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ience of the Government, and the money equivalent only of the number of rooms allowed by law should be returned as income.

HEAT AND LIGHT. Amounts received by, or paid for, an officer for heat and light should be returned as income. This includes the money equivalent, as fixed by the Government, of heat and light furnished to an officer occupying public quarters. Amounts expended for heat and light are in the nature of personal living expenses and differ in this respect from amounts furnished for mileage, the latter being in the nature of a business expense or an expense of the employer rather than of the employee.

MILEAGE. Mileage, as such, is not income to an officer or employee, as he is required to pay his actual expenses while traveling under mileage orders. The difference between the amount received as mileage and the amount of actual necessary expenses incurred on a journey should, however, be returned as income. The actual expenses to be deducted by the individual before ascertaining his income on account of mileage are the expenses for which reimbursement would be made by the Government if he had traveled on an actual expense basis instead of a mileage basis.

REIMBURSEMENT FOR ACTUAL EXPENSES. Amounts paid by the Government in the nature of reimbursement for subsistence and other items of actual expense incurred while absent on business for the Government are not required to be returned as income.

PER DIEM ALLOWANCES. Per diem allowances in lieu of subsistence while traveling under orders are not in

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.

7 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.

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 in 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 produts, 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.6

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.

5 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.

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