upon profits realized from transactions in stocks, securities or commodities in the United States through a resident broker, commission agent or custodian. A the United States and not having an | is not liable to United States income tax office or place of business therein at any time within the taxable year is liable to the tax at the rate of 15 percent (10 percent in the case of dividends) imposed by section 231 (a), Revenue Act of 1938, upon the gross amount of its fixed or determinable annual or periodical gains, profits and income from sources within the United States. Such gains, profits and income are to be determined under the provisions of section 119, Revenue Act of 1938. Specific items of fixed or determinable annual or periodical income are enumerated in the Act as interest (except interest on deposits with persons carrying on the banking business which is nontaxable under the Act), dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, but other fixed or determinable annual or periodical gains, profits and income are also subject to tax, as, for instance, royalties. However, a French corporation is not taxable upon those items of income enumerated in Article IX of the convention and referred to in § 13.8 (a) with respect to French citizens subject to tax under section 211 (a), Revenue Act of 1938. See § 13.7. (b) Resident French corporations. French corporation, not carrying on a French enterprise, which at any time within the taxable year is engaged in trade or business within the United States or has an office or place of business therein, or a French corporation, carrying on a French enterprise, which has a permanent establishment in the United States, is, like other foreign corporations, liable to the tax of 19 perRevenue cent imposed by section 14 (e), Act of 1938, upon its special class net income from sources within the United States (gross income from sources within the United States minus the statutory deductions provided in sections 23 and 232 and the credits provided in sections 26 (a) and (b) of the Revenue Act of 1938). Such net income includes all industrial and commercial profits from sources within the United States. See §13.3 (c). Such net income is to be determined under the provisions of section 119, Revenue Act of 1938, but in determining such income no account shall be taken of the purchase of goods, wares, or merchandise within the United States for the purpose of supplying establishments maintained by such corporation in France. In the determina tion of the income of such French cor poration from sources within the United States all industrial and commercial profits from sources within the United States shall be deemed to be allocable the United States. Such corporation is to its permanent establishment within not taxable upon those items of income enumerated in Article IX of the con The term "fixed or determinable annual or periodical income" within the meaning of section 231 (a), Revenue Act of 1938, does not include industrial and commercial profits as that term is used in the convention. Under the Revenue Act of 1938 as modified by the convention a French corporation taxable under section 231 (a) of that Act is exempt from United States income tax on industrial and commercial profits. For example, under the convention profits realized by such French corporation, which carries on a French enterprise, from transactions in the United States in goods, wares or merchandise through a resident broker or commission agent are not subject to tax. If, however, such corporation does not carry on such enterprise such transactions are not exempt under the convention and constitute engaging in trade or business within the United States and it is accordingly taxable upon the resulting profit under section 231 (b), Revenue Act of 1938. On the other hand, a French corporation taxable under section 231 (a), whether A French corporation carrying on a or not it carries on a French enterprise, | French enterprise which carries on busi vention and referred to in paragraph (a) of this section with respect to nonresident French corporations. See § 13.7. A French corporation having an office or place of business within the United States within the meaning of section 231 of the Revenue Act of 1938, shall be presumed (if it carries on a French enterprise) to have a permanent establishment in the United States within the meaning of the convention. § 14.0 Introductory. The reciprocal tax convention between the United States and Canada which was ratified August 13, 1937, provides as follows: ARTICLE I The High Contracting Parties mutually agree that the income taxation imposed in the two States shall be subject to the following reciprocal provisions: (a) The rate of income tax imposed by one of the Contracting States, in respect of income derived from sources therein, upon are not engaged in trade or business in the taxing State and have no office or place of business therein, shall not exceed five per centum for each taxable year, so long as an equivalent or lower rate of income taxation is imposed by the other State upon individuals residing in the former State who other State and do not have an office or are not engaged in trade or business in such place of business therein. ness transactions through a bona fide commission agent or broker in the United States and which has no permanent establishment in the United States is not liable to income tax on the industrial and commercial profits arising to it from such transactions. However, a French corporation not carrying on a French enterprise is held to be engaged in trade or business in the United States if it sells therein, through a commission agent or broker, goods, wares or mer-individuals residing in the other State, who chandise (not including stocks, securities or commodities) and, hence, is liable to income tax on the resulting profit. Such French corporation, whether or not it carries on a French enterprise, otherwise liable to the tax imposed by subsection (a) of section 231 of the Revenue Act of 1938 is, however, not liable to the tax upon profits arising from transactions in stocks, securities or commodities through a resident broker, commission agent or custodian. As to what constitutes a "French enterprise", see § 13.2. As to what constitutes a "permanent establishment", see § 13.2. As to the computation of gross income, the allow-on dividends is imposed by the other State ance of deductions and credits, the requirements as to filing of returns and payment of the tax, in the case of foreign corporations generally, including French corporations, see sections 231 to 236, inclusive, Revenue Act of 1938.** (b) The rate of income tax imposed by one of the Contracting States, in respect of dividends derived from sources therein, upon nonresident foreign corporations organized under the laws of the other State, which are not engaged in trade or business in the taxing State and have no office or place of business therein, shall not exceed five per centum for each taxable year, so long as an equivalent or lower rate of income taxation upon corporations organized under the laws of the former State which are not engaged in trade or business in such other State and do not have an office or place of business therein. (c) Either State shall be at liberty to increase the rate of taxation prescribed by paragraphs (a) and (b) of this article, and in such case the other State shall be released from the requirements of the said paragraphs (a) and (b). (d) Effect shall be given to the foregoing provisions by both States as and from the first day of January, nineteen hundred and thirty-six. ARTICLE II The provisions of this Convention shall not apply to citizens of the United States of America domiciled or resident in Canada. ARTICLE III This Convention shall be ratified and shall take effect immediately upon the exchange of ratifications which shall take place at Washington as soon as possible. Signed, in duplicate, at Washington by the duly authorized representatives of Canada and the United States of America, this thirtieth day of December, in the year of our Lord, one thousand nine hundred and thirty-six. The regulations in this part are prescribed to carry into effect the quoted provisions of the Convention between the to nonresident foreign corporations which are organized under the laws of Canada are subject to withholding at the reduced rate of 5 percent. (Sec. 62, 52 Stat. 480; 26 U.S.C., Sup., 62) [Art. 2, United States of America and Canada | frequent intervals) and dividends paid under the Revenue Act of 1938 (the provisions of T.D. 4766,1 1937-2 Cum. Bull. 158, applicable under the Revenue Acts of 1936 and 1937, remaining in full force and effect as to taxable years beginning prior to January 1, 1938) (Sec. 62, 52 | T.D. 4883, Jan. 16, 1939; 4 F.R. 275] Stat. 480; 26 U.S.C., Sup., 62) [Preamble, T.D. 4883, Jan. 16, 1939; 4 F.R. 274] § 14.3 Resident of Canada or corporation organized under the laws of Can§ 14.1 Rate of tax. The convention ada. For the purpose of withholding, was ratified and became effective August every individual whose address is in Can13, 1937. Under the terms of the Con- ada (including a nonresident alien indivention, the provisions of which are re-vidual, fiduciary, or partnership) shall troactive to January 1, 1936, the tax at be considered by United States withholdthe rate of 10 percent imposed by sectioning agents as a resident of Canada, and 211 (a) is reduced to 5 percent with respect to the amount received from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, by every nonresident alien individual not engaged in trade or business within the United States and not having an office or place of business therein, provided he is a resident of Canada. Under the terms of the Convention the tax at the rate of 10 percent imposed by section 231 (a) is reduced to 5 percent with respect to the amount received from sources within the United States as dividends, by every foreign corporation not engaged in trade or business within the United States and not having an office or place of business therein, provided it is organized under the laws of Canada. (Sec. 62, 52 Stat. 480; 26 U.S.C., Sup., 62), [Art. 1, T.D. 4883, Jan. 16, 1939; 4 F.R. 275] §14.2 Withholding in general. The items of income from sources within the United States enumerated in sections 211 (a) and 231 (a) are subject to the withholding provisions of sections 143 and 144, at the rates specified therein, with the exception that all items of fixed or determinable annual or periodical income paid to nonresident alien individuals who are residents of Canada (other than the compensation for personal services received by such residents who enter and leave the United States at 12 F.R. 2160. every corporation whose address is in Canada shall be considered by such withholding agents as a corporation organized under the laws of Canada. These provisions relative to Canadian residents and Canadian corporations are based upon the assumption that the payee is the actual owner of the property from which the income is derived and consequently is the person liable to the tax upon such income. A person receiving income which is distributable to an organization exempt from Federal income tax under section 101 of the Revenue Act of 1938, or corresponding sections of prior revenue acts, shall be considered merely a conduit through which the income flows and not a taxable entity. In preparing ownership certificate, Form 1001, the person receiving the income should make a notation thereon substantially as follows: "As this organization has been held to be exempt from the payment of income tax by the Commissioner of Internal Revenue under date of , the interest on this certificate is not subject to withholding," giving the date of the official letter in which the organization was held to be exempt. A similar statement made with respect to other items of fixed or determinable annual or periodical income which are subject to withholding will relieve the withholding agent from liability to withhold the tax. (Sec. 62, 52 Stat. 480; 26 U.S.C., Sup., 62) [Art. 3, T.D. 4883, Jan. 16, 1939; 4 F.R. 276] § 14.4 Recipient not actual owner. If the recipient in Canada is a nominee or agent through whom the income flows to a person who is not entitled to the reduced rate of 5 percent, i. e., a nonresi dent alien individual who is not a resi- | ada. Every United States withholding dent of Canada, or a nonresident foreign corporation not organized under the laws of Canada, the recipient in Canada from whom a tax of only 5 percent was withheld, becomes in turn a withholding agent, and is required to withhold an additional tax of 5 percent (10 percent on income other than dividends received for such foreign corporation) before transmitting the income. (a) Fiduciaries and partnerships. Fiduciaries and partnerships with an address in Canada are liable to have 5 percent income tax deducted at the source. If the fiduciary or partnership is acting as a nominee or agent receiving the income for and on behalf of a person other than a resident of Canada or a corporation organized under the laws of Canada, an additional tax of 5 percent or 10 percent, as the case may be, must be deducted by such Canadian fiduciary or partnership and remitted to the United States Treasury. If the fiduciary or partnership receives the income in its own right and distributes its income under a trust deed or partnership agreement, then no further tax in Canada need be deducted. (b) Tax-free covenant bonds. No additional withholding is required with respect to interest on so-called tax-free covenant bonds issued prior to January 1, 1934, where the liability assumed by the obligor exceeds 2 percent but under section 143 (a) of the Revenue Act of 1938 only 2 percent income tax is required to be withheld at the source. An additional tax of 5 percent or 10 percent, as the case may be, is required to be withheld, however, by Canadian withholding agents as above provided, (1) where the bonds were issued prior to January 1, 1934, and the liability assumed by the obligor does not exceed 2 percent; (2) where the bonds were issued on or after January 1, 1934, irrespective of the liability assumed by the obligor; (3) where the bonds do not contain a tax-free covenant, regardless of the date of issue. (Sec. 62, 52 Stat. 480; 26 U.S.C., Sup., 62) [Art. 4, T.D. 4883, Jan. 16, 1939; 4 F.R. 276] § 14.5 Return of tax withheld from persons whose addresses are in Can agent shall make and file with the collector, in duplicate, an information return on Form 1042B, for the calendar year 1938 and each subsequent calendar year, in addition to withholding return, Form 1042, with respect to the items of income from which a tax of only 5 percent was withheld from persons whose addresses are in Canada. There shall be reported on Form 1042B not only such items of income listed on Form 1042, but also such items of interest listed on monthly returns, Form 1012, including items of interest where the liability for withholding is only 2 percent. In the case of corporations whose addresses are within Canada, only the fixed or determinable annual or periodical income from sources within the United States consisting of dividends should be reported. (Sec. 62, 52 Stat. 480; 26 U.S.C., Sup., 62) [Art. 5, T.D. 4883, Jan. 16, 1939; 4 F.R. 276] § 14.6 Returns filed by Canadian withholding agents. Form 1042 is the form to be prepared annually for the calendar year 1938 and each subsequent calendar year by persons in Canada who receive for the account of any person (other than a resident of Canada or a corporation organized under the laws of Canada) fixed or determinable annual or periodical income from sources within the United States which is subject to tax at the rate of 10 percent or 15 percent, as the case may be, but from which only 5 percent has been withheld as a result of the Convention. Annual withholding return, Form 1042, should be forwarded to the Collector of Internal Revenue, Baltimore, Maryland, accompanied by the tax shown to be due in United States dollars. An extension of time to June 15 is hereby granted to Canadian withholding agents in which to file such returns. The following table of withholding rates under the Revenue Act of 1938 and the tax convention between the United States and Canada has been prepared for the purpose of making a summary of such rates readily available to withholding agents: 1 Salary or compensation for personal services rendered in the United States is not subject to withholding in the case of nonresident aliens, residents of Canada or Mexico, who enter and leave the United States at frequent intervals. (Sec. 62, 52 Stat. 480; 26 U.S.C., Sup., 62) [Art. 6, T.D. 4883, Jan. 16, 1939; 4 F.R. 276] PART 15-CONSOLIDATED RETURNS | COMPUTATION OF TAX, RECOGNITION OF GAIN RATIONS PRESCRIBED UNDER 15.30 1 15.31 OR LOSS, AND BASIS Computation of tax. Method of computation of net income 15.32 ACT OF 1938 1 Sale of stock; basis for determining gain or loss. 15.35 Sale of bonds; basis for determining gain or loss. Limitation on allowable losses on sale of stock or bonds. Basis of property. Inventories. Bad debts. Sale and retirement by corporation of its bonds. Limitation on capital losses. Credit for foreign taxes. Methods of accounting. SECTION 141 OF THE REVENUE ACT OF 1938 SEC. 141. Consolidated returns of railroad corporations-(a) Privilege to file consolidated returns. An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. The making of a consolidated return shall be upon the condition that all the corporations which 1 Applicable to taxable years beginning have been members of the affiliated group at after December 31, 1937. any time during the taxable year for which |