Territory, or income accruing to the government of any possession of the United States, or any political subdivision thereof.

Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, District of Columbia, or political subdivision; but this provision is not intended to confer upon such person any financial gain or exemption or to relieve such person from the payment of a tax as provided for in this title upon the part or portion of such income to which such person is entitled under such contract;

(8) So much of the amount received during the present war by a person in the military or naval forces of the United States as salary or compensation in any form from the United States for active services in such forces, as does not exceed $3,500. * *

ART. 71. What excluded from gross income.-Gross income excludes the items of income specifically exempted by the statute and also certain other kinds of income by statute or fundamental law free from tax. Such tax-free income should not be included in the return of income and need not be mentioned in the return, unless information regarding it is specifically called for, as in the case, for example, of interest on municipal bonds. See article 402. See article 402. The exclusion of such income should not be confused with the reduction of taxable income by the application of allowable deductions. See section 212 of the statute and article 21. As to exclusions from gross income by corporations, see section 233 and article 541.

ART. 72. Proceeds of insurance.-(a) Upon the death of an insured the proceeds of his life insurance policies, whether paid to his estate or to individual beneficiaries (including partnerships), directly or in trust, are excluded from the gross income of the beneficiary. See article 541. (6) During his life only so much of the amount received by an insured under life, endowment or annuity contracts as represents a return, without interest, of premiums paid by him therefor is excluded from his gross income. See article 47. (c) Whether he be alive or dead, the amounts received by an insured or his estate or other beneficiaries through accident or health insurance or under workmen's compensation acts as compensation for personal injuries or sickness are excluded from the gross income of the insured, his estate and other beneficiaries. Any damages recovered by suit or agreement on account of such injuries or sickness are similarly excluded from the gross income of the individual injured or sick, if living, or of his estate or other beneficiaries entitled to receive such damages, if dead. See further article 294. Since June 25, 1918, no assessment of any Federal tax may be made on any allotments, family allowances, compensation, or death or disa

bility insurance payable under the War Risk Insurance Act of September 2, 1914, as amended, even though the benefit accrued before that date.

ART. 73. Gifts and bequests.-Money and real or personal property received as gifts, or received under a will or under statutes of descent and distribution, are exempt from tax, although the income therefrom derived from investment, sale or otherwise is not. See section 202 of the statute and articles 32, 51, and 1562. An amount of principal paid under a marriage settlement is a gift. Neither alimony nor an allowance based on a separation agreement is taxable income. See article 291.

ART. 74. Interest upon State obligations.-Among income exempt from tax is interest upon the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia. Obligations issued for a public purpose by or on behalf of the State or Territory or a duly organized political subdivision acting by constituted authorities duly empowered to issue such obligations are the obligations of a State or Territory or a political subdivision thereof. The term "political subdivision" denotes any division of the State or Territory made by the proper authorities thereof acting within their constitutional powers for the purpose of carrying out a portion of those functions of the State or Territory which by long usage and the inherent necessities of government have always been regarded as public. Political subdivisions of a State or Territory, within the meaning of the exemption, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or Territory. The purchase by a State of property subject to a mortgage executed to secure an issue of bonds does not render the bonds obligations of the State, and the interest upon them does not become exempt from taxation, whether or not the State assumes the payment of the bonds.

ART. 75. Dividends and interest from Federal land bank and national farm loan association.-As section 26 of the Federal Farm Loan Act of July 17, 1916, provides that every Federal land bank and every national farm loan association, including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from taxation, except taxes upon real estate, and that farm loan bonds, with the income therefrom, shall be exempt from taxation, the income derived from dividends on stock of Federal land banks and national farm loan associations and from interest on such farm loan bonds is not subject to the income tax. See also section 231 (13) of the statute.

ART. 76. Dividends from Federal reserve bank. As section 7 of the Federal Reserve Act of December 23, 1913, provides that Federal

reserve banks, including the capital stock and surplus therein and the income derived therefrom, shall be exempt from taxation, except taxes upon real estate, such exemption attaches to and follows the income derived from dividends on stock of Federal reserve banks in the hands of the stockholders, so that the dividends received on the stock of Federal reserve banks are not subject to the income tax. Dividends paid by member banks, however, are treated like dividends of ordinary corporations.

ART. 77. Interest upon United States obligations.-Although interest upon the obligations of the United States and its possessions is in general exempt from tax, in the case of obligations issued by the United States after September 1, 1917, which include Treasury certificates of indebtedness, war savings certificates, the liberty bond issues (except the first liberty loan 3 per cent bonds), and Victory notes, the interest is exempt from tax only if and to the extent provided in the acts authorizing the issue thereof, as amended and supplemented. Interest credited to postal savings accounts upon moneys deposited in postal savings banks on or before September 1, 1917, is exempt from income tax, while interest credited upon deposits made subsequent to September 1, 1917, is liable to tax. Interest on the first liberty loan 3 per cent bonds is entirely exempt from tax, but that absolute exemption does not extend to the bonds of the first liberty loan converted.

ART. 78. Liberty bond exemption under Second, Third, and Fourth Liberty Bond Acts.-The Second Liberty Bond Act of September 24, 1917, as amended by the Third Liberty Bond Act of April 4, 1918, and by the Fourth Liberty Bond Act of July 9, 1918, provides:

SEC. 7. That none of the bonds authorized by section one, nor of the certificates authorized by section five, or by section six, of this act, shall bear the circulation privilege. All such bonds and certificates shall be exempt, both as to principal and interest from all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals. partnerships, associations, or corporations. The interest on an amount of such bonds and certificates the principal of which does not exceed in the aggregate $5,000, owned by any individual, partnership, association, or corporation, shall be exempt from the taxes provided for in subdivision (b) of this section. Accordingly, in addition to the interest on first liberty loan 31 per cent bonds, which is entirely free from tax, all interest on first liberty loan converted 4 per cent bonds, first liberty loan converted 41 per cent bonds, first liberty loan second converted 4 per cent bonds, second liberty loan 4 per cent bonds, second liberty loan con

verted 44 per cent bonds, third liberty loan 44 per cent bonds, and fourth liberty loan 44 per cent bonds, together with all interest on United States certificates of indebtedness and war savings certificates, is exempt from the normal tax. Such interest in excess of the interest on not exceeding $5,000 principal amount of such bonds and certificates may, however, be subject to surtax and to the war profits and excess profits tax and may accordingly require to be included in gross income.

ART. 79. Liberty bond exemption under Supplement to Second Liberty Bond Act.-Section 7 of the Second Liberty Bond Act provides that the interest on an aggregate of not exceeding $5,000 principal amount of liberty bonds of issues after the first, owned by any person, including in such later issues bonds of the first liberty loan converted, Treasury certificates and war savings certificates, shall be exempt from surtaxes and war profits and excess profits taxes, as well as the normal tax. The Supplement to Second Liberty Bond Act, approved September 24, 1918, provides:

That until the expiration of two years after the date of the termination of the war between the United States and the Imperial German Government, as fixed by proclamation of the President

(1) The interest on an amount of bonds of the Fourth Liberty Loan the principal of which does not exceed $30,000 owned by any individual, partnership, association, or corporation, shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excessprofits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations;

(2) The interest received after January 1, 1918, on an amount of bonds of the First Liberty Loan Converted, dated either November 15, 1917, or May 9, 1918, the Second Liberty Loan, converted and unconverted, and the Third Liberty Loan, the principal of which does hot exceed $45,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from such taxes: Provided, however, That no owner of such bonds shall be entitled to such exemption in respect to the interest on an aggregate principal amount of such bonds exceeding one and one-half times the principal amount of bonds of the Fourth Liberty Loan originally subscribed for by such owner and still owned by him at the date of his tax return; and

(3) The interest on an amount of bonds, the principal of which does not exceed $30,000, owned by any individual, partnership, association, or corporation, issued upon conversion of 34 per centum bonds of the First Liberty Loan in the exercise of any privilege arising as a consequence of the issue of bonds of the Fourth Liberty Loan, shall be exempt from such taxes.

The exemptions provided in this section shall be in addition to the exemption provided in section 7 of the Second Liberty Bond Act in respect to the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty Bond Act.

nd Accordingly, the exemption from surtaxes and war profits and excess ts profits taxes covers, and there may be excluded from gross income, the interest received on not exceeding $5,000 principal amount in the aggregate of first liberty loan converted 4 per cent bonds, first liberty loan converted 4 per cent bonds, first liberty loan second converted 4 per cent bonds, second liberty loan 4 per cent bonds, second liberty loan converted 44 per cent bonds, third liberty loan 44 per cent bonds, fourth liberty loan 44 per cent bonds, and Treasury certificates and war savings certificates, apportioned as the taxpayer may choose; and in addition, until the expiration of two years after the termination of the war, (a) the interest received on not exceeding $30,000 principal amount of fourth liberty loan 41 per cent bonds; plus (b) the interest received on an aggregate principal amount of first liberty loan converted 4 per cent bonds, first liberty loan converted 44 per cent bonds (dated May 9, 1918), second liberty loan bonds, converted and. unconverted, and third liberty loan 44 per cent bonds, not exceeding $45,000 and not exceeding 150 per cent of the principal amount of bonds of the fourth liberty loan both originally subscribed for by the taxpayer and still owned by him at the date of his return; plus (c) the interest received on not exceeding $30,000 principal amount of first liberty loan second converted 4 per cent bonds (dated October 24, 1918).

ART. 80. Liberty bond exemption after December 31, 1918.-The Victory Liberty Loan Act of March 3, 1919, provides:

SEC. 2. (a) That until the expiration of five years after the date of the termination of the war between the United States and the German Government, as fixed by proclamation of the President, in addition to the exemptions provided in section 7 of the Second Liberty Bond Act in respect to the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty Bond Act or the Supplement to Second Liberty Bond Act, the interest received on and after January 1, 1919, on an amount of bonds of the First Liberty Loan Converted, dated November 15, 1917, May 9, 1918, or October 24, 1918, the Second Liberty Loan converted and unconverted, the Third Liberty Loan, and the Fourth Liberty Loan, the principal of which does not exceed $30,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations.

(b) In addition to the exemption provided in subdivision (a), and in addition to the other exemptions therein referred to, the interest received on and after January 1, 1919, on an amount of the bonds therein specified the principal of which does not exceed $20,000 in the aggregate, owned by any indivdual, partnership, association, or corporation, shall be exempt from the taxes therein specified: Pro