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^ " ■ ITTTBä 1 Vi FEDERAL REGISTER
VOLUME I \ 1934 ^ NU M BER 175 ^ O M I-n o *
Washington, Saturday, November li ,
TREASURY DEPARTMENT. C o n t e n t s Bureau of Internal Revenue. CHAPTER I [Regulations 94] Scope of Regulations
I ncom e T a x U nder th e R evenu e A c t o p 1936 Title I—Income Tax, Subtitle A—Introductory Provisions INTRODUCTORY [Tbe section numbers refer to the Revenue Act of 1936 and the article numbers to Regulations 94] These regulations deal with, the tax imposed on income by Section 1. Application of title. the Revenue Act of 1936. Article 1—1. Scope of regulations. Since these regulations deal only with the tax on income, Section 2. Cross references. certain parts of the Act, which are general in their nature, Section 3. Classification of provisions. Article 3-1. Division of regulations. or which do not relate directly to the im posing and collecting Section 4. Special classes of taxpayers. of the tax, have not been printed in the body of these Article 4-1. Application of regulations to special classy of regulations, but have been inserted in the Appendix, where taxpayers. they are grouped and classified under proper headin gs. F or CHAPTER H this reason the main body of these regulations deals only with Titles I, IA, and VUE of the Act. Treasury Decision Rates of Tax 4666, approved July 16, 1936, and Treasury Decision 4690, Subtitle B—General Provisions, Part I—Rates of Tax approved August 26, 1936, relating to the excess-profits tax Section 11. Normal tax on individuals. imposed under Title I of the Revenue Act of 1935, as Article 11—1. Income tax on individuals. amended by Title n of the Revenue Act of 1936, have been 11-2. Citizens or residents of the United States liable printed in their entirety in the Appendix. The regulations to tax. 11- 8. Who Is a citizen. under Title HE of the Act, relating to the tax on unjust Section 12. Surtax on individuals. enrichment, have been promulgated as Regulations 95. Article 12-1. Surtax. The numbering of the respective articles in the body of the 12- 2. Computation of surtax. regulations follows the plan adopted in Regulations 86 pre Section 13. Normal tax on corporations. * Article 13—1. Normal income tax on corporations. scribed under the Revenue Act of 1934. In accordance with Section 14. Surtax on undistributed profits. this plan the numbers of the sections of the Act are used as Article 14—1. Surtax on undistributed profits of corporations. key numbers, followed by a dash (— ), with the number of the 14-2. Method of computation of surtax— Example. 14-3. Specific credit if adjusted net Income is less than article placed after the dash. By this means anyone who $50,000. desires to learn how a given section or subsection of the Act has been interpreted by the Bureau can readily and quickly CHAPTER H I find that interpretation by using the key number. Thus, if Gross Income—Net Income one desires to learn what interpretation has been placed on section 21 of the Act, he should turn to article 21-1 of the Part n —Computation of Net Income regulations. In some cases several articles are necessary in Section 21. Net Income. the interpretation of different phases of one section or sub Article 21—1. Meaning of net income. Section 22 (a). Gross income: General definition. section or paragraph of the Act. For example, section 23
Se c tio n 22 (c) Gross income: Inventories. Article 22 (c)-l. Need of inventories. 22 (c)-2. Valuation of inventories. 22 (c)-3 . Inventories at cost. 22 (c)—4. Inventories at cost or market, whichever is lower. 22 (c>—5- Inventories by dealers in securities. 22 (c)—6. Inventories of live stock raisers and other farmers. 22 (c)—7. Inventories of miners and manufacturers. 22 (c)—8. Inventories of retail merchants. Section 22 (d ). Gross income: Distribution by corporations. Published by the Division of the F e d e r a l R e g is t e r , The National Se c tio n 22 (e ). Gross income: Determination of gain or loss. Archives, pursuant to the authority contained in the Federal Pur-mrur 22 (f). Gross income: Gross income from sources within Register Act, approved July 26, 1935 (49 Stat. L. 500), under reg «■•nri without United States. ulations prescribed by tha Administrative Committee, with the approval of the President. CHAPTER IV The Administrative Committee consists of the Archivist or Acting Deductions From Gross' Income Archivist, an officer of the Department of Justice designated by the Se c tio n 23 (a ). Deductions from gross income: Expenses. Attorney General, and the Public Printer or Acting Public Printer. Article 23 (a )- l. Business expenses. 23 (a )-2. Traveling expenses. The daily issue of the F ederal R egister will be furnished by mail 23 (a)-3. Cost of materials. to subscribers, free of postage, for $1 per month or $10 per year; 23 (a)-4. Repairs. single copies 5 cents; payable in advance. Remit by money order 23 (a)~6. Professional expenses. payable to Superintendent of Documents, Government Printing 23 (a)-6 . Compensation for personal services. Office, Washington, D. C. 23 (a)—7. Treatment of excessive compensation. Correspondence concerning the publication of the F ederal 23 (a>-8. Bonuses to employees. 23 (a)—9. Pensions—Compensation for injuries. R egister should be addressed to the Director, Division of the F ederal R egister, The National Archives, Washington, D. O. 23 (a )—10. Rentals. 23 ( a ) - l l . Expenses of farmers. 23 (a )—12. Depositors* guaranty fund. Se c tio n 23 (b). Deductions from gross-income: Interest. Article 23 (b )-l. Interest. TABLE OF CONTENTS Se c tio n 23 (c). Deductions from gross income: Taxes generally. ..Article 23 (c )—1. Taxes. 23 (c )—2. Federal duties and excise taxes. Interstate Commerce Commission: Page Application for relief from long-and-short-haul provi 23 (c)-3. Taxes for local benefits. Sec tio n 2 3 (d ). Deductions from gross income: Taxes of share sion, Interstate Commerce Act: holder paid by corporation. Handles from, to, and between points in the South-. west______2156 Article 23 (d )-l. Tax on bank or other stock. S e c tio n 23 (e ) . Deductions from gross income: Losses by individuals. Notice of hearing, application to operate as common Article 23 (e )- l. Losses by individuals. carrier: 23 (e)—2. Voluntary removal of buildings. Dekay, C. M______!------2155 23 (e)-3. Loss of useful value. Securities and Exchange Commission: 23 (e )—4. Shrinkage in value of stocks. Order terminating proceeding, offering sheet by: 23 (e)-5. Losses of farmers. Carraher, W. H------______2156 1 Sec tio n 23 ( f ) . Deductions from gross income: Losses by corpora Permanent suspension order, offering sheet by: tions. Knickerbocker, P. R ------2157 , Article 23 ( f ) - l . Losses by corporations. Securities Act of 1933: Se c tio n 23 ( g ) . Deductions from gross income: Wagering losses. Adoption oi, Rule 600—Financial statements------2156 Sec tio n 23 (h ). Deductions from gross income: Basis for determin Suspension order, etc_ offering sheet by: ing loss. Thompson, T. G— ------2157 Article 23 (h )-l. Basis for determining loss. Treasury Department: Sec tio n 23 (i). Deductions from gross income: Loss on wash sales Bureau of Internal. Revenue: of stock or securities. Regulations 94—Income Tax under the Revenue Se c tio n 23 (J ). Deductions from gross income: Capital losses. Act of 1936: nnnn Se c tio n 23 ( k ) . Deductions from gross income: Bad debts. Table of Contents______2093 Article 23 (k )—1. Bad debts. Chapter L—Introductory Provisions, Subtitle A 23 (k )—2. Examples of bad debts. of T itle I ______2100 23 (k )-3 . Uncollectible deficiency upon sale of mortgaged Chapter^ tt—rx~—General Provisions, Subtitle or pledged property. B of Title I______2101-2155 23 (k)-4. Worthless bonds and similar obligations. United States Tariff Commission: 23 (k )-5 . Reserve for bad debts. Public notice, investigation ordered and hearing set: S e c t io n 23 (1). Deductions from gross income: Depreciation. Cigar lighters------—------2157 Article 23 (1)—L Depreciation. 23 (1)—2. Depreciable property. 23 (1)—3. Depreciation of intangible property. 23 (1)—4. Capital sum recoverable through depreciation allowances. 23 ( i ) —5. Method of computing depreciation allowance. Sec tio n 22 (a). Gross income: General definition.—Continued. Art. 22 (a)-20. Income to lessor corporation from leased prop 23 (l)-6 . Obsolescence. 23 (l)-7. Depreciation of patent or copyright. erty. 22 (a)—21. Gross income of corporation in liquidation. 23 (1)—8. Depreciation of drawings and models. 23 (1)—9. Records of depreciable property. Se ctio n 22 (b ). Gross income: Exclusions from gross income. Article 22 (b )- L Exemptions—Exclusions from gross income. 23 (1)—10. Depreciation in the case of farmers. 22 (b) (1)—1. Life insurance—Amounts paid by reason of Sec tio n 23 (m ). Deductions from gross income: Depletion. the death of the insured. Se c tio n 23 (n ). Deductions from gross income: Basis for deprecia 22 (b) (2)—1. Life insurance—E n d ow m en t contracts— tion and depletion. Amounts paid other than by reason of the Article 23 (m>—1. Depletion of mines, oil and gas wells, other death of the insured. natural deposits, and timber; depreciation 22 (b ) (2>—2. Annuities. of improvements. 22 (b) (3 )- L Gifts and bequests. 23 (m )—2. Computation of depletion of mines, oil and 22 (b) (4)—1. Interest upon State obligations. gas wells, and other natural deposits with 22 (b) (4)-2. Dividends and interest from Federal land out reference to discovery value or per banks, Federal intermediate credit banks, centage depletion. national farm-loan associations, banks for 23 (m)-3. Computation of depletion of mines (other cooperatives, and production credit cor than metal, coal, or sulphur mines) on the porations and associations. basis of discovery value. 22 (b) (4) -3. Dividends from Federal reserve banks. 23 (m)-4. Computation of depletion based on a per 22 (b) (4)-4. Interest upon United States obligations. centage of income in the case of oil and 22 (b) (4)-5. Treasury bond exemption in the case of trusts gas wells. or partnerships. 23 (m)—5. Computation of depletion based on a per 22 (b) (4)—6*. Interest upon United States obligations in centage of income in the case of coal mines, the case of nonresident aliens and certain metal mines, and sulphur mines or deposits. foreign organizations. 23 (m)-fi- Determination of cost of deposits. FEDERAL REGISTER, November 14, 1936 2095
Sectio n 23 ( n ) . Deductions from gros3 income— Continued. Section 27 (g ). Corporation credit for dividends paid: Preferential Art. 23 (m)-7. Determination of fair market value of min dividends. eral properties, including oil and gas Article 27 (g )-l. Preferential distributions. properties. Section 27 (h). Corporation credit for dividends paid: Nontaxable 23 (m)-8. Revaluation of mineral deposits not allowed. distributions. 23 (m)-9. Determination of mineral contents of mines Article 27 (h )—1. Nontaxable distributions. and of oil or gas wells. 23 (m )—10. Depletion—Adjustments of accounts based on CHAPTER V I bonus or advanced royalty. 23 (m )—11. Depletion and depreciation accounts on Credits Against Tax books. 23 (m )—12. Statement to be attached to return when Part m —Credits Against Tax valuation, depletion, or depreciation of Section 31. Taxes of foreign countries and possessions of United mineral property is claimed. States. 23 (m )—13. Statement to be attached to return when Section 32. Taxes withheld at source. depletion is claimed on percentage basis. Section 33. Credit for overpayments. 23 (m )—14. Discovery of mines other than coal, metal, or sulphur mines. chapter vn 23 (m )—15. Allowable capital additions in case of mlnps 23 (m )—16. Charges to capital and to expense in the Accounting Periods and Methods case of oil and gas wells. 23 (m )-17. Depreciation in the case of mines. Part IV—Accounting Periods and Methods of Accounting 23 (m)-18. Depreciation of improvements in the case of Section 41. General rule. oil and gas wells. Article 41—1. Computation of net income. 23 (m)-19. Depletion and depreciation of oil and gas 41—2. Bases of computation and changes in accounting wells in years before 1916. methods. 23 (m)-20. Capital recoverable through depletion allow 41-3. Methods of accounting. ance in the case of timber. 41- 4. Accounting period. Article 23 (m )-21. Computation of allowance for depletion of Section 42. Period in which items of gross Income included. timber for given year. Article 42-1. When included in gross income. ' 23 (m)-22. Revaluation of timber not allowed. 42- 2. Income not reduced to possession. 23 (m)-23. Depreciation of improvements in the case 42-3. Examples of constructive receipt. of timber. 42-4. Long-term contracts. 23 (m)-24. Information to be furnished by taxpayer 42— 5. Subtraction for redemption of trading stamps. claiming depletion of timber. I Section 43. Period for which deductions and credits taken. 23 (m)-25. Determination of fair market value of Article 43-1. “Paid or incurred” and “paid or accrued.” timber. 43— 2. When charges deductible. 23 (m)-26. Determination of quantity of timber. Section 44. Installment basis. 23 (m)-27. Aggregating timber and land for purposes of Article 44-1. Sale of personal property on Installment plan. valuation and accounting. 44— 2. Sale of real property involving deferred payments. 23 (m)-28. Timber depletion and depreciation accounts 44-3. Sale of real property on installment plan. on books. 44 4. Deferred-payment sale of real property not on in Se c t io n 23 ( o ) . Deductions from gross income: Charitable and stallment plan. other contributions. 44-5. Gain or loss upon disposition of installment obli Article 23 (o )—1. Contributions or gifts by individuals. gations. Section 23 (p ). Deductions from gross income: Pension trusts. Section 45.. Allocation of income and deductions. Article 23 (p )— 1. Payments to employees’ pension trusts. Article 45-1. Determination of the taxable net income of a Section 23 (q ). Deductions from gross income: Charitable and controlled taxpayer. other contributions by corporations. Section 46. Change of accounting period. Article 23 (q )—1. Contributions or gifts by corporations. Article 46-1. Change in accounting period. Section 24. Items not deductible. Section 47. Returns for a period of less than twelve months. Article 24-1. Personal and fam ily expenses. Article 47-1. Returns for periods of less than 12 months. 24-2. Capital expenditures. Section 48 (a ). Definitions: Taxable year. 24—3. Premiums on business insurance. Section 48 (b ). Definitions: Fiscal year. 24-4. Amounts allocable to exempt income, other than Section 48 (c ). Definitions: Paid, incurred, accrued. interest. Se c tio n 48 (d ). Definitions: Trade or business. 24-5. Losses from sales between members of fam ily and Section 48 (e); Definitions: Mutual investment companies. between individuals and corporations. Article 48 (e)—1. Taxation of mutual investment companies— 24- 6. Life or terminable interests. General. c h a p t e r v 48 (e)—2. Definition of a mutual investment company. 48 (e)—3. Proof of status of a mutual investment com Credits Against Income pany. 48 (e)-4. Records to be kept for purpose of ascertaining Section 25. Credits of individual against net income. actual ownership of outstanding stock of Article 25-1. Credits of individual against net income. mutual investment companies. 25- 2. Earned income credit. 48 (e)-5. Records to be kept for purpose of determining 25-3. Amount of personal exemption allowable. whether a company claiming to be a mutual 25-4. Personal exemption of head of family. investment company is a personal holding 25-5. Personal exemption of married person. company. 25-6. Credit for dependents. 48 (e)—6. Additional information required in returns of 25— 7. Personal exemption and credit for dependents shareholders. where status changes. Section 26. Credits of corporations. chapter v in Article 26—1. Credit of corporation for interest on obligations of the United States and its instrumentalities. Returns and Payment of Tax 26- 2. Credit in connection with contracts restricting payment of dividends. Part V—Returns and Payment of Tax 26-3. Bank affiliate. Section 51. Individual returns. Section 27 (a). Corporation credit for dividends paid: Dividends Article 51-1. Individual returns. paid credit in general. 51—2. Form of return. Article 27 (a)—1. Dividends paid credit in general. 51—3. Return of income of minor. Section 27 (b). Corporation credit for dividends paid: Dividend 51—4. Verification of returns. carry-over. Article 27 (b )—1. Dividend carry-over. 51— 5. Use of prescribed forms. Se c tio n 52. Corporation returns. Section 27 (c). Corporation credit for dividends paid: Dividends Article 52—1. Corporation returns. in kind. Article 27 (c )—1. Dividends in kind. 52— 2. Returns by receivers. Section 53. Time and place for filing returns. Section 27 (d). Corporation credit for dividends paid: Dividends Article 53—1. Time for filing returns. in obligations of the corporation. 53— 2. Extensions of time for filing returns. Article 27 (d )-l. Dividends in obligations of the corporation. 53—3. Extensions of time in the case of foreign organiza Section 27 (e). Corporation credit for dividends paid: Taxable tions, certain domestic corporations, and citi stock dividends. zens of United States residing or traveling Article 27 (e)—1. Taxable stock dividends. abroad. Section 27 (f) Corporation credit for dividends paid: Distributions 53-4. Due date of return. in liquidation. 53—5. Place for filing individual returns. Article 27 (f)—1. Dividends paid credit for distributions in Section 54. Records and special returns. liquidation. Article 54-1. Aids to collection of tax. 2096 FEDERAL REGISTER, November lif 1936
Section 55. Publicity of returns. Section 112 (b ). Recognition of gain or loss— Continued. Article 55(b)—1. Definitions. Art. 112 (b) (6)—1. Distributions in liquidation of subsidiary 55(b)-2. Copies of income returns. corporation. 55(b)—3. Inspection of copies of returns. 112 (b ) (6 )—2. Liquidations completed within one tax-» 55(b)-4. Bequest for permission to inspect copies. able year. Se c tio n 56. Payment of tax. 112 (b) (6)—3- Liquidations covering more than one tax Article 56-1. Date on which, tax shall be paid. able year. 56-2. Extension of time for payment of the tax or in 112 (b) (6)—4. Distributions In liquidation as affecting stallment thereof. m lnnrtiy interests. 56-3. When fractional part of cent may be disregarded. 112 (b) (6)—5. Records to be kept and information to be 56-4. Receipts far tqx payments. filed with return. Section 57. Examination of return and determination of tax. Section 112 (c). Recognition of gain or loss: Gain from exchanges Article 57—1. TCrarntnalien of return and determination of tax not solely in kind. by the Commissioner. Article 112 (c)—1. Receipt of other property or money in tax- Section 58. Additions to tax and penalties. free exchange not connected with corpo Section 59. Administrative proceedings. rate reorganization. Section 112 (d)r Recognition of gain or loss: Same—Gain of cor chafteb ix poration. Miscellaneous Provisions Section 112 (e ). Recognition of gain or loss: Loss from exchanges not solely In kind. Part VI—Miscellaneous Provisions Article 112 (e )-l. Nonrecognition of loss, Section 61. Laws made applicable. Section 112 (f). Recognition of gain or loss: Involuntary conver Sec tio n 62. Rules and regulations. sions. Se c tio n 63. Taxes in lieu of taxes under 1934 Act. Article 112 (f)- l. Reinvestment of proceeds of involuntary con Section 64. Short title. version. 112 (f )—2. Replacement funds. chafteb x Section 112 (g). Recognition of gain or loss: Definition of reor Corporations Exempt From Tax ganization. Article 112 (g)—1. Purpose and scope of exception of reorgani Subtitle C—Supplemental Provisions, Supplement A—Rates of Tax zation exchanges. (Supplementary to Subtitle B, Part I) 112 (g )—2. Definition of terms. 112 (g )-3 . Exchanges solely of stock ¿or securities, or Section 101. Exemptions from tax on corporations. property, solely for stock or securities, in Article 101-1. Proof of exemption. • 101 (1)—1. Labor, agricultural, and horticultural organ pursuance of plan of reorganization. 112 (g)-4- Exchanges in reorganization for stock or se izations. curities and other property or money. 101 (2 )—1. Mutual savings banks. 101 (3 )—1. Fraternal beneficiary societies. 112 (g)—5. Receipt of stock or securities in reorganiza 101 (4 )—1. Building and loan associations and cooperative tion without surrender of stock by share banks. holder. 112 (g)-6. Records to be kept and information to bo 101 (5 )—1- Cemetery companies. 101 (6)-1. Religious, charitable, scientific, literary, and filed with returns. educational organizations and community Section 112 (h ). Recognition of gain or loss: Definition of control. chests. Article 112 (h )-l. Control of corporation. 101 (7 )- l. Business leagues, chambers of commerce, real Section 112 (i). Recognition of gain or loss: Foreign corporations. estate boards, and boards of trade. Article 112 (i)—1. Reorganization with, or transfer or prop 101 (8 )—1. Civic leagues and local associations of employees. erty to, a foreign corporation. 101 (9 )- L Social clubs. Section 113 (a ). Adjusted basis for determining gain or loss: 101 (10)—1. Local benevolent life insurance associations, mu Basis (unadjusted) of property. tual irrigation and telephone companies, and Article 113 (a)—1. Scope of basis for determining gain or loss. like organizations.. 113 (a )-2. General rule. 101 (11)—1. Farmers’ or other mutual bail, cyclone, casualty, 113 (a) (1)—1. Property included in inventory. or fire insurance companies or associations. 113 (a) (2)—1. Property transmitted by gift after December 101 (12)-1. Farmers* cooperative marketing and purchasing 31, 1920. associations. a 113 (a) (3)—1. Transfer in trust after December 31, 1920. 101 (13)—1. Corporations organized to finance crop operations. 113 (a) (4)—1. Gift or transfer in trust prior to January 1* 101 (18)—1. Religious or apostolic associations or corporations. 1921. 113 (a) (5 )—1. Basis of property acquired by bequest, devise, CHAPTER X I or inheritance. 113 (a) (6 )-l. Property acquired upon a tax-free exchange. Corporations Used to Avoid Surtax 113 (a) (7)—1. Property acquired by corporation in reorgan Section 102. Surtax on corporations improperly accumulating ization after December 31, 1917. surplus. 113 (a) (8)—1. Property acquired by a corporation after1 Article 102-1. Taxation of corporation formed or ultllized for December 31, 1920. avoidance of surtax. 113 (a) (9)—1. Property acquired as a result of an involun 102-2. Purpose to avoid surtax. tary conversion. 102-3. Unreasonable accumulation of profits. 113 (a) (10)—1. Stocks or securities acquired in “wash sales.” 102-4. Computation of retained net income. 113 (a) (ll)- l. Basis of property acquired during affiliation. 102-5. Payment of surtax on pro rata shares. 113 (a) (12)—1. Basis of property established by Revenue Act of 1932. ch apter xn 113 (a) (13)-1. Property contributed in kind by a partner to Tax on Citizens and Corporations of Foreign Countries a partnership. 113 (a) (13)—2. Readjustment of partnership interests. Banks and Trust Companies—Sale of Oil or Gas Properties 113 (a) (14)—1. Property acquired prior to March 1, 1913. 113 (a) (15)-1. Basis of property received in complete liqui Section 103. Rates of tax on citizens and corporations of certain dation. foreign countries. 113 (a) (16)—1. Basis of property established by Revenue Act Section 104. Banks and trust companies. of 1934. Section 105. Sale of oil or gas properties. Section 113 ( b ) . Adjusted basis for determining gain or loss:; CHAPTER X III Adjusted basis. Article 113 (b )—1. Adjusted basis: General rule. Gain or Loss—Recognition, Basis, Determination 113 (b )-2 . Substituted basis. Supplement B—Computation of Net Income (Supplementary to Subtitle B, Part n ) chapter XXV Section 111. Determination of amount of, and recognition of, gain Depreciation and Depletion or loss. Section 114. Basis for depreciation and depletion. , Article 111-1. Computation of gain or loss. Article 114-1. Basis for allowance of depreciation and depletion. Se c tio n 112 (a). Recognition of gain or loss: General rule. Article 112 (a )- l. Sales or exchanges. chapter xv Section 112 (b ). Recognition of gain or loss: Exchanges solely in kind. Distributions by Corporations—Dividends Article 112 (b) (1)-1. Property held for productive use In trade or business or for investment. Section 115. Distributions by corporations. 112 (b) (2)—1. Stock for stock of the same corporation. Article 115-1. Dividends. 112 (b) (5)—1. Transfer of property to corporation con 115-2. Sources of distributions in general. trolled by transferor. 115-3. Earnings or profits. 112 (b) (5)-2. Records to be kept and information to be 115-4. Distributions other than a dividend. filed. 115-5. Distributions in liquidation. FEDERAL REGISTER, November 14, 1936 2097
Section 115. Distributions by corporations—Continued. ch apter xxrr Art. 115-6. Distributions from depletion or depreciation re serves. Returns and Payment of Tax 115-7. Stock dividends. 115-8. Election of shareholders as to medium of pay Supplement D—Returns and Payment of Tax (Supplementary to ment. Subtitle B, Part V) 115- 9. Distribution in redemption or cancellation of Section 141. Consolidated returns of railroad corporations. stock taxable as a dividend. Article 141—1. Consolidated returns of affiliated corporations for taxable years beginning after December 115-10. Dividends paid in property. 31, 1935. 115-11. Effect on earnings or profits of certain tax-free 141—2. Formation of and changes in affiliated group. exchanges and tax-free distributions. 141-3. Corporations to be included in consolidated re CHAPTER XVI turns for taxable years beginning after Decem ber 31, 1935. Additional Exclusions From Gross Income 141- 4. Foreign corporations which may be treated as domestic corporations. Section 116. Exclusions from gross income. Section 142. Fiduciary returns. Article 116-1. Income of foreign governments, ambassadors, and Article 142—1. Fiduciary returns. consuls. 142— 2. Return by guardian or committee. 116- 2. Compensation of State officers and employees. 142—3. Returns where two trusts. 116- 3. Bridges to be acquired by State or political subdi 142—4. Return by receiver. vision. 142-5. Return for nonresident alien beneficiary. 142- 6. Time for filing return upon death, or termina chapter x vn tion of trust. Section 143. Withholding of tax at source. Capital Gains and Losses Article 143—1. Withholding tax at source. 143- 2. Fixed or determinable annual or periodical in Section 117. Capital gains and losses. come. Article 117-1. Meaning of capital assets. 143—3. Exemption from withholding. 117- 2. Limitations on capital gains and capital losses. 143-4. Ownership certificates for bond interest. 117-3. Determination of period for which capital assets 143-5. Form of certificate for citizens or residents. are held. 143-6. Form of certificate for nonresident aliens, non 117—4. Application of section 117 generally. resident foreign corporations, and unknown 117—5. Application of section 117 in the case of husband owners. and wife. 143-7. Return and payment of tax withheld. 117-6. Gains and losses from short sales. 143-8. Ownership certificates in the case of fiduciaries and joint owners. chapter xvra 143- 9. Return of income from which tax was withheld. Section 144. Payment of corporation income tax at source. Loss From Wash Sales Article 144-1. Withholding in the case of. nonresident foreign corporations. Section 118. Loss from wash sales of stock or securities. 144- 2. Aids to withholding agents in' determining lia Article 118—1. Losses from wash sales of stock or securities. bility for withholding of tax. CHAPTER XIX Section 145. Penalties. Article 145—1. Penalties. Income From Sources Within United States Section 146. Closing by Commissioner of taxable year. Article 146-1. Termination of the taxable period by Commis Section 119. Income from sources within United States. sioner. Article 119-1. Income from sources within the United States. Section 147. Information at source. 119—2. Interest. Article 147-1. Return of information as to payments of $1,000. 119—3. Dividends. 147-2. Return of information as to payments to em 119—4. Compensation for labor or personal services. ployees. 119-5. Rentals and royalties. 147-3. Cases where no return of information required. 119—6. Sale of real property. 147-4. Return of information as to interest on corporate 119-7. Income from sources without the United States. bonds. 119—8. Sale of personal property. 147-5. Return of information as to payments to other 119-9. Deductions in general. than citizens or residents. 119—10. Apportionment of deductions. 147—6. Foreign items. 119-11. Other income from sources within the United 147-7. Return of information as to foreign items. States. 147- 8. Information as to actual owner. 119-12. Income from the sale of personal property de Section 148. Information by corporations. rived from sources partly within and partly Article 148—1. Return of information as to payments of divi without the United States. dends. 119—13. Transportation service. 148- 2. Information respecting compensation of officers 119-14. Computation of income. and employees in excess of $15,000. Section 149. Returns of brokers. chapter xx Article 149-1. Return of information by brokers. Section 150. Collection of foreign items. • Certain Deductions for Charitable and Other Contributions and Article 150-1. License to collect foreign items. Dividends Paid CHAPTER XXIII Section 120. Unlimited deduction for charitable and other con tributions. Estates and Trusts Section 121. Deduction of dividends paid on certain preferred stock of certain corporations. Supplement E—Estates and Trusts CHAPTER XXI Se c tio n 161. Imposition of tax. Article 161—1. Imposition of the tax. Credits Against Tax—Supplemental Se c tio n 162. Net income. Article 162—1. Income of estates and trusts. Supplement C—Credits Against Tax (Supplementary to Subtitle B Se ctio n 163. Credits against net income. Part i n ) Article 163-1. Credits to estate, trust, or beneficiary. Se ctio n 164. Different taxable years. ection S 131. Taxes of foreign countries and possessions of Unitec Se c tio n 165. Employees’ trusts. States. Sectio n 166. Revocable trusts. Article 131—1. Analysis of credit for taxes. Article 166-1. Trusts with respect to the corpus of which the 131—2. Meaning of terms. grantor is regarded as remaining in substance 131-3. Conditions of allowance of credit. the owner. 131-4. Redetermination of tax when credit prove! Se c tio n 167. Income for benefit of grantor. incorrect. Article 167-1. Trusts in the income of which the grantor retains 131-5. Countries which do or do not satisfy the Rimila an interest. credit requirement. Se c tio n 168. Taxes of foreign countries and possessions of United 131-6. When credit for taxes may be taken. States. 131-7. Domestic corporation owning a majority of the Se c tio n 169. Common trust funds. stock of foreign corporation. Article 169—1. Common trust fund defined. 131-8. Limitations on credit for foreign fox a«, 169-2. Returns of common, trust funds. 2098 FEDERAL REGISTER, November 14, 1936
CHAPTER XXIV Section 212. Gross Income. Artide 212-1. Gross income of nonresident alien individuals. Partnerships 212-2. Exclusion of earnings of foreign ships from gross income. Supplement F—Partnerships Section 213. Deductions. Artide 213-1. Deductions allowed nonresident alien individuals. Se c tio n 181. Partnership not taxable. Section 214. Credits against net income. Article 181—L Partnerships. Artide 214-1. Credits to nonresident alien Individuals. Section 182. Tax of partners. Section 215. Allowance of deductions and credits. Artide 182—1. Distributive share of partners. Article 215-L Allowance of deductions and credits to nonresi Section 183. Computation of partnership income. dent alien individuals. Artide 183—1. Computation of partnership income. Section 216. Credits against tax. Sectio n 184. Credits against net income. Section 217. Returns. Article 184-L Credits allowed partners. Artide 217-1. Time and place for filing returns of nonresident Section 185. Earned income. alien Individuals. Article 185-1. Earned income credit of partners. 217-2. Return of income. Section 186. Taxes of foreign countries and possessions of United Section 218. Payment of tax. States. Artide 218-1. Date on which tax shall be paid by nonresident Section 187. Partnership returns. alien Individual. Artide 187-1. Partnership returns. Section 219. Partnerships. 187-2. Contents of partnership return. Artide 219-1. Partnership«. Section 188. Different taxable years of partner and partnership. . CHAPTER XXv h . CHAPTER XXV Foreign Corporations Insurance Companies Supplement I— Foreign Corporations Supplement G—Insurance Companies Section 231. Tax on foreign corporations. Section 201 (a). Tax on life insurance companies: Definition. Article 231-1. Taxation of foreign corporations. Article 201 (a )-l. Life insurance companies: Definition. 231-2. Undistributed profits surtax. Section 201 (b ). Tax on life insurance companies: Imposition of 231—3. Gross Income of foreign corporations. tax. 231-4. Exclusion of earnings of foreign ship» from, Article 201 (b )-l. Life insurance companies: Rate of tax. gross Income. 201 (b)-2. Foreign life insurance companies—Net in Section 232. Deductions. come. Artide 232-1. Deductions allowed foreign corporations. Section 202. Gross income of life insurance companies. Section 233. Allowance of deductions and credits. Section 203(a). Net income of life insurance companies: General Article 233-1. Allowance of deductions and credits. rule. Section 234. Credits against tax. Article 203 (a )-l. General limitation on deductions. Section 235. Returns. 203 (a) (1)—1. Tax-free interest. Article 235-1. Time and place for filing returns of foreign 203 (a) (2)—1. Reserve funds. corporations. 203 (a) (4 )- l. Investment expenses. 235-2. Return of income. 203 (a) (5)—1. Taxes and expenses with respect to real Sec tio n 236. Payment of tax. estate. Article 236-1. Dates on which tax shall be paid by foreign 203 (a) (6)—1. Depreciation. corporations. 203 (a) (7)—1. Interest. Section 237. Foreign insurance companies. Section 203 (b ). Net income of life insurance companies: Rental Section 238. Affiliation. value of real estate. Article 203 (b )-l. Real estate owned and occupied. CHAPTER XXVIII Section 204 (a). Insurance companies other than life or mutual: Income from Sources W ithin Possessions of United States Imposition of tax. Artide 204 (a )-l. Tax on insurance companies other than life Supplement J—Possessions of the United States or mutual. Section 251. Income from sources within possessions of United Section 204 (b). Insurance companies other than life or mutual: States. Definition of income, etc. Article 204 (b )-l. Gross income of insurance companies other : Article 251-1. Citizens of the United States and domestic cor than life or mutual. porations deriving income from sources within Section 204 (c). Insurance companies other than life or mutual: a possession of the United States. Deductions allowed. 251-2. Income received within the United States. Section 204 (d). Insurance companies other than life or mutual: 251-3. Tax in case of corporations. Deductions of foreign corporations. 251-4. Definition. Section 204 (e ). Insurance companies other than life or mutual: 251-5. Deductions allowed citizens and domestic cor Double deductions. porations entitled to the benefits of section, Artide 204 (c)-l. Deductions allowed insurance companies 251. other than life or mutual. 251-6. Allowance of deductions and credits to citizens Section 205. Taxes of foreign countries and possessions of United and domestic corporations entitled to the bene States. fits of section 251. Section 206. Computation of gross income. Section 207. Mutual insurance companies other than life. Section 252. Citizens of possessions of United States. A rtide 207-1. Tax on mutual insurance companies other than Article 252—L Status of citizens of United States possession. life. 207-2. Gross income of mutual insurance companies CHAPTER XXIX other than life. 207-3. Deductions allowed mutual Insurance companies China Trade Act Corporations other than life insurance companies. Supplement K—China Trade Act Corporations 207-4. Required addition to reserve funds of mutual in surance companies other than life. Section 261. Taxation In general. 207-5. Special deductions allowed mutual marine in Se c tio n 262. Credit against net income. surance companies. Section 263. Credits against the tax. 207-6. Special deductions allowed mutual insurance Section 264. Affiliation. companies other than life or marine. Section 265. Income of shareholders. 207-7. Returns of mutual insurance companies other Article 262-1. Income of China Trade Act corporations. than life. 262—2. Credits allowed China Trade Act corporations. 262-3. Meaning of terms used in connection with China CHAPTER XXVI Trade Act corporations. 262-4. Withholding by a China Trade Act corporation. Nonresident Aliens Supplement H—Nonresident Alien Individuals chapter xxx Section 211. Tax on nonresident alien individuals. Assessment and Collection of Deficiencies Artide 211-1. Taxation of aliens in general. Supplement L— Assessment and Collection of Deficiencies 211-2. Definition. 211-3. Alien seamen, when to be regarded as residents. Section 271. Definition of deficiency. , 211-4. Proof of residence of alien. Article 271-1. Deficiency defined. 211-5. Loss of residence by alien. S e c t io n 272. Procedure in general. 211-6. Duty of employer to determine status of alien Article 272—1. Assessment of a deficiency. employee. 272-2. Collection of a deficiency. 211—7. Taxation of nonresident alien individuals. 272-3. Extension of tim e for payment of a deficiency. FEDERAL REGISTER, November Id, 1936 2099.
Se c tio n 273. Jeopardy assessments. Section 1002. Separability clause. Article 273—1. Jeopardy assessments. Section 1003. Effective date of Act. Sectio n 274. Bankruptcy and receiverships. Article 1003-1. Effective date of Act. Article 274-1. Bankruptcy, proceedings for the relief of debtors, and receiverships. 274— 2. Immediate assessments In bankruptcy, proceed Contents op Appendix Paragraph ings for the relief of debtors, and receivership number cases. Adjustments of carriers’ tax liabilities to conform to recap Section 275. Period of lim itation upon assessment and collection. ture payments______fc______j¡j Section 276. Same— Exceptions. Section 1107, Revenue Act of 1932. Se ctio n 277. Suspension o f running of statute. Administrative review______■ ■ gp Article 275-1. Period of lim itation upon assassmunt of far Section 1107, Revenue Act of 1926. 275- 2. Period of limitation upon collection of tax. Board of Tax Appeals: Date when Board’s decision becomes final______i g CHAPTER XXXI Section 1005, Revenue Act of 1926. Expenditures and personnel______jq Interest and Additions to Tax Section 910, Revenue Act of 1924 as amended. Supplement M—Interest and Additions to the Tax Frivolous appeals______Section 911, Revenue Act of 1924 as ampnitwi, Section 291. Failure to file return. Membership______Z______.______3,4, 5 Article 291—1. Addition to the tax in case of failure to file Sections 900, 901, 902, Revenue Act of 1924 as return. amended. Se c tio n 292. Interest on deficiencies. Organization and procedure______*______6 7 S Sectio n 293. Additions to the tax in case of deficiency. Sections 903, 904, 905, 906, 907, Revenue Act" of 1924 ’ ’ ■ Section 294. Additions to the tax in case of nonpayment. as amended. Section 295. Time extended for payment of tax shown on return. Review of Board’s decision by courts______13 Section 296. Time extended for payment of deficiency. Section 1001, Revenue Act of 1926, as amended Section 297. Interest in case of jeopardy assessments. Transferee proceedings— Se c tio n 298. Bankruptcy and receiverships. Burden of proof______12■ Section 299. Removal of property or departure from United States. Section 912, Revenue Act of 1924 as amended. CHAPTER XXXII Preliminary examination ______12 Section 913, Revenue Act of 1924 as amended. Claims Against Transferees and Fiduciaries Sections 1002, 1003, 1004, Revenue Act" of~ 1926^ as *** 1& Supplement N—Claims Against Transferees and Fiduciaries amended. Section 311. Transferred assets. Witnesses______g Article 311—1. Claims in cases of transferred assets. Sections 908, 909, Revenue Act of 1924 as amended. ~ Section 312. Notice of fiduciary relationship. Closing agreements______17 ^g Article 312-1. Fiduciaries. Section 606, Revenue Act o f 1928. Article 1301, Regulations 74. CHAPTER XXTTTT Collection of taxes: Overpayments Acceptance of Treasury certificates and Treasury notes— Article 1391, Regulations 69, as amended______;___ 19 Supplement O—Overpayments Article 1392, in part, Regulations 69, as amended__ I 20 Checks in payment of taxes____-______21 Sectio n 321. Overpayment of installment. — Section 322. Refunds and credits. Section 109, Title 26, U. S. Code. Article 322-1. Authority for abatement, credit, and refund of Enforcement of liability for taxes collected____;______26 tax. Section 607, Revenue Act of 1934. 322-2. Credit and refund adjustments. Payment of and receipt for taxes______■ 22 322-3. Claims for refund by taxpayers. Section 1118, in part, Revenue Act of 1926." "«122—4. Claim for payment of judgment obtained against Receipts for payment______23 collector. Section 3183, Revised Statutes, as a-menriefl 322-5. Claim for payment of judgment obtained in Suits to restrain, barred______;______24 United States district court against the United Section 3224, Revised Statutes. States. Uncertified checks______25 322-6. Claim for payment of judgment obtained in the Article 1393, Regulations 69. Court of Claims against Hie United States. Compromises: 322-7. Limitations upon the crediting and refunding of Civil and criminal cases______27 taxes paid. Section 3229, Revised Statutes. 322—8. Crediting of accounts of collectors in cases of Concealment of assets______28 assessments against several persons covering Section 616, Revenue Act of 1928. same liability. Courts—Jurisdiction: Section 617, Revenue Act of 1928______29 chapter xxxiv Section 1122, Revenue Act of 1926, amending section Surtax on Personal Holding Companies 24, in part, United States Judicial Code______30 Deposit of United States bonds or notes of surety______31 Title IA—Additional income Taxes Sedtion 1126, Revenue Act of 1926, as amended. Disclosure of income-tax returns prohibited______32 Section 351. Surtax on personal holding companies. Article 351—1. Surtax on personal holding companies. Section 3167, Revised Statutes, as amended. 351—2. Classification of a personal holding company. Examination of books and witnesses______33 351-3. Computation of undistributed adjusted net in Section 1104, Revenue Act of 1926, as amended. come. Transferees______34, 351-4. Amounts used or set aside to retire indebtedness Section 507, Revenue Act of 1934. incurred prior to January 1, 1934. Unnecessary examinations.______35 351-5. Computation of surtax. Section 1105, Revenue Act of 1926. 351-6. Illustration of computation of undistributed Informers______35 Section 514, Revenue Act of 1934. adjusted net Income and surtax. Interest: 351—7. Payment of surtax on pro rata shares. 351-8. Return and payment of tax. Delinquent taxes______;______39 351-9. Determination of tax, assessment, collection. Section 404, Revenue Act of 1935. Judgments.____1______;______33 CHAPTER XXXV Section 177 (b ), United States Judicial Code, "as amended. General Provisions—Definitions Overpayments______.______’____ 37 Title V III— General Provisions Section 614, Revenue Act of 1928, as amended. Liens for taxes______J.______49 Sectio n 1001. Definitions. Section 3186, Revised Statutes, as amended. Article 1001—1. Classification of taxables. Priority of debts due United States— 1001-2. Association. Section 3466, Revised Statutes______41 1001-3. Association distinguished from trust. Section 3467, Revised Statutes, as amended______42 1001—4. Partnerships. Limitation: 1001-5. Limited partnership as corporation. Effect of expiration period of limitation against taxpayer. 43 1001—6. Limited partnership as partnership. Section 608, Revenue Act of 1928, as amended. 1001—7. Insurance company. Effect of expiration period of limitation against United ,1001-8. Domestic, foreign, resident, and Tvmrpstdpn* . States______;______44 persons. Section 607, Revenue Act of 1928. 1001-9. Fiduciary. Prosecutions for internal revenue offenses______45 1001-10. Fiduciary distinguished from agent. Section 1108, Revenue Act of 1932. 2100 FEDERAL REGISTER, November 14, 1936 Paragraph REVENUE ACT OF 1924 number « Paragraph Section 900 ______3 Penalties______46-48 4 Section 1114, Revenue Act of 1926. 901 Q02 5 Failure to file return------48 6 Section 406, Revenue Act of 1935. 903 poJSg plftiTn — 47 904. 6 Section 35, Criminal Code of the United States, as 905 6 90R 7 amended. 8 Refund or credit: 907 908 9 Assignment of claim void before allowance—— ----— 49 9 Section 3477, Revised Statutes. 909 Effect of expiration period of limitation against United 910 10 11 States______— 51 911 912 12 Section 607, Revenue Act of 1928. .12 Erroneous credits______50 913 Section 609, Revenue Act of 1928. REVISED STATUTES Recovery of amounts erroneously refunded------52 Section 610, Revenue Act of 1928, as amended. 3167 32 Suit may not be brought unless claim is filed; limitation- 53 3173 58 Section 3226, Revised Statutes, as amended. •3176 57 Regulations: 3133 23 Retroactive regulations------54 3188 40 24 Section 1108, Revenue Act of 1926, as amended. 3224 / When law is changed------55 Section 3447, Revised Statutes; U. S. Code, Title 26, 3226 53 section 1691 (2). 3229 27 Reserve requirements of holding company affiliates------56 3447 55 Section 5144 (b) and (c), Revised Statutes, as amended. 3466 41 Returns: 3467 42 Failure to make; procedure; penalties------57 3477 49 Section 3176, Revised Statutes, as amended. 6144 56 Notice and summons.— —— ------58 Section 3173, Revised Statutes, as amended. XT . S. CODE Public records _•------59 109, Title 26— 21 Section 257, Revenue Act of 1926. Suits to restrain assessment or collection------60 CRIMINAL CODE OF THE UNITED STATES, AS AMENDED Section 3224, Revised Statutes, as amended. 38 47 Suits to restrain enforcement of tax liability— ------61, 62 Declaratory judgments------61 JUDICIAL CODE Section 274D, U. S. Judicial Code, as amended. 177 (b )______---- 38 Transferee qr fiduciary------— 62 274D (1 )______61 Section 604, Revenue Act of 1928. Tax on transfers to avoid income tax: Sections 901 to 904, Revenue Act of 1932------■------63-66 Article 1281, Regulations 77------67 CHAPTER I Excess-profits tax regulations: Scope of Regulations T. D. 4666. T. D. 4690. Be it enacted by the Senate and Home of Representatives of the United States of America in Congress assembled, T h a t Certain General Provisions of Law R elating to I ncome T axes this Act, divided into titles and sections according to the fol for 1936 and Subsequent T axable Y ears lowing Table of Contents, may be cited as the “Revenue Act REVENUE ACT OF 1935 o f 1936” : V Paragraph 39 S e c t io n 404------Title I—Income Tax, Subtitle A—Introductory Provisions 406______•*------48 Sec. 1. Application of title .—The provisions of this title shall ap REVENUE ACT OF 1934 ply only to taxable years beginning after December 31, 1935. In S e c t io n 507------34 36 come, war-profits, and excess-profits taxes for taxable years begin 514------ning prior to January 1, 1936, shall not be affected by the provisions 607---- ,------26 of t.iii« title, but shall remain subject to the applicable provisions REVENUE ACT OF 1932 of prior revenue Acts, except as such provisions are modified by legislation enacted subsequent to this Act. S e c t io n 901------63 64 A r t ic le 1-1. Scope of regulations.— These regulations deal 903ZZZZ-Z------65 904______66 with the taxes upon net income imposed by Title I of the 1107 ______1 Revenue Act of 1936, including the tax imposed by section 102 1108 ------,-- •'------45 of Title I of that Act upon the net income of certain corpora REVENUE ACT OF 1928 tions, and the tax imposed by Title IA of that Act upon the 62 S e c t io n 604------•------undistributed adjusted net income of personal holding com 606------17 44 panies (see section 351). 607 ______{ 51 The articles of these regulations have been given key num 608 ------i------43 bers corresponding to the numbers of the sections, subsec 609 ______50 610 ______52 tions, or paragraphs of the Act. For example, articles 23 614______— 37 (a )-l to 23 (a )-12, relating to deduction for expenses, bear 28 the key number 23 (a ), which corresponds to subsection 23 29 617ZZZZZZIZZZZIZ-- — ------— (a) of the Act. The articles bearing a given key number are REVENUE ACT OF 1928 t.bp regulations prescribed with respect to the corresponding S e c t io n 257------59 section, subsection, or paragraph of the Act; and the section, 1001 ______:------* ------13 1002------.------14 subsection, or paragraph of the Act shall be considered as a 15 part of the respective articles to which it corresponds. 1004 ______15 1005 ______16 Sec. 2. Cross References.—The cross references in this title to 33 other portions of the title, where the word “ see” is used, are made 1105______35 only for convenience, and shall be given no legal effect. 1107 ______2 Sec. 3. Classification of Provisions .—The provisions of this title 1108 ______- 54 are herein classified and designated as— 1114______46 Subtitle A— Introductory provisions, 22 Subtitle B— General provisions, divided into Parts and sections, 1118------Subtitle C—Supplemental provisions, divided into Supple 1122______30 1126______31 ments and sections. FEDERAL REGISTER, November 14, 1936 2101
A r t . 3—1. Division of regulations.—These regulations have resident, are liable to the tax, and it makes no difference that been divided into 35 chapters. Chapter I relates to Intro they may own no assets within the United States and may ductory Provisions, Subtitle A of Title I. Chapters II to IX receive no income from sources within the United States. relate to General Provisions, Subtitle B of Title L Chapters Every resident alien individual is liable to the tax, even X to XXJLl relate to Supplements A to D of Supplemental though his income is wholly from sources outside the United Provisions, Subtitle C of Title I. Chapters xX m to XXIX States. As to nonresident alien individuals, see sections relate to Supplements E to K of Supplemental Provisions, 211-219. Subtitle C of Title I. Chapters XXX to x x x m relate to A r t . 11-3. Who is a citizen.— Every person bora or nat Supplements L to O of Supplemental Provisions, Subtitle C of uralized in the United States, and subject to its jurisdiction, Title L Chapter XXXIV relates to Title IA, Surtax on Per is a citizen. When any naturalized citizen has left the sonal Holding Companies. Chapter XXXV relates to Title United States and resided for two years in the foreign coun Vm , General Provisions of the Act. try from which he came, or for five years in any other Sec. 4. Special Classes of Taxpayers.—The application of the foreign country, it is presumed that he has ceased to be an General Provisions and of Supplements A to D, inclusive, to each American citizen. This presumption does not apply, how of the following special classes çf taxpayers, shall be subject to ever, to residence abroad while the United States was at war, the exceptions and additional provisions found in the Supplement applicable to such class, as follows: nor does it apply in the case of individuals bom in the United (a) Estates and trusts and the beneficiaries thereof— Supple States subject to its jurisdiction. However, even thmjgb an ment E. individual bom in the United States, subject to its jurisdic (b) Members of partnerships—Supplement F. (c) Insurance companies— Supplement G. tion, of either citizen or alien parents, resided in a foreign (d) Nonresident alien individuals—Supplement H. country for a number of years, he would still be a citizen (e) Foreign corporations—Supplement I. of the United States, unless he had become naturalized in, (f) Individual citizens of any possession of the United States or taken an oath of allegiance to, the foreign country of who are not otherwise citizens of the United States and who are not residents of the United States—Supplement J. residence or some other foreign state. A foreigner who has (g) Individual citizens of the United States or domestic cor filed his declaration of intention of becoming a citizen of porations, satisfying the conditions of section 251 by reason of the United States but who has not yet received his final deriving a large portion of their gross income from sources within a possession of the United States— Supplement J. citizenship papers is an alien. See articles 211-2 to 211-5 (h) China Trade Act corporations—Supplement K. for distinction between a resident alien individual and a nonresident alien individual. A rt. 4-1. Application of regulations to special classes of taxpayers.—With respect to certain classes of taxpayers, the Sbc. 12. Surtax on Individuals .— (a) Definition of "surtax net income .”—As vised In this section application of the provisions of Chapters H to x x n is sub the term “surtax net Income” means the amount of the net in ject to certain exceptions and additional provisions, which come in excess of the-credits against net -income provided in are discussed in Chapters x x t t t to x x ix , as follows: section 25 (b). (b) Rates of surtax .—There shall be levied, collected, and paid Chapter X X lIi— Estates and trusts. for each taxable year upon the surtax net income of every indi Chapter X x lv —Partnerships. vidual a surtax as follows: Chapter X X v —Insurance companies. Chapter XXVI—Nonresident alien individuals. Upon a surtax net income of $4,000 there shall be no surtax; Chapter XV11—Foreign corporations. upon surtax net incomes in excess of $4,000 and not in excess Chapter X X V III— Income from sources in possesions of the of $6,000, 4 per centum of such excess. ______United States. $80 upon surtax net incomes of $6,000; and upon surtax net Chapter X a i a —China Trade Act corporations. incomes in excess of $6.000 and not in excess of $8,000, 5 per centum in addition of such excess. For provisions interpretative of section 351, surtax on per $180 upon surtax net Incomes of $8,000; and upon surtax net sonal holding companies, see articles 351-1 to 351-9, inclu incomes in excess of $8,000 and not in excess of $10,000, 6 per centum in addition of such excess. sive. For provisions relative to surtax on corporations im $300 upon surtax net incomes of $10,000; and upon surtax net properly accumulating surplus, see articles 102-1 to 102-6. Incomes in excess of $10,000 and not in excess of $12,000, 7 per centum in addition of such excess. chapter n $440 upon surtax net incomes of $12,000; and upon surtax net incomes in excess of $12,000 and not in excess of $14,000, 8 per Rates of Tax centum in addition of such excess. $600 upon surtax net incomes of $14,000; and upon surtax net incomes in excess of $14,000 and not in excess of $16,000, 9 per Subtitle B—General Provisions, Part I—Rates of Tax centum in addition of such excess. Sec. 11. Normal Tax art Individuals .—There shall be levied, col $780 upon surtax net Incomes of $16,000; and upon surtax net lected, and paid for each taxable year upon the net income of incomes in excess of $16,000 and not in excess of $18,000, 11 per every individual a normal tax of 4 per centum of the amount of centum in addition of such excess. the net income in excess of the credits against net income provided $1,000 upon surtax net incomes of $18,000; and upon surtax in section 25. net incomes in excess of $18,(WO and not in excess of $20,000, 13 per centum in addition of such excess. A r t . 11-1. Income tax on individuals.—Title I of the Act, $1,260 upon surtax net incomes of $20,000; and upon surtax which applies only to taxable years beginning after Decem net incomes in excess of $20,000 and not in excess of $22,000, 15 ber 31, 1935 (see section 1 ) , imposes an income tax on in per centum in addition of such excess. $1,560 upon surtax net incomes of $22,000; and upon surtax dividuals, including a normal tax (section 11) and a surtax net incomes in excess of $22,000 and not in excess of $26,000, 17 (section 12). The tax is upon net income which is deter per centum in addition of such excess. mined by subtracting the allowable deductions from the gross $2,240 upon surtax net incomes of $26,000; and upon surtax net incomes in excess of $26,000 and not in excess of $32,000, 19 income. (See generally sections 21-24.) In certain cases per centum in addition of such excess. credits are allowed against the net income before computing $3,380 upon surtax net incomes of $32,000; and upon surtax the tax (section 25) and in other cases against the amount net incomes in excess of $32,000 and not in excess of $38,000, 21 per centum in addition of such excess. of the tax (sections 31, 32, and 131). In general, the tax is $4,640 upon surtax net incomes of $38,000; and upon surtax net payable upon the basis of returns rendered by persons liable incomes in excess of $38,000 and not in excess of $44,000, 24 per thereto (sections 51, 53, 142, and 217), except that in some centum in addition of such excess. instances it is to be paid at the source of the income (section $6,080 upon surtax net incomes of $44,000; and upon surtax net incomes in excess of $44,000 and not in excess of $50,000, 27 per 143). Exceptions and additional provisions applicable to centum in addition of such excess. certain special classes of taxpayers are listed in section 4. $7,700 upon surtax net incomes of $50,000; and upon surtax See section 102 as to shareholders of corporations formed or net incomes in excess of $50,000 and not in excess of $56,000, 31 per centum In addition of such excess. availed of to prevent imposition of surtax. See section 351 $9,560 upon surtax net incomes of $56,000; and upon surtax as to shareholders of personal holding companies. See sec net incomes in excess of $56,000 and not in excess of $62,000, 35 tion 117 as to treatment of capital gains and capital losses. per centum in addition of such excess. A rt. 11-2. Citizens or residents of the United States liable $11,660 upon surtax net incomes) of $62,000; and upon surtax net incomes in excess of $62,000 and not in excess o f $68,000, 39 to tax.—In general, citizens of the United States wherever per centum in addition of such excess. 2102 FEDERAL REGISTER, November 14, 1936
$14,000 upon surtax net incomes of $68,000; and upon surtax 1 Surtax Table —Continued net incomes in excess of $68,000 and not in excess of $74,000, 43 per centum in addition of such, excess. $16,580 upon surtax net incomes of $74,000; and upon surtax Surtax net income Percent Total surtax * net incomes in excess of $74,000 and not in excess of $80,000, 47 per centum in addition of such excess. $19,400 upon surtax net incomes of $80,000; and upon surtax $56,000 to $62,000 ___ — ------35 $11,660 $62,000 to $68,000__ 39 14,000 net incomes in excess of $80,000 and not in excess of $90,000, 51 $fis|nnn tn $7^ 0 0 0 .... 43 16,580 per centum in addition of such excess. $7tjnno tn $sn, nm 47 19,400 $24,500 upon surtax net incomes of $90,000; and upon surtax $8n’non tn $01,000 51 24; 600 net incomes in excess of $90,000 and not in excess of $100,000, 55 $0 1 'non to $100,000 55 30.000 per centum in addition of such excess. $100,000 t Surtax net income Percent Total surtax defined in section 104, (3) insurance companies (see sections 201, 204, and 207), (4) foreign corporations (see section 231), (5) domestic corporations entitled to the benefits of section $0 fin $4,000 $4,000 to $6,000 4 $30 251 by reason of deriving a large portion of their gross income nrm tn ss non 6 180 frpm sources within a possession of the United States, and $»7nm in $10,000 _ -..... 6 300 *Tn non in * 12.000 7 440 (6) China Trade Act corporations (see Supplement K ). It $124)00 to $14^000 8 600 makes no difference that a domestic corporation subject to *14 nnn tn iifi’nnn 9 780 «ifi’nnô in *i«'nnn _ __ 11 1,000 the graduated normal income tax imposed by section 13 (b) *18 000 tn *20.000 13 1,260 ion'rinri tn ¿99'nnn IS 1,560 may derive no income from sources within the United States. 17 2,240 $22,000 to $26,000.. ------The normal income tax on corporations is upon the normal- * 2fi nnn tn * 22.000 19 3,380 tax net income, that is, the net income as defined in section $32 060 to $38^000 . . ______. ______21 4,640 jjs'Ôôn tn $44^000 _ 24 6,080 21 minus the sum of (1) the credit provided in section 26 (a) $44^000 to $50^000 . . ______27 7,700 for interest on obligations of the United States and its mstru- $50!660 to $56^000...... 31 9,560 FEDERAL REGISTER, November 14, 1936 2103 mentalities and (2) the credit for dividends received provided I 22 per centum of the portion of the undistributed net Income in section 26 (b ), except that this credit is not allowed in the which is in excess of 40 per centum and not in excess of 60 per centum of the adjusted net income. case of a mutual investment company, as defined in section 27 per centum of the portion of the undistributed net income 48 (e). In the case of-a mutual investment company, for which is in excess of 60 per centum of the adjusted net income. the purpose of the normal-tax net income, a credit is allowed (c) Adjusted net income less than $50,000.— against net income for dividends paid as provided in section 27, computed without the benefit of subsection (b) thereof, (1) Specific credit.—I f the adjusted net Income is less than $50,000, there shall be allowed a specific credit equal to the relating to the dividend carry-over. portion of the undistributed net Income which is in excess of 10 The tax is payable upon the basis of returns rendered by per centum of the adjusted net income and not in excess of the corporations liable thereto, except that in some cases it is $5,000, such credit to be applied as provided in paragraph (2). (2) Application of specific credit.—If the corporation is en to be paid at the source of the income. (See also sections titled to a specific credit, the tax shall be equal to the sum of 47, 52, 53, 144, and 235.) For surtax on undistributed profits the following: of corporations, see section 14. For surtax on corporations (A) A tax computed under subsection (b) upon the amount improperly accumulating surplus, see section 102. As to sur of the undistributed net income reduced by the amount a t tax on personal holding companies, see section 351. For the specific credit, plus what the term “corporation” includes and for the difference (B) 7 per centum of the amount of the specific credit. between domestic and foreign corporations, see section 1001. (d ) Exemption from surtax.—The following corporations shall The following table shows the normal income tax due from not be subject to the surtax imposed by this section: corporations in general upon certain specified amounts of (1) Banks as defined in section 104. (2) Domestic corporations which for any portion of the tax normal-tax net income. In each instance the first figure of able year are in bankruptcy under the laws of the United the normal-tax net income in the normal-tax net income States, or are Insolvent and in receivership in any court of the column is to be excluded and the second figure included. United States or of any State, Territory, or the District of Columbia. The percentage given opposite applies to the excess of income (3) Insurance companies subject to the tax imposed under over the first figure in the normal-tax net income column. section 201, 204, or 207. The last column gives the total tax on a normal-tax net (4) Foreign corporations. income equal to the second figure in the normal-tax net (5) Corporations which, by reason of deriving a large portion of their gross income from sources within a possession of tha income column. United States, are entitled to the benefits of section 251. (6) Corporations organized under the China Trade Act, 1922. Corporation Normal Income Tax Table (7) Joint Stock Land Banks organized under the Federal Farm Loan Act, as amended. Normal tax net income Percent T o tal tax (e) Exempt corporations.—For corporations exempt from taxa tion under this title, see section 101. ( f ) Tax on personal holding companies.—For surtax on personal $0 to $2,000______8 $160 holding companies, see section 351. $2,000 til $15,000 11 1,590 (g ) Improper accumulation of surplus.—For surtax on corpora $15,000 to $40,000______. . . 13 4,840 $40,000 u p - tions which accumulate surplus to avoid surtax on stockholders, 15 see section 102. A r t. 14-1. Surtax on undistributed profits of corporations.— The normal tax for any amount of normal-tax net income In general, the Act imposes a surtax on the net income of cor not shown in the table is computed by adding to the tax for porations in an amount measured by the undistributed net the largest amount shown which is less than the normal- income. Hie rates of surtax are graduated in brackets, tax net income, the tax upon the excess over that amount the lowest Tate being 7 perçait of that portion of the at the rate indicated in the table. Accordingly, the normal undistributed net income not in excess of 10 percent of the tax due upon a normal-tax net income of $20,000 would be adjusted net income and the highest rate being 27 percent $2,240, computed as follows: of that portion of the undistributed net income which is in Tax on $15,000 from table______$1, 590 excess of 60 percent of the adjusted net income. Tax on $5,000 at 13 percent______650 The adjusted net income is defined in section 14 (a) (1) as Total______2,240 the net income (see section 21) minus the sum of (1) the normal tax imposed by section 13 and (2) the credit provided Sec. 14. Surtax on Undistributed Profits .— (a) Definitions.— As used in tbis title— in section 26 (a ), relating to interest on certain obligations of the United States and its instrumentalities. In the case (1) The term “adjusted net income” means the net income minus the sum of— of a holding company affiliate, as defined in section 2 of the Banking Act of 1933, the amount to be deducted in determin (A) The normal tax imposed by section 13. (B) The credit provided in section 26 (a ), relating to inter ing the adjusted net income includes also the credit allowed est on certain obligations of the United States and Govern under section 26 (d). In the case of a national mortgage ment corporations. association created under Title HE of the National Housing (C) In the case of a holding company affiliate (as defined in Act, the amount to be deducted also includes the amount al section 2 of the Banking Act of 1933), the amou n t allowed as a credit under section 26 (d ). lowed as a credit under section 26 (e ). (D) In the case of a national mortgage association created The undistributed net income is defined in section 14 (a) under Title HI of the National Housing Act, the a m o u n t (2) as the adjusted net income minus the sum of (a) the divi allowed as a credit under section 26 (e). dends paid credit provided in section 27 (see articles 27 (a )-l (2) The term “undistributed net income” means the adjusted to 27 (h )-l, inclusive), and (b) the credit provided in section net income minus the sum of the dividends paid credit provided 26 (c), relating to contracts restricting the payment of divi in section 27 and the credit provided in section 26 (c), relating to contracts restricting dividends. dends (see article 26-2). Every corporation is subject to the surtax imposed by sec (b ) Imposition of tax .—There shall be levied, collected, and paid for each taxable year upon the net Income of every corporation a tion 14 (b) except corporations expressly exempt from surtax equal to the sum of the following, subject to the applica taxation under Title I (see section 101) and those corpora tion of the specific credit as provided in subsection ( c ) : tions enumerated in section 14 (d ). 7 per centum of the portion of the undistributed net income A domestic corporation is not subject to the surtax on which is not in excess of 10 per centum of the adjusted net undistributed profits if for any portion of its taxable year— income. 12 per centum of the portion of the undistributed net income (1) it is in bankruptcy under the laws of the United which is in excess of 10 per centum and not in excess of 20 per States; or centum of the adjusted net Income. (2) it is insolvent and in receivership in any court of the 17 per centum of the portion of the undistributed net income which is in excess of 20 per centum and not in excess of 40 United States or any State, Territory, or the District of per centum of the adjusted net irirnm« . Columbia. 2104 FEDERAL REGISTER, November 14, 1936 Generally, in the case of proceedings for the relief of debtors A m o u n t of R ate of under section 77 or 77B of the Bankruptcy Act of 1898, as Bracket undistributed S u r t a x tax amended, if the debtor corporation has pending a debtor’s net income petition or answer which has been approved by the court finally determined to have jurisdiction thereof, it is in bank F i r s t , portion of undistributed net income not in ruptcy under the laws of the United States. In such case excess o1 10 percent of adjusted net income (10 P e r c e n t percent o f $411,285) $41,128.50 7 $2.879.00 no exemption from the surtax on undistributed profits is S e c o n d , portion of undistributed net income in allowed— excess erf 10 percent of adjusted net income and not in excess of 20 percent of adjusted net income (10 percent o f $411,285)______. 41,128.50 12 4,935.42 (a) the debtor corporation if the proceeding is dismissedT h i r d , portion of undistributed net income in prior to the confirmation by the court of a plan of reor excess of 20 percent of adjusted net income and not in excess of 40 perçoit of adjusted net income ganization; (20 percent of $411,285) . 82,257.00 17 13,983.69 (5) any corporation organized pursuant to the provisions F o u r t h , portion of undistributed net income in excess of 40 percent of adjusted net income and of the plan; not in excess of 60 percent of adjusted net Income ($231,285 less $164,514, the sum o f $41,128.50 plus (c) any corporation which pursuant to the plan acquires $41,12« 50 plus $82,257) 66,771.00 22 14,689.62 any of the properties of the debtor corporation by way of consolidation or merger o r any corporation which is Total ...... ' 231,285.00 36,487.73 merged or consolidated with the debtor corporation pursuant to the plan; or A r t . 14—3. Specific credit if adjusted net income is less (d ) the debtor corporation for any taxable year subse than $50ft00.~ S e c tio n 14 (c) provides for a specific credit quent to the taxable year during which any of the proper in the case of a corporation which has an adjusted net in ties dealt with by the plan either— come of less than $50,000. This specific credit is an amount (1) are transferred and conveyed by the trustee or equal to the excess of $5,000 or the total undistributed net trustees to the debtor corporation or the other corpora income, whichever is less, over 10 percent of the adjusted tion or corporations provided for by the plan, or, net income, and is to be deducted from the undistributed (2) if no trustee has been appointed, are retained by net income before computing the surtax. After deducting the debtor corporation, the specific credit from the undistributed net income a sur tax is computed on the remainder. The computation is made free and clear of all claims of the debtor corporation, its first according to the brackets as set forth in section 14 ( b ) . shareholders and creditors, except such claims as may con Then there is added 7 percent of the amount of the specific sistently with the plan be reserved in the order confirming credit. The sum is the total surtax on the corporation’s net the plan or directing the transfer and conveyance or reten income. tion of such properties. The application of the specific credit may be illustrated by Any corporation claiming an exemption from surtax under the following examples: section 14 (d) shall file as a part of its return for each taxa Example (1).—The A Company has an adjusted net income ble year for which the exemption is claimed a statement for the calendar year 1936 o f $1,000. Its undistributed net under oath of all facts pertinent to its claim. income likewise is $1,000. Giving effect to the specific credit, A r t . 14-2. Method of computation of surtax— E xam ple.— the surtax payable is $70, computed as follows: The application of the provisions of section 14 (b) to cor porations having an adjusted net income of not less than Adjusted net income______$1,000 $50,000 m ay be illu strated generally by the follow in g Undistributed net income------1,000 exam ple: Computation of specific credit: E xam ple.—The A Company, a domestic corporation, has Undistributed net income, or $5;000, whichever is less— 1, 000 fo r the calendar year 1936 a n et incom e o f $500,000, includ Less 10 percent of adjusted net income------100 ing interest on United States obligations in the amount of Specific credit under section 14 (c) (1 )------— 000 $25,000 and dividends am ounting to $50,000 from domestic corporations subject to taxation under Title I. The normal Computation of the surtax: Undistributed net income______1, 000 tax of the A Company (not a mutual investment company) Less specific credit------000 computed under section 13 is $63,715, Its dividends paid credit computed under section 27 (see articles 27 (a )-l to Remainder subject to surtax under section 14 (b ) ----- 100 27 ( h ) - l , in clu sive) amounts to $100,000, and its cred it under Surtax on remainder (7 percent of $100)------7 section 26 (c) (see article 26-2) relating to contracts restrict Plus 7 percent of amount of specific credit (7 percent of in g the paym ent o f dividends amounts to $80,000. T h e sur $900)______— 63 ta x fo r the calendar year 1936 is $36,487.73, computed as Total surtax computed under section 14 (c) (2)— 70 follow s: In those cases in which the undistributed net income does Net income______$500, 000 Minus: not exceed $5,000, the result produced by application of the (1) Normal tax under section 13------$63,715 statutory method of computation illustrated by this example (2) Credit under section 26 (a) for interest is obtainable by computing the surtax directly as 7 percent on United States obligations______25,000 ------88,715 on the whole of the undistributed net income. Exam ple (2 ).—The B Company has an adjusted net income Adjusted net income as defined* in section fo r the calendar year 1936 o f $25,000. I t pays no dividends 14 (a) (1 )______411,285 during its taxable year and is allowed no credit under section Minus: 26 (c). It has, consequently, an undistributed net income (1) Dividends paid credit under section 27_ $100,000 (2) Credit relating to contractual restric o f $25,000. G ivin g effect to the specific credit, the surtax tions under section 26 (c ) ______80,000 payable is $4,625, computed as follow s: ------180,000 Adjusted net income______$25, 000 Undistributed net income as defined in sec Undistributed net income------— ------25, 000 tion 14 (a) (2 )______231,285 Computation of specific credit: The brackets into which the undistributed net income is Undistributed net income, or $5,000, whichever is less— 5, 000 divided, the amount of the undistributed net income in each Less 10 percent of adjusted net income------2, 500 bracket, the rate of surtax applicable thereto, the surtax at Specific credit tinder section 14 (c) (1 )------2, 500 such rate, and the total surtax, are as follows: FEDERAL REGISTER, November 14, 1936 2105 Computation of the surtax: Undistributed net income______:______$25,000 in accordance with the method of accounting regularly em Less specific credit____ ;______2, 500 ployed in keeping the books of the taxpayer. (See section 41.) Remainder subject to surtax under section 14 (b )__ 22,500 The net income of corporations is determined in general Surtax on $22,500______4,450 in the same manner as the net income of individuals, but Plus 7 percent of amount of specific credit (7 per the deductions allowed corporations are not precisely the cent of $2,500) .______175 same as those allowed individuals. (See sections 23, 24, 102, 118, 121, 203, 204, 207, 232, and 351.) Total surtax computed under section 14 (c) (2 )____ 4,625 Sec. 22. Gross income ,— Exam ple (3).—The C Company has an adjusted net in (a ) General definition ,— “ Gross income” includes gains, profits; come fo r the calendar year 1936 o f $49,900. I t pays no d iv i and income derived from salaries, wages, or compensation for per dends during its taxable year, and is entitled to no credits, sonal service, of whatever kind and in whatever form paid, or from other than the specific credit, so that it has for the ta-vahie professions, vocations, trades, businesses, commerce, or sales, oz dealings in property, whether real or personal, growing out of the year an undistributed n et incom e o f an equal amnaint. G iv ownership or use of or interest in such property; also from inter ing effect to the specific credit, the surtax payable is $10,- est, rent, dividends, securities, or the transaction of any business 227.50, computed as follow s: carried on for gain or profit, or gains or profits and income de rived from any source whatever. In the case of Presidents of the Adjusted net income______- ______$49,900.00 United States and Judges of courts of the United States taking Undistributed net income______49,900.00 office after June 6, 1932, the compensation received as such shall be included in gross income; and all Acts fixing the compensation, Computation of specific credit: of such Presidents and. Judges are hereby amended accordingly. Undistributed net income, or $5,000, which ever is less------5,000.00 A r t . 22 (a )—1.— What included in gross income.— Gross Less 10 percent of adjusted net income______4, 990.00 income includes in general compensation for personal and Specific credit under section 14 (c) (1)______10.00 professional services, business income, profits from sales o f and dealings in property, interest, rent, dividends, and gains* Computation of the surtax: profits, and income derived from any source whatever, un Undistributed net income______49,900.00 Less specific credit______10.00 less exempt from tax by law. (See sections 22 (b) and 116.); In general, income is the gain derived from capital, from! Remainder subject to surtax under section labor, or from both combined, provided it be understood to 14 (b ) ------x.------49,890.00 include profit gained through a sale or conversion of capi Surtax on $49,890______10,226.80 tal assets. Profits of citizens, residents, or domestic cor Plus 7 percent of amount erf specific credit (7 per porations derived from sales in foreign commerce must be cent of $10)______.70 included in their gross income; but special provisions are Total surtax computed under section 14 made for nonresident aliens and foreign corporations by sec (c ) (2 )------_ ------10,227.50 tions 211-238 and, in certain cases, by section 251, for citizens and domestic corporations deriving income from sources CHAPTER H I within possessions of the United States. Income may be in Gross income—Net income the form of cash or of property. As to dividends, whether in cash or in property, see section 115. Part n —Computation of Net Income If property is transferred by a corporation' to a share Sec. 21. Net Income.— "N et income” means the gross income holder, or by an employer to an employee, for an amount computed under section 22, less the deductions allowed by sec tion 23. substantially leas than its fair market value, such share holder of the corporation or such employee shall include in A r t. 21—1. Meaning of net income,—The tax imposed by gross income the difference between the amount paid for the Title I is upon income. Neither income exempted by statute property and the amount of its fair market value. In com or fundamental law, nor expenses incurred in connection puting the gain or loss from the subsequent sale of such therewith, other than interest, enter into the computation of property its basis shall be the amount paid for the property, net income as defined by section 21. (See section 24 (a) (5) J increased by the amount of such difference included in gross In the computation of the tax various classes of m m s must income. This paragraph does not apply, however, to the is be considered: suance by a corporation to its shareholders of the right to (a) Income (in the broad sense), meaning all wealth subscribe to its stock, as to which see article 22 (a )-8. which flows in to the taxpayer other than as a mere return The fact that a dividend is declared shortly after the sale of capital. It includes the forms of income specifically de of corporate stock and the sale price is influenced by the scribed as gains and profits, including gains derived from expectation of the payment of a dividend does not make the sale or other disposition of capital assets. Cash receipts such dividend when paid taxable to the vendor as a dividend. alone do not always accurately reflect income, far the Act The amount advanced by the vendee to the vendor in con recognizes as income-determining factors other items, njurmg- templation of the next dividend payment is an investment of which are inventories, accounts receivable, property exhaus capital and may not be claimed as a deduction from gross tion, and accounts payable for expenses incurred. (See sec income. As to the amount of income tax paid for a bond tions 22, 23, and 117.) holder by the obligor pursuant to a so-called tax-free cove (b) Gross income, meaning income (in the broad sense) nant, see section 143 (a) (3). As to the determination of less income which is by statutory provision or otherwise gain or less from the sale or other disposition of property, see exempt from the tax imposed by the Act. (See section 22.) sections 111-113. (c) Net income, meaning gross income less statutory de As to insurance companies and foreign corporations, see ductions. The statutory deductions are in general, though sections 202, 204, 206, 207, and 231. not exclusively, expenditures, other than capital expenditures, A r t . 22 ( a ) -2 . Compensation for personal services.— Com connected with the production of income. (See sections 23 missions paid salesmen, Compensation for services on the and 24.) basis of a percentage of profits, commissions on insurance ( and are not taxable. H ie salaries of Federal officers and em- .] sources. The profit from the sale of live stock or other items ployees are subject to tax. See article 116—2 as to compensa which were purchased after February 28, 1913, is to be ascer tion of State officers and employees. tained by deducting the cost from the sales price in the year A r t . 22 ( a ) -3 . Compensation paid other than in cash.— I f in which the sale occurs, except that in the case of the sale services are paid for with something other than money, the of animals purchased as draft or work animals or solely for fair market value of the thing taken in payment is the breeding or dairy purposes and not for resale, the profit shall amount to be included as income. If -the services were be the amount of any excess of the sales price over the rendered at a stipulated price, in the absence of evidence to amount representing the difference between the cost and the contrary such price will be presumed to be the fair value the depreciation theretofore allowed (but not less than the of the compensation received. If a corporation transfers to amount allowable) in respect of such property as a deduction its employees its own stock as compensation for services in computing net income. rendered by the employee, the amount of such compensation In the case of a farmer reporting on the accrual basis to be included in the gross income of the employee is the (in which an inventory is used to determine profits) , his fair market value cf the stock at the time of the transfer. gross profits are ascertained by adding to the inventory If living quarters such as camps are furnished to employees value of live stock and products on hand at the end of the for the convenience of the employer, the ratable value need year the amount received from the sale of live stock and not be added to the cash compensation of the employees, products, and miscellaneous receipts for hire of teams, ma but if a person receives as compensation for services ren chinery, and the like, during the year, and deducting from dered a salary and in addition thereto living quarters, the this sum the inventory value of live stock and products on value to such person of the quarters furnished constitutes hand at the beginning of the year and the cost of live stock income subject to tax. The value of quarters furnished and products purchased during the year. In such cases all A rm y and Navy officers, members of the Coast Guard, Coast live stock raised or purchased for sale shall be included in and Geodetic Survey, and Public Health Service, or amounts the inventory at their proper valuation determined in ac received as commutation of quarters by such officers or cordance with the method authorized and adopted for the members, do not constitute taxable income. (See also sec purpose. Also live stock acquired, for draft, breeding, or tion 22 (b) (6) J Premiums paid by an employer on policies dairy purposes and not for sale, may be included in the of group life insurance covering the lives of his employees, inventory, instead of being treated as capital assets subject the beneficiaries of which are designated by the employees, to depreciation, provided such practice is followed consist -are not income to the employees. (See article 24-3.) ently by the taxpayer, in case of the sale of any live stock A r t . 22 ( a ) —4. Compensation paid in notes.—Notes or other included in an inventory their cost must not be taken as evidences of indebtedness received in payment for services an additional deduction in the return of income, as such constitute income to the amount of their fair market value. deduction will be reflected in the inventory. (See article A taxpayer receiving as compensation a note regarded as 22 (c )- 6 J good for its face value at maturity, but not bearing interest, In every case of the sale of machinery, farm equipment, shall treat as income as of the time of receipt the fair dis or other capital assets purchased after February 28, 1913 counted value of the note at such time. Thus, if it appears (which are not to be included in an inventory if one is used that such a note is or could be discounted on a 6 percent to determine profits), any excess over the cost thereof less basis, the recipient shall include such note in his gross in the amount of depreciation theretofore allowed (but not less come to the amount of its face value less discount computed than the amount allowable) in reject of such property as at the prevailing rate for such transactions. If the payments a deduction in computing net income, shall be included as due on a note so accounted for are met as they become due, gross income. If farm produce is exchanged for merchan there should be included as income in respect of each such dise, groceries, or the like, the market value of the article payment so much thereof as represents recovery for the received in exchange is to be included in gross income. Rents discount originally* deducted received in crop shares shall be returned as of the year in A r t . 22 ( a ) -5 . Gross income from business.—In the case which the crop shares are reduced to money or the equiva of a manufacturing, merchandising, or mining business lent of money. Proceeds of insurance, such as hail and fire “gross income” means the total sales, less the cost of goods insurance on growing crops, should be included in gross in^»' sold, plus any income from investments and from incidental come to the amount received in cash or its equivalent for or outside operations or sources. In determining the gross the crop injured or destroyed. If a farmer is engaged in income subtractions should not be made for depreciation, producing crops which take more than a year from the time depletion, selling expenses, or losses, or for items not ordi of planting to the time of gathering and disposing, the income narily used in computing the cost of goods sold. But see therefrom may, with the consent of the Commissioner (see article 23 (m )-l (g). article 41-2), be computed upon the crop basis; but in any A r t . 22 ( a ) -6 . State contracts.—The profit from a contract such cases the entire cost of producing the crop must be with a State or political subdivision thereof must be included taken as a deduction for the year in which the gross income in gross income. If warrants are issued by a city, town, or from the crop is realized. other political subdivision of a State, and are accepted by As herein used the term “farm” embraces the farm in the the contractor in payment for public work done, the fair ordinarily accepted sense, and includes stock, dairy, poultry, market value of such warrants should be returned as in fruit, ^nd truck farms; also plantations, .ranches, and all come. If for any reason the contractor upon conversion of land used for farming operations. All individuals, partner the warrants into cash does not receive and can not recover ships, or corporations that cultivate, operate, or manage the full value of the warrants so returned, he may deduct farms for gain or profit, either as owners or tenants, are from gross income for the year in which the warrants are designated as farmers. A person cultivating or operating a converted into cash any loss sustained, and if he realizes farm for recreation or pleasure, the result of which is a cpn- more than the value of the warrants so returned he should tinual loss from year to year, is not regarded as a farmer. include the excess in his gross income for the year in which Form 1040F should be filled in and attached to his income realized. tax return by every farmer who either keeps no records or A r t. 22 (a )-7. Gross income of farmers.—A farmer report only records of cash receipts and disbursements; its use is ing on the basis of receipts and disbursements (in which no optional with other farmers. (See further articles 23 (a )-11, inventory to determine profits is used) shall include in his 23 (e)-5, and 23 (1) —10.) gross income for the taxable year (1) the amount of cash A r t . 22 ( a ) -8. Sale of stock and rights .—If shares of stock or the value of merchandise or other property received dur in a corporation are sold from lots purchased at different ing the taxable year from the sale of live stock and produce dates or at different prices and the identity of the lots can -which were raised during the taxable year or prior years, not be determined, the stock sold shall be charged against (2) the profits from the sale of any live stock or other items the earliest purchases of such stock. In the determination which were purchased, and (3) gross income from all other of the earliest purchases of stock the rules prescribed in FEDERAL REGISTER, November 14, 1936 2107 paragraphs (1), (2), (3), and (4) of section 117 (c) (relating E xam ple.—A taxpayer in 1933 purchased 500 shares of to the period for which property has been held) shall be common stock at $125 a share, and in 1936, by reason of the applied. The excess of the amount realized, on the sale ownership of such stock, received 500 rights entitling him to over the cost or other basis of the stock will constitute gain. subscribe to 100 additional shares of such stock at $100 a In the case of stock in respect of which was paid a stock share. Upon the issuance of the rights each of the shares of dividend which did not constitute income under the Consti stock in respect of which the rights were issued had a fair tution, the basis for determining gain or loss from a sale market value of $120, and the rights had a fair market of either the stock in respect of which the distribution was value of $3 each. The taxpayer exercised his rights to sub made or the stock dividend shall be ascertained in accord scribe to the additional shares and later sold one of such ance with the principles set forth in article 113 (a) (12)—1. shares for $140. The profit is computed as follows. If common stock is received as a bonus with the purchase of $1,524.39 (cost o f old stock apportioned to righ ts pursuant preferred stock or bonds, the total purchase price shan be to the computation in the example under paragraph (1 )) fairly apportioned between such common stock and the H-$10,000 (subscription price o f additional shares) =$11,- securities purchased for the purpose of determining the 524.39, basis for determining gain or loss from sale of addi portion of the cost attributable to each class of stock or tional shares. securities, but if that should be impracticable in any case, $ll,524.39-i-100=$115.24, basis for determining gain or loss no profit on any subsequent sale of any part of the stock from sale of each share of additional stock. or securities will be realized until out of the proceeds of sales $140 (proceeds of sale of share of additional stock) less shall have been recovered the total cost. $115.24=$24.76, profit. Although the issuance by a corporation to its shareholders The basis for determining the gain or loss from subse of rights to subscribe to its stock may not under section quent sale of the stock in respect of which the rights were 115 (f) give rise to taxable income, gain may be derived or issued is $60,975.61-^-500, or $121.95 a share. loss sustained by the shareholder from the sale of such rights. If the stock in respect of which the rights are issued was In the case of stock in respect of which were issued stock purchased at different times or at different prices and the subscription rights which did not constitute income under the identity of the lots can not be determined, or if the stock Constitution, and in the case of such rights, the following in respect of which the rights are issued was purchased at rules are to be applied: different times or at different prices and the stock rights (1) If the shareholder does not exercise, but sells, his rights issued in respect of such stock can not be identified as hav to subscribe, the cost or other basis of the stock in respect of ing been issued in respect of any particular lot of such which the rights are issued shall be apportioned between the stock, the basis for determining the gain or loss from the rights and the stock in proportion to the respective values sale of the old shares, or the rights in cases where the rights thereof at the time the rights are issued, and the basis for are sold, or from the sale of the old or new shares in cases determining gain or loss from the sale of a right on one hand where the rights are exercised, shall be ascertained in ac or a share of stock on the other w ill be the quotient of the cost cordance with the principles laid down in article 113 (a) or other basis assigned to the rights or the stock, divided, as (1 2 )—1. • the case may be, by the number of rights issued or by the If a stock right is distributed tax free under section 115 (f ), number of shares held. the taxpayer may at his option include the entire proceeds Exam ple.—A taxpayer in 1931 purchased 500 shares of from the sale of nontaxable stock rights in gross income, in common stock at $125 a share, and in 1936, by reason of the which case the basis for determining gain or loss from the ownership erf such stock, received 500 rights entitling him to subsequent sale of the stock in respect of which the rights subscribe to 100 additional shares of such stock at $100 a were issued shall be the same as though the rights had not share. Upon the issuance of the rights each of the shares been issued. of stock in respect of which the rights were issued had. a fair As to deductions for losses from sales or exchanges of market value of $120, and the rights had a fair market value stocks or bonds, including losses from sales or exchanges of of $3 each. Instead of subscribing to the additional shares, rights to subscribe to stock, see article 23 (e )-l. A sold the rights at $4 each. The profit is computed as A r t . 22 ( a ) -9 . Sale of patents and copyrights.— A taxpayer follow s: disposing of patents or copyrights by sale should determine 500 (shares) X $125 =$62,500, cost of old stock (stock in the gain or loss arising therefrom by computing the difference respect of which the rights were between the selling price and the cost or other basis, with issued) proper adjustment for depreciation, as provided in articles 500 (shares) X $120 =$60,000, market value of old stock 111-1,113 (a) (14)—1, 113 (b )-l, and 113 (b)-2. 500 (rights) X$3 =$1,500, market value of rights A r t . 22 (a )-10. Sale of good will.— Gain or loss from a sale 60,000 of good will results only when the business, or a part of it, g-. of $62, 500 =$60,975.61, cost of old stock appor- to which the good will attaches is sold, in which case the gain ’ tioned to such stock after issuance or loss will be determined by comparing the sale price with o f rights the cost or other basis of the assets, including good will. 1,500 (See articles 111-1, 113 (a) (14)-1, 113 (b )-l, and 113 (b)-2.) of $62,500 =$1,524.39, cost of old stock appor- If specific payment was not made for good will there can be ’000 tioned to rights no deductible loss with respect thereto, but gain may be $2,000 (proceeds of sale of rights) less $1,52439 (cost of realized from the sale of good will built up through expendi old stock apportioned to rights) =$475.61, profit. tures which have been currently deducted. It is immaterial Por the purpose of determining the gain or loss from the that good will may never have been carried on the books subsequent sale of the stock in respect of which the rights as an asset, but the burden of proof is on the taxpayer to were issued, the adjusted cost of each share is $121.95— establish the cost or other basis of the good will sold. that is, $60,975.61-^-500. A r t . 22 (a )-ll. Sale of real property in lots.—If a tract (2) If the shareholder exercises his rights to subscribe, of land is purchased with a view to dividing it into lots the basis for determining gain or loss from a subsequent sale or parcels of ground to be sold as such, the cost or other of a share of the stock in respect of which the rights were basis shall be equitably apportioned to the several lots or issued shall be determined as in paragraph (1). The ba-Ris parcels and made a matter of record on the books of the tax for determining gain or loss from a subsequent sale of a payer, to the end that any gain derived from the sale of any share of the stock obtained through exercising the rights such lots or parcels which constitutes taxable income may shall be determined by dividing the part of the cost or other be returned as income for the year in which the sale is basis of the old shares assigned to the rights, plus the sub made. This rule contemplates that there will be gain or loss scription price of the new shares, by the number of new on every lot or parcel sold, and not that the capital in the shares obtained. entire tract may be recovered before any taxable income 210S FEDERAL REGISTER, November 14, 1936 shall be returned. The sale of each lot or parcel will be of a trustee who may be authorized to invest and reinvest treated as a separate transaction, and gain or loss computed such sums from time to time, the property or fund thus set accordingly. aside by the corporation and held by the trustee is an asset A r t . 22 (a )-12. Annuities and insurance policies.— Annu of the corporation, and any gain arising therefrom is income ities paid by religious, charitable, and educational corpora of the corporation and shall be included as such in its gross tions under an annuity contract are, in general, subject to income. tax to the same extent as annuities from other sources paid A r t . 22 (a )-16. Acquisition or disposition by a corporation under similar contracts. (See section 22 (b) (2) and article of its own capital stock.—Whether the acquisition or dispo 22 (b) (2)-2.) An annuity charged upon devised land is sition by a corporation of shares of its own capital stock gives ta vahip to a donee-annuitant if payable only out of the rents rise to taxable gain or deductible loss depends upon the real or other income of the land. In such case the devisee is not nature of the transaction, which is to be ascertained from required to return as gross income the amount of rent or all its facts and circumstances. The receipt by a corporation other income paid to the annuitant, and he is not entitled of the subscription price of shares of its capital stock upon to deduct from his gross income any sums paid to the an their original issuance gives rise to neither taxable gain nor nuitant. Amounts received as a return of premiums paid deductible loss, whether the subscription or issue price be in under life insurance, endowment, or annuity contracts, and excess of, or less than, the par or stated value of such stock. the so-called “dividend” of a mutual insurance company But if a corporation deals in its own shares as it might in which may be credited against the current premium, are not the shares of another corporation, the resulting gain or loss subject to tax. is to be computed in the same manner as though the corpo A r t . 22 (a )-13. Improvements by lessees.—If buildings are ration were dealing in the shares of another. So also if the erected or improvements made by a lessee and such buildings corporation receives its own stock as consideration upon the or improvements immediately become the property of the sale of property by it, or in satisfaction of indebtedness to it, lessor, as, for instance, if they are not subject to removal the gain or loss resulting is to be computed in the same man by the lessee, the lessor may at his option report the income ner as though the payment had been made in any other therefrom upon any one of the following bases: property. Any gain derived from such transactions is sub (a) The lessor may report as income for the taxable year ject to tax, and any loss sustained is allowable as a deduction in which such buildings or improvements are completed their where permitted by the provisions of the Act. fair market value at the time of their completion. A r t . 22 (a)-17. Contributions to corporation by share (b) The lessor may report as income at the time when holders.—If a corporation requires additional funds for con such buildings or improvements are completed the fair mar ducting its business and obtains such needed money through ket value of such buildings or improvements subject to the voluntary pro rata payments by its shareholders, the amounts lease. so received being credited to its surplus account or to a (c) The lessor may spread over the life of the lease the special capital account, such amounts will not be considered estimated depreciated value of such buildings or improve income although there is no increase in the outstanding ments at the expiration of the lease and report as income shares of stock of the corporation. The payments under for each year of the lease an aliquot part thereof. such circumstances are in the nature of voluntary assess Except in cases where the lessor has reported income upon ments upon, and represent an additional price paid for, the basis (a ), if the lease is terminated so that the lessor comes shares of stock held by the individual shareholders, and will into possession or control of the property prior to the time be treated as an addition to and as a part of the operating originally fixed for the expiration of the lease, the lessor capital of the company. (See articles 22 (a )—14 and 24-2.) shall report income for the year in which the lease is so A r t. 22 (a )-18. Sale and purchase by corporation of its terminated to the extent that the value of such buildings bonds.— (1) (a) If bonds are issued by a corporation at their or improvements when he becomes entitled to such possession face value, the corporation realizes no gain or loss, (b) If exceeds the amount already reported as income on account the corporation purchases any of such bonds at a price in of the erection of such buildings or improvements. No ap excess of the issuing price or face value, the excess of the preciation in value due to causes other than the termination purchase price over the issuing price or face value is a de of the lease shall be included. ductible expense for* the taxable year, (c) If, however, the If the buildings or improvements are destroyed prior to the corporation purchases any of such bonds at a price less than expiration of the lease, the lessor is entitled to deduct as a the issuing price or face value, the excess of the issuing price loss for the year when such destruction takes place the or face value over the purchase price is gain or income for the amount previously reported as income because of the erec taxable year. tion of such buildings or improvements, less proper adjust (2) (a) If, subsequent to February 28, 1913, bonds are ment for depreciation in case option (a) was exercised, and issued by a corpqration at a premium, the net amount of such less any salvage value subject to the lease to the extent premium is gain or income which should be prorated or that such loss is not compensated for by insurance or other amortized over the life of the bonds, (b) If the corporation wise. (See sections 23 (e) and (f) and 113 (a) (14).) purchases any of such bonds at a price in excess of the issuing A r t . 22 (a )-14. Cancellation of indebtedness.— T h e can price minus any amount of premium already returned as cellation of indebtedness, in whole or in part, may result income, the excess of the purchase price over the issuing price in the realization of income. If, for example, an individual minus any amount of premium already returned as income performs services for a creditor, who in consideration thereof (or over the face value plus any amount of premium not yet cancels the debt, income in the amount of the debt is real returned as income) is a deductible expense for the taxable ized by the debtor as compensation for his services. A tax year, (c) If, however, the corporation purchases, any of such payer realizes income by the payment or purchase of his bonds at a price less than the issuing price minus any amount obligations at less than their face value. (See article 22 of premium already returned as income, the excess of the (a)-18.) If a shareholder in a corporation which is in issuing price, minus any amount of premium already returned debted to him gratuitously forgives the debt, the transac as income (or of the face value plus any amount of premium tion am mints to a contribution to the capital of the cor not yet returned as income), over the purchase price is gain poration. Income is not realized by a taxpayer by virtue or income for the taxable year. of the discharge of his indebtedness as the result of an ad (3) (a) If bonds are issued by a corporation at a discount, judication in bankruptcy, or by virtue of a composition the net amount of such discount is deductible and should agreement among his creditors, if immediately thereafter the be prorated or amortized over the life of the bonds, (b) taxpayer’s liabilities exceed the value of his assets. If the corporation purchases any of such bonds at a price A r t . 22 (a ) 15. Creation of sinking fund by corporation .— in excess of the issuing price plus any amount of discount If a corporation, in order solely to secure the payment of its already deducted, the excess of the purchase price over the bonds or other indebtedness, places property in trust or sets issuing price plus any amount of discount already deducted aside certain-amounts in a sinking fund under the control (or over the face value minus any amount of discount not FEDERAL REGISTER, November 14y 1936 2109 yet deducted) is a deductible expense for the taxable year, tax on income under the provisions of any Act of Congress (c) If, however, the corporation purchases any of such bonds not inconsistent with or repealed by the Act; (3) the income at a price less than the issuing price plus any amount of exempted under the provisions of section 116. Since the discount already deducted, the excess of the issuing price, tax Is imposed on net income, the exemption referred to plus any amount of discount already deducted (or of the above is not to be confused with the deductions allowed by face value minus any amount of discount not yet deducted), section 23 and other provisions of the Act to be made from over the purchase price is gain or income for the taxable gross income in computing net income. As to other items year. not to be included in gross income, see sections 112 and 119 (4 ) (a ) If bonds were issued by a corporation prior to and Supplements G, H, I, and J. March 1, 1913, at a premium, the net amount of such pre [Sec. 22. Gross Income.] mium was gain or incomé for the year in which the bonds [ (b) Exclusions from gross income,—The following items shall were issued and should not be prorated or amortized over not be included in gross income and shall be exempt from taxa the life of the bonds, (b) If the corporation purchases any tion under this title:] of such bonds at a price in excess of the face value of the (1) Life insurance.— Amounts received under a life insurance bonds, the excess of the purchase price over the face value contract paid by reason of the death of the insured, whether in a single sum or otherwise fbtrt if such amounts are held by the is a deductible expense for the taxable year, (c) If, however, insurer under an agreement to pay interest thereon, the interest the corporation purchases any of such bonds at a price less payments shall be Included in gross incom e); than the face value, the excess of the face value over the A r t. 22 (b) (1)-L Life insurance■—Amounts paid by reason purchase price is gain or income for the taxable year. of the death of the insured.—The proceeds of life insurance A r t . 22 (a )-19. Sale of capital assets by corporation.— I f policies, paid by reason of the death of an insured to his property is acquired and later sold for an amount in excess estate or to any beneficiary (individual, partnership, or cor of the cost or other basis, the gain on the sale is income. poration, but not a transferee for valuable consideration), If, then, a corporation sells its capital assets in whole or in directly or in trust, are excluded from the gross income of the part, it shall include in its gross income for the year in beneficiary. While it is immaterial whether the proceeds of which the sale was made the gain from such sale, computed a life insurance policy payable upon the death of the insured as provided in sections 111-113. If the purchaser takes over are paid to the beneficiary in a single sum or in installments, all the assets and assumes the liabilities, the amount so only the amount paid solely by reason of the death of the assumed is part of the selling price. insured is exempted. The amount exempted is the amount A r t . 22 (a )-2 0 . Income.to lessor corporation from leased payable had the insured or the beneficiary not elected to property.—If a corporation has leased its property in con exercise an option to receive the proceeds of the policy or sideration that the lessee shall pay in lieu of other rental any part thereof at a later date or dates. If the policy pro an amount equivalent to a certain rate of dividend on the vides no option for payment upon the death of the insured, lessor’s capital stock or the interest on the lessor’s outstand or provides only for payments in installments, there is ex ing indebtedness, together with taxes, insurance, or other empted only the amount which the insurance company fixed charges, such payments shall be considered rental pay would have paid immediately after the death of the insured ments and shall be returned by the lessor corporation as in had the policy not provided for payment at a later date or come, notwithstanding the fact that the dividends a-nri dates. Any increment thereto is taxable. In any mode of interest are paid by the lessee directly to the shareholders settlement the portion of each distribution which is to be and bondholders of the lessor. The fact that a corporation so included In grass income shall be determined as follows: has conveyed or let its property and has parted with its (a ) Proceeds held by the insurer.—If the proceeds are held management and control, or has ceased to engage in the by the insurer under an agreement (whether with the insured business for which it was originally organized, will not relieve or with a beneficiary) to distribute either the increment to it from liability to the tax. While the payments made by such proceeds currently, or the proceeds and increment in the lessee directly to the bondholders or shareholders of equal installments until both are exhausted, there shall be the lessor are rentals as to both the lessee and lessor (rentals included in gross income, the increment so paid to the bene paid in one case and rentals received in the other), to the ficiary, or so credited to the fund in each year by the insurer. bondholders and the shareholders such amounts are interest (b ) Proceeds payable in installments for a fixed number of and dividend payments received as from the lessor and years.—If the proceeds are payable in installments for a as such shall be accounted for in their returns. fixed number of years, the amount that would have been A r t. 22 (a)-21. Gross income of corporation in liquida payable by the insurance company immediately upon the tion .—When a corporation is dissolved, its affairs are usually death of the insured (if payment at a later date had not wound up by a receiver or trustees in dissolution. The cor been provided for) is to be divided by the total number of porate existence is continued for the purpose of liquidating installments payable over the fixed number of years for the assets and paying the debts, and such receiver or trustees which payment is to be made, and the quotient represents the stand in the stead of the corporation for such purposes. portion of each installment to be excluded from gross income. (See sections 274 and 298.) Any sales of property by them The amount of each installment in excess of such excluded are to be treated as if made by the corporation for the pur portion is to be included in gross income. For example, if, pose of ascertaining the gain or loss. No gain or loss is at the insured’s death, $1,000 would have been payable in a realized by a corporation from the mere distribution of its single installment, but 10 equal annual payments are made assets in kind in partial or complete liquidation, however in lieu thereof, the portion of the installment received during they may have appreciated or depreciated in value since any taxable year to be excluded from gross income is $100 their acquisition. But see section 44 (d) and article 44-5. ($1,000 divided by 10). Any amount received as an install (See further article 52-2.) ment in excess of $100 is to be included in gross income. [Sec. 22. Gross Income.] (c ) Proceeds payable in installments during the life of the (b) Exclusions from gross income .—The ioUowlng items Rha.il beneficiary.—If the proceeds are payable in installments dur not be included in gross income and shall be exempt from taxa ing the life of the beneficiary the amount of each installment tion under this title : that is to be included in gross income will be determined as A r t . 22 (b )—1. Exemptions—Exclusions from gross in in paragraph (b) of this article, except that the number come.—Certain items of income specified in section 22 (b) of years to be used in the specified computation will be de are exempt from tax and may be excluded from gross in termined by the life expectancy of the beneficiary, as cal come. These items, however, are exempt only to the extent culated by the table of mortality used by the particular and in the amount specified. No other items are exempt insurance company in determining the amount of the from gross income except (1) those items of income which annuity. are, under' the Constitution, not taxable by the Federal Gov (d ) Proceeds payable for a fixed number of years and for ernment; (2) those items of income which are exempt from continued life.—If the proceeds are payable in installments No. 175----- 3 2110 FEDERAL REGISTER, November 14, 1936 for a fixed number of years and for continued life, the amount year, divided by the number of installments payable during of each installment that is to be included in gross income will such year. As soon as the aggregate of the amounts received be determined either as provided in paragraph (b) of J;his and excluded from gross income equals the aggregate pre article if the fixed number of years for which payment is to be miums or consideration paid for such annuity, the entire made exceeds the life expectancy of the beneficiary, as calcu amount received thereafter in each taxable year must be in lated by the table of mortality used by the particular insur cluded in gross income. Thè provisions of this article may ance company in determining the amount of the annuity; or, be illustrated by the following examples; as provided in paragraph (c) of this article if such life Exam ple ( I ) . — A bought in 1933, fo r $50,000 consideration, expectancy exceeds the specified fixed period. a life annuity, payable in annual installments of $5,000. For If a mode of settlement has been in effect prior to the first the calendar year 1936 he would be required to include in taxable year which begins after December 31, 1933 (or after gross income $1,500 o f the $5,000 received during th at year December 31, 1935, in the case of a mode of settlement de (3 percent of $50,000), $3,500 being exempt. If A should scribed in paragraph (d) of this article), the entire amount live long enough to receive as exem pt $50,000, then all received and excluded from gross income in such prior years amounts he receives thereafter under the annuity contract shall be deducted from the proceeds payable upon the death would be included in gross income. of the insured; the remainder shall be divided by the number Exam ple (2) ;—A bought an annuity on November 1, 1936, of installments unpaid at the beginning of such taxable year paying $96,000 as consideration therefor. The annuity (whether over the remaining portion of the fixed period or amounts to $12,000 a year, payable in monthly installments over the life expectancy as of that date, depending on the o f $1,000, and on December 1, 1936, A received the first mode of settlement adopted); and that quotient shall be the installment. A shall include in his gross income for the excludible portion of each installment. As soon as the aggre calendar year 1936 the sum of $240, being 3 percent of gate of the amounts received and excluded from gross income $96,000 (the consideration paid), divided by 12 (the number under the methods of computation provided for in this article o f installments payable over a period of 12 months). equals the amount of the proceeds payable upon the death of [Sec. 22. Gross Income.] the insured, the entire amount received thereafter in each [(b ) Exclusions from gross income.—The foUowing items shall taxable year must be included in gross income. not be included in gross income and shall be exempt from taxation under this title:] [Ssc. 22. Gross Income .] [(b ) Exclusions from gross income .—The following items shall not (3) Gifts, bequests, and devises.—The value of property ac be included in gross income and shall be exempt from taxation un quired by gift, bequest, devise, or inheritance (but the income der this title:] from such property shall be included in gross income); (2) Annuities, etc .—Amounts received (other than amounts A r t . 22 (b) (3)—1. Gifts and bequests.—Property received paid by reason of the death of the insured and interest payments as a gift, or received under a will, or under statutes of on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such descent and distribution, is exempt from the income tax, al amounts (when added to amounts received before the taxable though the income therefrom derived from investment, sale, year under such contract) exceed the aggregate premiums or con or otherwise is not. An amount of principal paid under a sideration paid (whether or not paid during the taxable year) marriage settlement is a gift. Neither alimony nor an allow then the excess shall be included in gross income. Amounts received as an annuity under an annuity or endowment contract ance based on a separation agreement is taxable income. shall be included in gross income; except that there shall be (See article 24-1.) excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the [Sec. 22. Gross In c o m e .] aggregate premiums or consideration paid for such annuity [ (b ) Exclusions from gross income.—The foUowing Items shaU (whether o mot paid during such year), until the aggregate not be included in gross income and shall be exempt from taxation amount excluded from gross income under this title or prior under this title:] income tax laws in respect of such annuity equals the aggregate (4) Tax-free interest.—Interest upon (A) the obligations of premiums or consideration paid for such annuity. In the case a State, Territory, or any political subdivision thereof, or the of a transfer for a valuable consideration, by assignment or other District of Columbia; or (B) obligations of a corporation organ wise, of a life insurance, endowment, or annuity contract, or any ized under Act of Congress, if such corporation is an instru interest therein, only the actual value of such consideration and mentality of the United States; or (C) the obligations of the the amount of the premiums and other sums subsequently paid United States or its possessions. Every person owning any of by the transferee shall be exempt fro mtaxation under paragraph the obUgations enumerated in clause (A ), (B ), or (C ), shall, in (1) or this paragraph; the return required by this title, submit a statement showing the number and amount of such obligations owned by him and the A r t . 22 (b ) (2 ) —1. Life insurance—Endowment contracts— income received therefrom, in such form and with such informa Amounts paid other than by reason of the death of the in tion as the Commissioner may require. In the case of obligations sured.—Amounts received under a life insurance or endow of the United States issued after September 1, 1917 (other than ment policy (other than amounts paid by reason of the postal savings certificates of deposit) and in the case of obliga tions of a corporation! organized under Act of Congress, the death of the insured, interest payments on such amounts, interest shaU be exempt only if and to the extent provided -in the and amounts received as annuities) are not taxable until respective Acts authorizing the issue thereof as amended and the aggregate of the amounts so received (when added to supplemented, and shall be excluded from gross income only if the amounts received before the taxable year under such and to the extent it is whoUy exempt from the taxes imposed by this title; i policy) exceeds the aggregate premiums or consideration paid, whether or not paid during the taxable year. A r t . 22 (b) (4)-l. Interest upon State obligations.— In te r A r t . 22 (b) (2)-2. A nnuities.—Amounts received as an est upon the obligations of a State, Territory, or any political annuity under an annuity or endowment contract include subdivision thereof, or the District of Columbia is exempt amounts received in periodical installments, whether an from the income tax. Obligations issued by or on behalf of nually, semiannually, quarterly, monthly, or otherwise, and the State or Territory or a duly organized political sub whether for a fixed period, such as a term of years, or for division acting by constituted authorities empowered to issue an indefinite period, such as for life, or for life and a guar such obligations, are the obligations of a State or Territory anteed fixed period, and which installments are payable or or a political subdivision thereof. Special tax bills issued may be payable over a period longer than one year. If for special benefits to property, if such tax bills are legally an annuity is payable in annual installments, there shall be collectible only from owners of the property benefited, are included in gross income only such portion of the amounts not the obligations of a State, Territory, or political sub received in any taxable year as is equal to 3 percent of the division. The term “political subdivision”, within the mean aggregate premiums or consideration paid for such annuity, ing of the exemption, denotes any division of the State or whether or not paid during such year. If an annuity is pay Territory which is a municipal corporation, or to which has able in two or more installments over each 12-month period, been delegated the right to exercise part of the sovereign such portion of each installment shall be taxable as is equal power of the State or Territory. As thus defined, a political to 3 percent of the aggregate premiums or consideration paid subdivision of a State or Territory may, for the purpose of for such annuity, whether or not paid during the taxable exemption, include special assessment districts so created. FEDERAL REGISTER, November 14* 1926 2111 such as road, water, sewer, gas, light, reclamation, drainage, Treasury bonds are entitled to a limited exemption from irrigation, levee, school, harbor, port improvement, and simi surtaxes imposed by the United States. Interest on an aggre lar districts and divisions of a State or Territory. gate of not exceeding $5,000 principal amount of these obliga A rt. 22 (b ) (4 )—2. Dividends and interest from Federal tions is exempt from the surtax» imposed by the Act. land banks, Federal intermediate credit banks, national Interest in excess of the interest on an aggregate of not farm-loan associations, banks for cooperatives, and produc exceeding $5,000 principal amount of such obligations is sub tion credit corporations and associations.— Section 26 o f the ject to surtax and must be included in gross income. Federal Farm Loan Act of July 17, 1916 (39 State, 360) , as Interest credited to postal savings accounts upon moneys amended by an Act approved March 4, 1923 (42 Stat. 1454), deposited in postal savings banks is wholly exempt from provides that Federal land banks, Federal intermediate income tax. credit banks, and national farm-loan associations, including A rt. 22 (b) (4)-5. Treasury bond exemption in the case of the capital and reserve or surplus therein and the income trusts or partnerships<—(a) When the income of a trust is derived therefrom, shall be exempt from taxation, except taxable to beneficiaries, as in the case of a trust the income of taxes upon real estate, and that first mortgages executed to which is to be distributed to the benefician» currently, each Federal land banks, Federal intermediate credit banks, or beneficiary is entitled to exemption as if he owned directly a to joint stock land banks, and farm-loan bonds, and deben proportionate part of the Treasury bonds held in trust. When, tures issued by intermediate credit banks, with the income oh the other hand, income is taxahle to the trustee, as in the therefrom, shall be exempt from taxation. Accordingly, the case of a trust the income of which is accumulated for the income derived from dividends on stock of Federal land benefit of unborn or unascertained persons, the trust, as the banks, Federal intermediate credit banks, and national owner of the bonds held in trust, is entitled to the exemption farm-loan associations and from interest an promissory n o t» on account of such ownership. secured by such first mortgages, or from such farm-loan (Z>) As the income of a partnership is taxable to the indi bonds or debentures, is not subject to the income tax. How vidual partners, each partner is entitled to exemption as if he ever, dividends on the stock of the central bank for coopera owned directly a proportionate part of the bonds held by the tives, the production credit corporations, production credit partnership. associations, and banks fpr cooperatives, organized under the A r t . 22 (b) (4) -6. Interest upon United States obligations provisions of the Farm Credit Act of 1933, constitute income in the case of nonresident aliens and certain foreign organ to the recipients, subject to both normal tax and surtax. izations.—By virtue of section 4 of the Victory Liberty Loan A r t. 22 (b) (4)-3. Dividends from Federal reserve banks.— A c t o f M arch 3, 1919, am ending section 3 o f th e Fourth Section 7 of the Federal Reserve Act of December 23, 1913, Liberty Bond Act of July 9,1918, the interest received on and provides that Federal reserve banks, including the capital after March 3, 1919, on bonds, notes, and certificates of in stock and surplus therein and the income derived therefrom, debtedness of the United States while beneficially owned by a shall be exempt from taxation, except ta x » upon real estate. nonresident alien individual, or a foreign corporation, part This exemption attach» to and follows the income derived nership, or association, not engaged in business in the United from dividends on stock of Federal reserve hanks in the States, is exempt from income taxes. hands of the shareholders, so that the dividends received on [Sec. 22. Gross Incom e.] the stock of Federal reserve banks are not subject to the [(b ) Exclusions from gross income.—The following items «hail income tax. Dividends paid by member banks, however, are not be included in gross income and shan he exempt from taxation treated like dividends of ordinary corporations. under this title:] A rt. 22 (b ) ( 4 ) —4. Interest upon United States obliga (5) Compensation for injuries or sickness.—Amounts received, tio n s.—Although interest upon the obligations of the United through, accident or health insurance or under workm en’s com pensation acts, as compensation fear personal Injuries or sickness, States and its possessions and upon obligations of a cor plus the amount of any damages received whether by suit or poration organized under Act of Congress, if such corpora agreement on account of such injuries or sickness; tion is an instrumentality of the United States, is generally (6) M in is te rs .—The rental value of a dwelling house and ap purtenances thereof furnished, to a minister of the gospel as part exempt from tax, in the case of obligations issued by the of his compensation; United States after September 1, 1917, which include Treas (7) Income exempt under treaty.—Income of any kind, to the ury certificates of indebtedness, Treasury bonds, and Treas extent required by any treaty obligation of the United States; ury notes, and in the case of obligations of a corporation (8) Miscellaneous items.—The following items, to the extent provided in section 116: organized under Act of Congress, the interest is exempt from tax only if and to the extent provided in the Acts authoriz Earned Income from sources without the United States; Salaries of certain Territorial employees; ing the issue thereof, as amended and supplemented. The Income of foreign governments; Every person owning any of the obligations enumerated Income of States, municipalities, and other political sub In clause (A ), CB), or (C) of paragraph (4) of subsection divisions; Receipts of shipowners* mutual protection and indemnity 22 (b) shall submit in his income tax return a statement associations; showing the number and amount of such obligations owned Dividends from China Trade Act corporations; and the income received therefrom. For the purpose of Compensation of employees of foreign governments. such statement, in the case of Treasury bills issued after (Sec. 22. Gross Income .] June 17, 1930, (1) the “amount of such obligations” is their (c ) Inventories.—Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine par (maturity) value and (2) the “income received there the income of any taxpayer, Inventories shan be taken by such from” is the net excess of the amount realized during the taxpayer upon such basis as the Commissioner, with the approval taxable year from the sale or other disposition of the bills of the Secretary, may prescribe as conforming as nearly as may be over the cost or other basis thereof, a separate computation to the best accounting practice in the trade or business ariH as of discount being unnecessary. fhost clearly reflecting the income. The interest on Treasury certificates of indebtedness is A r t . 22 ( c ) —1. Need of inventories.—In order to reflect the entirely exempt from Federal income ta x». Interest upon net income correctly, inventan» at the beginning and end Treasury notes is exempt only to the extent provided in the of each taxable year are necessary in every case in which terms of the issue. Interest (discount at which issued) on the production, purchase, or sale of merchandise is an in Treasury bills and any gain from the sale or other disposi come-producing factor. The inventory should include all tion of such bills are also entirely exempt from Federal in finished or partly finished goods and, in the case of raw mate come tax». With respect to the nondeductibility of loss» rials and supplies, only those which have been acquired from the sale or other disposition of such bills, see article for sale or which will physically become a part of merchan 23 ( e ) - l . dise intended for sale. Merchandise should be included in The interest on Treasury bonds is exempt from Federal the inventory only if title thereto is v»ted in the taxpayer. income taxes except surtax» imposed upon the income or Accordingly, the seller should include in his inventory goods profits o f individuals, partnerships, a-ssnciatinriK, o r corpora under contract for sale but not yet segregated and applied tions. to the contract and goods out upon consignment, but should 2112 FEDERAL REGISTER, November 14, 1936 exclude from inventory goods sold, title to which has passed of the accounting records of the taxpayer. The inventories of to the purchaser. A purchaser should include in Inventory taxpayers on whatever basis taken will be subject to investi merchandise purchased, title to which has passed to him, gation by the Commissioner, and the taxpayer must satisfy! although such merchandise is in transit or for other reasons the Commissioner of the correctness of the prices adopted, has not been reduced to physical possession, but should not The following methods, among others, are sometimes used include goods order«! for future delivery, transfer of title in taking or valuing inventories, but are not in accord with to which has not yet been effected. these regulations, viz: A r t . 22 (c )- 2 . Valuation of inventories,—Section. 22 Cc) (1) Deducting from the inventory a reserve for price provides two tests to which each inventory must conform: changes, or an estimated depreciation in the value thereof. (1) It must conform as nearly as may be to the best ac (2) Taking work in process, or other parts of the inventory, counting practice in the trade or business, and at a nominal price or at less than its proper value. (2) It must clearly reflect the income. (3) Omitting portions of the stock on hand. It follows, therefore, that inventory rules can not be uni (4) Using a constant price or nominal value for so-called form but must give effect to trade customs which come within normal quantity of materials or goods in stock. the scope of the best accounting practice in the particular (5) Including stock in transit, either shipped to or from trade or business. In order clearly to reflect income, the the taxpayer, the title to which is not vested in the taxpayer. inventory practice of a taxpayer should be consistent from A r t . 22 (c )—3. Inventories o f cost.—Cost means: year to year, and greater weight is to be given to consistency (1) In the case of merchandise on hand at the beginning of than to any particular method of inventorying or basis Of the taxable year, the inventory price of such goods. valuation so long as the method or basis used is substantially (2) In the case of merchandise purchased since the begin in accord with these regulations. An inventory that can be ning of the taxable year, the invoice price less trade or other used under the best accounting practice in a balance sheet discounts, except strictly cash discounts approximating a fa ir showing the financial position of the taxpayer can, as a interest rate, which may be deducted or not at the option of general rule, be regarded as clearly reflecting his income. the taxpayer, provided a consistent course is followed. To The bases of valuation most commonly used by business this net invoice price should be added transportation or other concerns and which meet the requirements of section 22 (c) necessary charges incurred in acquiring possesion of the are (a) cost and (b) cast or market, whichever is lower. goods. (For inventories by dealers in securities, see article 22 (c )—5.) (3) In the case of merchandise produced by the taxpayer Any goods in an inventory which are unsalable at normal since the beginning of the taxable year, (a) the cost of raw: prices or unusable in the normal way because of damage, materials and supplies entering into or consumed in connec imperfections, shop wear, changes of style, odd or broken tion with the product, (b) expenditures for direct labor, (c) lots, or other similar causes, including second-hand goods indirect expenses incident to and necessary for the produc taken in exchange, should be valued at bona fide selling tion of the particular article, including in such indirect ex prices less direct cost erf disposition, whether basis (a) or (b) penses a reasonable proportion of management expenses, but is used, or if such goods consist of raw materials or partly not including any cost of selling or return on capital, whether finished goods held for use or consumption, they shall be by way of interest or profit. valued upon a reasonable basis, taking into consideration the (4) In any industry in which the usual rules for computa usability and the condition of the goods, but in no case shall tion of cost o f' production are inapplicable, costs may be such value be less than the scrap value. Bona fide selling approximated upon such basis as may be reasonable and in price means actual offering of goods during a period ending conformity with established trade practice in the particular not later than 30 days after inventory date. The burden of industry. Among such cases are (a) farmers and raisers of proof will rest upon the taxpayer to show that such excep live stock (see article 22 (c)—6), (b) miners and manufac tional goods as are valued upon such selling basis come within turers who by a single process or u n iform series of processes the classifications indicated above, and he shall ma.int.fl.in derive a product of two or more kinds, sizes, or grades, the such records of the disposition of the goods as will enable a unit cost of which is substantially alike (see article 22 (c )-7 ), verification of the inventory to be made. and (c) retail merchants who use what is known as the In respect of normal goods, whichever basis is adopted “retail method” in ascertaining approximate cost (see article must be applied with reasonable consistency to the entire 22 ( c l - 8 ) . Inventory. Taxpayers were given an option to adopt the A r t. 22 ( c ) —4. Inventories at cost or market, whichever is basis of either (a) cost or (b) cost or market, whichever is low eri—Under ordinary circumstances and for normal goods lower, for their 1920 inventories. The basis properly adopted in an inventory, “market” means the current bid price pre for that year or any subsequent year is controlling, and a vailing at the date of the inventory for the particular mer change can now be made only after permission is secured chandise in the volume in which usually purchased by the from the Commissioner. Application for permission to taxpayer, and is applicable in the cases— change the basis of valuing inventories shall be mad*» in (a) Of goods purchased and on hand, and writing and filed with the Commissioner as provided in article (b) Of basic elements of cost (materials, labor, and bur 41-2. Goods taken in the inventory which have been so den) in goods in process of manufacture and in finished Intermingled that they can not be identified with specific goods on hand; exclusive, however, of goods on hand or in Invoices will be deemed to be the goods most recently pur process of manufacture for delivery upon firm sales con chased or produced, and the cost thereof will be the actual tracts (i. e., those hot legally subject to cancellation by cost of the goods purchased or produced during the period in either party) at fixed prices entered into before the date which the quantity of goods in the inventory has been ac of the inventory, under which the taxpayer is protected quired. Where the taxpayer maintains book inventories in against actual loss, which goods must be inventoried at cost. accordance with a sound accounting system in which the Where no open market exists or where quotations are respective inventory accounts are charged with the actual nominal, due to stagnant market conditions, the taxpayer cost of the goods purchased or produced and credited with must use such evidence of a fair market price at the date or the value of goods used, transferred, or sold, calculated upon dates nearest the inventory as may be available, such as the basis of the actual cost of the goods acquired during the specific purchases or sales by the taxpayer or others in taxable year (including the inventory at the beginning of the reasonable volume and made in good faith, or compensation year), the net value as shown by such inventory accounts will paid for cancellation of contracts for purchase commit be deemed to be the cost of the goods on hand. The balances ments. Where the taxpayer in the regular course of business shown by such book inventories should be verified by physical has offered for sale such merchandise at prices lower than Inventories at reasonable intervals and adjusted to conform the current price as above defined, the inventory may be therewith. valued at such prices less direct cost of disposition, and the Inventories should be recorded in a legible manner, properly correctness of such prices will be determined by reference computed and summarized, and should be preserved as a part to the actual sales of the taxpayer for a reasonable period FEDERAL REGISTER, November 14, 1936 2113 before and after the date of the inventory. Prices which inventory of live stock, crops, and products at the beginning vary materially from the actual prices so ascertained will of the year; provided, however— not be accepted as reflecting the market. (a) That if any live stock, grain, or other property on Where the inventory is valued upon the basis of cost or hand at the beginning of the taxable year has been pur market, whichever is lower, the market value of each article chased and the cost thereof not charged to expense, only on hand at the in v e n to r y date shall be compared with the the difference between the cost and the selling price should cost of the article, and the lower of such values shall be be reported as income for the year in which sold; feik-gn as the inventory value of the article. (b) But if the cost of such property has been charged Ar t. 22 (e>-5. *—A Inventories dealers in securities to expense for a previous year, the entire amount received dealer in securities who in his books of account regularly must be reported as Income fear the year in which sold. inventories unsold securities on hand either— Because of the difficulty of ascertaining actual cost of live (a) At cost; stock and other farm products, farmers who render their (b) At cost or market, whichever is lower; cor returns upon an inventory basis may value their inventories Cc) At market value, according to the “farm-price method”, which provides for may make his return upon the basis upon which his accounts the valuation of inventories at market price less direct cost are kept; provided that a description of the method em of disposition, n the use of the “farm-price method” of ployed shall be included in or attached to the return, that valuing inventories for any taxable year involves a change all the securities must 1» inventoried by the same method, in method of valuing inventories from that employed in and that such method must be adhered to in subsequent prior years, permission for such change shall first be secured years, unless another method be authorized by the Com from tiie Commissioner as provided in article 41-2. In such missioner pursuant to a written application therefor filed case the opening inventory for the taxable year in which with the Commissioner as provided in article 41-2. A dealer the change is made should be brought in at the same value in securities in whose books of account separate computa as the closing inventory for the preceding taxable year. If tions of the gain or loss from the sale of the various lots such valuation of the opening inventory for the taxable year of securities sold are made an the basis of the cost of each in which the change is made results in an abnormally large lot shall be regarded, for the purposes of this article, as regu income for that year, there may be submitted with the larly inventorying his securities at cost. For the purpose return for such taxable year an adjustment statement for of this rule a dealer in securities is a merchant of securities, the preceding year. This statement shall be based on the whether an individual, partnership, or corporation, with an “farm-price method” of valuing inventories, upon the established place of business, regularly engaged in the pur amount of which adjustments the tax, if any be due, shall chase of securities and their resale to customers; that is, one be assessed and paid at the rate of tax in effect for such who as a merchant buys securities and sells them to custom preceding year. If an adjustment for the preceding year ers with a view to the gains and profits that may be derived is not, in the opinion of the Commissioner, sufficient clearly therefrom. If such business is simply a branch of the ac to reflect income, adjustment sheets for prior years may be tivities carried on by such person, the securities inventoried accepted or required. as here provided may include only those held for purposes If returns have been made in which the taxable net income of resale and not for investment. Taxpayers who buy and has been computed upon incomplete inventories, the abnor sell or hold securities for investment or speculation, irre mality should be corrected by submitting with the return for spective of whether such buying or selling constitutes the the current taxable year a statement for the preceding year. carrying on of a trade or business, and officers of corpora In this statement such adjustments shall be made as are nec tions and members of partnerships who in their individual essary to bring tire closing inventory for the preceding year capacities buy and sell securities, are not dealers in securities into agreement with the opening complete inventory for the within the meaning of this rule. current taxable year. If necessary clearly to reflect income, A r t. 22 ( c ) —6. Inventories of live stock raisers and other similar adjustments may be made as at the beginning of the farm ers<—Farmers may change the basis of their returns from preceding year or years, and the tax, if any be due, shall be that, of receipts and disbursements to that of an inventory «yggpssAri and paid at the rate of tax in effect for such year or basis provided adjustments are m yte in accordance with one years. of the two methods outlined in Cl) and (2) below. It is A r t . 22 ( c ) —7. Inventories of miners and manufacturers.— optional with the taxpayer which method is used, but, having A taxpayer engaged in mining or m anufacturing who by a sin elected one method, the option so exercised will be binding gle process or uniform series of processes derives a product of upon the taxpayer, and he will be precluded from filing two or more kinds, sizes, o r grades, the unit cost of which is amended returns upon the baas of the other method. substantially alike, and who in conformity to a recognized CD Opening and closing inventories shall be used for the trade practice allocates an amount of cost to each kind, size, year in which the c.hangp is made. There should be included or grade of product, which in the aggregate will absorb the in the opening inventory all farm products (including live total cost of production, may, with the consent of the Com stock) purchased or raised which were on hand at the date missioner, use such allocated cost as a basis for pricing in of the inventory, and there must be submitted with the return ventories, provided such allocation bears a reasonable relation for the current taxable year an adjustment sheet for the to the respective selling values of the different kinds ’of preceding taxable year based on the inventory method, upon product. the amount of which adjustment the tax shall be assessed and A r t . 22 ( c ) —8. Inventories of retail merchants.— Retail mer paid (if any be due) at the rate of tax in effect for that year. chants who employ what is known as the “retail method” of Ordinarily an adjustment sheet for the preceding year will be pricing inventories may make their returns upon that basis, sufficient, but if, in the opinion of the Commissioner, such provided (1) that the use of such method is designated upon adjustment is not sufficient clearly to reflect income, adjust the return, (2) that accurate accounts are kept, and (3) that ments for earlier years may be accepted or required. If it is such method is consistently adhered to unless a change is impossible to render complete inventories for the preceding authorized by the Commissioner as provided in article 41-2. year or years, the Commissioner will accept estimates which, Under this method the total of the retail selling prices of the in his opinion, substantially reflect the income on the inven goods on hand at the end of the year in each department or tory basis for such preceding year or years; but inventories of each class of goods is reduced to approximate cost by must not include real estate, buildings, permanent improve deducting therefrom an amount which bears the same ratio ments, or any other assets subject to depreciation. to such total as— (2) No adjustment sheets will be required, but the net income for the taxable year in which the change is made (a) the total of the retail selling prices of the goods must be computed without deducting from the sum of the included in the opening inventory plus the retail selling closing inventory and the sales and other receipts, the prices of the goods purchased during the year, with proper 2114 FEDERAL REGISTER, November 14, 1936 adjustment to such selling prices for all mark-ups and (a) If, then, an individual, whose business requires him mark-downs, to travel, receives a salary as full compensation for his serv ices, without reimbursement for traveling expenses, or is less employed on a commission basis with no expense allowance, (b) the cost of the goods included in the opening invenhis traveling expenses, including the entire amount expended tory plus the cost of the goods purchased during the year, for meals and lodging, are deductible from gross income. (b) if an individual receives a salary and is also repaid his bears to (a). actual traveling expenses, he shall include in gross income This amount should represent as accurately as may be the the amount so repaid and may deduct such expenses. amounts added to the cost price of the goods to cover selling (c) If an individual receives a salary and also an allow and other expenses of doing business and for the margin of ance for meals and lodging, as, for example, a per diem al profit. lowance in lieu of subsistence, the amount of the allowance A taxpayer maintaining more than one department in his should be included in gross income and the cost of such store or dealing in classes of goods carrying different percent meals and lodging may be deducted therefrom. ages of gross profit should not use a percentage of profit A payment for the use of a sample room at a hotel for the based upon an average of his entire business, but should com display of goods is a business expense. Only such expenses pute and use in valuing his inventory the proper percentages as are reasonable and necessary in the conduct of the busi for the respective departments or classes of goods. ness and directly attributable to it may be deducted. A [Sec. 22. Gross Income.] taxpayer claiming the benefit of the deductions referred to (d.) Distributions by corporations .—Distributions by corporations herein must attach to his return a statement showing (1) shall be taxable to the shareholders as provided in section 115. the nature of the business in which engaged; (2) the num (e) Determination of gain or loss.—In the case of a sale or other disposition of property, the gain or loss shaU be computed as pro ber of days away from home during the taxable year on vided in section 111. ■ „ , account of business; (3) the total amount of expenses inci (f) Gross income from sources within and without united dent to m^a-ls and lodging while absent from home on busi S ta tes.—For computation of gross income from sources within and ness during the taxable year; and (4) the total amount of without the United States, see section 119. other expenses incident to travel and claimed as a deduction. CHAPTER IV Claim for the deductions referred to herein must be sub stantiated, when required by the Commissioner, by evidence Deductions From Gross Income showing in detail the amount and nature of the expenses Sec. 23. Deductions From Gross Income .—In computing net in incurred. come there shall be allowed as deductions: Commuters’ fares are not considered as business expenses (a) Expenses.—All the ordinary and necessary expenses paid orand are not deductible. incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other A r t . 23 ( a ) -3. Cost of materials.—Taxpayers carrying ma compensation for personal services actually rendered: traveling terials and supplies on hand should include in expenses the expenses (including the entire amount expended for meals and charges for materials and supplies only to the amount that lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as they are actually consumed and used in operation during a condition to the continued use or possession, for purposes of the year for which the return is made, provided that the the trade or business, of property to which the taxpayer has not cost of such materials and supplies has not been deducted in taken or is not taking title or in which he has no equity. determining the net income for any previous year. If a tax A r t . 23 ( a ) - l . Business expenses.—Business expenses de payer carries incidental materials or supplies on hand for ductible from gross income include the ordinary and neces which no record of consumption is kept or of which physical sary expenditures directly connected with or pertaining to inventories at the beginning and end of the year are not the taxpayer’s trade or business, except the classes of items taken, it will be permissible for the taxpayer to include in his which are deductible under the provisions of articles 23 expenses and deduct from gross income the total cost of (b )-l to 23 (q )-l. Double deductions are not permitted. such supplies and materials as were purchased during the Amounts deducted under one provision of the Act can not year for which the return is made, provided the net income again be deducted under any other provision of the Act. ! is clearly reflected by this method. The cost of goods purchased for resale, with proper adjust A r t . 23 ( a ) -4. R epairs.—<*The cost of incidental repairs ment for opening and closing inventories, is deducted from which neither materially add to the value of the property nor gross sales in computing gross income. (See article 22 appreciably prolong its life, but keep it in an ordinarily effi (a )-5.) Among the items included in business expenses are cient operating condition, may be deducted as expense, management expenses, commissions, labor, supplies, inci provided the plant or property account is not increased by dental repairs, operating expenses of automobiles used in the amount of such expenditures. Repairs in the nature of the trade or business, traveling expenses while away from replacements, to the extent that they arrest deterioration home solely in the pursuit of a trade or business (see article pr>H appreciably prolong the life of the property, should be 23 (a )-2), advertising and other selling expenses, together charged against the depreciation reserve if such account is with insurance premiums against fire, storm, theft, accident, kept. (£*ee articles 23 (1) —1 to 23 (1) —10.) or other similar losses in the case of a business, and rental A r t . 23 ( a ) -5. Professional expenses.—A professional man for the use of business property. Penalty payments with re may claim as deductions the cost of supplies used by him in spect to Federal taxes, whether on account of negligence, the practice of his profession, expenses paid in the operation delinquency, or fraud, are not deductible from gross income. and repaii* of an automobile used in making professional calls, The full amount of the allowable deduction for ordinary and dues to professional societies and subscriptions to professional necessary expenses in carrying on a business is nevertheless journals, the rent paid for office rooms, the cost of the fuel, deductible, even though such expenses exceed the gross in light, water, telephone, etc., used in such offices, and the hire come derived during the taxable year from such business. of office assistants. Amounts currently expended for books, As to items not deductible under any provision of section furniture, and professional instruments and equipment, the 23, see section 24. useful life of which is short, may be deducted. As to items A r t . 23 ( a ) -2. Traveling expenses.—Traveling expenses, as not deductible, see section 24. A r t . 23 ( a ) -6 . .— ordinarily understood, include railroad fares and meals and Compensation for personal services lodging. If the trip is undertaken for other than business Among the ordinary and necessary expenses paid or incurred purposes, the railroad fares are personal expenses and the in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for meals and lodging are living expenses. If the trip is solely on business, the reasonable and necessary traveling expenses, personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are including railroad fares, meals, and lodging, are business reasonable and are in fact payments purely for services. expenses. FEDERAL REGISTER, November U , 1936 2115 This test and its practical application may be further stated sum amounts paid or accrued as compensation for injuries, and illustrated as follows: are proper deductions as ordinary and necessary expenses. (1) Any amount paid in the form of compensation, but Such deductions are limited to the amount not compensated not in fact as the purchase price of services, is not deductible, for by insurance or otherwise. When the amount of the (a) An ostensible salary paid by a corporation may be a dis salary of an officer or employee is paid for a limited period tribution of a dividend on stock. This is likely to occur in after his death to his widow or heirs, in recognition of the the case of a corporation having few shareholders, practically services rendered by the individual, such payments may be all of whom draw salaries. If in such a case the salaries are deducted. As to deductions for payments to employees’ pen in excess of those ordinarily paid for similar services, and sion trusts, see section 23 (p ). the excessive payments correspond or bear a close relation A r t . 23 (a )-10. Rentals.— If a leasehold is acquired for ship to the stock holdings of the officers or employees, it business purposes for a specified sum, the purchaser may would seem likely that the salaries are not paid wholly for take as a deduction in his return an aliquot part of such services rendered, but that the excessive payments are a dis sum each year, based on the number of years the lease has tribution of earnings upon the stock, (b) An ostensible to run. Taxes paid by a tenant to or for a landlord for salary may be in part payment for property. This may business property are additional rent and constitute a de occur, for example, where a partnership sells out to a cor ductible item to the tenant and taxable income to the land poration, the former partners agreeing to continue in the lord, the amount of the tax being deductible by the latter. service of the corporation. In such a case it may be found The cost borne by a lessee in erecting buildings or making that the salaries of the former partners are not merely for permanent improvements on ground of which he is lessee is services, but in part constitute payment for the transfer of held to be a capital investment and not deductible as a busi their business. ness expense. In order to return to such taxpayer his in (2) The form or method of fixing compensation is not vestment of capital, an annual deduction may be made from decisive as to deductibility. While any form of contingent gross income of an amount equal to the total cost of such compensation invites scrutiny as a possible distribution of improvements divided by the number of years remaining of earnings of the enterprise, it does not follow that payments the term of lease, and such deduction shall be in lieu of a on a contingent basis are to be treated fundamentally on any deduction for depreciation. If the remainder of the term basis different from that applying to compensation at a flat of lease is greater than the probable life of the buildings rate. Generally speaking, if contingent compensation is paid erected, or of the improvements made, this deduction shall pursuant to a free bargain between the employer and thé take the form of an allowance for depreciation. (See article individual made before the services are rendered, not influ 22 (a )-13.) enced by any consideration on the part of the employer other A r t . 23 (a )-11. Expenses of farmers.—A farmer who oper than that of securing on fair and advantageous terms the ates a farm for profit is entitled to deduct from gross services of the individual, it should be allowed as a deduction income as necessary expenses all amounts actually expended even though in the actual working out of the contract it may in the carrying on of the business of farming. The cost prove to be greater than the amount which would ordinarily of ordinary tools of short life or small cost’, such as hand be paid. tools, including shovels, rakes, etc., may be deducted. The (3) In any event the allowance for the compensation paid cost of feeding and raising live stock may be treated as an may not exceed what is reasonable under all the circum expense deduction, in so fax as such cost represents actual stances. It is in general just to assume that reasonable and outlay, but not including the value of farm produce grown true compensation is only such amount as would ordinarily upon the farm or the labor of the taxpayer. Where a be paid for like services by like enterprises under like cir farmer is engaged in producing crops which take more than cumstances, The circumstances to be taken into considera a year from the time of planting to the process of gathering tion are those existing at the date when the contract for and disposal, expenses deducted may, with the consent of services was made, not those existing at the date when the the Commissioner (see article 41-2), be determined upon contract is questioned. the crop basis, and such deductions must be taken in the A r t. 23 (a ) -7 . Treatment of excessive compensation.— T h e year in which the gross income from the crop has been income tax liability of the recipient in respect of an amount realized. The cost of farm machinery, equipment, and farm ostensibly paid to him as compensation, but not allowed to buildings represents a capital investment and is not an be deducted as such by the payor, will depend upon the cir allowable deduction as an item of expense. Amounts ex cumstances of each case. Thus, in the case of excessive pay pended in the development of farms, orchards, and ranches ments by corporations, if such payments correspond or bear prior to the time when the productive state is reached may a close relationship to stock holdings, and are found to be a be regarded as investments of capital. Amounts expended distribution of earnings or profits, the excessive payments in purchasing work, breeding, or dairy animals are regarded will be treated as a dividend. If such payments constitute as investments of capital, and may be depreciated unless payment for property, they should be treated by the payor as such animals are included in an inventory in accordance a capital expenditure and by the recipient as part of the with article 22 (a )-7. The purchase price of an automo purchase price. In the absence of evidence to justify other bile, even when wholly used in carrying on farming opor treatment, excessive payments for salaries or other compen tions, is not deductible, but is regarded as an investment of sation for personal services will be included in gross income capital. The cost of gasoline, repairs, and upkeep of an of the recipient and subjected to both normal tax and automobile if used wholly in the business of farming is surtax. deductible as an expense; if used partly for business pur A r t . 23 ( a ) -8 . Bonuses to employees.—Bonuses to em poses and partly for the pleasure or convenience of the tax ployees will constitute allowable deductions from gross in payer or his family, such cost may be apportioned accord come when such payments are made in good faith and as ing to the extent of the use for purposes of business and additional compensation for the services actually rendered pleasure or convenience, and only the proportion of such by the employees, provided such payments, when added to the cost justly attributable to business purposes is deductible stipulated salaries, do not exceed a reasonable compensation as a necessary expense. If a farm is operated for recreation for the services rendered. It is immaterial whether such or pleasure and not on a commercial basis, and if the ex bonuses are paid in cash or in kind or partly, in cash and penses incurred in connection with the farm are in excess partly in kind. Donations made to employees and others, of the receipts therefrom, the entire receipts from the sale which do not have in them the element of compensation or of products may be ignored in rendering a return of income, are in excess of reasonable compensation for services, are and the expenses incurred, being regarded as personal not deductible from gross income. expenses, will not constitute allowable deductions. (See also A r t . 23 ( a ) -9. Pensions—Compensation for injuries.— articles 22 (a )-7, 23 (e)-5, and 23 (1) —10.) Amounts paid by a taxpayer for pensions to retired em A r t . 23 (a )-12. Depositors’ guaranty fund .—Banking cor ployees or to their families or others dependent upon them, porations which pursuant to the laws of the States in which or on account of injuries received by employees, and lump they are doing business are required to set apart, keep, and 2116 FEDERAL REGISTER, November 14, 1936 maintain in their banks the amount levied and assessed shall not exclude the allowance as a deduction of so much of such taxes as is properly allocable to maintenance or interest against them by the State authorities as a “Depositors’ guar charges. anty fund”, may deduct from their gross income the amount so set apart each year to this fund, provided that such fund, A r t. 23 ( c ) - l . Taxes.—Subject to the exceptions stated in when set aside and carried to the credit of the State banking this article and articles 23 (c)-2 and 23 (c)-3, taxes imposed board or duly authorized State officer, ceases to be an asset by the United States, any State or Territory, or political of the bank and may be withdrawn in whole or in part upon subdivision of either, possessions of the United States, or demand by such board or State officer to meet the needs of foreign countries, are deductible from gross income for the these officers in reimbursing depositors in insolvent banks, year in which paid or accrued (see section 43). Estate, and provided further that no portion of the amount thus set inheritance, legacy, succession, and gift taxes and Federal aside and credited is returnable under the laws of the State income, war-profits, and excess-profits taxes (other than, to the assets of the banking corporation. If, however, such the excess-profits tax imposed by section 106 of the Revenue amount is simply set up on the books of the bank as a re Act of 1935) are not deductible from gross income. Income, serve to meet a contingent liability and remains an asset of war-profits, and excess-profits taxes imposed by the author the bank, it will not be deductible except as it is actually ity of any foreign country or possession of the United States paid out as required by law and upon demand of the proper ate deductible from gross income in cases where the tax State officers. payer does not signify in his return his desire to have to any extent the benefits of section 131 (relating to credit for [Sec. 23. Deductions from Gross Income.] taxes of foreign countries or possessions of the United [In computing net income there shall be allowed as deductions:] (b ) Interest—All interest paid or accrued within the taxable States). See generally articles 131-1 to 131-8 as to tax year on indebtedness, except on indebtedness incurred or continued credits. Postage is not a tax. Amounts paid to States or to purchase or carry obligations (other than obligations of the Territories under secured debts laws in order to render United States issued after September 24, 1917, and originally sub securities tax exempt are deductible. Automobile license scribed for by the taxpayer) the interest upon which is whoUy ex empt, from the taxes imposed by this title. fees are ordinarily taxes. In general taxes are deductible only by the person upon whom they are imposed. As to A r t . 23 ( b ) - l . In tere st.—Interest paid or accrued within tax paid at the source on interest from tax-free covenant the year on indebtedness may be deducted from gross income, bonds, see section 143 (a) (3). except that interest on indebtedness incurred or continued A r t . 23 (c )- 2 . Federal, duties and excise taxes.—Import or to purchase or carry obligations, such as municipal bonds, tariff duties paid to the proper customs officers, and busi first Liberty loan 3 V2 percent bonds, or (in case of a taxpayer ness, license, privilege, excise, and stamp taxes paid to inter not an original subscriber) obligations of the United States nal revenue collectors, are deductible as taxes imposed by issued after September 24, 1917, the interest upon which the authority of the United States, provided they are not is wholly exempt from tax, is not deductible. Interest paid added to and made a part of the expenses of the business or or accrued within the year on indebtedness incurred or con the cost of articles of merchandise with respect to which tinued to purchase or carry (a) obligations of the United they are paid, in which case they can not be separately States issued after September 24, 1917, the interest upon deducted. (See article 23 (a )-l.) which is not wholly exempt from the taxes imposed by Title I A r t . 23 (c )- 3 . Taxes for local benefits.—So-called taxes, of the Act, or (b) (in the case of an original subscriber) obli more properly assessments, paid for local benefits, such as gations of the United States issued after September 24, 1917, street, sidewalk, and other like improvements, imposed be the interest upon which is wholly exempt from the taxes im cause of and measured by some benefit inuring directly to posed by Title I of the Act, is deductible in accordance with the property against which the assessment is levied, do not the general rule. constitute an allowable deduction from gross income. A tax Interest paid by the taxpayer on a mortgage upon real is considered assessed against local benefits when the prop estate of which he is the legal or equitable owner, even though erty subject to the tax is limited to property benefited. the taxpayer is not directly liable upon the bond or note Special assessments are not deductible, even though an inci secured by such mortgage, may be deducted as interest on dental benefit may inure to the public welfare. The real his indebtedness. Payments made for Maryland or Pennsyl property taxes deductible are those levied for the general vania ground rents are not deductible as interest but may, if public welfare by the proper taxing authorities at a like rate a proper business expense, be deducted as rent. against all property in the territory over which such authori Interest calculated for cost-keeping or other purposes on ties have jurisdiction. Assessments under the statutes of account of capital or surplus invested in the business which California relating to irrigation and of Iowa relating to does not represent a charge arising under an interest-bearing drainage, and under certain statutes of Tennessee relating obligation, is not an allowable deduction from gross income. to levees, are limited to property benefited, and if the assess .Interest paid by a corporation on scrip dividends is an allow ments are so limited, the amounts paid, thereunder are not able deduction. So-called interest on preferred stock, which deductible as taxes. The above statements are subject to the is in reality a dividend thereon, can not be deducted in com exception that in so far as assessments against local benefits puting net income. (See, however, article 22 (a)-18 and are made for the purpose of maintenance or repair or for section 121.) In the case of banks and loan or trust com the purpose of meeting interest charges with respect to such panies, interest paid within the year on deposits such as inter benefits, they are deductible. In such cases the burden is on est paid on moneys received for investment and secured by the taxpayer to show the allocation of the amounts assessed interest-bearing certificates of indebtedness issued by such to the different purposes. If the allocation can not be bank or loan or trust company may be deducted from gross made, none of the amounts so paid is deductible. income. [Sec. 23. Deductions from Gross Income.] [Sec. 23. Deductions from Gross Income.] [ In computing net income there shall he allowed as deductions: ] [In computing net income there shall be allowed as deductions:] (d ) Taxes of shareholder paid by corporation.—The deduction (c) Taxes generally.—Taxes paid or accrued within the taxable for taxes allowed by subsection (c) shaU be allowed to a corpora year, except— tion in the case of taxes imposed upon a shareholder of the cor poration upon his interest as shareholder which are paid by the (1) Federal income, war-profits, and excess-profits taxes (other corporation without reimbursement from the shareholder, but in than the excess-profits tax imposed by section 106 of the Reve such cases no deduction shaU be allowed the shareholder for the nue Act of 1935); (2) income, war-profits, and excess-profits taxes imposed by amount of such taxes. the authority of any foreign country or possession of the United A r t . 2 3 (d )-1 . Tax on bank or other stock.—Banks or States; but this deduction shall be allowed in the case of a tax payer who does not signify in his return his desire to have to other corporations paying taxes assessed against their share any extent the benefits of section 131 (relating to credit for holders on account of their ownership of the shares of stock taxes of foreign countries and possessions of the United States); issued by such corporations without reimbursement from (3) estate, inheritance, legacy, succession, and gift taxes; and such shareholders may deduct the amount of taxes so paid. (4) taxes assessed against local benefits of a kind tending to increase the value of the property assessed; but this paragraph The Act specifically provides, however, that in such cases FEDERAL REGISTER, November U , 1936 2117 the shareholders may not deduct the amount of the taxes. was sold, it was rented by the taxpayer. The fair market The amount so paid should not be included in the income value of the property at the time it was rented on January 1, of the shareholder. 1933, was $22,000, o f which $12,000 was allocable to the build ing. The building had an estimated life of 20 years on [S ec. 23. Deductions from Gross Income.] [In computing net income there shall be allowed as deductions:] January 1, 1933. The property was sold on January 1, 1936, (e) Losses by individuals «—In the case of an individuai, lossesfor $lfi,000. The loss from the sale allowable as a deduction sustained during the taxable year and not compensated for by In except as lim ited by section 117 is $4,200, computed as surance or otherwise— follow s: ( 1) if incurred in trade or business; or Cost of property In 1926______,------$25,000 (2 ) if incurred in* any transaction entered into for profit, Less depreciation, allowed (not less than amount allowable) though not connected with the trade or business; or in respect of the building (depreciation for 3 years at ( 3) of property not connected with the trade or business, if 5 percent based on $12jQ00, value of. building when con thè loss arises from fires, storms, shipwreck, or other casualty, or verted to business u se)______— 1,800 from theft. No loss »hall be allowed as a deduction under this paragraph if at the time of the filing of the return such loss has 23,200 been claimed as a deduction for estate tax purposes in the estate Selling price of property------16,000 tax return. Loss computed as provided in section 111------7,200 A r t . 23. ( e ) - l . Losses try individuals.—Losses sustained by individual citizens or residents of the United States and Value of property act time it was rented on January 1, 1933. 22,000 not compensated for by insurance or otherwise are fully Less proper adjustment for depreciation------1,800 deductible if (a) incurred in the taxpayer’s trade or busi 20,200 ness, or (b) incurred in any transaction entered into for Selling price of property------16,000 profit, or (c) arising from fires, steams, shipwreck, or other casualty, or theft, and a deduction therefor has not prior to Portion of $7,200 loss which is deductible except as limited the filing of the return been claimed for estate tax purposes by section 117------4, 200 in the estate tax return, or Cd) if not prohibited or lim Exam ple (2).—U, under the circumstances set forth in ited by any of the following sections of the Act: Section example (1), the property had been purchased at a cost 23 (g), relating to wagering losses; section 24 (a) (6), relat o f $20,000, o f which $10,000 was allocable to the building, but ing to losses from sales or exchanges of property between otherwise the facte assumed are the same, the deductible members of a family or between a corporation and its share loss, except as lim ited by section 117, is $2,500, computed as holders; section 112, relating to recognition of gain or loss follow s: Upon sales or exchanges of property; section 117, relating to Cost of property in 1926__ 1------$20,000 limitation on losses recognized by section 112 upon the sale Less depreciation allowed (not less than amount allowable) or exchange of capital asseto; section 118, relating to in respect of the building (depreciation for 3 years at 5 losses on wash sales of stock, or securities; section 251, percent based on $10,000, cost of building)------1,500 relating to income from sources within possessions of United 18, 500 States; and section 252, relating to citizens of possessions of Selling price of property______16,000 United States. See section 213 as to limitation upon losses Loss computed as provided in section 111------2, 500 sustained by nonresident aliens. Deductible loss, except as limited by section 117------2, 500 In general losses for which an amount may be deducted from gross income must be evidenced by closed and com Losses from the sale or other disposition of Treasury bills pleted transactions, fixed by identifiable events, bona fide issued after June 17, 1930, are not deductible. and actually sustained during the taxable period for which A r t . 23 (e )-2 . Voluntary removal of buildings.—Loss due allowed. Substance and not mere form will govern in deter to the voluntary removal or demolition of old buildings, the mining deductible losses. Pull consideration must be given scrawling of old machinery, equipment, etc., incident to re to any salvage value and to any insurance or other com newals and replacements, is deductible from gross income. pensation received in determining the amount of losses When a taxpayer buys real estate upon which is located a actually sustained. See section 113 (b ). building, which he proceeds to raze with a view to erecting A loss occasioned by damage to an automobile maintained thereon another building, it will be considered that the tax for pleasure, where such damage results from the faulty driv payer has sustained no deductible loss by reason of the ing of the taxpayer or other person operating the automo demolition of the old building, and no deductible expense on bile, but is not due to the willful act or negligence of the tax account of the cost of such removal, the value of the real payer, is a deductible loss in the computation of net income. estate, exclusive of old improvements, being presumably If damage to a taxpayer’s automobile results from the faulty equal to the purchase price of the land and budding plus the driving of the operator of an automobile with which the cost of removing the useless building. automobile of the taxpayer collides, the loss occasioned to the A r t . 23 (e )-3 . Loss of useful value.— When, through some taxpayer by such damage is likewise deductible. change in business conditions, the usefulness in the busi No lass is realized by the transfer of property by gift or by ness of some or all of the capital assets is suddenly termi death. But see section 44 (d ). nated, so that the taxpayer discontinues the business or dis A loss on the sale of residential property purchased or con cards such assets permanently from use in such business, structed by the taxpayer for use as his personal residence and he may claim as a loss for the year in which he takes such so used by him up to the time of the sale is not deductible. action the difference between the basis (adjusted as pro If, however, property so purchased or constructed is prior to vided in section 113 (b) and articles 113 (a) (14)— 1,113 (b )—1, its sale rented or otherwise appropriated to income-produc and 113 (b)-2) and the salvage value of the property. This ing purposes and is used for such purposes up to the time of exception to the rule requiring a sale or other disposition of its sale, a loss from the sale of the property, computed as property in order to establish a loss requires proof of some provided in section 111, is, subject to the limitations provided unforeseen cause by reason of which the property has been in section 117, an allowable deduction in an amount not to prematurely discarded, as, for example, where an increase in exceed the excess of the value of the property at the time it the cost or change in the manufacture of any product makes was appropriated to income-producing purposes (with proper it necessary to abandon such manufacture, to which special adjustment for depreciation) over the amount realized from machinery is exclusively devoted, or where new legislation the sale. directly or indirectly makes the continued profitable use of Exam ple Cl) .—Residential property was purchased by a the property impossible. This exception does not extend to taxpayer in 1926 for use as his personal residence at a cost a case whore the useful life of property terminates solely as o f $25,000, o f which $15,000 was allocable to the building. a result of those gradual processes for which depreciation H ie property was so used by the taxpayer until January 1, allowances are authorized. It does not apply to inventories 1933. Fremi that date to January 1,1936, when the property or to other than capital assets. The exception applies to No. 175— -4 2118 FEDERAL REGISTER, November 14, 1936 buildings only when they are permanently abandoned or horses, etc., is not ehtitled to claim as a loss the value of permanently devoted to a radically different use, and to animals that perish from among those animals that were machinery only when its use as such is permanently aban raised on the farm, except as such loss is reflected in an in doned. Any loss to be deductible under this exception must be ventory if used. If live stock has been purchased after Feb fully explained in the return of income. The limitations pro ruary 28, 1913, for any purpose, and afterwards dies from vided in section 117 with respect to the sale or exchange of disease, exposure, or injury, or is killed by order of the au capital assets have no application to losses due to the dis thorities of a State or the United States, the actual purchase carding of capital assets. price of such live stock, less any depreciation allowable as a If the depreciable assets of a taxpayer consist of more than deduction in respect of such perished live stock, may be de one item and depreciation, whether in respect of items or ducted as a loss if the loss is not compensated for by insur groups of items, is based upon the average lives of such assets, ance or otherwise. The actual cost of other property (with losses claimed on the normal retirement of such assets are not proper adjustment for depreciation) which is destroyed by allowable inasmuch as the use of an average rate contem order of the authorities of a State or of the United States, plates a normal retirement of assets both before and after may in like manner be claimed as a loss. If reimbursement the average life has been reached and there is, therefore, no is made by a State or the United States in whole or in part possibility of ascertaining any actual loss under such circum on account of stock killed or other property destroyed in stances until all assets contained in the group have been re respect of which a loss was claimed for a prior year, the tired. In order to account properly for such retirement the amount received shall be reported as income for the year entire cost or other basis of assets retired, adjusted for salvage, in which reimbursement is made. The cost of any feed, will be charged to the depreciation reserve account, which pasturage, or care which has been deducted as ail expense will enable the full cost or other basis of the property to be of operation shall not be included as part of the cost of the recovered. stock for the purpose of ascertaining the amount of a de In cases in which depreciable property is disposed of due to ductible loss. If gross income is ascertained by inventories, causes other than exhaustion, wear and tear, and normal no deduction can be made for livestock or products lost obsolescence, such as casualty, obsolescence other than nor during the year, whether purchased for resale or produced mal, or sale, a deduction for the difference between the basis on the farm, as such lasses will be reflected in the inventory of the property (adjusted as provided in section 113 (b) and by reducing the amount of live stock or products on hand articles 113 (a) (14)—1, 113 (b )-l, and 113 (b>-2) and its at the close of the year. If an individual owns and operates salvage value and/or amount realized upon its disposition a farm, in addition to being engaged in another trade, busi may be allowed subject to the limitations provided in the 'Act ness, or calling, and sustains a loss from such operation of upon deductions for losses, but only if it is clearly evident the farm, then the amount of loss sustained may be deducted that such disposition was not contemplated in the rate of from gross income received from all sources, provided the depreciation. farm is not operated for recreation or pleasure. As to losses In the case of classified accounts, if it is the consistent claimed as deductions for estate tax purposes, see article 23 practice of the taxpayer to base the rate of depreciation on (e )-l. See also articles 22 (a)-7, 23 (a )—11, and 23 (1)-10. the expected life of the longest lived asset contained in the [Sec. 23. Deductions from Gross Income .] account, or in the case of single item accounts if the rate [In computing net income there shall be allowed as deductions:] of depreciation is based on the maximum expected life of the (f) Losses by corporations.— In the case of a corporation, losses sustained during the taxable year and not compensated for by asset, a deduction for the basis of the asset (adjusted as insurance or otherwise. provided in section 113 (b) and articles 113 (a) (14)-1, 113 (b )-l, and 113 (b)-2) less its salvage value is allowable A r t . 23 ( f ) —1. Losses by corporations.—Losses sustained by upon its retirement. (See articles 23 (1)—1 to 23 (1)—10.) domestic corporations during the taxable year and not com A r t . 23 (e ) -4 . Shrinkage in value of stocks.— A person pos pensated for by insurance or otherwise are deductible except sessing stock of a corporation can not deduct from gross in in so far as not prohibited or limited by sections 23 (g), come any amount claimed as a loss merely on account of 24 (a) (6), 112, 117, 118, and 251. The provisions of articles shrinkage in value of such stock through fluctuation of the 23 (e )-l, 23 (e)-2, 23 (e)-3, 23 (e)-4, 23 (e)-5, and 23 (h )-l market or otherwise. The loss allowable in such cases is are in general applicable to corporations as well as individuals. that actually suffered when the stock is disposed of. If stock See section 232 as to deductions by foreign corporations. of a corporation becomes worthless, its cost or other basis [Sec. 23. Deductions from Gross Income .] as determined and adjusted under section 113 is deductible by [In computing net income there shall be allowed as deductions:] (g ) Wagering losses.—Losses from wagering transactions shall be the owner for the taxable year in which the stock became allowed only to the extent of the gains from such transactions. worthless, provided a satisfactory showing is made of its (h ) Basis for determining loss.— The basis for determining the worthlessness. Federal or State authorities incident to the amount of deduction for losses sustained, to be allowed under sub regulation of banks and certain other corporations may re section (e) or (f), shall be the adjusted basis provided in section 113 (b ) for determining the loss from the sale or other disposition quire that stock be charged off as worthless or written down of property. to a nominal value. If, in any such case, the basis of the requirement is the worthlessness of the stock, such charging A r t . 23 ( h ) - l . Basis for determining loss.—The basis for off or writing down will, for income tax purposes, be con determining the amount of the deduction for losses is the sidered prima facie evidence of worthlessness; but if the same as is provided in section 113 for determining the loss charging off or writing down is due to market fluctuations, or from the sale or other disposition of property. Proper ad if no reasonable attempt -has been made to determine worth justment must be made in each case for any expenditure, lessness, no deduction for income tax purposes of the amount receipt, loss, or other item properly chargeable to capital so charged off or written down can be allowed. For dealers account, and for depreciation, obsolescence, amortization, or in securities, see article 22 (c)-5. For limitations on deduc depletion. (See section 113 (b).) tions for losses from sales or exchanges of capital assets gen [Sec. 23. Deductions from Gross Income.] erally, including stocks and bonds, see section 117. [In computing net income there shall be allowed as deductions:] (i) Loss cm toash sales of stock or securities.—For disallowance of A r t . 23 (e )-5 . Losses of farmers.—Losses incurred in the loss deduction in the case of sales of stock or securities where operation of farms as business enterprises are deductible within thirty days before or after the date of the sale the taxpayer from gross income. If farm products are held for favor has acquired substantially identical property, see section 118. able markets, no deduction on account of shrinkage in weight (j) Capital losses.— Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section or physical value or by reason of deterioration in storage 117 (d ). shall be allowed, except as such shrinkage may be reflected (k ) Bad debts.—Debts ascertained to be worthless and charged in an inventory if used to determine profits. The total loss off within the taxable year (or, in the discretion of the Commis sioner, a reasonable addition to a reserve for bad debts); and when by frost, storm, flood, or fire of a prospective crop is not a satisfied that a debt is recoverable only in part, the Commissioner deductible loss in computing net income. A farm er en may allow such debt, in an amount not in excess of the part gaged in raising and selling stock, such as cattle, sheep, charged off within the taxable year, as a deduction. FEDERAL REGISTER, November 14, 1936 2119 A r t. 23 (k)-l. Bad debts.—Bad debts may be treated in for any taxable year it must be shown that the charge-off either of two ways— took place within such taxable year. (1) By a deduction from income in respect of debts ascer A r t . 23 (k )-2 . Examples of bad debts.— Worthless debts tained to be worthless in whole or in part, or arising from unpaid wages, salaries, rents, and similar items (2) By a deduction from incrane of an addition to a reserve of taxable income will not be allowed as a deduction unless for bad debts. the income such items represent has been included in the Taxpayers were given an option for 1921 to select either of return of Income for the year for which the deduction as the methods mentioned for treating such debts. (See article a bad debt is sought to be made or for a previous year. 151 Regulations 62.) The method used in the return for Only the difference between the amount received in distribu 1921 must be used in returns for subsequent years and in tion of the assets of a bankrupt and the amount of the returns under the Revenue Act of 1936 unless permission is claim may be deducted as a bad debt. The difference be granted by the Commissioner to change to the other method. tween the amount received by a creditor of a decedent in A taxpayer filing a first return of income may select either distribution of the assets of the decedent’s estate and the of the two methods subject to approval by the Commissioner amount of his claim may be considered a worthless debt. A upon examination of the return. If the method selected is purchaser of accounts receivable which can not be collected approved, it must be followed in returns for subsequent years, and are consequently charged off the books as bad debts except as permission may be granted by the Commissioner to is entitled to deduct them, the amount of deduction to be change to another method. Application for permission to based upon the price he paid for them and not upon their change the method of treating bad debts shall be made at face value. least 30 days prior to the close of the taxable year for which A r t . 23 (k )-3 . Uncollectible deficiency upon sale of mort the change is to be effective. (See also article 23 (k)-5.) gaged or pledged property .—If mortgaged or pledged prop If all the surrounding and attending circumstances indi erty is lawfully sold (whether to the creditor or another cate that a debt is worthless, either wholly or in part, the purchaser) for less than the amount of the debt, and the amount which is worthless and charged off or written down mortgagee or pledgee ascertains that the portion of the in to a nominal amount on the books of the taxpayer shall be debtedness remaining unsatisfied after such sale is wholly allowed as a deduction in computing net income. There or partially uncollectible, and charges it off, he may deduct should accompany the return a statement showing the pro such amount (to the extent that it constitutes capital or priety of any deduction claimed for bad debts. ' No deduc represents an item the income from which has been returned tion shall be allowed for the part of a debt ascertained to be by him) as a bad debt for the taxable year in which it is worthless and charged off prior to January 1, 1921, unless ascertained to be wholly or partially worthless and charged and until the debt is ascertained to be totally worthless and off. In addition, if the creditor buys in the mortgaged or is finally charged off or is written down to a nominal amount, pledged property, loss or gain is realized measured by the or the loss is determined in some other manner by a closed difference between the amount of those obligations of the and completed transaction. Before a taxpayer may charge debtor which are applied to the purchase or bid price of the off and deduct a debt in part, he must ascertain and be able property (to the extent that such obligations constitute to demonstrate, with a reasonable degree of certainty, the capital or represent an item the income from which has amount thereof which is uncollectible. Any amount subse been returned by him) and the fair market value of the quently received on account of a bad debt or on account of property. The fair market value of the property shall be a part of such debt previously charged off and allowed as a presumed to be the amount for which it is bid in by the deduction for income tax purposes, must be included in gross taxpayer in the absence of clear and convincing proof to income for the taxable year in which received. In deter the contrary. If the creditor subsequently sells the prop mining whether a debt is worthless in whole or in part the erty so acquired, the basis for determining gain or loss is Commissioner will consider all pertinent evidence, including the fair market value of the property at the date of the value of the collateral, if any, securing the debt and the acquisition. financial condition of the debtor. Partial deductions will be Accrued interest may be included as part of the deduction allowed with respect to specific debts only. only if it has previously been returned as income. Where the surrounding circumstances indicate that a debt A r t . 23 (k )-4 . Worthless bonds and similar obligations.— is worthless and uncollectible and that legal action to en Bonds, if ascertained to be worthless, may be treated as bad force payment would in all probability not result in the debts to the amount actually paid for them. Bonds of an satisfaction of execution on a judgment, a showing of these insolvent corporation secured only by a mortgage from which facts will be sufficient evidence of the worthlessness of the on foreclosure nothing is realized for the bondholders are debt for the purpose of deduction. Bankruptcy is generally regarded as ascertained to be worthless not later than the an indication of the worthlessness of at least a part of an un year of the foreclosure sale, and no deduction for a bad debt secured and unpreferred debt. Actual determination of is allowable in computing a bondholder’s income for a sub worthlessness in bankruptcy cases is sometimes possible be sequent year. fore and at other times only when a settlement in bank A taxpayer (other than a dealer in securities) possessing ruptcy shall have been had. Where a taxpayer ascertained debts evidenced by bonds or other similar obligations can not a debt to be worthless and charged it off in one year, the deduct from gross income any amount merely on account of mere fact that bankruptcy proceedings instituted against market fluctuation. If a taxpayer ascertains, however, that the debtor are terminated in a later year, confirming the due, for instance, to the financial condition of the debtor, or conclusion that the debt is worthless, will not authorize shift conditions other than market fluctuation, he will recover ing the deductions to such later year. If a taxpayer com upon maturity none or only a part of the debt evidenced by putes his income upon the basis of valuing his notes or the bonds or other similar obligations and so demonstrates accounts receivable at their fair market value when received, to the satisfaction of the Commissioner, he may deduct in which may be less than their face value, the amount deduct computing net income the uncollectible part of the debt evi ible for bad debts in any case is limited to such original denced by the bonds or other similar obligations. valuation. A r t . 23 (k )-5 . Reserve for bad debts.— Taxpayers who Where banks or other corporations which are subject to have established the reserve method of treating bad debts supervision by Federal authorities (or by State authorities and maintained proper reserve accounts for bad debts, or maintaining substantially equivalent standards) in obedience who, in accordance with article 23 (k )-l adopt the reserve to the specific orders of such supervisory officers charge off method of treating bad debts, may deduct from gross income debts in whole or in part, such debts shall be conclusively a reasonable addition to a reserve for bad debts in lieu of a presumed, for income tax purposes, to be worthless or recov deduction for specific bad debt items. erable only in part, as the case may be, but in order that What constitutes a reasonable addition to a reserve for bad any amount of the charge-off may be allowed as a deduction debts must be determined in the light of the facts, and will 2120 FEDERAL REGISTER» November 14, 1936 vary as between classes of business and with conditions of of the business. It does not apply to inventories or to stock in business prosperity. It will depend primarily upon the total trade, or to land apart from the improvements or physical amount of debts outstanding as of the close of the taxable development added to it. It does not apply to bodies of min year, those arising currently as well as those arising in prior erals which through the process of removal suffer depletion, taxable years, and the total amount of the existing reserve. other provisions for this being made in the Act. (See sec In case subsequent realizations upon outstanding debts prove tions 23 (m) and 114.) Property kept in repair may, never to be more or less than estimated at the time of the creation theless, be the subject of a depreciation allowance. (See arti of the existing reserve, the amount of the excess or inade cle 23 (a )-4.) The deduction of an allowance for deprecia quacy in the existing reserve should be reflected in the deter tion is limited to property used in the taxpayer’s trade or mination of the reasonable addition necessary in the taxable business. No such allowance may be made in respect of auto year. A taxpayer using the reserve method should make a mobiles or other vehicles used solely for pleasure, a building statement in his return showing the volume of his charge used by the taxpayer solely as his residence, or in respect of sales (or other business transactions) for the year and the furniture or furnishings therein, personal effects, or clothing; percentage of the reserve to such amount, the total amount of but properties and costumes used exclusively in a business, notes and accounts receivable at the beginning and close of such as a theatrical business, may be the subject of a depreci the taxable year, and the amount of the debts which have ation allowance. been ascertained to be wholly or partially worthless and A r t . 23 (1) —3. Depreciation of intangible property.— In ta n charged against the reserve account during the taxable year. gibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation [S ec. 23. Deductions from Gross Incom e.] - [In computing net income there shall be allowed as deductions:] allowance. Examples are patents and copyrights, licenses, (1) Depreaciation.— A reasonable allowance for the exhaustion,and franchises. Intangibles, the use of which in the business wear and tear of property used in the trade or business, including or trade is not so limited, will not usually be a proper subject a reasonable allowance for obsolescence. In the case of property held by one person for life with remainder to another person, the of such an allowance. If, however, an intangible asset ac deduction shall be computed as if the life tenant were the absolute quired through capital outlay is known from experience to be owner of the property and shall be allowed to the life tenant. In of value in the business for only a limited period, the length the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in of which can be estimated from experience with reason accordance with the pertinent provisions of the instrument creating able certainty, such intangible asset may be the subject of a the trust, or, in the absence of such provisions, on the basis of the depreciation allowance, provided the facts are fully shown in trust income allocable to each. the return or prior thereto to the satisfaction of the Commis A r t . 23 (1) —1. Depredation .—A reasonable allowance for sioner. No deduction for depreciation, including obsolescence, the exhaustion, wear and tear, and obsolescence of property is allowable in respect of good will. used in the trade or business may be deducted from gross in A r t . 23 (1 )—4. Capital sum recoverable through depre come. For convenience such an allowance will usually be dation allowances.—The capital sum to be replaced by referred to as depreciation, excluding from the term any idea depreciation allowances is the cost or other basis of the of a mere reduction in market value not resulting from ex property in respect of which the allowance is made. (See haustion, wear and tear, or obsolescence. The proper al sections 113 (a ) and 114.) To this amount should be added lowance for such depreciation of any property used in the from time to time the cost of improvements, additions, and trade , or business is that amount which should be set aside betterments, and from it should be deducted from time for the taxable year in accordance with a reasonably con to time the amount of any definite loss or damage sustained sistent plan (not necessarily at a uniform rate), whereby by the property through casualty,- as distinguished from the the aggregate of the amounts so set aside, plus the salvage gradual exhaustion of its utility which is the basis of the value, will, at the end of the useful life of the property in depreciation allowance. (See section 113 (b).) In the the business, equal the cost or other basis of the property case of the acquisition on or after March 1, 1913, o f a com determined in accordance with section 113. Due regard must bination of depreciable and nondepreciable property for also be given to expenditures for current upkeep. In the a lump price, as, for example, buildings and land, the capi case of property held by one person for life with remainder tal sum to be replaced is limited to an amount which bears to another person, the deduction for depreciation shall be the same proportion to the lump price as the value of the computed as if the life tenant were the absolute owner of the depreciable property at the time of acquisition bears to the property so that he will be entitled to the deduction during value of the entire property at that time. If the lessee of his life, and thereafter the deduction, if any, will be allowed real property erects buildings, or makes permanent im to the remainderman. In the case of property held in trust, provements which become part of the realty and income the allowable deduction is to be apportioned between the has been returned by the lessor as a result thereof, as pro income beneficiaries and the trustee in accordance with vided in paragraphs (b) and (c) of article 22 ( a ) -13, the the pertinent provisions of the will, deed, o r other instrument capital sum to be replaced by depreciation allowances is held creating the trust, or, in the obsence of such provisions, on to be the same as though no such buildings had been the basis of the trust income which is allocable to the trustee erected or such improvements made. In the case of property and the beneficiaries, respectively. For example, if the trust which has been the subject of deductions for amortization instrument provides that the income of the trust computed under sections 214 (a ) (9 ) and 234 (a) (8) of the Revenue without regard to depreciation shall be distributed to a Acts o f 1918 and 1921, depreciation deductions will be com named beneficiary, such beneficiary will be entitled to the puted after the close of the amortization period upon the depreciation allowance to the exclusion of tile trustee, while cost or other basis of such property after the amortization if the instrument provides that the trustee in determining allowance has been deducted. No depreciation deduction the distributable income shall first make due allowance for will be allowed in the case of property which has been keeping the trust corpus intact by retaining a reasonable amortized to its scrap value and is no longer in use. amount of the current income for that purpose, the allowable A r t . 23 (1) —5. Method of computing depreciation allow deduction will be granted in full to the trustee. ance.—The capital sum to be recovered shall be charged off A r t . 23 (1) —2. Depreciable property.— The necessity for a over the useful life of the property, either in equal annual depreciation allowance arises from the fact that certain prop installments or in accordance with any other recognized erty used in the business gradually approaches a point where trade practice, such as an apportionment of the capital sum its usefulness is exhausted. The allowance should be confined over units of production. Whatever plan or method of ap to property of this nature. In the case of tangible property, portionment is adopted must be reasonable and must have it applies to that which is subject to wear and tear, to decay due regard j£> operating conditions during the taxable period. or decline from natural causes, to exhaustion, and to obsoles The reasonableness of any claim for depreciation shall be cence due to the normal progress of the art, as where machin determined upon the conditions known to exist at the end of ery or other property must be replaced by a new invention, or the period for which the return is made. If the cost or other due to the inadequacy of the property to the growing needs basis of the property has been recovered through déprécia- FEDERAL REGISTER, November 14, 1936 2121 tion or other allowances no further deduction for deprecia attorneys’ fees, development or experimental expenses, etc., tion shall be allowed. The deduction for depreciation in re actually paid. Depreciation of a copyright can be taken on spect of any depreciable property for any taxable year shall the basis of the fair market value as of March 1, 1913, only be limited to such ratable amount as may reasonably be when affirmative and satisfactory evidence of such value is considered necessary to recover during the remaining useful offered. Such evidence should whenever practicable be sub life of the property the unrecovered cost or other basis. The mitted with the return. If the patent becomes obsolete prior burden of proof will rest upon the taxpayer to sustain the to its expiration, such proportion of the amount on which deduction claimed. Therefore, taxpayers must furnish full its depreciation may be based as the number of years of its and complete information with respect to the cost or other remaining life bears to the whole number of years inter basis of the assets in respect of which depreciation is claimed, vening between the basic date and the date when it legally their age, condition, and remaining useful life, the portion expires may be deducted, if permission so to do is specifically of their cost or other basis which has been recovered through secured from the Commissioner. Owing to the difficulty of depreciation allowances for prior taxable years, and such allocating to a particular year the obsolescence of a patent, other information as the Commissioner may require in sub such permission will be granted only if affirmative and satis stantiation of the deduction claimed. factory evidence that the patent became obsolete in the A taxpayer is not permitted under the law to take advan year for which the return is made is submitted to the Com tage in later years of his prior failure to take any deprecia missioner. The fact that depreciation has not been taken tion allowance or of his action in taking an allowance plainly in prior years does not entitle the taxpayer to deduct in inadequate under the known facts in prior years. This para any taxable year a greater amount for depreciation than graph may be illustrated by the following example: would otherwise be allowable. E xam ple.—An asset was purchased January 1, 1931, at a A r t . 23. <1) —8. Depreciation of drawings and models.— I f a cost o f $10,000. T h e useful life o f th e asset is 10 years. I t taxpayer has incurred expenditures in his business for has no salvage value. Depreciation was deducted .and al designs, drawings, patterns, models, or work of an experi lowed for 1931 to 1935 as followed: mental nature calculated to result in improvement of his 1931______-______— $1,000.00 facilities or his product, and if the period of usefulness of any such asset may be estimated from experience with reason 1933 ______I ______- ______2, ÖÖÖ.ÖÖ able accuracy, it may be the subject of depreciation allow 1934 ______s______2, 000.00 ances spread over such estimated period of usefulness. The facts must be fully shown in the return or prior thereto to the Total amount allowed______5, 000.00 satisfaction of the Commissioner. Except for such deprecia tion allowances no deduction shall be made by the taxpayer The correct amended reserve as of December 31, 1935, is against any sum so set up as an asset except on the sale or computed as follows: other disposition of such asset at a loss or on proof of a total December 31— loss thereof. 1931 ______;______$1,000. 00 A r t . 23 (l)- 9 . Records of depreciable property.— In order 1932 ______1,000.00 1933 ______2, 000. 00 that the verification of depreciation allowances claimed by 1934 ______2, 000. 00 the taxpayer may be facilitated, depreciation shall be recorded 1935— ______— ______666. 67 on the taxpayer’s books, the amount measuring a reasonable allowance for depreciation either being deducted directly from Reserve December 31, 1935______!______6, 666.67 the book value of the assets or preferably being credited to a Depreciation for 1936 and subsequent taxable years is depreciation reserve account, which should be reflected in the $666.67, computed as follow s: annual balance sheet. For the same reason the allowances Cost______$10,000.00 shall be computed and recorded with express reference t o Reserve as of December 31, 1935 ------— , 6, 666. 67 specific items, units, or groups of property, each item or unit being considered separately or specifically included in a group Unrecovered cost______3,333.33 Depreciation aUowable for 1936 and each, subsequent with others to which the same factors apply. Also, the tax taxable year (6 % percent of $10,000)______666.67 payer’s bocks shall show the basis of the depreciable property and any adjustments thereto, and, in cases where the basis A r t. 23 (1) —6. Obsolescence.— W ith respect to physical prop of the property is other than cost, or value on March 1, 1913, erty the whole or any portion of which is clearly shown by or value at date of acquisition (as, for example, if the property the taxpayer as being affected by economic conditions that was acquired by gift or transfer in trust after December 31, will result in its being abandoned at a future date prior to the 1920, or through a reorganization or a tax-free exchange end of its normal useful life, so that depreciation deductions (see particularly section 113 (a )), the books shall show the alone are insufficient to return the cost or other basis at the data used in ascertaining such basis and the adjustments end of its economic term of usefulness, a reasonable deduc thereto. If a taxpayer does not desire to have his regular tion for obsolescence, in addition to depreciation, may be books of account show all of the factors entering into the allowed in accordance with the facts obtaining with respect computation erf depreciation allowances, such factors shall to each item of property concerning which a claim for obso be recorded in permanent auxiliary records which shall be lescence is made. No deduction for obsolescence will be per kept with and reconciled with the regular books of account.] mitted merely because, in the opinion of a taxpayer, the A r t . 23 (1)-10. Depreciation in the case of farmers.— A property may become obsolete at some later date. This reasonable allowance for depreciation may be claimed on' allowance will be confined to such portion of the property on farm buildings (other than a dwelling occupied by the which obsolescence is definitely shown to be sustained and owner), farm machinery, and other physical property. A cannot be held applicable to an entire property unless all reasonable allowance for depreciation may also be claimed portions thereof are affected by the conditions to which obso on live stock acquired for work, breeding, or dairy pur lescence is found to be due. poses, unless they are included in an inventory used to de A r t . 23 (l)- 7 . Depreciation of patent or copyright.—In termine profits in accordance with article 22 (a)—7. Such computing a depreciation allowance in. the case of a patent depreciation should be based on the cost or other basis and or copyright, the capital sum to be replaced is the cost or the estimated life of the live stock. If such live stock be in other basis of the patent or copyright. The allowance cluded in an inventory no depreciation thereof will be al should be computed by an apportionment of the cost or lowed, as the corresponding reduction in their value will be other basis of the patent or copyright over the life of the reflected in the inventory. (See also articles 23 (a )-11 and patent or copyright since its grant, or since its acquisition 23 (e)-5.) % by the taxpayer, or in the case of a copyright, since March [Sec. 23. Deductions from Gross Income.] 1, 1913, as the case may be. If the patent or copyright was [In computing net Income there shall be allowed as deductions:! acquired from the Government, its cost consists of the vari (m ) D e p le tio n .—In the case of mines, oil and gas wells, other ous Government fees, cost of drawings, experimental models, natural deposits, and timber, a reasonable allowance for depletion. 2122 FEDERAL REGISTER, November U , 1936 and for depreciation of improvements, according to tlie peculiar value of the deposit bears to the value of the property at the conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Com time of its purchase. missioner, with the approval of the Secretary. In any case in which (d ) “Minerals” include ores of the metals, coal, oil, gas, it is ascertained as a result of operations or of development work and such nonmetallic substances as abrasives, asbestos as- that the recoverable units are greater or less than the prior esti mate thereof, then such prior estimate (but not the basis for phaltum, barytes, borax, building stone, cement rock, clay, depletion) shall be revised and the allowance under this subsection crushed stone, feldspar, fluorspar, fuller’s earth, graphite, for subsequent taxable years shall be based upon such revised esti gravel, gypsum, limestone, magnesite, marl, mica, mineral mate. In the case of leases the deductions shall be equitably apportioned between the lessor and lessee. In the case of prop pigments, peat, potash, precious stones, refractories, rock erty held by one person for life with remainder to another per phosphate, salt, sand, silica, slate, soapstone, soda, sulphur, son, the deduction shall be computed as if the life tenant were and talc. the absolute owner of the property and shall be allowed to the (e) “Operating profit” is the net amount received from life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the Income beneficiaries Hie sale of minerals before depletion and depreciation are and the trustee in accordance with the pertinent provisions of the deducted. It is distinct from net income, as defined in sec instrument creating the trust, or, in the absence of such provi tion 21, and from the net income from the property as de sions, on the basis of the trust income allocable to each. (For percentage depletion allowable under this subsection, see section fined in paragraph (h ) of this article. 114 (b), (3) and (4).) (/) The term “mine” does not include oil and gas wells, (n ) Basis for depreciation and depletion .—The basis upon which (fir) “Gross income from the property” as used in section depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be as provided in 114 (b) (3) and (4) and articles 23 (m )-l to 23 (m)-28, section 114. inclusive, means the amount for which the taxpayer sells (a ) the crude mineral product of the property or (b ) the A r t . 23 ( m )- l. Depletion of mines, oil and gas wells, other product derived therefrom, not to exceed in the case of (a ) natural deposits, and timber; depreciation of improve the representative market or field price (as of the date of ments.—Section 23 (m ) provides that there shall be allowed sale) of crude mineral product of like kind and grade be as a deduction in computing net income in the case of fore transportation from the immediate vicinity of the mine mines, oil and gas wells, other natural deposits, and timber, or well, or in the case of (b ) the representative market or a reasonable allowance for depletion and for depreciation of field price (as of the date of sale) of a product of the kind improvements. Section 114 prescribes the bases upon which and grade from which the product sold was derived, before depreciation and depletion are to be allowed. the application of any processes to which the crude mineral Under these provisions of the Act the owner of an interest product may have been subjected after emerging from the in mineral deposits, mineral properties, or timber, whether mine or well) with the exception of those listed below, and freehold or leasehold, is allowed annual depletion and de before transportation from the place where the last of the preciation deductions which, in the aggregate, will return processes listed below was applied. If there is no such repre to him the cost or other basis of such property as provided sentative „market or field price (as of the date of sale) , then in section 113, plus, in either case, subsequent allowable there shall be used in lieu thereof the representative market capital additions (see articles 23 (m)-15 and 23 (m)-16) or field price of the first marketable product resulting from with the following exceptions and qualifications: any process or processes minds the costs (including trans Cl) In the case of coal mines, metal mines, sulphur mines portation costs) of the processes not listed below. Thé proc or deposits, and oil and gas wells the aggregate annual esses excepted are as follows: allowable deductions may, because of percentage depletion, ultimately exceed the cost or other basis; (1) In the case of coal—cleaning, breaking, sizing, and (2) In the case of coal minés, metal mines, and sulphur loading at the mine for shipment; mines or deposits the aggregate annual allowable deductions (2) In the case of sulphur—pumping to vats, cooling, may never be as great as the cost or other basis, if an breaking, and loading at the mine for shipment; election of the percentage depletion method is made in his (3) In the case of iron ore and ores which are cus first return under Title I of the Act; and tomarily sold in the form of the crude mineral product— (3) In the case of mines other than metal, coal, or sul sorting or concentrating to bring to shipping grade, and phur mines the aggregate annual allowable deductions may loading at the mine for shipment; and exceed the cost or other basis because of the discovery (4) In the case of lead, zinc, copper, gold, or silver ores provision. and ores which are not customarily sold in the form of Operating owners, lessors, and lessees, whether corpora the crude mineral product—crushing, concentrating (by tions or individuals, are entitled to deduct an allowance for gravity or flotation), and other processes to the extent to depletion and depreciation, but a shareholder in a m in in g or which they do not beneficiate the product in greater degree oil or gas corporation is not allowed such deductions with (in relation to the crude mineral product on the one hand respect to the property of the corporation. But see article and the refined product on the other) than crushing and 115-6. concentrating (by gravity or flotation). The principles governing the apportionment of depreciation In the case of oil and gas, if the crude mineral product is in the case of property held by one person for life with re not sold on the property but is manufactured or converted mainder to another person and in the case of property held into a refined product or is transported from the. property in trust are also applicable to depletion. (See article 23 prior to the sale, then the “gross income from the property” (1)- 1 .) shall be assumed to be equivalent to the market or field When used in these articles (23 (m )-l to 23 (m )-28) cow price of the oil or gas before conversion or transportation. ering depletion and depreciation— In all cases there shall be excluded in determining the (a ) The “fair market value” of a property is that amount “gross income from the property” an amount equal to any which would induce a willing seller to sell and a willing rents or royalties which were paid or incurred'by the tax buyer to purchase. payer in respect of the property and are not otherwise (b ) A “mineral property” is the mineral deposit, the de excluded fom the “gross income from the property.” If velopment and plant necessary for its extraction, and so royalties in the form of bonus payments or advanced royalties much of the surface of the land only as is necessary for (see article 23 (m)-10) have been paid in respect of the purposes of mineral extraction. The value of a mineral prop property in the taxable year or in prior years, the amount erty is the combined value of its component parts. excluded from “gross income from the property” for the (c) A “mineral deposit” refers to minerals only, such as taxable year on account of such payments shall be an amount the ores only in the case of a mine, to the oil only in the equal to that part of such payments which is allocable to case of an oil well, and to the gas only in the case of a gas the products sold during the taxable year. well, and to the oil and gas in the case of a well producing (h ) “Net income of the taxpayer (computed without al both oil and gas. The cost of a mineral deposit is that pro lowance for depletion) from the property”, as used in section portion of the total cost of the mineral property which the 114 (b) (2), (3), and (4) and articles 23 (m )-l to 23 (m)-28, FEDERAL REGISTER, November 14, 1936 2123 inclusive, means the “gross income from the property” as than depletion, and (c) the residual value of other property defined in paragraph (g ) less the allowable deductions at at the end of operations, but there shall be included, in the tributable to the mineral property upon which the depletion case of oil and, gas wells, those amounts of capitalized drill is claimed and the allowable deductions attributable to the ing and development costs which, as provided in article processes listed in paragraph ( g ) in so far as they relate to 23 (m)-16, are recoverable through depletion. the product of such property, including overhead and oper In the case of a natural gas well, where the annual pro ating expenses, development costs properly charged to ex duction is not metered and is not capable of being estimated pense, depreciation, taxes, losses sustained, etc., but exclud with reasonable accuracy, the taxpayer may compute the ing any allowance for depletion. Deductions not directly depletion allowance (without reference to percentage de attributable to particular properties or processes shall be pletion) in respect of such property for the taxable year by fairly allocated. To illustrate: In cases where the taxpayer multiplying the adjusted basis of the property by a fraction, engages in activities in addition to mineral extraction and to the numerator of which is equal to the decline in closed the processes listed in paragraph (fir), deductions for de or rock pressure during the taxable year and the denomi preciation, taxes, general expenses, and overhead, which can nator of which is equal to the expected total decline in closed not- be directly attributed to any specific activity, shall be or rock pressure from the taxable year to the economic lim it fairly apportioned between (1) the mineral extraction and of production. Taxpayers computing depletion by this the processes listed in paragraph (fir) and (2) the additional method must keep accurate records of periodical pressure activities, taking into account the ratio which the operating determinations. expenses directly attributable to the mineral extraction and A r t . 23 (m )—3. Computation of depletion of mines ( o th er the processes listed in paragraph (g ) bear to the operating than metal, coal, or sulphur mines) on the basis of discovery expenses directly attributable to the additional activities. If value.—The basis upon which depletion is to be computed more than one mineral property is involved, the deductions in the case of mines (other than metal, coal, or sulphur apportioned to the mineral extraction and the processes listed mines) discovered by the taxpayer after February 28, 1913, in paragraph (g ) shall, in turn, be fairly apportioned to the is the fair market value of the property at the date of dis several properties, taking into account their relative covery or within 30 days thereafter, if such mines were not production. acquired as the result of purchase of a proven tract or lease, (() “Crude mineral product”, as used in paragraph (g ) of and if the fair market value of the property is materially this article, means the product in the form in which it disproportionate to cost. The value must be equitably ap emerges from the mine or well. portioned between the lessor and the lessee. For the method ( j ) “The property”, as used in section 114 (b) ( 2 ) , ( 3 ) , and of determining whether a discovery has been made, see article (4) and articles 23 ( m ) - l to 23 holes, and proven oil arid gas lands (the map should show sulphur, metal, or metallic ores) , it must appear that the depth, initial production, and date of completion of 'each mine or minerals were not acquired as the result oi the pur well, to the extent that such data are available) ; chase of a proven tract or lease; also, the discovery must (6) The number of pay sands and average thickness of be made by the taxpayer after February 23, 1913, and must each pay sand or zone on the property; result in the fair market value of the property becoming dis (7) The average depth of the top of each of the different proportionate to the cost. The fair market value of the pay sands; property will be deemed to have become disproportionate to (8) Annual production of the tract or of the individual the cost when the newly discovered minerals are of such wells, if the latter information is available, from the quantity and of such quality as to afford a reasonable ex beginning of its productivity to the end of the taxable pectation of return to the taxpayer of an amount materially year, the average number of wells producing during each in excess of the capital expended in making such discovery year, and the initial daily production of each well (the plus the cost of future development, equipment, and exploi extent to which oil or gas is used for fuel on the property tation. should be stated with reasonable accuracy) ; (b) A mine or minerals of a kind not excepted by this (9) All available data regarding change in operating article may be said to be discovered when (1) there is found conditions, such as unit operation, proration, flooding, use a natural deposit of mineral, or (2) there is disclosed by of air-gas lift, vacuum, shooting, etc., which have a direct drilling or exploration, conducted above or below ground, a effect on the production of the property; and mineral deposit not previously known to exist and the exist (10) Available geological information having a probable ence of which was so improbable that such deposit had not bearing on the oil and gas content; information with and could not have been included in any previous valuation respect to edge-water, water drive, bottom hole pressures, for the purpose of depletion, and which in either case exists oil-gas ratio, porosity of reservoir rock, percentage of re in quantity and grades sufficient to justify commercial covery, expected date of cessation of natural flow, decline exploitation. in estimated potential, and characteristics similar to char (c) In determining whether a discovery entitling the tax acteristics of other known fields. payer to a valuation has been made, the Commissioner will take into account the peculiar conditions of each case; but Xd) All of the foregoing information must be furnished no discovery, for the purposes of depletion, can be allowed under oath, should be summarized, and may be included in as to minerals which constitute merely uninterrupted exten a single affidavit. sions of continuing commercial veins or deposits already (e) Any of the information required by this article which known to exist, which have been or should have been in has been previously filed by the taxpayer need not be filed cluded in "probable*’ or “prospective” mineral, or which again but the statement attached to the return must indi were in any other way comprehended in a prior valuation, cate clearly when and in what form the information was nor can a discovery, for purposes of depletion, be allowed previously filed. When a taxpayer has filed adequate maps as of a date subsequent to that when, in fact, discovery was with the Commissioner he may be relieved of filing further evident, when delay by the taxpayer in making claim there maps of the same properties, provided all additional infor for has resulted or will result in excessive allowances for mation necessary for keeping the maps up to date is filed depletion. each year. Thjs includes records of dry holes, as well as Xd) Discoveries include minerals in commercial quantities producing wells, together with logs, depth and thickness of contained within a vein or deposit discovered in an existing sands, location of new wells, etc. mine or mining tract by the taxpayer after February 28, A r t . 23 (m)-13. Statement to be attached to return when 1913, but such vein or deposit must not be merely the unin depletion is claimed on percentage basis.— (a) There shall be3 terrupted extension of a continuing commercial vein or attached to the return of every taxpayer who claims deple deposit already known to exist, and the newly discovered tion of oil and gas wells under section 114 (b) (3) and article minerals must be of sufficient value and quantity that they 23 (m )—4, or depletion of coal mines, metal mines, or sulphur could be‘separately mined and marketed at a profit. mines or deposits under section 114 (b) (4) and article 23 Xe) The value of property claimed as the result of a dis (m)-5, a statement containing the following information covery must be the fair market value, as defined in article with respect to every property for which percentage depletion 23 (m )-7, based on what is evident within 30 days after the is allowable; commercially valuable character and extent of the discovered (1) All data necessary for the determination of the deposits of mineral have with reasonable certainty been "gross income from the property” as defined in paragraph established, determined, or proved. Xg) of article 23 (m )-l, including the amounts paid to A r t . 23 (m)-15. Allotoable capital additions in case of lessors as rents or royalties, the amounts paid to holders mines.— (a) All expenditures in excess of net receipts from of other interests in the mineral property, and the price minerals sold shall be charged to capital account recoverable per unit at which royalties were paid; through depletion while the mine is in the development (2) All additional data necessary for the determination stage. The mine will be considered to have passed from of the “net income of the taxpayer (computed without a development to a producing status when the major portion allowance for depletion) from the property” as defined iii of the mineral production is obtained from workings other paragraph Xh) of article 23 (m )-l; and than those opened for the purpose of development, or when (3) The information required by paragraphs (a) (1), the principal activity of the mine becomes the production of (a) (2), (a) (3), and Xb) of article 23 (m)-12. The other developed ore rather than the development of additional ores information required by article 23 (m)-12 shall also ba for mining. furnished if necessary in determining the gain or loss Xb) Expenditures for plant and equipment and for replace from the sale or other disposition of the property during ments, not including expenditures for maintenance and for the taxable year or if a valuation of the property is neces ordinary and necessary repairs, shall ordinarily be charged sary for any purpose. The taxpayer may find it desirable to capital account recoverable through depreciation. Ex to furnish such other information in all cases. ' penditures for equipment (including its installation and housing) and for replacements thereof, which are necessary Xb) All of the foregoing information shall be furnished to maintain the normal output solely because of the recession under oath, should be summarized, and may be included in of the working faces of the mine, and which (1) do not a single affidavit. increase the value of the mine, or (2) do not decrease the A r t. 23 (m)-14. Discovery of mines other than coal, metal, cost of production of mineral units, or (3) do not represent or sulphur mines.— (a) To entitle a taxpayer to a valuation an amount expended in restoring property or in making good of his property, for the purpose of depletion allowances, by the exhaustion thereof for which an allowance is or has reason of the discovery of a mine (other than a coal, metal, been made, shall be deducted as ordinary and necessary or sulphur mine) or minerals (other than oil or gas, coal, business expenses. 2128 FEDERAL REGISTER, November 14, 1936 A r t . 23 vided into two or more accounts based on the character of shall be allowable as deductions only if verified under rules and the timber ór its accessibility, or scattered tracts may be regulations prescribed by the Commissioner, with the approval of the Secretary. (For unlimited deduction if contributions and gifts included in separate accounts. If such a division is made, exceed 90 per centum of the net income, see section 120.) a proper portion of the total value or cost, as the case may be, shall be allocated to each account. A r t . 23 ( o ) - l . Contributions or gifts by individuals.— In The timber accounts mentioned in the preceding para connection with claims for deductions under section 23 (o ), graph shall not include any part of the value or cost, as the there shall be stated on returns of income the name and case may be, of the land. In a manner similar to that pre address of each organization to which a contribution or gift scribed in the foregoing part of this article the land in a was made and the approximate date and the amount of the given “block” may be carried in a single land account or may contribution or gift in each case. Claims for deductions un be divided into two or more accounts on the basis of its der section 23 (o) must be substantiated, when required by character or accessibility. When such a division is made, the Commissioner, by a statement from the organization to a proper portion of the total value or cost, as the case may which the contribution or gift was made showing the name be, shall be allocated to each account. and address of the contributor or donor, the amount of the The total value or total cost, as the case may be, of land contribution or gift and the date it was made, and by such and timber shall be equitably allocated to the timber and other information as the Commissioner may deem necessary. land accounts, respectively. If the contribution or gift is other than money, the basis for Each of the several land and timber accounts carried on calculation of the amount thereof shall be the fair market the books of the taxpayer shall be definitely described as to value of the property at the time of the contribution or gift. their location on the ground either by maps or by legal de No part of the contributions or gifts made by a partnership scriptions. may be claimed as a deduction in the personal return of a For good and substantial reasons satisfactory tp the Com partner. As to deduction of contributions or gifts by part missioner, or as required by the Commissioner, thè timber or nerships, see section 183. In the case of a nonresident alien the land, accounts may be readjusted by dividing individual individual or a citizen of the United States entitled to the accounts; by combining two or more accounts, or by divid benefits of section 251, see sections 213 (c) and 251. This ing and recombining accounts. article does not apply to gifts by estates and trusts (see sec A r t . 23 (m)-28. Timber depletion and depreciation ac tion 162). For contributions or gifts by corporations see counts on books.—Every taxpayer claiming or expecting article 23 (q )-l. to claim a deduction for depletion or depreciation of timber Whether a husband and wife make a joint return or sepa property (including plants, improvements, and equipment rate returns, the 15 percent limitation on the deduction for used in connection therewith) shall keep accurate ledger contributions or gifts is based on the separate net income accounts in which shall be recorded the cost or other basis (computed without regard to such contributions or gifts) of provided by section 113 (a), as the case may be, of the the spouse making the contributions or gifts. (See article property, and the plants, improvements, and equipment, to 51-1.) gether with subsequent allowable capital additions to each A donation made by an individual to an organization account and all of the other adjustments provided by section other than one referred to in section 23 (o) which bears a 113 (b) and articles 113 (a) (14)-4,113 (b )-l, and 113 (b)-2. direct relationship to his business and is made with a reason In such accounts there shall be set up separately the quan able expectation of a financial return commensurate with tity of timber, the quantity of land, and the quantity of the amount of the donation may constitute an allowable other resources, if any, and a proper part of the total cost deduction as business expense. or value shall be allocated to each. (See article 23 (m)-27.) [Sec. 23. Deductions from Gross Income.] These accounts shall be credited with the amount of the [In computing net income there shall be allowed as deductions:] depreciation and depletion deductions computed in accord (p ) Pension trusts.—An employer establishing or maintaining a ance with article 23 (m)-20 each year, or the amount of pension trust to provide for the payment of reasonable pensions to his employees (if such trust is exempt from tax under sec the depreciation and depletion shall be credited to deprecia tion 165, relating to trusts created for the exclusive benefit of tion and depletion reserve accounts, to the end that when employees) shall be allowed as a deduction (in addition to the the sum of the credits for depreciation and depletion equals contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction the cost or other basis of the property, plus subsequent al under subsection (a) of this section) a reasonable amount trans lowable capital additions, no further deduction for depre ferred or paid into such trust during the taxable year in excess ciation and depletion will be allowed. of such contributions, but only if such amount (1) has not theretofore been allowable as a deduction, and (2) is apportioned [Sec. 23. Deductions from Gross Income.] in equal parts over a period of ten consecutive years beginning [In computing net income there shall he allowed as deductions:] with the year in which the transfer or payment is made. Any (o) Charitable and other contributions.—In the case of an indideduction allowable under section 23 (q) of the Revenue Act of vidual, contributions or gifts made within the taxable year to or 1928 or the Revenue Act of 1932 or the Revenue Act of 1934 for the use of: which under such section was apportioned to any taxable year (1) the United States, any State, Territory, or any political beginning after December 31, 1935, shall be allowed as a deduc subdivision thereof, or the District of Columbia, for exclusively tion in the years to which so apportioned to the extent allowable public purposes; under such section if it had remained in force with respect to (2) a corporation, or trust, or community chest, fund, or such year. foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the A r t . 23 ( p ) - l . Payments to employees’ pension trusts.— prevention of cruelty to children or animals, no part of the net An employer who adopts or has adopted a reasonable pen earnings of which inures to the benefit of any private share sion plan, actuarially sound, and who establishes, or has holder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to established, and maintains a pension trust for the payment influence legislation; of reasonable pensions to his employees (if the trust is (3) the special fund for vocational rehabilitation authorized exempt from tax under section 165, relating to trusts cre by section 12 of the World War Veterans’ Act, 1924; ated for the exclusive benefit of employees) shall be al (4) posts or organizations of war veterans, or auxiliary units or societies of any such posts or organizations, if such posts, or lowed to deduct from gross income reasonable amounts ganizations, units, or societies are organized in the United States paid to such trust, in accordance with the pension plan (in or any of its possessions, and if no part of their net earnings cluding any reasonable amendment thereof), as follows: . inures to the benefit of any private shareholder or individual; or (a) If the plan contemplates the payment to the trust, in (5) a fraternal society, order, or association, operating under advance of the time when pensions are granted, of amounts the lodge system, but only if such contributions or gifts are to to provide for future pension payments, then (1) amounts be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to paid to the trust during the taxable year representing the children or animals; pension liability applicable to such year, determined in ac to an amount which in all the above cases combined does not cordance with the plan, shall be allowed as a deduction for exceed 15 per centum of the taxpayer’s net income as computed such year as an ordinary and necessary business expense, without the benefit of this subsection. Such contributions or gifts and in addition (2) one-tenth of a reasonable amount 2132 FEDERAL REGISTER, November 14, 1936 transferred or paid to the trust during the taxable year If the pension plan does not contemplate the payment to to cover in whole or in part the pension liability ap the trust in advance of the time when pensions are granted, plicable to the years prior to the taxable year, or so trans of amounts to provide for future pension payments, the data ferred or paid to place the trust on a sound financial basis, j described under 5 and 6 above need not be furnished. shall be allowed as a deduction for the taxable year and In cases where the annuity plan is underwritten by an for each of the nine succeeding taxable years; insurance company, the taxpayer should show the amount of (b) If the plan does not contemplate the payment to theany refunds made to him by the carrier under the terms of trust, in advance of the time when pensions are granted, his annuity contract. If such refunds were applied by the of amounts to provide for future pension payments, then insurance company to reduce subsequent premiums or to re (1) amounts paid to the trust during the taxable year rep duce the accrued liability of the annuity plan, or in any other resenting the present value of the expected future payments manner except a cash refund, the taxpayer should submit in respect of pensions granted to employees retired during full information in regard thereto. the taxable year shall be allowed as a deduction for such The right to a deduction under section 23 (p) will be recog year as an ordinary and necessary business expense, and nized in cases where the pension trust may not be perpetual, in addition (2) one-tenth of a reasonable amount trans provided tire trust is of such a character as to evidence good ferred or paid to the trust during the taxable year to cover faith on the part of the employer actually to pay the amounts in whole or in part the present value of the expected future placed in trust for employees’ pension purposes. However, payments in respect of pensions granted to employees re should any portion of the funds of a pension trust revert to tired prior to the taxable year, or so transferred or paid the possession, ownership, or control of the employer by rea to place the trust on a sound financial basis, shall be al son of the termination of the trust or otherwise, such amount lowed as a deduction for the taxable year and for each (except to the extent that it represents a payment to the of the nine succeeding taxable years. pension trust made by the employer in accordance with the Reasonable payments made by an employer during the pension plan and pursuant to paragraph (a) or (b) of this taxable year directly to pensioners on account of pensions article, and not theretofore allowed as a deductiop to the in respect of which no payment has been made to a pen employer) shall be returned as income by the employer for sion trust shall be allowed as a deduction from gross in tire taxable year in which it so reverts, unless prior to the come for such year as an ordinary and necessary business close of such year it shall again be placed in trust for the expense. benefit of employees under provisions satisfactory to the In no case will any amount be allowed as a deduction under Commissioner. this article which was allowable as a deduction from gross A pension trust maintained by affiliated corporations for income for any prior year. Devices of whatever nature for the exclusive benefit of their employees is within the scope withdrawing profits or paying salaries to officers are not pen of sections 23 (p) and 165. sion trusts within the meaning of the Act. Example—Accruals in advance of pensions granted.— In A taxpayer claiming the benefit of the deduction allowable 1936 the M Company adopted a reasonable pension plan and by section 23 (p) must show himself entitled to such deduc established a pension trust which was exempt from tax tion. If a deduction from gross income is claimed on ac under section 165. During the year and upon the basis of count of payments to an employees’ pension trust, the fol an actu arial com putation th e com pany paid $8,950,000 to lowing described data shall be filed with the return: the trust. At the time of the payment and in accordance 1. A statement describing the pension trust plan, includ with the pension plan of the company, the pension liability ing the basis and method of its operation, together with a applicable to the years prior to 1936, in respect of employees copy of the trust indenture, with any amendments thereto, then on the retired roll, for pensions to be paid in the future, and other documents constituting a part of the plan. was $2’,000,000; the pension lia b ility applicable to th e years 2. If all employees are not included as beneficiaries of the prior to 1936, in respect of employees on the active roll, for pension trust, a statement showing what classes of employees pensions to be paid in the future, was $6,500,000; the pay are excluded, and the general nature of their respective ment required to cover the pension liability applicable to the employment and duties, together with the reason why all taxable year 1936 for pensions to be paid in the future, was employees are not covered by the pension trust plan. $450,000. T h e amount paid to retired employees o f the M 3. A statement showing the actuarial computation upon Company by the pension trust as pensions during 1936 was which the deduction is based. 4. A statement of the receipts and disbursements of the $360,000. trust. The deduction for 1936 is computed as follows; 5. A schedule showing the application of actuarially com (o) Entire amount paid to pension trust representing puted “reserve factors” to the pay roll data properly classified the pension liability applicable to 1936 for pen- * for the purpose of computing the reserve liability of the pen sions to be paid in the future------$450,000 (b) One-tenth of $8,500,000, amount transferred to pen sion fund as of the end of the taxable year. sion trust to cover the pension liability applicable 6. A schedule showing the application of actuarially com to the years prior to 1936, in respect of employees puted “current liability factors” to the pay roll data prop on either the retired roll or the active roll, for erly classified for the purpose of computing the liability of pensions to be paid in the future______850,000 the pension fund as of the end of the taxable year. Total deduction______1» 300,000 7. A schedule showing the computation of the pension liability for all employees retired prior to the taxable year. The amount of $360,000 paid to pensioners is now allow 8. A schedule showing the computation of the liability for able as a deduction for income tax purposes since it was employees retired during the taxable year. paid by the pension trust and not by the M Company. 9. A schedule showing the receipts and disbursements of Example—Accruals cm basis of pensions granted,.— In 1936 the pension fund during each month of the taxable year, and the N Company adopted a reasonable pension plan and the total amount of the fund as of the beginning and end established a pension trust which was exempt from tax of the taxable year. under section 165. During the year and upon the basis of If the valuation factors are changed at any time, either an actuarial com putation tire com pany paid $2,300,000 to because of a change in the pension plan or because of a the trust. At the time of the payment the present value of change in the assumptions upon which the valuation factors the expected future payments in respect of pensions granted are based, the data indicated under 5, 6, and 7 above, should to em ployees retired prior to 1936 was $2,000,000; the present be submitted showing the new valuation factors applied to value of the expected future payments in respect of pensions the pay roll data classified as of the end of the preceding granted to employees retired during 1936 was $300,000. T h e taxable year, and also as of the end of the current taxable amount paid to retired employees of the N Company by the year. pension trust as pensions during 1936 was $360,000. FEDERAL REGISTER, November 14, 1936 2133 The deduction for 1936 is computed as follows: (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has (a) Entire amount paid to the penison trust representing been made; the present value of the expected future payments (4) Premiums paid on any life insurance policy covering the in respect of pensions granted to employees retired life of any officer or employee, or of any person financially inter during 1936______$300, 000 ested in any trade or business carried on by the taxpayer, when CHAPTER V earned net income, but not in excess of 10 percent of the C redits A g ain st I ncom e amount of the entire net income. The entire amount received as professional fees may be Sec. 25. Credits of Individual Against Net Income.— (a) Credits for normal tax only.— There shall be allowed for the treated as earned income if the taxpayer is engaged in a purpose of the normal tax, but not for the surtax, the following professional occupation, such as a doctor or a lawyer, even credits against the net income : thqpgh he employs assistants to perform part or all of the (1) Interest on United States obligations.—The amount re services, provided the clients or patients are those of the ceived as interest upon obligations of the United States which taxpayer and look to the taxpayer as the person responsible is included in gross income under section 22. (2) Interest on obligations of instrumentalities of the United for the services performed. In the case of a husband and States—»-The amount received as interest on obligations of a wife domiciled in a so-called community property State and corporation organized under Act of Congress, if (A ) such cor rendering separate income tax returns on the community poration is an instrumentality of the United States; and (B) income basis, one-half of the income derived from personal such interest is included in gross' income under section 22; and (C ) under the Act authorizing the issue thereof, as amended services rendered by one spouse may be treated as earned and supplemented, such interest is exempt from normal tax. income in the separate return of the other spouse. (3) Earned income credit.—10 per centum of the amount of In the case of a taxpayer engaged in a trade or business in the earned net income, but not in excess of 10 per centum of the amount of the net income. which both personal services and capital are material income- (4) Earned income definitions.— For the purposes of this sec producing factors, a reasonable allowance as compensation tion— for the personal services actually rendered by the taxpayer (A ) “ Earned income” means wages, salaries, professional shall be considered earned income, but the total am ount, fees, and other amounts received as compensation for per which shall be treated as the earned income of the taxpayer sonal services actually rendered, but does not include any from such a trade or business shall, in no case, exceed 20 amount not included in gross income, nor that part of the compensation derived by the taxpayer for personal services percent of his share of the net profits of such trade or busi rendered by him to a corporation which represents a distribu ness. No general rule can be prescribed defining the trades tion of earnings or profits rather than a reasonable allowance or businesses in which personal services and capital are mate as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in rial income-producing factors, but this question must be de which both personal services and capital are material income termined with respect to the facts of the individual cases. producing factors, a reasonable allowance as compensation for The provisions of sections 25 (a) (3) and 25 (a) (4) may the personal services actually rendered by the taxpayer, not be illustrated generally by the following examples: in excess of 20 per centum of his share of the net profits of such trade or business, shall be considered as earned income. Exam ple 1.—An individual received income from interest (B) “Earned income deductions” means such deductions as on bonds during the calendar year 1936 amounting to $6,000. are allowed by section 23 for the purpose of computing net His allowable deductions under section 23 for that year income, and are properly allocable to or chargeable against earned income. amounted to $2,000. H e is en titled to an earned income (C) “ Earned net income” means the excess of the amount credit o f $300, computed as follow s: of the earned income over the sum of the earned income deduc Gross income______$6, 000 tions. If the taxpayer’s net income is not more than $3,000, his entire net income shall be considered to be earned net Allowable deductions______2,000 income, and if his net income is more than $3,000, his earned net income shall not be considered to be less than $3,000. In Entire net income______*______4,000 no case shall the earned net Income be considered to be more Earned net income allowable under section 25 (a) (4) (C )__ 3^ 000 than $14,000. Earned income credit allowable (10 percent of $3,000)______300 (b) Credits for both normal tax and surtax.— There shall be Exam ple 2.—An individual received a salary of $20,000 as allowed for the purposes of the normal tax and the surtax the a traveling salesman for the calendar year 1936. His allow following credits against net income. able deductions under section 23 for that year amounted to (1) Personal exemption.— In the case of a single person, a $12,000, o f which $2,000 was fo r travelin g expenses in the personal exemption of $1,000; or in the case of the head of a family or a married person living with husband or wife, a course of his business and $10,000 was for a loss of his home personal exemption of $2,500. A husband and wife living from fire. H is net incom e is $20,000 minus $12,000, or $8,000. together shall receive but one personal exemption. The amount He is entitled to an earned income credit of $800, computed as of such personal exemption shall be $2,500. I f such husband follow s: and wife make separate returns, the personal exemption may be taken by either or divided between them. Earned income______$20, 000 (2) Credit for dependents.—$400 for each person (other than Earned income deductions.______2, 000 husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen Earned net income before applying limitation in years of age or is incapable of self-support because mentally section 25 (a ) (4 ) ( C ) ------18,000 or physically defective. Earned net income as limited to maximum amount pre (3) Change of status.— I f the status of the taxpayer, insofar scribed by section 25 (a ) (4 ) ( C ) ______14,000 as it affects the personal exemption or credit for dependents, Earned income credit before applying limitation in section changes during the taxable year, the personal exemption and 25 (a ) (3 ) (10 percent o f $14,000)______1.40Q credit shall be apportioned, under rules and regulations pre Earned income credit allowable as limited by section 25 scribed by thè Commissioner with the approval of the Secre ( a ) (3 ) (10 percent o f $8,000, net in c o m e )______300 tary, in accordance with the number tìf months before and after such change. For the purpose of such apportionment a frac Exam ple 3.—During the calendar year 1936 an individual tional part of a month shall be disregarded unless It amounts was engaged in a business in which both personal services to more than half a month in which case it shall be considered as a month. and capital were income-producing factors. A reasonable allowance as compensation for the personal services actually A r t. 25-1. Credits of individual against net income.— For rendered by the taxpayer in the conduct of the business for the purpose of computing the normal tax the taxpayer’s net that year was $10,000. T h e net profits o f the business were income as determined pursuant to sections 21-24 is first $35,000, w hich constituted his net incom e fo r the year. He reduced by the sum of the allowable credits. These include is entitled to an earned income credit of $700, computed as interest exempt from normal tax only (and hence included in follow s: \ gross income) received upon (1) obligations of the United Earned income before applying limitations in section 25 States and (2) obligations of corporations organized under (a) (4) (A) ------$10,000 Act of Congress which are instrumentalities of the United Earned income as limited by section 25 (a) (4) (A) (20 States; an earned income credit; a personal exemption; and percent of $354)00)______7,000 a credit for dependents. (See section 22 (b) (4).) For the Earned income credit allowable (10 percent of $7,000)______700 purpose of computing the surtax the taxpayer’s net income A r t. 25-3. Amount of personal exemption allowable.— A is entitled to none of these credits, except the credit for single person is entitled to a personal exemption of $1,000 personal exemption and credit for dependents. and the head of a family or a married person living with A rt. 25-2. Earned income credit.— Under section 25 (a) (3) husband or wife to .$2,500, regardless of the amount of the the earned income credit allowable for the purpose of com net income. A husband and wife living together have but puting the normal tax-is 10 percent of the amount of the one personal exem ption, which is $2,500. I f they make 2136 FEDERAL REGISTER, November 14, 1936 separate returns, each may claim one-half of the personal several periods of the taxable year during which each status exemption, or such exemption may, in accordance with an was occupied. agreement entered into by them, be taken by either or di Exam ple (1).—A, who had been single during the pre vided between them in any proportion. ceding months of 1836, married B on July 20 and lived with A r t . 25-4. Personal exemption of head of family.— A head her during the remainder of the year. If a joint return is of a family is an individual who actually supports and main made by A and B on the calendar year basis for 1936, the tains in one household one or more individuals who are personal exem ption w ill be $2,208.33; th at is, %2 o f $1,000 closely connected with him by blood relationship, relation fo r A w hile single, plus %2 o f $1,000 fo r B w hile single, plus ship by marfiage, or by adoption, and whose right to exer of $2,500 for the period during which they were married. cise family control and provide for these dependent indi If separate returns are made by A and B on the calendar viduals is based upon some moral or legal obligation. In year basis for 1936, each may claim a personal exemptioh the absence of continuous actual residence together, whether o f $1,104.17; th at is, %2 o f $1,000, plus y2 o f %2 o f $2,500. or not a person with dependent relatives is a head of a fam In the latter case, however, the joint exemption of %2 of ily within the meaning of the Act must depend on the char $2,500 may by agreement be taken either by A or B or acter of the separation. If a father is absent on business, divided between them in any proportion. or a child or other dependent is away at school or on a E xam ple (2).—A and B, who were heads of families during visit, the common home being still maintained, the addi the first six months of 1936, were married on July 1, 1936, and tional exemption applies. If, moreover, through force of lived together during the remainder of the year. If a joint circumstances a parent is obliged to maintain his dependent return is made by A and B on the calendar year basis for children with relatives or in a boarding house while he lives 1936, the personal exemption will be $3,750; that is, V2 of elsewhere, the additional exemption may still apply. If, $2,500 for A while the head of a family, plus % of $2,500 for however, without necessity the dependent continuously makes B while the head of a family, plus M> of $2,500 for the period his home elsewhere, his benefactor is not the head of a during which they were married and living together. If sepa family, irrespective of the question of support. A resident rate returns are made by A and B on the calendar year basis alien with children abroad is not thereby entitled to credit fo r 1936, each m ay claim a personal exem ption o f $1,875; as the head of a family. As to the amount of the exemp th at is, y2 o f $2,500, plus y2 o f y2 o f $2,500. In th e latter tion, see article 25-3. case, however, the joint exemption of ^ of $2,500 may by A r t . 25-5. Personal exemption of married person.— In the agreement be taken either by A or B or divided between case of a married man or married woman the joint ex them in any proportion. emption replaces the individual exemption only if the man Exam ple (3) .—A and B were married and living together lives with his wife or the woman lives with her husband. until November 30, 1936, when B, the wife, died. They had In the absence of continuous actual residence together, no dependents. The executor or administrator in making a whether or not a man or woman has a wife or husband liv return fo r B m ay claim a personal exem ption o f $1,229.16; ing with him or her within the meaning of the Act must th a t is, y2 o f o f $2,500, or $1,145.83, fo r the period from depend on the character of the separation. If merely occa the beginning of the taxable year to the date of the decedent’s sionally and temporarily a wife is away on a visit or a hus death, plus %2 o f $1,000, or $83.33, fo r the period from the band is away on business, the joint home being maintained, date of the decedent’s death to the close of the taxable year. the additional exemption applies. The unavoidable absence If A, the surviving spouse, makes a return for 1936 on the of a wife or husband at a sanatorium or asylum on account calendar year basis, he may claim a personal exemption of of illness does not preclude claiming thé exemption. If, how $1,229.16; th a t is, y2 o f i% 2 o f $2,500, o r $1,145.83, plus %2 of ever, the husband voluntarily and continuously makes his $1,000, or $83.33. However, th e combined personal exemption home at one place and the wife hers at another, they are of A and B for the period during which they were married not living together within the meaning of the Act, irrespective and living together, that is, 1 ^ 2 o f $2,500, or $2,291.67, may of their personal relations. A resident alien with a wife re by agreement be taken either by A, or by B’s executor or siding abroad is not entitled to the joint exemption. administrator in behalf of B, or divided between them in any A r t; 25-6. Credit for dependents.—A taxpayer, other than proportion. a nonresident alien who is not a resident of Canada or Mex Exam ple (4).—A furnished the chief support of a child ico (see section 214), receives a credit of $400 for each person under 18 years of age until the death of the child on June 20, (other than husband or w ife), whether related to him or not 1936. If A makes a return on the calendar year basis for and whether living with him or not, dependent upon and re 1936, he is entitled, in addition to the personal exemption ceiving his chief support from the taxpayer, provided the allowed under section 25 (b) (1), to a credit for dependents dependent is either (a) under 18, or (b) incapable of self- in the amount of $200; that is, % 2 o f $400. support because defective. Exam ple (5).—A and B were married and living together The credit is based upon actual financial dependency and until June 30, 1936, when A, the husband, died. Prior to the not mere legal dependency. It may accrue to a taxpayer who date of death, A was the chief support of a child 10 years is not the head of a family. But a father whose children re of age. B, the surviving spouse, was the chief support of the ceive half or more of their support from a trust fund or child during the remainder of the year. If B makes a return other separate source is not entitled to the credit. for 1936 on the calendar year basis, she is entitled, in addi A r t . 25-7. Personal exemption and credit for dependents tion to a personal exemption, ta a credit for dependents in where status changes.—If the status of the taxpayer changes th e amount o f $200; th at is, % 2 o f $400. Th e executor or during the taxable year, the personal exemption allowed by administrator in making a return for A is entitled, in addi section 25 (b) (1) to a single person, a head of a f a m ily , or tion to a personal exemption, to a credit for dependents in a married person living with husband or wife, and the credit the amount o f $200; th a t is, %2 o f $400. for dependents allowed by section 25 (b) (2) will be appor Se c . 26. Credits of corporations.— In the case of a corporation tioned according to the number of months during which the the following credits shall be allowed to the extent provided in taxpayer occupied each status. A taxpayer not having the the various sections imposing tax— (a) Interest on obligations of the United States and its instru status of a head of a family or the status of a married per mentalities.— The amount received as interest upon obligations of son living with husband or wife shall be considered as hav the United States or of corporations organized under Act of Con ing the status of a single person. P m * the purpose of the gress which is allowed to an individual as a credit for purposes of apportionment of the personal exemption and credit for de normal tax by section 25 (a) (1) or (2). ( b ) Dividends received.— 85 per centrum of the amount received pendents a fractional part of a month shall be disregarded as dividends from a domestic corporation which is subject to tax unless it amounts to more than half a month, in which case ation under this title. The credit allowed by this subsection shall it shall be considered as a month. In general, the personal not be allowed in respect of dividends received from a corporation organized under the China Trade Act, 1922, or from a corpora exemption and credit for dependents allowable to any tax tion which under section 251 is taxable only on its gross income payer will be the sum of the amounts apportioned to the from sources within the United States by reason of its receiving a FEDERAL REGISTER, November 14, 1936 2137 large percentage of its gross income from sources within a posses their sum, shall be allowable under section 26 (c) (1) and, sion of the United States. (c ) Contracts restricting payment of dividends.— for such purpose, if two or more credits are equal in amount, only one shall be taken into account. However, section 25 (1 ) Prohibition on payment of dividends.— An amount equal to the excess of the adjusted nét Income over the aggregate of (c) (3) provides that if both section 26 (c) (1) and section the amounts which can be distributed within the taxable year 26 (c) (2) apply, only the one of such paragraphs which as dividends without violating a provision of a written contract allows the greater credit shall be applied, and, if the credit» executed by the corporation prior to May 1, 1936, which pro allowable under each paragraph is the same, only one of; vision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph such paragraphs shall be applied. because of a contract provision and also to one or more credits (b) Prohibition on payment of dividends.—The credit pro because of other contract provisions, only the largest of such vided in section 26 (c) (1) is allowable only with respect tor credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into a written contract executed by the corporation prior to May account. 1, 1936, which expressly deals with the payment of dividends (2 ) Disposition of profits of taxable year.—An amount equal and operates as a legal restriction upon the corporation as to» to the portion of the earnings and profits of the taxable year the amounts which it can distribute within the taxable yeau which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly as dividends. If an amount can be distributed within thei deals with the disposition of earnings and profits of the taxable taxable year as a dividend— year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the (1) in one form (as, for example, in stock or bonds of? discharge of a debt; to the extent that such amount has been the corporation) without violating the provisions of a con so paid or set aside. For the purposes of this paragraph, a re tract, but can not be distributed within the taxable year, quirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay as a dividend in another form, as, for example, in cash), or set aside such percentage of earnings and profits. As used without violating such provisions, or in this paragraph, the word “debt” does not include a debt in (2) at one time (as, for example, during the last half curred after April 30, 1936. of the taxable year) without violating the provisions of a (3 ) Double credit not allowed.—If both paragraph (1) and paragraph ( 2) apply, the one of such paragraphs which allows contract, but can not be distributed as a dividend at an the greater credit shall be applied; and, if the credit allowable other time within the taxable year (as, for example, dur under each paragraph is the same, only one of such paragraphs ing the first half of the taxable year) without violating shall be applied. such provision— (d ) Bank affiliates— In the case of a holding company affiliate (as defined in section 2 of the Banking Act of 1933), the amount then the amount is one which, under section 26 (c) (1), can of the earnings or profits which the Board of Governors of the be distributed within the taxable year as a dividend with Federal Reserve System certifies to the Commissioner has been out violating such provisions. devoted by such affiliate during the taxable year to the acquisi tion of readily marketable assets other than bank stock in com The credit provided in section 20 (c) (1) is equal to the pliance with section 5144 of the Revised Statutes. The aggregate excess of the adjusted net income, as defined in section of the credits allowable under this subsection for all taxable years 14 (a ), over the aggregate of the amounts which can be dis shall not exceed the amount required to be devoted under such tributed within the taxable year without violating the pro section 5144 to such purposes. (e ) National mortgage associations.—In the case of a national visions of such contract. The requirement that the provisions mortgage association created under Title in of the National Hous of the contract expressly deal with the payment of divi ing Act, the amount of the earnings or profits which the Federal dends is not met in case (1) a corporation is merely required Housing Administrator certifies to the Commissioner has been to set aside periodically a sum to retire its bonds, or (2) the devoted by such association during the taxable year to the ac quisition of such reserves as the Administrator may require under contract merely provides that while its bonds are outstand the provisions of section 303 of that Act. ing the current assets shall not be reduced below a specified amount. A r t . 26-1. Credit of corporation for interest on obligations of the United States and its instrumentalities.—The credit The computation of the credit allowable under section allowed by section 26 (a) is an amount equal to the interest 26 (c) (1) may be illustrated by the following examples: received upon obligations of the United States or of a cor Exam ple (.1).—For the calendar year 1936 the A Corpora poration organized under Act of Congress (if such corpora tion (which was organized in 1918) has a net income (on tion is an instrumentality of the United States and under the accrual basis) o f $200,000, a norm al tax lia b ility o f the Act authorizing the issue of such obligations, as amended $28,840, and an adjusted net income o f $171,160. A t the and supplemented, such interest is in the case of individuals beginning of the taxable year is had $50,000 of accumulated exempt from normal tax) which is included in gross income earnings and profits. Its earnings and profits of the taxable under section 22. year before deducting Federal income taxes amount to $210,000. T h e corporation has second m ortgage 6 percent A r t . 26-2. Credit in connection with contracts restricting payment of dividends.— (a ) The credit provided in section bonds outstanding at the close of the year, issued prior to January 1, 1936, in the amount o f $1,000,000. An amount o f 26 (c) with respect to contracts restricting the payment of dividends is not available under every contract which might the earnings and profits sufficient to retire 10 percent of such operate to restrict the payment of dividends, but only with bonds must, by the provisions of the underlying mortgage, be set aside annually before any dividends can be paid on respect to those provisions of written contracts executed by the corporation prior to May 1, 1936, which satisfy the its stock. The credit allowable under section 26 (c) (1) is $40,000, computed as follow s: conditions prescribed in the Act. The charter of a corpora tion does not constitute a written contract executed by the Adjusted net income______$171,160 Aggregate of amounts which can be distributed: corporation within the meaning of section 26 (c ). The pro Earnings and profits of the taxable year visions recognized by the Act are of two general types, as before deducting Federal Income taxes___$210, 000 follow s: Less normal tax______28, 840 (1) Those which come within section 26 (c) (1), in 181 ,160 that they prohibit or limit the payment of dividends dur Plus earnings and profits at beginning of ing the taxable year; and taxable year accumulated after February 28, 1913______;______50, 000 (2) Those which come within section 26 (c) (2), in that they require the payment, or irrevocable setting aside, 231,160 within the taxable year, of a specified portion of the earn Less amount required for retirement of bonds 100,000 ings or profits of the taxable year for the discharge of a ------131,160 debt incurred on or before April 30, 1936. Credit allowable______40,000 If a corporation is restricted with respect to the payment Exam ple (2 ).—Under the terms of a contract entered of dividends by two or more contract provisions coming into prior to January 1, 1936, Corporation B obtained a loan within section 26 (c) (1), only the largest of the credits o f $300,000. T h e contract provided th a t as long as the computed with respect to each of such provisions, and not debt remains unpaid not more than 50 percent of the 2138 FEDERAL REGISTER, November 14, 1936 annual earnings shall be used for the payment of dividends. company affiliate holds, at the end of the taxable year, a Corporation B has an adjusted net income (on the accrual general voting permit granted by the Board of Governors basis) o f $162,660 and a norm al tax lia b ility o f $27,340. The of the Federal Reserve System; current earnings and profits amount to $140,000 before de (2) in the amount of the earnings or profits of such ducting Federal income taxes and in addition thereto the holding company affiliate which, in compliance with sec corporation had at the beginning of its taxable year $40,000 tion 5144 of the Revised Statutes, has been devoted by it representing earnings and profits accumulated after Febru during the taxable year to the acquisition of readily mar ary 28, 1913. The credit allowable under section 26 (c) (1) ketable assets other than bank stock; is $66,330, computed as follow s; (3) upon certification by the Board of Governors of the Adjusted net income______$162, 660 Federal Reserve System to the Commissioner that such an Aggregate of amounts which can he distributed: amount of the earnings or profits has been so devoted by C urrent earnings an d profits______$140, 000 such affiliate during the taxable year. Less normal tax______27,340 No credit is allowable either for the amount of readily mar Current earnings and profits available____ 112,660 ketable assets acquired and on hand at the beginning of the Plus earnings and profits at beginning of taxable year accumulated after February first taxable year subject to the Revenue Act of 1936 or for 2.8, 1913______40, 000 an amount of readily marketable assets in excess of what is required, by such section 5144, to be acquired by such T o t a l______— 152, 660 affiliate. Less amount restricted: 50 percent of current earnings, i. e., 50 percent o f Every taxpayer claiming and making a deduction for the $112,660______56. 330 credit provided for in section 26 (d) shall attach to its re ------96,330 turn a supplementary statement, in duplicate, setting forth C redit allow able______66,330 all the facts and information upon which the claim is predi cated, including such facts and information as the Board of (c ) Disposition of profits of taxable year.—Under the proGovernors of-the Federal Reserve System may prescribe as visions of section 26 (c) (2), a corporation is allowed a necessary to enable it, upon the request of the Commissioner credit in an amount equal to that portion of the earnings subsequent to the filing of the return, to certify to the Com and profits of the taxable year which, by the terms of a missioner the amount of earnings or profits devoted to the written contract executed by the corporation prior to May. acquisition of such readily marketable assets. A certified 1, 1936, and expressly dealing with the disposition of the copy of such supplementary statement shall be forwarded by earnings and profits of the taxable year, it is required within the taxpayer to the Board of Governors at the time of the the taxable year to pay in, or irrevocably to set aside for, filing of the return. The holding company affiliate shall also the discharge of a debt incurred on or before April 30, 1936. furnish the Board of Governors such further information as The credit is limited to that amount which is actually so the Board shall require. For the requirements with respect paid or irrevocably set aside during the taxable year pur to the amount of such readily marketable assets which must suant to the requirements of such a contract. be acquired and maintained by a holding company affiliate Only a contractual provision which expressly deals with to which a voting permit has been granted, see subsections the disposition of the earnings and profits of the taxable (b) and (c) of section 5144 of the Revised Statutes (para year shall be recognised as a basis for the credit provided graph 56 of the Appendix to these regulations). > in section 26 (c) (2). A corporation having outstanding Se c . 27. Corporation Credit for Dividends Paid .— bonds is not entitled to a credit under a provision merely (a ) Dividends paid credit in general.— For the purposes of this requiring it, for example, (1) to retire annually a certain title, the dividends paid credit shall be the amount of dividends percentage or amount of such bonds, (2) to maintain a sink paid during the taxable year. ing fund sufficient to retire all or a certain percentage of A r t. 27 (a)-l. Dividends paid credit in general.— (a ) A l such bonds by maturity, (3) to pay into a sinking fund for low ance.—The amount of the dividends paid credit pro the retirement of such bonds a specified amount per thou vided by section 27 is the amount of the dividends paid dur sand feet of timber cut or per ton of coal mined, or (4) to ing the taxable year, subject, however, to the qualifications, pay into a sinking fund for the retirement of such bonds limitations, and exceptions prescribed in subsections (b) an amount equal to a certain percentage of gross sales or to (h), inclusive, of section 27. See also section 121 with gross income. Such provisions do not expressly deal with respect to dividends paid on preferred stock owned by the the disposition of earnings and profits of the taxable year. United States or instrumentalities thereof. A contractural provision, however, shall not be considered as (b ) When dividends are considered paid.—A dividend not expressly dealing with the disposition of earnings and will be considered as paid when it is received by the share profits of the taxable year merely because it deals with such holder. A dividends paid credit can not be allowed unless earnings and profits in terms of “net income”, “net earn the shareholder receives the dividend during the taxable ings”, or “net profits.” year for which the credit is claimed. The term “debt” as used in section 26 (c) (2) does not If a dividend is paid by check and the check bearing a include an obligation of the corporation to a shareholder, as date within the taxable year is deposited in the mails, in such, as distinguished from a creditor. Accordingly," a cover properly stamped and addressed to the shareholder amounts paid into, or set aside for, a sinking fund by a cor at his last known address, at such time that in the or poration for the retirement of preferred stock, pursuant to dinary handling of the mails the check would be received the terms of an agreement underlying the preferred stock by the shareholder within the taxable year, a presumption issue, shall not be considered as set aside fen* discharge of a arises that the dividend was paid to the shareholder in debt. An indebtedness evidenced by bonds or other similar such year. obligations issued by a corporation is incurred as of the date The payment of a* dividend during the taxable year toi such obligations are issued, and the amount of such indebted the authorized agent of the shareholder will be deemed pay ness is the amount represented by the face value of the obli ment of the dividend to the shareholder during such year. gations. For the purpose of this article a bond or other If a corporation, instead of paying the dividend directly similar obligation is not issued until it is executed and de to the shareholder, credits the account of the shareholder livered to a person who holds it as a debt of the corporation. on the books of the corporation with the amount of the Bonds issued after April 30, 1936, in exchange in refunding dividend, the credit for a dividend paid will not be allowed a preexisting issue represent debts incurred after April 30, unless it be shown to the satisfaction of the Commissioner 1936, within the meaning of section 26 (c) (2). that such crediting constituted payment of the dividend A r t . 26-3. Bank affiliates.— The credit provided in section to the shareholder within the taxable year. 26 (d) is allowed— A credit will not be allowed for the amount-of a dividend (1) to a holding company affiliate of a bank, as defined credited during the taxable year upon an obligation of the in section 2 of the Banking Act of 1933, which holding shareholder to the corporation unless it is shown to the FEDERAL REGISTER, November 14, 1936 2139» satisfaction of the Commissioner that such crediting con in the dividends paid credit of such first preceding tax stituted payment of the dividend to the shareholder within able yea r) ; and the taxable year. (2) the amount by which the dividends actually paid In the case of a stock dividend, if the shares (other than during the first preceding taxable year exceeded the ad fractional shares payable to bearer) constituting the dividend justed net income for such year. are not entered or registered on the books of the corporation The Act prohibits any part of the dividend carry-over from in the name of the shareholder (or his nominee or trans consisting of dividends paid by the corporation during any feree) within the taxable year, the dividend will not be taxable year or period beginning prior to January 1, 1936. deemed to have been paid in such year. Delivery of a cer The first taxable year or period for which a corporation tificate, or certificates, for such new shares, within the tax may avail itself of the benefit of the dividend carry-over able year, constitutes prima facie evidence of the payment is its second taxable year or period beginning after Decem of the dividend. ber 31, 1935. If the dividend is payable in obligations of the corporation, Every corporation claiming a dividend carry-over for any ‘they should be entered or registered in the taxable year on taxable year or period shall file with its return for such the books of the corporation, in the name of the share year or period a concise statement setting forth the amount holder (or his nominee or transferee), and, in the case of of the dividend carry-over claimed and all material and obligations payable to bearer, should be received in the tax pertinent facts relative thereto, including a detailed schedule able year by the shareholder (or his nominee or transferee), showing the computation of the dividend carry-over claimed. to constitute payment of the dividend within the taxable The application of section 27 (b) may be illustrated by the year. following examples: In the case of a dividend from which the tax has been de Exam ple (1).—The N Corporation has an adjusted net in ducted and withheld as required by section 143 or 144, the come of $80,000 for the calendar year 1936, and during that dividend is considered as paid when such deducting and year pays dividends aggregating $90,000. F or the calendar withholding occur. year 1937 the corporation has an adjusted net income of (c ) Methods of accounting.—The determination of whether $120,000 and during that year pays dividends in the amount a dividend has been paid to the shareholder by the corpora o f $50,000. T h e dividends paid credit fo r the calendar year tion during its taxable year is in no way dependent upon the 1937 is $60,000, computed as follow s: method of accounting regularly employed by the corporation in keeping its books or upon the method of accounting upon Dividends paid d u ring 1936______$90, 000 the basis of which the net income of the corporation is Adjusted net income for 1936______80, 000 computed. See section 43. Excess of dividends paid during 1936 over adjusted (d ) Records.—Every corporation claiming a dividends net incom e fo r th a t year______10, 000 paid credit shall keep such permanent records as are neces Dividends paid d u ring 1937______50, 000 sary (1) to establish that the dividends with respect to Plus excess of dividends paid during 1936 over adjusted net which such credit is claimed were actually paid during the incom e fo r 1936______10,000, taxable year and (2) to supply the information required to be filed with the income tax return of the corporation. Such Dividends paid credit for 1937______60, 000 corporation shall file with its return (a) a true copy of the Exam ple (2).—The R Corporation has an adjusted net in dividend resolution; and (b) a concise statement of the come of $60,000 for the calendar year 1936 and during that pertinent facts relating to the payment of the dividend, year pays dividends aggregating $75,000. For th e calendar clearly specifying (1) the medium of payment and (2) , if year 1937 the corporation has an adjusted net income of not paid in money, the fair market value and adjusted basis $100,000 and during that year pays dividends aggregating (or face value, if paid in its own obligations) on the date $90,000. D uring the calendar year 1938 the corporation pays of distribution of the property distributed, and the manner dividends of $50,000, the adjusted net income for that year in which such fair market value and adjusted basis were being $80,000. The dividends paid credit fo r the calendar determined. Canceled dividend checks and receipts obtained year 1937 is $100,000, computed as follow s: from shareholders acknowledging payment of dividends paid D ividends p aid du rin g 1937______$90, 000 otherwise than by check need not be filed with the return Portion of $15,000, the excess of dividends paid during but shall be kept by the corporation as a part of its records. 1936 ($75,000) over adjusted net income for that year ($60,000) needed as a dividends paid credit for 1937___ 10,000 [S ec. 27. Corporation Credit for Dividends Paid.] (b ) Dividend carry-over.— In computing tbe dividends paid credit Dividends p aid credit fo r 1937______^______100, 000 for any taxable year, if the dividends paid dinring the taxable year are less than the adjusted net income, there shall be allowed The dividends paid credit for the calendar year 1938 is as part of the dividends paid credit, and in the following order: $55,000, computed as follow s: (1) Dividends paid during the second preceding taxable year Dividends paid d u ring 1938______$50, 000 in excess of the adjusted net income for such year, to the P lu s: extent not needed as a dividends paid credit for the taxable The excess of dividends paid during 1936 over adjusted year preceding the taxable year the tax for which is being net incom e fo r th a t year ($75,000— $60,000, or computed: and $15,000), to the extent not needed as dividends paid (2 ) Dividends paid during the first preceding taxable year in credit fo r 1937 ($15,000— $10,000)— ______5,000 excess of the adjusted net income for such year. Excess of dividends paid during 1937 over adjusted No Credit shall be allowed for dividends paid by a corporation net income for that year______None prior to its first taxable year under this title. D ividends paid credit fo r 1938______55, 000 A r t . 27 ( b ) - l . Dividend carry-over.— A corporation is allowed under section 27 (b) to include in its dividends paid As applied to this example, the Act provides for a 2-year credit a dividend carry-over from certain preceding taxable dividend carry-over in computing the dividends paid credit years, in addition to the credit for dividends paid during the for 1938, since the excess ($15,000) of the dividends paid taxable year. If in the taxable year no dividends are actu during 1936 over the adjusted net income for that year is ally paid or if in such year dividends actually paid are less allowed as part of the dividends paid credit for 1937 and in amount than the adjusted net income for such year, 1938, $10,000 of such excess being applicable to 1937 and the there shall be included as part of the dividends paid credit rem aining $5,000 to 1938. O f the $15,000 excess, the en tire for such taxable year in the following order— amount of $10,000 (the difference between the adjusted net incom e o f $100,000 and the dividends o f $90,000 paid during (1) the amount by which dividends which were actually 1937) must be applied, if at all, as part of the dividends paid paid during the second preceding taxable year exceeded credit for 1937. the adjusted net income for such year, but only to the extent that the excess was not needed as part of the [S ec. 27. Corporation Credit for Dividends Paid.] (c ) Dividends in hind.— If a dividend is paid in property other dividends paid credit for the first preceding taxable year than money (including stock of the corporation if held by the (whether or not the part needed was actually included corporation, as an investment) the dividends paid credit with 2140 FEDERAL REGISTER, November 14, 1936 respect thereto shall he the adjusted basis of the property in the comes entitled to an additional dividends paid credit for hands of the corporation at the time of the payment, or the fair market value of the property at the time of the payment, which the taxable year in which it redeems such obligations, but ever is the lower. only in the event that the amount at which such obligations are redeemed is higher than their fair market value at the A r t . 27 ( c ) - l . Dividends in kind.— Section 27 (c) imposes time of the distribution. The amount of such additional limitations upon the extent to which dividends paid in assets dividends paid credit is in excess of the price at which such (other than money) may be recognized for purposes of deter obligations are redeemed over their fair market value at mining the amount of the dividends paid credit. Irrespective the time of the distribution, subject to the restriction that of the form of the corporate resolution by which a dividend such excess be diminished by any amounts which were al is declared, if the dividend is ultimately and actually paid lowable as deductions for amortized bond discount or bond by the corporation in any property other than money, con issue commissions and expenses allocable to the obligations stituting its corporate assets, the amount of the dividends redeemed in computing the net income of the corporation paid credit to which the corporation is entitled with respect for any taxable year. A corporation is entitled to such addi thereto can not exceed the lesser of the two following tional dividends paid credit regardless of the identity of the amounts determined as of the time of payment: holders of the obligations at the time of their redemption. (1) The adjusted basis of such property in the hands The term “obligations” as used in this article means any of the corporation as provided for in section 113; or legal liability on the part of the corporation (not including (2) The fair market value of such property. liability as a guarantor, indorser, or surety), regardless of As used in this article the term “property” includes shares when incurred, to pay a fixed or determinable sum of money, of capital stock of the corporation making the dividend evidenced in writing executed by the corporation. The term distribution if such shares of stock are held by it as an “redeemed” as used in this article includes (1) repurchase investment. Unless shown to the contrary, shares of capital in the open market for investment or sinking fund purposes, stock once issued but thereafter acquired by the corporation (2) retirement, or (3) cancellation of the obligations before, at, or after maturity. in any manner whatsoever, but not retired, shall be deemed to be held by the corporation as an investment. The term The application of section 27 (d) may be illustrated by the following example: “property” also includes obligations upon which the corpo ration making the distribution is liable as a guarantor, E xam ple.—The X Corporation declared a dividend of indorser, or surety. $85,000 in 1936, payable in th a t year in its 5 percent bonds at 85. Pursuant to such declaration, bonds having an ag The application of section 27 (c) may be illustrated by gregate fa ce value o f $100,000 were issued during 1936 in the following example: payment of the dividend. The fair market value of the bonds E xam ple.—The S. Corporation, in 1930, purchased stock of at th e tim e o f issuance was $75,000. T h e dividends paid th e Y Corporation fo r $100,000. In 1936 such stock had a credit for 1936 is the fair market value of the bonds at the fa ir m arket value o f $70,000. D uring the period o f its owner time of the dividend payment ($75,000), since such fair ship of such stock, the S Corporation received distributions market value is lower than the face value ($100,000) of the amounting to $5,000 out of earnings or profits of Y Corpora obligations. tion accumulated before March 1,1913. In 1936 the corpora The corporation prior to the redemption of the bonds at tion used such stock for the payment of a dividend. The face value deducted in its returns over the life of the bonds dividends paid credit fo r 1936 is $70,000, computed as the $15,000 bond discount resulting from the payment in follow s: 1936 of the $85,000 dividend in bonds having a face value Purchase price, or cost o f stock------$100,000 o f $100,000. T h e dividends paid cred it w ith respect to the Less tax-free distribution ------5,000 bond redemption for the taxable year in which the redemp Adjusted basis of stock in the hands of the corpo tion o f the bonds occurs is $10,000, computed as follow s: ration at the time of the dividend payment------95,000 Redemption price of bonds______i______$100, 000 Pair market value of stock at the time of the dividend Less fair market value of bonds when dividend was paid paym ent------70,000 in 1936------75,000 D ividends p aid credit fo r 1936------70,000 D ifferen ce______25, 000 Since the fair market value of the stock ($70,000) a t the Less bond discount allowed as a deduction in computing time of the dividend payment is less than the adjusted basis n et incom e______15,000 ($95,000) of the stock in the hands of the corporation at the Amount treated as dividend paid in taxable year time of the dividend payment, the lesser amount ($70,000) in which, redem ption occurs______10,000 should be used as the dividends paid credit for 1936 w ith [S e c . 27. Corporation Credit for Dividends Paid.] respect to such stock. (e ) Taxable stock dividends.— In case of a stock dividend or stock right which is a taxable dividend in the hands of share [S ec. 27. Corporation Credit for Dividends Paid.] holders under section 115 (f), the dividends paid credit with re (d ) Dividends in obligations of the corporation.— I f a dividend is spect thereto shall be the fair market value of the stock or the paid in obligations of the corporation, the amount of the dividends stock right at the time of the payment. paid credit with respect thereto shall be the face value of the obligations, or their fair market value at the time of the payment, A r t . 27 ( e ) - l . Taxable stock dividends.—The dividends whichever Is the lower. If the fair market value is lower than the face value, then when the obligation is redeemed by the corpora paid credit provided by section 27 with respect to distribu tion, the excess of the amount for which redeemed over the fair tions in stock dividends or stock rights is limited by section market value at the time of the dividend payment (to the extent 27 (e) to distributions which are taxable dividends in the not allowable as a deduction in computing net income for any taxable year) shall be treated as a dividend paid in the taxable hands of shareholders under section 115 (f) and article year in which the redemption occurs. 115-3. Such credit, however, is limited in amount to the fair market value of such stock or stock rights at the time A r t . 27 (d ) -1 . Dividends in obligations of the corpora of the payment of the dividend. As to a distribution by a tio n .— Section 27 (d) is concerned solely with the amount corporation of its own capital stock held as an investment, of dividends paid credit allowable to the extent that divi see article 27 (c )-l. dends are paid by a corporation in its own obligations. If the Corporation ultimately pays a dividend in its own obliga [S e c . 27. Corporation Credit for Dividends Paid.] ( f ) Distributions in liquidation.— In the case of amounts dis tions (regardless of the form of the corporate resolution by tributed in liquidation the part of such distribution which is which the dividend is declared), the amount of the dividends properly chargeable to the earnings or profits accumulated after paid credit to which it is entitled with respect thereto for the February 28, 1913, shall, for the purposes of computing the divi year in which such dividend is paid is limited to the lesser dends paid credit under this section, be treated as a taxable dividend paid. of the face value or fair market value of such obligations as of the date of payment. If the dividends paid credit as of A r t . 2 is allowable only with respect to taxable dividends paid, ings or profits of $30,000 accumulated prior to March 1, 1913, section 27 (f) makes one exception, namely, for that part and earnings or profits accumulated since February 28, 1913, of ah amount distributed in liquidation which, under the o f $75,000. On July 15, 1936, the option w ith respect to the Act, constitutes a distribution of, and is properly chargeable preferred stock was exercised and the entire amount of such to, earnings or profits accumulated after February 28, 1913. stock was redeemed at $141 per share or a total of $141,000 Thus, a distribution either in complete or partial liquidation in a transaction upon which gain or loss to the distributees of a corporation Is treated by the Act as one constituting in resulting from the exchange was determined and recognized part a' distribution of, and being properly chargeable to, under the Act, such transaction being only a partial liquida earnings or profits, if— tion under section 115 (c). The amount of the distribution allocable to capital account was $116,000 ($100,000 attribu (1) Under the provisions of section 115 (c ), the amounts table to par value, $6,000 attributable to paid-in surplus, and distributed in liquidation are treated as received in pay $10,000 attributable to earnings or profits accumulated prior ment in exchange for the stock; and to M arch 1, 1913). T h e rem ainder, $25,000 ($141,000, the (2) Under the provisions of section 112, the gain or loss, amount o f the distribution, less $116,000, the amount a llo if any, from such exchange is recognized. cable to capital account) is properly chargeable to the earn In such a case, a dividends paid credit is allowable for the ings or profits accumulated since February 28, 1913, and is amount actually involved in such distribution which is allowable as a dividends paid credit. properly chargeable to the earnings or profits accumulated (c ) Credit in respect of earnings or profits transferred after February 28, 1913, even though the m ethod o f taxation under certain tax-free transactions,—If, as a result of one of the distribution is that ordinarily employed with respect or more transactions. described in section 112, a corpora to the gain or loss realized and recognized upon an exchange, tion’s earnings or profits accumulated after February 28, rather than that employed with respect to a taxable 1913, and its undistributed earnings or profits of the taxable dividend. year, shall have become the earnings or profits of another On the other hand, certain transactions described in sec corporation subject to distribution as dividends by such tions 112 and 115 are treated, for the purposes of the Act, other corporation, any dividend paid by the transferee cor not as distributions to the shareholders of earnings or profits, poration during that portion of the transferor’s taxable but as transfers of such earnings or profits intact to another year subsequent to the consummation of such tax-free trans corporation in whose hands such earnings or profits, being action may, subject to the provisions of section 115, be ap available for distribution by it as dividends to its shareholders, portioned and allocated to the transferor as a distribution have essentially the same status for the purposes of the Act out o f such earnings or profits of the transferor. The reso as earnings or profits derived from its own operations. Char lution of the board of directors of the transferee shall specifi acteristic of these transactions is the circumstance that the cally designate the distribution, or part thereof, so appor gain or loss realized from the receipt by the shareholders of tioned and allocated. For the purposes of the dividends paid property is not recognized by the Act. No dividends paid credit, any such distribution so allocated shall be treated as credit is allowable with respect to such transactions. a dividend paid only in the computation of the credit allow (b ) Amount properly chargeable to earnings or profits.— able to the transferor, and must be consistently so treated In the case of a distribution in liquidation with respect to by both corporations for the current and succeeding tax which a dividends paid credit is allowable (see paragraph (a ) able years. Each corporation shall file as a part of its re of this article) the amount of the credit is equal to the part turn for the taxable year involved, (1) a statement setting of such distribution which is properly chargeable to the earn forth concisely all of the material facts, including the date ings or profits accumulated after February 28, 1913. To de and the character of the transaction under section 112, the termine the amount properly chargeable to the earnings or status at that time of the earnings or profits of both cor profits accumulated since February 28, 1913, there must be porations, the date and amount of all dividend distributions deducted from the amount of the distribution that part subsequently made, and the particular distribution or por allocable to capital account. The capital account, for pur tion thereof designated as effecting, a distribution of the poses of these regulations, includes not only amounts repre earnings or profits of the transferor corporation; and (2) senting the par or stated value of the stock with respect to a certified copy of the resolution of the board of directors which the liquidating distribution is being made but also that of the transferee corporation with respect to the distribu stock’s proper share of the paid-in surplus, and such other tion. No dividends paid credit based upon such apportion corporate items, if any, which, for purposes of income tax ment and allocation will be allowed unless the Commissioner ation, are treated like capital in that they are not taxable is satisfied that the transferor corporation is entitled thereto dividends when distributed but are applied against and re pursuant to the provisions of this paragraph and that there duce the basis of the stock. The remainder of the distribu has been a full compliance with the requirements of this tion in liquidation is, ordinarily, properly chargeable to the paragraph. The provisions of this paragraph may be illus earnings or profits accumulated since February 28, 1913. trated by the following example: The application of this paragraph may be illustrated by the Exam ple.—The P Corporation, which keeps its books and following example: makes its income tax returns on the basis of a fiscal year Exam ple.—The Y Corporation was organized on January ending March 31, owned all of the capital stock of the S Cor 1, 1910, with an authorized and outstanding capital stock of poration. The S Corporation, which keeps its books and 2,000 shares of common stock of a par value of $100 each makes its returns on the calendar year basis, was completely and 1,000 shares of participating preferred stock of a par liquidated on December 1, 1936. At that time, the S Cor value of $100 each. The preferred stock was to receive an poration had earnings or profits accumulated subsequent to nual dividends of $7 per share and $100 per share on com February 28, 1913, in the amount o f $50,000, in addition to plete liquidation of the corporation in priority to any pay earnings or profits fo r 1936 o f $20,000, and an adjusted net ments on common stock, and was to participate equally with incom e o f $45,000. I t had paid no dividends p rior to its the common stock in either instance after the common stock liquidation. The P Corporation had earnings or profits had received a similar amount. However, the preferred stock accumulated subsequent to February 28, 1913, in the amount was redeemable in whole or in part at the option of the board of $60,000 in addition to earnings or profits of the taxable of directors at any time at $106 per share plus its proportion year computed as of the end of the year in the amount at of the earnings of the company at the time of such redemp $80,000, and an adjusted n et incom e in the amount o f tion. In 1910 the preferred stock was issued at $106 per $60,000. Th e P C orporation pays dividends as follow s: June share, fo r a tota l o f $106,000, and the common stock was 15, 1936, $25,000; Septem ber 15, 1936, $25,000; December 15, issued, at $100 per share, fo r a tota l o f $200,000. On July 1936, $25,000; and M arch 15, 1937, $25,000. No portion o f 15, 1936, the company had a p aid -in surplus o f $6,000, con the dividends paid on June 15 and September 15 prior to the sisting of the premium received on the preferred stock, eam- liquidation and no portion of the dividend paid on March 15, 2142 FEDERAL REGISTER, November 14* 1936 1937, after the close of the taxable year of the S Corporation (a) not out of earnings or profits of the taxable year or may be allocated to the S Corporation. The dividend paid out of earnings or profits of the corporation accumulated sub on December 15 may, by appropriate corporate action, be sequent to February 28, 1913 (see section 115), or, in the case made as one effecting a distribution out of the current earn of distributions in liquidation, not properly chargeable to ings o r profits o f the S C orporation to the exten t o f $20,000. earnings or profits of the corporation accumulated after Feb No part of that distribution may be allocated to the S Cor ru ary 28, 1913, under a rticle 27 CD—1; poration’s accumulated earnings or profits since, under sec (Z>) in the case of a corporation which was classified as a tion 115 (b), the earnings or profits of the P Corporation personal service corporation under the Revenue Act of 1918 and the S Corporation for the taxable year ($100,000) are or the Revenue Act of 1921, out of earnings or profits which sufficient in amount to cover all the distributions made dur were taxable in accordance with the provisions of section 218 ing that year ($100,000). of the Revenue Act of 1918 or section 218 of the Revenue Act [S ec . 27. Corporation credit for dividends paid.\ of 1921 (see section 115 (e )); or (g ) Preferential dividends.—No dividends paid credit shall be (c) a distribution in stock of the corporation or rights to allowed with respect to any distribution unless the distribution is acquire its stock which does not constitute income to its pro rata, equal in amount, and with no preference to any share of stock as compared with other shares of the same class. shareholders within the meaning of the sixteenth amendment to the Constitution (see section 115 (f) and articles 115-3 A rt. 27 ( g ) - l . Preferential distributions.—Section 27 (g) and 115-4). imposes a limitation upon the general rule that a corpora The effect of subsections (g) and (h) of section 27 is that tion is entitled to a dividends paid credit with respect to all no dividends paid credit is allowed with respect to any distri dividends which it actually pays during the taxable year. bution unless each of the shareholders of that class, who are Before a corporation may be entitled to any dividends paid subject to taxation under Title I for the period in which the credit with respect to a distribution, regardless of the me distribution is made, receives a taxable dividend as a result of dium in which the distribution is made, every shareholder the distribution. of the class of stock with respect to which the distribution The application of section 27 (h) may be illustrated by is made must be treated the same as every other shareholder the following examples: of that class. The limitation imposed by the Act is unquali Exam ple (1).—A, B, C, and D are the shareholders of the fied and the existence of a preference is sufficient to prohibit Y Corporation, which makes its returns on the calendar year allowance of the dividends paid credit regardless of the fact basis, D being an educational corporation, exempt from in (1) that such preference is authorized by all the shareholders come tax under section 101. On July 15, 1936, the Y Cor of the corporation, or (2) that the part of the distribution poration paid a dividend (within the meaning of section 115) received by the shareholder benefited by the preference is in cash o f $1,000. A and B make th eir returns on the cal taxable to him as a dividend. A corporation will not be en endar year basis, but C makes his return on the basis of the titled to a dividends paid credit with respect to any distribu fiscal year ending July 31. The Y Corporation is entitled to tion upon a class of stock if there is distributed to any share a dividends paid credit in the amount of $1,000 with respect holder of such class (in proportion to the number of shares to the dividends paid on July 15. held by him) more or less than his pro rata part of the dis Exam ple (2).—If the facts in the preceding example! tribution as compared with the distribution made to any are the same, except that A and B make their returns on the other shareholder of the same class. The disallowance of the basis of the fiscal year ending July 31, the Y Corporation dividends paid credit, where any preference or inequality in is entitled to a dividends paid credit in the amount of $1,000 fact exists, extends to the entire amount of the distribution with respect to the dividends paid on July 15. and not merely to a part of such distribution. The term “distribution,” as used in this article, includes a dividend as chapter v i defined in section 115, and a distribution in liquidation re Credits Against Tax ferred to in section 27 (f). The application of the provisions of section 27 (g), relat Part m —Credits Against Tax ing to distributions which are preferential or unequal in S e c . 31. Taxes of Foreign Countries and Possessions of TJniteQ amount, may be illustrated by the following examples: States.—The amount of income, war-profits, and excess-profits E xam ple (1).—A, B, C, and D are the owners of all the taxes imposed by foreign countries or possessions of the Unite4 States shaU be allowed as a credit against the tax, to the extent shares of class A common stock in the M Corporation, which provided in section 131. makes its income returns on a calendar year basis. With S e c . 32. Taxes Withheld at Source.—The amount of tax with the consent of all the shareholders, the M Corporation, on held at the source under section 143 or 144 shall be allowed as a July 15, 1936, declared a dividend of $5 a share payable credit against the tax. S e c . 33. Credit for Overpayments.—For credit against the tax in cash on August 1, 1936, to A. On September 15, 1936, of overpayments of taxes imposed by this title for other taxable it declared a dividend of $5 a share payable in cash on years, see section 322. October 1, 1936, to B, C, and D. No dividends paid credit CHAPTER VII for the taxable year 1936, is allowable to the M Corporation with respect to any part of the dividends paid on August 1, Accounting Periods and Methods 1936, and O ctober 1,1936. Part IV—Accounting Periods and Methods of Accounting E xam ple (2 )t—The N Corporation has a capital of $100,- 000 (consisting of 1,000 shares of common stock of a par S e c . 41. General Rule.—The net income shall be computed upoh the basis of the taxpayer’s annual accounting period (fiscal year value of $100) and earnings or profits accumulated after or calendar year, as the case may be) in accordance with the February 28, 1913, in th e amount o f $50,000. In the year method of accounting regularly employed in keeping the books 1936, the N Corporation distributes $7,500 in cancellation o f of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect 50 shares of the stock owned by three of the four share the income, the computation shall be made in accordance with holders of the corporation. No dividends paid credit is such method as in the opinion of the Commissioner does clearly allowable under section 27 (g) with respect to such dis reflect the income. If the taxpayer’s annual accounting period tribution. is other than a fiscal year as defined in section 48 or if the tax payer has no annual accounting period of does not keep books, [S ec. 27. Corporation Credit for Dividends P a id .] the net income shall be computed on the basis of the calendar (h ) Nontaxable distributions.— If any part of a distribution (in year. (For use of inventories, see section 22 ( c ) .) cluding stock dividends and stock rights) is not a taxable divi dend in the hands of such of the shareholders as are subject to A r t . 41-1. Computation of net income.— Net income must taxation under this title for the period in which the distribution be computed with, respect to a fixed period. Usually that is made, no dividends paid credit shall be allowed with respect to period is 12 months and is known as the taxable year. Item3 su ch part. of income and of expenditures which as gross income and A r t. 27 ( h ) - l . Nontaxable distributions.—No dividends deductions are elements in the computation of net income! paid credit shall be allowed with respect to any part of the need not be in the form of cash. It is sufficient that such distribution by a corporation to its shareholders which is— items, if otherwise properly included in the computation# FEDERAL REGISTER, November 14, 1936 2143 can be valued in terms of money. The time as of which any Section 44 contains special provisions for reporting the item of gross income or any deduction is to be accounted for profit derived from the sale of property on the installment; must be determined in the light of the fundamental rule plan. that the computation shall be made in such a manner as The foregoing requirements relative to a change of ac clearly reflects the taxpayer’s income. If the method of counting method are not applicable if a taxpayer desires to accounting regularly employed by him in keeping his books adopt the installment basis of returning income, as provided clearly reflects his income, it is to be followed with respect in article 44-1, but are applicable if a taxpayer desires to to the time as of which items of gross income and deduc change from such basis to a straight accrual basis. In cases! tions are to be accounted for. (See articles 42-1 to 42-3.) where permission to make such change is granted, the tax If the taxpayer does not regularly employ a method of ac payer will be required to return as additional income for counting which clearly reflects his income, the computation the taxable year in which the change is made all the profit shall be made in such manner as in the opinion of the not theretofore returned as income pertaining to the pay Commissioner clearly reflects it. ments due on installment sales contracts as of the close of A r t . 41-2. Bases of computation and changes in account the preceding taxable year. ing methods.—Approved standard methods of accounting A r t . 41-3. Methods of accounting.— It is recognized that will ordinarily be regarded as clearly reflecting income. A no uniform method of accounting can be prescribed for all method of accounting will not, however, be regarded as taxpayers, and the law contemplates that each taxpayer shall clearly reflecting income unless all items of gross income and adopt such forms and systems • of accounting as are in hia all deductions are treated with reasonable consistency. See judgment best suited to his purpose. Each taxpayer is re section 48 for definitions of “paid or accrued” and “paid or quired by law to make a return of his true income. He incurred.” All items of gross income shall be included in the must, therefore, maintain such accounting records as will gross income for the taxable year in which they are received enable him to do so. (See section 54 and article 54-1.) by the taxpayer, and deductions taken accordingly, unless in Among the essentials are following: order clearly to reflect income such amounts are to be prop (1) In all cases in which the production, purchase, or erly accounted for as of a different period. But see sections sale of merchandise of any kind is an income-producing 42 and 43. See also section 48. For instance, in any case factor, inventories of the merchandise on hand (including in which it is necessary to use an inventory, no accounting finished goods, work in process, raw materials, and sup in regard to purchases and sales will correctly reflect income plies) should be taken at the beginning and end of the except an accrual method. A taxpayer is deemed to have year and used in computing the net income of the year received items of gross income which have been credited to (see section 22 (c) and articles 22 (c) —1 to 22 (c)-8 ; or set apart for him without restriction. (See articles 42-2 (2) Expenditures made during the year should be prop and 42-3.) On the other hand, appreciation in value of erly classified as between capital and expense; that is to property is not even an accrual of income to a taxpayer prior say, expenditures for items of plant, equipment, etc., which to the realization of such appreciation through sale or con have a useful life extending substantially beyond the year version of the property. (But see article 22 (c)-5.) should be charged to a capital account and not to an The true income, computed under the Act and, if the tax expense account; and payer keeps books of account, in accordance with the method (3) In any case in which the cost of capital assets is be of accounting regularly employed in keeping such books ing recovered through deductions for wear and tear, de (provided the method so used is properly applicable in de pletion, or obsolescence, any expenditure (other than termining the net income of the taxpayer for purposes of ordinary repairs) made to restore the property or prolong taxation), shall in all cases be entered in the return. If for its useful life should be added to the property account any reason the basis of reporting income subject to tax is or charged against the appropriate reserve and not to changed, the taxpayer shall attach to his return a separate current expenses. statement setting forth for the taxable year and for the pre ceding year the classes of items differently treated under the A r t . 41—4. Accounting period .— The return of a taxpayer two systems, specifying in particular all amounts duplicated is made and his income computed for his taxable year, or entirely omitted as the result of such change. which in general means his fiscal year, or the calendar year A taxpayer who changes the method of accounting em if he has not established a fiscal year. (See section 48.) ployed in keeping his books shall, before computing his in The term “fiscal year” means an accounting period of 12 come upon such new method for purposes of taxation, secure months ending on the last day of any month other than the consent of the Commissioner. For the purposes of this December. No fiscal year will, however, be recognized unless article, a change in the method of accounting employed in before its close it was definitely established as an accounting keeping books means any change in the accounting treat period by the taxpayer and the books of such taxpayer were ment of items of income or deductions, such as a change kept in accordance therewith. A person having no such from cash receipts and disbursements method to the accrual fiscal year must make his return on the basis of the calendar method, or vice versa; a change involving the basis of year. Except in the case of a first return for income tax a valuation employed in the computation of inventories (see taxpayer shall make his return on the basis upon which he articles (22 (c )-l to 22 (c)—8); a change from the cash or made his return for the taxable year immediately preceding, accrual method to the long-term contract method, or vice unless, with the approval of the Commissioner, he has versa; a change in the long-term contract method from the changed his accounting period. See article 46-1. percentage of completion basis to the completed contract Sec. 42. Period in Which Items of Gross Income Included.—The basis, or vice versa (see article 42-4); or a change involving amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, the adoption of, or a change in the use of, any other special unless, under methods of accounting permitted under section 41, ized basis of computing net income such as the crop basis any such amounts are to be properly accounted for as of a different (see articles 22 (a )-7 and 23 (a )-11). Application for per period. In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which mission to change the method of accounting employed and falls the date of his death, amounts accrued up to the date of the basis upon which the return is made shall be filed within his death if not otherwise properly includible in respect of such 90 days after the beginning of the taxable year to be cov period or a prior period. ered by the return. The application shall be accompanied A r t. 42-1. When included in gross income.— Except as by a statement specifying the classes of items differently otherwise provided in section 42 in the case of the death treated under the two methods and specifying all amounts of a taxpayer, gains, profits, and income are to be included which would be duplicated or entirely omitted as a result of in the gross income for the taxable year in which they are the proposed change. Permission to change the method of received by the taxpayer, unless they are included as of a accounting will not be granted unless the taxpayer and the different period in accordance with the approved method of Commissioner agree to the terms and conditions under which accounting followed by him. (See articles 41-1 to 41-3.) the change will be effected. If a taxpayer has died there shall also be included in com- 2144 FEDERAL REGISTER, November 14, 1936 puting net income for the taxable period in which he died excess of the aggregate amount paid in by the shareholder amounts accrued up to the date of his death if not otherwise is income for the year of the maturity of the share. properly includible in respect of such period or a prior pe A r t . 42-4. Long-term contracts.— Income from long-term riod, regardless of the fact that the decedent may have kept contracts is taxable for the period in which the income is his books and made his returns on the basis of cash receipts determined, such determination depending upon the nature and disbursements. If no determination of compensation is and terms of the particular contract. As used in this article had until the completion of the services, the amount received the term “long-term contracts” means building, installation, is ordinarily income for the taxable year of its determina or construction contracts covering a period in excess of one tion, if the return is rendered on the accrual basis; or, for year. Persons whose income is derived in whole or in part the taxable year in which received, if the return is rendered from such contracts may, as to such income, prepare their on the receipts and disbursements basis. If a person sues returns upon either of the following bases: in one year on a pecuniary claim or for property, and money (a) Gross income derived from such contracts may be or property is recovered on a judgment therefor in a later reported upon the basis of percentage of completion. In year, income is realized in the later year, assuming that the such case there should accompany the return certificates of money or property would have been income in the earlier architects or engineers showing the percentage of completion year if then received. This is true of a recovery for patent during the taxable year of the entire work to be performed infringement. Bad debts or accounts charged off subsequent under the contract. There should be deducted from such to March 1, 1913, because of the fact that they were deter gross income all expenditures made during the taxable year mined to be worthless, which are subsequently recovered, on account of the contract, account being takefi of the mate whether or not by suit, constitute income for the year in rial and supplies on hand at the beginning and end of the which recovered, regardless of the date when the amounts taxable period for use in connection with the work under the were charged off. (See article 23 Sec. 44. Installment Basis.— made during that respective year. No payments received in (a ) Dealers in personal property .— Under regulations prescribedthe taxable year shall be excluded in computing the amount by the Commissioner with the approval of the Secretary, a person of income to be returned on the ground that they were re Who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any tax ceived under a sale the total profit from which was returned 2146 FEDERAL REGISTER, November 14,1936 as income during a taxable year or years prior to the change determining the amount of the “initial payments,” the by the taxpayer to the installment basis of returning income. “total contract price,” or the “selling price.” The term But in the case of any taxpayer who, by an original return “initial payments” contemplates at least one other payment made prior to February 26, 1926, changed the method of in addition to the initial payment. If the entire purchase reporting his net income for the taxable year 1924 or any price is to be paid in a lump sum in a later year, there being prior taxable year to the installment basis, see section 705 no payment during the first year, the income may not be of the Revenue Act of 1920. Deductible items are not to be returned on the installment basis. Income may not be re allocated to the years in which the profits from the sales turned on the installment basis where no payment in cash of a particular year are to be returned as income, but must or property, other than evidences of indebtedness of the be deducted for the taxable year in which the items are purchaser, is received during the first year, the purchaser “paid or incurred” or “paid or accrued”, as provided by having promised to make two or more payments in later sections 43 and 48. A dealer who desires to compute his years. income on the installment basis shall maintain books, of A r t . 44-3. Sale of real property on installment plan.— In account in such a manner as to enable an accurate com transactions included in class (1) in article 44-2 the vendor putation to be made on such basis in accordance with the may return as income from such transactions in any taxable provisions of this article. year that proportion of the installment payments actually The income from a casual sale or other casual disposition received in that year which the total profit realized or to be of personal property (other than property of a kind which realized when the property is paid for bears to the total should properly be included in inventory) may be reported contract price. cm the installment basis only if (1) the sale price exceeds If the vendor has retained title to the property and the $1,000 and (2 ) th e in itia l paym ents do n ot exceed 30 percent purchaser defaults in any of his payments, and the vendor of the selling price. repossesses the property, the difference between (1) the If for any reason the purchaser defaults in any of his entire amount of the payments actually received on the payments, and the vendor returning income on the install contract and retained by the vendor plus the fair market ment basis repossesses the property, the entire amount re value at the time of repossession of fixed improvements ceived in installment payments and retained by the vendor, placed on the property by the purchaser and (2) the sum less the sum of the profits previously returned as income of the profits previously returned as income in connection and an amount representing proper allowance for damage therewith and an amount representing what would have and use, if any, will be income of the vendor far the year been a proper adjustment for exhaustion, wear and tear, in which the property is repossessed, and the property re obsolescence, amortization, and depletion of the property possessed must be carried on the books of the vendor at its for the period during which the property was in the hands original cost, less proper allowance for damage and use, if of the purchaser had the sale not been made, will con any. stitute gain or loss, as the case may be, to the vendor for If the vendor chooses as a matter of consistent practice to the year in which the property is repossessed, and the basis return the income from installment sales on the straight of the property in the hands of the vendor will be the origi accrual or cash receipts and disbursements basis, such a nal basis at the time of the sale plus the fair market value course is permissible. at the time of repossession, of fixed improvements placed on If an installment obligation is satisfied, or otherwise dis the property by the purchaser. If the vendor has previously posed of, gain or loss may result therefrom and must be de transferred title to the purchaser, and the purchaser de termined in accordance with section 44 (d) and article 44-5. faults in any of his payments and the vendor reacquires A r t . 44r-2. Sale of real property invoicing deferred pay the property, such reacquisition shall be regarded as a m ents.—Under section 44 deferred-payment sales of real transfer by the vendor, in exchange for the property, of property include (a) agreements of purchase and sale which such of the purchaser’s obligations as are applied by the contemplate that a conveyance is not to be made at the out vendor to the purchase or bid price of the property. Such set, but only after all or a substantial portion of the selling an exchange will be regarded as having resulted in the price has been paid, and (b) sales in which there is an im realization by the vendor of gain or loss, as the case may mediate transfer of title, the vendor being protected by a be, for the year of reacquisition, measured by the difference mortgage or other lien as to referred payments. Such sales, between the fair market value of the property reacquired, either under (a) or (b ), fall into two classes when considered including the fair market value of fixed improvements placed with respect to the terms of sale, as follows: on the property by the purchaser, and the basis in the hands (1) Sales of property on the installment plan, that is, of the vendor of the obligations of the purchaser which were sales in which the payments received in cash or property applied by the vendor to the purchase or bid price of the other than evidences of indebtedness of the purchaser property. The basis in the hands of the vendor of the during the taxable year in which the sale is made do not obligations of the purchaser so applied will be the excess exceed 30 percent of the selling price; of the face value of the obligations over an amount equal (2) Deferred-payment sales not on the installment plan, to the income which would be returnable were the obliga that is, sales in which the payments received in cash or tions satisfied in full. The fair market value of the property property other than evidences of indebtedness of the pur reacquired shall be presumed to be the amount for which it chaser during the taxable year in which the sale is made is bid in by the vendor in the absence of clear and con exceed 30 percent of the selling price. vincing proof to the contrary. If the property reacquired In the sale of mortgaged property the amount of the is subsequently sold, the basis for determining gain or loss mortgage, whether the property is merely taken subject to is the fair market value of the property at the date of the mortgage or whether the mortgage is assumed by the reacquisition, including the fair market value of the fixed purchaser, shall be included as a part of the “selling price,” improvements placed on the property by the purchaser. but the amount of the mortgage, to the extent it does not If the vendor chooses as a matter of consistent practice exceed the basis to the vendor of the property sold, shall to return the income from installment sales on the straight not be considered as a part of the “initial payments” or of accrual or cash receipts and disbursements basis, such a the “total contract price,” as those terms are used in section course is permissible, and the sale will be treated as de 44, in articles 44-1 and 44-3, and in this article. The term ferred-payment sales not on the installment plan. “initial payments” does not include amounts received by the A r t . 44-4. Deferred-payment sale of real property not on vendor in the year of sale from the disposition to a third installment plan .—In transactions included in class (2) in person of notes given by the vendee as part of the purchase article 44-2, the obligations of the purchaser received by the price which are due and payable in subsequent years. Com vendor are to be considered as the equivalent of cash to the missions and other selling expenses paid or incurred by the amount of their fair market value in ascertaining the profit vendor are not to be deducted or taken into account in or loss from the transaction. FEDERAL REGISTER, November 14, 1936 2147 If the vendor has retained title to the property and the Proceeds of sale of notes______"__ $13, oodf purchaser defaults in any of his payments, and the vendor Selling price of property______$20,000 repossesses the property, the difference between (1) the Cost of property______10,000 entire amount of the payments actually received on the con Total profit------10, 000 tract and retained by the vendor plus the fair market value Total contract price______20, 000 at the time of repossession of fixed improvements placed on Percent of profit, or proportion of each, payment returnable as income, $10,000 divided by $20,000, the property by the purchaser, and (2) the sum of the profits 60 percent. previously returned as income in connection therewith and Face value of notes______15,000 an amount representing what would have been a proper Amount of income returnable were tbe notes adjustment for exhaustion, wear and tear, obsolescence, satisfied In full, 50 percent of $15,000______7, 500 amortization, and depletion of the property during the period Excess of face value—of notes over amount of the property was in the hands of t-bft purchaser had the sale income returnable were tbe notes satisfied in not been made, will constitute gain or loss, as the case may f u ll------7, 500 be, to the vendor for the year in which the property is re Taxable income to be reported for 1936______5, 500 possessed, and the basis of the property in the hands of the vendor will be the original basis at the time of the sale plus Exam ple (2).—Suppose in the example given above the' the fair market value at the time of repossession, of fixed M Corporation, instead of selling the notes, distributed fhpm.1 improvements placed on the property by the purchaser. If in 1936 to its shareholders as a dividend, and at the time of the vendor has previously transferred title to the purchaser, such distribution the fair market value of the notes was and the purchaser defaults in any of his payments and the $14,000. The incom e to be reported fo r 1936 is $6,500,, vendor reacquires the property, such reacquisition shall be computed as follows: regarded as a transfer by the vendor, in exchange for the Fair market value of notes______;______$14, OOO property, of such of the purchaser’s obligations as are applied Excess of face value of notes over amount of Income re turnable were the notes satisfied in full (computed as by the vendor to the purchase or bid price of the property. in example (1 )) ------7,500 Such an exchange will be regarded as having resulted in the realization by the vendor of gain or loss, as the case may be, Taxable income to be reported for 1936______6,500 for the year of reacquisition, measured by the difference If the taxpayer, referred to in the above examples (1) and between the fair market value of the property reacquired, (2) as Corporation M, had been an individual, the taxable including the fair market value of fixed improvements placed incom e to be reported, shown above as $5,500 and $6,500, on the property by the purchaser, and the basis in the hands respectively, would have been limited to 30 percent thereof of the vendor of the obligations of the purchaser (generally, by section 117 (a ), the real estate having been held for more the fair market value thereof which was previously recognized than 10 years prior to its sale in 1934. in computing income) which were applied by the vendor to In the case of decedents who die possessed of installment the purchase or bid price of the property. The fair market obligations, no gain on account of the transmission a t death value of the property reacquired shall be presumed to be the of such obligations is required to be reported as income in amount for which it is bid in by the vendor in the absence the return of the decedent for the year of his death, if the of clear and convincing proof to the contrary. If the property executor or administrator of the estate of the decedent or reacquired is subsequently sold, the basis for determining gain any of the next of kin or legatees files with the Commissioner or loss is the fair market value of the property at the date of a bond on Form 1132 in an amount not less than the amoynt reacquisition including the fair market value of the fixed by which thé tax of the decedent for the year of his death improvements placed on the- property by the purchaser. would have been increased had no such bond been filed. If the obligations received by the vendor have no fair mar The bond shall be conditioned upon the return as income, by ket value, the payments in cash or other property having any person receiving any payment in satisfaction of such a fair market value shall be applied against and reduce the obligations, of the same proportion of such payment as would basis of the property sold, and, if in excess of such basis, shall be returnable as income by the decedent if he had lived and be taxable to the extent of the excess. Gain or loss is realized had received such payment. The bond shall be executed by when the obligations are disposed of or satisfied, the amount a surety company holding a certificate of authority from being the difference between the reduced basis as provided the Secretary of the Treasury as an acceptable surety on above and the amount realized therefor. Only in rare and Federal bonds, shall be subject to the approval of the Com extraordinary cases does property have no fair market value. missioner, and must be filed at the time of filing the return A r t. 44-5. Gain or loss upon disposition of installment ob of the decedent for the year of his death. See section 1126 ligations.—The entire amount of gain or loss resulting from of the Revenue Act of 1926, as amended (paragraph 31 of the disposition or satisfaction of installment obligations, com the Appendix to these regulations), providing that where a puted in accordance with section 44 (d ), is recognized under the Act, unless the disposition is within one of the exceptions bond is required by law or regulations, in lieu of surety or sureties there may be deposited bonds or notes of the made by the Act. Such an exception is provided in section United States. 112 (b) (4) and (5), but not in section 112 (b) (6). The See section 117 as to the limitation on capital losses sus fact that section 112 (b) (6) provides for the nonrecognition of gain or loss upon the receipt of property by one corpora tained by corporations and the limitation as to both capital gains and capital losses of individuals. tion in complete liquidation of another corporation under certain specifically described circumstances is immaterial S e c . 45. Allocation of Income and Deductions.—In any case of two or more organizations, trades, or businesses (whether or not in detennining the recognized gain or loss resulting to the incorporated, whether or not organized in the United States, and liquidating corporation in case installment obligations are whether or not affiliated) owned or controlled directly or indirectly distributed in liquidation. by the same interests, the Commissioner is authorized to distribute, The application of subsection (d) of section 44 may be apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines illustrated by the following examples: that such distribution, apportionment, or aUocation is necessary in Example (I).—In 1934 the M Corporation sold a piece of order to prevent evasion of taxes or clearly to reflect the ir>/wmp unimproved real estate to B fo r $20,000. T h e company ac of any of such organizations, trades, or businesses. quired the property in 1916 a t a cost o f $10,000. D uring 1934 A r t . 45-1. Determination of the taxable net income of a the company received $5,000 cash and vendee’s notes for the controlled taxpayer.— (a ) Definitions.—When used in this remainder o f th e sellin g price, or $15,000, payable in subse article— quent years. In 1936, before the vendee made any further (1) The term “ organization” includes any organization payments, the company sold the notes for $13,000 in cash, of any kind, whether it be a sole proprietorship, a partner ^ e corporation makes it returns on the calendar year basis. ship, a trust, an estate, or a corporation (as each is defined The income to be reported fo r 1936 is $5,500, computed as or understood in the Act or these regulations), irrespective follows: of the place where organized, where operated, or where its 2148 FEDERAL REGISTER, November 14, 1936 trade or business is conducted, and regardless of whether income of a controlled taxpayer, the Commissioner is not domestic or foreign,-whether exempt, whether affiliated, restricted to the case of improper accounting, to the case or whether a party to a consolidated return. of a fraudulent, colorable, or sham transaction, or to the (2) The terms “ trade” or " business” include any trade or case of a device designed to reduce or avoid tax by shifting business activity of any kind, regardless of whether or or distorting income or deductions. The authority to de where organized, whether owned individually or otherwise, termine true net income extends to any case in which either and regardless of the place where carried on. by inadvertence or design the taxable net income, in whole (3) The term “ controlled” includes any kind of control, or in part, of a controlled taxpayer, is other than it would direct or indirect, whether legally enforceable, and however have been had the taxpayer in the conduct of his affairs exercisable or exercised. It is the reality of the control been an uncontrolled taxpayer dealing at arm’s length with which is decisive, not its form nor the mode of its exercise. another uncontrolled taxpayer. A presumption of control arises if income or deductions Sec. 46. Change of Accounting Period.— I f a taxpayer changes have been arbitrarily shifted. his accounting period from fiscal year to calendar year, from (4) The term "controlled taxpayer” means any one of calendar year to fiscal year, or from one fiscal year to another, two or more organizations, trades, or businesses owned or the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject controlled directly or indirectly by the same interests. to the provisions of section 47. (5 ) “ G rou p” or *group of controlled taxpayers” means Art. 46-1. Change in accounting period *—I f a taxpayer the organizations, trades, or businesses owned, or controlled changes his accounting period he shall, prior to the expira by the same interests. tion of 30 days from the close of the proposed period for (6) The term “true net income” mfians, in the case of a which a return would be required to effect the change, fur controlled taxpayer, the net income (or, as the case may be, nish to the collector, for transmission to the Commissioner, any item or element affecting net income) which would the information required on Form 1128. The due date of have resulted to the controlled taxpayer, bad it in the con the separate return for such period is the- 15th day of the duct of its affairs (or, as the case may be, in the particular third month following the close of that period. If the change contract, transaction, arrangement, or other act) dealt with is approved by the Commissioner, the taxpayer shall there the other member or members of the group at arm's length. after make his returns and compute his net income upon It does not mean the income, the deduction, or the item or the basis of the new accounting period. (See section 47.) element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrange Sec. 47. Returns for a Period of Less Than Twelve Months .— ( a ) Returns for short period resulting from change of accounting ment, the controlled taxpayer, or the interests controlling it, p e rio d *—I f a taxpayer, with the approval of the Commissioner, choose to make (even though such contract, transaction, or changes the basis of computing net income from fiscal year to cal arrangement be legally binding upon the parties thereto). endar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the Cb) Scope and purpose*—The purpose of section 45 is to following December 81. If the change is from calendar year to place a controlled taxpayer on a tax parity with an uncon fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and trolled taxpayer, by determining, according to the standard the date designated as the close of the fiscal year. If the change of an uncontrolled taxpayer, the true net income from the is from one fiscal year to another fiscal year a separate return shall property and business of a controlled taxpayer. The in be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. terests controlling a group of controlled taxpayers are as (b ) Income computed on basis of short period.— Where a sepa sumed to have complete power to cause each controlled rate return is made under subsection (a) on account of a change taxpayer so to conduct its affairs that its transactions in the accounting period, and in all other cases where a separate and accounting records truly reflect the net income from the return is required or permitted, by regulations prescribed by the Commissioner with the approval of the Secretary, to be made for property and business of each of the controlled taxpayers. a fractional part of a year, then the income shall be computed If, however, this has not been done, and the taxable net on the basis of the period for which separate return is made. incomes are thereby understated, the statute contemplates (e) Income placed, on annual basis.—If a separate return is made (except returns of the income of a corporation) under sub that the Commissioner shall intervene, and, by making such section (a) on account of a change in the accounting period, the distributions, apportionments, or allocations as he may deem net income, computed on the basis of the period for which necessary of gross income or deductions, or of any item or separate return is made, shall be placed on an annua.! basis by element affecting net income, between or among the con multiplying the amount thereof by twelve and dividing by the number of months included in the period for which the separate trolled taxpayers constituting the group, shall determine the return is made. The tax shall be such part of the tax computed true net income of each controlled taxpayer. The standard on such annual basis as the number of months in such period is to be applied in every case is that of an uncontrolled tax of twelve months. (d ) Earned income *—The Commissioner with the approval of payer dealing at arm’s length with another uncontrolled the Secretary shall by regulations prescribe the method of apply taxpayer. ing the provisions of subsections (b) and (c) (relating to com Section 45 and this article apply to the case of any con puting income on the basis of a short period, and placing such income on an annual basis) to cases where the taxpayer makes trolled taxpayer, whether such taxpayer makes a separate or a separate return under subsection (a) on account of a change a consolidated return. If a controlled taxpayer makps a in the accounting period, and it appears that for the period for separate return, the determination is of its true separate which the return is so made he has received earned income. (e) Reduction of credits against net income *—In the case of a net income. If a controlled taxpayer is a party to a consoli return made for a fractional part of a year, except a return made, dated return, the true consolidated net income of the affili under subsection (a), on account of a change in the accounting' ated group and the true separate net income of the controlled period, the personal exemption and credit for dependents shall be taxpayer are determined consistently with the principles of a reduced respectively to amounts which bear the same ratio to the .full credits provided as the number of months in the period for consolidated return. which return is made bears to twelve months. Section 45 grants no right to a controlled taxpayer to ap (f ) Closing of taxable year in case of jeopardy.—For closing of ply its provisions at will, nor does it grant any right to taxable year in case of jeopardy, see section 146. compel the Commissioner to apply such provisions. It is not Art. 47-1. Returns for periods of less than 12 months.— intended (except in the case of the computation of consoli No return can be made for a period of more than 12 months. dated net income under a consolidated return) to effect in A separate return for a fractional part of a year is therefore any case such a distribution, apportionment, or allocation of required wherever there is a change, with the approval of the gross income, deductions, or any item of either, as would Commissioner, in the basis of computing net income from produce a result equivalent to a computation of consolidated one taxable year to another taxable year. The periods to net income under section 141. be covered by such separate returns in the several cases are (c ) Application .—Transactions between one controlled stated in section 47 (a). The requirements with respect to taxpayer and another will be subjected to special scrutiny the filing of a separate return and the payment of tax for to ascertain whether the common control is being used to a part of a year are the same as for the filing of a return reduce, avoid, or escape taxes. In determining the true n et and the payment of tax for a full taxable year closing at FEDERAL REGISTER, November 14, 1936 2149 the same time. (See sections 53 and 56.) If a return is pany if, subsequent to a date thirty days after the date of the enactment of this Act, at any time during the taxable year—• made for a fractional part of a year, except where a return (A ) More than 5 per centum of the gross assets of the is made for a period of less than 12 months by reason of a corporation, taken at cost, was invested in stock or securities, change in accounting period, the personal exemption and or both, of any one corporation, government, or political sub credit for dependents shall be reduced to that proportion division thereof, but this limitation shall not apply to invest of the full credit which the number of months in the period ments in obligations of the United States or in obligations of any corporation organized under general Act of Congress It for which the return is made bears to 12 months. such corporation, is an instrumentality of the United States; In case of a change in accounting period the net income or computed on the return for the fractional part of a year (B) It owned more than 10 per centum of the outstanding: stock or securities, or both, of any one corporation; or (except the return of a corporation) shall be placed on an (C ) I t had any outstanding bonds or indebtedness in excess annual basis and the tax computed as provided in section of 10 per centum of its gross assets taken at cost; or 47 (c ). (D) It fails to comply with any rule or regulation pre scribed by the Commissioner, with the approval of the Secre Exam ple.—A citizen of the United States made a return tary, for the purpose of ascertaining the actual ownership of. for a 10-month period by reason of a change in accounting its outstanding stock. period. His net income including his earned net income for A r t . 48 ( e ) - l . Taxation of mutual investment companies— such 10-month period was $10,000, and his earned net in G eneral.—If a corporation, as defined in section 1001, shows come fo r such period was $4,000. H e was en titled to a to the satisfaction of the Commissioner that it is entitled, personal exemption of $2,500 but not to a credit for depend to the status of a mutual investment company, as defined* ents. H is tax fo r the period is $525.67, computed as follow s: in section 48 (e ), it is allowed, under section 13 (a) (3), a Net income for 10-month period------$10,000.00 credit for dividends paid, as provided in section 27, computed; Multiplied by 12------120, 000.00 without the benefit of section 27 (b) relating to dividend) Net income on annual basis ($120,000-^-10)----- 12,000.00 carry-over, but under section 13 (a) (2 ) it is not allowed the» Earned net income for 10-month period------$4,000.00 credit for dividends received provided in section 26 (b ).j Multiplied by 12------48,000.00 It is also required to keep records satisfactory to the Com Earned net income on annual basis missioner for the purpose of ascertaining the actual owner ($48,000^-10)______4,800.00 ship of its outstanding stock. In all other respects a mutual!, Subtracting: investment company is treated, for purposes of taxation, as, Earned income credit (10 percent of any other corporation subject to taxation under the Act. $4,800)______480 ■ 00 A r t . 48 (e )- 2 . Definition of a mutual investment com Personal exemption— ------2, 500.00 pany.— The term “mutual investment company” means a corporation whether chartered or incorporated, o r created) N et incom e .subject to norm al tax------9,020.00 under a trust instrument or otherwise, as an investment Normal tax (4 percent of $9,020)------360.80 trust, and whether of the fixed or general management type* Surtax net income ($12,000 less personal exemption of (other than a personal holding company as defined in sec $2,500)___ — ______i------,------— 9. 500.00 tion 351), which complies with all the conditions prescribed* Surtax on $9,500______270.00 by section 48 (e ). As to definition of a corporation see sec T o tal tax o n n-rmnal basis ($360.80+$270)------630.80 tion 1001. Amount of tax fo r period ($630.80 X 10/12)------625.67 A r t . 48 (e )- 3 . Proof of status of a mutual investment com pany.—(a) The Act requires that the company must have; The return of a decedent or of his estate for the year in been organized for the purpose of, and that substantially alL which he died is a return for 12 months and not for a frac of its business must have consisted of, holding, investing or tional part of a year. reinvesting in, stock or securities. It is not sufficient that Sec. 48. Definitions.— When used in this title— the corporation Is engaged in holding, investing or reinvest (a ) Taxable year.— “Taxable year" means the calendar year, or ing in, stock or securities. It must have been organized for the fiscal year ending during such calendar year, upon the basis of which the net income Is computed under this Part, “Taxa that purpose, and, throughout the taxable year, operated ble year" includes, in the case of a return made for a fractional primarily as a medium through which contributing share part of a year under the provisions of this title or under regula holders are offered centralized management and diversity' tions prescribed by the Commissioner with the approval of the of investments. If its predominant purpose is to hold, invest' Secretary, the period for which such return Is made. (b ) Fiscal year.— "Fiscal year” means an accounting period of or reinvest in, stock or securities, and if substantially all of twelve months ending on the last day of any month other than its business consists of holding, investing or reinvesting in, December. . such stock or securities, the existence or exercise of incidental! (c ) Paid, incurred, accrued.—The terms “paid or incurred” and powers to engage in other business will not deprive a cor “paid or accrued” shall be construed according to the method of accounting upon the basis of which the net income Is computed poration erf classification as a mutual investment company. under this Part. A finance company, or a company engaged in the business, of’ (d ) Trade or business.— The term “trade or business" Includes a dealer in stock or securities, or of a trader in stock or se- ’ the performance of the functions of a public office. curities for its own account, is not a mutual investment com (e ) Mutual investment companies.— pany. (1 ) General definition.— The term “mutual Investment com- ; 0>) The Act provides that at least 95 percent of the corn-* pany” means any corporation (whether chartered or created as an investment trust, or otherwise), other than a personal party's gross income for the taxable year must be derived holding com pany as defined in section 851, if— from dividends, interest, and gains from sales or other dis position of stock or securities, and that less than 30 percent ', (A) It is organized for the purpose of, and substantially all its business consists of, holding, investing, or reinvesting in of the company’s gross income for the taxable year must have’ stock or securities; and been derived from the sale or other disposition of stock or (B) At least 95 per centum of its gross Income is derived securities held for less than six months. (See section 48 (e) from dividends, interest, and gains from sales or other disposition of stock or securities; and Cl) (B) n-nd (C ). In determining the percentage of the com (C) Less than 30 per centum of its gross income Is derived pany’s gross income which has been derived from such' from the sale or other disposition of stock or securities held source, a loss from the sale or other disposition of stock or, for less than six months; and securities does not alter into the computation. The deter- , (D) An amount not less than 90 per centum of its net In come is distributed to its shareholders as taxable dividends m i nation of the period for which stock or securities have! during the taxable year; and been held shall be governed by the provisions of section 1171 (E) Its shareholders are, upon reasonable notice, entitled (c) in so far as applicable; to redemption of their stock for their proportionate interests in the corporation’s properties, or the cash equivalent thereof (c) The Act provides that an amount not less than 90 less a discount not in excess of 3 per centum thereof. percent of the company’s net income for the taxable year) must have been distributed to its shareholders as taxable»., (2 ) L im it a t io n s .— Despite the provisions of paragraph (1) a corporation «baji not be considered as a mutual investment cam-. dividends during the taxable year. The term “taxable divW No. 175-----8 2150 FEDERAL REGISTER, November 14, 1936 dends” means dividends (as defined in section 115) which I year. In case the actual owner is a corporation, partnership, are taxable in the hands of such shareholders as are sub estate, or trust, the information shall also give the names and ject to taxation under Title I, and includes the proportionate addresses and the proportionate interests of such sharehold share of the net earnings of the current year to the date ers, partners, or beneficiaries, who had beneficial interests of redemption distributed to the shareholder upon redemp to the extent of at least 10 percent at any time during the tion. A taxable dividend is not distributed to its share last half of the mutual investment company’s taxable year. holders during the taxable year within the meaning of section Statements giving such additional information shall be de 48 (e) (1) (D ), unless the dividend is received by the share manded not later than 30 days after the close of the com holders during the taxable year of the company. See article pany’s taxable year, as follows: 27 (a)-l, relating to the dividends paid credit allowed corporations. (1) In the case of a company having 2,000 or more (d ) The Act requires that shareholders must, upon reason actual owners of its stock on any dividend payment date, as disclosed by statements received in response to demands able notice, be entitled at all times during the taxable year to made by the company as provided in article 48 (e)-4, from redemption or purchase of their stock for their proportionate each person so disclosed or known to the company as the interests in the corporation’s properties, or the cash equiva actual owner of 5 percent or more of its stock; or lent thereof, less a discount not in excess of 3 percent thereof. Redemption within 60 days of written notice is redemption (2) in the case of a company having less than 2,000 and upon reasonable notice, even though subject to exception in more than 200 actual owners of its stock as so disclosed, from each person so disclosed or known to the company as case of extraordinary crises. actually owning 1 percent or more of its stock; or (e) Corporations are given 30 days after June 22, 1936, the date of the enactment of the Act, within which to com (3) in the case of a company having 200 or less actual ply with the provisions of section 48 (e) (2). Although a owners of its stock, from each person who is the actual corporation may be otherwise classified as a mutual invest owner of one-half of 1 percent or more of its stock. ment company, it will not be considered such for any tax A r t. 48 (e)-6. Additional information required in returns able year if at any time (after July 22, 1936) during the of shareholders.—Any person who fails or refuses to comply taxable year it failed to comply with section 48 (e) (2). with the demand of a mutual investment company for the A r t . 48 (e )- 4 . Records to be kept for purpose of ascertain- written statements which articles 48 (e)-4 and 48 (e>-5 re ing actual ownership of outstanding stock of mutual invest quire the company to demand from its shareholders shall ment companies.—Every mutual investment company shall submit as a part of the income tax return required by the Trmrnt«.in in the collection district in which it is required to Act of such person a statement showing, to the best of his file its income tax return permanent records showing the in knowledge and belief— formation relative to the actual owners of its stock contained in the written statements required by these regulations to be (1) the number of shares actually owned by him at any demanded from the shareholders. The term “actual owner and all times during the period for which the return is of stock”, as used in these regulations, includes the person filed in any company claiming to be a mutual investment who is required to include in gross income in his return the company; dividends received on the stock. All such records shall be (2) the dates of acquisition of any such stock during open for inspection, by any duly authorized officer or em such period and the names and addresses of persons from ployee of the Bureau of Internal Revenue, for a period of four whom it was acquired; years from the end of the taxable year of the company to (3) the dates of disposition of any such stock during which they relate. such period and the names and addresses of the transferees th ereof; A mutual investment company shall demand of each of its shareholders (or in the case of a company all or substan (4) the names and addresses of the members of his family, as defined in section 351 relating to personal hold tially all of the capital stock of which is held by trustees for ing companies; and the maximum number of shares, if the purpose of exercising voting rights, such company shall any, actually owned by each in any company claiming to demand of each of the registered holders of certificates of be a mutual investment company, at any time dining the beneficial interest in the company) on or before the payment last half of the taxable year of such company; of any dividend made after 30 days from August 18, 1936, a (5) the names and addresses of any corporation, part written statement giving (1) the name and address of the nership, association, or trust in which he had a beneficial actual owner as of the date the shareholder becomes entitled interest to the extent of at least 10 percent at any time to the dividend, whether payable then or later, of the stock during the period for which such return is made, and the with respect to which the dividend is payable, (2) the name number of shares of any company claiming to be a mutual and address of the person who executes the statement, and investment company actually owned by each; and (3) the number of shares to which the statement pertains, or, if the statement is made by the actual owner, the total (6) the amount and date of receipt of each dividend received during such period from every company claiming number of shares actually owned by such person. to be a mutual investment company. At the time the first demand is made after the expiration o f 30 days from August 18, 1936, a like statem ent shall be When making demand for the written statements required demanded with respect to any prior dividends paid within of each shareholder under these regulations, the company; the taxable year. ? \ shall inform each of the shareholders of his duty to submit A r t . 48 (e ) —5. Records to be kept for purpose of determin as a part of his income tax return the statements which are ing whether a company claiming to be a mutual investment required by this article if he fails or refuses to comply with company is a personal holding company,—For the purpose such demand. A list of the persons failing or refusing to of determining whether a company eln.imrng to be a mutual comply in whole or in part with a company’s demand shall investment company is a personal holding company as de be maintained as a part of its records required by these regu fined in section 351,, the permanent records of the company lations. A company which fails to keep such records to show shall show the additional information required by these regu the actual ownership of its outstanding stock as are required lations disclosing the maximum number of shares actually by these regulations, or which may be required from time to owned by each person at any time during the last half of the time by any rule or regulation prescribed by the Commis company’s taxable year. In the case of an individual actual sioner, with the approval of the Secretary, for such purpose, owner, the information shall give, to the best of the knowl- shall not be taxable as a mutual investment company. edge and belief of such owner, the names and addresses of, j Nothing in these regulations shall be construed to relieve and the maximum number of shares actually owned by, j mutual investment companies or their shareholders from the each member of his family (as defined in section 351 (b) (1 )) duty of filing infonnation returns required by regulations at any time during the last half of the company’s taxable prescribed under sections 147 and 148. FEDERAL REGISTER, November 14, 1936 2151 CHAPTER VIH article 51-4) by the spouse preparing the return. The spouse who fills in the return shall be considered to have prepared Returns and Payment of Tax the return within the meaning of this paragraph. If the Part V—Returns and Payment of Tax return is prepared by both spouses, or is prepared by neither spouse, then both spouses shall swear to the return, except Sec. 51. Individual Returns.— (a) Requirement.—The following individuals shall each make where one spouse acts for the other spouse under a power under oath a return stating specifically the items of his gross in of attorney submitted on Form 936, or the return is made come and the deductions and credits allowed under this title and by an agent by reason of illness or absence, as provided in such other information for the purpose of carrying out the provi sions of this title as the Commissioner with the approval of the article 51-2. Secretary may by regulations prescribe— Whether or not an individual is the head of a family or (1) Every individual having a net income for the taxable year has dependents is immaterial in determining his liability tat of $1,000 or over, if single, or if married and not living with render a return. For returns by fiduciaries, see section 142; husband or wife; by partnerships, see section 187; and by nonresident alien (2) Every individual having a net income for the taxable year individuals, see section 217. See also section 53. of $2,500 or over, if married and living with husband or wife; and A rt. 51-2. Form, of return .—The return shall be on Form (3) Every individual having a gross income for the taxable 1040, except that it may be on short Form 1040A if the net year of $5,000 or over, regardless of the amount of his net incom e does not exceed $5,000, and is derived ch iefly from, income. salaries and wages. The forms may be had from the collec (b) Husband and wife.—If a husband and wife living together tors of the several districts. The return may be made by an have an aggregate net income for the taxable year of $2,500 or over, or an aggregate gross income for such year of $5,000 or over— agent if, by reason of fitness, the person liable for the mak ing of the return is unable to make it. The return may also (1) Each shall make such a return, or (2) The income of each shall be included in a single joint re be made by an agent if the taxpayer is unable to make thel turn, in which case the tax shall be computed on the aggregate return by reason of continuous absence from the United Income. States for a period of at least 60 days prior to the date pre (c) Persons under disability.—If the taxpayer is unable to make scribed by law for making the return. Whenever a return ia his own return, the return shall be made by a duly authorized made by an agent (except returns on Form 1040NB for non agent or by the guardian or other person charged with the care resident aliens not engaged in trade or busines in the United of the person or property of such taxpayer. (d) Fiduciaries.—For returns to be made by fiduciaries, see States and not having an office or place of business therein, section 142. see article 217-2) it must be accompanied by the prescribed power of attorney, Form 935. The taxpayer and his agent, A r t . 51-1. Individual returns.—For each taxable year if any, are responsible for the return as made and incur every single person and every married person not living with liability for the penalties provided for erroneous, false, or husband or wife for any part of the taxable year, whose gross fraudulent returns. For returns of nonresident aliens, see income as defined in sections 22 and 116 is $5,000 or over, articles 217-1 and 217-2. or whose net income as defined in section 21 is $1,000 or over, must make a return of income. Every married person living The home or residental address of the taxpayer (includ with husband or wife for any part of the taxable year, but ing the street and number, if any) shall be given in the space not at the close of the taxable year, must make a return provided at the top of the return for the name and address If his gross income for the taxable year is $5,000 or more, of the taxpayer. A taxpayer having a permanent business or his net income is equal to, or in excess of, the credit al address may give that address as the principal or mailing lowed him by section 25 (b) (1) and (3) (computed with address, provided that the complete home or residential out regard to his status as the head of a fam ily). (See address is also given within the space provided. article 25-7.) A husband and wife living together for the Art. 51-3. Return of income of minor.—An individual, al entire year need make no returns unless their aggregate though a minor, is required to render a return of income if gross income fo r th e taxable year is a t least $5,000, or th eir he has a net income of his own of $1,000 or over, or a gross aggregate net incom e is at least $2,500. O f th eir ag income of $5,000 or over, for the taxable year. If he is mar gregate net income for the taxable year is $2,500 or more, ried, see article 51-1. If under the laws of a State the earn or their aggregate gross income is $5,000 or more, either each ings of a minor belong to the minor, such earnings, regard must make a return, or the income of each must be included less of amount, are not required to be included in the return in a single joint return. A husband and wife living together of the parent. If the aggregate of the net income of a minor at the close of the taxable year but not during the entire from any property which he possesses, and from any funds taxable year must make a return or returns if their aggre held in trust for him by a trustee or guardian, and from his gate gross income for the taxable year is $5,000 or more, earnings which belong to him, is at least $1,000, or his gross or their aggregate net income is equal to, or in excess of, income is at least $5,000, a return, as in the case of any other the credit allowed them by section 25 (b) (1) and (3) (com individual, must be made by him or for him by his guardian, puted without regard to the status of either of them as the or other person charged with the care of his person or prop head of a family). (See article 25-7.) If the income of erty. (See article 142-2.) In the absence of proof to the each is included in a single joint return, the tax is computed contrary, a parent will be assumed to have the legal right to on the aggregate income and all deductions and credits to the earnings of the minor and must include them in his re which either is entitled shall be taken from such aggregate turn. income. A joint return of husband and wife may be filed Art. 51-4. Verification of returns—All income tax returns only if they were living together at the close of their tax must be verified under oath or affirmation. The oath or able year. If one spouse dies prior to the last day of the affirmation may be administered by any officer duly author taxable year, the surviving spouse may not include the in ized to administer oaths for general purposes by the law of come of the deceased spouse in a joint return for such the United States or of any State, Territory, or possession of taxable year. the United States, wherein such oath is administered, or by a The joint return of a husband and wife (if not made by consular officer of the United States. Persons in the naval an agent other than husband or wife, see article 51-2) must or military service of the United States may verify their re be signed by both spouses, except that one spouse may sign turns before any official authorized to administer oaths for the return as the agent for the other, if the return is accom the purposes of those respective services. Income tax re panied by a power of attorney on Form 936, authorizing turns executed abroad may be attested free of charge before such action. The spouse acting as agent shall, with the United States consular officers. If a foreign notary or other principal, assume the responsibility for making the return official having no seal shall act as attesting officer, the and incur liability for the penalties provided for erroneous authority of such attesting officer should be certified to by false, or fraudulent returns. some judicial official or other proper officer having knowl The joint return of a husband and wife must be sworn edge of the appointment and official character of the to before an officer duly authorized to administer oaths (see attesting officer. 2152 FEDERAL REGISTER, November 14, 1936 A r t . 51-5. Use of prescribed forms.—Copies of the pre section 52, whether he is engaged in carrying on the busi scribed return forms will so far as possible be furnished ness for which the corporation was organized or only in taxpayers by collectors. A taxpayer will not be excused from marshaling, selling, and disposing of its assets for purposes making a return, however, by the fact that no return form of liquidation. Notwithstanding that the powers and func has been furnished to him. Taxpayers not supplied with tions of a corporation are suspended and that the prop the proper forms should make application therefor to the erty and business are for the time being in the custody collector in ample time to have their returns prepared, veri of the receiver, trustee, or assignee, subject to the order fied, and filed with the collector on or before the due date. of the court, such receiver, trustee, or assignee stands in Each taxpayer should carefully prepare his return so as the place of the corporate officers and is required to per fully and clearly to set forth the data therein called for. form all the duties and assume all the liabilities which Returns which have not been so prepared will not be ac would devolve upon the officers of the corporation were cepted as meeting the requirements of the Act. In lack of th ey in control. (S ee sections 274 and 298 and articles a prescribed form a statement made by a taxpayer disclos 274-1 and 274-2.) A receiver in charge of only part of the ing his gross income and the deductions therefrom may be property of a corporation, however, as, for example, a re accepted as a tentative return, and if filed within the pre ceiver in mortgage foreclosure proceedings involving m erely scribed time the statement so made will relieve the taxpayer a small portion of its property, need not maki> a return of from liability to penalties, provided that without unneces incom e. sary delay such a tentative return is supplemented by a S e c . 53. Time and Place for Filing Returns.— return made on the proper form. (See further articles 53-2 (a) Time for filing.— to 53-4.) (1) General rule.—Returns made on the basis erf the calendar S e c . 52. Corporation Returns .— Every corporation subject to year shall be made on or before the 15th day of March following taxation under this title shall make a return, stating specifically the close of the''calendar year. Returns made on the basis of a the Items of its gross Income and the deductions and credits fiscal year shall be made on or before the 15th day of the third allowed by this title and such other Information for the purpose month following the dose of the fiscal year. of carrying out the provisions a t this title as the Commissioner (2) Extension of time.—The Commissioner may grant a rea with the approval of the Secretary may by regulations prescribe. sonable extension of time for filing returns, under such rules nnfl The return shall be sworn to by the president, vice president, or regulations as he shall prescribe with the approval of the Secre other principal officer and by the treasurer, assistant treasurer, or tary. Except in the case of taxpayers who are abroad, no chief accounting officer. In cases where receivers, trustees In extension shall be for more than six months. bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make (b ) To whom return made.— returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the (1) Individuals.—Returns (other than corporation returns} basis of such returns made by receivers, trustees, or assignees shall be made to the collector far the district In which Is located shall be collected in the same manner as if collected from the the legal residence or principal place of business of the person corporations of whose business or property they have custody and making the return, or, if he has no legal residence or principal control. place of business in the United States, then to the collector at Baltimore, Maryland. A r t . 52-1. Corporation returns.—Every corporation not (2) Corporations.—Returns of corporations shall be made to expressly exempt from tax must make a return of income, the collector of the district in which is located the principal regardless of the amount of its net income. In the case of place of business or principal office or agency of the corporation, or, if It has no principal place of business or principal office or ordinary corporations, the return shall be on Form 1120. agency in the United States, then to the collector at Baltimore, For returns of insurance companies, see articles 201 (b )-l, Maryland. 204 (a )-l, and 207-7; of foreign corporations, see section 235; and of affiliated corporations, see section 141 and article A rt. 53-1. Time for filing returns .— Returns of income (ex 141-1. A corporation having an existence during any portion cept in the case of nonresident alten individuals, as to which of a taxable year is required to make a return. A corporation see section 217, and foreign corporations, as to which see which has received a charter, but has never perfected is section 235) must be made on or before the 15th day of the organization, which has transacted no business and had no third month following the dose of the taxable year. A cor income from any source, may upon presentation of the facts poration going into liquidation diming any taxable year may; to the collector be relieved from the necessity of making a upon the completion of such liquidation, prepare a return return as long as it remains in an unorganized condition. for that year covering its income for the part of the year In the absence of a proper showing to the collector such a during which it was engaged in business said may immedi corporation will be required to make a return. A corpora ately file such return with the collector. tion which was dissolved in 1936 prior to the enactment of Art. 53-2. Extensions of time for filing returns.— I t is im the Revenue Act of 1936 is not relieved from the necessity of portant that the taxpayer render on or before the due date rendering returns thereunder for any period or periods of its a return as nearly complete and final as it is possible for him existence for which the Act is effective. For information to prepare. However, the Commissioner is authorized to grant returns by corporations relating to profits of the taxable a reasonable extension of time for filing returns under such year declared as dividends, see section 148 (b ). For verifica rules and regulations as he shall prescribe with the approval tion of returns and use of prescribed forms, see. articles 51-4 of the Secretary. Accordingly, authority for granting exten and 51-5. Upon liquidation or dissolution of a corporation sions of time for filing income tax returns is hereby delegated there shall be attached to the final return a statement show to the various collectors of internal revenue. Application for ing: (1) The date and manner of dissolution, (2) the name extensions of time for filing income tax returns should be ad and address of each shareholder at dissolution and the dressed to the collector of internal revenue for the district in number and par value of the shares of stock held by each which the taxpayer files his returns and must contain a full of them, (3) a description and the value of the liquidating recital of the causes for the delay. Except in the case of tax assets received by each shareholder, (4) the n a m e and ad payers who are abroad, no extension for filing income tax dress of each individual or corporation other than share returns may be granted for more than six months. For ex holders and creditors, if any, that received assets at dissolu tensions of time for payment of tax, see sections 56 (c) and tion, (5) a description and the value of the assets received by 272 (j) and articles 53-3, 56-2, and 272-3. each such individual or corporation, and (6) the considera A rt. 53-3. Extensions of time in the case of foreign organi tion, if any, paid by each of them for the assets received. zations, certain domestic corporations, and citizens of United A r t . 52-2. Returns by receivers.— Receivers, trustees in States residing or traveling abroad.—An extension of time for dissolution, trustees in bankruptcy, and assignees, oper filing returns of income for taxable years begun after Decem ating the property or business of corporations, must make ber 31, 1935, is hereby granted up to and including the 15th returns of income for such corporations. If a receiver day of the sixth month following the close of the taxable has full custody of and control over the business or year in the case of: property of a corporation, he shall be deemed to be oper (a) Foreign partnerships regardless of whether they main ating such business or property within the meaning of tain an office or place of business within the United States; FEDERAL REGISTER, November U , 1936 2153 (b) Foreign corporations which maintain an office or place A r t . 54-1. Aids to collection of tax.— The Commissioner of business within the United States; may require any person to keep specific records, render under (c) Domestic corporations which transact their business oath such statements and returns, and comply with such and keep their records and books of account abroad; rules and regulations as the Commissioner, with the ap id ) Domestic corporations whose principal income is from proval of the Secretary, may prescribe, in order that he sources within the possessions of the United States; and may determine whether such person is liable for the tax „ (e ) American citizens residing or traveling abroad, includ or for the collection thereof. In accordance with this pro ing persons in military or naval service on duty outside the vision, every person subject to tax carrying on the business United States. of producing, manufacturing, purchasing, or selling any com In all such cases an affidavit must be attached to the modities or merchandise, except the business of growing and return, stating the cause of the delay in filing. selling products of the soil, shall for the purpose of deter Taxpayers who take advantage of this extension of time mining the amount of income which may be subject to the will be charged with interest at the rate of 6 percent per tax keep such permanent books of account or records, in annum on the first installment of tax from the original due cluding inventories, as are necessary to establish the amount date until paid. of his gross income and the deductions, credits, and other A r t. 53-4. Due date of return .—The due date is the date information required to be shown in an income tax return. on or before which a return is required to be filed in accord Forms relating to Federal income taxes shall be prescribed ance with the provisions of the Act or the last day of the by the Commissioner and filled in according to the instruc period covered by an extension of time granted by the Com tions contained thereon and the regulations applicable missioner or a collector. When the due date falls on Sunday thereto. or a legal holiday, the due date for filing returns will be the Sec. 55. Publicity of returns.— day following such Sunday or legal holiday. If placed in (a) Returns made under tills title shall be open to Inspection in the mails, the returns should be posted in ample time to the same manner, to tbe same extent, and subject to the same provisions of law, including penalties, as returns made under reach the collector’s office, under ordinary handling of the Title n of the Revenue Act of 1926; and all returns made under mails, on or before the date on which the return is required this Act shall constitute public records and shaU be open to public to be filed. If a return is made and placed in the mails in examination and inspection to such extent as shall be authorized in rules and regulations promulgated by the President. due course, properly addressed and postage paid, in ample ( b ) (1) All income returns filed under this title (or copies there time to reach the office of the collector on or before the of, if so prescribed by regulations made under this subsection), due date, no penalty will attach should the return not actu shall be open to inspection by any official, body, or commission, ally be received by such officer until subsequent to that date. lawfully charged with the administration of any State tax law, if the inspection is for the purpose of such administration or for If a question may be raised as to whether the return was, the purpose of obtaining information to be furnished to local tax- * posted in ample time to reach the collector’s office on or ing authorities as provided in paragraph (2). The inspection shall before the due date, the envelope in which the return was be permitted only upon written request of the governor of such State, designating the representative of such official, body, or com transmitted will be preserved by the collector and forwarded mission to make the inspection on behalf of such official, body, or to the Commissioner with the return. As to additions to coinmission. The inspection shall be made in such manner, and the tax in the case of failure to file return within the at such times and places, as shall be prescribed by regulations prescribed time, see section 291. made by the Commissioner with the approval of the Secretary. (2) Any information thus secured by any official, body, or com A r t. 53-5. Place for'Jlling individual returns.— Section 53 mission of any State may be used only for the administration of (b) (1) provides that individual returns shall be made to the the tax laws of such State, except that Upon written request of collector for the district in which is located the legal resi the Governor of such State any such information may be fur nished to any official, body, or commission of any political sub dence or principal place of business of the person making the division of such State, lawfully charged with the administration return, or, if he has no legal residence or principal place of of the tax laws of such political subdivision, but may be fur business in the United States, then to the collector at Balti nished only for the purpose of, and may be used only for, the administration of such tax laws. Any officer, employee, or agent more, Md. of any State or political subdivision, who divulges (except as An individual employed on a salary or commission basis authorized in this subsection, or when called upon to testify in who is not also engaged in conducting a commercial or pro any judicial or administrative proceeding to which the State or political subdivision, or such State or local official, body, or com fessional enterprise for profit on his own account does not mission, as such, is a party) any information acquired by him have a “principal place of business” within the meaning of through an inspection permitted him or another under this sub section 53 (b) (1), and shall make his return to the collector section «frail be guilty of a misdemeanor and shall upon convic for the district in which is located his legal residence, or, if tion be punished by a fine of not more than $1,000, or by im prisonment for not more than one year, or both. he has no legal residence in the United States, then to the collector at Baltimore, Md. A r t . 55 ( b ) - l . Definitions.—Any word or term used in this article and articles 55 (b)-2 to 55 (b)-4, inclusive, Sec. 54. Records and Special Returns.— (a ) By taxpayer.— Every person liable to any tax imposed by this which is defined in the Act shall be given the respective title or for the collection thereof, shall keep such records, render definition contained in the Act. under oath such statements, make such returns, and comply with A r t . 55 (b )-2 . Copies of income returns.—Every person such rules and regulations, as the Commissioner, with the approval of the Secretary, may from time to time prescribe. (except nonresident alien individuals, nonresident alien fidu (b ) To determine liability to tax.— Whenever in the Judgment ciaries, nonresident foreign partnerships, and nonresident of the Commissioner necessary he may require any person, by notice foreign corporations) required to file an income return (in served upon him, to make a return, render under oath such state cluding affiliation schedules) under the provisions of sections ments, or keep such records, as the Commissioner deems sufficient to show whether or not such person is liable to tax under this title. 51, 52, 141, 142, or 187 o f T itle I o f the Revenue A ct o f 1936, (c ) Information at the source.— For requirement of statements or section 351 of Title IA of that Act, or section* 106 of the and returns by one person to assist in determining the tax liability Revenue Act of 1935, as amended by section 402 of the Reve of another person, see sections 147 to 150. (d ) Copies of returns.— If any person, required by law or regula nue Act of 1936, for any taxable year beginning after Decem tions made pursuant to law to file a copy of any Income return ber 31, 1935, shall file with the return a copy thereof on a for any taxable year, fails to file such copy at the time required, duplicate form on colored paper which will be provided for there shall be due and assessed against such person $5 in the that purpose. The copy on such duplicate form shall be a case of an individual return or $10 in the case of a fiduciary, part nership, or corporation return, and the collector with whom the complete duplicate of the return as filed except that the return is filed shall prepare such copy. Such amount shall be affidavits on the duplicate form need not be filled in. There collected and paid, without interest, in the same manner as the shall be attached to the copy on the duplicate form a copy of amount of tax due in excess of that shown by the taxpayer upon a return in the case of a mathematical error appearing on the face any schedule or statement attached to the original return of the return. Copies of returns filed or prepared pursuant to this except (1) Schedule 0-1 in the case of a corporation return, subsection shall remain on file for a period of not less than two (2) the copy of the will or trust instrument in the case of a years from the date they are required to be filed, and may be fiduciary return, (3) the power of attorney on Form 935 or. destroyed at any time thereafter under the direction of the Commissioner. Form 936 in the case of a return made by an agent, and (4), 2154 FEDERAL REGISTER, November 14* 193$ the copy of the annual statement made to the insurance porations, and In the case o f so-called tax-free covenant bonds, department of the State, Territory, or District of Columbia see section 143 and 144. (g ) Fractional parts of cent.—In the payment of any tax under in the case of a return of an insurance company. In lieu of this title a fractional part of a cent shall be disregarded unless it filling in the duplicate form on colored paper, a legible photo amounts to one-half cent or more. In which case it shall be in stat or photograph of the return and related schedules as creased to 1 cent . (h ) Receipts.—Every collector whom any payment of any income filed may be filed with the return provided such photostat tax is made shall upon request give to the person making such or photograph is not of larger dimensions than the return payment a full written or printed receipt therefor. and is securely fastened to the duplicate form. For amounts A r t. 56-1. Date on which tax shall he paid.—The tax, un to be assessed and collected in the case of the failure to file less It Is required to be withheld at the source (see sections a copy of any income return required by law or regulations, 143 and 144) or unless it is to be paid by a nonresident alien see section 54 (d ). individual (see section 218) or a foreign corporation not A rt. 55 (b )-3 . Inspection of copies of returns.—-Within a having any office or place of business in the United States reasonable time after the returns are filed the copies thereof (see section 236), is to be paid on or before the 15th day of (including photostats and photographs), under such pro March following the dose of the calendar year, or, if the cedure as may be prescribed by the Commissioner, shall be return is made on the basis of a fiscal year, on or before the made available for inspection In the office of the collector of 15th day of the third month following the close of such internal revenue in which the returns are filed, by any offi fiscal year. But see article 53-3. H ie tax may, at the option cial, body, or commission, lawfully charged with the admin of the taxpayer, be paid in four equal installments instead istration of any State tax law, or by the representatives of of in a single payment, in which case the first installment such official, body, or commission designated in writing by Is to be paid on or before the date prescribed for the pay the governor of the State, for the purpose of such adminis ment of the tax as a single payment, the second installment tration or for the purpose of obtaining information to be on or before the 15th day of the third month, the third furnished to local taxing authorities as provided in section installment on or before the 15th day of the sixth month, 55 (b) (2). The governors of the respective States «haJi be and the fourth installment an or before the 15th day of the notified by the Commissioner of the date the copies of the ninth month, after such date. If the taxpayer elects to pay returns are available for inspection and inspection thereof the tax in four installments, each of the four installments shall not be permitted after one year from such date. must be equal in amount, botany installment may be paid, at A rt. 55 (b )-4 . Request for permission to inspect copies.— the election of the taxpayer, prior to the date prescribed for Requests for permission to inspect the copies of returns must its payment. If an installment is not paid in full on or be in writing signed by the governor under the seal of his before the date fixed for its payment either by the Act or State, and must be addressed to the Commissioner of Inter by the Commissioner in accordance with the terms of an nal Revenue, Records Division, Washington, D. C. The re extension, the whole amount of the tax unpaid shall be paid quest must state (a) the kind of returns it is desired to upon notice and demand from the collector. inspect, (b) the taxable year or years covered by the copies A r t. 56-2. Extension of time for payment of the tax or of returns it is desired to inspect, (c) the name of the official, instaUment thereof.—If it is shown to the satisfaction of body, or commission by whom or which the inspection is to the Commissioner that the payment of the amount de be made, (d) the name of the representative of such official, termined as the tax by the taxpayer or any part or install body, or commission, designated to make the inspection, (e) ment thereof upon the date or dates prescribed for the pay by specific references, the State tax law which such official, ment thereof will result in undue hardship to the taxpayer, body, or commission is charged with administering and the the Commissioner, at the request of the taxpayer, may grant law under which he, she, or it is so charged, (/) the purpose an extension of time for the payment for a period not tol for which the inspection is to be made, and (fir) if the in exceed six months from the date prescribed for the pay spection Is for the purpose of obtaining information to be ment of such amount, part, or installment. The extension furnished to local taxing authorities, (1) the name of the will not be granted upon a general statement of hardship. official, body, or commission of any political subdivision of The term “undue hardship” means more than an incon the State, lawfully charged with the administration of the venience to the taxpayer. It must appear that substantial tax laws of such political subdivision, if any, to whom or to financial loss, for example, due to the sale of property at which the information secured by the inspection is to be a sacrifice price, will result to the taxpayer from making furnished, and (2) the purpose for which the information is payment of the amount at the due date. If a market exists, to be used by such official, body, or commission. the sale of property at the current market price is not or Sec. 56. Payment of Tax.— dinarily considered as resulting in an undue hardship. ( a ) Time of payment.— The total amount of tax imposed by this An application for an extension of time for the payment title shall be paid on the fifteenth day of March following the of such tax should be made under oath on Form 1127 and close a t the calendar year, or, if the return should be made on the basis of a fiscal year, then on the fifteenth day of the third month must be accompanied or supported by evidence showing the| following the close of the fiscal year. undue hardship that would result to the taxpayer if the ( b ) Installment payments.— The taxpayer may elect to pay the extension were refused. A sworn statement of assets and tax in four equal installments, in which case the first installment liabilities of the taxpayer is required and should accom shall be paid on the date prescribed for the payment of the tax by the taxpayer, the second installment shall be paid on the pany the application. An itemized statement showing all fifteenth day of the third month, the third installment on the receipts and disbursements for each of the three months fifteenth day at the sixth month, and the fourth installment on preceding the due date of the tax shall also be submitted. the fifteenth day of the ninth month, after such date. If any installment is not paid on or before the date fixed for its payment, The application with the evidence must be filed with the the whole amount of the tax unpaid shall be paid upon notice and collector, who will at once transmit it to the Commissioner demand from the collector. with his recommendations as to the extension. When it is (c ) Extension of time for payment.—At the request of the tax received by the Commissioner it will be examined immedi payer, the Commissioner may extend the time for payment of the ately and, if possible, within 30 days win be rejected, ap amount determined as the tax by the taxpayer, or any installment thereof, for a period not to exceed six months from the date pre proved or tentatively approved, subject to certain conditions scribed for the payment of the tax or an installment thereof. In of which the taxpayer will be immediately notified. The such case the amount in respect of which the extension is granted Commissioner will not consider an application for an exten shall be paid on or before the date of thft expiration of the period of the extension. sion of time for the payment of a tax unless such application (d ) Voluntary advance payment.— A tax imposed by this title, is made in writing, and is made to the collector on or before) or any installment thereof, may be paid, at the election of the the due date of the tax or installment thereof for which taxpayer, prior to the date prescribed for its payment. the extension is desired, or on or before the date or dates (e ) Advance payment in case of jeopardy.— For advance payment In case of jeopardy, see section 146. prescribed for payment in any prior extension granted. ( f ) Tax withheld at source.— For requirement of withholding tax As a condition to the granting of such an extension, the at the source in the case of nonresident aliens and foreign cor Commissioner will usually require the taxpayer to furnish a! FEDERAL REGISTER, November 14, 1936 2155 bond on Form 1130 in an amount not exceeding double the ment of taxes, so far as applicable, are hereby extended to and amount of the tax or to furnish other security satisfactory to made a part of this title. Sec. 62. Rules and Regulations.—The Commissioner, with tha the Commissioner for the payment of the tax, or installment approval of the Secretary, shall prescribe and publish all needful thereof, on the date prescribed for payment in the extension, rules and regulations for the enforcement of this title. so that the risk of loss to the Government will not be greater Sec. 63. Taxes in Lieu of Taxes Under 1934 A ct.—The taxes im posed by this title and Title IA shall be in lieu of the taxes at the end of the extension period than it was at the begin imposed by Titles I and IA of the Revenue Act of 1934, as amended. ning of the period. If a bond is required it must be filed with Sec. 64. Short Title.—This title may be cited as the “Income Tax the collector within 10 days after notification hy the Com Act of 1936.” missioner that such bond is required. It shall be conditioned upon the payment of the tax, interest, and additional {.Chapters X—XX X TII (Supplemental Provisions, Subtitle Q amounts assessed in connection therewith in accordance with of Title I) wiU appear in the Federal Register for Tuesday, the terms of the extension granted, and shall be executed N ovem ber 17, 1936. Chapters X X X IV (Surtax on Personal by a surety company holding a certificate of authority from Holding Companies, Title IA ) and XXXV (General Provisions the Secretary as an acceptable surety on Federal bonds, and T itle VIII), and the Appendix will appear in the Federal shall be subject to the approval of the Commissioner. In Register for Wednesday, November 18, 1936.1 lieu of such a bond, the taxpayer may file a bond secured by [ s e a l] Ch as. T . R u sse ll, deposit of Liberty bonds or other bonds or notes of the Acting Commissioner of Internal Revenue, United States equal in their total par value to an amount Approved: November 12, 1936. not exceeding double the amount of the tax, or installment thereof. (See section 1126 of the Revenue Act of 1926, as W a y n e C. T a y l o r , amended, paragraph 31 of the Appendix to these regula Acting Secretary of the Treasury. tions.) A request by the taxpayer for an extension of time [F. R. Doc. 3378— Filed, November 13,1936; 1:05 p. m ] for the payment of one installment does not operate to pro cure an extension of time for payment of subsequent install ments. Nor does an extension of time for filing a return operate to extend the time for the payment of the tax or INTERSTATE COMMERCE COMMISSION. any part thereof, unless so specified in the extension. If an O rder extension of time for payment of the tax or any installment is granted, the amount, time for payment of which is so ex At a Session of the Interstate Commerce Commission. tended, shall be paid on or before the expiration of the pe Division 5, held at its office in Washington, D. Cn on the riod of the extension, together with interest at the rate of 10th day of November A. D. 1936. 6 percent per annum on such amount from the date when [No. MC 20987] the payment should have been made if no extension had been granted until the expiration of the period of the extension. A p p l ic a t io n of C. M . D e k a y for A u t h o r it y to O perate as a (See section 295.) C o m m o n C arrier A rt. 56-3. When fractional part of cent may he disre In the Matter of the Application of C. M. Dekay, Individual, garded.—In the payment of taxes a fractional part of a cent Doing Business as D. & H. Motor Freight Co., of 417 shall be disregarded unless it amounts to one-half cent or Charles Street, Jamestown, N. Y., for a Certificate of more, in which case it shall be increased to 1 cent. Frac Public Convenience and Necessity (Form BMC 1), Author tional parts of a cent should not be disregarded in the com izing Operation as a Common Carrier by Motor Vehicle putation of taxes. in the Transportation of Commodities Generally, in Inter A rt. 56-4. Receipts for tax payments.—Upon request a col state Commerce, From and Between Points Located in the lector will give a receipt for each tax payment. In the case States of Connecticut, Delaware, Illinois, Indiana., M ary of payments made by check or money order the canceled land, Massachusetts, New Jersey, New York, Ohio, Penn check or the money order receipt is usually a sufficient re sylvania, Rhode Island, and District of Columbia, Over ceipt. In the case of payments in cash, however, the tax Irregular Routes and Over the Following Regular Routes payer should in every instance require and the collector should furnish a receipt. Route No. 1.—Between Jamestown and New York, N. Y. Route No. 2.—Between Jamestown, N. Y., and Philadelphia, Sec. 57. Examination of Return and Determination of Tax.— As Pa. soon as practicable after the return is filed the Commissioner shaU examine it and shall determine the correct amount of the tax. R ou te N o. 3.—Between Jamestown, N. Y., and Washington, D. C. A rt. 57-1. Examination of return and determination of tax Route No. 4.—Between Jamestown and Buffalo, N. Y. by the Commissioner.—As soon as practicable after returns Route No. 5.—Between Jamestown, N. Y., and Youngsville, are filed, they will be examined and the correct amount of Pa. the tax determined under such procedure as may be pre scribed from time to time by the Commissioner. (See section A more detailed statement of route or routes (or terri 272.) tory) is contained in said application, copies of which are on file and may be inspected at the office of the Interstate Sec. 58. Additions to Tax and Penalties.— (a) For additions to the tax in case of negligence or fraud in the nonpayment of tax or Commerce Commission, Washington, D. C., or offices of the failure to file return therefor, see Supplement M. boards, commissions, or officials of the States involved in (b) For criminal penalties for nonpayment of tax or failure to file this application. return therefor, see section 145. Sec. 59. Administrative Proceedings.— For administrative proceed It appearing, That the above-entitled matter is one which ings in respect of the nonpayment or overpayment of a tax im the Commission is authorized by the Motor Carrier Act, p o s e d by this title, see as foUows: , 1935, to refer to an examiner: (a) Supplement L, relating to assessment and collection of de ficiencies. It is ordered, That the above-entitled matter be, and it (b) Supplement M, relating t6 interest and additions to tax. is hereby, referred to Examiner T. Naftalin for hearing on ( c ) Supplement N, relating to claims against transferees and the 30th day of November A. D. 1936, at 10 o’clock a. m. fiduciaries. (d) Supplement O, relating to overpayments. (standard tim e), at the Federal Building, Jamestown, N. Y., and for recommendation of an appropriate order thereon CHAPTER IX accompanied by the reasons therefor; It is further ordered, That notice of this proceeding be Miscellaneous Provisions duly given; Part V I—Miscellaneous Provisions And it is further ordered, That any party desiring to be Sec. 61. Laws Made Applicable.—All administrative, special, o: notified of any change in the time or place of the said hear stamp provisions of law, including the law relating to th* assess. ing (at his own expense if telegraphic notice becomes nec- 2153 FEDERAL REGISTER, November 14, 1936 essary) shall advise the Bureau of Motor Carriers of the (b) Balance sheets and profit and loss statements of: Commission, Washington, D. C., to that effect by notice which must reach the said Bureau within 10 days from the (i) Every business of which the registrant is sole proprietor; date of service hereof and that the date of mailing of this notice shall be considered as the time when said notice is (ii) Every partnership m Which the registrant has a controlling interest: served. By tiie Commission, division 5. (iii) Every business trust, unincorporated association, or similar business organization in which the registrant has [ s e a l ] G eorge B. M cG i n t y , Secretary. a controlling interest; and [F. R. Doc. 3371— Filed, November 13,1936; 11:49 a. m.] (iv) Every corporation in which the registrant owns directly or indirectly securities representing more t.hqn 50% of the voting power other than as affected by events of default. [Fourth Section Application No. 16606] Such financial statements need not be filed, however, with H andles F rom , to , and B e t w e e n P o in t s i n t h e S o u t h w e s t respect to any corporation or other business organization designated in (iii) or (iv) above if both of the following N ovember 13, 1936. conditions exist: The Commission is in receipt of the above-entitled and numbered application for relief from the long-and-short- (1) The registrant’s total investment in such corpora haul provision of section 4 (1) of the Interstate Commerce tion or business organization does not exceed 5% of the A ct, registrant’s total assets; (2) The registrant’s total income from such corporation Filed by: F. A. Leland, Agent. Commodities involved: Handles, broom or mop, with or with or business organization does not exceed 5% of the regis out metal hooks or hangers attached, in carloads. trant’s gross income; From, to, and between: Points in the Southwest. Grounds for relief: Analogous commodity. provided that the registrant’s aggregate investment in all such corporations and business organizations whose state Any interested party desiring the Commission to hold a ments are omitted pursuant to this sentence shall not exceed hearing upon such application shall request the Commission 15% of the registrant’s total assets, and that the registrant’s in writing so to do within 15 days from the date of this aggregate income from all such corporations and business notice; otherwise the Commission may proceed to investi organizations shall not exceed 15% of the registrant’s gross gate and determine the matters involved in such application income. without further or formal hearing. By the Commission, division 2. Financial statements required by this paragraph (b) shall be for the dates and periods prescribed for the finan [ s e a l ] G eorge B. M cG i n t y , Secretary. cial statements of an unconsolidated subsidiary in the ap [F. R. Doc. 3372— Filed, November 13,1936; 11:49 a. m.] propriate form for registration. Such statements shall also conform, so far as practicable, to all other requirements as to financial statements, including requirements as to certifi cation, as set forth in such form. SECURITIES AND EXCHANGE COMMISSION. The foregoing amendment shall be effective immediately Se c u r it ie s A ct of 1933 upon publication. By the Commission. a d o p tio n o f RULE 600— f in a n c ia l sta te m en ts [ se a l] F rancis P. B rassor, Secretary. The Securities and Exchange Commission, acting pursuant [F. R. Doc. 3374—Filed, November 13,1936; 12:50 p. m.] to authority conferred upon it by the Securities Act of 1933, as amended, particularly Sections 7 and 19 (a) thereof, and finding that the information specified in Schedule A of the Act which is permitted by Rule 600 to be omitted from any United States of America—Before the Securities - registration statement in respect of a specified class of issu and Exchange Commission ers is inapplicable to such class, and that disclosure fully At a regular session of the Securities and Exchange Com adequate for the protection of investors is otherwise required mission held at its office in the City of W ashington, D . C., to be included in the registration statement, and that any on the 12th day of November A. O. 1936. information not specified in Schedule A which is required by such rule to be set forth in the registration statement is nec I n th e M atter of a n O ffe r in g S h ee t of a R o y a l t y I nterest essary and appropriate in the public interest and for the i n th e M a g n o lia -R ogers F arm , F ile d o n O ctober 19, 1936, protection of investors, and that Rule 600 is necessary to b y W . H . C arraher, R espo nd ent carry out the provisions of the Act and is necessary and order terminating proceeding after am e n d m e n t appropriate in the public interest and for the protection of investors, hereby takes the following action: The Securities and Exchange Commission, finding th a t the The following new rule is adopted, to be inserted in Article offering sheet filed with the Commission, which is the sub 3 of Regulation C of the "General Rules and Regulations ject of this proceeding, has been amended, so far as neces under the Securities Act of 1933”, under a new caption as sary, in accordance with the Suspension Order previously follow s: entered in this proceeding;1 - It is ordered, pursuant to Rule 341 (d) of the Commis C. Financial Statements sion^ General Rules and Regulations under the Securities R u l e 600. Special Financial Requirements in Case Regis Act of 1933, as amended, that the amendment received at trant is a Natural Person.—A registrant who is a natural the office of the Commission on November 9, 1936, be effec person may file, in lieu of the balance sheets and profit and tiv e as o f Novem ber 9, 1936; and loss statements otherwise required in the appropriate form It is further ordered, that the Suspension Order, Order for for registration or the instructions accompanying such Hearing, and Order Designating a Trial Examiner, heretofore form, the following financial statements: entered in this proceeding, be, and the same hereby are, (a) A statement of assets and liabilities of the registrant revoked and the said proceeding terminated. as of a date within ninety days, and statements of the By the Commission. regisrant’s income year by year for the three calendar [ s e a l ] « F r an c is P . B rassor, Secretary. years preceding the date of such statement of assets and [F. R. Doc. 3377—Filed, November 13,1936; 12:50 p. m.] liabilities. These statements shall be set forth in reasonable detail and need not be certified. 1 F. R. 1957. FEDERAL REGISTER, November U, 1936 2157 United States of America—Before the Securities [H ie No. 20— 189A1-1] and Exchange Commission I n th e M atter of a n O ffe r in g S h e e t of R o y a l t y I nterests i n th e P ure O i l C o .-R. L. W e lls N o . 47 L ease, F iled o n At a regular session of the Securities and Exchange Com J u l y 9, 1936, b y P . R . K nickerbocker , R espondent mission held at its office in the City of Washington, D. C., on the 12th day of November A. D. 1936. PERMANENT SUSPENSION ORDER The Securities and Exchange Commission initiated this pro I n the M atter of a n O ffe r in g S heet of a R o y a l t y I n terest ceeding pursuant to the provisions of Rule 340 of the General in th e S ttnray et a l .-C a p it a l -M a n s io n -S tate et al. F arm , Rules and Regulations promulgated by the Commission under P eled o n N ovember 6, 1936, b y T . G. T h o m p s o n , R espond the Securities Act of 1933, as amended, to determine whether ent or not an order should be entered suspending the effectiveness SUSPENSION ORDER, ORDER FOR HEARING (UNDER RULE 340 (A )), of the filing of an offering sheet of royalty interests in the AND ORDER DESIGNATING TRIAL EXAMINER Pure Oil Co.-R. L. Wells No. 47 Lease, located in Van Zandt County, Texas, which offering sheet was filed with the Com The Securities and Exchange Commission, having reason mission on July 9, 1936, by P. R. Knickerbocker, of Dallas, able grounds to believe, and therefore alleging, that the Texas, the respondent herein. offering sheet described in the title hereof and filed by the This matter having come on regularly for hearing before respondent named therein is incomplete or inaccurate in the the Commission at Washington, D. C., on July 29, 1936, and following material respects, to wit: due notice thereof having been given to the said respondent,1 1. In that the date in Division I when the information and the said respondent having failed to appear, and evi contained in the offering sheet will be out of date is mis dence both oral and documentary having been introduced, calculated based on Items 15 and 16 (a) of Division n and the hearing having been closed, and the Commission thereof; having found upon the evidence that said offering sheet 2. In that in Item 1 of Division n the participation stated omits to state material facts required to be stated therein for each smallest fractional interest is incorrectly stated or (for the omission of which no sufficient reason is given in miscalculated and appears inconsistent with the note to said offering sheet) and which are necessary to make the Item 16 (e ); statements therein not misleading, all as more fully set forth in the Findings and Opinion of the Commission filed in this It is ordered, pursuant to Rule 340 (a) of the Commission’s proceeding, and it appearing appropriate in the public interest General Rules and Regulations under the Securities Act of so to do; 1933, as amended, that the effectiveness of the filing of said It is ordered, pursuant to Rule 340 (b) of the Commis offering sheet be, and hereby is, suspended until the 12th day sion’s General Rules and Regulations promulgated under of December 1936; that an opportunity for hearing be given the Securities Act of 1933, as amended, that the effective to the said respondent for the purpose of determining the ness of the filing of said offering sheet be, and same hereby material completeness or accuracy of the said offering sheet in is, permanently suspended. the respects in which it is herein alleged to be incomplete By the Commission. or inaccurate, and whether the said order of suspension shall be revoked or continued; and [ s e a l] F ran c is P. B rassor, Secretary. It is further ordered, that John H. Small, an officer of the [F. R. Doc. 3375— Filed, November 13,1936; 12:50 p. m ] Commission, be, and hereby is, designated as trial examiner to preside at such hearing, to continue or adjourn the said hearing from time to time, to administer oaths and affirma UNITED STATES TARIFF COMMISSION. tions, subpena witnesses, compel their attendance, take evidence, consider any amendments to said offering sheet as P u b lic N otice may be filed prior to the conclusion of the hearing, and require the production of any books, papers, correspondence, investigation ordered and h earing s e t : cigar lig h te rs memoranda, or other records deemed relevant or material to [Docket 11; Section 337, Tariff Act of 1930] the inquiry, and to perform all other duties in connection In the Matter of Investigation of Alleged Unfair Methods therewith authorized by law; and of Competition or Unfair Acts in the Importation or Sale It is further ordered, that the taking of testimony in this of Cigar Lighters proceeding commence on the 25th day of November 1936 at Upon consideration of the complaint under oath filed on 10:00 o’clock in the forenoon at the office of the Securities the 28th day of December 1935, by Art Metal Works, Inc., and Exchange Commission, 18th Street and Pennsylvania having its principal place of business in Newark, New Jersey, Avenue, Washington, D. C„ and continue thereafter at such it was; on August 14, 1936, ordered: times and places as said examiner may designate. 1. That an investigation pursuant to the provisions of Upon the completion of testimony in this matter the exam Section 337 of the Tariff Act of 1930 be instituted into alleged iner is directed to close the hearing and make his report to unfair methods of competition or unfair acts in violation of the Commission. said section in the importation or sale in the United States By the Commission. of cigar lighters made in accordance with the terms of [ seal] F ran c is P. B rassor, Secretary. U nited States Letters P aten t Nos. 1,986,384, 2,002,845 and Des. 96,639 or in simulation of such lighters. [F. R. Doc. 3376— Filed, November 13,1936; 12:50 p. m.] 2. That notice be, and the same is hereby, given to Atlantic & Pacific Merchandise Co., 876 Broadway; Henry Amdur & Sons, Inc., 325 Fifth Avenue; and National Silver Co., 61 West 23rd Street, all in New York City; Homer’s, Inc., Boston, Mass.; and Mallove’s, Inc., 48 State Street, New United States of America— Before the Securities London, Conn., and to all other persons, partnerships, associ and Exchange Commission ations, and corporations concerned as owners, importers, consignees, agents, or otherwise in the alleged, unfair At a regular session of the Securities and Exchange Com methpds of competition or unfair acts in the importation' mission held at its office in the City of Washington, D. C., on the 12th day of November A. D. 1936. 11F. R. 976. No. 175----- 9 2158 FEDERAL REGISTER, November 14, 1936 or sale of said products, and that they, and each of them, lishing the text of this notice in Treasury Decisions, pub will be afforded opportunity to make written answer under lished by the Department of the Treasury, and by announce oath and file said answer in quadruplicate with the Commis ment thereof in Commerce Reports, published by the De sion on or before the 15th day of December 1936, and show partment of Commerce, copies of which said publications are cause, if any they have, why the provisions of Section 337 of obtainable from the Superintendent of Documents, Govern the Tariff Act of 1930 should not be applied in respect of said ment Printing Office, Washington, D. C., also by posting a alleged unfair methods of competition or unfair acts in the copy of this notice for 30 days prior to said 7th day of Jan importation or sale of said products. uary 1937 at the principal office of the Tariff Commission in 3. T h a t a public hearing in said investigation be held at the city of Washington, D. C., and at the office of the Tariff ithe office of the United States Tariff Commissi on, W ashing Commission at the port of New York. ton, D. C., at 10 o’clock a. im, on the 7th day of January 1937, 5. That notice of said investigation, of time for answers, at which hearing the said complainant and respondents and and of public hearing shall also be given by mailing registered, all other persons, partnerships, associations, and corporations postage prepaid, a copy of this notice to the complainant concerned as owners, importers, consignees, agents, or other herein, and by mailing registered, postage prepaid, a copy of wise, in the alleged unfair methods of competition and unfair this notice, together with a copy of the complaint, to the acts in the importation or sale of said products will be respondents named herein. afforded opportunity to be present, to produce evidence, aruj I hereby certify that the foregoing investigation was to be heard concerning said alleged unfair methods of com ordered by the United States Tariff Commission on August petition and unfair acts in the importation or sale of said 14,1936. products constituting the subject matter of this investigation. 4. That public notice of said investigation, and of timp for [ se a l] Sid n e y M organ, Secretary. filing answers and of public hearing shall be given by pub [F . R. Doc. 3370— Filed. Novem ber 12,1936; 3:49 p. m.1