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ANSWER:

$67,000. Even though the $5,000 was paid to the agents living in Germany, the amount is a direct charge against income from sources within the United States, just as much as the $2,000 paid for janitor services and the $1,000 paid as collection charges.

REFERENCE:

Sec. 217 (b): "From the items of gross income specified in subdivision (a) there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto. The re

mainder, if any, shall be included in full as net income from sources within the United States."

PROBLEM 163

Illustrating, in the Case of a Nonresident Alien Individual, the Deduction of Expenses Which Cannot be Definitely Allocated to Some Item or Class of Gross Income

FACTS:

Hans Vandervoot, a subject of Holland residing in that country, conducts business in the United States and Holland. Fifty per cent of his gross income is derived from sources within the United States, and the balance from sources within his own country. His only office is located in Holland.

QUESTION:

Can he deduct the general office expense, or any part thereof from the gross income which he reports for United States income tax purposes?

ANSWER:

Yes. He can deduct a ratable portion of his office expenses from the gross income derived from sources within the United States.

REFERENCE:

Sec. 217 (b): "From the items of gross income specified in subdivision (a) there shall be deducted the expenses, losses, and other

deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States."

NOTE:

The above-quoted section relates to net income of a nonresident alien individual. In the case of a foreign corporation the treatment is similar to the above.

REFERENCE:

Sec. 234 (b): "In the case of a foreign corporation or of a corporation entitled to the benefits of section 262 the deductions allowed in subdivision (a) shall be allowed only if and to the extent that they are connected with income from sources within the United States; and the proper apportionment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 217 under rules and regulations prescribed by the Commissioner with the approval of the Secretary."

PROBLEM 164

Illustrating Taxability of Income by Nonresident Alien Derived from the Sale of Personal Property Produced in Part Within the United States and Completed and Sold Without the United States

FACTS:

R. H. Holmes, a British subject residing in Quebec, manufactures the parts of a certain make of automobile in the United. States, and ships the parts to Canada to be assembled and sold. During the year 1921 Mr. Holmes derived a profit of $100,000 on the sale of the automobiles.

QUESTION:

Is all of this income exempt from tax in the United States?

ANSWER:

No. The net income was derived from sources partly within and partly without the United States. The income attributable

to sources within the United States will be apportioned by processes or formulæ prescribed by the Commissioner, and will be subject to the United States income taxes.

REFERENCE:

...

Sec. 217 (e): 66 Gains, profits and income (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States. . . shall be treated as derived partly from sources within and partly from sources without the United States."

NOTE:

The above-quoted section relates to the net income of nonresident alien individuals.

PROBLEM 165

Illustrating Taxability of Income by Nonresident Alien Derived From Sale of Personal Property Produced in Whole by the Taxpayer Without and Sold Within the United States

FACTS:

William Tell, a Swiss subject residing in Berne, manufactures toys in Switzerland and sends his entire output to his agent in the United States to be disposed of. Mr. Tell's net income from these operations in 1921 is $50,000.

QUESTION:

Is this income subject to the United States income taxes?

ANSWER:

It is only in part subject to the United States income taxes. The net income was made partly within and partly without the United States. The net income attributable to sources within the United States will be subject to the United States income taxes.

REFERENCE:

Sec. 217 (e): "... Gains, profits and income from ... (2) the sale of personal property produced (in whole or in

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part) by the taxpayer without and sold within the United States, shall be treated as derived partly from sources within and partly from sources without the United States.

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PROBLEM 166

Illustrating Tax Liability of Individuals Doing Partnership Through the Purchase of Personal Property in a Foreign Country and Sale in the United States

FACTS:

M. A. Vivian, a French subject residing in Paris, purchased merchandise in France for $50,000, and shipped it to New York, where his agent sold the same for $75,000 net, Mr. Vivian realizing a profit of $25,000. This transaction occurred in 1921.

QUESTION:

Is the income taxable in the United States?

ANSWER:
Yes.

REFERENCE:

Sec. 217 (e) (2): "... Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States shall be treated as derived entirely from the country in which sold."

NOTE:

The above section relates to the net income of nonresident alien individuals.

PROBLEM 167

Illustrating Tax Liability of Individuals Doing Partnership Business

FACTS:

Jones & Jones, two individuals, during 1921, carried on a business in partnership form.

QUESTION:

Is the partnership liable for income tax?

ANSWER:
No.

REFERENCE:

Sec. 218 (a): "That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity.

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PROBLEM 168

Illustrating Computation of Net Income of Individuals
Carrying on Business as Partnership

FACTS:

(a) Brown & Brown, a partnership consisting of two equal partners, shows a net income of $20,000 for the calendar year 1921, its accounting year. Of this amount $14,000 has been distributed to the partners within the calendar year 1921. This is the only income of the partners, both of whom report on the calendar-year basis.

(b) Boyd & Boyd, a partnership consisting of two equal partners, shows a net income of $14,000 for its fiscal year ending June 30, 1921. The partners have income from other sources and make their returns on the calendar-year basis.

QUESTION:

What is the 1921 taxable net income from the partnership to be reported by the partners in each of the cases above stated?

ANSWER:

(a) Although only $14,000, was actually distributed, each partner must report as taxable net income his distributive share, whether distributed or not, in this case a total of $10,000 each.

(b) Since the two individuals file on a different basis from the partnership's accounting year, they must each add to their in

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