of such bonds and certificates the principal of which does not exceed in the aggregate $5,000, owned by any individual, partnership, association, or corporation, shall be exempt from the taxes provided for in subdivision (b) of this section.

Accordingly, all interest on liberty bonds of the second, third and fourth issues is exempt from the normal tax. Such interest may, however, be subject to surtax and may require to be included in gross income. As to any issue after the fourth, the provisions of the act authorizing it will govern its exemption.5

Liberty Bond Exemption from Surtax. Section 7 of the Second Liberty Bond Act provides that the interest on an aggregate of not exceeding $5,000 principal amount of liberty bonds of issues after the first, including in such later issues the first liberty bonds converted, owned by any person at one time shall be exempt from all income and war excess profits taxes.6 The Supplement to Second Liberty Bond Act, approved September 24, 1918, provides:

That until the expiration of two years after the date of the termination of the war between the United States and the Imperial German Government, as fixed by proclamation of the President

(1) The interest on an amount of bonds of the Fourth Liberty Loan the principal of which does not exceed $30,000, owned by any individual, part

5 Id. Art. 77

6 Where a husband and wife each own in his own or her own right bonds of these issues not exceeding $5,000, each is entitled to exclude the income therefrom in computing the tax on their joint incomes, and minor children having separate estates are also entitled to the exemption. (Letter from Treasury Department dated October 8, 1917, I. T. S. 1918, ¶ 447.) A taxpayer holding bonds and certificates of indebtedness issued under the act is entitled to the exemption of $5,000 of his aggregate holdings, not on $5,000 of each class of obligations (T. D. 2585).

nership, association, or corporation, shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations.

(2) The interest received after January 1, 1918, on an amount of bonds of the First Liberty Loan Converted, dated either November 15, 1917, or May 9, 1918, the Second Liberty Loan, converted and unconverted, and the Third Liberty Loan, the principal of which does not exceed $45,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from such taxes: Provided, however, That no owner of such bonds shall be entitled to such exemption in respect to the interest on an aggregate principal amount of such bonds exceeding one and one-half times the principal amount of bonds of the Fourth Liberty Loan originally subsubscribed for by such owner and still owned by him at the date of his tax return; and

(3) The interest on an amount of bonds, the principal of which does not exceed $30,000, owned by any individual, partnership, association, or corporation, issued upon conversion of 311⁄2 per centum bonds of the First Liberty Loan in the exercise of any privilege arising as a consequence of the issue of bonds of the Fourth Liberty Loan, shall be exempt from such taxes.

The exemptions provided in this section shall be in addition to the exemption provided in Section 7 of the Second Liberty Bond Act in respect to the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty Bond Act.

Accordingly, there may be excluded from gross income (a) the interest received on not exceeding $5,000 principal amount of liberty bonds of any or all issues after the first, up to and including the fourth; and, until two years after the war, (b) the interest received on not exceeding $30,000 principal amount of liberty bonds of the fourth issue; plus (c) the interest received on an aggregate principal amount of liberty bonds of the first liberty loan, converted, the second liberty loan, converted or unconverted, and the third liberty loan, not exceeding $45,000 and not exceeding 150 per cent of the principal amount of the bonds of the fourth liberty loan both originally subscribed for by the taxpayer and still owned by him at the date of his return; plus (d) the interest received on not exceeding $30,000 principal amount of liberty bonds into which first liberty bonds may have been converted in the exercise of any privilege arising as a consequence of the issue of the fourth liberty bonds." It has been held that an individual who originally subscribed to bonds of the Fourth Liberty Loan to an amount not exceeding $30,000 in accordance with the Government plan and, who made payments in accordance with such plan is not required to pay for such bonds in full on or before December 31, 1918, in order to obtain this exemption. Likewise, if an individual subscribed for bonds of the Fourth Liberty Loan through a bank by agreeing to pay the subscription price in installments acceptable to the bank, and make payments in accordance with this plan, it will not be necessary for such individual to pay for the bonds in full on or before December 31, 1918, in order to obtain this exemption.8

Liberty Bond Exemption in the Case of Trusts. (a) When income is taxable to beneficiaries, as in the case of a trust the income of which is to be distributed to the

7 Id. Art. 78.

8 Letter from Treasury Department dated January 3, 1919, I. T. S. 1918, ¶ 3715.

beneficiaries periodically, each beneficiary is regarded as the owner of a proportionate part of the bonds held in trust and is entitled to exemption on account of such ownership as if he owned such proportionate part of the bonds directly. In such a case a subscription by a trustee for bonds of the fourth liberty loan constitutes each beneficiary existing at the time of such subscription an original subscriber for his proportionate part of such bonds and entitles such beneficiary to the collateral exemption of interest on bonds of previous issues, whether owned by such beneficiary or by the trustee, as if the beneficiary had himself originally subscribed for such proportionate part of the bonds, and a subscription by such beneficiary for bonds of the fourth liberty loan entitles him to the collateral exemption of interest on bonds of previous issues held by the trustee. (b) When, on the other hand, income is taxable to the trustee, as in the case of a trust the income of which is accumulated for the benefit of unborn or unascertained persons, the trustee is regarded as the owner of all the bonds held in trust and the trust is entitled to any exemption on account of such ownership. In such a case a subscription by a trustee constitutes the trustee as such the original subscriber and entitles the trust, on account of such subscription, to the collateral exemption of interest on bonds of previous

issues.9

Liberty Bond Exemption in the Case of Partnerships and Personal-Service Corporations. As income of a partnership is taxable to the individual partners, each partner is treated and entitled to exemption on account of such ownership as if such partner owned such proportionate part of the bonds directly. Such partner, if a partner at the time of the original subscription by the partnership for bonds of the fourth liberty loan, is treated as an original subscriber for a proportionate part of such bonds subscribed for by the partnership and is en

9 Reg. 45, Art. 79.

titled to the collateral exemption of interest on bonds of previous issues on account of such original subscription for bonds of the fourth liberty loan as if he had subscribed directly for such proportionate part of the bonds. principle applies also to stockholders in personal-service corporations.10

This

War Finance Corporation Bonds. The War Finance Corporation Act makes the same provision for the exemp tion of bonds which the War Finance Corporation is empowered and authorized to issue, as is provided in the case of Second Liberty Loan Bonds as to interest on an amount of such bonds, the principal of which does not exceed in the aggregate $5,000 owned by any individual, partnership, corporation or association.11

Interest from Federal Land Bank and National Farm Loan Association. As section 26 of the Federal Farm Loan Act of July 17, 1916, provides that every federal land bank and every national farm loan association, including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from taxation, except taxes upon real estate, and that farm loan bonds, with the income therefrom, shall be exempt from taxation, the income derived from dividends on stock of federal land banks and national farm loan associations and from interest on such farm loan bonds is not subject to the income tax.12

Obligations of the Possessions of the United States. Interest paid on the obligations of possessions of the United States is exempt.13

Obligations of the Territories.

Interest on the ob

ligations of the Territories, or political subdivisions thereof, is exempt.14

10 Id. Art. 80.

11 Act of April 5, 1918 (Public No. 121), § 16.

12 Reg. 45, Art. 74.

13 Revenue Act of 1918, § 213 (b) 4.

14 Such interest was not exempt under the 1916 law, since the law

F. T.-24