vided, however, That no owner of such bonds shall be entitled to such exemption in respect to the interest on an aggregate principal amount of such bonds exceeding one and one-half times the principal amount of bonds of the Fourth Liberty Loan originally subscribed for by such owner and still owned by him at the date of his tax return; and

(3) The interest on an amount of bonds, the principal of which does not exceed $30,000, owned by any individual, partnership, association, or corporation, issued upon conversion of 3 per centum bonds of the First Liberty Loan in the exercise of any privilege arising as a consequence of the issue of bonds of the Fourth Liberty Loan, shall be exempt from such taxes.

The exemptions provided in this section shall be in addition to the exemption provided in section 7 of the Second Liberty Bond Act in respect to the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty Bond Act.

Accordingly, the exemption from surtaxes and war profits and excess profits taxes covers, and there may be excluded from gros income, the interest received on not exceeding $5,000 principal amount in the aggregate of first liberty loan converted 4 per cent bonds, first liberty loan converted 41 per cent bonds, first liberty loan second converted 41 per cent bonds, second liberty loan 4 per cent bonds, second liberty loan converted 44 per cent bonds, third liberty loan 44 per cent bonds, fourth liberty loan 44 per cent bonds and Treasury certificates and war savings certificates, apportioned as the taxpayer may choose; and in addition, until the expiration of two years after the termination of the war, (a) the interest received on not exceeding $30,000 principal amount of fourth liberty loan 44 per cent bonds; plus (b) the interest received on an aggregate principal amount of first liberty loan converted 4 per cen bonds, first liberty loan converted 41 per cent bonds (dated May 9 1918), second liberty loan bonds, converted and unconverted, and third liberty loan 41 per cent bonds, not exceeding $45,000 and no exceeding 150 per cent of the principal amount of bonds of the fourth liberty loan both originally subscribed for by the taxpayer and still owned by him at the date of his return; plus (c) the interest received on not exceeding $30,000 principal amount of first liberty loan second converted 41 per cent bonds (dated October 24, 1918). ART. 80.1 Liberty bond exemption after December 31, 1918.-The Victory Liberty Loan Act of March 3, 1919, provides:

SEC. 2. (a) That until the expiration of five years after the date of the termination of the war between the United States and the German Government, as fixed by proclamation of the President, in addition to the exemptions provided in section 7 of the Second Liberty Bond Act in respect to the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other ex1 See pp. 311-313 for modification of Arts. 77-82.

emptions provided in the Second Liberty Bond Act or the Supplement. to Second Liberty Bond Act, the interest received on and after January 1, 1919, on an amount of bonds of the First Liberty Loan Converted, dated November 15, 1917, May 9, 1918, or October 24, 1918, the Second Liberty Loan converted and unconverted, the Third Liberty Loan, and the Fourth Liberty Loan, the principal of which does not exceed $30,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations.

(b) In addition to the exemption provided in subdivision (a), and in addition to the other exemptions therein referred to, the interest received on and after January 1, 1919, on an amount of the bonds therein specified the principal of which does not exceed $20,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from the taxes therein specified: Provided, That no owner of such bonds shall be entitled to such exemption in respect to the interest on an aggregate principal amount of such bonds exceeding three times the principal amount of notes of the Victory Liberty Loan originally subscribed for by such owner and still owned by him at the date of his tax return.

Accordingly, with respect to the interest on liberty bonds received after December 31, 1918, the exemption from surtaxes and war profits and excess profits taxes covers, and there may be excluded from gross income, in addition to the exemptions specified in articles 77, 78 and 79, (a) the interest received on and after January 1, 1919, until the expiration of five years after the termination of the war, on not exceeding $30,000 principal amount in the aggregate of first liberty loan converted 4 per cent bonds, first liberty loan converted 44 per cent bonds, first liberty loan second converted 41 per cent bonds, second liberty loan 4 per cent bonds, second liberty loan converted 4 per cent bonds, third liberty loan 44 per cent bonds, and fourth liberty loan 44 per cent bonds, apportioned as the taxpayer may choose; and in addition (b) the interest received on and after January 1, 1919, during the life of the notes of the victory liberty loan, on an aggregate principal amount of the bonds described in subdivision (a) not exceeding $20,000 and not exceeding three times the principal amount of notes of the victory liberty loan originally subscribed for by the taxpayer and still owned by him at the date of his return. The specific exemptions of notes of the victory liberty loan will be prescribed by the Secretary of the Treasury pursuant to the Victory Liberty Loan Act.

ART. 81.1 Liberty bond exemption in the case of trusts.—(a) When income is taxable to beneficiaries, as in the case of a trust the income of which is to be distributed to the beneficiaries periodically, each beneficiary is regarded as the owner of a proportionate part of the

1 See pp. 311-313 for modification of Arts. 77-82.

bonds held in trust and is entitled to exemption on account of such ownership as if he owned such proportionate part of the bonds directly. In such a case a subscription by a trustee for bonds of the fourth liberty loan, or notes of the victory liberty loan, constitutes each beneficiary existing at the time of such subscription an original subscriber for his proportionate part of such bonds or notes, as the case may be, and entitles such beneficiary to the appropriate collateral exemption of interest on bonds of previous issues, whether owned by such beneficiary or by the trustee, as if the beneficiary had himself originally subscribed for such proportionate part of the bonds or notes; and a subscription by such beneficiary for bonds of the fourth liberty loan or notes of the victory liberty loan, as the case may be, entitles him to the appropriate collateral exemption of interest on bonds of previous issues held by the trustee. (b) 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. 82.1 Liberty bond exemption in the case of partnerships and per sonal service corporations.-As income of a partnership is taxable to the individual partners, each partner is treated as the owner of a proportionate part of the bonds held by the partnership and is entitled to exemption on account of such ownership as if such partner owned such proportionate part of the bonds directly. Such partner, if a partner at the time of the original subscription by the partnership for bonds of the fourth liberty loan or notes of the victory liberty loan, as the case may be, is treated as an original subscribe: for a proportionate part of such bonds or notes subscribed for by the partnership and is entitled to the appropriate collateral exemption of interest on bonds of previous issues on account of such original subscription for bonds or notes as if he had subscribed directly for such proportionate part. This principle also applies to stockholders in personal service corporations.

ART. 83. Income of foreign governments. The exemption of income of foreign governments applies also to their political subdivi sions. Any income collected by foreign governments from invest ments in the United States in stocks, bonds or other domestic securities, which are not actually owned by but are loaned to such foreign governments, is subject to tax. The income of foreign ambassadors and ministers from investments in bonds and stocks and from interest 1 See pp. 311-313 for modification of Arts. 77-82.

on bank balances, and the fees of foreign consuls, are exempt from tax, but income of such foreign officials from any business carried on by them in the United States would be taxable. The compensation of citizens of the United States who are officers or employees of a foreign government is, however, not exempt from tax.

ART. 84. Income of States.-In general income accruing to any State, Territory or possession of the United States, or to any political subdivision thereof, or to the District of Columbia, is exempt from tax. See article 74. The income of State workmen's compensation insurance funds established by State statutes is not taxable. In the case of a public utility acquired, constructed, operated or maintained by a taxpayer under contract with any State, Territory, or political subdivision thereof, or with the District of Columbia, containing an agreement that a portion of the net earnings of such public utility shall be paid to the State, Territory, or political subdivision thereof, or the District of Columbia, the amount so paid may be deducted by the taxpayer as a necessary expense in transacting business. See section 214 (a) (1) of the statute.

ART. 85.1 Compensation of State officers.-Compensation paid its officers and employees by a State or political subdivision thereof, including fees received by notaries public commissioned by States and the commissions of receivers appointed by State courts, are not taxable. Employees of universities receiving salaries paid in part or in whole from funds available under the Smith-Lever Act of May 8, 1914, who are officers or employees of a State, are not required to return as taxable incomes the salaries so received. This is also true with respect to the Act of August 30, 1890, relating to colleges for the benefit of agriculture and the mechanic arts, and to the Act of March 2, 1887, relating to agricultural experiment stations in such colleges.

ART. 86. Compensation of soldiers and sailors.—A person of either sex in active service in the military or naval forces of the United States may exclude from gross income his or her compensation received from the United States up to the amount of $3,500 in any taxable year, except that this exemption does not apply to compensation received either before or after the present war. The date of the termination of the war for the purpose of the statute will be fixed by proclamation of the President. The military and naval forces of the United States include, among others, army contract surgeons and the individuals named in section 1 of the statute. A person is in active service if he is actually serving in such forces, not necessarily in the field or in the theatre of war, and is not merely on the retired or reserve list. Accordingly, if such a person receives compensation from the United States of $3,500 or less and

1 See p. 313 for modification.

has no other income of an amount sufficient in itself to require him to render a return of income, he need make no return. Members of draft boards are not as such entitled to this exemption.

ART. 87. Income accruing prior to March 1, 1913.-Property held by the taxpayer on March 1, 1913, is capital. Included in this capital are all claims, whether evidenced by writing or not, and all interest which had accrued thereon before that date. Interest accruing on or after that date is taxable income. Where an interest-bearing claim contracted prior to March 1, 1913, is paid in whole or in part after that date, any gain derived from the conversion of the claim int money is taxable. The amount of such gain is the excess of the pro ceeds of the claim (both principal and interest), exclusive of an interest accrued since February 28, 1913, already returned as income over the fair market value of the claim as of March 1, 1913 (bot principal and interest then accrued). In the case of an insuran policy its surrender value as of March 1, 1913, may be used as a basi for the purpose of ascertaining the gain derived from the sale c other disposition of such policy. Where services were rendered pric to March 1, 1913, but paid for thereafter, the amount received taxable income to the extent of the excess of such amount over the fair market value on March 1, 1913, of the principal of the clai and any interest which had then accrued. A claim for the purpo of this article means a right existing unconditionally on March 1 1913, and then assignable, whether presently payable or not. Inte est does not, of course, include dividends on corporate stock. St section 201 of the statute and articles 1541-1549.

ART. 88. Subtraction for redemption of trading stamps.-Where a tax payer, for the purpose of promoting his business, issues with sale trading stamps or premium coupons redeemable in merchandise c cash, he should in computing the income from such sales subtra only the amount received or receivable which will be required for the redemption of such part of the total issue of trading stamps c premium coupons issued during the taxable year as will eventual be presented for redemption. This amount will be determined in th light of the experience of the taxpayer in his particular business an of other users engaged in similar businesses. The taxpayer shall fi for each of the five preceding years, or such number of these years $་ stamps or coupons have been issued by him, a statement showing ( the total issue of stamps during each year, (b) the total stamps r deemed in each year, and (c) the percentage for each year of the stamps redeemed to the stamps issued in such year. A similar state ment shall also be presented showing the experience of other users of stamps or coupons whose experience is relied upon by the taxpayer to determine the amount to be subtracted from the proceed of sales. The Commissioner will examine the basis used in each re