losses adjusted, and after the recipient of the income is free to use it as he chooses.

Commissions to foreign corporation on American goods sold abroad not taxable.—

RULING. Reference is made to your letter of the 12th instant, in which you state that a corporation located at Singapore, incorporated under the laws of that country, which has no office or agent in the United States, and is engaged in the commission business has, during the year 1917, sold in Singapore and nearby countries certain. products of manufacturing establishments in the United States. The purchase price of these goods is transmitted by the purchasers to the manufacturers and American houses direct. When the money is received in the United States a commission is paid out of the proceeds of sale to this foreign corporation.

Relative to your inquiries, you are advised that under the above statement of facts the commission earned by the Singapore corporation is not considered to be income derived from sources within the United States, and the Singapore corporation is not required to report such commissions as income under the provisions of the act of September 8, 1916, and Titles I and II of the act of October 3, 1917.

In regard to your second inquiry, you state that a corporation in this country receives from the manufacturer these commissions and transmits the same to the Singapore corporation, and ask to be advised whether this corporation which so receives and transmits these commissions is under obligations to report such commissions in its returns of annual net income.

In reply, you are informed that if the American corporation in question simply acts as the agent for the Singapore corporation in receiving and transmitting such commissions, and does not retain for its own use any part thereof, it is held that such commissions need not be reported as income by the domestic corporation referred to. (Letter to Brower, Brower and Brower, Brooklyn, New York, signed by Deputy Commissioner L. F. Speer, and dated April 20, 1918.)

Taxable income of foreign steamship companies.

RULING. The rule or position of this office with respect to the method of ascertaining the taxable income of foreign steamship companies, whose steamships touch at American ports and which carry therefrom freight and passengers for hire, follows: The returns made by such corporations, for the purpose of the income tax imposed by the act cited, should include as gross income the total receipts of all outgoing business, whether freight or passengers.

With the gross income thus ascertained, the ratio existing between it and the gross income from all ports, both within and without the United States, should be determined as the basis upon which allowable deductions may be computed, the principle being that allowable deductions shall be computed upon a basis which recognizes that the income arising and accruing from business done in and from this country shall bear its share, and no more, of expense, incident to the earning or creation of such income, in the ratio that the gross income arising in and from this country bears to the entire gross income arising from business done both within and without this country. In other words, the net income of a foreign steamship company doing business in or from this country, for the purpose of the income tax assessable and payable to the United States, will be ascertained by deducting from the gross receipts from outgoing business such a portion of the aggregate expenses, losses, etc., as such receipts bear to the aggregate receipts from all ports, except that the interest deduction, after being likewise apportioned, shall be subject to the limitation fixed by the law in the case of foreign corporations transacting business or having capital invested in this country. (Letter to the Corporation Trust Company, signed by Acting Commissioner David A. Gates, and dated July 18, 1916.)

Income from Government Contracts

The 1918 law differentiates in several particulars between net income from business in general and net income derived from government contracts. The latter term is defined thus:

LAW. Section I. . . . . The term "Government contract" means (a) a contract made with the United States, or with any department, bureau, officer, commission, board, or agency, under the United States and acting in its behalf, or with any agency controlled by any of the above if the contract is for the benefit of the United States, or (b) a subcontract made with a contractor performing such a contract if the products or services to be furnished under the subcontract are for the benefit of the United States.

The term "Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive" when applied to a contract of the kind referred to in clause (a) of this paragraph, includes all such contracts which, although entered into during such period, were originally not enforceable, but which have been or may become enforceable by reason of subsequent validation in pursuance of law;40

The sections of the law which refer to government contracts are discussed in the following paragraphs:

Corporations subsidiary to or affiliated with others.-The law provides that corporations which are affiliated shall make consolidated returns," but an affiliated corporation 50 per cent of whose gross income was derived from government contracts is denied the privilege.

LAW. Section 240.

(a) That corporations which are affiliated

. shall . . . . make a consolidated return . . . . : Provided, That there shall be taken out of such consolidated net income and invested capital, the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business, 50 per centum or more of whose gross income consists of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income and the remainder of such affiliated group shall be assessed on the basis of the remaining consolidated invested capital and net income.

Corporations in great numbers placed their facilities unreservedly at the disposal of the government. Because certain corporations were guilty of actual and despicable profiteering, there is no justification for a general penalty that will reach many corporations which deserve credit rather than punishment. The guilty ones should be punished in some other

way.

May not qualify as a personal service corporation.-The privilege of qualifying as a personal service corporation (which means reporting as a partnership) is denied to a corporation, under certain circumstances.

LAW. Section 200. The term "personal service corporation" does not include . . . any corporation 50 per centum or more of whose gross income consists . . . . (2) of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive;

"For method of allocating income from government contracts, and computation of tax thereon, see Excess Profits Tax Procedure.

Section 240 (b).

Government contract adjustments.

REGULATION. In view of the unusual conditions prevailing at the close of the year 1918 it is recognized that many items of gross income, such as claims for compensation under cancelled contracts, together with claims against contracting departments of the Government for amortization and other matters, while properly constituting gross income for the taxable year 1918 were undecided and not sufficiently definite in amount to be reported in the original return for that year. In every such case the taxpayer should attach to his return a full statement of such pending claims and other matters, and when the correct amount of such items is ascertained an amended return for the taxable year 1918 should be filed. (Art. 52.)

At the end of 1918 many taxpayers having claims against the government were unable to evaluate such claims because of the inability of government representatives to state the basis of settlement.

If a contractor included in gross income for 1918 a larger or smaller amount as due from the government than has been actually collected, the book profit or loss shown in 1919 is in most cases not an actual profit or loss at all, but represents a mere adjustment of an estimate as of December 31, 1918. In such cases the proper procedure would be to file an amended return for 1918.

When amortization allowances must be included in gross income.

REGULATION. Any allowance made to a taxpayer by a contracting Department of the Government or by any other contractor for amortization or fall in the value of property, either as a part of the cost of production or as a part of the price of the product, shall be included in gross income. .. (Art. 181.)

The foregoing regulation merely provides for the inclusion in gross income of allowances for amortization which have been, or which are supposed to have been, reflected in the price of goods, as distinguished from allowances for amortization which should be credited to construction or other capital accounts. The method of determining the proper de

duction for amortization is fully discussed in Chapter XXX, "Deductions for Amortization."

The law does not impute fictitious net income arising from amortization allowances, and the regulation should only be construed as requiring taxpayers to include all proper items in gross income, in order that deductions there from will be disclosed in the returns.