(2) in strict conformity with the rules and regulations of the Board of Governors of the Federal Reserve System, relating to the collective investment of trust funds by national banks. Section 10 (c) of Regulation F of the Board of Governors of the Federal Reserve System provides that:

Funds received or held by a national bank as fiduciary shall not be invested in participations in pools of mortgage bonds or other securities, except that when the cash balances to the credit of certain trust estates held by such national bank are too small to be invested separately to advantage. This does not prevent the bank from investing the funds of several trusts in a single real estate loan of the kind which could be made by the bank under the provisions of section 24 of the Federal Reserve Act, as amended, if the bank owns no participation in the loan and has no interest therein except as trustee or other fiduciary. Such small amounts may, with the approval of the trust investment committee, be invested collectively, and participation certificates may be issued by the trust department to the various participating estates, provided—

(1) That the bank owns no participation in the securities in which such collective investments are made and has no interest in them except as trustee or other fiduciary; and

(2) That such collective investments are not prohibited by State law or by the instrument creating the trust.

ART. 169-2. Returns of common trust funds.-Every bank that maintains a common trust fund as defined in section 169 shall make a return with respect thereto under oath for each taxable year on a form prescribed by the Commissioner. In such return the bank shall state specifically with respect to such fund all the items of gross income and the deductions allowed under Title I. The bank shall also include in its return (1) the names and addresses of all the participants who would be entitled to share in the net income if distributed, and (2) the amount of the proportionate share of each of such participants. The return shall be sworn to in the same manner as in the case of its corporation return filed by the bank under section 52.

CHAPTER XXIV

PARTNERSHIPS

Supplement F-Partnerships

SEC. 181. PARTNERSHIP NOT TAXABLE.

Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity.

ART. 181-1. Partnerships.-Partnerships as such are not subject to taxation under the Act, but are required to make returns of income. (See sections 187 and 188.) For definition of what the term "partnership" includes, see section 1001 (a) (3).

SEC. 182. TAX OF PARTNERS.

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.

ART. 182-1. Distributive share of partners.-Individuals carrying on business in partnership are taxable upon their distributive shares of the net income of such partnership, whether distributed or not, and are required to include such distributive shares in their returns. The distributive share of the net income of the partnership which a partner is required to include in his return is his proportionate share of the net income of the partnership, either—

(a) For the taxable year upon the basis of which the partner's net income is computed, or

(b) If the partner's net income is computed upon the basis of a taxable year different from that upon the basis of which the net income of the partnership is computed, for the taxable year of the partnership ending within the taxable year upon the basis of which the partner's net income is computed.

Amounts earned and distributed to a partner by a partnership after the end of its taxable year and before the end of his corresponding taxable year should be accounted for both by the partnership and by the partner in their returns for their next succeeding taxable year. If the result of partnership operation is a net loss (excess of allowable deductions over gross income), the loss will be divisible by the partners in the same proportion as net income would have been divisible (or, if the partnership agreement pro

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vides for the division of a loss in a manner different from the division of a gain, in the manner so provided), and may be taken by the individual partners in their returns of income. If separate returns are made by the husband and wife domiciled in a community property State, and the husband only is a member of a partnership, that part of his distributive share of the partnership's net income which is community property should be reported by the husband and by the wife in equal proportions. In the case of a partnership closely related to other trades or businesses, see section 45.

SEC. 183. COMPUTATION OF PARTNERSHIP INCOME.

The net income of the partnership shall be computed in the same manner and on the same basis as in the case of an individual.

ART. 183-1. Computation of partnership income.-The net income of the partnership shall be computed in the same manner and on the same basis as the net income of an individual. In computing the gain or loss recognized by section 112 upon the sale or exchange by a partnership of capital assets to be taken into account in computing the net income of the partnership, section 117(a) is applicable, and the fact that a partnership net loss (excess of allowable deductions over gross income) for a taxable year beginning after December 31, 1935, may have been caused in whole or in part by taking into account certain losses sustained upon the sale or exchange of capital assets will not prevent the partner from deducting from his individual gross income his pro rata share of the partnership's net loss even though the partner individually may not have realized any gain on the sale or exchange of capital assets. Payments made to a partner for services rendered and for interest on capital contributions are not deductible in computing the net income of the partnership, such payments being held to represent a division of partnership profits.

SEC. 184. CREDITS AGAINST NET INCOME.

The partner shall, for the purpose of the normal tax, be allowed as a credit against his net income, in addition to the credits allowed to him under section 25, his proportionate share of such amounts (not in excess of the net income of the partnership) of interest specified in section 25 (a) as are received by the partnership.

ART. 184–1. Credits allowed partners.-The credits against net income provided in section 25 are not applicable to partnerships as such. An individual partner, however, is entitled for the purpose of the normal tax to a credit against his net income, in addition to the credits allowed to him under section 25, of his proportionate share of such amounts (not in excess of the net income of the partnership)

of interest specified in section 25 (a) as are received by the partnership. There shall be included in the return of the partnership a statement of the amounts of such interest and the proportionate share thereof of each partner.

SEC. 185. EARNED INCOME.

In the case of the members of a partnership the proper part of each share of the net income which consists of earned income shall be determined under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary and shall be separately shown in the return of the partnership.

ART. 185-1. Earned income credit of partners.-For the purpose of computing the earned income credit against net income (see section 25(a) (4) and (5)), a member of a partnership is entitled to treat a proper part of his distributive share of the partnership net income as earned income. Such part cannot exceed a reasonable allowance as compensation for personal services actually rendered by the partner in connection with the partnership business. In the case of a partnership which is engaged in a trade or business in which capital is a material income-producing factor and in the trade or business of which the partner renders personal services which are material to the earning of the partnership income, the earned income of the partner from the partnership is a reasonable allowance as compensation for the personal services actually rendered by him, but not in excess of 20 percent of his share of the net profits of the partnership (computed without deduction for so-called salaries to members). In such a case, if reasonable compensation is less than 20 percent of the partner's share of the net profits, the earned income is the full amount of the reasonable compensation. but, if reasonable compensation is more than 20 percent of the partner's share of the net profits, then the earned income is 20 percent of the partner's share of such profits.

There must be included in the return of the partnership a statement showing the names of the members and the amount (determined in accordance with the first paragraph of this article) of each partner's distributive share of the partnership net income which consists of earned income.

Example: A partnership composed of A, B, and C is engaged in the retail men's clothing business. Each partner is entitled to onethird of the net profits, after deduction of so-called salaries to members. A devotes most of his time to the business and is paid a salary of $10,000. B devotes half of his time to the business and is paid a salary of $5,000. C devotes none of his time to the business and receives no salary. The net profits of the partnership for the

taxable year, computed without deduction for so-called salaries to members, are $24,000. The earned income of the partners from the partnership is as follows: Although A received a salary of $10,000 and B a salary of $5,000, since the partnership is engaged in a business in which capital is a material income-producing factor, the earned income of each from the partnership is limited to 20 percent of his share of the net profits. A's share of the net profits is $13,000 ($10,000 (salary) +$3,000 (% of net profits after deduction of $15,000 for salaries)). Twenty percent of $13,000 is $2,600, to which amount A's earned income from the partnership is limited. Since B's share of the net profits is $8,000 ($5,000+ $3,000), 20 percent thereof, or $1,600, is B's earned income from the partnership. C has no earned income from the partnership, since he renders no personal services in connection with the partnership business.

SEC. 186. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.

The amount of income, war-profits, and excess-profits taxes imposed by foreign countries or possessions of the United States shall be allowed as a credit against the tax of the member of a partnership to the extent provided in section 131.

SEC. 187. PARTNERSHIP RETURNS.

Every partnership shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowed by this title and such other information for the purpose of carrying out the provisions of this title as the Commissioner with the approval of the Secretary may by regulations prescribe, and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. The return shall be sworn to by any one of the partners.

ART. 187-1. Partnership returns.-Every partnership shall make a return of income, regardless of the amount of its net income (see section 1001 defining the term "partnership"). The return shall be on the form prescribed by the Commissioner, shall be filled in according to the instructions contained thereon, and shall be sworn to by one of the partners. Such return shall be made for the taxable year of the partnership, that is, for its annual accounting period (fiscal year or calendar year, as the case may be), irrespective of the taxable years of the partners. (See sections 182 and 183.) If the partnership makes any change in its accounting period, it shall make its return in accordance with the provisions of section 47.

ART. 187-2. Contents of partnership return.-The return of a partnership shall state specifically

(a) The items of its gross income enumerated in section 22;