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may be granted and the same penalties are imposed for neglect or failure to file.15

Withholding at the Source Against Foreign Fiduciaries. The provisions with respect to withholding the tax at the source apply, in the case of payments to foreign fiduciaries, in the same manner as in the case of payments to non-resident aliens. A foreign fiduciary may not receive the benefit of the specific exemption by filing a claim therefor with the withholding agent,16 and cannot otherwise claim exemption from withholding of the tax at the source.17 He may claim the benefit of deductions and credits and obtain a refund of any amounts withheld in excess of the tax liability of the estate, in the same manner as is prescribed with respect to non-resident alien individuals. 18

Withholding at the Source by Foreign Fiduciaries. Since a foreign fiduciary is not personally within the jurisdiction of this Government, the requirements imposed upon domestic or resident fiduciaries to withhold the tax in paying net income to non-resident aliens, do not apply to such fiduciaries.

Information at the Source. A foreign fiduciary is under no duty to supply the Government with information at the source as to payments made to others, except so far as information is supplied with respect to beneficiaries in the return of annual net income.

15 See Chapters 34 and 36 on Returns and on Penalties.

16 Revenue Act of 1918, $ 217. This provision of the law authorizes the Commissioner to permit non-resident aliens to claim exemption at the source, but no such permission has been granted. (Reg. 45, Art. 362.)

17 Letter from Treasury Department dated December 28, 1916; I. T. S. 1918, s 119.

18 See Chapter 5 on Non-Resident Aliens.

CHAPTER 10

PARTNERSHIPS AND PERSONAL-SERVICE CORPORATIONS

The Revenue Act of 1918 provides 1 that individuals carrying on business in partnership shall be liable for income tax only in their individual capacity and that there shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year,2 or if his net income is computed upon the basis of a period different from the basis upon which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any annual accounting period of the partnership ending within the

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1 Revenue Act of 1918, $ 218 (a). Partnerships as such were not taxable under the 1916 Law the partners thereof being taxable in their individual capacity. (Revenue Act of 1916, $ 8 (e); T. D. 1957.) Partnerships were expressly excepted from the tax on corporations. (Revenue Act of 1916, $ 10.) In U. S. v. Coulby, 251 Fed. 982, arising under the 1913 Law, the court said in part: “This law, therefore, ignores for taxing purposes the existence of a partnership. The law is so framed as to deal with the gains and profits of a partnership as if they were the gains and profits of the individual partner.

The law looks through the fiction of a partnership and treats its profits and its earnings as those of the individual taxpayer. Unlike a corporation, a partnership has no legal existence aside from the members who com

The Congress, consequently, it would seem, ignored, for taxing purposes, a partnership’s existence and placed the individual partner's share in its gains and profits on the same footing as if his income had been received directly by him without the intervention of a partnership name."

2 See the definition of the term “taxable year" in the next paragraph.

pose it.

fiscal 3 or calendar year upon the basis of which the partner's net income is computed.4 An important new provision 5 is contained in the Revenue Act of 1918 taxing the individual stockholders of personal-service corporations in the same manner as the members of partnerships. This subject is discussed in a subsequent paragraph of this chapter, as well as the new requirement of the Revenue Act of 1918 that partnerships file returns for each taxable year.

Definition. For the purpose of the discussion in this and the following chapter, general partnerships are divided into two classes, domestic and foreign. A domestic partnership is defined as one which has its principal place of business in this country and directs all or the greater part of its business from its office or offices in this country, whether or not the partners are citizens or aliens, residents or non-residents. This distinction seems to be more logical than one based on the situs of the contract or articles of partnership, since a partnership is not a distinct entity apart from the members. The definition of "foreign partnership" is found in the following chapter. The term "taxable year," used in this chapter as defined in the law,8 means the calendar year or the fiscal year ending during such calendar year, upon the basis of which the net income of the partnership is computed. The first taxable year, called the taxable year 1918, is the calendar year 1918 or any fiscal year ending during the calendar

3 For a general discussion on the subject of reporting on the basis of the fiscal year, see Chapter 34 on Returns.

4 See p. 152 as to rates of tax applicable where fiscal year of partnership falls in calendar year in which rates are changed.

5 Revenue Act of 1918, $ 218 (e): 6 See Revenue Act of 1918, $ 224.

7 Under the 1918 Law and the regulations a domestic partnership is defined as one organized or created in the United States, including only the states, the territories of Alaska and Hawaii, and the District of Columbia, and a foreign partnership is one created outside the United States as so defined. The nationality or residence of members of a partnership does not affect its status. Thus, a partnership created by articles entered into in San Francisco between residents of the United States and residents of China is held to be a domestic partnership. (Reg. 45, Art. 1508.)

8 Revenue Act of 1918, 8200.

year 1918.

Limited Partnerships. Limited partnerships were first broadly and without any qualifications held to be in the same category as corporations or associations under the 1916 Law and subject to the income tax imposed on such entities. The profits of limited partnerships so reporting were treated as dividends and were not subject to the normal tax in the hands of the partners receiving them but were subject to the additional or surtaxes in the hands of such partners. A limited partnership was defined as a form of business organization created by statute in many of the United States, wherein the liability of certain special partners, who contribute a specific amount of capital, is limited to the amount so contributed, while the general partners of the same partnership are jointly and severally responsible as in ordinary partnerships.10 It was held that a limited partnership would be classed as a quasi-corporation or association within the meaning of the law.11 The Treasury Department later modified this ruling, drawing a distinction between limited partnerships of the Penn

9 Reg. 33 Rev., Art. 62; Reg. 33, Art. 86; T. D. 2137. Under the 1909 Law it was held that a limited partnership was liable for the tax, if organized for profit and having a capital stock represented by shares, although no “certificates of stock” were issued. (Op. Atty. Gen. Feb. 14, 1910.)

10 Reg. 33 Rev., Art. 62.

11 In a letter dated January 19, 1916, written with particular reference to limited partnerships of the type created under the New York Statute, Laws of 1897, Ch. 427, $ 3D, the Treasury Department gave its reasons for classifying limited partnerships with corporations. After quoting the language of Revenue Act of 1916, $10 (a), which imposed a tax on “every corporation, joint-stock company or association, or insurance company

but not including partnerships” the letter stated that the term “partnership” as there used was a common law term and applied ouly to such partnerships as were known to the common law. As stated in the text above, this ruling has now been modified.

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sylvania type and New York type and holding that, for purposes of the income, war excess profits and capital stock taxes, limited partnerships of the New York type were partnerships and limited partnerships of the Pennsylvania type were corporations or joint stock-companies.18 So-called limited partnerships of the type authorized by the statutes of New York and most of the States are partnerships and not corporations within the meaning of the statute. Such limited partnerships, which can not limit the liability of the general partners, although the special partners enjoy limited liability so long as they observe the statutory conditions, which are dissolved by the death or attempted transfer of the interest of a general partner, and which can not take real estate or sue in the partnership name, are so like common law partnerships as to render impracticable any differentiation in their treatment for tax purposes. Michigan and Illinois limited partnerships are partnerships. A California special partnership is a partnership.13 On the other hand, limited partnerships of the type of partnerships with limited liability or partnership associations authorized by the statutes of Pennsylvania and of a few other States are only nominally partnerships. Such so-called limited partnerships, offering opportunity for limiting the liability of all the members, providing for the transferability of partnership shares, and capable of holding real estate and bringing suit in the common name, are more truly corporations than partnerships and must make returns of income and pay the tax as corporations. The income received by the members out of the earnings of such limited partnerships will be treated in their personal returns in the same manner as distributions on the stock of corporations. In all doubtful cases limited partnerships will be treated as corporations un

12 T. D. 2711. Letter from Treasury Department dated May 4, 1918; I. T. S. 1918, 1 3355. Telegram from Treasury Department dated April 24, 1918; I. T. S. 1918, s 3325.

13 Reg. 45, Arts. 1505, 1506; T. D. 2711.

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