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FOREIGN CORPORATIONS HAVING BRANCH OFFICES IN This COUNTRY. Where a foreign corporation has one or more branch offices in this country the return should include the income of all the branches, including branches in the Philippines and Porto Rico. The principal branch office determines the district in which the return should be filed and the tax should be paid. Where branches in this country transact business in foreign jurisdictions, the net income accruing to the branch here, it seems that the income derived from such business in foreign jurisdictions should be treated as income from sources within this country since the management and conduct of such business is directed from within this jurisdiction and the foreign corporation eventually receives its net income from a source within this country, namely the branch conducting such business.

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INCOME FROM INVESTMENTS. Income from investments of all kinds in property located within this country is subject to the tax under the broad provisions of the law which provide for the taxation of the total net income from all sources within the United States. 17

17 Under the 1913 Law, the tax was imposed only upon such foreign corporations as were doing business and had capital invested in this country. The Treasury Department construed this to mean that the tax applied if a foreign corporation was either doing business or had capital invested here and held that money invested in the securities of American corporations was capital invested in the United States regardless of the domicile of the securities or that of the corporation owning them. (Letter from Treasury Department dated June 6, 1916; I. T. S. 1917, 9 1505.) In DeGanay v. Lederer, 239 Fed. 568, it was held that the income tax properly applied to income on domestic securities owned by a non-resident alien, which securities were kept in this country.

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Deductions from Gross Income Allowed by Law. The deductions from the gross income of a foreign corporation should as nearly as possible represent the actual expenses and authorized charges incident to the income derived from this country and must not comprehend either directly or indirectly any expenditures or charges incurred in the transaction of business or the investment or capital without the United States.18 The principle followed by the Treasury Department is that all allowable' deductions shall be computed upon a basis which recognizes that the income arising and accruing from business done in and from this country shall bear its share, and no more, of expense incident to the earning or creation of such income in the ratio that the gross income arising in and from this country bears to the entire gross income arising from business done both within and without this country.19

WHEN INCOME IS DERIVED FROM INVESTMENTS ONLY. A corporation deriving its sole income from this country in the form of dividends or interest on domestic stocks and bonds is permitted to deduct from the income so received such items of disbursement, loss, etc., as would be properly deductible were the income derived from any other source. The deduction shall comprehend only such expenditures, losses, etc., as are incurred in or are incidental to the creation of the income against which they are charged and in all cases the amounts must be within the limits fixed by law.20

18 Reg. 33, Art. 157.

19 Letter from Treasury Department dated July 18, 1916; I. T. S. 1917, 11114.

20 Letter from Treasury Department dated June 6, 1916; I. T. S. 1917, 1 1505.

ORDINARY AND NECESSARY EXPENSES. A foreign corporation may deduct all the ordinary and necessary expenses actually paid within the year out of earnings in the maintenance and operation of its business and property within the United States, including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity. This chapter contains only the rulings applicable to foreign corporations. The chapter on domestic corporations should be read as well as the chapters discussing the general provisions relating to deductions. Where certain expenses such as coal, ships stores, etc., in the case of foreign steamship companies, cannot be segregated the total expenses of the foreign corporation for such items should be pro-rated in such proportion as the gross income of the corporation from sources within the United States bears 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 is from this country one half of such expenses would be proper deduction. 21

LOSSES. All losses actually sustained within the year in business or trade conducted by the foreign corporation within the United States and not compensated by insurance or otherwise may be deducted including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade, within the limits permitted to domestic corporations. It should be noted that losses which may be deducted are those sustained in the business conducted in the United States and depreciation may be deducted only on property used in connection with such business. The general rulings relating to losses and depreciation are discussed in the chapters on deductions.22 No rulings or decisions especially applicable to foreign corporations have been made with reference to these deductions.

21 T. D. 1675; Reg. 33, Art. 116; Letter from Treasury Depart. ment dated December 8, 1916.

DEPLETION OF NATURAL RESOURCES. Foreign corporations owning mines or oil and gas wells in this country are entitled to the same allowances for depletion of the natural resources as are permitted to domestic corporations and individuals. For a discussion of these allowances see the chapters on depletion.23

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

INTEREST. Foreign corporations are permitted to deduct a part of the interest paid during the year under the following rules. The amount of indebtedness on which the interest may be deducted must be an amount not in excess of the entire amount of the paid up capital stock outstanding at the close of the year, or if no capital stock, the entire amount of the capital employed in the business 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 can deduct is limited in the same way as in the case of domestic corporations. The discussion of this limitation in the Chapter on Corporations applies equally to domestic and foreign corporations.24 If the foreign corporation does all its business in the United States the interest on the amount of indebtedness ascertained as above may be deducted. If it does only a part of its business in the United States there may 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 bears to the gross amount of its income derived from all sources within and without the United States. As in the case of all other taxpayers, foreign corporations are not permitted to deduct the amount of interest on indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from the income tax.

22 See Chapters 31 and 32. 23 See Chapters 33 and 34.

INTEREST ON INDEBTEDNESS SECURED BY COLLATERAL. The provision of law permitting a deduction to domestic corporations 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 is not allowed by the law to foreign corporations.

INTEREST PAID BY BANKS ON DEPOSITS. A foreign bank, banking association, loan or trust company, or branch thereof, may 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 interest-bearing certificates of indebtedness issued by such bank, bank association, loan or trust company or branch thereof. Interest so paid to citizens and residents being taxable as income to them

24 See Chapter 12.

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