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customer. It seems to the committee that no one of these elements is sufficient to outweigh all of the others and that the only safe and proper course is to leave it to the tax commission to determine in each individual case which office of the taxpayer chiefly handled the matter, considering everything involved both in its negotiation and execution. While it seems impossible to make a specific rule applying to all cases, it is believed there will be no great difficulty in making the correct allocation in the great majority of individual cases. Similar problems of allocation are presented with respect to wages, salaries and purchases, and it would seem possible to allocate them in a similar manner.

10. WHAT INCOME SHOULD BE ASSIGNED BY THE FORMULA

ITS LIMITATIONS As already suggested, it is recommended that interest, dividends, rents and royalties be allocated specifically to sources within or without the state. These items form no part of the trading profit in the first place, and therefore do not need to be separated by any formula. It would be highly unjust to add net income of this character to the trading profit and then apportion it by a formula in which the source of such net income has no representation whatever.

The same is true of gains from sale of capital assets or other property distinct from the stock of merchandise sold in the regular course of business. No allocation is needed, as the profit is already separated and can be assigned to its proper source and, obviously, receipts from unusual sales of this character should be eliminated from the sales factor used in dividing the trading profit.

The above exceptions and deductions are recognized in the model law as now drawn and it has simply been restated in the committee's revision of Sections 308 and 309. The only substantial difference is in the allocation of gains from the sale of intangibles which, in the model law, are allocated to the state if the taxpayer is a resident and outside of the state if a non-resident. The committee believes that for purposes of a business income tax there should be no distinction between residents and non-residents. If the intangibles from which the profit resulted were outside investments not connected with the business, in neither case should the profit be subjected to a business tax. On the other hand, if the intangibles are of a character connected with the businessfor example, the good will of a business plant-the profit of sale should be taxed or not taxed regardless of the residence of the owner, depending on whether the plant is located within or without the state.

The committee is quite clear that the application of the formula herein recommended should be confined strictly to the allocation of

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the trading profit of manufacturing and mercantile concerns. The subject matter assigned to the committee did not involve the apportionment of other business income, such as that derived from financial, investment, brokerage, advertising, personal service, real estate, insurance businesses, etc. However, it seems to be within the scope of the committee's work to define the limitations of its own recommendations and it is evident that the formula herein recommended cannot be properly applied except to manufacturing and mercantile concerns, and even with such concerns it should be confined to the portion of that income derived from manufacturing and mercantile business.

In the committee's redraft of Sections 308 and 309 of the business income tax law, it will be noted that a clear distinction is made between mercantile and manufacturing business and all other kinds of business, and that with respect to such other business it is provided that the income shall be specifically allocated under rules and regulations of the tax commission. This provision is inserted tentatively, simply to complete the text and pending such further study as the Model Tax Committee may wish to give it. While the committee has given no intensive study to the question of allocating income of miscellaneous concerns, other than manufacturing and mercantile, it may be proper to say that it feels doubtful whether any statutory formula can be devised applicable to such miscellaneous concerns. Specific allocation in the case of each particular taxpayer or each class of business under rules and regulations of the tax commission may be the only feasible course.

11. ReliEF PROVISION WHERE FORMULA IS INAPPLICABLE Section 310 of the model business income tax law permits the taxpayer to petition for determination of his income on some other basis, where the statutory method of allocation seems to be inapplicable and to work unreasonable results. The change in the statutory formula recommended by this committee does not in any way do away with the necessity of this section, as cases will no doubt arise where any rule will not work fairly and relief will be required. The only new question considered by the committee was whether departure from the statutory formula should be only on application of the taxpayer for relief, or whether the tax commission itself should have power to drop the formula and allocate the taxable income in some other way. There was a difference of opinion among the members of the committee on this point, but the majority are of the opinion that no substantial change should be made in Section 310 which, as now drawn, provides for departure from the statutory rule only on application of the taxpayer. If the tax commission wishes to adopt another method of apportionment which will decrease the tax, no doubt the taxpayer can be prevailed

upon to file an application. On the other hand, if the tax commission can freely depart from the statutory rule for the purpose of increasing the tax, this power would no doubt be exercised in many cases judiciously and cautiously, but in other cases it might not. Inequality between individuals would creep in; differences between state practices develop and uniformity, the prime essential, would be lost. It seems fair to assume that any rule generally adopted will, on the average, give the state all it is entitled to and that the great majority of taxpayers will pay on this basis without question. It, therefore, seems no hardship to the state that departure from the rule shall be made only on the application of the taxpayer for relief in extreme cases.

12. PERSONAL INCOME TAX AND APPORTIONMENT

The theory of the model business income tax and model personal income tax is that the business tax shall be a low privilege tax imposed at the place where the income is derived. The main income tax, with progressive rates, is imposed only on the individual and this only at his place of residence. It would seem, therefore, that no apportionment provision is necessary in the model personal income tax law. Non-residents are not subject to this tax at all, and residents are intentionally subjected to a tax on their entire income wherever derived, including income from business outside of the state, which has already been subjected to a business income tax in another state. This committee is in entire accord witil the theory and correlation of these two laws, and the following suggestion is made primarily with the idea of encouraging the passage of the two laws.

As the matter now stands, passage of the model law is discouraged, as the citizens of any state which passes the law in advance of other states will be penalized by double taxation. New York, Wisconsin and other states still subscribe by their legislation to the theory that income of a non-resident from trade or business in the state should be subjected to the personal income tax rate. If now, for example, Illinois should adopt the model tax system, its citizens will pay a personal graded income tax in two states with respect to income from business in New York and Wisconsin. This will all be ironed out when the other states adopt the model tax system, but pending that millennium it would seem that some relief from double taxation should be given to the citizens of the state which has adopted the model system. The committee, therefore, suggests an additional section to the model personal income tax, somewhat as follows:

“If any part of the income taxable under this act is derived from the conduct of trade or business by the taxpayer wholly

per cent

or partly outside of the state, and the taxpayer has paid or
will be required to pay to any other state or country an income
tax on the portion of such income attributable to the business
in said other state or country in excess of
thereof, the amount of such excess tax shall be allowed as a
direct credit, in reduction of the taxes which would otherwise
be payable hereunder upon the same income. Such credit
shall be allowed only on presentation of satisfactory proof

that the taxpayer is entitled to the same.” The rate to be filled in in the blank should be the business tax rate, whatever that may be, in the state adopting the above provision.

CARL S. LAMB, Chairman,

Pittsburgh Plate Glass Company
H. H. BURBANK,

Harvard University
WM. S. ELLIOTT,

International Harvester Company
R. M. Haig,

Columbia University
ALEXANDER HOLMES,

Department of Taxation of Massachusetts
HENRY B. NELSON,

Nash Sales Company
FRANK D. STRADER,

Wisconsin Tax Commission
* J. F. ZOLLER,

General Electric Company

* Disagrees with recommendation to include purchases in apportionment formula.

RECOMMENDATIONS OF THE COMMITTEE REFERRED

TO IN THE ABOVE REPORT

For Sections 308, 309, 310, 311 of the Model Business Income Tax substitute two sections reading as follows:

Sec. 308. ALLOCATION AND APPORTION MENT OF INCOME.

1. Interest, dividends, rents and royalties not received in connection with the transaction of business, and gains from the sale of property not held, owned or used in connection with business (less related expenses, if any) shall be deducted from the taxpayer's total net income and only the balance, hereinafter referred to as business income, shall be taxable hereunder.

2. If the trade or business of the taxpayer is carried on entirely within the state, the tax shall be imposed on the entire business income, but if such trade or business is carried on partly within and partly without the state, the tax shall be imposed only on the portion of the business income reasonably attributable to the trade or business within the state, to be determined as follows:

(a) Interest, dividends, rents and royalties (less related expenses) received in connection with business in the state, shall be allocated to the state and where received in connection with business outside of the state, shall be allocated outside of the state.

(b) Gains from the sale of capital assets or property held, owned or used in connection with the trade or business of the taxpayer but not for sale in the regular course of business shall be allocated to the state if the property sold is real or tangible personal property situated in the state or intangible property connected with the business in the state; otherwise, such gains shall be allocated outside of the state.

(c) Net income of the above classes having been separately allocated and deducted as above provided, the remainder of the net business income of the taxpayer shall be allocated and apportioned as follows:

(1) Where income is derived from business other than the manufacture and sale of tangible personal property, such income shall be specifically allocated or equitably apportioned within and without the state under rules and regulations of the Tax Commission.

(2) Where income is derived from the manufacture or sale of tangible personal property, the portion thereof attributable to business within the state shall be taken to be such percentage of the total of such income as the tangible property and business within the state bear to the total tangible property and total business, the percentages of tangible property and of business being separately determined as hereinafter provided and the two percentages averaged.

For purposes of the foregoing computation, the value of the tangible property shall be taken to be the average value of the tangible property held and owned by the taxpayer in connection with such business during the year for which the income is returned, excluding any property the income of which is not taxable or separately allocated under the foregoing provisions of this Act.

The business of the taxpayer shall be measured by the amount which the taxpayer has paid out during the year for which the income is returned for wages, salaries or other compensation to employes and for the purchase of

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