holding tax and reported in the salary schedule. Compensation included for persons who received pay for personal service covering a period of 36 months or more is only that portion to which the 1948 tax rates applied; back pay for a prior year, although received in 1948, is not included. Enlisted and noncommissioned military personnel exclude from gross income all active service pay; and commissioned officers exclude the first $1,500 of annual pay for active service. Veteran pensions and disability retirement pay, monthly allowances for support of veterans and their dependents, mustering-out pay, principal of terminal leave bonds, and benefits under Serviceman's Readjustment Act are exempt from tax and therefore are not reported. Travel and lodging expenses incurred by an employee while away from home on his employer's business are deducted from gross salary received.

Dividends include foreign and domestic dividends and the taxable and partially tax-exempt dividends on share accounts in Federal savings and loan associations, but exclude all dividends received through partnerships and fiduciaries, and the dividends, not exceeding $100 per return, reported as other income on the optional return, Form 1040A.

Interest includes interest on notes, mortgages, and bank deposits, and interest (before amortization of bond premium) on corporation bonds and taxable and partially tax-exempt Government obligations. Also included, when received through partnerships and fiduciaries, are amounts of partially tax-exempt Government interest and partially tax-exempt dividends on share accounts in Federal savings and loan associations. Tabulated amounts exclude interest, not exceeding $100 per return, reported as other income on the optional return, Form 1040A.

Annuities and pensions include only the taxable portion of amounts received during the year. An amount equal to 3 percent of the total cost of the annuity is reported as income annually, until the aggregate of amounts received and excluded from gross income in this year and prior years equals the cost. Thereafter, the entire amount received is taxable and must be included in gross income for the year it is received. Pensions are generally regarded as deferred compensation for services rendered and the entire amount received is subject to income tax unless expressly exempt by law. Annuities, pensions, and retirement pay are sometimes reported in the schedule for wages, particularly if they are subject to withholding of income tax.

Rents and royalties are reported in the same schedule. The net profit from rents is the excess of gross rents received over deductions for depreciation, repairs, interest, taxes, and other expenses attributable to the rented property. Rent includes the fair market value of crops received as rent from farm property. Net profit from royalties is the excess of gross revenue received from copyrights, patents, trade-marks, formulas, mineral rights, and the like over the allowable depletion, amortization, and other expenses relating to royalties. Conversely, net loss from these sources is the excess of deductions over the gross income received. The separate amount of net profit or net loss from either source is not available.

Profit or loss from business or profession is reported by individuals, including farmers, who are sole proprietors of their business activity

reported as total receipts from business. Expenses deductible in arriving at the net profit or loss from business include cost of goods sold, salaries and wages paid to employees, interest on business debts, taxes on business and business property, losses arising from business operations, bad debts arising from sales or service, depreciation, obsolescence or depletion, rent, repairs, cost of supplies, advertising, selling expenses, insurance premiums for business property, amortization of emergency facilities, and the net operating loss deduction. due to the unabsorbed operating loss deduction from business, partnership, or common trust funds, for the two preceding years. Compensation of the sole proprietor is not an allowable deduction.

Partnership profit or loss is reported by persons who are members of a partnership, syndicate, joint venture, or the like. Each member must report as income his proportionate share of the net profit or net loss, whether actually received or not, of every such organization whose income year ends within his taxable year. The net profit or loss reported in the schedule for partnership income excludes partially taxexempt interest on Government obligations, partially tax-exempt dividends on share accounts in Federal savings and loan associations, and net gain or loss from sales or exchanges of capital assets. In computing the partnership profit or loss to be distributed, charitable contributions are not deductible nor is the net operating loss deduction allowed. However, each partner shall take into account his share of the income and losses of the partnership in computing his own net operating loss deduction.

Net gain or loss from sales or exchanges of capital assets is the net gain or the allowable loss taken into account in computing adjusted gross income whether or not the alternative tax is imposed on the gain. Either is the result of combining net short- and long-term capital gain and loss and the capital loss carry-over from the years 1943-1947, inclusive, not previously deducted; however, the deduction allowed in the computation of adjusted gross income for such a loss is limited to the amount of the loss, or to net income (adjusted gross income, if tax is determined from the optional tax table) computed without regard to gains and losses from sales of capital assets, or to $1,000, whichever is smallest. For the purpose of this report, the returns are not edited to ascertain whether or not the deduction conforms to the specified limitation and there may be instances, particularly among returns with no adjusted gross income, where the amount deducted exceeds the limitation. For a comprehensive discussion of gains and losses from sales of capital assets, the capital loss carry-over, and other pertinent facts, see pages 26-30.

Net gain or loss from sales of property other than capital assets is the net gain or loss from sales or exchanges of depreciable property and real property used in trade or business and from sales of obligations of the United States or any of its possessions, a State or Territory or any political subdivision thereof, or the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from date of issue. A net loss from this source is deductible without limitation. (As to the possibility of property used in trade or business being treated as a capital asset, see p. 27.)

Income from estates and trusts is the taxpayer's share (whether

under which the taxpayer is a beneficiary. Such income, however, excludes partially tax-exempt interest on Government obligations and partially tax-exempt dividends on share accounts in Federal savings and loan associations, received through these entities but reported in interest income. In computing the distributable income of an estateor trust, the net operating loss deduction is allowed.

Miscellaneous income includes alimony received, prizes, rewards, sweepstakes winnings, gambling profits, recovery of bad debts deducted in a prior year, insurance received as reimbursement for medical expenses previously deducted, and all other taxable income for which an entry is not provided on the return form. Also tabulated as miscellaneous income is $40,448,000 of wages not subject to withholding tax, dividends, and interest, not exceeding a total of $100 per return, reported as other income on 896,400 optional returns, Form 1040A.

ITEMIZED DEDUCTIONS

Deductions tabulated in this report are those reported by 8,828,927 taxpayers who itemized their nonbusiness deductions for the computation of net income on the long-form return, Form 1040. No deductions are reported by the 43,243,079 taxpayers who elected to use the optional standard deduction.

Contributions are those made to organizations created in the United States or possessions thereof, or under the law of the United States, or of any State, Territory, or possession of the United States, and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals; to veterans' organizations; or to governmental organizations for public purposes exclusively. Individuals who are members of a partnership may include in their personal return their pro rata share of contributions made by the partnership. The amount of contributions allowed as a deduction is limited, in general, to 15 percent of the taxpayer's adjusted gross income. For the purpose of this report, the returns are not edited to ascertain whether or not the deduction conforms to the limitation and there may be instances, particularly among returns with no adjusted gross income, where the amount exceeds the specified limitation.

Interest paid is that paid on personal indebtedness, mortgages, installment purchases, bank loans, interest incurred in the production or collection of income or in the management, conservation, or maintenance of property; but does not include interest chargeable against rental or royalty income nor interest on business debts, such interest being reported in rental or business expenses; neither does it include interest on loans to buy tax-exempt securities nor single-premium life insurance and endowment contracts.

Taxes paid include personal property taxes, State and local income taxes, certain retail sales taxes, and real estate taxes except those levied for improvements which tend to increase the value of property. This deduction for taxes does not include Federal income taxes, Federal import duties, Federal excise or stamp taxes; estate, legacy,

paid for the taxpayer by the corporation; taxes deducted in the schedules for rents and for business; income taxes paid to a foreign country or possession of the United States if any portion thereof is claimed as tax credit; nor Federal social security and employment taxes paid by or for the employee.

Losses from fire, storm, etc., are the net losses on nonbusiness property resulting from accident, fire, storm, shipwreck, or other casualty, or from theft. The deduction is limited to the net loss sustained, that is, the value of the property just before the loss, less the salvage value and insurance or other reimbursement received.

Medical and dental expenses are the medical, hospital, dental, and other expenses, paid during the year for the care of the taxpayer, his spouse, or dependents, which are not compensated for by insurance or otherwise, and which exceed an amount equal to 5 percent of the adjusted gross income. The deduction cannot exceed $1,250 multiplied by the number of exemptions other than those for age and blindness with a maximum deduction of $2,500, except in the case of a joint return of husband and wife, when the maximum is $5,000. Medical expenses include amounts paid for diagnosis, cure, treatment, or prevention of disease, or to alleviate a defect, as well as amounts paid for health, accident, and hospitalization insurance; also includible are expenses for eyeglasses, dentures, artificial limbs, hearing aids, X-ray, nursing service, medical supplies, drugs, ambulance service, and the like. Returns showing a deduction for medical expenses are tabulated separately in a table on page 31.

Miscellaneous deductions include the allowable deductions not reported elsewhere on the return, such as alimony payments, expenses incurred in the production or collection of taxable income or in the management of property held for the production of taxable income, amortizable bond premium, the taxpayer's share of interest and real estate taxes paid by a cooperative apartment corporation, and gambling losses not exceeding the gambling gains reported in gross income. In the tabulation which follows, the income or loss from each specific source comprising adjusted gross income, the aggregate positive and negative income, and the adjusted gross income for all returns, together with the adjusted gross income, deductions, net income, and net deficit for returns with itemized deductions, are presented by broader adjusted gross income classes than are used in basic table 2; and the taxable and nontaxable returns are tabulated together. Following this tabulation, there are percentage distributions of these data. In these distributions, income and loss from each of the specific sources comprising adjusted gross income are shown as a percentage of the aggregate positive income; and each itemized deduction is shown as a percentage of the adjusted gross income for returns with itemized deductions. Aggregate positive income, used as the percentage base in this tabulation, is the sum of the positive items of income; namely, salaries and wages, dividends, interest, annuities and pensions, net profit from rents and royalties, net profit from business or profession, net profit from partnership, net gain from sales of capital assets, net gain from sales of property other than capital assets, and miscel

Individual returns for 1948, by adjusted gross income classes: Number of returns, income or loss from each of the sources comprising adjusted gross income, aggregate positive and negative income, adjusted gross income; and for returns with itemized deductions the adjusted gross income, deductions, net income, and net deficit

[Adjusted gross income classes and money figures in thousands of dollars]