(b) If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall, under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title and by Title III for such preceding taxable year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess shall under regulations prescribed by the Commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year.

Section 213 (b) (1). Proceeds of life insurance policies.

This paragraph excludes from gross income "the proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estate of the insured." It has been suggested that this paragraph be amended so as to omit the limitation resulting from the words "to individual beneficiaries or to the estate of the insured." The adoption of this suggestion would leave no doubt as to the right of a partnership to exclude from gross income the proceeds of any life insurance policy in which the partnership is named as beneficiary and would extend to corporations a similar right.

In support of this suggestion it has been urged that business concerns partnerships and corporations-are no longer allowed as deductions the amount paid for premiums on policies insuring in their favor the lives of officers and employees, and that such insurance constitutes a reasonable and proper provision against actual losses which business enterprises sustain in the death of responsible officers and employees.

It has been suggested that this change could be accomplished by an amendment in substantially the following form:

Strike out paragraph (1) of subdivision (b) of section 213 and insert. in lieu thereof:

(1) The proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estate of the insured;

Section 213 (b) (3). Value of property acquired by gift, bequest, devise, or descent.

Under this paragraph of the law the owner of property acquired by gift, bequest, devise, or descent takes over such property at its market value when he acquires it and thereafter depreciation, depletion, and

gain or loss are computed on the basis of this value which is often higher than the value when the property was originally acquired.

It has been suggested that, although transfers of property by gift, bequest, devise, or descent should not be treated as giving rise to realized gain or loss, whenever thereafter gain or loss is realized by actual sale, the gain or loss at that time should be measured as the difference between the price received and the cost to the original owner who acquired the property for value.

It is urged in support of this suggestion that the effect of the present legislation is to permit realized gains due to appreciation taking place during the previous ownership to escape taxation.

It has been suggested that it is desirable also to clear from doubt the status of life interests or estates. Life tenants have made claim for an obsolescence allowance based upon shrinkage due to the mere passage of time in the so-called capital value of the life interest. Certain State statutes and the decisions thereunder give color to the claim that the value of a life interest at the time received is such a capital value as may serve as the basis of deductions for obsolescence. If these claims be allowed, cases would arise in which a clear income from an unimpared corpus divided between a life tenant and remainderman would entirely escape taxation-the income from the property being wiped out by the annual shrinkage or obsolescence of the so-called capital value of the life estate.

It has been suggested that these changes could be accomplished by an amendment in substantially the following form:

Strike out paragraph (3) of subdivision (b) of section 213 and insert in lieu thereof:

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(3) The value of property acquired by gift, bequest, devisc, or descent (but the income from such property shall be included gross income, and such property shall be valued for the purposes of computing invested capital, depreciation, depletion, gain or loss, under Title II and III, as if in the possession of the previous owner; and the income from such property shall be included in the gross income without deduction for any shrinkage in the so-called value of a life interest due to the mere lapse of time);

Section 213 (c) and Section 233 (b). Gross income of nonresident aliens and foreign corporations.

These paragraphs of the law provide that in the case of nonresident alien individuals and foreign corporations gross income shall include "the gross income from sources within the United States."

It has been suggested that these paragraphs be amended to exempt or exclude from gross income interest on deposits in banks, banking associations, and trust companies received by alien individuals or

foreign corporations not engaged in trade or business within the United States and not having any office or any place of business therein.

It is urged in support of this suggestion that the loss of revenue which would result if this deduction were allowed would be relatively small in amount, while the exemption of such interest from taxation would be in keeping with the action of other countries and would encourage nonresident alien individuals and foreign corporations to transact financial business through institutions located in the United States.

It has been further suggested in connection with these paragraphs of the law that the gross income of nonresident alien individuals and foreign corporations be so defined as to exclude profits attributable to the manufacture or production of goods by nonresident aliens or foreign corporations outside the United States, and that such profits be determined by processes of allocation or apportionment under administrative regulations.

It has been urged in support of this suggestion that under the present language of the law foreign producers or manufacturers who sell from an established office in the United States are subject to taxation on the entire profit derived from the goods sold within this country, although the greater part of this profit may be attributable to manufacture or production abroad, whereas foreign producers or manufacturers may escape all taxation by establishing their selling agency as well as their factories and plants outside the United States. It is also urged that the present rule is inconsistent because in the case of a factory of a foreign corporation located in the United States and making sales abroad the entire profit is taxed on the ground that this income is derived from sources (that is, manufacture or production) within the United States, whereas if the factory of a foreign corporation is located abroad and sales are made through an office in the United States, the entire profit is again taxed on the ground that the income is derived from sources (that is, sale) within the United States.

It has been suggested that these changes could be accomplished by amendments in substantially the following form:

Strike out subdivision (c) of section 213 and insert in lieu thereof:

(c) In the case of nonresident alien individuals, gross income includes only the gross income from sources within the United States, including

(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, except interest on deposits in banks, banking associations, and trust companies received by nonresident alien individuals not engaged in trade or business within the United States or not having an office or place of business therein;

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(2) Dividends from resident corporations; and including all (3) Amounts received (although paid under a for the sale of goods or otherwise) representing profits on the manufacture and disposition of geeds within the United States from the sale or disposition of goods within the United States manufactured or produced by nonresident alien individuals without the United States, but not including such amounts received by nonresident alien individuals not engaged in trade or business within the United States, or not having an office or place of business therein. The profits attributable to the manufacture or production of goods by nonresident alien individuals without the United States shall be determined by processes of allocation or apportionment under regulations to be prescribed by the Commissioner with the approval of the Secretary.

Strike out subdivision (b) of section 233 and insert in lieu thereof:

(b) In the case of a foreign corporation gross income includes only the gross income from sources within the United States, including the

(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, except interest on deposits in banks, banking associations and trust companies received by foreign corporations not engaged in trade or business within the United States or not having an office or place of business therein;

(2) Dividends from resident corporations; and including all (3) Amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States from the sale or disposition of goods within the United States manufactured or produced by foreign corporations without the United States, but not including such amounts received by foreign corporations not engaged in trade or business within the United States or not having an office or place of business therein. The profits attributable to the manufacture or production of goods by foreign corporations without the United States shall be determined by processes of allocation or apportionment under regulations to be prescribed by the Commissioner with the approval of the Secretary. If the preceding amendments are adopted, corresponding changes should be made in section 221 (dealing with payment at source) and 214 and 234 authorizing certain deductions to nonresident alien individuals and foreign corporations respectively.

Section 213 (d). Compensation for personal service and gains from sales or dealings in property.

This paragraph includes in gross income all gains, profits, and income derived by way of compensation for personal service and from sales and dealings in property whether real or personal, and makes

all such income taxable as income of the year in which received. It has been suggested that a special rule be provided to afford relief to taxpayers who receive in any one year an extraordinary amount of income representing an accumulation of saving or effort over a period of several prior years.

In support of this suggestion it has been argued that compensation paid in a lump sum in one year for services rendered partly in that year and partly in prior years should not be subjected to the high rates of surtax which apply if the income is regarded as income of a single taxable year, but that a part of such income should be set aside and taxed separately according to a special method. It has been pointed out also that the realization in one year of gains from the sale of capital assets or long-time investments may similarly result in tax out of all reasonable proportion to the tax which would have been paid if the gain were prorated over the entire period. As it is obviously undesirable to reopen and amend the returns of prior years for the purpose of prorating such income, those who have supported the suggestion for the amendment of this section of the law favor the creation of a special method for computing the tax on all extraordinary income arising within the taxable year.

It has been suggested that these changes could be accomplished by an amendment in substantially the following form:

Amend section 213 by adding at the end thereof a new subdivision, as follows:

(d) Income received after January 1, 1919, in any taxable year from compensation for personal service rendered during a period of three or more years, and profits derived from sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property, where such ownership or interest has existed for a period of three or more years, and amounts to not less than 50 per centum of the ordinary income of the taxpayer for the taxable year, shall be deemed to be, for the purposes of this title, extraordinary income.

Such extraordinary income shall be deemed to be income of the first year in which it can be definitely determined, but the taxpayer may at his option return it for purposes of taxation under this title separate and apart from his ordinary income for such year. In cases in which the taxpayer returns his extraordinary income separate and apart from his ordinary income, the extraordinary income shall be taxed at the normal rate of the year in which the income is determined, plus an additional amount equivalent to 25 per centum of such income.

All deductions to which the taxpayer is entitled unless clearly and directly related to the extraordinary income shall be taken against the ordinary income, but any excess of such deduction over ordinary income may be taken against the extraordinary income.