to an amount of each partner's share of such partnership profits equal to the proportion which the part of such fiscal year falling within such preceding calendar year bears to the full fiscal year and the rate for the calendar year during which such fiscal year ends shall apply to the remainder of such profits.23 As an illustration of this provision, assume that a partnership closed its fiscal year on June 30, 1916. In such case after each partner has determined the share of the profits to be reported he will be permitted to divide the amount by two (since one-half of the fiscal year was in 1916 and one-half in 1915) and pay at the 1915 rates on one-half and at the 1916 rates on the other half. Similarly in the case of a fiscal year ending in 1917 the 1916 rates will apply to such proportion of the profits as the part of the fiscal year in 1916 bears to the whole fiscal year. Prior to this amendment of the statute the Treasury Department held that where the fiscal year of a partnership ended at any time other than December 31st the total profits of the partnership were required to be reported as income for the calendar year in which the fiscal year of the partnership ended.

Profits Earned Prior to March 1, 1913. In a case arising under the 1913 Law it was contended that where the fiscal year of a partnership ended between March 1, 1913, and December 31st of the same year, the equitable method would be to apportion the profits for the fiscal year in equal monthly instalments and allot to the period preceding March 1st its proper proportion, making the partners taxable only on their respective shares in the remainder. The court held that the plaintiff

23 Act of September 8, 1916, §8 (e), as amended by Act of October 3, 1917.

in this case failed to show that profits were earned by the partnership prior to March 1, 1913, and in what sum, and in the absence of such showing the court assumed that the tax was legally collected.24 The Treas ury Department held under the 1913 Law that the entire amount of profits accruing to a partner at the close of the fiscal year of the partnership were taxable in the calendar year in which the fiscal year ended,25 although a part of the fiscal year may have covered a period prior to the incidence of the tax.

Net Losses of Partnership. Where the books of a partnership show a loss for a year in accordance with. the actual facts, the respective members of the partnership should include as a deduction such amount as is charged against them respectively, as the loss of a partnership is considered to be a loss incurred in trade by the individual members. The partner may deduct the loss whether he is compelled to make good his proportionate share by payment of money to the partnership or whether the loss is charged against profits accrued to his account in preceding years.26 If the loss occurs in a fiscal year covering a period in which there is a change of tax rates it does not seem that the loss should be pro-rated although the income if any would be, since a loss is deductible in the year in which it is actually sustained.27

Returns by Partnerships. Partnerships as such are not required to render returns of annual net income.

24 Cohen v. Lowe, 234 Fed. 474.

25 T. D. 2090.

28 Letter from Treasury Department dated February 12, 1915; I. T. S. 1917, ¶ 522.

27 See Chapter 31 on Losses.

They are, however, required to report annually the amount of tax withheld on income paid to non-resident aliens under the provisions of law requiring collection at the source,* 28 and to file such annual returns as are required under the provisions relating to information at the source.2 29

Special Returns. Any partnership when requested by the Commissioner of Internal Revenue or any collector is required by law to make a correct return of its earnings, profits and income, showing the gross income and the deductions and credits allowed by the law and the names and addresses of the individuals who would be entitled to the net earnings, profits and income if distributed. It is not required in such special returns that the partnership report income exempt under Section 4 of the 1916 Law.30

28 See Chapter 41 on Collection at the Source. 29 See Chapter 40 on Information at the Source.

30 Act of September 8, 1916, § 8 (e); Reg. 33, Art. 12. A special return from partnerships was required generally in 1913, but no return was required for the year 1914 or for subsequent years, except in instances where it was specifically requested by the Commissioner of Internal Revenue or a collector.

CHAPTER 11

FOREIGN PARTNERSHIPS

The law expressly mentions foreign partnerships in only one provision that which requires the withholding of the tax on payments of income from interest upon bonds and mortgages or deeds of trust or similar obligations of domestic or other resident corporations, to nonresident alien firms and copartnerships not engaged in business or trade within the United States and not having any office or place of business therein. By implication, however, the income of a foreign partnership from sources within the United States is taxable in the hands of the non-resident alien partners, to the extent included in the distributable share of each, and such is the ruling of the Treasury Department. If the partner is a citizen or resident of this country, he is of course subject to tax upon his entire distributive share of the profits of any partnership of which he may be a member.

Definition. No definition of the words "alien partnership" appearing in the section of the law referred to in the preceding paragraph, is to be found in the law or the regulations. The law refers to "non-resident alien firms" and to "non-resident alien copartnerships"

1 Act of September 8, 1916, as amended, § 13, Subdivision (e). 2 Letter from Treasury Department dated April 7, 1917; I. T. S. 1917, ¶ 2287.

synonymously, and applies the term without regard to whether or not the firm or copartnership is engaged in business or trade within the United States or has an office or place of business in this country. The term apparently has reference to the status of the partners composing the firm, and in this respect it is indefinite, as a firm may be composed of non-resident aliens and resident aliens or citizens. For the sake of clearness in discussing the subject of this chapter, the term "foreign partnership" as used herein is defined as a partnership or firm, whether composed of aliens or citizens, residents or non-residents, which has its principal place of business in a foreign country and directs all or the principal part of its business from its office outside the jurisdiction of the United States.

Limited Partnerships. If the foreign partnership is one of the kind which, if it were domestic, would be treated as a corporation or association, it seems that it should report its net income and pay the tax according to the provisions of the law and regulations applicable to foreign corporations. Having done so, its partners should treat their net distributive shares of the profits as dividends. Since non-resident alien stockholders of a non-resident foreign corporation are not taxable to any extent on the dividends of such corporation, it would follow that the partners of a non-resident foreign partnership or association which is required by the regulations to report and pay the tax as a corporation, would not be subject to any tax on their net distributive shares of the profits. For a statement of the rulings bearing on the subject of partnerships required to pay the tax in the manner of corporations see the preceding chapter on partnerships.