(T. D. 2152.)

Synopsis of rulings on questions relating to the income tax imposed by section 2 of the act of October 3, 1913.

The following synopsis of rulings on questions relating to the income tax imposed by section 2 of the act of October 3, 1913, on individuals, corporations, joint-stock companies, associations, and insurance companies is published for the information of internal-revenue officers and others concerned. All rulings or parts of rulings heretofore made which are in conflict herewith are hereby revoked.

PART I.-Rulings in Relation to Personal Income Tax.

Alien, nonresident, services rendered by a, in a foreign country.-If the status is that of a nonresident alien the compensation paid for services rendered in a foreign country, including the per diem allowance for business and travel expenses, is not subject to the income tax imposed by section 2 of the act of October 3, 1913.

Annuity. The ruling with reference to annuities on page 2 of T. D. 2090 of December 14, 1914, is hereby amended by omitting therefrom the words, "When the settlement under such a contract is made in more than one payment, each payment will be considered as being composed of interest and a proportionate part of the principal. Where the entire annuity is composed of an interest return upon the principal sum paid therefor, the entire annuity is income," so that the ruling as amended will read as follows:

“Annuity.—The amount paid under a life insurance, endowment, or annuity contract is not income when returned to the person making the contract, either upon the maturity or surrender of the contract; but the amount by which the sum received exceeds the sum paid and coming into the hands of the person making the contract and payment is income."

Executor or administrator: Return on Form 1040, revised,

by. The income-tax law of October 3, 1913, provides in paragraph E that—

The tax herein imposed upon annual gains, profits, and income not falling under the foregoing and not returned and paid by virtue of the foregoing shall be assessed by personal return under rules and regulations to be prescribed by the Commissioner of Internal Revenue and approved by the Secretary of the Treasury.

It is held that the income tax due from a deceased person is a debt against the estate in the hands of his executor or administrator; and under the authority quoted it has been prescribed by regulations that the executor or administrator shall file a return for the decedent in order that the amount due the Government from the decedent's estate may be determined and paid.

Income-tax laws of other countries.-American citizens, whether residing at home or abroad, resident aliens, and nonresident aliens receiving income from property owned and from business, trade, or profession carried on within the United States, all of whom are subject to the income-tax law of October 3, 1913, are not relieved from tax liability under that act by reason of the fact that they are also subject to the income-tax laws of other countries.

Scrip. The ruling under this heading on page 17 of T. D. 2090 of December 14, 1914, is hereby amended by inserting after the word "of," in line 8, the words "interest paid on," and omitting the word "payment" after the word “scrip" in same line, so that the ruling as amended will read:

"Scrip.-Scrip certificates issued by a corporation to its stockholders in lieu of dividends, such scrip certificates bearing interest and redeemable at a specified time not longer than one year from date of issue, are not corporate obligations similar to bonds, mortgages, or deeds of trust, and the interest payable thereon will not be subject to withholding except when the amount thereof payable to an individual in a calendar year exceeds $3,000. Payment in scrip is held to be equivalent to payment in cash, and when the amount of interest paid on such scrip to any one individual in a calendar

year is in excess of $3,000 the tax must be withheld and accounted for in excess of exemption claimed."

State, payment by, to contractor not exempt.—An individual who enters into a contract with a State, or any political subdivision thereof, for the construction of a public highway, is held not to be an officer or employee of the said State or a political subdivision thereof, and, therefore, the amounts received by him from the State or a political subdivision thereof, under the terms of the contract, are not exempt from tax under the provisions of the Federal Income Tax Law, and should be included in any return of annual net income he may be required to render.

PART II.-Rulings in Relation to Corporation Income Tax.

Assessments against private banks as associations.—In the case of private banks which have the form of corporations and which are held to be associations within the meaning of the Federal Income Tax Law, it is not the purpose of this office to assess the income tax against such banking associations and then also against the individual members of the association.

Income which the members of the association receive from the bank because of their investments therein will be considered dividends, and for the purposes of the normal tax these dividends will not be required to be returned by the individual members receiving them, but if any individual member of the association have an income, including the dividends, of more than $20,000, the dividends in that case must be returned as income for the purposes of the additional or supertax.

Bank guaranty fund.-Banking corporations, which, pursuant to the laws of the States in which they are doing business, are required to set apart, keep, and maintain in their banks the amount levied and assessed against them by the State authorities as a "Depositors' guaranty fund," may deduct from their gross income in their returns of annual net income the amount so set apart each year to this fund, provided that such fund is set aside and carried to the credit of

the State banking board, or other duly authorized State officer, and may be withdrawn upon demand by such board or State officer to meet the demands of these officials in reimbursing depositors in insolvent banks, and provided further that no portion of the amount thus set aside and credited is returnable under the existing laws of the State to the assets of the banking corporation.

In such cases the amount of the guaranty fund thus levied against the banking corporation and so set apart, kept and maintained is no longer an asset of the bank, but is in the nature of a tax "imposed by authority of the State," and as such is deductible from the gross income of the banking corporation.

The first paragraph on page 19 of T. D. 2090, issued December 14, 1914, which paragraph bears the title "Bank Guaranty Fund," being in conflict with the above ruling, is hereby rescinded.

Bank taxes deductible.-The ruling of this office previously made to the effect that banking corporations are not permitted to deduct from gross income the amount of taxes paid for stockholders on the value of their capital stock outstanding applies only to the taxes levied upon the value of the capital stock and is not intended to operate so as to prevent banking corporations from deducting from their gross income any State tax imposed against the corporation itself, as an excise or franchise tax; that is, a tax which the corporation is required to pay to the State in order that it may transact business within the State.

Corporations liable to make returns.-The tax imposed by the Federal Income Tax Law is not imposed only upon such corporations as are organized and operated for profit. Any corporation, joint-stock company, or association, and any insurance company, no matter how created or organized or what the purposes of its organization may be, unless it comes within the class of organizations specifically enumerated in the act as exempt, will be required to make returns of annual net

income and pay income tax upon the net income which arises and accrues to it during the year.

A corporation is not exempt simply and only because it is primarily not organized and operated for profit. If income within the meaning of the law arises and accrues to a corporation which is not organized and operated for profit, such income will be subject to the tax imposed by this act.

It is therefore held that commercial men's associations, farmers' mutual fire insurance companies, and like organizations come within the requirements of the law.

Corporations not completely organized.—Corporations which have applied for and never received charters, or corporations which have received charters and never perfected their organizations, transacted no business and had no income whatever from any source, may, upon presentation of these facts to the collector of internal revenue, be relieved from the necessity of making returns of annual net income so long as they remain in this unorganized condition.

Cost of manufactured products.-A manufacturing corporation may include as an element of the cost of manufactured products the cost of the raw material, the cost of labor of the men who actually work on such products, as well as the cost of supervisory, or what may be denominated as "unproductive" labor, such as that of the foremen, inspectors, overseers, etc., provided such expenditures are not separately deducted from gross income in the return of annual net income.

The overhead charges referred to in Form 1031 should include the salaries of officers, clerk hire, and such other office expenses as do not have to do directly with the manufacture of the product.

Fixed salaries and commissions.-In cases wherein employees or officers of a corporation are paid a stated salary to which is added a certain percentage of the net profits of the corporation as compensation for services rendered, such corporation will be required to report under item 4 (a) 7 of Form 1030 or 1031 the amount of such combined payments