and the services of its expert engineers, draftsmen, etc., has no particular bearing on the question under consideration. The foreign company and the American corporation are two separate and distinct taxable entities. They are not required and would not be permitted to file a consolidated tax return, and the contractual relationship does not constitute the American corporation the agent of the foreign company. Under the terms of the agreement between the two companies the American corporation merely received compensation for assistance rendered and dividends on its stockholdings. It has not been shown that the foreign company maintained an office or place of business in the United States during the time the contracts with the United States Government were being negotiated and their terms fulfilled, and the answer to the question presented by the Unit appears to depend entirely upon where the goods contracted for were produced and sold.

Section 233 (b) of the Revenue Act of 1918 reads:

In the case of a foreign corporation gross income includes only the gross income from sources within the United States, including the interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, and including all 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.

*

Under this section of the statute profits derived from the manufacture and disposition of goods within the United States are subject to tax.

From the records in the case it appears that the goods were manufactured and sold by a foreign corporation having no office or place of business in the United States; that they were manufactured, sold, delivered, and payment there for received outside the United States; that is, the foreign corporation executed the contract for sale outside the United States, manufactured and made delivery of the goods to the United States f. o. b. at a point outside the United States and received payment there for outside the United States, and inasmuch as it thus appears that the goods were manufactured, sold, delivered, and payment there for was received outside the United States by a foreign corporation having no office or place of business in the United States, the Committee is of the opinion and holds that the profits. from such sales were not derived from a source within the United States, and consequently are not subject to any income or profits taxes provided for by the Revenue Act of 1918.

SECTION 213(c), ARTICLE 92(a): When the wages of a nonresident alien seaman are derived from sources within the United States.

5-21-1416 O. D. 784

A vessel sailing from a port in the United States on the Pacific coast to a port in the United States on the Atlantic coast, or vice versa, via the Panama Canal, does not come within the meaning of the term "a vessel engaged in foreign trade." The wages of nonresident alien seamen received for services rendered on such vessels are subject to withholding.

SECTION 214(a) 1.-DEDUCTIONS ALLOWED:
BUSINESS EXPENSES.

SECTION 214(a) 1, ARTICLE 101: Business ex

penses.

REVENUE ACT OF 1917.

6-21-1429

A. R. R. 374

The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in disallowing as a deduction an item of 3x dollars, advances to salesmen in excess of commissions earned, and assessing additional tax for 1917, on account of such disallowance.

The M Company was chartered in 1911, and is engaged in a general brokerage and commission business. The corporation filed a return for the calendar year 1917, and claimed therein certain deductions which have been disallowed by the revenue agent making the examination of the returns for 1917, and such disallowance has been approved by the Income Tax Unit and additional taxes have been assessed.

It appears that in the year 1917 this corporation advanced to its salesmen under contract 3x dollars over commissions earned by and credited to their accounts at the close of the accounting period, October 31, 1917. This amount was charged off on the books as worthless accounts and not as selling expense. It further appears that in the year 1916 these balances were treated as assets and were so shown on the balance sheet which was attached to the original income and profits tax returns. The revenue agent making the investigation has treated this item charged off for 1917 in the same way as the corporation had treated it for prior years, and has disallowed the item as a deduction in computing the tax liability of the corporation on the theory that the salesmen to whom the advances had been made were still employed by the corporation and the amounts so charged off may be collected in the next year.

A hearing was granted at the request of the taxpayer at which was present the president of the corporation. A brief was submitted explaining in detail the method of accounting employed by the corporation and also copies of contracts with the salesmen. All of the employees have contracts with the corporation guaranteeing them weekly or monthly drawing accounts. Under the contracts referred to the corporation was obligated to make these weekly or monthly allowances so long as the salesmen remained in the employ of the corporation, regardless of the amount of business secured by them.

It does not appear that any of the advances required to be made under the contracts are ever repaid by the salesmen unless such salesmen under the contracts earn commissions in a subsequent year in excess of such advances. In the brief submitted by the president of the corporation an illustration is given, which reads as follows:

Merchandise invoiced at 32 cents is sold at 36 cents, and the salesman's proportion of the profit-2 cents-is charged by the corporation as its selling expense, and, at the same time, the salesman's account is credited with the 2 cents profit on the order.

It is, therefore, proper to charge all weekly or monthly advances to salesmen as a part of the selling expense of the corporation for these reasons:

(1) Because, under its contracts with its salesmen, the company is obligated, so long as the salesmen remain in the employ of the corporation, to make these weekly or monthly advances to the salesmen.

(2) Because such sums represent the selling expense of the corporation, for, in most cases, they are in liquidation of the profits earned by the salesmen under the contract, and, as hereinbefore explained, such profits represent the selling expense of the corporation.

The various accounts between the corporation and its salesmen are kept for the purpose of ascertaining whether each salesman is earning on the basis of the contract commissions in excess of the advances required to be made. There does not appear to be any substantial difference in the method of paying the salesmen and the ordinary method of employing salesmen upon salary only or upon a commission basis. A corporation employing salesmen upon either basis properly may charge all advances to such salesmen to " expense ac

count."

It was explained at the recent conference that this corporation charged direct to "selling expense" the percentage of gross profits earned by its salesmen. At the termination of the year it charged as an additional selling expense the excess of advances made to salesmen over the profits earned by the salesmen, and in the event such profits exceeded the guaranteed advances only the profits were charged and deducted as a selling expense.

Under the contracts certain advances are required to be made. The corporation is obligated to make these advances as long as the salesmen continue in its employ, and such advances represent a selling expense of the corporation to the extent that the commissions earned are less than the guaranteed advances. If such advances exceed the commissions earned in one year and then in a subsequent year the commissions exceed the advances, an adjustment is made on the books. of the corporation and a charge is made against the deficit of the preceding year and the balance, if any, is paid over to the salesmen.

At the conference it was explained that under the system of accounting used by the corporation and under the contracts with the salesmen, profits are not credited to the salesmen's accounts until actual shipment and invoicing to the customer. The profits of the salesmen which will accrue upon the shipment and invoicing of the merchandise apparently are deferred liabilities of the corporation which it does not consider in closing its account.

The Revenue Act of 1917 allows a corporation to deduct all the ordinary and necessary expenses paid within the year in the maintenance and operation of its business properties.

An analysis of the facts in the instant case indicates clearly that the accounts on the books of the corporation showing advances made and commissions earned by the salesmen are kept for the convenience of the corporation and for the purpose of comparison; that is, so that the corporation may ascertain at a definitely fixed date whether a specific salesman is earning more or less than the advances required to be made under the contract. The total advances to the salesmen in 1917, over the commissions earned by them, amounted to 3x dollars. It is held by the Income Tax Unit that this item is not a proper deduction as a business expense for the purpose of computing net income subject to income and war profits taxes imposed by the Revenue Act of 1917.

The Committee is of the opinion that the item in question constitutes a proper deduction as a selling expense of the corporation for 1917, irrespective of any book entries made on the books of the

corporation for its own convenience. No part of the advances made in 1917, over the commissions earned, will ever be repaid to the corporation except to the extent hereinbefore explained, in which case adjustments are made in the succeeding year. The Committee is advised that a new accounting system has been installed and that the situation which existed in 1917 has been corrected.

The Committee recommends that the total amount of advances made to salesmen in 1917, over commissions earned, be reinstated and allowed as an ordinary and necessary business expense in the maintenance and operation of the business of the corporation.

SECTION 214(a) 1, ARTICLE 101: Business expenses. (Also Section 215, Article 293.)

7-21-1446 O.D. 805

In addition to his salary as an employee, a taxpayer receives sundry amounts from various periodicals for articles contributed by him. His activities in this respect are sufficiently frequent to constitute his writing a business. Held, that the expenses incurred for information services, magazines, stationery, and supplies used in connection with the production of the articles referred to may be deducted as a business expense, but the cost of books is held to be a capital expense and as such not deductible. There may be taken as a deduction an amount representing depreciation on books, typewriter, furniture, and other equipment of a permanent character in proportion to their use in connection with the production of such articles, providing, however, that no other deduction in respect thereof has been or is being claimed in a return.

In accordance with article 292 of Regulations 45, as amended by Treasury Decision 3101 (C. B. 3, p. 191), it is held that when trips are made for the express purpose of securing facts for an article, there may be deducted from gross income the reasonable and necessary traveling expenses, including railroad fares, as well as expenses for meals and lodging in an amount in excess of any expenditures ordinarily required for such purposes when at home.

SECTION 214(a) 1, ARTICLE 101: Business expenses.

(Also Section 215, Article 293; Section 219, Article 343.)

8-21-1463 Sol. Op. 88

Executors who continue the trade or business of the decedent may deduct from the gross income of the estate, in computing its net income, all ordinary and necessary expenses paid or incurred during the taxable year in continuing such trade or business, but may not deduct expenses of administration.

The amounts which may be deducted as salaries or other compensation for personal services are limited to a reasonable compensation for personal services actually rendered in continuing the trade or business of the decedent.

A, a resident of Texas, died testate in 1918, her estate consisting principally of corporate securities. After numerous specific bequests to named beneficiaries, the residuary estate is, by the will, given to the testatrix's "executors and trustees" with instructions that for a

period of two years after the death of the decedent, or for a shorter period at the election of the "executors and trustees," they shall collect the rents, income, and profits thereof and apply so much of such rents, income, and profits as they shall deem advisable for the support, education, and maintenance of B, and the balance to the payment of the taxes, debts, and charges, governmental or otherwise, payable by or out of the estate. It is provided that at the end of said period the residuary estate shall be divided into two parts by the "executors and trustees" and the income of one part paid to C during his life and the income of the other part paid to or accumulated for B with various remainders and cross remainders over.

By subsequent provisions of the will certain parties are appointed "executors of my will and trustees of every trust created thereby." As permitted by the Statutes of Texas, the will provides that the probate court shall have no jurisdiction of the estate other than to probate and record the will and receive and approve the inventory, appraisement, and list of claims of the estate. Article 3362, Vernon's Sayles' Texas Civil Statutes, 1914.

The question presented is the deductibility, in computing the net income of the estate for the two years following the death of the testatrix, of certain expenses incurred by the executors.

Section 219 of the Revenue Act of 1918 provides that the income tax shall apply to the income of estates and property held in trust, including "income received by estates of deceased persons during the period of administration or settlement of the estate" and "income held for future distribution under the terms of the will or trust." That section also provides that "the net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212." Section 212, which defines the net income of an individual, as supplemented by section 214 (a) 1, provides that in computing net income there shall be deducted from gross income “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered."

It is settled that where substantially the entire income of a taxpayer is received from investments and dealings in securities, such investments and dealings in securities constitute the carrying on of a trade or business. Law Opinions 98, 484 and 601; Solicitor's Memoranda 386 and 776 (not in bulletin service). It follows that in such cases the ordinary and necessary expenses incurred in managing such property are deductible in computing net income. However, article 293 of Regulations 45 provides that the "expenses of the administration of an estate, such as court costs, attorneys' fees and executors' commissions, are chargeable against the corpus of the estate and are not allowable deductions."

The difficulty lies in distinguishing between business expenses and administration expenses. In this case the executors are engaged in trade or business only to the extent that they continue the business of the decedent, and only such expenses as are incurred in continuing the business of the decedent are allowable deductions in comput