has not taken or is not taking title or in which it has no equity. The deduction of such expenses, however, is subject to the conditions stated above.38 Where under the 1916 and prior laws certain expenses, such as coal, ships, stores, etc., in the case of foreign steamship companies, could not be segregated, the total expenses of foreign corporations for such items were pro-rated in such proportion as the gross income of the corporation from sources within the United States bore to the gross income derived from all sources both within and without the United States; that is to say, if one-half of the gross income of the foreign corporation was from sources within this country, one-half of such expense was a proper deduction.39 A Canadian manufacturing corporation which sells part of its product in the United States and part in Canada should report its deductions for cost of manufacture, exclusive of interest paid on its indebtedness, in the same proportion as the quantity of its product sold in the United States bears to the total quantity sold.39a

INTEREST. A foreign corporation may deduct that proportion of all interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is wholly exempt from income tax to the foreign corporation, which the amount of the gross income of the foreign corporation from sources within the United States bears to the amount of its gross income from all sources within and without the United States.40

38 Rev. Act of 1918, § 234, (a) 1, (b).

39 T. D. 1675; Reg. 33, Art. 116; Letter from Treasury Department dated December 8, 1916. This chapter contains only rulings applicable to foreign corporations. Chapter 12 on Domestic Corporations and the chapters discussing the general provisions relating to deductions should be read as well, especially for any changes introduced by the Revenue Act of 1918.

39a Reg. 45, Art. 571.

40 Revenue Act of 1918, § 234 (a) 2 and (b). Foreign corporations

INTEREST PAID BY BANKS ON DEPOSITS. A foreign bank, banking association, loan or trust company, or branch thereof was permitted under the 1916 Law to deduct in full the interest paid within the year on deposits by or on moneys received for investment from either citizens or residents of the United States and secured by interestbearing certificates of indebtedness issued by such bank, banking association, loan or trust company, or branch. thereof.41 Interest so paid to citizens and residents being taxable as income to them, seems to be properly deductible from the income of a foreign corporation, but the present law contemplates that all interest shall be apportioned as indicated in the preceding paragraph.

were permitted, under the 1916 Law, to deduct part of the interest paid during the year, under the following rules: The indebtedness of interest on which interest might be deducted could not be in excess of the entire amount of the paid-up capital stock outstanding at the close of the year, or in the absence of capital stock, the entire amount of the capital of the business employed at the close of the year, plus one-half of its interest-bearing indebtedness then outstanding; that is to say, the greatest amount of interest which a foreign corporation could deduct was limited in the same way as in the case of domestic corporations. If the foreign corporation did all its business in the United States, the interest on the amount of indebtedness ascertained as above might be deducted. If it did only a part of its business in the United States there might be deducted only the interest paid on such proportion of the amount of indebtedness ascertained as above as the gross amount of its income for the year from business transacted and capital invested within the United States bore to the gross amount of its income derived from all sources within and without the United States. Foreign corporations were not permitted to deduct the amount of interest on indebtedness incurred for the purchase of obligations or securities the interest upon which was exempt from income tax. The provision of Law (Revenue Act of 1916, § 12 (a)), permitting a deduction to domestic corporation of the full amount of interest paid on indebtedness secured by collateral, the subject of sale or hypothecation in the ordinary business of the corporation was held not to apply to foreign corporations. See p. 236.

41 See Reg. 33, Rev., Art. 190 as to the general ruling. No formal ruling was made with respect to foreign corporations but the statement in the text is based on the practice of the Department.

TAXES. A foreign corporation may deduct taxes paid or accrued within the taxable year imposed (a) by the authority of the United States, except income, war profits and excess-profits taxes, or (b) by the authority of any possession of the United States, except income, war-profits and excess-profits taxes, or (c) by the authority of any State or Territory or any County, school district, municipality or other taxing subdivision of any state or territory or (d) by the authority of any foreign country (except income, war profits and excess-profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed). In the case of (a), (b), and (c) above, the deduction is allowed to foreign corporations without any limit, but in the case of (d), it is allowed only if and to the extent that the taxes are connected with income arising from a source within the United States.42

LOSSES. A foreign corporation may deduct all losses sustained during the taxable year and not compensated for by insurance or otherwise, to the extent that they are connected with income arising from a source within the United States.43 But it does not seem that the business or property with respect to which the loss is sustained need be located in the United States.44

42 Revenue Act of 1918, § 234 (a) 3, (b). Under the 1916 Law a foreign corporation might deduct taxes paid within the year imposed by the authority of the United States (except income and excess-profits taxes) or its territories or possessions or under the authority of any state, county, school district or municipality or other subdivision of any state, paid within the United States, not including those assessed against local benefits. This allowance for taxes was the same as that allowed to domestic corporations and to individuals except that it was expressly limited to cases where the tax was assessed by a governmental authority within the jurisdiction of the United States and the tax paid within the United States. (For a general discussion of the extent to which taxes may be deducted see Chapter 29 on Deduction of Taxes.)

43 Revenue Act of 1918, § 234 (a) 4 and (b).

44 Under the 1916 Law the losses which might be deducted were

LOSSES IN VALUE OF INVENTORY. The new provision of the Revenue Act of 1918 5 relating to losses in the value of inventory and to a redetermination of the value of inventories taken at the close of the taxable year 1918 applies to foreign corporations as well as domestic corporations subject to the limitation that such losses must be connected with income arising from a source within the United States. This subject is more fully discussed in

another chapter.46

NET LOSSES. The provision 47 of the Revenue Act of 1918 with regard to net losses applies to foreign corporations as well as to domestic corporations. The deduction of such losses is more fully discussed in another chapter. 48

WORTHLESS DEBTS. A foreign corporation may deduct. debts ascertained to be worthless and charged off within the taxable year, if and to the extent that they are connected with income arising from a source within the United States.49

DIVIDENDS ON STOCK OF OTHER CORPORATIONS. A foreign corporation may deduct all amounts received as dividends from a corporation taxable upon its net income.50

DEPRECIATION. A foreign corporation may deduct a reasonable allowance for the exhaustion, wear and tear of property used in its trade or business, including a reasonable allowance for obsolescence.51 The manufacturing need

those sustained in a business conducted in the United States. Revenue Act of 1916, § 12 (b).

45 Revenue Act of 1918, § 234 (a) 14.

46 See Chapter 30 on Deduction of Losses. 47 Revenue Act of 1918, § 204.

48 See Chapter 30 on Deduction of Losses. 49 Revenue Act of 1918, § 234 (a) 5, (h). 50 Revenue Act of 1918, § 234 (a) 6, (b).

51 Id. § 234 (a) 7, (b). The 1916 Law allowed deduction for depreciation if the business or trade was conducted within the United States (Section 12 (a) Second Clause). The present law allows it if "connected with income arising from a source within the United States."

not be conducted in the United States in order to permit any such deduction so long as the income therefrom is taxable in the United States by reason of the sale of the product therein. This subject is more fully disclosed

elsewhere in this book.52 AMORTIZATION. A foreign corporation may deduct a reasonable amount for amortization in the case of buildings, machinery, equipment or other facilities constructed, erected, installed or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war with Germany, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the war with Germany, in the same manner as domestic corporations, subject to the general requirement that all deductions in the case of foreign corporations will be allowed only if and to the extent that they are connected with income arising from a source within the United States.53 This deduction is more fully discussed elsewhere in this book.54

Foreign corpora

DEPLETION OF NATURAL RESOURCES. tions are allowed to claim depletion with respect to mines or oil and gas wells or other natural deposits and timber to the extent that the income therefrom is held to arise from a source within the United States.55

DEDUCTIONS FROM INCOME OF FOREIGN INSURANCE COMPANIES. The special deductions allowed in the case of insurance companies, domestic and foreign, are treated in another chapter.56

ITEMS NOT DEDUCTIBLE. In computing the net income of foreign corporations no deduction is allowed for any amount paid out for new buildings or for permanent im

52 See Chapter 31 on Depreciation.

53 Rev. Act of 1918, § 234 (a) 8.

54 See Chapter 31 on Depreciation.

55 Rev. Act of 1918, § 234 (a) 9, (b). See Chapter 32 on Depletion.

56 See Chapter 13 on Insurance Companies.