of its citizens wherever they reside and over all aliens who reside within the borders of the United States. Hence, as to citizens and resident aliens, the tax is imposed on income from all sources whether arising in this country or in a foreign country. No jurisdiction can be claimed over the persons of nonresident aliens, but insofar as their income is received from sources within this country, it is taxed on the theory that the Government has jurisdiction over the income, grants protection to the creation of such income, and is, therefore, entitled to a share thereof to defray the expenses of government. The fact that a person is taxable in foreign countries on all or part of his income does not relieve him from tax liability on the same income in this country, although he is entitled under the Revenue Act of 1918 to a credit in certain cases against his tax liability in this country by reason of the payment of taxes to foreign countries."

Persons Exempt from the Tax. Individuals may enjoy exemption from the income tax by reason of the amount or character of their income.

EXEMPTION BASED ON AMOUNT OF INCOME. Citizens and residents receiving less than $1,000 of net income during the year,. if single, or less than $2,000, if the head of a family or a married person living with husband or wife, are exempt from the tax. Such persons are not required to file returns of annual income, but on demand of the Commissioner they may be required to file a statement sufficient to satisfy him that they are not liable. Non-resident aliens are allowed the same personal exemptions of $1,000 and $2,000 on income received from sources within the United States if they file the required returns,7 and provided the country of which they are citizens or subjects, if it imposes an income tax, allows a similar credit to citizens of the United States not residing in such foreign country. Citizens of possessions of the United States (but not otherwise citizens of the

3 Reg. 45, Art. 3. See Union Ref. Transit Co. v. Kentucky, 199 U. S. 194. 4 T. D. 2152.

5 Revenue Act of 1918, §§ 222, 238. This credit against a person's tax should not be confused with the deduction of taxes in order to determine net income.

6 Revenue Act of 1918, §§ 223, 1305.

7 Reg. 45, Art. 311-316.

Revenue Act of 1918, §§ 216 (e), 217.

United States), who are not residents of the United States, are subject to taxation in the United States under the Revenue Act of 1918 only as to income derived from sources within this country.9

EXEMPTION BASED ON CHARACTER OF INCOME. Individuals may also enjoy an exemption from the tax because of the character of their income, since the law expressly provides that certain kinds of income shall not be included in gross income and shall be exempt from the tax. Among the items of income so exempt 10 are: (a) the proceeds of life insurance policies paid upon the death of the insured, to individual beneficiaries, or to the estate of the insured, (b) the amount received by the insured as return of premiums paid by him under life insurance, endowment or annuity contracts, (c) property acquired by gift, bequest, devise or descent (but the income from such property is taxable), (d) amounts received through accident or health insurance or under Workmen's Compensation Acts as compensation for personal injuries or sickness and the amount of any damages received whether by suit or agreement on account of such injuries or sickness, (e) so much of the amount received during the war with Germany by a person in the military or naval forces, as salary or compensation in any form from the United States, for active services in such forces, as does not exceed $3,500.11 Income derived from the operation of a public utility is also exempt to a certain extent and under certain conditions, as is indicated more fully in another chapter.12 Interest upon (1) the obligations of a State, Territory or any political subdivision thereof, the District of Columbia, or any possession of the United States, (2) securities issued under the provisions of the Federal Farm Loan Act, (3) the obligations of the United States, issued prior to September 1,

9 Revenue Act of 1918, § 260.

10 Revenue Act of 1918, § 213.

11 The term "active services" is used in the sense of services in all military and naval branches at home or abroad, as contradistinguished from the retired or reserve list and is not confined merely to services in the field or the theatre of war. The term "military or naval forces" includes the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, and the Navy Nurse Corps, Female. The term also includes Army contract surgeons, but does not include members of draft boards. (Reg. 45, Art. 86.) This subject is more fully discussed in Chapter 15.

12 See Chapter 14.

1917, is exempt. But every person owning any such obligations, securities or bonds, is required to submit a statement in his return, showing the number and amount thereof, and the interest received therefrom. The interest upon obligations of the United States issued after September 1, 1917, and bonds issued by the War Finance Corporation is exempt only if and to the extent provided in the acts authorizing the issue thereof, as amended and supplemented, and may be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under the income and excess-profits taxes.13 The 1916 Law expressly exempted the compensation of the present President of the United States, during the term for which he has been elected, and the compensation of the Judges of the Supreme Court and inferior courts of the United States, in office at the time the Act was passed, but the Revenue Act of 1918 expressly taxes the compensation received as such of the President, the Judges of the Supreme Court and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia.14 The Revenue Act of 1918 does not expressly exempt "the compensation of all officers and employees of a State, or any political subdivision thereof, except when such compensation is paid by the United States Government, "15 as did the 1916 Law. It seems to have been the intent of Congress in the present statute to tax such salaries and to leave the constitutional question involved in levying the tax to the courts, 16 but the Treasury Department has ruled that compensation paid to its officers and employees by a state or any political subdivision thereof, will not be taxed.17 Exempt income is ordinarily omitted from the returns of individuals and corporations, 18 but income exempt only from normal tax and not

13 Revenue Act of 1918, § 213 (b) 4, § 233. 14 Revenue Act of 1918, § 213 (a).

The constitutional question involved in taxing such salaries is discussed in Chapter 15. 15 Revenue Act of 1916, § 4.

16 Revenue Act of 1918, § 213 (a). The constitutional question involved in taxing such salaries is discussed in Chapter 15.

17 Reg. 45, Art. 85.

This subject is more fully discussed in Chapter 15. 18 Reg. 45, Art. 71. Exempt interest, however, is included, as above indicated. The exclusion of such income should not be confused with the reduction of taxable income by the application of allowable deductions. Under the

F. V. KEESLING

from surtax, or from the income tax but not from the excess-profits tax, must be included in the return.

Citizens of the United States. Citizens of the United States are taxable upon their net income from all sources, whether they reside in this country or not.19 It makes no difference that they may own no assets within the United States and may receive no income from sources within the United States.20 They are taxable for the purpose of the surtax upon their entire net income received in each year from all sources and for the purpose of the normal tax upon net income less statutory credits.21 Income wholly exempt is not included in gross income, the foundation for the computation of net income.22 On dividends of corporations taxable upon their net income and dividends of personal service corporations, out of earnings or profits upon which income tax has been imposed, they are liable only for the surtax; and so also with respect to interest on bonds of the United States issued after September 1, 1917, and bonds of the War Finance Corporation.23 The regulations and rulings respecting taxable and nontaxable income are, as a rule, applicable both to individuals and corporations, and are discussed in detail in the later chapters on income.24

WHO IS A CITIZEN. Every person born in the United States subject to its jurisdiction, or naturalized in the United States, is a citizen. An individual born in the United States of citizen or resident alien parents, who has long since moved to a foreign country and established a domicile there, but who never has been naturalized therein or taken an oath of allegiance thereto is still a citizen of the United States.25 Married women are considered 1916 law corporations were at first required to report exempt income in a supplementary statement, but this requirement was omitted in later forms.

19 In U. S. v. Goelet, 232 U. S. 293, the court held that a United States citizen permanently residing or domiciled aboard was not liable to the tax on foreign-built yachts imposed by the tariff Act of August 5, 1909. The court said that "the taxing power, when exerted, is not usually applied to those even albeit they are citizens, who have a permanent domicile or residence outside of the country levying the tax.”

20 Reg. 45, Art. 3.

21 Reg. 45, Arts. 3 and 21.

22 Revenue Act of 1918, § 212; Reg. 45, Art. 21.

23 Revenue Act of 1918, § 216.

24 See Chapters 14-20.

25 Reg. 45, Art. 4.

F. T.-3

to have the same citizenship as their husbands. An American woman who marries a foreigner consequently loses her status as an American citizen and is thereafter treated as an alien.26 Determination by the State Department of the status of an individual is not conclusive upon the Treasury Department in fixing citizenship for income tax purposes.27

CITIZENS RESIDING IN THE UNITED STATES. Citizens residing in the United States report and pay the tax in the district in which they legally reside or have their principal place of business, regardless of where their income may arise.2

28

CITIZENS RESIDING ABROAD. If a citizen residing abroad has no office or place of business in this country, he files his return and pays his tax to the Collector at Baltimore, Maryland. He is, of course, required to report his income from all sources, whether within or without the United States. Although the question as to the liability of a nonresident citizen is determined by the Treasury Department, not by the State Department, still, in the case of a naturalized citizen against whom the presumption of expatriation has arisen, the fact that he has paid the income tax will receive due consideration by the State Department in connection with other evidence submitted to overcome such presumption in connection with applications for passports or for registration in a consulate or for actual protection in a foreign country. The payment of the income tax will also be duly considered by the State Department in passing upon rights to the continued protection of this Government in cases of native American citizens who have resided abroad for a period sufficiently prolonged to raise the natural presumption that they have abandoned citizenship in this country.29

Aliens Residing in the United States. All residents of this country, even though they may be aliens, are classified with citizens of the United States for the purpose of income tax, and are taxable upon their entire net income from all sources.30

26 T. D. 2092.

27 T. D. 2135.

28 Revenue Act of 1918, § 227 (b); Reg. 45, Art. 448.

29 Letter from Secretary of State to American Diplomatic and Consular Officers, dated March 18, 1914; I. T. S. 1918, ¶5; Revenue Act of 1918, § 227 (b).

30 Reg. 45, Art. 3.