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Stockholders in Personal Service Corporations

The question of taxable interest received by personal service corporations affects the income of the stockholders, as they, not the corporation, are taxable on income received by or from it." The exemptions of such stockholders are determined in the same manner as members of a partnership. (See article 82, quoted above.)

Fiduciaries Liberty bond interest received by executors, administrators, guardians, trustees and other fiduciaries is taxable to them only in case it is not distributable to the beneficiaries of the estate or trust.12

If the fiduciary is liable to tax, he is entitled to the same exemptions of Liberty bond interest as those granted to an individual.

REGULATION. . . . . When, on the other hand, income is taxable to the trustee, as in the case of a trust the income of which is accumulated for the benefit of unborn or unascertained persons, the trustee is regarded as the owner of all the bonds held in trust and the trust is entitled to exemption on account of such ownership. In such a case a subscription by a trustee constitutes the trustee as such the original subscriber and entitles the trust, on account of such subscription, to the collateral exemption of interest on bonds of previous issues. (Art. 81.)

Corporations The general statements on pages 419 to 434 in this chapter apply to interest on Liberty bonds received by corporations other than personal service. corporations.

Exemptions of affiliated corporations.-Under the ruling of the Treasury now in force, affiliated corporations are en

See Chapter XXII.

**See Chapter XXXIV, “Fiduciaries,” for discussion of the cases in which fiduciaries must make a return and pay a tax,

titled in the consolidated returns to the total of the exemptions under the various Liberty bond acts to which the several corporations would be entitled upon the bonds held by them if separate returns were made.

RULING. Reference is made to your letter dated April 22, 1919, in which you question the validity of a ruling in connection with exemptions to which several affiliated corporations included in a consolidated return are entitled on account of their ownership of various issues of Liberty bonds appearing in a letter from Acting Commissioner J. H. Callan dated April 16, 1919, to the Corporation Trust Company and printed in the War Tax Service, 1919, to the effect that:

"Whether each of the subsidiary companies owns the bonds or whether the parent company, or any one of the companies alone, owns the exempt bonds makes no difference in the amount of exemption allowable in cases where consolidated returns are required, as such exemptions are based upon the consolidated condition.”

Upon further consideration this office rules that each of several affiliated corporations included in a consolidated return under section 240 of the Revenue Act of 1918 is entitled to the same full benefits under the exemption provisions of the several Liberty bond acts to which it would be entitled if not affiliated. (Letter, signed by Commissioner Daniel C. Roper, and dated May 21, 1919.) 13

Parent corporation may not apportion Liberty bonds held to its subsidiaries.—The Treasury has ruled that a parent corporation may not apportion Liberty bonds held by it among the affiliated corporations. The ruling, however, in so far as it would imply that the affiliated corporations would not have the benefit of all exemptions appropriate to bonds actually owned by the separate corporations is superseded by the ruling of May 21, 1919, quoted above.

[Former Procedure] A ruling to the contrary effect contained in a letter to the Corporation Trust Company, signed by Acting Commissioner J. H. Callan and dated April 16, 1919, was superseded by the letter of May 21, 1919, above quoted.

RULING. Receipt is acknowledged of your letter of March 25, 1919, in which you state that the - Company is affiliated with various subsidiaries in which the - Company owns all the stock directly or owns the stock of the company which does own all the stock of such affiliated company. The - Company has on hand an investment in Liberty bonds amounting to $2,345,000 of the second, third and fourth issues.

You inquire if the - Company may apportion the Liberty bonds held by it among its several subsidiaries in order to determine the total exemption allowable for purposes of a consolidated return.

In reply you are advised that in cases of consolidated returns, affiliated corporations are treated as if they were one corporation and the tax is based upon the consolidated income and the consolidated invested capital of these corporations. Whether the parent company owns the bonds or apportions them among its subsidiaries, makes no difference in the amount of exemption allowable in cases where consolidated returns are required, as such exemption is based upon the consolidated condition. (Letter, signed by Commissioner Daniel C. Roper, and dated April 5, 1919.)

If the parent corporation should make a bona fide sale of bonds to the subsidiary corporations, then such corporations would be entitled to the exemptions consequent on the holding of the bonds purchased under the ruling of May 21, 1919, quoted on page 438.

United States Obligations Owned by Non-Resident Aliens,

Foreign Corporations, etc.14 In order to encourage foreign investors to buy and hold Liberty bonds, Congress provided in the Victory Liberty Loan Act that obligations of the United States shall be exempt from federal, state and local taxes while beneficially owned by nonresident aliens and foreign corporations, partnerships and associations not engaged in business in the United States.

Law. Section 4. That section 3 of the Fourth Liberty Bond · Act is hereby amended to read as follows:

“Section 3. That, notwithstanding the provisions of the Second Liberty Bond Act or of the War Finance Corporation Act or of

"See Chapter XXXIII, “Non-Resident Aliens.”

any other Act, bonds, notes, and certificates of indebtedness of the United States and bonds of the War Finance Corporation shall, while beneficially owned by a nonresident alien individual, or a foreign corporation, partnership, or association, not engaged in business in the United States, be exempt both as to principal and interest from any and 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.15

"SVictory Liberty Loan Act, approved March 3, 1919, section 4.

INCOME FROM RENTS

Under each of the successive income tax acts rent has, in all cases, been made returnable as income subject to taxation.

Law. Section 213. . . . . the term "gross income”-
(a) Includes .... income derived from .... rent ....

Income from rents may be reported on the accrual basis or on the actual receipt basis. If books of account are kept, all rents accrued, and believed to be collectible, should be reported. Any items found to be uncollectible may be deducted as losses in subsequent returns. If reporting on the accrual basis is not practicable or convenient, it is sufficient to return all rents received in cash during the tax year.

The author has been informed that during 1919 some taxpayers were advised that rents should be reported as income only when collected in cash, but that all expenses, such as interest, insurance and repairs, should be claimed as deductions on the accrual basis. Such a method could not clearly reflect the true net income of a taxpayer. Therefore any taxpayer who followed such advice may expect to be penalized. Taxpayers who do not keep books will probably always be permitted to report on a cash basis, but no taxpayer can expect to be allowed to return his expenses on an accrual basis and his income on a cash basis.

Permanent improvements by lessees.—It has been held that where improvements by a lessee revert to the landlord at the end of a lease, the value of the improvement is taxable to the landlord as the equivalent of additional rent.

An old Treasury decision (T. D. 2442, February 6, 1917) specifically states that the landlord may not claim any annual depreciation during the lease term.

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