come except to the extent that the per diem allowance exceeds the amount of actual necessary expenses incurred while so traveling.

Compensation of Officers and Employees of a State or Political Subdivision Thereof. The compensation of all officers and employees of a state, or any political subdivision thereof, is exempt from tax, except when the compensation is paid by the United States Government.8 This exemption applies to officers and employees of the state and of its counties, municipalities, townships and other political subdivisions. The salaries of public school teachers come within this class. The exemption does not include an individual who enters into a contract with a state for the construction of public works, as such person is neither an officer nor an employee.10 It has also been ruled that where a real estate corporation is employed by a city to appraise the value of property, it cannot claim exemption as an employee. Officials of the governments of the District of Columbia, Porto Rico and the Philippine Islands, or the political subdivisions thereof, do not come within this class and the compensation paid to them is not exempt.11 It seems, also that the officers and employees of a Territory, or any political subdivision thereof, are not entitled to this exemption, since the law does not include them and there is not the same constitutional objection to taxing them as exists in the case of State employees.

This exemption rests on the theory that Congress has no power, even by an act taxing all incomes, to levy a tax on salaries of state officers. See Collector v. Day, 11 Wall. 113.

8 Act of September 8, 1916, § 4.

9 Reg. 33, Art. 5.

10 T. D. 2152.

11 Act of September 8, 1916, § 23.

Compensation of Federal Judges. The salaries of Judges of the Supreme Court and inferior courts of the United States, in office at the time the law was passed, are exempt from the tax, but this does not include the salaries of such judges as have been appointed subsequent to the passage of the law or of judges who have been retired.12

Compensation of the President of the United States. The compensation of the President of the United States in office at the time the law was passed is exempt from the tax during the term for which he was elected.13

source.

in

Professions and Vocations. Incomes from professions and vocations are taxable as is income from any other No rulings are specially applicable to these forms of income. Such income is taxable in the year which it is received, not necessarily for the year in which it is earned. Rulings as to this point are general and are discussed in the preceding chapter.

12 Act of September 8, 1916, § 4; T. D. 2090. This exemption was inserted in view of the provision of the Federal Constitution, Art. 3, § 1, which guarantees that the compensation of Federal judges shall not be diminished during their continuance in office. See Opinion of Justice Field in Pollock v. Farmers Loan & Trust Company, 157 U. S. 429; and 13 Op. Atty. Gen. 161.

13 Act of September 8, 1916, § 4. In an opinion of the Attorney General in 1869 it was held that a specific tax by the United States upon the salary of the President in office at the time the act was passed, to be deducted from the salary which otherwise would be paid him, would be a diminution of his compensation in contravention of Article 2, Section 1, Clause 7, of the Federal Constitution, which provides that the compensation of the President shall neither be increased or diminished during the period for which he shall have been elected. 13 Op. Atty. Gen. 162. This consideration no doubt moved Congress to grant the exemption in the present law.

CHAPTER 18

INCOME FROM BUSINESS, TRADE OR COMMERCE

Income from this source is, as indicated in the title, the income derived by an individual or a corporation from business, trade or commerce in which he or it is engaged. With respect to this class of income the phrase gross income has a meaning which differs from that of gross receipts as indicated in the following paragraphs.

Gross Income in Manufacturing Businesses. The gross income of a manufacturing business consists of total sales of manufactured goods during the year covered by the return, increased or decreased by the gain or loss as shown by the inventories of finished or unfinished products, raw material, etc., at the beginning and end of the year.1 A manufacturer may include as an element of the cost of manufactured products, the cost of the raw material, the cost of labor of the men who actually work on such products, as well as the cost of supervisory, or what may be denominated as "unproductive" labor, such as that of the foreman, inspectors, overseers, etc., provided such expenditures are not separately deducted from gross income in the return of annual net income.2

Gross Income in Mercantile Businesses. The gross income of a mercantile business should include the total 1 Reg. 33, Art. 104.

2 T. D. 2152.

merchandise sales during the year, increased or decreased by the gain or loss as shown by the inventories of merchandise at the beginning and end of the year for which the return is made.3

Inventory. Where, in order to arrive at the correct amount of income, it is necessary that an inventory, or its equivalent, of materials, supplies, and merchandise on hand for use or sale at the close of each year shall be made in order to determine the gross income or to determine the expense of operation, a physical inventory is at all times preferred by the Treasury Department. Where a physical inventory is impossible and an equivalent inventory is equally accurate, the latter will be accepted. An equivalent inventory is an inventory of materials, supplies, and merchandise on hand taken from the books of the taxpayer. The Treasury Department requires inventories to be taken at the cost price.5

Gross Income of Insurance Companies. Special rules are applicable to ascertaining the gross income of insurance companies. These rules are discussed in the chapter on insurance companies.

Gross Income Generally. The gross income of the taxpayer is, generally speaking, his total income derived from the operation and management of his or its busi

3 Reg. 33, Art. 105.

4 Reg. 33, Art. 161.

Although the Department is positive in its stand on this point, it seems to have issued no express ruling or regulation, the only express reference to the requirement that inventory be taken at cost being in the instructions on the back of the form of return of net income of corporations. See Form 1031.

6 See Chapter 13.

ness and property, together with all amounts of income from all other sources. It embraces, of course, not only the income of a manufacturer or dealer from his business, but also income from all other sources such as rentals, royalties, interest, dividends, and profits from the sale of assets."

Income of Contracting Companies. Where a contracting company has contracts which may run for a period of several years, it may prepare its return in such manner that its gross income will be arrived at on the basis of completed work; that is to say, on jobs which have been finally completed and payments made during the year. If the gross income is arrived at by this method, the deductions from gross income should be limited to the expenditures made on account of such completed contracts.8

Income from Export Business. Income from the business of exporting goods is held to be taxable by the Treasury Department. It has also been held that a tax on such income is not a tax on the articles exported, and therefore not unconstitutional in that regard.9

Accounts Receivable. Accounts and bills receivable of a business concern are treated by the Treasury Department as income for the year in which they are created; that is, in the year in which the accounts

7 Reg. 33, Arts. 106 and 107.

8 T. D. 2161.

9 Peck v. Lowe, 234 Fed. 125. It was so held by the District Court in which the case was first decided. At the present time the case is before the Supreme Court on appeal.