a reasonable allowance for depreciation may be claimed, based upon the cost of draft and work animals and animals kept solely for breeding purposes and not for resale.35

Returns of Farmers. Farmers are required to make returns of annual income or special returns with respect to withholding at the source, information at the source, and other matters in the same manner and according to the same rules as those prevailing in the case of all individuals and corporations. This subject is treated elsewhere in this book.36 In addition to the annual return of income, farmers are required to prepare and file a "schedule of farm income and expenses" (Form 1040 F) copies of which may be obtained from the local collector.

Payment of Tax; Penalties. Farmers pay the tax in the same. manner as other individuals and corporations.37 They are also subject to all the penalties which may be imposed upon other individuals and corporations.38

35 Reg. 45, Art. 171; Reg. 33 Rev., Arts. 4 and 123. For the rule when al inventory is used, see p. 96.

36 See Chapter 34. 37 See Chapter 35. 38 See Chapter 36.

CHAPTER 8

PARTNERSHIPS

1

The Revenue Act of 1918 provides that individuals carrying un business in partnership shall be liable for income tax only in their individual capacity and that there shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or if his net income is computed upon the basis of a period different from the basis upon which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any annual accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner's net income is computed. The Revenue Act of 1918 contains a new provision requiring partnerships to file returns for each taxable year.3 Domestic and Foreign Partnerships. General partnerships are divided into two classes, domestic and foreign. A domestic partnership is one organized or created in the United States, includ

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1 Revenue Act of 1918, § 218 (a). Partnerships as such were not taxable under the 1916 Law, the partners thereof being taxable in their individual capacity. (Revenue Act of 1916, § 8 (e); T. D. 1957.) Partnerships were expressly excepted from the tax on corporations. (Revenue Act of 1916, § 10.) In U. S. v. Coulby, 251 Fed. 982, affirmed 258 Fed. 27, arising under the 1913 Law, the court said in part: "This law, therefore, ignores for taxing purposes the existence of a partnership. The law is so framed as to deal with the gains and profits of a partnership as if they were the gains and profits of the individual partner. The law looks through the fiction of a partnership and treats its profits and its earnings as those of the individual taxpayer. Unlike a corporation, a partnership has no legal existence aside from the members who compose it. The Congress, consequently, it would seem, ignored, for taxing purposes, a partnership's existence and placed the individual partner's share in its gains and profits on the same footing as if his income had been received directly by him without the intervention of a partnership name. 2 See p. 119 as to rates of tax applicable where the fiscal year of a partnership falls in calendar year in which rates are changed.

8 See Revenue Act of 1918, § 224.

ing only the States, the Territories of Alaska and Hawaii, and the District of Columbia, and a foreign partnership is one organized or created outside the United States as so defined. The nationality or residence of members of a partnership does not affect its status. A partnership ereated by articles entered into in San Francisco between residents of the United States and residents of China is a domestic partnership.*

Limited Partnerships. So-called limited partnerships of the type authorized by the statutes of New York and most of the States are partnerships and not corporations within the mean

4 Reg. 45, Art. 1508. According to this definition (which is practically unavoidable in view of the definitions contained in Section 1 of the Statute), a partnership composed entirely of citizens and residents and doing all its business here would be a "foreign" partnership if created by articles entered into in a foreign country. The intention of the parties as to the place where the principal business is to be carried on (which is best evidenced by the subsequent acts of the partnership) would seem to be a sounder basis for a distinction between domestic and foreign partnerships. Thus, a domestic partnership would be one which has its principal place of business in this country and directs all or the greater part of its business from its office or offices in this country, whether or not the partners are citizens or aliens, residents or non-residents, and a foreign partnership would be one which has its principal place of business in a foreign country and directs all or the principal part of its business from its office outside the jurisdiction of the United States, whether or not the partners are citizens or aliens, residents or non-residents. This distinction would be more consistent with the recent ruling that dividends on stock and interest on obligations of corporations organized in the United States, but doing no business and owning no property therein, paid to nonresident alien individuals or corporations, are not subject to the income tax. (Reg. 45, Art. 92.)

The 1916 Law expressly mentioned foreign partnerships in only one provision (Revenue Act of 1916, § 13 (e)) that which required the withholding of the tax on payments of income from interest upon bonds and mortgages or deeds of trust or similar obligations of domestic or other resident corporations, to non-resident alien firms and copartnerships not engaged in business or trade within the United States and not having any office or place of business therein. No definition of the term "alien partnership" was given in the law or was to be found in the regulations. The Law also referred to "non-resident alien firms" and to "non-resident alien copartnerships" synonymously, and applied the terms without regard to whether or not the firm or copartnership was engaged in business or trade within the United States or had an office or place of business in this country. The term may be argued to have had reference to the status of the partners composing the firm, and in this respect it was indefinite, as a firm may be composed of non-resident aliens and resident aliens or citizens.

ing of the statute. Such limited partnerships, which can not limit the liability of the general partners, although the special partners enjoy limited liability so long as they observe the statutory conditions, which are dissolved by the death or attempted transfer of the interest of a general partner, and which can not take real estate or sue in the partnership name, are so like common law partnerships as to render impracticable any differentiation in their treatment for tax purposes. Illinois limited partnerships are held to be partnerships. A California special partnership is a partnership. On the other hand, limited partnerships of the type of partnerships with limited liability or partnership associations authorized by the statutes of Pennsylvania and of a few other States are only nominally partnerships. Such so-called limited partnerships, offering opportunity for limiting the liability of all the members, providing for the transferability of partnership shares, and capable of holding real estate and bringing suit in the common name, are more truly corporations than partnerships and must make returns of income and pay the tax as corporations. In all doubtful, cases limited partnerships will be treated as corporations unless they submit satisfactory proof that they are not in effect so organized. A Michigan partnership is a corporation. Such a corporation may or may not be a personal service corporation.5

5 Reg. 45, Art. 1505, Art. 1506 as amended by T. D. 2943. In Art. 1506 as first promulgated Virginia partnership associations, also, were held to be corporations. Under the 1909 Law it was held that a limited partnership was liable for the tax, if organized for profit and having a capital stock represented by shares, although no "certificates of stock'' were issued. (Op. Atty. Gen. Fed. 14, 1910.) Limited partnerships were first broadly and without any qualifications held to be in the same category as corporations or associations under the 1916 Law and subject to the income tax imposed on such entities. The profits of limited partnerships so reporting were treated as dividends and were not subject to the normal tax in the hands of the partners receiving them but were subject to the additional or surtaxes in the hands of such partners. (Reg. 33 Rev., Art. 62; Reg. 33, Art. 86; T. D. 2137.) A limited partnership was defined as a form of business organization created by statute in many of the United States, wherein the liability of certain special partners, who contribute a specific amount of capital, is limited to the amount so contributed, while the general partners of the same partnership are jointly and severally responsible as in ordinary partnerships. (Reg. 33 Rev., Art. 62.) It was held that a limited partnership would be classed as a quasi-corporation or association within the meaning of the law. In a letter dated January 19, 1916, written with

PARTNERSHIP ASSOCIATIONS. Under the 1909 Law the Attorney General held that partnership associations organized under the laws of Pennsylvania (referred to in the foregoing paragraph as limited partnerships of the Pennsylvania type), possessing every privilege and power essential to a corporation were properly taxable as corporations. Such associations have capital contributed by the partners, who are not individually liable beyond. the unpaid capital subscribed by each. The other characteristics of such associations which are more in the nature of a corporation than of a partnership are that the word "Limited" must be a suffix to the name, the interest of a partner may be transferred and new partners may be taken in by vote of a majority of the partners, and the association may sue or be sued in the association name. Michigan and Virginia partnership associations are of this type and are held to be taxable as corporations.7

DIVIDENDS FROM LIMITED PARTNERSHIPS. The profits of limited partnerships of the Pennsylvania type should be treated by the members of the partnership as dividends of corporations are treated by stockholders.8 Members of limited partnerships should ascertain if the partnership is paying a tax according to this requirement and if so the normal tax should not again be paid on their shares of the profits.

PRIVATE OR PARTNERSHIP BANKS. A partnership bank conducted like a corporation and so organized that the interests

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particular reference to limited partnerships of the type created under the New York Statute, Laws of 1897, Ch. 427, § 3D, the Treasury Department gave its reasons for classifying limited partnerships with corporations. After quoting the language of Revenue Act of 1916, § 10 (a), which imposed a tax on "every corporation, joint-stock company or association, or insurance company but not including partnerships" the letter stated that the term "partnership'' as there used was a common law term and applied only to such partnerships as were known to the common law. The Treasury Department later modified this ruling, drawing a distinction between limited partnerships of the Pennsylvania type and New York type and holding that, for purposes of the income, excess-profits and capital stock taxes, limited partnerships of the New York type were partnerships and limited partnerships of the Pennsylvania type were corporations or joint-stock companies. (T. D. 2711; Letter from Treasury Department dated May 4, 1918; I. T. S. 1918, ¶ 3355; Telegram from Treasury Department dated April 24, 1918; I. T. S. 1918, ¶ 3325.)

628 Op. Atty. Gen. 189 (1910).

7 Reg. 45, Art. 1506. See note 5.

8 T. D. 2137.