determining whether or not the income, under the language of the statute, is "held for future distribution."

LIMITED PARTNERSHIPS.-Certain types of limited partnerships are taxed as corporations. See pages 38, 39.

"Personal Service Corporations" under the Revenue Act

In order to relieve certain types of corporations from the excess profits tax, a special class of "personal service corporations" was established and defined as follows:

LAW. Section 200. (5) The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits, or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. Corporations falling within this class were treated as partnerships, the stockholders being taxed on their distributive shares and the corporations as such being relieved of all taxes.

The personal service corporation, being essentially a creature of the excess profits tax, disappeared with the repeal of that tax as of December 31, 1921.

The intention of Congress has not been carried out by the Treasury. As a result many corporations of the personal service type have been denied their proper classification. Relief under sections 327 and 328 of the 1918 law has been extended to them, but this is a poor substitute. In the opinion of the author the law has not been correctly interpreted. Until the United States Supreme Court broadly interprets the law, taxpayers should protect their rights. The only new decision of interest during 192234 is distinctly in favor of the ordinary

"[Former Procedure] The United States District Court for the Southern District of New York, in a decision handed down March 10,

personal service corporation. Those who are interested in the procedure which governed these corporations during the time the law was supposed to be in force are referred to Income Tax Procedure, 1922, pages 813-841.

1922, in the case of Martin, Inc., v. Edwards (not yet reported; see C. B. I-1, page 8; Ct. D. 25), held "that the plaintiff had more than a nominal capital and had a substantial invested capital which was employed in making advances to or on account of the mines, and also in buying merchandise on its own account for profitable sale." The plaintiff's income from profits from buying and selling and from interest were greater than its commission from selling for account of others. The court made this significant remark: "If it had limited itself to buying and selling on commission, with a small incidental trading on its own account, the plaintiff's contention would be good."

CHAPTER III

EXEMPT INCOME IN GENERAL, AND EXEMPT

CORPORATIONS

Exemptions under the income tax are granted for constitutional reasons, in order to avoid double taxation, for reasons of public welfare, to assist certain kinds of enterprises, or to encourage certain forms of investment.

Exempt Income in General

Exempt income may be conveniently divided into four classes:

I. Income which is exempt from all taxes imposed by the 1921 revenue act because it is received by certain types of corporations or by states or by the political subdivisions thereof. This class of exemptions is dealt with in this chapter.

2. Income which is exempt because, geographically, it lies beyond the scope and application of the law. (See Chapter XV.)

3. Income such as is not included in either of the above

classes, which is exempt from both normal tax and surtaxes. Such items are not included in gross income. (See Chapter XV.)

4. Income such as is not included in any of the above classes, which is exempt from normal tax but is subject to surtax. (See Chapter XV.)

The first class can be called an "exemption of the person," while the other three are "exemptions of the income."

No individual' is entirely exempt from the tax merely be

'This statement includes minors. See Chapter V

cause of his status or character as an individual unless one construes the personal exemption as an exception to this statement. That exemption, of course, operates to relieve entirely from taxation the person whose income is smaller than the specified amounts.

If one should receive all his income from interest upon the obligations of a state or of a political subdivision thereof, or upon certain of the obligations of the United States or its possessions or from securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916, he would be subject to no income tax and would not be required to make any return, however large that income might be. He might receive and enjoy his income as if the tax did not exist. This is true even though, in addition, he receives taxable income of any amount less than $1,000 (single person) during the year. If he receives more than $1,000 of such additional taxable income, he proceeds in the same manner as any other taxpayer.

Taxpayers who receive dividends from the stock of American corporations subject to the income tax, or who receive interest on certain government securities, are exempt from the normal taxes on such income but are nevertheless required to report such items annually if their total net income is large enough to justify them in making any return at all, or if their gross income exceeds $5,000.

Exempt Corporations

Certain corporations are expressly exempt from the provisions of the law."

Types of corporations exempt.-The law groups the corporations which are expressly exempt under fourteen heads:

In Commercial Health & Accident Co. v. Pickering, Collector (281 Fed. 539, January 3, 1922), the court held that the principle of construing taxing acts in favor of the taxpayer and against the government, does not apply to a claim for exemption from taxation. In such a case the excepting section must be strictly construed.

LAW. Section 231. That the following organizations shall be exempt from taxation under this title.

REGULATION. Agricultural or horticultural organizations exempt from tax do not include corporations engaged in growing agricultural or horticultural products or raising live stock or similar products for profit, but include only those organizations which, having no net income inuring to the benefit of their members, are educational or instructive in character and have for their purpose the betterment of the conditions of those engaged in these pursuits, the improvement of the grade of their products, and the encouragement and promotion of these industries to a higher degree of efficiency. Included in this class as exempt are organizations such as county fairs and like associations of a quasi-public character, which through a system of awards, prizes, or premiums are designed to encourage the production of better live stock, better agricultural and horticultural products, and whose income, derived from gate receipts, entry fees, donations, etc., is used exclusively to meet the necessary expenses of upkeep and operation. Societies or associations which have for their purpose the holding of annual or periodical race meets, from which profits inure or may inure to the benefit of the members or stockholders, do not come within the terms of this exemption. A corporation engaged in the business of raising stock or poultry, or growing grain, fruits, or other products of this character, as a means of livelihood and for the purpose of gain, is an agricultural or horticultural society only in the sense that its name indicates the kind of business in which it is engaged, and it is not exempt from tax. (Art. 512.)

It has been specifically held that "a business activity organized for the purpose of affording employment to the members. of a certain labor union, .not a part of the union as such,

.

although . . . . owned and controued by the union,"

paying wages to the members employed, and turning all profits, after paying expenses, into the treasury of the union, is not exempt.3

MUTUAL SAVINGS BANKS.

LAW. Section 231. . . . . (2) Mutual savings banks not having a capital stock represented by shares;

'C. B. 2, page 211; O. D. 523.