the law, through litigation and by specific rulings of the Treasury Department on cases brought to its attention.46

Deductions Allowed in Computing Net Income. A nonresident alien is required to report all his taxable income from sources within this country, but from the gross amount so reported is entitled to make certain deductions before the tax is assessed on the remainder. The deductions are similar in kind to those allowed to residents and citizens but, in general, are confined to expenditures connected with the income subject to tax or limited by the proportion of the individual's income arising from sources within this country.47 An extended discussion of deductions is contained in other chapters, the discussion in this chapter being limited to the provisions which apply particularly to non-resident aliens.

BUSINESS EXPENSES. Non-resident aliens may deduct from their gross income all ordinary and necessary expenses paid or incurred in carrying on any trade or business subject to the same general provisions applicable to citizens and residents,48 but only if and to the extent that they are connected with income arising from a source within the United States and as properly apportioned and allocated with respect to sources of income within and without the United States.49 The method of apportioning and allocating general deductions to income from sources in this country is required by the law to be prescribed by the Commissioner, but no specific rulings have as yet appeared under the 1918 Law. Where the business or trade

46 It will be noted that § 213 (c) of the Revenue Act of 1918 goes further than the 1916 Law in expressly citing special kinds of income as being "from sources within the United States," and Reg. 45, Art. 91 expand the definition beyond all previous regulations. But the phrase "sources within the United States'' is too broad and indefinite for practical certainty and it naturally results in imposing the tax on incomes in cases where there is serious question as to the moral right or economic wisdom of so doing.

carried on in this country is by means of separate and distinct branches the expenses are readily determined. Where the accounts are kept at, and the business is under the supervision of, the home office abroad, the home office expenses connected therewith, if segregated, may be included. If not segregated, the Treasury Department has permitted the deduction of such proportion of the entire expenses of the business as the gross income from this country bears to the entire gross income from business done both within and without the United States.5 50

INTEREST. Non-resident aliens may deduct the proportion of interest paid or accrued within the taxable year on their indebtedness which the amount of their gross income from sources within the United States bears to the amount of their gross income from all sources within and without the United States.51 For instance, if half the amount of the gross income of a non-resident alien for the taxable year is from sources within the United States he may deduct one half of the entire amount of interest he has paid during the taxable year on his indebtedness. To obtain this deduction it is required that the claimant report his total income received from all sources, corporate or otherwise, in the United States, so that the Commissioner may calculate the amount of deduction to which he may be entitled.52 The one limitation on the amount of interest which may be deducted by non-resident aliens is the same as the limitation in respect to citizens or residents, namely, interest paid or accrued within the taxable year 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 interest upon which is wholly exempt from taxation as income to the taxpayer.53

TAXES. Non-resident aliens may deduct taxes paid or

50 See Chapter 28 on Deduction of Business Expenses.

51 Revenue Act of 1918, § 214 (a) 2.

52 Revenue Act of 1918, § 217.

53 Revenue Act of 1918, § 214 (a) 2.

accrued within the taxable year to taxing authorities in this country in the same manner and subject to the same limitation as citizens or residents. They may also deduct taxes imposed by the authority of any foreign country upon property or business (except income, war profits and excess profits taxes and taxes assessed against local benefits of a kind tending to increase the value of the property assessed) upon property or business, to the extent that such taxes are connected with income arising from a source within the United States and as they are properly apportioned and allocated with respect to sources of income within and without the United States.54

LOSSES SUSTAINED IN TRADE. Non-resident aliens may deduct losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business; such losses, however, may only be deducted if and to the extent that they are connected with income arising from a source within the United States and must be properly apportioned and allocated with respect to sources of income within and without the United States.55

NET LOSSES OF ANY BUSINESS. Non-resident aliens may déduct net losses resulting from (1) the operation of any business regularly carried on by them, or (2) the bona fide sale by them of a plant, buildings, machinery, equipment, or other facilities constructed, installed or acquired by them on or after April 6th, 1917, for the production of articles contributing to the prosecution of the war with Germany in the same manner as citizens or residents. This subject is more fully treated elsewhere in this book.56

LOSSES NOT SUSTAINED IN TRADE. Non-resident aliens

54 Revenue Act of 1918, § 214 (a) 3. See paragraph on Taxes in Chapter 4 on Citizens and Residents.

55 Revenue Act of 1918, § 214 (a) 4, and (b). See paragraph on Losses Sustained in Trade in Chapter 4 on Citizens and Residents for a discussion of the term "trade or business' and other rulings in respect to such losses.

56 See Chapter 4 on Citizens and Residents and Chapter 30 on Deduction of Losses.

may deduct losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction within the United States, entered into for profit, though not connected with the trade or business.57 This provision is a substantial departure from the corresponding provision of the 1916 Law which limited the deduction of losses in transactions entered into for profit, though not connected with trade or business, to an amount not in excess of the profits arising from similar transactions. This change is discussed at length in another chapter.58

LOSSES OF PROPERTY FROM FIRE, STORMS, ETC. Nonresident aliens may deduct losses sustained during the taxable year of property within the United States not connected with the trade or business, if arising from fires, storms, shipwreck or other casualties, or from theft, and if not compensated for by insurance or otherwise.59

LOSSES IN VALUE OF INVENTORY. The provision of the Revenue Act of 1918, permitting the deduction of losses in value of inventory, is applicable to non-resident aliens to the extent that such losses are connected with income arising from a source within the United States. Such losses, when deductible, must be properly apportioned and allocated to sources of income within and without the United States.60

WORTHLESS DEBTS. Non-resident aliens may deduct debts ascertained to be worthless and charged off within the taxable year subject to the same limitations as citizens and residents, except that such debts must be connected with income arising from a source within the United States and must be properly apportioned and al

57 Revenue Act of 1918, § 214 (a) 5.

58 See paragraph Losses not Sustained in Trade in Chapter 4 on Citizens and Residents.

59 Revenue Act of 1918, § 214 (a) 6.

60 Revenue Act of 1918, § 214 (a) 12, (b). See Chapter 5 on Citizens and Residents and Chapter 30 on Deduction of Losses.

located to sources of income within and without the United States.61

DEPRECIATION. Non-resident aliens are permitted a reasonable allowance for the exhaustion, wear and tear of property used in their trade or business, including a reasonable allowance for obsolescence, under the same rules and regulations as apply to citizens and residents except that any deduction for depreciation will be allowed only if and to the extent that the property in respect of which the depreciation is claimed is connected with income arising from a source within the Uinted States and a proper apportionment and allocation of this deduction is determined with respect to sources of income within and without the United States.62

DEPLETION OF NATURAL RESOURCES. A non-resident alien is permitted the same allowance in the case of the depletion of mines, oil and gas wells, other natural deposits, and timber, and for depreciation of improvements as is allowed to citizens and resident individuals and domestic corporations except that the subject of depletion must be connected with income arising from a source within the United States and a proper apportionment and allocation of the deduction with respect to sources of income within and without the United States must be determined.63

CONTRIBUTIONS TO CHARITIES. Non-resident aliens may deduct from their gross income contributions or gifts made within the taxable year, subject to the same limitations which apply in the case of citizens and residents, except that the donee corporations or associations must be domestic. Contributions or gifts by non-resident aliens to the Vocational Rehabilitation Fund are also deductible. But the total of all contributions so deducted cannot be in

61 Revenue Act of 1918, § 214 (a) 7 and (b). See paragraph on Worthless Debts in Chapter 4 on Citizens and Residents.

62 Revenue Act of 1918, § 214 (a) 8 and (b). See Chapter 32 on Depreciation. See also paragraph on Depreciation in Chapter 4 on Citizens and Residents.

63 Revenue Act of 1918, § 214 (a) 10 and (b). See Chapter 32.