otherwise would not be taxable, nor does it serve to relieve from taxation income which otherwise would be taxed.21 Dividends, for instance, would not be subject to the normal tax for the reason that they are paid to a trustee and by him distributed to non-resident aliens.22 Similarly, exempt income is not made taxable by passing through the hands of a fiduciary to the beneficiary.23 One important class of exempt income from estates is gifts, legacies, bequests, etc., the principal sum being exempt, but the income therefrom being taxable.24 Where a non-resident alien is a trustee, or other fiduciary, of an estate deriving income from sources within the United States, he is charged with the duty of making a return of such income, and the normal tax is withheld at the source on payments of fixed and determinable income made to him by persons in this country.25

INCOME FROM PARTNERSHIPS. Non-resident aliens, who are members of partnerships deriving all their income from sources within this country, are taxable on their entire distributive shares.26 If a partnership derives only part of its income from sources within the United States, non-resident alien partners are taxable only on that part of their respective shares of the profits which

21 Letter from Treasury Department dated March 25, 1915; I. T. S. 1917; ¶¶ 89 and 90.

22 Letter from Treasury Department dated April 5, 1916; I. T. S. 1917, ¶ 42.

23 Exempt income is not reported by the fiduciary, as income accruing to the estate, for the purpose of the tax.

24 See Chapter 25.

25 Letter from Treasury Department dated December 28, 1916; I. T. S. 1917, ¶ 1963. See Chapter 9.

26 See Chapter 10 on partnerships.

F. I. Tax.-4

represent income of the partnership from such sources.27 This would seem to be true although the partnership had its principal place of business here from which the operations abroad were directed.

PROFITS ON THE SALE OF PROPERTY. Non-resident aliens are taxable on profits and gains from the sale of real or personal property located in the United States.28 Where sales of intangible personal property, for example, stocks, bonds, notes, etc., of domestic corporations or residents are made in the United States, the profit is held to be taxable and the custodian of the securities here is charged with the duty of reporting the profit of the non-resident alien, for which purpose he must place himself in possession of all the facts necessary to an accurate determination of the amount of profit or loss in the transaction.29 If a sale of such intangible personal property is made in a foreign country by a non-resident alien, it does not seem that the seller would be taxable on the gain or profit therefrom.

OTHER INCOME. Gains or profits and income derived from any source whatever in the United States (except exempt income) are taxable.30 The questions which arise

27 This is one of the many questions on which the Treasury Department has not as yet made any public statement of its position. The status of a partner differs from that of a stockholder in a corporation since in the case of a partnership there is no separate entity interposed between the recipient of the income and its original source.

28 See Chapter 20 for method of computing taxable gains on the sale of property.

29 Letter from Treasury Department dated May 31, 1916; I. T. S. 1917,

86.

30 Act of September 8, 1916, § 1, § 2 and § 4.

in this connection are with respect to the source of the income, rather than with respect to its character. Many of the questions will be settled only by the slow and gradual process of development of the law, through litigation and by specific rulings of the Treasury Department on cases brought to its attention.31

Deductions Allowed in Computing Net Income. A non-resident alien is required to report all his taxable income from sources within this country, but from the gross amount so reported is entitled to make certain deductions before the tax is assessed on the remainder. The deductions are similar in kind to those allowed to residents and citizens but, in general, are confined to expenditures made with respect to the income subject to tax or limited by the proportion of the individual's income derived from sources within this country. An extended discussion on deductions is contained in other chapters, the discussion in this chapter being limited to the provisions which apply particularly to non-resident aliens.3

32

EXPENSES. All necessary expenses actually paid in carrying on any business or trade conducted within the United States may be deducted, but not including per

31 This development of the law may be hastened by action of Congress in making amendments more clearly defining taxable Sources. At present there is not only uncertainty as to the meaning of the law as it stands, but also a need for amendment. The phrase "sources within the United States' is too broad and indefinite for practical certainty and it naturally results in imposing the tax on incomes in cases where there is serious question as to the moral right or economic wisdom of so doing.

32 The deductions allowed to a non-resident alien are set forth at length in the 1916 Law, § 6.

sonal living or family expenses. Where the business or trade carried on in this country is by means of separate and distinct branches the expenses are readily determined. Where the accounts are kept at, and the business is under the supervision of, the home office abroad, the home office expenses connected therewith, if segregated, may be included. If not segregated, the Treasury Department has permitted the deduction of such proportion of the entire expenses of the business as the gross income from this country bears to the entire gross income from business done both within and without the United States.33

INTEREST. The proportion of all interest paid within the year by a non-resident alien on his indebtedness, (except on indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from taxation as income under the 1916 Law) which the gross amount of his income for the year derived from sources within the United States bears to the gross amount of his income for the year derived from all sources within and without the United States may be deducted. For instance, if half of the individual's gross income for the year is from sources within the United States, he may deduct one-half of the entire amount of interest he has paid during the year on his indebtedness. To obtain this deduction it is required that the claimant report the entire amount of interest paid during the year and his entire gross income from all sources, so that the Treasury Department may calculate the amount of deduction to which he is entitled.3 34

33 See Chapter 28 for general discussion of deduction of business expenses.

34 See Chapter 29 on deduction of interest.

TAXES. Subject to the limitations applicable to all classes of taxpayers, the non-resident alien may deduct all taxes imposed by the authority of the United States or its territories, or possessions, or under the authority. of any State, county, city, school district, and other taxing subdivision of any State, and paid within the United States. The general limitations are discussed in a subsequent chapter.35

LOSSES INCURRED IN TRADE. Losses incurred in the non-resident alien's business or trade may be deducted, if actually sustained during the year and incurred in business or trade conducted within the United States. Losses of property within the United States arising from fires, storms, shipwreck or other casualty, and from theft, may also be deducted to the extent that such losses are not compensated for by insurance or otherwise.36

Loss NOT INCURRED IN TRADE. In the case of losses in transactions entered into for profit but not connected with his business or trade, the losses actually sustained during the year may be deducted to an amount not exceeding the profits arising therefrom in the United States. The profits arising from such transactions must be reported as income, and the losses sustained therein may be deducted, to an amount not exceeding the income so reported. It seems that the tax is imposed on the net profits of the year on a series of such transactions taking place in this country, the loss in one transaction being set off against the gain in another. But if the entire series of transactions results in a loss, that loss may not be set off against income from busines or trade in this

35 See Chapter 30 on deduction of taxes.

36 See Chapter 31 for general discussion of losses.