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received during the taxable year as dividends upon the stock or from the net earnings of other corporations, joint-stock companies or associations, or insurance companies, subject to the income tax imposed by Title I of such act of September 8, 1916, as amended, except as otherwise provided in article 27.

ART. 29. Prewar period. The net income of a corporation for the prewar period shall be computed as follows:

66 (a) For the calendar year 1911 by adding (1) the amount of net income shown in item 9 of the return made under section 38 of the act of August 5, 1909, for the calendar year 1911, and (2) the amount of taxes paid to the United States within the calendar year 1911 under section 38 of such act;

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(b) For the calendar year 1912 by adding (1) the amount of net income shown in item 9 of the return made under section 38 of the act of August 5, 1909, for the calendar year 1912, and (2) the amount of taxes paid to the United States within the calendar year 1912 under section 38 of such act; and

(c) For the calendar year 1913 by adding (1) the amount of the entire net income shown in item 8 of the return made under Section II of the act of October 3, 1913, for the calendar year 1913, and (2) the amount of taxes paid within the calendar year 1913 under section 38 of the act of August 5, 1909, and Section II or IV of the act of October 3, 1913, and deducting from the total so obtained the amounts received during the calendar year 1913 as dividends upon the stock or from the net earnings of other corporations, jointstock companies or associations, or insurance companies, subject to the income tax imposed by Section II of the act of October 3, 1913.

NET INCOME-PARTNERSHIPS.

ART. 30. Taxable year. The net income of a partnership for the taxable year shall be determined by adding the amount of its entire net income (or in the case of a foreign partnership, its entire net income from sources within the United States) ascertained upon the same basis and in the same manner as provided with respect to individuals for income-tax purposes by Title I of the act of September 8, 1916, as amended (see Income Tax Regulations, art. 30), including the amounts, if any, received during the year as interest on bonds or other obligations of the United States issued after September 24, 1917 (other than the interest on an amount of such bonds or obligations, the aggregate principal of which does not exceed $5,000), and deducting therefrom

(1) The amounts received during the taxable year as dividends upon the stock or from the net earnings of corporations, jointstock companies or associations, or insurance companies, subject to the income tax imposed by Title I of the act of September 8, 1916, as amended, except as otherwise provided in article 27; and

(2) The deductions, if any, for salaries or interest allowed by 71 articles 32 and 33, if such deductions have not already been made. ART. 31. Prewar period. The net income of a partnership for each 72 of the calendar years 1911, 1912, and 1913 shall be determined in the same manner as the net income for the taxable year, except that dividends upon the stock or from the net earnings of corporations, joint-stock companies or associations, or insurance companies, subject to the tax imposed by section 38 of the act of August 5, 1909, or by Section II of the act of October 3, 1913, shall be deducted. (See art. 30.)

ART. 32. Deductions allowed for salaries paid to partners.-In com- 73 puting net income for purposes of the excess profits tax a partnership will be allowed to deduct as an expense reasonable salaries or compensation paid to individual partners for personal services actually rendered during the taxable year, if the payments are made in accordance with prior agreements and are properly recorded on the books of the partnership. In no case shall the salaries or compensation so deducted be in excess of the salaries or compensation customarily paid for similar services under like responsibilities by corporations engaged in like or similar trades or businesses.

With respect to any period prior to March 1, 1918, regardless of 74 whether a previous agreement has been made as to salaries or compensation, a similar deduction will be allowed for services actually rendered.

In the case of a foreign partnership the deduction shall be limited 75 to those portions of salaries or compensation which are paid for services rendered with respect to trade or business carried on in the United States.

A partner in his individual capacity is, however, subject to the 76 excess profits tax, if any, at the 8 per cent rate under article 15 with respect to any salary or compensation from the partnership for personal services (including any amounts allowed to the partnership as a deduction on his account for the period prior to March 1, 1918). ART. 33. Deductions allowed for interest on bona fide loans by 77 partners. In computing net income for purposes of the excess profits tax a partnership will be allowed to deduct amounts paid during the year to an individual partner as interest upon any bona fide loan, but no deduction for so-called interest upon capital will be allowed.

ART. 34. If deduction is made under article 32 or 33, corre- 78 sponding deduction must also be made for prewar period.-If, in computing net income for purposes of the excess profits tax, a partnership makes a deduction as allowed by article 32 for salaries paid to partners during the taxable year, it must also in computing net income. for the prewar period make a corresponding deduction; and if it 38680°-18-VOL 20- -20

makes such a deduction as allowed by article 33 for interest paid to partners, it must also in computing net income for the prewar period make a corresponding deduction for any such interest actually paid during that period.

NET INCOME INDIVIDUALS.

79 ART. 35. Determination of net income where there is no invested capital or only nominal capital.-The net income which is derived from a trade or business having no invested capital or not more than a nominal capital, including salaries, wages, fees or other compensations (constituting net income of class A as defined in art. 14) shall be determined for the taxable year by adding the total net income from all such sources (or in the case of a nonresident alien individual the total net income from all such sources within the United States) as reported for income tax purposes for the same year.

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ART. 36. Determination of net income for taxable year when there is invested capital. The net income which is derived from a trade or business having invested capital (constituting net income of class B, as defined in art. 14) shall be determined for the taxable year by adding the total net income from such sources (or in the case of a nonresident alien individual the total net income from such sources within the United States) as reported for income tax purposes for the same year and deducting therefrom the deduction, if any, for salary allowed by article 39, if such deduction has not already been made.

There shall be excluded the amounts received during the year upon the stock or from the net earnings of corporations, joint-stock companies or associations, or insurance companies, subject to the income tax imposed by Title I of the act of September 8, 1916, as amended.

In the case, however, of an individual dealing in securities or otherwise using securities in trade or business there shall be included (1) the amount, if any, received as interest on bonds or obligations of the United States, issued after September 24, 1917 (other than the interest received on an amount of such bonds or obligations the aggregate principal of which does not exceed $5,000), and (2) such proportion of dividends received upon the stock of foreign corporations as is required to be included by article 27.

ILLUSTRATION. An individual owns a farm representing an invested capital of $25,000, a country store with an invested capital of $6,000, and a flour mill with an invested capital of $10,000. His net income from the farm is $4,000, from the store $3,000, and from the mill $3,000. Thus his total net income of class B is $10,000. His total invested capital is $41,000. Assuming that his deduction is at the rate of 8 per cent, his total deduction will be $3,280 plus $6,000, or $9,280, to be applied against his net income of $10,000 in computing the tax at the graduated rates under articles 16 and 17.

The same individual allows himself a salary of $1,000 for working the farm and $900 for running the store, draws a salary of $1,200 as president of the local bank,

and receives $250 in compensation for personal services of various kinds, such as road work, helping neighbors in harvest, etc. He also receives $300 in dividends on an investment in certain stocks and $100 as supervisor's fees. The last item-that is, supervisor's fees-is exempt under the law (sec. 201, subdivision a). The $300 in dividends is not taxable, inasmuch as it is derived from a mere investment not connected with his trade or business. His net income of class A will therefore consist of his salaries and his compensation for personal services, a total of $3,350. Since he is entitled to a deduction of $6,000 as to this class of income, he will have no tax to pay at the 8 per cent rate under article 15.

ART. 37. Deduction of contributions for religious, charitable, etc., 84 purposes. Contributions or gifts for religious, charitable, etc., purposes allowed as a deduction for purposes of the income tax under paragraph "Ninth" of subdivision (a) of section 5 of the act of September 8, 1916, as amended, may, subject to the limitations therein contained, be deducted in computing the net income of the trade or business for purposes of the excess profits tax only when it is shown to the satisfaction of the Commissioner of Internal Revenue that such contributions or gifts are made by the trade or business and not by the individual in his personal capacity.

ART. 38. Determination of net income for the prewar period where 85 there is invested capital.-The net income which is derived from a trade or business having invested capital (constituting net income of class B as defined in article 14) shall be determined for each of the calendar years 1911, 1912, and 1913 upon the same basis and in the same manner as provided in article 36.

ART. 39. Deduction allowed for salary to himself. An individual 86 carrying on a trade or business having an invested capital may in computing the net income of the trade or business for purposes of the excess profits tax deduct a reasonable amount designated by him as salary or compensation for personal service actually rendered by him in the conduct of such trade or business. In no case shall the amount so designated be in excess of the salaries or compensation customarily paid for similar service under like responsibilities by corporations or partnerships engaged in like or similar trades or businesses.

In the case of a nonresident alien individual, the amount deducted 87 shall be limited to that portion of the salary or compensation which is for service rendered with respect to trade or business carried on in the United States.

The amount so designated shall, however, be included in com- 88 puting his net income of class A under article 35; and the balance of the income from his trade or business shall be included in computing his net income of class B under article 36.

ILLUSTRATION.-An individual owns and runs a newspaper having an invested 89 capital of $50,000. The net income from the newspaper, without making any allowance for the salary of the owner, is $20,000, and, as income of class B, is subject to the

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graduated rates prescribed in article 16. His deduction, as provided for in subdivision (b) of article 21, would be $4,500 (9 per cent of his capital) plus $6,000, a total of $10,500. If, however, he allows himself a salary of $3,000, the net income from the newspaper will be $17,000, and the deduction of $10,500 will be applied against that

amount.

His salary of $3,000 must be included in his return as income of class A, which is subject to the 8 per cent rate under article 15. If it constitutes his only income of that class he will pay no tax thereon, inasmuch as it is less than the deduction of $6,000 to which he is entitled as to that class of income. But if, for example, he receives in addition a salary of $4,000 as president of the local bank, his total net income of class A will be $7,000, and he will be required to pay a tax of 8 per cent on $1,000 thereof, or $80.

ART. 40. If deduction is made under article 39 corresponding deduction must also be made for prewar period.-If, in computing net income for purposes of the excess profits tax, an individual deducts a reasonable amount designated as salary or compensation for personal services rendered by himself, as allowed by article 39, he must also in computing net income for the prewar period, make a corresponding deduction.

ART. 41. Individual member of partnership.-Inasmuch as a partner in his individual capacity is not considered to be engaged in trade or business with respect to his share in the profits of the partnership, he is not subject to excess profits tax thereon. Consequently, in computing his net income for purposes of the excess profits tax he need not include his share of the partnership profits.

92 He shall, however, in computing his net income of class A under article 35, include any salary or compensation from the partnership for personal services (including any amount allowed to the partnership as a deduction on his account for the period prior to March 1, 1918, in accordance with article 32).

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INVESTED CAPITAL-GENERAL PROVISIONS.

ART. 42. Allowance for depletion, depreciation, and obsolescence in computation of invested capital. The term "invested capital" as used in the excess profits tax law means the invested capital of the present owner. The basis, or starting point, in the computation of invested capital is found in the amount of cash and other property paid in, the original values of such other property being determined in accordance with the rules laid down in these regulations. But the computation does not stop with such original entries or amounts; it must take properly into account the surplus and undivided profits. In the computation of surplus and undivided profits, however, full recognition must first be given to expenses incurred and losses sustained from the original organization of the business concern down to the taxable year, including among such expenses and losses a reasonable allowance for depletion, depreciation, or obsolescence of