RECEIVERS.

Receivers of insolvent corporations were not taxable prior to the act of September 8, 1916. (Scott v. Western Pacific R. R. Co., 246 Fed. 545.)

Receivers are not subject to tax under the 1913 act on net earnings of an insolvent railroad operated by them. (Equitable Trust Co. of N. Y. v. Western Pac. Ry. Co., 236 Fed. 813, 1916, following Penn. Steel Co. v. N. Y. C. Ry. Co., 198 Fed. 775; decided under 1909 act.)

JOINT-STOCK ASSOCIATIONS.

Where trustees hold shares of stock of a corporation and real estate subject to lease, collecting the dividends and rents, but otherwise doing no business, and distribute the income less taxes and similar expenses to the holders of their receipt certificates, who have no control except the right of filling a vacancy among the trustees and of consenting to a modification of the terms of the trust, upon the special fact under the act of October 3, 1913, the trust is not subject to the income tax as a joint-stock association, and the trustees and the cestui que trust are to be treated as fiduciaries and beneficiaries for purposes of taxation. (Crocker v. Malley, 249 U. S. 223, reversing 250 Fed. 817, 1919.) This case distinguished in Malley v. Bowditch (259 Fed. 809, 1919.)

See case of Haiku Sugar Co. v. Johnstone, 249 Fed. 103, 1918. Under Partnerships (case 2) this section.

PARTNERSHIPS.

"Partnerships are expressly excluded from section G, *

*

* The

If Congress had intended that partnerships, as such, should be taxable upon their net income, the logical place to have so provided would have been in section G, and to have excluded from the net income of a natural taxable person, subject to the normal tax, that part of his income derived from a partnership, just as is provided with respect to his income derived from a corporation. Congress consequently, it would seem, ignored, for taxing purposes, a partnership's existence, and placed the individual partner's share in its gains and profits on the same footing as if his income had been received directly by him without the intervention of a partnership name." (U. S. v. Coulby, 251 Fed. 982, affirmed in 258 Fed. 27, 1919.) Under Session Laws, Hawaii, 1903, act 51, section 1, permitting any two or more corporations organized under the laws of Hawaii to enter into partnership with each other for the transaction of any lawful business, several corporations, by an agreement dated October 30, 1903, formed a partnership, the by-laws of which provided for management by representatives selected by the several partners, who were to represent the partners according to their respective interests. There were no special partners, and there was no partner

ship capital stock. Held, That as the partnership was lawful under the laws of Hawaii, it could not be treated as a joint-stock company, and so subject to taxation under this act. (Haiku Sugar Co. et al. v. Johnstone, 249 Fed. 103, 1918.)

The changeability of membership or transferability of shares is often used as a determining criterion between ordinary partnerships and joint-stock companies. In a joint-stock company, the members have no right to decide what new members shall be admitted; on the other hand, the right of delectus personarum is an inherent quality of an ordinary partnership.

A joint-stock company usually consists of a large number of persons between whom there is no special relation of confidence and the retirement or death of a member works no dissolution, while a partnership, though it may consist of several, is ordinarily made up of members who are drawn to each other by feelings of mutual confidence and no member is at liberty to retire and substitute another. In a joint-stock company a shareholder has no power to contract for the company, whereas a partner may bind a partnership though the partnership is composed of corporations. (Haiku Sugar Co. v. Johnstone, 249 Fed. 103, 1918.)

"ACCRUING" OF INCOME.

An annual dividend received by a corporation on the stock of another corporation is subject to the tax imposed by this section, for the calendar year in which it was declared and paid, as income "accruing" during such year, although half of the profits out of which the dividend was paid accrued prior to the passage of the act. (Skinner v. Union Pacific Coal Co., 249 Fed. 152, 1918; petition for certiorari granted, 247 U. S. 511, pending in the U. S. Supreme Court.)

MINING CORPORATIONS.

The tax on the product of a mine is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations. (Stanton v. Baltic Mining Co., 240 U. S. 103, 1916.)

HOLDING COMPANIES.

A corporation, which merely held the stock of other corporations and, by issuance of proxies to vote at the meetings of the subsidiary companies, directed such corporations, is not exercising any franchise on which excise taxes may be assessed, under income-tax act 1913, for the months of January and February of that year, prior to the ratification of the income-tax amendment to the Constitution of the United States; this being so, though the holding corporation made a loan to its subsidiary company. (Butterick Co. v. United States, and Federal Pub. Co. v. Same, 240 Fed. 539, 1917; dismissed on motion of U. S., 248 U. S., 587.)

EXCISE TAX FOR JANUARY AND FEBRUARY, 1913.

The proviso in section 4-S was intended to relate only to rights and liabilities in respect to taxes which had accrued under the act of 1909, and was not intended to cover excise taxes upon corporations for the months of January and February, 1913, which were imposed by the income-tax act, as the constitutional amendment of March 1, 1913, designed to permit taxation of income without apportionment was not adopted until March 1, this being apparent from the provision that the excise tax for these two months shall be ascertained in accordance with the provisions of section G. Consequently, exemptions in the corporation excise tax act are not applicable to taxes imposed for these two months. (Butterick Co. v. United States, and Federal Pub. Co. v. Same, 240 Fed. 539, 1917; dismissed on motion. of U. S., 248 U. S., 587.)

PARAGRAPH G (b).

(b) Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, joint-stock company or association, or insurance company, received within the year from all sources, (first) all the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, including rentals or other payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation by use, wear, and tear of property, if any; and in the case of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made; and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided, That mutual fire insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided further, That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof and life insurance companies shall not include as income in any year such portion of any actual premium received trom any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; (third) the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding one-half of the sum of its interest bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of its indebtedness not exceeding the amount of capital employed in the business at the close of the year: Provided, That in case of indebtedness wholly secured by collateral the subject of sale in ordinary business of such corporation, joint-stock company, or association, the total interest secured and paid by such company, corporation, or association within the year on any such indebtedness may be deducted as a part of

its expense of doing business: Provided further, That in the case of bonds or other indebtedness, which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed; and in the case of a bank, banking association, loan, or trust company, interest paid within the year on deposits or on moneys received for investment and secured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan or trust company; (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof, or imposed by the Government of any foreign country: Provided, That in the case of a corporation, joint-stock company or association, or insurance company, organized, authorized, or existing under the laws of any foreign country, such net income shall be ascertained by deducting from the gross amount of its income accrued within the year from business transacted and capital invested within the United States, (first) all the ordinary and necessary expenses actually paid within the year out of earnings in the maintenance and operation of its business and property within the United States, including rentals or other payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year in business conducted by it within the United States and not compensated by insurance or otherwise, including a reasonable allowance for depreciation by use, wear and tear of property, if any, and in the case of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made; and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided further, That mutual fire insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided further, That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment thereof and the payment thereof and life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; (third) the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding the proportion of one-half of the sum of its interest-bearing capital indebtedness and its paid-up stock outstanding at the close of the year, or if no capital stock, the capital employed in the business at the close of the year which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States: Provided, That in the case of bonds or other indebtedness which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed; (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof or the District of Columbia. In the case of assessment insurance companies whether domestic or foreign, the actual deposit of sums with State or Territorial officers, pursuant to law, as additions to guarantee or reserve funds shall be treated as being payments required by law to reserve funds.

Income of corporations.

DIVIDENDS FROM SUBSIDIARIES.

Case 1. Where a holding company owns all the stock of its subsidiary corporation except the qualifying shares of the directors, and the subsidiary corporation, together with the holding company, constitute a single enterprise, the accumulated earnings and surplus of the subsidiary corporations used by them as capital prior to January 1, 1913, do not become taxable income of the holding company when formally transferred to it as dividends.

Though the holding company did not itself do the business of its subsidiaries and have possession of their property, as in Southern Pacific v. Lowe (247 U. S. 330), the principle of that case governs. (Gulf Oil Corp'n v. Lewellyn, 248 U. S. 71, reversing 245 Fed. 1.)

Case 2. Where a corporation is the owner of all the stock in a subsidiary company and the lessee of all its property, regularly maintaining possession, control, and management of all of the subsidiaries money and other property, so that the subsidiary is a mere agent of the other corporation and is practically merged therewith, dividends of the subsidiary declared out of a surplus which accrued prior to March 3, 1913, are not taxable income of the parent corporation. (Collector v. Hubbard, 12 Wall, 1; Pullman Car Co. v. Missouri Pac. Co., 115, U. S., 587; Peterson v. Chicago, Rock Island & Pac. Ry. 206 U. S. 364, distinguished; Southern Pacific Railway Co. v. Lowe, 247 U. S. 330, 1918.)

FOREIGN CORPORATIONS.

Case 3. Income from activities carried on in United States. See case 1 under paragraph G (a).

INSOLVENT CORPORATIONS.

Case 4. No income tax could be assessed on income collected by a receiver of an insolvent corporation prior to the act of September 8, 1916. (Scott v. Western Pacific R. R. Co., 246 Fed. 545.)

RENTALS FROM LESSEE.

Case 5. Prior to the passage of the act, plaintiff railroad company had leased its line to a second company, which agreed to pay the interest upon bonds issued by plaintiff and to pay direct to each stockholder dividends at the rate of 8 per cent per annum. Under the agreement, plaintiff received $1,000 yearly from the lessee to enable it to maintain its corporate organization. Held, in view of the fact that the agreement provided that lessee should not pay any income tax which might thereafter be imposed on the dividends and interest, and that, if required by law to pay the same, it might