payer's income is from dividends or from a large amount of Liberty bonds, it is possible for him to be subject to a surtax while exempt from the normal tax.

PERSONAL EXEMPTIONS OF NON-RESIDENT ALIENS.

LAW. Section 216. (e) In the case of a nonresident alien individual who is a citizen or subject of a country which imposes an income tax, the credits allowed in subdivisions (c) and (d) [$200 for each dependent and $1,000 and $2,000, as the case may be, for heads of families (see page 29)] shall be allowed only if such country allows a similar credit to citizens of the United States not residing in such country.

LAW. Section 217. That a nonresident alien individual shall receive the benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received from all sources corporate or otherwise in the United States, in the manner prescribed by this title, including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits: Provided, That the benefit of the credits allowed in subdivisions (c) and (d) of section 216 [the personal exemptions] may, in the discretion of the Commissioner, and except as otherwise provided in subdivision (e) of that section, be received by filing a claim therefor with the withholding agent. In case of failure to file a return, the collector shall collect the tax on such income, and all property belonging to such nonresident alien individual shall be liable to distraint for the tax.29

REGULATION. A nonresident alien individual, similarly to a citizen or resident, is entitled for the purpose of the normal tax to credit dividends from domestic or resident foreign corporations, interest on obligations of the United States, a personal exemption,

29

[Former Procedure] Under the 1916 law [section 7 (b)], nonresident alien individuals were entitled to the benefit of the personal exemption, either $3,000 or $4,000 according to their status, but only on condition that they filed or caused to be filed with the collector a return of the total income received from all sources in the United States within the year for which the exemption was claimed. It will be observed that under the 1918 law the failure to give this information involves the denial of all the deductions and credits, not merely the personal exemption. The filing of form 1001B may be sufficient.

The 1917 law amended section 7 (a) of the 1916 law by restricting its application to a "citizen or resident of the United States" and repealed (b) referred to above. The effect was to make a non-resident alien subject to one normal tax only of 2 per cent, but subject to the surtaxes under both laws. Further, in 1917, a non-resident alien was not entitled to the specific exemption even though he filed a return. This applies likewise to non-resident alien trusts and estates.

and $200 for each dependent, except that if he is a citizen or subject of a country which imposes an income tax a personal exemption or credit for dependents is allowed him "only if such country allows a similar credit to citizens of the United States not residing in such country." "If such country allows a similar credit" means if such country in imposing its income tax allows a personal exemption or a credit for dependents, as the case may be, and allows it without discrimination to citizens of the United States not residing in such country. For the meaning of "country" see article 382. To satisfy the requirement of a similar credit it is not necessary that the personal exemption or credit for dependents, as the case may be, should be the same as that allowed by the United States statute. The status as to residence of an alien individual on the last day of his taxable year determines his right to be treated as a resident or as a nonresident for such year. (Art. 306.)

This means substantially that a non-resident may have the advantage of the personal exemptions in case he files a complete return unless his country refuses similar concessions to Americans. Foreign countries, if they desire exemptions for their citizens subject to taxation here, must make no discrimination against Americans as compared with their own residents.

Lists of countries imposing income taxes, classified according to their treatment of Americans with regard to exemptions, have been issued by the Treasury from time to time. The latest of these lists appears in Chapter XXXIII. It is worth noting that exemptions may not be claimed here by subjects of Great Britain, not permanently residing here, the law there not making the necessary concessions to Americans.

PERSONAL EXEMPTIONS OF RESIDENT ALIENS.-An alien resident in the United States is in almost all respects treated exactly as a citizen. He is permitted to take advantage of the personal exemptions in the usual manner.

PERSONAL EXEMPTIONS OF WARDS, BENEFICIARIES AND ESTATES.-Wards and other beneficiaries receiving their income from estates are entitled to claim exemption according to their status, and the guardian or trustee when making returns is allowed to deduct this personal exemption from the

amount of income derived from the property of which he has charge in favor of each ward or beneficiary who has not claimed a personal exemption independently or through another trustee [section 219 (d)]. Where the estate is subject to a tax by reason of income received by it but not distributed during the year, a deduction of $1,000 only (no deductions for dependents) is allowed in computing the tax upon the estate [section 219 (c)]. This is the only instance in which the personal exemption may be claimed by anyone other than the individual taxpayer.3

30

For a detailed discussion of the subject of fiduciaries, see Chapter XXXIV.

REGULATION. (a) In the case of an estate or trust taxed to the fiduciary it is allowed the same credits against net income as a single person, including a personal exemption of $1,000, but no credit for dependents. . . . . Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income. (Art. 346.)

Specific credit to corporations.

LAW. Section 236. That for the purpose only of the tax imposed by section 230 [income tax] there shall be allowed the following credits: . . . . (c) In the case of a domestic corporation, $2,000.31

This provision, which corresponds closely with the specific exemption from normal tax extended to individuals, has as one of its effects the entire elimination of the payment of any tax by a domestic corporation whose net income is less than $2,000.32 In case a consolidated return is filed for several corporations, only one $2,000 specific credit is allowed. [Section 240 (a)].

[Former Procedure] Prior to the enactment of the 1917 law this exemption (but $3,000 in amount) applied to all estates [section 7 (a)], but as amended by that law the exemption was limited to citizens or residents of the United States, excluding non-resident aliens. The 1918 law once more permits the exemptions in the case of all estates, domestic and foreign.

[Former Procedure] Under the 1913, 1916 and 1917 laws corporations did not receive any specific exemption. Under the 1909 law corporations received a $5,000 exemption.

32 For a discussion of the credit allowed corporations for excess profits taxes imposed, see Chapter XXVI, "Deductions for Taxes."

Dividends which are exempt from normal tax.—

LAW. Section 216. That for the purpose of the normal tax only there shall be allowed the following credits:

(a) The amount received as dividends from a corporation which is taxable under this title upon its net income, and amounts received as dividends from a personal service corporation out of earnings or profits upon which income tax has been imposed by Act of Congress;

The above credit applies to individuals and its effect is to exempt dividends from the normal tax. In the case of corporations substantially the same language is used in a clause [section 234 (a-6)], included among the deductions, which makes dividends received from other corporations non-taxable. The passage of this section eliminated completely the long-standing discrimination against corporations which own stocks in other corporations.33

Dividends paid by a personal service corporation from earnings accumulated prior to January 1, 1918, are exempt from the normal tax. Dividends paid by a personal service corporation between January 1 and March 1, 1918 (both inclusive), are deemed to have been paid from the earnings of 1917 [section 201 (e)], but were taxable at the rates of surtax in force in the year in which received, viz., 1918. The result is that as to the dividends received in these two months the stockholders of a personal service corporation were on the same basis as the stockholders of any other corporation, and if the dividend received in these two months was a stock dividend it was taxable to the stockholders at the rates in force in the years in which earned.

Dividends of a personal service corporation paid on or

[Former Procedure] Under the 1913 and 1916 laws corporations were not permitted to deduct dividends received from other corporations. The 1917 law, which levied an additional 4 per cent tax on corporations, exempted dividends received by corporations from this rate, but not from the 2 per cent rate of the 1916 law, which continued in force, except as to dividends out of earnings realized during 1913, 1914 and 1915, which were taxable at I per cent (see Chapter VI). The exemption was granted in the form of a "credit" (1917 law, war income tax, section 4). The permission given corporations by the 1918 law to deduct dividends has the effect of automatically relieving such dividends from the excess profits tax. This was accomplished by special provision in 1917.

after March 2, 1918, out of earnings accumulated prior to January 1, 1918, are exempt from the normal tax and returnable the same as dividends paid by ordinary corporations. Dividends of a personal service corporation paid on or after March 2, 1918, out of earnings accumulated after January 1, 1918, have not been subject to any tax at all in the hands of the corporation. The entire net income of the corporation has been taxed to the individual stockholders for both normal and surtaxes, whether or not distributed, hence dividends, as such, when received are not taxable and need not be reported at all. If the distributee is not a stockholder at the end of the year an accounting must be made to determine the tax liability for the taxable year. [See section 218 (e)].

Dividends of foreign corporations received by citizens or residents of the United States when such corporations have income from sources within the United States and pay tax to the United States on such income, are free from the normal tax, even though the income from sources within the United States may be very small and the relative dividend received from such corporation may be very large.

RULING. Receipt is acknowledged of your letter dated May 9, 1919, in which you request advice as to whether article 301 of Regulations 45 contemplated that the normal tax imposed by section 210 of the revenue act of 1918 does not apply to dividends received from foreign corporations deriving any income whatever from sources within the United States, without regard to the character of that income and also without regard to the proportion which such income bears to the entire income of the corporation. In reply you are advised that section 216 (a) of the act upon which article 301 of the regulations is based, provides that for the purpose of the normal tax only there shall be allowed as a credit "the amount received as dividends from a corporation which is taxable under this title upon its net income." Therefore, article 301 of the regulations contemplates that the normal tax imposed by section 210 of the act does not apply to dividends, regardless of the amount of such dividends, received from a foreign corporation taxable upon income from sources within the United States, however small such income may be. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 9, 1919.)