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the laws of Hawaii permitted corporations to become members of a partnership. In many of our states the corporation laws would not permit a corporation to become a general partner. In other states the position is not so clear. The subject is not of enough general interest to warrant a full discussion in these pages, but it may be said that unless the charter of a corporation expressly prohibits its entering into partnership relations with other corporations or with individuals, it may do so, subject to the further possible restriction that the corporation laws of the state may inhibit such relationship.

Limited Partnerships The Treasury draws a distinction between different types of limited partnerships, regarding one type as corporations and the other type as partnerships for income tax purposes. 21

Limited partnerships may or may not be partnerships.

REGULATION. So-called limited partnerships of the type authorized by the statutes of New York and most of the States are partnerships and not corporations within the meaning of the statute. Such limited partnerships, which can not limit the liability of the general partners, although the special partners enjoy limited liability so long as they observe the statutory conditions, which are dissolved by the death or attempted transfer of the interest of a general partner, and which can not take real estate or sue in the partnership name, are so like common law partnerships as to render impracticable any differentiation in their treatment for tax purposes. Michigan and Illinois limited partnerships are partnerships. A California special partnership is a partnership. (Art. 1505.)

LIMITED PARTNERSHIP AS CORPORATION.

REGULATION. On the other hand, limited partnerships of the type of partnerships with limited liability or partnership associations authorized by the statutes of Pennsylvania and of a few other States are only nominally partnerships. Such so-called limited partnerships, offering opportunity for limiting the liability of all the members, providing for the transferability of partnership shares, and capable of holding real estate and bringing suit in the common name, re

2[Former Procedure] All limited partnerships were formerly considered corporations. (Reg. 33, 1918, Art. 62.)

more truly corporations than partnerships and must make returns of income and pay the tax as corporations. The income received by the members out of the earnings of such limited partnerships will be treated in their personal returns in the same manner as distributions on the stock of corporations. In all doubtful cases limited partnerships will be treated as corporations unless they submit satisfactory proof that they are not in effect so organized. A Michigan partnership association is a corporation. Such a corporation may or may not be a personal service corporation. ... .22 (Art. 1506.)

"Pennsylvania” type of limited partnerships.—Limited partnerships of the Pennsylvania type mentioned above are such as are organized under the act of June 2, 1874.23 The limited or special partnerships, created by the acts of March 21, 1836,24 April 6, 1870,25 and June 15, 1871,26 are not covered. The matter is discussed in an opinion from the AttorneyGeneral's department.27 In general, so far as article 1506 applies to limited partnerships created under the act of June 2, 1874, it seems to be sound. Such a limited partnership is a quasi-corporation,28 having many of the characteristics of a corporation. The limited partnerships of 1836, 1870 and 1871 are quite different and are not within the ruling in Coal Company v. Rogers, nor should they be within article 1506.

In the circumstances it would be better to designate limited partnerships, which must be treated throughout as corporations, as being of the “corporation type” rather than the “Pennsylvania type.” It should be noted that article 1506 as amended November 6, 1919, provides that, “a Michigan partnership association is a corporation." The article as originally issued declared that Virginia partnership associations also are corporations.

This is an amendment of Reg. 45, Art. 1506 (April 17, 1919, edition), issued as T. D. 2943 (November 6, 1919). The previous regulation held that Virginia partnership associations were corporations.

23P. L. 271.
2P. L. 143
2P. L. 56.
*P. L. 389.
245 District Reports 288.
**Coal Co. v. Rogers, 108 Pa. 147.

Distributions by limited partnerships.—All divisions of profits by limited partnerships which are of the corporation type should be treated by the partners as dividends. The normal tax will have been paid, so that in 1919 the recipients will receive credit of 8 per cent on such distributions in calculating their normal tax.

Undivided profits will not be subject to the surtax on the returns of partners of the limited partnership as is the case with ordinary partnerships, but limited partnerships of the corporation type are subject to the excess profits tax.

Personal Service Corporations Grouped with

Partnerships In an attempt to put partnerships and corporations on a more equal footing the 1918 law established a class of "personal service corporations” which are to be considered partnerships for income tax purposes. They are specifically exempt from the corporation income and excess profits tax.29

LAW. Section 218. (e) Personal service corporations shall not be subject to taxation under this title, but the individual stockholders thereof shall be taxed in the same manner as the members of partnerships. All the provisions of this title relating to partnerships and the members thereof shall so far as practicable apply to personal service corporations and the stockholders thereof: Provided, That for the purpose of this subdivision amounts distributed by a personal service corporation during its taxable year shall be accounted for by the distributees; and any portion of the net income remaining undistributed at the close of its taxable year shall be accounted for by the stockholders of such corporation at the close of its taxable year in proportion to their respective shares.

"Personal service corporation" defined.

Law. Section 200. .... The term “personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any

**Law, section 231 (14). (See page 57.)

foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading as a principal, or (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;

The following illustrations used by Mr. Kitchin may be considered an authoritative expression of the intention of Congress. 30

An insurance agency that writes insurance on commissions and requires no capital; a corporation of architects, which requires no capital; a lawyers' guaranty title company that looks up titles and requires no capital; any company where the earnings may be ascribed primarily to personal services and in which capital is not a material income-producing factor. .... where it (capital) is not actually required—where the business does not require them to have capital.

The regulations of the Treasury have deviated somewhat from this expression of legislative intent. It was to be expected from this expression that the controlling test would be found in an answer to the question : “Is capital (invested or borrowed) a material income-producing factor?” No rule can be laid down which can be used as an infallible answer to the question. Each taxpayer who believes that he may claim the benefit of the section is entitled to have his claim considered on its merits.

REGULATION. The term “personal service corporation” means a corporation, not expressly excluded, the income of which is derived from a profession or business (a) which consists principally of rendering personal service, (b) the earnings of which are to be ascribed primarily to the activities of the principal owners or stockholders, and (c) in which the employment of capital is not necessary or is only incidental. No definite and conclusive tests can be prescribed by which it can be finally determined in advance of an examination of the corporation's return whether or not it is a personal service corporation. In the following articles are laid down the general principles under which such determination will be made. . . . . (Art. 1523.)

* Congressional Record, September 18, 1918, page 11329, but this was said before the provision was inserted eliminating "traders” from the scope of the definition.

1. What constitutes rendering of personal service?—

(a) SERVICES MUST BE RENDERED PRINCIPALLY BY THE STOCKHOLDERS.—

REGULATION. . In order that a corporation may be deemed to be a personal service corporation its earnings must be derived principally from compensation for personal services rendered by the corporation to the persons with whom it does business. Merchandising or trading either directly or indirectly in commodities or the services of others is not rendering personal service. Conducting an auction, agency, brokerage, or commission business strictly on the basis of a fee or commission is rendering personal service. If, however, the corporation assumes any such risks as those of market fluctuations, bad debts, failure to accept shipments, etc., or if it guarantees the accounts of the purchaser or is in any way responsible to the seller for the payment of the purchase price, the transaction is one of merchandising or trading and this is true even though the goods are shipped directly from the producer to the consumer and are never actually in the possession of the corporation. The fact that earnings of the corporation are termed commissions or fees is not controlling. The fact that a commission or fee is based on a difference in the prices at which the seller sells and the buyer buys raises a presumption that the transaction is one of merchandising or trading, and it will be so considered in the absence of satisfactory evidence to the contrary. (Art. 1525.)

It will be noted that any agency or brokerage business conducted strictly on the basis of fees or commissions is deemed to be rendering personal service, but that any trading in commodities or the services of others is not rendering personal service. This is hardly consistent, because many businesses use the services of employees, in which case there is a trading in such services. The official illustration in Chapter V, Excess Profits Tax Procedure, deals with a corporation which renders engineering services and assumes an income of $60,000 therefrom. It may reasonably be assumed that the fees paid for services are for the services of others than the principal stockholders. If the use of capital is the fundamental test there is practically no more capital required to pay the salaries of employees than for the salaries or living expenses of the principal stockholders. The language of the

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