created, since the Treasury Department holds that the net income of taxpayers in manufacturing or mercantile businesses should be ascertained from their books and from the actual inventory of merchandise in accordance with the established procedure in such businesses.37

Receipt by Agent Is Receipt by Principal. A system of accounting adopted by an insurance company, which allowed a period of two months to local agencies in which to report their cash premium receipts to the home office, was held, in view of the rules and regulations of the Commissioner of Internal Revenue, not to "clearly reflect" the company's income. A payment to the agent was held to be payment to the principal, and the company was required to include such payments in the return for the year in which they were received by the agent. The provision of the 1916 Law, permitting a corporation to report according to its books, was held not to justify the system followed by the corporation in this case, as the system adopted must be such as to "clearly reflect its income." 38

Income from Foreign Countries. Where income has accrued in a foreign country on foreign investments but has not been remitted to the owner here, being placed to his credit in the foreign country, he should include the same as income for the year in which it is placed to his credit, computing the amount in United States money by using the rates of exchange prevailing at the time the amounts were credited abroad.39

37 Letter from Treasury Department dated March 31, 1915; I. T. S. 1917, ¶ 241.

38 Maryland Casualty Company v. U. S., Ct. Cls., T. D. 2451. 39 Letter from Treasury Department dated January 11, 1916; I. T. S. 1917, ¶ 230.

Income Received from Porto Rico or the Philippines. A corporation or individual whose return under the law is specifically required to be filed with the collector of one of the districts of the continental United States would not be taxable in Porto Rico or the Philippines, although a portion of the income received might be derived from business carried on in one or both of those jurisdictions. Although the law provides that income collected in those jurisdictions "shall accrue intact to the general governments thereof," this refers only to the tax legally assessable therein, and does not alter the general rule that all of the tax shall be paid in the district in which the taxpayer resides or has his or its principal place of business.40

Gross Income. The Treasury regulations and rulings refer to gross income generally as the income of the taxpayer before making the deductions and allowances permitted by law. The statute does not use the phrase gross income but in prescribing the deductions allowed to corporations makes use of the phrase "gross amount" of its income. Gross income is not synonymous with gross receipts.

Net Income. The phrase "net income" as used by the Treasury Department seems to mean the amount remaining after subtracting from gross income the deductions allowed by law. In the case of individuals the net income includes the amount received as dividends and the amount of the personal exemption, that is, these amounts are not subtracted from gross income in arriving at what is termed net income but they are subtracted

40 Letter from Treasury Department dated April 4, 1917. F. I. Tax.-15

from net income only in arriving at the net taxable income for the purpose of the normal tax.

Exempt Income. The act specifically prescribes the income which is exempt from tax. The intent seems to be that the income shall be exempt (with four exceptions) regardless of the status or character of the recipient. The four exceptions are (a) proceeds of life insurance policies; such proceeds are exempt only if paid to individual beneficiaries, not to corporations or partnerships; (b) compensation of the President of the United States; (c) compensation of the Federal Judges, and (d) compensation of officers and employees of a state or political subdivision thereof. In the case of the last

named class it is held by the Treasury Department that "officers or employees" refer only to individuals. The other provisions as to exempt income have no limitation with respect to the character or status of the recipient and the income would seem to be exempt whether received by an individual, a partnership or a corporation. Such income is as follows: the amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon the surrender of the contract; the value of property acquired by gift, bequest, devise, or descent; interest upon the obligations of a state or any political subdivision thereof or upon the obligations of the United States, (but, in case of the obligations of the United States issued after September 1, 1917, only if and to the extent provided in the act authorizing the issue thereof) or its possessions or securities issued under the provisions of the Federal Farm Loan

Act of July 17, 1916.41 A more complete discussion of this class of income is contained in the several chapters dealing with the respective kinds of income enumerated.

Reporting Income on Basis of Book Entries. The law provides that an individual or a corporation keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect his or its income, may make returns. upon the basis upon which the accounts are kept, in which case the tax shall be computed upon the income as so returned. This privilege is subject, however, to regulations made by the Commissioner of Internal Revenue, which regulations may limit the right as the Commissioner sees fit.42 Taxpayers who do not keep books in accordance with standard systems of accounting will be required to report their net income on the basis of actual receipts and payments, but where books are kept in accordance with standard systems of accounting, or in conformity with the requirements of some federal, state or municipal authority having supervision over the taxpayer, returns may be made on the basis on which such books are kept, provided the books are so kept and the return so made as to reflect the true net income of the corporation for each year.43

41 Act of September 8, 1916, § 4, as amended by Act of October 3, 1917.

42 Act of September 8, 1916, § 8 (g) and § 13 (d).

43 T. D. 2433. In this ruling the Treasury Department has placed certain limitations upon the extent to which reserves may be set up and deducted. These limitations are discussed in the chapters on deductions. While the language of the ruling refers particularly to corporations, there seems to be no reason why it should not be applicable to individuals as well,

SAME BASIS MUST BE USED CONSISTENTLY. Where a taxpayer adopts a system of reporting according to his books, he must report consistently on this basis. He may not claim a right to report on the cash basis in part and the accrual basis in part. The two systems cannot overlap.44

ACCRUED CHARGES. Under this provision, it is permissible for a corporation which accrues on its books, monthly or at other stated periods, amounts sufficient to meet fixed annual or other charges, to deduct the amount so accrued, provided the accruals approximate as nearly as possible the actual liabilities for which the accruals are made, and income from fixed and determinable sources aceruing to the corporation is returned on the same basis.45

44 Maryland Casualty Company v. U. S. (Ct. Cls.) T. D. 2451. 45 T. D. 2433.