of $2,500 or more for the period from March 1 to December 31, 1913, inclusive, he should make a return of his gross income on Form 1040, as required by the regulations. To illustrate: If a fiduciary's gross income was $10,000, derived from the following sources: 1. Interest upon the obligations of the United States.... $ 1,000 2,000 4. Income from rents, etc. 2,000 5,000 $10,000 the fiduciary's return on Form 1041 would show as follows: Page 2. Line 3, column B, amount of rents... $5,000 Line 5, interest from bonds, "tax-free clause," column 2,000 Line 10, dividends 2,000 Aggregate total of gross income.. $9,000 (No entry of interest on United States bonds, $1,000.) Page 3. Line 1, necessary expenses actually paid in carrying on business, including compensation of fiduciary, $ 450 Line 3, taxes paid 400 Line 6, actual repairs made on building, or amount 150 ..... Line 7, dividends not subject to normal tax...... 2,000 .... 2,000 Total deductions $5,000 Page 1. Line 1, gross income Line 2, total deductions Line 3, amount of income due beneficiary, which is $9,000 5,000 $ 4,000 The beneficiary has filed with the fiduciary as a withholding agent a claim for exemption under paragraph C for $2,500 (exemption of single person for 1913), and the return on Form 1041 would show on page 1, in addition to the foregoing entries, the following: John Doe, 76 B Street, New York City. In third column, amount of income paid or accrued to beneficiary ...... $4,000 In fourth column, amount of exemption claimed.. 2,500 In fifth column, amount of income on which fiduciary is liable to tax ... 1,500 15 In sixth column, amount of normal tax withheld.. In the foregoing illustration the beneficiary, in his return on Form 1040, would make no return of item 1, interest on United States bonds. Item 2, dividends, would be entered on page 2, line 11, and for the purpose of calculating the normal tax would be an allowable deduction on page 1, line 4. Item 3, interest on bonds, would be entered on page 2, line 7, column A, and for the purpose of calculating the normal tax would be an allowable deduction on page 1, line 5. Item 4, rents, would be entered on page 2, line 7; $1,500 in column A, and $2,500 in column B (exemption of $2,500 claimed and no tax withheld on this amount). This would show Income received from fiduciary subject to be returned on ..... Deductions and exemption allowable in calculating normal tax .... $8,000 8,000 ...... No normal tax due, it having been paid at the source by the fiduciary as shown by his return on Form 1041. In making the foregoing entry on Form 1040, on line 11, there should be written just above the printed heading, "Amount received from fiduciary," and the amount should be entered in the appropriate column. No illustration is given of income accruing to the beneficiary from other sources, an illustration of this not being deemed necessary, as such income is entered in the usual way. (T. D. 1945-See T. D. 1947.) Regulation relative to exclusion of income derived from dividends or net earnings of corporations, joint-stock companies or associations, and insurance companies by persons subject to the normal tax only in computing their net income for the taxable year. Referring to that provision of the income-tax law which reads as follows: Provided further, That persons liable for the normal income tax only, on their own account or in behalf of another, shall not be required to make return of the income derived from dividends on the capital stock or from the net earnings of corporations, jointstock companies or associations, and insurance companies taxable upon their net income as hereinafter provided— you are informed that returns of individuals, when such individuals are subject to the normal tax only, need not include the income derived from the dividends or net earnings referred to above. When individuals are subject to the additional tax, such income derived from said dividends or net earnings must be shown on the return. Persons having an annual net income of $3,000 or more, including the income derived from dividends or net earnings of corporations, etc., but whose total net income is less than $20,000, and whose net income, exclusive of the income derived from dividends or net earnings of such corporations, etc., is less than $3,000 for the taxable year ($2,500 for the year 1913), shall not be required to make a return of annual net income. Returns which have been or may be received from persons subject to the normal tax only, in which such dividends are included and deducted, need not be changed to meet the provisions of this regulation. All previous rulings of the department, including the general regulations No. 33, are amended accordingly. (T. D. 1946.) Special assessment districts created under the laws of the several States for public purposes, such as the improvement of streets and public highways, the provision for sewerage, gas, and light, and the reclamation, drainage, or irrigation of bodies of land, and levee and school districts are held to be political subdivisions of a State. To collectors of internal revenue: Referring to paragraph B, section 2, of the income-tax law, which reads as follows: That in computing net income there shall be excluded interest upon the obligations of a State or any political subdivision thereof you are informed that under date of January 30, 1914, the honorable the Attorney General held that special assessment districts created under the laws of the several States for public purposes, such as the improvement of streets and public highways, the provision for sewerage, gas, and light, and the reclamation, drainage, or irrigation of bodies of land within such special assessment districts when such districts are for public use, are political subdivisions of the State within the meaning of the above proviso. It is held that the term "political subdivision" includes special assessment districts or divisions of a State created by the proper authority of the State acting within its constitutional powers and under its general laws, for the purpose of carrying out a portion of those functions of the State which by long usage and inherent necessities of government have always been regarded as public. Levee and school districts when lawfully created under the authority of the State and which are authorized by the laws of the State to levy a tax to meet the obligations of such districts are also held to be political subdivisions of a State within the meaning of the income-tax law. The income derived from interest upon the obligations of all such public districts shall therefore be excluded in computing net income for the income tax. This decision supersedes T. D. 1910. (T. D. 1947.) Extending T. D. 1945 to cover returns made by fiduciaries in their fiduciary capacity. You are advised that the provisions of T. D. 1945—in matter of exclusion of dividends or net earnings of corporations, joint-stock companies or associations, and insurance companies, by persons subject to the normal tax only, in computing their net income for the taxable year—are extended to cover such returns by fiduciaries. To make clear any doubt on the subject, the provisions of T. D. 1945 are hereby specifically extended to include returns made by fiduciaries as such. (T. D. 1948-Tax-free covenant clause-succeeding T. D. 1942.) This office is in receipt of numerous letters asking whether income, tax on which is paid or to be paid at the source, although not withheld at the source, can be placed in column A, page 2, of Form 1040, and in reply to this inquiry you will advise as follows: The stipulation in bonds whereby the tax which may be assessed against them or the income therefrom is guaranteed, is a contract wholly between the corporation and the bondholder, and in so far as the income-tax law applies, the Government will not differentiate between coupons from bonds of this character and those from bonds carrying no such guaranty. The debtor corporation, or its duly authorized withholding agent, will be held responsible for the normal tax due in such cases when no tax has been withheld and no exemption claimed. Income paid by "debtors" from March 1 to November 1, 1913, shall be included in the return of the individual (under column B, page 2, of Form 1040) as income upon which the |