of the same kind of stock as those he intends to sell, but which were acquired prior to the acquisition of the shares which the taxpayer intends to identify as those to be sold.

Section 7 (g) (4). Commissions paid in purchase of securities are part of the cost price of said securities.

Commissions paid in selling securities are a deduction from the selling price.

Dividends charged or paid in the case of short sales of securities are a part of the cost of the transaction.

Section 12. That Section 7, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (h) (5), and inserting in lieu thereof the following:

Section 7 (h) (5). If property is transferred to ,a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

As used in this Section the term "reorganization" means (a) merger or consolidation, including the acquisition by one corporation of at least eighty (80) per centum of the voting stock and at least eighty (80) per centum of the total number of shares of all other classes of stock of another corporation, or substantially all the property of another corporation, or (b) a transfer by a corporation of all or part of its assets to another corporation if immediately after the transfer the transferor or its stockholders, or both, are in control of the corporation to which the assets are transferred, or (c) a recapitalization, or (d) a mere change in identity, form, or place of organization, however effected.

As used in this Section: the term "control" means the ownership of at least eighty (80) per centum of the voting stock and at least eighty (80) per centum of the total number of shares of all other classes of stock of the corporation.

Section 13. That Section 12, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (i) and inserting in lieu thereof the following:

Section 12 (1). Report monthly to the Tax Board the amount of all refunds, abatements and credits resulting from overpayments made with the names of the taxables concerned and the date when such adjustments were authorized. Such report shall be spread in the Minutes of the Board.

Section 14. That Section 13, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraphs (e) and (f), and inserting in lieu thereof the following:

Section 13 (e). All persons, fiduciaries, association of persons, syndicates, joint ventures, co-partnerships or corporations in whatever capacity acting, including lessees or mortgagors of real or personal property, and employers, making payments to another person of interest, dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed and determinable gains, profits, and incomes, of $1,000 or more in any taxable year, shall render a true and accurate return to the Tax Department, under such regulations and in such form and manner and to such extent as may be prescribed by the Tax Department, setting forth the amount of any and all such payments made to the taxable of the State of Delaware and the names and addresses of the recipients of such payments. The provisions of this paragraph shall apply to officers or employees of the State of Delaware or of any political subdivision or any municipal corporation therein. Returns may be required regardless of amounts, in the case of payments of any fixed or determinable income.

Section 13 (f). Every person or partnership doing business in the State of Delaware as a stock broker shall, when specially required by the Tax Commissioner render a correct return duly verified under oath, showing the name of customers who are citizens or residents of the State of Delaware for whom such person or partnership has transacted any business, with such details as to the profits, losses or other information which the Tax Commissioner may require for each of such customers, as will enable the Tax Commissioner to determine whether all, income tax due on profits or gain of such customers has been paid.

Section 13 (g). Every taxable is required to keep such specific records, including inventories, as are necessary to establish the amount of his gross income and the deductions and other information, for the purpose of determining the amount of income which may be subject to tax.

Section 15. That Section 15, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out all of paragraph (e) and inserting in lieu thereof the following:

Section 15 (e). If the time for filing the return shall be extended, interest at the rate of four per centum per annum, from the time when the return was originally required to be filed, to the date of payment, shall be added and paid.

Section 16. That Section 16, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (c) and inserting in lieu thereof the following:

Section 16 (c). If the amount of 'tax found due shall be less than the amount theretofore paid, either as a result of examination of the return by the Tax Department or by the allowance of a claim for overassessment filed by the taxable, the excess shall be refunded by the Tax Department out of the repayment fund retained by it as provided in this Act.

Interest shall be allowed the taxable at the rate of one-third per cent per month or fraction of a month, from the time the payment was made if tax was paid in full, to the date of the refund.

If the tax was paid in installments interest shall be allowed at the rate of one-third per cent per month or fraction of a month, from the time of the most recent payments to the extent of the overpayment.

No refund of or abatement, or credit of excess payment shall be made until the same has been approved by the Tax Board or a majority thereof either at a recorded meeting or in writing.

Section 17. That Section 19, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (a) and inserting in lieu thereof the following:

Section 19 (a). A taxable may apply to the State Tax Commissioner, State Tax Board, and the Superior Court, in the order named, as hereinbefore provided, for refund of the taxes imposed by this Act alleged to have been erroneously or illegally assessed or collected or of any interest or penalty alleged to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected from said taxable at any time within two years from the date such return was originally required to be filed or thirty days from the date of payment of any additional tax.

The Tax Board shall grant a hearing thereon and if it shall determine that the tax, interest or penalties, are excessive or incorrect, it shall resettle the same according to the law and the facts and adjust the computation of tax, interest or penalties accordingly. The Tax Department shall notify the taxable of such determination and shall refund to the taxable the amount paid in excess of taxes, interest and penalties found by it to be due.

Section 18. That Section 20, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out the following words where they appear in paragraphs (a) (b) (c) (d) (i) and (j) "one-half of one per centum" and inserting in lieu thereof the following words: one-third of one percentum.

Section 19. That Section 20, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (k) and inserting in lieu thereof the following:

Section 20 (k). The interest provided for in this Section shall in all cases be computed from the time when the return was originally required to be filed to the date of payment.

Section 20. That Section 21, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by striking out paragraph (b), and inserting in lieu thereof the following:

Section 21 (b). The Tax Board and the officers and employees of the Tax Department shall be entitled to receive from the State their actual and necessary expenses while engaged in the performance of their duties. Each member of the Tax Board shall receive compensation at the rate of Two Hundred Dollars ($200.00) per annum. All expense accounts shall be made in detail and shall be approved by the Tax Commissioner. The total shall in no case exceed the sums appropriated therefor.

Section 21. That Section 27, Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by inserting the following paragraph:

Notwithstanding the provisions of this Section, the Tax Commissioner may permit the Commissioner of Internal Revenue of the United States or the proper officer of any State imposing an income tax upon the incomes of individuals, or the authorized representatative of either of such officers, to inspect the income tax return of any individual or may furnish to such officer or his authorized representative an abstract of the return of income of any individual or supply him with information contained in any return; or disclosed by the report of any investigation of the income or return of income of any individual; but such permission shall be granted or such information furnished to such officer or his representative only if the statutes of the United States or of such other States, as the case may be, grant substantially similar privileges to the proper officer of this State charged with the administration of the income tax law thereof.

Section 22. That Chapter 8, Volume 36, Laws of Delaware, as amended, be and the same is hereby amended by adding the following:

Section 29. Chapter 8, of Volume 36, as amended, by Chapter 9, Volume 37, of the Laws of Delaware, shall be continued in full force and effect as to all taxes, assessments, proceedings, suits and matters arising out of or in connection with returns required to be made for the year 1934, and all prior years, and shall so continue until such time as all of said taxes, assessments, proceedings, suits and matters shall have been finally collected, determined or disposed of.

Chapter 8, of Volume 36, Laws of Delaware, as amended by Chapter 9, Volume 37 and by this Act shall, except as otherwise provided, become effective for taxes to be assessed as provided by law on net incomes for the year 1935, and each succeeding year, due in the year 1936 and thereafter.

All acts or parts of acts inconsistent with this act are hereby repealed to the extent of such inconsistency only.

Approved April 24, 1935.