from such property as patents and not from the activity of its stockholders (T. B. M. 9), or from patents owned which were personally developed and continually demonstrated by the stockholders, the patent being held to be capital and the royalties income from patents (A. R. R. 363); a corporation where branch agencies conducted by employees aided materially in producing the income (A. R. M. 59); a sanitarium owned and conducted by doctors who, in addition to selling their services, derived income from the building and grounds (O. D. 2); a stevedoring company, inasmuch as its income was due to the services of employees (A. R. R. 213); a selling organization acting as a sales agent, trading on its own account, and making advances to its principal (Ct. D. 25, T. D. 3334); likewise a purchasing organization (A. R. M. 50), and a commission business that derived 30% of its income from outright sales and purchases (A. R. R. 364); a corporation whose income was ascribed in part to a number of branch managers who owned no stock (A. R. R. 464 and A. R. M. 59); a corporation which relied on the personal credit of the principal stockholder to supply capital (A. R. R. 564); a school which received income from books and supplies and had only 62% of the stockholders on its staff (A. R. R. 683); a corporation which had spent its $10,000 capital in improving a secret chemical process and subsequently had earned $2,000 and had on hand unexpired valuable contracts because of the process (T. D. 3183); corporations engaged in the retail automobile business even though the two principal stockholders performed most of the labor (T. B. R. 58); a mill agent (incorporated) who received title to goods and was responsible to the mill for the payment (A. R. R. 23); and a mining corporation (A. R. R. 652).

A stockholder of a personal service corporation in 1918-1921 should report the profits in the year earned and not the year received (O. D. 141). A list of the distributive shares of the income, whether distributed or not was also required (M. 2708). Eisner v. Macomber had no application with respect to personal service corporations and the taxability of stockholders therein relative to distributive earnings (O. D. 679). The point, however, has frequently been raised.

Where a personal service corporation changes its accounting period so that two accounting periods fall within one fiscal year of its stockholders, the stockholders must report the income for the two periods in their taxable year (O. D. 453). If a personal service corporation had a net loss for the year, the loss was de

ductible by stockholders in proportion to their respective shares (O. D. 581).

The procedure required to change to a personal service corporation was as follows: File amended returns on Form 1065 and refund on Form 46 (now 843) for the tax or instalments thereof paid. The individual members should also have filed claims in abatement and amended return (O. D. 614).

XXVIII

RESIDENT AND NON-RESIDENT ALIENS AND

FOREIGN CORPORATIONS

Taxation of income of resident aliens. Determination of who is a resident alien. Income of non-resident aliens and foreign corporations. Residents of Mexico and Canada. Income from possessions of the United States.

A RESIDENT alien is entitled, (a) in general to the same credits for normal tax purposes as citizens. If his wife lives abroad, he can claim the personal exemption of $1,000 only, but for dependents, $400 each providing they are under 18 or defective and providing they receive their chief support from him. He can claim credit for foreign taxes paid if that country allows similar privileges to citizens of the United States (Art. 381). He is taxed otherwise as a citizen.

A business trip in this country does not render the income of an alien taxable, but income from interests here are taxable as in the case of any non-resident alien (O. D. 592). Where a member of a foreign firm is here for 7 or 8 months every year to buy raw material for his firm, he is a non-resident alien and only taxable for income from sources within the United States (O. D. 592). An alien who established his residence here in 1910 and subsequently acquired property, did not lose his status as a resident alien by going abroad and serving in the army of his native country. Any compensation received while in that army is taxable income (O. D. 498). Pay-rolls of an employer may be accepted as evidence of an employee's continuous residence unless the employer knows that the alien does not intend to reside here permanently (O. D. 127). The minor children of a foreigner become naturalized with the parent. If they go to their native country and register as Americans abroad they are American citizens under the law. (O. D. 695). An alien who desires to depart from the United States is required to submit to the proper officials a certificate stating that the collector has

satisfied himself that all income obligations have been satisfied up to the end of the month preceding the departure (O. D. 131). This certificate may be obtained from the collector or any branch in the district (O. D. 324). Where a non-resident alien becomes a citizen during the year he is taxable for the entire year upon income derived from all sources (O. 785). The death of a husband who was a non-resident alien did not automatically restore the citizenship of the widow (O. D. 533). When an agent had full authority to act with property as he saw fit, it was held to be owned in the United States for tax purposes, even though title was vested in non-resident aliens (T. D. 2876).

A non-resident alien who has served one year in the United States Army is considered a resident (O. D. 117). An alien residing in the United States over one year is presumed to be a resident but such presumption may be rebutted by proper evidence (O. D. 197). Members of families of foreign ambassadors and ministers occupy the status of non-resident aliens for income tax purposes (O. D. 198). The status of a resident alien employed in this country should be determined by the employer and reported on Form 1078 (T. D. 3155, O. D. 50, 127, 128, 254, 302, 660). Loss of citizenship due to marriage to a foreigner is regained again (Art. of March 2, 1907) upon termination of the relation in the United States where she continued to reside (I. T. 1459); but the death of a husband who was a nonresident alien did not in itself restore the citizenship of the widow (O. D. 523). Persons who lived here and appeared to make this their home and had not inferred their departure were considered resident aliens (O. D. 400). A sentenced deserter forfeited his citizenship (I. T. 1502).

(b) Non-resident aliens and foreign corporations are taxable on income received from sources within the United States. Individuals are entitled to a personal credit of but $1,000 (Sec. 216(e)). No specific credit is allowed foreign corporations. The 1921 law (Sec. 217) clarified the inclusions under income and the deductions of non-resident aliens and foreign corporations. Previously, the computation of an alien's income was left to the regulations of the Department. The principal points in the present rule are:

An amendment of March 4, 1923, gives residents of Canada and Mexico the credit for dependents and the 4%

and 8% normal tax, computed as in the case of citizens (T. D. 3465; see also Mim. 3081).

1. Interest, generally, from obligations of residents is taxable. Definite exception, however, is made to bank interest paid to non-resident aliens not conducting business within the United States and interest paid by a resident alien individual or foreign corporation when less than 20% of the total income (for a three-year period) of the payor arises from sources within the United States (Art. 317).

2. Dividends described above as credits for individual normal tax purposes, must be included in the income of a non-resident individual or corporation (Art. 318).

3. Income from ships documented under a foreign country are exempt if a similar privilege is extended citizens and corporations of the United States (Sec. 213(b) (8)).

4. All other items of income must be returned, including compensation for services, rentals and royalties and profits from the sale of property, having their source within the United States (Art. 319-21; 323).

5. Deductions are limited to those directly applicable to the production of the above income (Art. 324).

6. Income and deductions from sources partly within the United States and partly without are to be distributed in accordance with regulations formulated by the Department in Articles 325-329.

Income from Porto Rico and the Philippine Islands is taxable under their income tax laws, but a citizen of the United States is entitled to a credit as in the case of foreign income taxes (Art. 1131-3). Citizens of other possessions of the United States are treated as non-resident aliens (Art. 1121). A provision in the 1921 Revenue Act (Sec. 262) permits the exemption of profits of citizens or domestic corporations derived within the possessions of the United States (excluding the territories of Hawaii and Alaska), providing the