(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 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 ineluding 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. 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.

The.

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.

Section 213 (e). Replacement fund.

During the war, in the case of property requisitioned for war purposes by the Government and property lost or destroyed in whole or in part through war hazards,' especially in the case of ships, it happened that at the time of requisition or loss the market value of such ships was considerably increased over the cost or market value as of March 1, 1913, in cases in which the property was acquired prior to that date, and that in practically no case would the taxpayer have been willing to sell the property for its appraised value at the time of requisition or loss.

To require the taxpayer to pay income and war profits and excess profits taxes upon the difference between the cost or market price on March 1, 1913, and the compensation received at the time of requisition or loss would have been to take such a large proportion of the amount received for the vessel that, although the owner desired to replace the same, the taking of the tax by the Government would have made it impossible in practically every instance.

In all cases where the owner desired to replace the vessel the department allowed him to create a replacement fund and upon giving bond and security for the payment of the taxes assessable by the Government to defer payment of the taxes for a reasonable period in order to replace the vessel, and it required a taxpayer to carry the new or restored property in its accounts at an amount not in excess of that at which the requisitioned, damaged, or destroyed property was carried, except and to the extent that such new or restored property had an increased productive capacity.

Treasury Decision 2706 sets forth the replacement fund procedure adopted by the Treasury Department.

It has been suggested that this procedure should be made applicable to all cases of requisitioned property by the Government, or property lost or destroyed, in whole or in part, by fires, storms, shipwreck, or other casualties.

It has been suggested that this 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:

(e) In the case of property title to which has been requisitioned by the Government, or property which has been lost or destroyed, in whole or in part, by fire, storm, shipwreck, or other casualty, the amount received by the owner as compensation for the property in excess of the value of the property on March 1, 1913, or its cost, if acquired after that date, may be placed in a replacement fund for the replacement in kind of the lost or damaged property. In case a taxpayer establishes a replacement fund, the entire amount of the

compensation so received may be held in such fu nd, and the account ing for gain or loss thereupon deferred for a reasonable period of time, to be determined by the Commissioner, with the approval of the Secretary.

In such cases the taxpayer shall make application under oath to the Commissioner for permission to establish such a replacement fund. The application shall state all the facts relating to the transaction and that the taxpayer will proceed immediately to replace or restore such property.

The taxpayer shall be required to furnish a bond with such security or surety as the commissioner, with the approval of the Secretary, shall require for an amount not less than the estimated income, war-profits, and excess-profits taxes assessable by the United States upon the income so carried to the replacement fund. In lieu of such bond the taxpayer may at his option deposit as security for such estimated amount of taxes, obligations of the United States, such obligations to be held in trust as such security in a bank or trust company designated by the Commissioner, with the approval of the Secretary.

When the replacement or restoration is made, the new or restored property shall not be valued in the accounts of the taxpayer at an amount in excess of that at which the requisitioned, damaged, or destroyed property was carried, except and to the extent that such new or restored property has an increased productive capacity.

Section 214 (a) (2) and section 234 (a) (2). Deductibility of interest paid on indebtedness incurred to purchase or carry obligations of the United States.

These paragraphs, as now worded, permit taxpayers (individuals and corporations, respectively) to borrow money for the purpose of purchasing or carrying tax-free 33 per cent Victory notes and to deduct interest paid upon such borrowed money, although the interest received from such notes is exempt from all Federal, State, and local taxation except estate or inheritance taxes.

It has been suggested that this departure from the principle that taxpayers, in computing taxable income, should not be permitted to deduct interest paid on indebtedness contracted to purchase or carry tax-free securities, is unwise and should not be continued and that the law should be amended so as to remove the exceptionally favorable status which has been accorded this particular issue of Government securities.

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

Strike out paragraph (2) of subdivision (a) of section 214 and insert in lieu thereof;

(2) All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917 the income from which is subject, to graduated additional income taxes, commonly known as surtaxes and excess-profits and war-profits taxes), the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or, in the case of a nonresident alien individual, the proportion of such interest which the amount of his gross income from sources within the United States bears to the amount of his gross income from all sources within and without the United States. Strike out paragraph (2) of subdivision (a) of section 234 and insert in lieu thereof:

(2) All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917 the income from which is subject to graduated additional income taxes, commonly known as surtaxes and excess-profits and war-profits taxes), the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or, in the case of a foreign corporation, the proportion of such interest which the amount of its gross income from sources within the United States bears to the amount of its gross income from all sources within and without the United States;

Section 216. Personal credits of a taxpayer whose status changes during the year.

This section of the law does not specify whether the credits therein allowed are to be taken according to the status of the taxpayer at the beginning or at the end of the taxable year or on the basis of prorating the credits allowable under two or more statuses during the time within the taxable year throughout which each status continued.

It has been suggested that these credits are not sufficient in amount to justify the inconvenience of prorating and that the ruling of the department that the status of the taxpayer at the close of the taxable year is controlling should be confirmed by legislation.

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

Amend section 216 by adding a new subdivision at the end thereof as follows:

(f) The credits allowed by subdivisions (c), (d), and (e) of this section shall be determined by the status of the taxpayer on the last day of the period for which the return of income is made, but in