net income of the trade or business for the taxable year as the average deduction (determined in the same manner as provided in Art. 21 without including the $3,000 or $6,000 therein referred to) for the corresponding calendar year, or representative corporations, partnerships, and individuals engaged in a like or similar trade or business, is of their average net income, plus

(2) In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States, $6,000.14

The Commissioner of Internal Revenue in determining for any calendar year the proportion which the average deduction of representative corporations, partnerships, and individuals engaged in any particular trade or business is of their average net income, will include the deductions and net income of representative corporations and partnerships for fiscal years ending during such calendar year.

For the purpose of applying this article in the case. of a corporation or partnership which has fixed its own

14 See Sec. 210 of the Law. This provision relieves the taxpayer who through faulty accounting methods is unable to ascertain the amount of invested capital in the business. Wide latitude is given to the Secretary of the Treasury in the use of this method. In a trade in which there are many operators who do not keep books according to the recognized systems of accounting, the average return on invested capital may be ascertained among the representative concerns and also the ratio of deduction to income, which may thereupon be applied to all others in that industry whose invested capital cannot be satisfactorily determined. Thus, if the average return on invested capital is found to be 20% and the average deduction is found to be 25% of the net income for that taxable year, one whose income was $36,000 would be entitled to a deduction of $9,000—and the average return on invested capital being 20%, his "invested capital'' would be arbitrarily fixed at $180,000. See Art. 18.

fiscal year, the proportion determined for the calendar year ending during such fiscal year shall be used.

In every case or a trade or business having invested capital a return shall be made in the first instance in accordance with Art. 21 or 23, but the taxpayer may submit therewith a statement of reasons why in his opinion the tax should be assesed in accordance with this article.

NET INCOME GENERAL PROVISIONS

Art. 25. Exemptions.-The following classes of income are exempt from the tax :

(a) Income exempt from taxation under Sec. 4 of the act of September 8, 1916, as amended.15

(b) Income derived from the business of life, health, and accident insurance combined in one policy issued on a weekly premium payment plan.

(c) Compensation or fees received by officers and employees under the United States or any State, Territory, or the District of Columbia for their services as such.16

Art. 26. Net income of foreign corporations, partnerships, and non-resident alien individuals. In the case of a foreign corporation or partnership or a non-resident alien individual the net income shall be the net income from sources within the United States.

Art. 27. Dividends received from a foreign corporation which is subject to Federal income tax. In the case of income derived by a corporation or partnership from dividends upon the stock of a foreign corporation, part of whose net income is subject to the income tax, there shall be deducted only that proportion of the divi

15 See Holmes Income Tax, Ch. 16, p. 226.

16 Salaries of Congressmen have been held not to be exempt under this provision, on the ground that Congressmen are neither officers nor employees of the United States.

dends received upon such stock which the net income of such foreign corporation from sources within the United States is of its entire net income.17

Where dividends upon the stock of a foreign corporation are received by an individual, as a part of his income from trade or business, there shall be included in the net income that proportion of the dividends received upon such stock which the net income of such corporation from sources outside the United States is of its entire net in

come.

NET INCOME-CORPORATIONS

Art. 28. Taxable year.-The net income of a corporation for the taxable year shall be determined by adding (1) the amount of net income ascertained and returned for income tax purposes for such taxable year as provided in Title I of the act of September 8, 1916, as amended and (2) the amount, if any, received as interest on bonds or other obligations of the United States, issued after September 24, 1917 (other than the interest received on an amount of such bonds or obligations the aggregate principal of which does not exceed $5,000),1 and deducting from the total so obtained the amounts received during the taxable year as dividends upon the stock or from the net earnings of other corporations, joint-stock companies or associations, or insurance companies, subject to the income tax imposed by Title I of such act of September 8, 1916, as amended, except as otherwise provided in Art. 27.19

17 See Holmes Income Tax, Ch. 23, p. 264.

18 See Holmes Income Tax, Ch. 22, p. 256.

18

19 Dividends may be deducted if the corporation from which they were received is subject to the income tax whether or not it is subject to the excess profits tax and whether or not the

Art. 29. Prewar period. The net income of a corporation for the prewar period shall be computed as follows:

(a) For the calendar year 1911 by adding (1) the amount of net income shown in item 9 of the return made under Sec. 38 of the act of August 5, 1909, for the calendar year 1911, and (2) the amount of taxes paid to the United States within the calendar year 1911 under Sec. 38 of such act; 20

(b) For the calendar year 1912 by adding (1) the amount of net income shown in item 9 of the return made under Sec. 38 of the act of August 5, 1909, for the calendar year 1912, and (2) the amount of taxes paid to the United States within the calendar year 1912 under Sec. 38 of such act; and

(c) For the calendar year 1913 by adding (1) the amount of the entire net income shown in item 8 of the return made under Sec. II of the act of October 3, 1913, for the calendar year 1913, and (2) the amount of taxes paid within the calendar year 1913 under Sec. 38 of the act of August 5, 1909, and Sec. II or IV of the act of October 3, 1913, and deducting from the total so obtained the amounts received during the calendar year 1913 as dividends upon the stock or from the net earnings of other corporations, joint stock companies or associations,

dividends are from earnings of the year 1917 or from preceding years. Dividends from foreign corporations may be deducted if, and to the extent that the foreign corporation is subject to the income tax. See Art. 27.

20 Under the 1909 and 1913 Laws corporations were permitted to deduct the amount of such taxes paid to the United States. Under the present laws income taxes cannot be deducted. Hence, for the purpose of comparing the average income for the prewar period with the income for the taxable year, the amount of such taxes are restored to the income account of the prewar years.

or insurance companies, subject to the income tax imposed by Sec. II of the act of October 3, 1913.

NET INCOME-PARTNERSHIPS

Art. 30. Taxable year. The net income of a partnership for the taxable year shall be determined by adding the amount of its entire net income (or in the case of a foreign partnership, its entire net income from sources within the United States) ascertained upon the same basis and in the same maner as provided with respect to individuals for income-tax purposes by Title I of the act of September 8, 1916, as amended,21 including the amounts, if any, received during the year as interest on bonds or other obligations of the United States issued after September 24, 1917 (other than the interest on an amount of such bonds or obligations, the aggregate principal of which does not exceed $5,000), and deducting therefrom

(1) The amounts received during the taxable year as dividends upon the stock or from the net earnings of corporations, joint-stock companies or associations, or insurance companies, subject to the income tax imposed by Title I of the act of September 8, 1916, as amended, except as otherwise provided in Art. 27; and

(2) The deductions, if any, for salaries or interest allowed by Articles 32 and 33, if such deductions have not already been made.

Art. 31. Prewar period.-The net income of a partnership for each of the calendar years 1911, 1912, and 1913 shall be determined in the same manner as the net income for the taxable year, except that dividends upon the stock or from the net earnings of corporations, joint

21 See Holmes Income Tax, Ch. 4 and Ch. 5.